Since Constitution of India is foundation and source of powers to all laws in India, it

is necessary to understand general background of Constitution to enable us to

understand and appreciate each individual Law. In India, Constitution which came
into effect on 26th January 1950 is supreme and all laws and Government actions
are subordinate to our Constitution.

INDIA IS UNION OF STATES - Our Constitution generally follows British pattern,

though concepts of federal structure are borrowed from American and other
constitutions. India is a Union of States. The structure of Government is federal in
nature. Government of India (Central Government) has certain powers in respect of
whole country. India is divided into various States and Union Territories and each
State and Union Territory has certain powers in respect of that particular State. Thus,
there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh,
Punjab etc. and Union Territories like Pondicherry, Chandigarh etc.

Taxation under Constitution - In the basic scheme of taxation in India, it is

envisaged that (a) Central Government will get tax revenue from Income Tax (except
on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State
Government will get tax revenue from sales tax, excise on liquor and tax on
Agricultural Income (c) Municipalities will get tax revenue from octroi and house
property tax.

Income Tax, Central Excise and Customs are administered by Central Government.
As regards sales tax, Central Sales Tax is levied by Central Government while State
Sales Tax is levied by individual State Governments. Though Central Sales Tax is
levied by Central Government, it is administered by State Governments and tax
collected in each State is retained by that State Government itself.

Article 246(1) of Constitution of India states that Parliament has exclusive powers to
make laws with respect to any of matters enumerated in List I in the Seventh
Schedule to Constitution. (Called Union List). As per Article 246(3), State
Government has exclusive powers to make laws for State with respect to any matter
enumerated in List II of Seventh Schedule to Constitution. Seventh schedule to
Constitution (referred to in Article 246) indicates bifurcation of powers to make laws,
between Union Government and State Governments. Parliament has exclusive
powers to make laws in respect of matters given in list I of the Seventh Schedule of
the Constitution (called Union List). List II (State List) contains entries under
jurisdiction of States. List III (concurrent list) contains entries where both Union and
State Governments can exercise power. [In case of Union Territories, Union
Government can make laws in respect of all the entries in all three lists].

Union List relevant to taxation - List I, called Union List, contains entries like
Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list
relevant to taxation provisions are as follows :

ENTRY NO. 82 - Tax on income other than agricultural income.

ENTRY NO. 83 - Duties of customs including export duties.

ENTRY NO. 84 - Duties of excise on tobacco and other goods manufactured or
produced in India except alcoholic liquors for human consumption, opium, narcotic
drugs, but including medicinal and toilet preparations containing alcoholic liquor,
opium or narcotics.

ENTRY NO. 85 - Corporation Tax.

ENTRY NO. 92A - Taxes on the Sale or purchase of goods other than newspapers,
where such sale or purchase takes place in the course of Interstate trade or
commerce.

ENTRY NO. 92B - Taxes on consignment of goods where such consignment takes
place during Interstate trade or commerce.

ENTRY 92C - Service Tax (Not yet made effective)

ENTRY NO. 97 - Any other matter not included in List II, list III and any tax not
mentioned in list II or list III. (These are called Residual Powers.)

State list pertaining to taxation - State Government has exclusive powers to make
laws in respect of matters in list II of Seventh Schedule to our Constitution. These
entries include Police, Public Health, Agriculture, Land etc. Entries in this list
relevant to taxation provisions are as follows:

ENTRY NO. 46 - Taxes on agricultural income.

ENTRY NO. 51 - Excise duty on alcoholic liquors, opium and narcotics.

ENTRY NO. 52 - Tax on entry of goods into a local area for consumption, use or sale
therein (usually called Octroi).

ENTRY NO. 54 - Tax on sale or purchase of goods other than newspapers except
tax on interstate sale or purchase.

List III of Seventh Schedule, called concurrent list, includes matters where both
Central Government and State Government can make laws. This list includes entries
like Criminal Law and Procedure, Trust and Trustees, Civil procedures, economic
and social planning, trade unions, charitable institutions, price control, factories, etc.
In case of entries included in concurrent list, in case of conflict, law made by Union
Government prevails. The only exception is that if law made by State contains any
provision repugnant to earlier law made by Parliament, law made by State
Government prevails, if it has received assent of President. Even in such cases,
Parliament can make fresh law and amend, repeal or vary law made by State.
[Article 254 of Constitution].

Nature of Excise Duty

Power to levy excise duty is derived from Constitution. Excise is a duty on excisable
goods manufactured or produced in India. Each word of this definition is vitally
important to fix liability of Central Excise Duty.

Indian Constitution has given powers to Central Govt. and State Govt. to levy
various taxes and duties. Powers of Central and State Govt. are enlisted in Seventh
Schedule to our Constitution. Entry No. 84 of list I of Seventh Schedule to the
Constitution reads as follows : Duties of excise on tobacco and other goods
manufactured or produced in India, except alcoholic liquors for human consumption,
opium, narcotics, but including medical and toilet preparations containing alcohol,
opium or narcotics.

In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence,

central excise duty is presently levied under entry 84 and 97.

Power to impose excise on alcoholic liquors, opium and narcotics is granted to

States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is
called State Excise. The Act, Rules and rates for excise on liquor are different for
each State (this is the reason why price of liquor varies widely from Goa to MP to
Punjab. In some States, it is officially not available.).

Basic conditions of excise liability - Section 3 of Central Excise Act ( often called
the Charging Section ) states that There shall be levied and collected in such
manner as may be prescribed duties on all excisable goods (excluding goods
produced or manufactured in special economic zones) which are produced or
manufactured in India - . - . -'. The words goods which are manufactured or
produced in India are same as those used in Entry No 84 to list I. Thus, the power to
levy Central Excise duty is derived from the Constitution. This definition of charging
section of Central Excise is vital, because it clearly signifies that there are four basic
conditions for levy of Central Excise duty. (1) The duty is on goods. (2) The goods
must be excisable. (3) The goods must be manufactured or produced (4) Such
manufacture or production must be in India. Unless all of these conditions are
satisfied, Central Excise Duty cannot be levied. Each of these requirements
needs close scrutiny.

GOODS MANUFACTURED IN SEZ ARE EXCLUDED EXCISABLE GOODS A

per section 3(1) of CE Act, duty is leviable on all excisable goods (excluding goods
manufactured or produced in Special Economic Zones). Thus, goods manufactured
or produced in SEZ are excisable goods but no duty is leviable, as charging section
3(1) excludes those goods. Thus, the goods manufactured in SEZ are not exempted
goods. They can be termed as excluded excisable goods [The revised definition is
made effective from 15-8-2003].

Taxable Event for Excise Duty - Taxable event is that on happening of which the
charge is fixed. It is that event, which on its occurrence creates or attracts the
liability to tax. Such liability does not accrue at any earlier or later point of time -
Goodyear India Ltd. v. State of Haryana (1990) 76 STC 71 (SC) = 1990 UPTC 198 =
AIR 1990 SC 781. Tax becomes payable when liability to pay tax arises and liability
to pay tax arises by the happening of the taxable event. - Kalwa Devadallain v. UOI
(1963) 49 ITR 165 (SC) * M A Co. v. Asstt Commissioner (1964) 15 STC 487 (All
HC).

In Re Sea Customs Act, 1878 - AIR 1963 SC 1760 = (1964) 3 SCR 787 (SC 9
member full bench), it was observed - 'Excise duty is not directly on the goods, but
manufacture thereof. - . - . - Though both excise duty and sales tax are levied with
reference to goods, the two are very different imposts. In one case, the imposition is
on the act of manufacture or production, while in the other it is on act of sale. In
neither case, therefore, can it be said that the excise duty or sale tax is directly on
the goods, for in that event, they will really become the same tax' - confirmed in
Shinde Brothers v. Dy Commissioner - AIR 1967 SC 1512 = (1967) 1 SCR 548,
where it was held that excise duty is on goods and taxable event is manufacture or
production of goods.

It has been held that in Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC)
= 1989 (44) ELT 598 (SC) = 1989(2) SCALE 804 = (1989) 4 SCC 592 that
manufacture or production in India of an 'excisable article is a taxable event for
Central Excise, though duty can be levied and collected at a later stage for
administrative convenience - quoted with approval and followed in Shree Synthetics
Ltd. v. UOI 1999(113) ELT 774 (SC 3 member bench). Removal from factory is not
the 'taxable event'. In CCE v. Vazir Sultan Tobacco Co. Ltd. - 1996 (2) SCALE 603 =
(1996) 13 RLT 291 = JT 1996 (3) (2 ?)112 = AIR 1996 SC 3025 = 1996 AIR SCW
1353 = 63 ECR 359 = 1996 (83) ELT 3 = (1996) 3 SCC 434 (SC - 3 member bench),
Supreme Court has confirmed that the levy is and remains upon the manufacture or
production alone. Only the collection is shifted to stage of removal. It is also
confirmed that the removal of goods is not a taxable event. In Empire Industries v.
UOI (1985) 20 ELT 179 (SC) = AIR 1986 SC 662 = (1985) 1 SCALE 1269 = (1987)
64 STC 42 (SC) = (1985) 3 SCC 314 = 1985 Supp (1) SCR 292 = (1986) 162 ITR
846 (SC), it was observed - 'Taxable event in Central Excise is the manufacture of
excisable goods. - . - . - The sale or the ownership of the end-product is absolutely
irrelevant for the purposes of 'taxable event' under Central Excise'.

Person liable to pay excise duty - Once duty liability is fixed, the duty can be
collected from a person at the time and place found administratively most
convenient for collection.

THE DUTY LIABILITY IN CASE OF MANUFACTURED GOODS - Rule 4(1) of

Central Excise Rules makes it clear that excise duty is payable by the manufacturer
or producer of excisable goods. In case where goods are allowed to be stored in a
warehouse without payment of duty, the duty liability is of the person who stores the
goods. Rule 4(1) makes it clear that goods can be removed from the place where
they are manufactured or produced or warehoused, only on payment of duty.

Ownership of raw material is not relevant for duty liability. CCE v. Mahindra &
Mahindra 2001(132) ELT 632 (CEGAT). Duty demand is payable by manufacturer,
even if it cannot be recovered from customer. Snap Chem v. CCE 2001(137) ELT
235 (CEGAT).

DUTY LIABILITY IN CASE OF GOODS STORED IN WAREHOUSE - Rule 20 of CE

Rules permit warehousing of certain goods in warehouses without payment of duty.
These goods are coffee, petroleum products, benzene, tolune etc. In such cases,
the duty liability is on the person who stores the goods.

DUTY LIABILITY IN CASE OF MOLASSES PRODUCED IN KHANDSARI SUGAR

FACTORY - The other exception is in case of molasses produced in a khandsari
sugar factory, the duty liability is of the procurer (i.e. purchaser) of such molasses.
The duty is payable on the date of receipt of such molasses in the factory of
procurer. The duty on molasses produced in khandsari sugar factory is payable only
when the procurer procures the molasses for use in the manufacture of any
commodity. Such commodity may or may not be excisable. [Rule 4(2) of CE Rules].
- - Validity of this rule has been upheld in Ranson Industries v. UOI 2003(151) ELT
53 (J&K HC DB).

DUTY LIABILITY IN CASE OF JOB WORK - Even in case of job work, the duty
liability is of actual manufacturer and not of the raw material supplier.- GTC
Industries v. CCE 2001(132) ELT 74 (CEGAT). - - However, a job worker
manufacturing goods under notification No 214/86 is exempt from excise duty, as the
raw material supplier undertakes that he will use these goods further to manufacture
final product or clear for export or pay duty on such goods. [The only exception is in
case of textile articles, as explained below].

Rate of duty as applicable on date of removal relevant - Though taxable event is

'manufacture', duty payable is as applicable on date of removal i.e. clearance from
factory. In Wallace Flour Mills Co. Ltd. v. CCE 1989(44) ELT 598 = 1989(2) SCALE
804 = 186 ITR 440 = 1989(4) SCC 592 (SC), goods were fully manufactured and
packed when goods were exempt from duty. These were cleared after the exemption
was withdrawn and goods became liable to duty. It was held that duty is payable as
applicable on date of removal.

State of goods at the time of removal is relevant - Goods have to be classified and
valued in the state in which goods are removed from the factory. Any further
processing done after removal is not relevant.

Duty payable even when not collected - An assessee is liable to pay sales tax and the question
whether he has collected it from consumer or not is of no consequence. His liability is by
virtue of being an assessee under the Act. - American Remedies P Ltd. v. Govt of AP 1999(1)
SCALE 30 = 113 STC 400 (SC 3 member bench).

Duty is a manufacturing expense from accounting point of view - Excise duty should
be considered as a manufacturing expense and should be considered as an element
of cost for inventory valuation, like other manufacturing expenses. Excise duty
cannot be treated as a period cost. - Guidance Note of ICAI on Accounting
Treatment for Excise Duty - Chartered Accountant - July 2000.

Types of excise duties - Excise duties are of following types -

DUTIES UNDER CENTRAL EXCISE ACT - Basic duty is levied under Central
Excise Act.

BASIC EXCISE DUTY TO BE TERMED AS CENVAT - Basic excise duty (also

termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is
levied at the rates specified in First Schedule to Central Excise Tariff Act,
read with exemption notification, if any. [section 3(1)(a) of CEA].

Basic excise duty is levied u/s 3(1) of Central Excise Act. The section is termed as charging
section. The duty rate is generally 10.30% w.e.f. 27-2-2010including education and SAH
cess [ It was 8% w.e.f. 24-2-2009 i.e. total 8.24%. Still earlier, it was 14% i.e. total 14.42%].

Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is
1% of basic excise duty.

EDUCATION CESS AND SAH EDUCATION CESS ON EXCISE DUTY - If excise duty
rate is 8%, education cess will be 0.16% and SAH Education cess will be 0.08%. A
provisions of Central Excise Act, including those relating to refunds, exemptions and
penalties will apply to education cess and SAH cess.

EXCISE DUTY IN CASE OF CLEARANCES BY EOU The EOU units are expected
to export all their production. However, if they clear their final product in DTA
(domestic tariff area), the rate of excise duty will be equal to customs duty on like
article if imported in India. [proviso to section 3(1)]. Note that even if rate of customs
duty is considered for payment of duty, actually the duty paid by them is Central
Excise Duty. The rate of customs duty is taken only as a measure. The EOU unit can
sale part of their final products in India at 50% of customs duty or normal excise duty
in certain cases.

NATIONAL CALAMITY CONTINGENT DUTY A National Calamity Contingent

Duty (NCCD) has been imposed vide section 136 of Finance Act, 2001 [clause 129
of Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chewing
tobacco and cigarettes. It varies from 10% to 45%. - - NCCD of 1% was imposed on
PFY, motor cars, multi utility vehicles and two wheelers and NCCD of Rs 50 per ton
was imposed on domestic crude oil, vide section 169 of Finance Act, 2003.

DUTIES UNDER OTHER ACTS - Some duties and cesses are levied on
manufactured products under other Acts. The administrative machinery of central
excise is used to collect those taxes. Provisions of Central Excise Act and Rules
have been made applicable for levy and collection of these duties / cesses.

DUTY ON MEDICAL AND TOILET PREPARATIONS - A duty of excise is

imposed on medical preparations under Medical and Toilet Preparations
(Excise Duties) Act, 1955.

ADDITIONAL DUTY ON MINERAL PRODUCTS - Additional duty on mineral

products (like motor spirit, kerosene, diesel and furnace oil) is payable
under Mineral Products (Additional Duties of Excise and Customs) Act,
1958.

CESS - A cess has been imposed on certain products.

Goods

The word goods has not been defined under the Central Excise Act. Article 366(12)
of the Constitution defines goods as goods includes all materials, commodities and
articles. Sale of Goods Act defines that Goods means every kind of movable
property other than actionable claims and money; and includes stocks and shares,
growing crops, grass and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale. These definitions are
quite wide for purpose of Central Excise Act. However, case law on this is well
developed and as per judicial interpretation, the word goods, for purpose of levy of
Excise duty, must satisfy two requirements i.e. (a) they must be movable and (b)
they must be marketable.
Goods must be movable - They must be movable. Thus, immovable property or
property attached to earth is not goods and hence duty cannot be levied on it -
Kailash Oil Cake Industries v. CCE - 1993 (63) ELT 693 (CEGAT). Duty cannot be
levied on immovable property - National Radio v. CCE - 1995 (76) 436 (CEGAT).

Goods must be Marketable - The item must be such that it is capable of being
bought or sold. This is the test of Marketability. The goods must be known in the
market. Unless this test of marketability is satisfied, duty cannot be levied as these
will not be goods. [This is also termed as 'Vendibility Test']. This view, expressed in
UOI v. Delhi Cloth Mills - AIR 1963 SC 791 = 1963 (Suppl.) (1) SCR 586 = 1977 (1)
ELT (J 177) (SC 5 member Constitution bench), has been consistently followed by
Supreme Court in subsequent cases and by all High Courts. It was held that to
become goods an article must be something which can ordinarily come to market to
be bought and sold.

In case of DCM, they were manufacturing Vanaspati. Raw material was groundnut
and til oil. During manufacture, refined oil got produced at intermediate stage which
was consumed within factory for manufacture of Vanaspati. Excise department
demanded duty on this refined oil. [During the relevant period, there was no excise
duty on Vanaspati, but refined oil was excisable.] This stand was negated by
Supreme Court. It was observed that process of deodorisation was not carried out
on the refined oil. In the market, the product is not known as refined oil unless it is
deodorized. Applying this marketability test, it was held that the refined oil which is
not deodorized is not goods. [Deodorisation was carried out in the manufacturing
process after hydrogenation only.]

Actual sale is not necessary - Marketability is an essential ingredient in order to be

dutiable. Marketability is a decisive test for dutiability. It only means saleable or
suitable for sale. It need not in fact be marketed. The article should be capable of
being sold to consumers, as it is - without any thing more. - Indian Cable Co. Ltd. v.
CCE - 1994 (74) ELT 22 (SC) = JT 1994 (6) SC 243 = (1995) 97 STC 307 (SC) =
1994 AIR SCW 4071 = AIR 1995 SC 64 = (1994) 6 SCC 610 = 1994 (4) RLT 437
(SC 3 member bench).

Mere mention in Tariff is not enough - Mere mention of an item in tariff is not enough.
Simply because a certain article falls within the schedule (of Central Excise Tariff), it
would not be dutiable if the article is not goods known to the market. - Bhor
Industries Ltd. v. CCE (1989) 40 ELT 280 (SC) = 1989 (1) SCC 602 = 1989(1)
SCALE 226 = 1989 (1) SCR 382 = AIR 1989 SC 1153 = (1989) 73 STC 145 (SC) =
(1990) 184 ITR 129 (SC) - In this case, it was found that crude PVC films
(intermediate product) manufactured by the assessee for captive consumption, for
further manufacture of leather cloth were not marketable in that stage and hence not
dutiable.

Mere specification in tariff is not proof of marketability. - Ion Exchange

(India) Ltd. v. CCE 1999(4) SCALE 345 = 1999 AIR SCW 2606 = AIR 1999
SC 2457 = 1999(112) ELT 746 (SC).

The aforesaid judgments that goods are not dutiable if they are not marketable, even
when they are specifically mentioned in Central Excise Tariff, were under review and
the matter was referred to large bench in UOI v. Delhi Cloth and General Mills
(DCM) 1997(91) ELT 23 = 19 RLT 475 = 1998 AIR SCW 2300 = 1997(2) SCALE 609
= AIR 1998 SC 2917 = 1997(4) SCC 203 (SC 2 member bench). A three member
bench in UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC
767 = 109 STC 113 = (1997) 92 ELT 315 = AIR 1997 SC 2429 (SC 3 member
bench) has reiterated and confirmed the present view that even if a commodity is
specifically mentioned in tariff, duty is not payable if the commodity is not
marketable. In this case, it was also observed that the commodity which is sought to
be made liable to excise duty must be a commodity that is marketable as it is, and
not a commodity that may, by further processing, be made marketable.

Duty leviable on captive consumption - Since excise is a duty on manufacture, duty

is leviable even if goods are consumed within the factory and not sold. However, the
goods must be marketable in the condition in which they are manufactured and
further consumed within the factory.

However, mere fact that goods have been captively consumed (i.e. consumed within
the factory) is no evidence of its marketability (or non-marketability). Even transient
items can be goods provided that the article is capable of being marketed even
during that short period. Goods which are unstable can be theoretically marketable if
there was market for such transient article - but one has to take a practical view on
the basis of available evidence. - Ambalal Sarabhai Enterprises v. CCE (1989) 43
ELT 214 (SC) = JT 1989 (3) SC 741 = 1989 (3) SCR 784 = (1990) 77 STC 190 =
AIR 1990 SC 59 = (1989) 4 SCC 112.

Every thing that is sold is not 'marketable' - 'Marketability' implies regular market for
a product. Occasional, stray or distress sales do not mean that the product is
'marketable'.

Marketability to be decided on the basis of the state in which it is produced - The

commodity which is sought to be made liable to excise duty must be a commodity
that is marketable as it is, and not a commodity that may, by further processing, be
made marketable - UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 =
1997(5) SCC 767 = (1997) 92 ELT 315 = 109 STC 113 = AIR 1997 SC 2429 (SC 3
member bench) - same view in Wochardt Ltd. v. CCE 1999(105) ELT 573 (CEGAT) *
Eastern Coils v. CCE 2001(132) ELT 369 (CEGAT).

What are Goods - Some examples will clarify the legal position.

GAS, STEAM ETC. - Gas and Steam are goods as it is a tangible property. - . - It is
marketable - Ambalal Sarabhai Enterprises Ltd. v. UOI 1991 (54) ELT 30 (Guj HC). It
is held that steam is goods as it can be weighted, measured and marketed.

ELECTRICITY In case of electrical energy, generation or production coincides

almost instantaneously with its consumption. Sale, supply and consumption takes
place without any hiatus. - - Electricity is movable property though it is not tangible. It
is goods. State of Andhra Pradesh v. National Thermal Power Corporation
(NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). The electricity
is goods - CST v. MPEB - (1970) 25 STC 188 (SC) = (1969) 2 SCR 939 = AIR 1970
SC 732 (partly overruled in 2002 only to the extent that it was held in 2002 judgment
that electricity cannot be stored). - followed in Indian Oil Corpn v. CTO (1997) 107
STC 463 (Raj TT)

DRAWING, DESIGNS ETC. ARE GOODS Drawing and designs relating to

machinery or technology are goods, even if payment is made for technical advice
or information technology, which is intangible asset. But the moment it is put on a
media, whether paper or diskettes or any other things, that what is supplied
becomes chattel. Associated Cement Companies Ltd. v. CC 2001 AIR SCW 559 =
128 ELT 21 = 124 STC 59 = AIR 2001 SC 862 = 2001(1) SCALE 436 = JT 2001(2)
SC 141 (SC 3 member bench). Knowledge in the form of drawing and design
relating to machinery are goods Prerna Textiles v. CCE 2000(117) ELT 241
(CEGAT) civil appeal dismissed by SC (2001) 134 ELT A169.

MACHINERY - Will be goods if it is in marketable condition at the time of removal

from factory of manufacture, even if subsequently, it is to be fastened to earth.

Waste and Scrap are goods - In Khandelwal Metal and Engg Works v. UOI - 1985
(Supp) 1 SCR 750 = 1985 (20) ELT 222 (SC) = AIR 1985 SC 1211 = (1985) 3 SCC
620, Apex Court held that scrap would be liable to duty, if it is known in commercial
parlance by that name and has an established market - followed in Dhrunal
Chhotalal Patel v. UOI - 1993 (63) ELT 27 (Bom HC). In Greysham v. CCE
2000(117) ELT 350 (CEGAT), it was held that waste and scrap of steel arising during
manufacture is dutiable as it is marketable and specifically mentioned in tariff.

WASTE AND SCRAP NOT GOODS IF NOT MARKETABLE - Carbide sludge arising
in manufacture of acetylene gas is not marketable and hence not liable to duty
CCE v. Bansal Indus. Gases 2003(151) ELT 4 (SC 3 member bench). Spent Nickel
Catalyst arising during manufacture of soap is not an excisable commodity as
department failed to prove that it is a marketable commodity. CCE v. Hindustan
Lever 2003(151) ELT 10 (SC).

WASTE AND SCRAP EXCISABLE ONLY IF MENTIONED IN CETA - The waste and
scrap will not be excisable goods unless they are specified in CETA. In CCE v.
Carborandum Universal Ltd. 1998(103) ELT 363 (CEGAT), it was held that waste
termed as 'dust collector fine' emerging during grinding is merely an industrial waste
and even if it fetches some price, it is not 'excisable goods' as there is no tariff entry
in CETA.

What are not Goods - Some cases where the product was held as not goods
are illustrated here.

Goods having very short life are not goods, if not marketable in that short period
Yeast having short shelf life is not goods when there is no proof about its
marketability, even if the product is specified in tariff. CCE v. Jagjit Industries 2002
AIR SCW 1277 = 141 ELT 306 (SC)

Immovables are not goods - Articles which are attached to earth are not goods as
goods means a movable property.

Excisability of plant & machinery assembled at site - Plant and Machinery or

structure assembled and erected at site cannot be treated as 'goods' for the purpose
of Excise duty, if it is not marketable and movable.

The word goods applies to those which can be brought to market for being bought
and sold, and it is implied that it applies to such goods as are movable. Goods
erected and installed in the premises and embedded to earth cease to be goods and
cannot be held to be excisable goods. - Quality Steel Tubes (P.) Ltd. v. CCE - 1995
(75) ELT 17 (SC) = 1994(5) SCALE 183 = (1995) 2 SCC 372 = 6 RLT 131 = 1995
AIR SCW 11 = JT 1995 (1) SC 99 = (1995) 56 ECR 209 (SC) - in this case, it was
held that tube mill and welding head erected and installed in the premises and
embedded in the earth for manufacture of steel tubes and pipes are not goods.

In Municipal Corporation of Greater Bombay v. Indian Oil Corporation - JT 1990 (4)

SC 533 = 1990(2) SCALE 1140 = AIR 1991 SC 686 = 1991 Supp (2) SCC 18, it was
held that if the chattel is movable to another place in the same position (condition?),
it is movable property. If it has to be dismantled and re-erected at later place, it is
attached to earth and is immovable property.

ASSEMBLY AT SITE IS NOT MANUFACTURE, IF IMMOVABLE PRODUCT

EMERGES - In Mittal Engg Works v. CCE - 1996 (8) SCALE 452 = 1996 (88) ELT
622 (SC) = 17 RLT 612 = (1997) 106 STC 201 (SC) = (1997) 1 SCC 203 = JT
1996(10) SC 722, it was held that if an article has to be assembled, erected and
attached to the earth at site and if it is not capable of being sold as it is, without any
thing more, it is not 'goods'. Erection and installation of a plant is not excisable -
followed in CCE v. Hyderabad Race Club - 1996 (8) SCALE 468 = 1996 (88) ELT
633 (SC), where it was held that an article embedded in the earth was not 'goods'
and hence excise duty is not leviable.

PRESENT LEGAL POSITION There were some conflicting judgments. All

Supreme Court judgments were of division benches, i.e. 2 member benches. In case
of conflicting decisions of coordinate benches (i.e. judgments given by same number
of judges), the later judgment prevails. The latest judgment on the issue is of Triveni
Engineering judgment dated 8-8-2000, which has been practically accepted by
Board vide its circular dated 15-1-2002. Hence, the present legal provision is, as
decided in Triveni Engineering, i.e. 'The marketability test requires that the goods
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. Following is also clear - (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 dismantle, no duty can be levied. (c) If machinery is 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.

Intermediate Product - Captive Consumption - Manufacture is possible at

intermediate stage also. If a product which is complete, identifiable and which can
be sold in market comes into existence during the manufacturing process at
intermediate stage, it will amount to manufacture and will be dutiable even if it is not
sold and it is used within the same factory. (In excise terminology, it is called
Captive Consumption). (Such intermediate products are exempt from duty if these
are used in manufacture of final product which is dutiable. If such exemption is not
available, duty liability is certain.) In A S Processors v. CCE 1999(112) ELT 706
(CEGAT), it was observed that once a new product comes into existence at
intermediate stage, it is charged to duty if not exempted under any notification. In
CCE v. Modern Mills 1999(113) ELT 822 (CEGAT), it was held that duty liability on
intermediate product arises as soon as manufacture (of intermediate product for
captive consumption) is complete as it is 'deemed to have been removed' under rule
9(1).

Excisable Goods

Other essential requirement is that the goods must be excisable. Section 2(d) of
Central Excise Act defines Excisable Goods as Goods specified in the Schedule to
Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt.
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
[Explanation to section 2(d) of CEA].

Thus, unless the item is specified in the Central Excise Tariff Act as subject to duty,
no duty is leviable.

Goods excisable even if exempt from duty - Excisable goods do not become
non-excisable goods merely because they are exempt from duty by an exemption
notification -. Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989(2)
SCALE 804 = 1989 (44) ELT 598 (SC) = (1989) 4 SCC 592.

If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be
excisable goods and levy of duty is not erased. CCE v. Smithkline Beecham
Consumer Health Care Ltd. 2003(151) ELT 5 (SC).

Goods not included in CETA are non-excisable goods - Some goods like
wheat, rice, cut flowers, horses, soya beans etc. are not mentioned in Central Excise
Tariff at all and hence they are not excisable goods, though they may be goods.
These are non-excisable goods. Similarly, waste and scrap will be excisable
goods only if specifically mentioned in CETA - CCE v. Amol Decalite Ltd. 1999(105)
ELT 222 (CEGAT). In Western India Ceramics P Ltd. v. CCE 1998(9) ELT 425
(CEGAT), it was held that broken glazed tiles are not excisable as there is no
specific entry (in Tariff) for it.

Mere mention in CETA not enough - Mere mention in the Excise Tariff will not
attract duty, unless these are goods i.e. unless test of marketability is satisfied -
Bhor Industries Ltd. v. CCE - 1989 (40) ELT 280 (SC) = (1989) 73 STC 145 (SC) =
(1989) 1 SCC 602 = (1989) 1 SCALE 226 = (1989) 1 SCR 382 = (1990) 184 ITR 129
(SC) = AIR 1989 SC 1153 = 1989 (21) ECR 273

Further, the excisable goods are liable to duty only if they are manufactured or
produced.

Goods excisable even if duty is nil If by virtue of an exemption notification, the

rate of duty is reduced to NIL, the goods specified in the tariff would still be regarded
as excisable goods on which NIL rate of duty was payable.

Goods removed under bond are not 'exempted goods' - Under Central Excise, the
term 'exempted goods' has specific meaning. 'Exempted goods' means those
exempted under notification issued u/s 5A of CEA. Goods removed under bond
without payment of duty are neither goods 'exempt from duty' nor 'goods chargeable
to Nil rate of duty'. - CBE&C circular No 278/112/96-CX dated 11.12.1996 - relying
on law ministry opinion dated 29.10.1974.

Goods manufactured in SEZ are excluded excisable goods As per section 3(1) of
CE Act, as made effective w.e.f. 15-8-2003, duty is leviable on all excisable goods
(except goods manufactured or produced in Special Economic Zone). Thus, goods
manufactured or produced in SEZ are excisable goods but no duty is leviable, as
charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ
are not exempted goods. They can be termed as excluded excisable goods.

Meaning of 'Goods which have suffered duty' - In some cases, the wording used
is 'goods which have suffered duty / tax'. In such case, it has been held that actual
payment of tax / duty is necessary. Goods cannot be said to have 'suffered tax' when
no tax is paid. - State of MP v. Indore Iron & Steel Mills 1998(4) SCALE 562 also
1998(5) SCALE 467 = AIR 1998 SC 3050 = 111 STC 261 = 1998(6) SCC 416 = JT
1998(6) SC 501.

Manufactured or produced

Excise is a duty on manufacture or production of goods. Excise is mainly levied on

goods manufactured or produced. Thus, definition of manufactured or produced is
important because excise is a duty on manufacture and if there is no manufacture,
there is no liability of payment of Central Excise duty. In Hyderabad Industries Ltd. v.
UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - (SC 3
member bench), it was held that even if Central Excise Tariff mentions an item, there
is no duty liability unless the process is manufacture, i.e. if new and identifiable
product does not emerge after the process.

DIFFERENCE BETWEEN SALES TAX AND EXCISE - Central Excise duty has to be
distinguished from Sales Tax. The Sales Tax is a tax on sales and hence can be
imposed only when there is a sale. On the other hand, excise duty is a duty on
manufacture and the duty liability is fastened immediately after goods are
manufactured ; whether these are sold or not is immaterial. For example, if a
Company manufactures a machine or fabricates some furniture within the factory for
its own use, there will be no sales tax on the machine or furniture manufactured as it
is not sold. However, the machine or furniture will be liable to excise duty as it has
been manufactured. However, for administrative convenience, the payment of duty
may be deferred till removal of goods from the factory.

Produced - The word produced is used to cover items like tobacco, tea, coal, ores
etc. which are produced, but no manufacturing process may be carried out. In CIT v.
N C Budharaja and Co. - (1993) 204 ITR 412 (SC) = (1993) 91 STC 448 (SC) = AIR
1993 SC 2529 = JT 1993 (5) SC 346 = 1994 Supp (1) SCC 280 = (1993) 70 Taxman
312 = 1993 AIR SCW 3317, it has been held that the word production has a wider
connotation than the word manufacture. Every manufacture can be characterised
as production, but every production need not amount to manufacture. When the
word produced or production is used in juxtaposition with the word manufacture, it
takes in bringing into existence new goods by a process which may or may not
amount to manufacture. It also takes in all by-products, intermediate products and
residual products, which emerge in the course of manufacture of goods. Thus,
waste, scrap and by-products are dutiable even if they are not manufactured, as
they are produced.

Thus, the word 'produced' covers (a) Items like coffee, tea, tobacco, coal, dairy
products, ores etc. which are 'produced' (b) The word 'produced' can also cover live
products like horse, fish, flowers etc. which are 'produced' (c) By-products, scrap
etc. which are not really 'manufactured' but they do get 'produced' (d) It will obviously
cover goods 'manufactured'.

Manufacture - Section 2(f) of Central Excise Act merely states that manufacture
includes any process - (i) incidental or ancillary to the completion of manufactured
product or (ii) which is specified in relation to any goods in the Section or Chapter
notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to
manufacture, or (iii) which, in relation to goods specified in third schedule to the
CEA, involves packing or repacking of such goods in a unit container or labelling or
re-labelling of containers or declaration or alteration of retail sale price or any other
treatment to render the product marketable to consumer. [clauses (ii) and (iii) are
called deemed manufacture]. - - Thus, definition of manufacture is inclusive and not
exhaustive. However, there is ample case law on this issue. Manufacture means :
(a) Manufacture as specified in various Court decisions i.e. new and identifiable
product must emerge or (b) Deemed Manufacture.

Manufacture as defined by Courts, takes place only when the process results in a
commercially different article or commodity. Following would be instances when
manufacture has taken place (a) manufacture of table from wood (b) conversion of
pulp into base paper (c) conversion of sugarcane to sugar.

DEEMED MANUFACTURE Deemed manufacture is of two types (a) CETA

specifies some processes as amounting to manufacture. If any of these processes
are carried out, goods will be said to be manufactured, even if as per Court
decisions, the process may not amount to manufacture [section 2(f)(ii)] (b) In
respect of goods specified in third schedule to Central Excise Act, repacking, re-
labelling, putting or altering retail sale price etc. will be manufacture. The goods
included in Third Schedule of Central Excise Act are same as those on which excise
duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii)
w.e.f. 14-5-2003] - - These provisions are discussed later in this chapter.

Manufacture as defined by Courts - Some important Court decisions are

discussed here.

New substance having distinct name, character or use must emerge - In Union of
India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 =
1977 (1) ELT (J199) (SC) and 1990 (27) ECR 151 SC]; a five member constitution
bench of Supreme Court has held that the manufacture means bringing into
existence a new substance. (This is a very important and leading case regarding
definition of Manufacture). Manufacture is end result of one or more processes,
through which original commodity passes. Thus, manufacture implies a change but
every change is not manufacture. A new and different article must emerge having a
distinctive name, character or use.

There is no manufacture and hence no excise duty liability if a new and

commercially different identifiable product does not result - Hyderabad Industries
Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 -
SC 3 member bench

(For example cutting of wood in small pieces or making small pieces of a long steel
bars would not amount to manufacture as no new product emerges).

MERE MENTION IN TARIFF DOES NOT MEAN MANUFACTURE In CCE v.

Markfed Vanaspati 2003(153) ELT 491 (SC)., it was held that even if an article is
specified in tariff, there is no duty liability unless it is manufactured.

Trade Parlance is important - The test to be applied is whether a commodity subject

to processing retains its original character and identity or whether the processed
commodity is regarded in the trade by those who deal in it, as distinct identity from
original commodity. Nature and extent of processing may vary. With each process,
the original commodity experiences change. But it is only when the change or series
of change take commodity to a point where commercially it is recognised as a new
and distinct commodity, then it can be said that new commodity has come into being.
The test is whether in the eyes of those dealing in the commodity or in commercial
parlance, the processed commodity is regarded as distinct in character and identity
from the original commodity - Sterling Foods v. State of Karnataka - 1986 (63) STC
239 = 1986(3) SCC 469 = AIR 1986 SC 1809 = 1986(2) SCALE 106 = 1986 (26)
ELT 3 (SC). Similar views in Aditya Mills Ltd. v. UOI (1989) 1 CLA 137 (SC) = (1989)
73 STC 195 = 37 ELT 471 = AIR 1988 SC 2237.

Assembly can be manufacture - Assembly of various parts and components may

amount to manufacture if new product emerges, which is movable and marketable.

Manufacture even if final product falls under same tariff - There can be manufacture
even if both inputs and final product fall under same tariff heading, if a different
identifiable commercially known product comes into existence - Laminated Packings
(P.) Ltd. v. CCE - 1990 (49) ELT 326 (SC) = 1990 (30) ECR 166 (SC) = 1990(2)
SCALE 272 = (1990) 3 JT (SC) 493.

Deemed manufacture - Section 2(f), which defines Manufacture has two deeming
provisions. Deemed manufacture is of two types (a) CETA specifies some
processes as amounting to manufacture. If any of these processes are carried out,
goods will be said to be manufactured, even if as per Court decisions, the process
may not amount to manufacture [section 2(f)(ii)] (b) In respect of goods specified in
third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail
sale price etc. will be manufacture. The goods included in Third Schedule of Central
Excise Act are same as those on which excise duty is payable u/s 4A on basis of
MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003].

Thus, the process may not amount to manufacture as per principles evolved by
Courts, but these will be liable to excise duty if it is defined as amounting to
manufacture under CETA, or if the product is included in third schedule to Act and
any of specified process (like re-packing, re-labelling, alteration of retail sale price
etc.) are carried out. - - This is called 'deeming provision' or a 'legal fiction'. e.g.
process like labelling, re-labelling, re-packing is not 'manufacture' as no new product
emerges. However, it will be 'deemed manufacture' and duty will be payable if the
process is specified in Central Excise Tariff as 'amounting to manufacture' in relation
to any goods. This amounts to charging excise duty on product which is not really
manufactured as defined by Courts.

BOTH REPACKING AND LABELLING REQUIRED AND PRODUCT SHOULD BE

MADE MARKETABLE In many deemed manufacture provisions, the wording
used is labelling or re-labelling of containers and repacking from bulk packs to retail
packs or the adoption of any other treatment to render the products marketable to
the consumer. Since the word used is and, it can be argued that mere labelling
without re-packing is not deemed manufacture, as activities of labelling/re-labelling
and re-packing in small packs are inter-dependent and not mutually exclusive.

MERE RE-PACKING IS NOT MANUFACTURE The words used in many deeming

provisions are repacking from bulk packs to small packs. Thus, mere re-packing is
not deemed manufacture. If goods returned are re-packed, such re-packing is from
one retail pack to another retail pack and hence cannot be termed as manufacture.
- - Similarly, if goods returned for rectification are re-packed, it is not any other
treatment to render the product marketable, as the product was already marketable.

WHEN 'REPACKING AND LABELLING' WILL AMOUNT TO MANUFACTURE - In

some cases, goods are bought in bulk and sold in retail. This will not amount to
'repacking'. Generally, the expression 'packing' is considered as a package
containing pre-packed commodity and quantity of the product contained therein is
also pre-determined. - . - Activity of simply transferring material from one container
to another may not come under the description 'repacking and labelling' - . - . -
However, facts should be ascertained and decision should be taken based on all
relevant facts- CBE&C circular No 342/58/97-CX dated 8.10.1997.

Deemed manufacture in case of goods covered under MRP provisions - In respect

of goods specified in third schedule to Central Excise Act, any process which
involves packing or repacking of such goods in a unit container or labelling or re-
labelling of containers including the declaration or alteration of retail sale price on
the container or adoption of any other treatment on the goods to render the product
marketable to consumer will be manufacture. [section 2(f)(iii) effective from 14-5-
2003].

The goods included in Third Schedule of Central Excise Act are same as those on
which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package.
Thus, in case of goods on which duty is payable on basis of MRP, if any of the
process as specified (like labelling, re-labelling, repacking in unit container, alteration
of MRP etc.), it will be manufacture and duty will become payable. - - Some times,
a manufacturer of goods (which are covered under MRP provisions) clears goods
from factory in bulk without putting MRP at the time of clearance. Duty is paid on
basis of section 4. The goods are packed and labeled and MRP is put either by the
buyer who buys the goods or in some godown or depot or C&F Agent of the
manufacturer. Now, the process carried out by the buyer or by C&F Agent or at such
depot or godown of manufacturer will be manufacture. Such depot/buyer/C&F
Agent/godown will have to be registered under Central Excise as manufacturer. It
will have to pay duty on the basis of MRP, but will get Cenvat credit of duty paid at
the time of clearance from the factory.

Though the section provides that alteration of Retail Sale Price shall be deemed
manufacture, rule 23(7) of Standards of Weights and Measures (Packaged
Commodities) Rules, 1997 reads as follows The manufacturer/packer shall not
alter the price on wrapper once printed and used for packing. - - Thus, in any case,
alteration of MRP printed on wrapper is not permissible.

Incidental or ancillary process - Section 2(f), which defines Manufacture states

that manufacture includes any process which is incidental or ancillary to the
completion of manufactured product. Incidental means occasional or casual
process. Ancillary means auxiliary, i.e. it is integral part of manufacturing.
Manufacture is not complete unless all ancillary and incidental processes are
complete. In border line cases, there can be ambiguity whether a particular process
is incidental or ancillary process. For instance, painting or polishing may be essential
process for manufacture of furniture. However, a machinery may be said to be
finished without painting. It has been held that quality checking is not a process
ancillary or incidental to manufacture, unless it is legally mandatory.
Manufacturer

The liability to pay duty is on Manufacturer or producer. Duty cannot be recovered

from his purchaser - Mahindra & Mahindra Ltd. v. CCE - (1983) 13 ELT 974
(CEGAT) (though the manufacturer may recover the same from buyer). Hence,
Excise demands, if any, are always raised on manufacturer and recovered from
manufacturer. Hence, it is essential to decide who is to be termed as Manufacturer.

Who is the 'manufacturer' - The definition of manufacture u/s 2(f) is not

exhaustive. Hence, the word Manufacturer has to be understood in its natural
meaning, i.e. Manufacturer is a person who actually manufactures or produces
excisable goods, i.e. one who actually brings into existence new and identifiable
product.

Person who transforms commodity into another commodity having a distinct name
and character is the manufacturer. Pearl Soap Co. v. CCE (2001) 138 ELT 1317
(CEGAT).

SIMPLE DOMESTIC ILLUSTRATION - One domestic example might be helpful. It is

common to send wheat to a Mill to grind the wheat and convert it into Wheat Flour.
Now, even if the wheat belongs to you, the Mill Owner will be the manufacturer of
wheat flour as per definition of Central Excise. Thus, ownership and manufacturer
may be different. If the cost of wheat is Rs. 12 per Kg and the Mill Owner charges
one rupee as job charges (conversion charges for converting wheat into wheat
flour), value of wheat flour for Central Excise valuation purposes would be Rs. 13/-.
Similarly, when you give cloth to tailor to make shirt, the tailor will be the
manufacturer of shirt even if cloth belongs to you and the shirt has been made as
per your requirements.

Enlarging definition of manufacturer - Section 2(f), which defines the word

manufacture, after defining the word manufacture states that the word
manufacturer shall be understood accordingly and shall include not only a person
who employs hired labour in the production or manufacture of excisable goods, but
also any person who engages in their production or manufacture on his own
account. Here again, the definition is not exhaustive but inclusive. The definition
enlarges definition of manufacture to two categories of persons, besides actual
manufacturers, namely : (a) Persons who get the goods manufactured through hired
labour. (b) Persons who engage in manufacture of goods on their own account. - -
These may be termed as deemed manufacturers.

MANUFACTURE THROUGH HIRED LABOUR - A person will be treated as

Manufacturer if he engages hired labour who may be Employee or Contractor for
manufacture of excisable goods. A hired labour is one who hires himself out to work
for and under control of another for wages. However, if he undertakes manufacture
on own account, he cannot be said to have hired himself out to another even if he
manufactures for other - Techma Engineering Enterprise v. CCE - 1987 (27) ELT 460
(CEGAT).

Sub-contractor is manufacturer if relation to the main contractor is on principal to

principal basis, even when job work is done at site, if relationship between sub-
contractor and main contractor is on principal to principal basis. - Voltas Ltd. v. CCE
2002(139) ELT 223 (CEGAT) * Voltas Ltd. v. CCE 2002(144) ELT 108 (CEGAT).
ENGAGES IN MANUFACTURE ON HIS OWN ACCOUNT The word engages has
to be read as engages others. This is because, if he is himself engaged in
manufacturer, then he is actually the manufacturer. Extended or enlarged definition
is not required to treat him as manufacturer. On his own account has been
interpreted to mean as under his direction and control in Philips India v. UOI
1980(6) ELT 263 (All HC DB).

Manufacture at site of buyer - In Basti Sugar Mills v. CCE 2000(115) ELT 626
(CEGAT), it was held that an independent contractor who assembles the parts in a
factory (assembly of crane in this case) will be the manufacturer and not the owner
of factory. [In this case, contractor assembling the parts was independent contractor
appointed by supplier of parts of crane. Obviously, he was not 'hired labour' of the
factory owner.] same view in Solid and Correct Engineering Works v. CCE
2002(145) ELT 673 (CEGAT). In this case, the marketing company assembled
various parts at the site of buyer. It was held that the marketing company is the
manufacturer.

Raw material Supplier is not the manufacturer - It is common in Industry to supply

raw material to a Job Worker or Processor and get the goods manufactured from
him in his factory e.g. Automobile Manufacturers like Bajaj, Maruti, Mahindra,
Premier Automobiles or Hindustan Motor very often get many parts manufactured
from outside on Job Work basis. In such cases, they (Maruti, Bajaj etc.) will not be
treated as Manufacturer even if the Raw Material is supplied by them and right of
rejection is retained by them. In Ujagar Prints v. UOI - AIR 1989 SC 516 = 42
Taxman 151 (SC) = 1989 (39) ELT 493 (SC) = (1989) 74 STC 401 (SC) = (1989) 3
SCC 488 = 179 ITR 317 (SC) (5 member constitution bench), it has been held that
excise duty is on manufacture and production of goods and liability to pay duty is
not dependent upon whether the manufacturer is owner or not.

Brand Owner is not the Manufacturer - Some large units get their goods
manufactured from others under their Brand Name, instead of manufacturing it
themselves. They usually control quality and may even supply the design. e.g. Bajaj
Electricals get many electrical goods manufactured from others; Batas procure some
foot-wear from others and supply under their brand name. Some large
pharmaceutical companies also get the goods manufactured from small scale units
under their brand names. In such cases; Bajaj, Bata or the Pharmaceutical
Companies will not be treated as Manufacturer even if they exercise quality control,
or allow use of their brand name, or provide financial help to the small
manufacturers, or even supply the raw material, if their relation with the
manufacturer is Principal to Principal basis. Supreme Court in Cibatul Ltd. v. UOI -
1978 (22) ELT 302 (SC) - have held that if the goods are produced with Customers
brand name under his quality control, it does not mean that the Customer is the
Manufacturer. Same view was reaffirmed in Jt. Secretary to Government of India v.
Food Specialities Ltd. - 1985 (22) ELT 324 (SC).

Brand name owner will not be manufacturer even if he supplies raw material. -
Philips India Ltd. v. UOI - 1980 (6) ELT 263 (All HC DB) - quoted and followed in
Cheryl Laboratories v. CCE - 1993 (65) ELT 596 (CEGAT - 3 member bench order).

Manufacture must be in India

Last operative word of section 3 of Central Excise Act is that excisable goods must
be manufactured or produced in India. Thus, excise levy cannot be imposed on
imported goods or goods manufactured in Nepal. This is also true if goods are
imported in SKD or CKD condition and they are only assembled in India, as no new
product emerges - Walchand Nagar Industries v. CCE - 1995 (79) ELT 485 (CEGAT
- 3 member bench order). - same view in Indian Xerographic System Ltd. v. CC,
Bombay - (1995) 80 ELT 337 (CEGAT) * CIT v. Telco (1968) 68 ITR 325 (Bom).

However, if goods are classified as per rules of classification as complete machine

as per legal fiction, but actually components or sub-assemblies are imported, its
assembly in India will amount to manufacture and excise duty will be payable. Case
law on this issue has been discussed earlier in this chapter.

Central Excise Tariff Act (CETA)

There are thousands of varieties of manufactured goods and all goods cannot carry
the same rate or amount of duty. It is also not possible to identify all products
individually. It is, therefore, necessary to identify the numerous products through
groups and sub-groups and then to decide a rate of duty on each group/sub-group.
This is called Classification of a product, which means determination of heading or
sub-heading under which the particular product will be covered.

Excise is a duty on excisable goods manufactured or produced in India. Unless all

these factors are in existence, there can be no duty liability. The liability of payment
of excise is on the Manufacturer. Once the liability of payment is established, the
next question is what is the amount of duty payable. The two step process is (a)
Correctly classify the goods (b) Find its assessable value.

The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 96
chapters (chapter 77 is blank) and specific code is assigned to each item. There are
over 1,000 tariff headings and 2,000 sub-headings. This classification forms basis
for classifying the goods under particular Chapter head and Sub-head to prescribe
duty to be charged on that particular product. Salient features of the tariff are as
follows.

As international trade increased, need was felt to have universal standard system of
classification of goods to facilitate trade flow and analysis of trade statistics. Hence,
International convention of Harmonised System of Nomenclature (HSN), called
Harmonised Commodity Description and Coding System, was developed by World
Customs Organisation (WCO) (That time called as Customs Cooperation Council).
Indian Customs adopted this nomenclature w.e.f. 28.2.1986.

This is an International Nomenclature standard adopted by most of the Countries to

ensure uniformity in classification in International Trade. HSN is a multi purpose 8
digit nomenclature classifying goods in 5019 groups of goods. It contains 241
headings at 4 digit level and 5019 at 6 digit level.
Thus, Customs Tariff uses 8 digit nomenclature. Central Excise Tariff is also of 8 digit
w.e.f. 28-2-2005.

WCO in its various committees discusses classification of individual products and

gives classification opinion on them. Though their opinion is not binding in legal
sense, it provides a useful guideline for classifying goods.

Customs Tariff is fully aligned with HSN. Central Excise Tariff (CETA) is also based
on HSN. Though CETA generally follows HSN pattern, it is not a copy of HSN. CE
Tariff is aligned upto four digit level and at six digit level, proper enumeration and
sub-division of products is done in view of the goods that enter the trade, our
experience with the concept of manufacture and the level of growth of the
indigenous industry. Chapter 4 Para 3 of CBE&Cs Customs Manual, 2001.

CETA contains two schedules - CETA consists of two schedules - the first
schedule gives basic excise duties (i.e. Cenvat duty) leviable on various products,
while second schedule gives list of items on which special excise duty is payable.
Second schedule contains only few items. It has been clarified that the tariff
headings given in second schedule will be interpreted in the same way as those in
first schedule. Items included in second schedule are already covered and included
in first schedule. Hence, our discussions in this chapter are in respect of first
schedule only.

Sections and Chapters of CEA Central Excise Tariff is divided in 20 sections. (21
sections in case of Customs Tariff). A section is a grouping of a number of Chapters
which codify a particular class of goods. Each of the sections is related to a broader
class of goods e.g. Section I is Animal Products, Section VII is Plastics and Articles
thereof, Section XI is Textile and Textile Articles, Section XVII is Vehicles, Aircrafts,
Vessels and associated transport equipment, etc. Section Notes are given at the
beginning of each Section, which govern entries in that Section. These notes are
applicable to all Chapters in that section.

SECTION DIVIDED IN CHAPTERS - Each of the sections is divided into various

Chapters and each Chapter contains goods of one class. For example, Section XI
relates to Textile and Textile Articles and within that Section, Chapter 50 is Silk,
Chapter 51 is Wool, Chapter 52 is Cotton, Chapter 53 is other vegetable textile
fabrics, Chapter 61 is Articles of Apparel and so on.

There are 96 chapters out of which chapter 77 is blank. In Customs Tariff, there are
99 chapters out of which only one i.e. Chapter 77 is blank, which is kept reserved for
future use.

CHAPTER NOTES - Chapter Notes are given at the beginning of each Chapter,
which govern entries in that Chapter.

Groups and Sub-groups within the Chapter - Each chapter is further divided into
various headings depending on different types of goods belonging to same class of
products. For instance, Chapter 50 relating to Silk is further divided into 5 headings.
50.01 relates to Silk worm cocoons, 50.02 relates to raw silk, 50.03 relates to silk
waste, 50.04 relates to silk yarn and 50.05 relates to woven fabric of silk. The
headings are sometimes divided into further sub-headings. For example 5004.11
means silk yarn containing 85% or more by weight of silk or silk waste, 5004.19
means containing less than 85% by weight of silk or silk waste.

GROUPING OF GOODS - The tariff is designed to group all goods relating to same
industry and all the goods obtained from the same raw material under one Chapter
in a progressive manner as far as possible. So far as practicable, Goods are
classified beginning with raw materials and ending with finished products within the
same chapter. Pattern of arrangement is in following sequence Natural products,
raw materials, semi finished goods and fully manufactured goods / article /
machinery etc. - Chapter 4 Para 5 of CBE&Cs Customs Manual, 2001.

EIGHT DIGIT CLASSIFICATION All goods are classified using 8 digits system. In
above example, first two digits i.e. 50 related to the Chapter Number, next two digits
e.g. 01 or 02 relate to heading of the goods in that chapter> Next two 2 digits
indicate sub-heading and last two digits indicate tariff heading. Thus, a 4 digit code
is called as heading and 6 digit code is called as sub-heading and 8 digit code is
called 'tariff entry'. - - In case of Customs, 8 digit classification code has been
adopted w.e.f. 1-2-2003. Excise adopted 8 digit classification w.e.f. 28-2-2005.

The same classification will be used by DGFT (Director General of Foreign Trade)
and DGCIS (Director General of Commercial Intelligence & Statistics). The
additional 2 digits are to facilitate and provide flexibility in international trade. The
common classification will reduce transaction costs and reduce diversion of
classification among different agencies.

Coding of Single, Double, triple and quadruple dashes - Single dash (-) at the
beginning of description indicates a group, while two dashes (- -) at the beginning
indicate a sub-group. The single dash (-) indicates sub-classification of article
covered by the heading, while double dash (- - ) is the sub-classification of the
preceding article which has single dash (-) i.e. it is a sub-sub-classification. Triple
dash (- - -) and four dashed (- - - -) are used for further classification.

Broad grouping in CETA - Following is broad grouping of goods in

CETA:

Animal Products (Section I - Chapters 1 to 5)

Vegetable Products (Section II - Chapters 7 to 14)
Animal or vegetable fats (Section III - Chapter 15)
Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24)
Mineral Products (Section V - Chapters 25 to 27)
Chemicals, Fertilisers, soap etc. (Section VI - Chapters 28 to 38)
Plastics and Rubber and their articles (Section VII - Chapters 39 and 40)
Leather and articles (Section VIII - Chapters 41 to 43)
Wood, cork, straw and their articles (Section IX - Chapters 44 and 46)
Pulp, Paper, Paper-board and articles (Section X - Chapters 47 to 49)
Textile and Textile Products (Section XI - Chapters 50 to 63)
Footwear, Headgear, Umbrellas, Articles of human hair (Section XII - Chapters 64
to 67).
Articles of stone, plaster, ceramic, glass (Section XIII - Chapters 68 to 70)
Pearls, precious metals (Section XIV - Chapter 71)
Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin
 etc.). (Section XV - Chapters 72 to 83)
Machinery and mechanical appliances, electrical equipments, television etc.
(Section XVI - Chapters 84 and 85)
Vehicles, Aircrafts, vessels ( Section XVII - Chapters 86 to 89)
Optical, photographic, medical, surgical instruments, clocks, musical instruments
(Section XVIII - Chapters 90 to 92)
Arms and Ammunition (Section XIX - Chapter 93)
Misc. Manufactured articles like Furniture, toys etc. (Section XX - Chapters 94 to
96)
Works of Art, collectors pieces and antiques (Section XXI - Chapters 97 to 99)
This section is only in Customs Tariff and not in Central Excise Tariff.

SPECIAL PROVISIONS IN CUSTOMS TARIFF Though most of goods are

classified as per above system, special classification is used in certain cases - * All
goods imported under project imports - 98.01 * All laboratory chemicals in packs
less than 500 gms or 500 ml - 98.02 * All baggage of passengers or member of crew
- 98.03 * Goods for personal use imported by post or air - 98.04 * Stores on board of
vessel or aircraft 98.05. Thus, those goods will be classified in these headings,
irrespective of actual classification as per the Customs Tariff.

Rules for Interpretation of CETA

Rules for Interpretation of Schedule are given in the Tariff itself. These are termed as
General Interpretative Rules (GIR).

Abbreviation % in Column 4 indicates that duty is charged ad valorem on the value

of goods as calculated in section 4 of Excise Act.

Rule 1 of Rules for interpretation of the Schedule states that classification shall be
determined according to the terms of the headings and any relative section or
chapter notes and, provided such headings or Notes do not otherwise require,
according to other provisions of the rules. It has been held that these rules are
required to be applied only if classification is not possible on basis of tariff entry read
with Chapter notes and section notes. * Track Parts Corporation v. CC - 1992 (57)
ELT 98 (CEGAT) * L M Van Moppes Diamond Tools India Ltd. v. CC 1986 (24) ELT
623 (CEGAT) * Hindustan Gas v. CC 1990(49) ELT 548 (CEGAT) * Netlon India v.
CCE 2000(121) ELT 675 (CEGAT).

USE FOR INTERPRETING IMPORT POLICY Rule of Interpretation cannot be

used to interpret provisions of import policy. S S Appliances v. CCE 1998(100) ELT
429 (CEGAT) * Chan Tronix v. CC 2000(124) ELT 510 (CEGAT).

RULES TO BE APPLIED SEQUENTIALLY The Rules are to be applied

sequentially. - Chapter 4 Para 7 of CBE&Cs Customs Manual, 2001. Classification
is to be first tested in light of Rule 1. Only when it is not possible to resolve the issue
by applying this rule, recourse is taken to Rules 2, 3 and 4 in seriatim. - Chapter 3
Part II Para 2.1 of CBE&Cs Customs Manual, 2001. [Though rules nowhere state
that these should be applied sequentially, the general arrangement and wording
does indicate that intention].

These rules are briefly explained below :

Titles are for reference - The titles of sections and chapters are provided for use of
reference only, and have no legal importance for purposes of classification. (Rule 1)

Section Notes and Chapter Notes have overriding effect - Classification is to be

determined only on the basis of description of the heading, read with relevant
section or chapter notes. Since these notes are part of the Act itself, these have full
statutory (legal) backing. Tribunal has (very rightly) held that coverage of respective
headings has to be determined in the light of respective section notes and chapter
notes. In this sense, Section Notes and Chapter Notes have an overriding force over
the respective headings and sub-headings. - * Saurashtra Chemicals, Porbunder v.
CC - 1986 (23) ELT 283 (CEGAT). * Tractors and Farm Equipments Ltd. v. CC -
1986 (25) ELT 235 (CEGAT).

If the description read with section or chapter notes is not enough to correctly
classify the goods, following further rules have been provided :

Classification of Incomplete Goods - Any reference to complete goods also

includes incomplete or un-finished goods, if such incomplete or un-finished goods
have the essential characteristic of finished goods. [Rule 2(a)]. Some illustrations in
HSN Explanatory notes are - * a machine or apparatus normally incorporating an
electric motor is classified in the same heading even if presented without motor. *
Passenger coach not fitted with seats will still be a passenger coach * Motor vehicle
not yet fitted with wheels, battery or tyres * Bicycles without saddles and tyres *
Photographic camera without an optical element * Electric supply metre without its
totalling device.

RULE 2(A) IS A LEGAL FICTION - In Wipro Medical Systems v. CC 1999(106) ELT

169 (CEGAT), it was held that if some major part is not imported and major
assembly / testing work is required to be done in India, the imported goods may be
classified as full machine as legal fiction. However, it will be treated as import of
parts for purposes of any exemption notification - following CC v. Maruti Udyog Ltd.
1996(16) RLT 646 (CEGAT). same view in Phoenix International v. CCE (2001)
138 ELT 484 (CEGAT).

Un-assembled finished goods - Rule 2(a) further provides that the heading will
also include finished goods removed un-assembled or disassembled i.e. in SKD or
CKD packs. [Rule 2(a)]. This provision is essential because some times, goods
cannot be despatched in fully assembled condition. These are despatched in SKD
(semi knocked down) or CKD (completely knocked down) condition and assembled
at site. As we saw in previous chapter, in such cases, assembly at site does not
amount to manufacture. The goods are, in fact, fully manufactured in the factory
itself. These are sent in SKD or CKD condition only for convenience of transport.

Sub-assemblies of air conditioning machines removed in CKS/SKD packs will be

classified as complete machine, if it contains essential elements of air conditioning
machine. - CBEC circular No. 666/57/2002-CX dated 25-9-2002.

In Shirke Construction Equipments P Ltd. v. CCE 1997(95) ELT 644 (CEGAT), it was
held that even when bulky goods are cleared in stages, the clearance is still of whole
article and not its parts. In this case, bulky crane was cleared in disassembled
condition in two consignments. It was held that assessee cleared 'crane in parts' and
not 'parts of crane'.

Cycle removed in CKD condition is a cycle. T I Cycles v. UOI 1983(12) ELT 681
(Mad HC DB).

Classification of Mixture or Combinations - Any reference in heading to material

or substance will also include the reference to mixture or combination of that
material or substance with other materials or substance e.g. Article of Gold will
include an Article which is made partly of Gold. Reference to goods of a given
material or substance shall also include reference to goods consisting wholly or
partly of such material or substance. [Rule 2(b)]. In Himson Textile Engg v. CCE
1997(95) ELT 519 (CEGAT), it was held that if rule 2(a) covers the goods in dispute,
resort cannot be had to rule 2(b). In Union Carbide v. CC 1995(79) ELT 521
(CEGAT), it was held that interpretative rule 2(b) does not deal with composite
goods made of different materials and the relevant rule for the same is rule 3(b).

Rule in case of Conflict between various headings - While applying the aforesaid
rules, some conflict may arise e.g., (a) a mixture or combination containing more
than one material may be classifiable under more than one headings by applying
rule 2(b). If it contains two items A and B, one classification may be on the basis of
A and other on the basis of B, (b) There may be two descriptions which may both
seem possible. In such cases, following rules apply.

Specific Description preferable over general heading - The heading which provides
most specific description shall be preferred to heading providing a general
description. [Rule 3(a)].

When an article has, by all standards, a reasonable claim to be classified under an

enumerated item in the tariff schedule, it will be against the very principle to deny it
the parentage and consign it to be an orphanage of the residuary clause. - Dunlop
India Ltd. v. UOI - AIR 1977 SC 597 = (1976) 2 SCC 241 = (1976) 2 SCR 98 = 1983
(13) ELT 1566 (SC)].

Classification as per Essential Character - If Mixture and Composite of goods

consisting of different materials cannot be classified based on above rule, it should
be classified as if they consisted of the material or component which gives it their
essential character [Rule 3(b)] e.g. if a set consists of drawing instruments (90.17),
pencil (96.09) and pencil sharpener (82.14), put up in a leather case (4201.90); the
set will be classifiable under 90.17 i.e. drawing instrument.

Some times, a floppy diskette is attached to a book. Such diskette is supplementary

or accessory to the book, which either explains contents of book or supplies some
freeware or some tutorials. On the other hand, a manual is supplied along-with
software. The manual gives instructions as to how to use the software. In the former
case, the 'essential character' of the goods is 'book', while in later case, the
'essential character' is 'software'. Hence, the goods will be classified according to
'essential character' as per rule 3(b). - CBE&C circular No. 528/10 6/93-Cus (TU)
dated 24-8-1993.

MEANING OF ESSENTIAL CHARACTER - In Bharat Heavy Electricals v. CC

1987(28) ELT 574 (CEGAT 5 member bench), it was held that as per CCCN
Notes, factors governing essential character will vary as between
different kinds of goods and may be determined by the nature of material
or component, its bulk, quantity, weight or value or by the role of a
constituent material in relation to use of the goods. [It was stated that this
principle applies to determine essential character under rule 2(a) also].
If both are specific - Later the better - If two or more headings seem equally
possible and the dispute cannot be resolved by any of the aforesaid rules, if both the
headings appear equally specific, the heading which occurs last in numerical order
is to be preferred (i.e. later the better). [rule 3(c)].

Akin Goods - Last Rule of classification - If the classification is not possible by

any of the aforesaid rules, then it should be classified under the heading appropriate
to goods to which they are most akin. This is only a last resort and a desperate
remedy to resolve the dispute as the matter of classification cannot be kept hanging
indefinitely [rule 4].

Goods can be compared at the same level only - Sub-Headings can be

compared only at the same level [Rule 5]. This means that if one heading contains
5-6 sub-headings, these sub-headings can be compared with each other. However,
sub-heading under one heading cannot be compared with sub-heading under a
different heading. Thus, first heading has to be decided and then one of the sub-
headings within that heading has to be selected.

As we saw earlier, single dash ( - ) indicates sub-classification and double dash (- -

) indicates sub-sub-classification.

Principles of Classification

We have so far seen provisions of Classification as stipulated in Central Excise Tariff

Act. Though these provisions are quite elaborate, they are not always adequate to
correctly classify a product. Some principles have been evolved by Courts and
Tribunals over the years.

Trade Parlance Theory - Criteria for classifications are given in the CETA.
However, basic principle of classification, devised over one hundred twenty five
years ago by Justice Pollok in Grenfell v. IRC (1876) 1 Ex D 242 continues. As per
this principle, a word in statute should be construed in its popular sense and not in
the strict or technical sense. Popular sense means that which people conversant
with the subject matter with which the statute is dealing, would attribute to it.
Legislature does not suppose our merchants to be naturalists, geologists or
botanists. This has been confirmed by Supreme Court in various cases like Indo
International Industries v. CST (1981) 3 SCR 294 = 1981 (8) ELT 325 (SC) = AIR
1981 SC 1079 = 1981 (2) SCC 528 = 1981(1) SCALE 582 = 1981 UPTC 481 =
(1981) 47 STC 359 (SC) * Dunlop India Ltd. v. UOI - (1976) 2 SCC 241 = (1976) 2
SCR 98 = AIR 1977 SC 597 = 1983 (13) ELT 1566 (SC).

PRINCIPLE APPLIES TO TARIFF ALSO - Headings and sub-headings in Central

Excise Tariff should be understood not in strict technical sense but in their popular
sense, i.e. the meaning assigned to them by those trading and using the product.
Kedia Agglomerated Marbles v. CCE 2003(152) ELT 22 (SC).

CUSTOMERS IDENTITY WITH FUNCTION - Supreme Court, in Atul Glass

Industries (P.) Ltd. v. CCE - (1986) 3 SCC 480 = 1986(2) SCALE 15 = AIR 1986 SC
1730 = 1986 (25) ELT 473 (SC) = 1986 (1) ECC 1 (SC) = 1986 (63) STC 322 (SC),
have held that identity of a product is associated in mind of consumer with its
primary function. The consumer buys an article because it performs a specific
function for him. This mental association with a product is highly important for
classification.
Statutory definition overrides Trade parlance - The trade parlance is relevant only
when Statute does not define the words. If words are defined in the Statute, trade
parlance is not relevant. - Indo International Industrial v. CST, UP - 1981 (2) SCC
528 = AIR 1981 SC 1079 = (1981) 3 SCR 294 = 1981(1) SCALE 582 = 1981 UPTC
481 = 1981 (8) ELT 325 (SC) = (1981) 47 STC 359 (SC).

Technical term must be understood in technical sense only - If the legislature has
adopted a technical term, then that technical term has to be understood in the
technical sense and not on basis of market parlance - Reliance Cellulose Products
Ltd. v. CCE 1997(93) ELT 646 (SC) = 1997 AIR SCW 3495 = AIR 1997 SC 3414.

HSN and Classification - CETA is based on Harmonised System of Nomenclature

(HSN), but Tariff nowhere states that notes in HSN will be applicable for interpreting
the tariff. However, Apex Court, in CCE v. Wood Craft Products Ltd. - 1995 (77) ELT
23 = 1995 (57) ECR 417 = (1995) 3 SCC 452 = 1995(2) SCALE 364 = 1995 AIR
SCW 1963 (SC - 3 member bench order) - has held that as per Statement of
Objects and Reasons of Central Excise Tariff Bill, 1985, new tariff has been
introduced, based on HSN to reduce classification disputes. Thus, in case of doubt,
HSN is a safe guide for ascertaining true meaning of any expression used in the Act,
unless there is an express different intention indicated in the Tariff itself. - confirmed
in CC v. Business Forms 2002(142) ELT 18 = JT 2002(1) SC 424 = 50 RLT 375 (SC
3 member bench).

DEPARTMENT IS OF SAME VIEW In case of difficulty in understanding the

scope of the headings / sub-headings, reference should be made to
supplementary texts like the Explanatory Notes to HS. - - WCO (World
Customs Organisation) gives classification opinion on classification of
individual products. Such information, though not binding in nature,
provide a useful guideline for classifying the goods. Chapter 4 Paras 4
and 10 of CBE&Cs Customs Manual, 2001.

End Use relevant only in limited cases - Generally, a product can be used for
various purposes and it is not correct to classify the goods on the basis of its final
use. Supreme Court in Dunlop India v. UOI - 1983 (13) ELT 1566 (SC) = (1976) 2
SCR 98 = (1976) 2 SCC 241 = AIR 1977 SC 597 have held that end use is irrelevant
for interpretation, unless definition so requires.

End use to be considered if classification is related to function of goods - If the tariff

demands, classification can and should be as per end use. Articles of Plastic are
classifiable under Chapter 39.26. However, a plastic article specially designed as
automobile part will be classified as Part of Motor Vehicle and not as Article of
Plastic. If an article has alternate uses, its predominant use is highly relevant.

Summary of decisions - In the opinion of author, there cannot be any general and
universal rule that end use can be considered or cannot be considered. It depends
on nature of goods, description used in tariff and other relevant factors. In CC v.
Kumudam Publications 1997(96) ELT 226 (SC) also, it was observed that it cannot
be said that in no case the end use or function is relevant for classification. (i.e. in
suitable cases, end use can be considered).

Machinery independent even if it can be attached to another - A machinery can

be independent even if it is connected to another machinery. Mere fact that a
machinery can be connected to another machinery does not change its character to
accessory - Nirulas Corner House P Ltd. v. CC 1999(108) ELT 332 (SC) = 1999 AIR
SCW 1712 = AIR 1999 SC 2008.

Condition at the time of import/clearance relevant - Condition of the material at

the time of importing is a material factor for purpose of classification as to the head
under which goods will be classified - Dunlop India Ltd. v. UOI - 1983 (13) ELT 1566
(SC) = (1976) 2 SCR 98 = (1976) 2 SCC 241 = AIR 1977 SC 597.

Dictionary meaning/technical literature - Apex Court in Indo International

Industries v. CST, UP - AIR 1981 SC 1079 = (1981) 3 SCR 294 = 1981(1) SCALE
582 = 1981 (2) SCC 528 = (1981) 47 STC 359 (SC) = 1981 UPTC 481 = 1981 (8)
ELT 325 (SC) - held In interpreting items in statutes like Excise Tax Act or Sales Tax
Act, where diverse products, articles and substances are classified, resort should be
had, not to the scientific and technical meaning of terms and expressions used, but
to their popular meaning i.e. the meaning attached to them by those dealing with
them. If any term or expression has been defined in the enactment then it must be
understood in the sense in which it is defined, otherwise, common parlance or
commercial parlance has to be obtained.

Exemption Notification/ Valuation principles cannot determine classification -

Classification of a product is to be decided on basis of relevant heading and section
and chapter notes. Classification cannot be decided on basis of exemption
notification - CCE v. Roha Dyechem (P.) Ltd. - (1989) 22 ECC 140 - quoted with
approval in CCE v. Gujarat State Fertilisers Co. Ltd. - (1996) 13 RLT 222 = (1996) 83
ELT 624 (CEGAT 3 member bench).

Other aspects of classification

Steps of classification - Following are the steps of classification.

(1) Refer the heading and sub-heading. Read corresponding Section Notes and
Chapter Notes. If there is no ambiguity or confusion, the classification is final and
you do not have to look to classification rules or trade practice or dictionary
meaning.

(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a
product cannot be established, find technical or dictionary meaning of the term used
in the tariff. You may also refer to BIS or other standards, but trade parlance is most
important.

(3) If goods are incomplete or un-finished, but classification of finished product is

known, find if the un-finished item has essential characteristics of finished goods. If
so, classify in same heading. Rule 2(a).

(4) If ambiguity persists, find out which heading is specific and which heading is
more general. Prefer specific heading.- Rule 3(a).

(5) If problem is not resolved by Rule 3(a), find which material or component is
giving essential character to the goods in question. - Rule 3(b).

(6) If both are equally specific, find which comes last in the Tariff and take it - Rule
3(c).

(7) If you are unable to find any entry which matches the goods in question, find
goods which are most akin. - Rule 4.

In case of mixtures or sets too, the procedure is more or less same, except that
each ingredient of the mixture or set has to be seen in above sequence. As per rule
2(b), any reference to a material or substance includes a reference to mixtures or
combinations of that material or substance with other material or substance.

Classification of Parts - Classification of parts is subject to notes in Sections and

Chapters. Question of classification of parts is relevant for parts of machinery,
electrical equipment, vehicles, instruments, arms, furniture and toys (Chapters 82 to
96).

In Electrosteel Castings v. CCE 1989(43) ELT 305 (CEGAT), it was observed that
'part' is a component whose absence will disable a machine or appliance. It must be
regarded as an essential ingredient or part of that machine.

Broadly, parts suitable solely for a particular machine generally fall in the same
heading number in which main item falls. However, there are many exceptions.

Parts of General Use - Parts of general use are defined as (a) tube and pipe fittings,
stranded wire, ropes, cables, chains, nails, screws, bolts, springs (other than clock
springs) of base metal i.e. Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc
etc. or of plastic (b) Padlocks, locks; mountings and fittings suitable for furniture,
doors, windows etc.; clasps, buckles, eyelets; sign-plates, name plates; frames of
pictures; mirrors; of Iron and Steel, Copper, Aluminium, Tin, Nickel, Lead, Zinc etc.
or of plastic.

These parts are to be classified in their respective heading and not as part of the
machine or equipment e.g. a bolt used in a vehicle will be classified as bolt and not
as motor vehicle part.

Part of part is part of whole - A part of part is part of whole e.g. tyre is a part of cycle.
Valve is a part of the tyre. Hence, valve will be treated as part of cycle.

Ayurvedic, Unani, Homoeopathic medicines - Ayurvedic, unani, siddha and

homoeopathic medicines prepared strictly as per formulae in authoritative texts are
fully exempt from duty, if these are sold under the name as per text book. [Refer
chapter heading 3003.31 in CETA]

Basis of calculation of duty payable

After duty liability is established and after the product is correctly classified, the next
question is What is the Excise Duty payable ? If you refer to CETA, you will find that
some rates are fixed on per Kg or per quintal basis, while some rates are based on
% basis. This percentage is the % of Assessable Value of goods fixed as per
section 4 of Central Excise Act.

Excise duty is payable on one of the following basis :

Specific duty
Duty as % of Tariff Value fixed under Section 3(2).
Duty based on annual production capacity under section 3A
Duty based on Maximum Retail Price printed on carton after allowing deductions
- section 4A of CEA
Duty as % based on Assessable Value fixed under Section 4 (ad valorem duty)

Specific Duty - It is the duty payable on the basis of certain unit like weight, length,
volume, thickness etc. For example, duty on Cigarette is payable on the basis of
length of the Cigarette, duty on sugar is based on per Kg basis etc. In such cases,
calculation of duty payable is comparatively easy. In view of the simplicity, many
goods were earlier covered under specific duty. However, the disadvantage is that
even if selling price of the product increases, revenue earned by Government does
not increase correspondingly. Frequent revisions of rates have to be done, which is
a slow and time consuming process. Hence, now most of the goods are covered
under Ad valorem duty. Presently, specific rates have been announced for - (a)
Cigarettes (length basis) (b) Matches (per 100 boxes / packs) (c) Sugar (per quintal
basis) (d) Marble slabs and tiles (Square meter basis) (e) Colour TV when MRP is
not marked on the package or when MRP is not the sole consideration (Based on
screen size in cm). (f) Cement clinkers (per tonne basis) (g) Molasses resulting from
extraction of sugar (Per ton basis)

Duty on basis of production capacity - Section 3A of Central Excise Act provides

for payment of duty on basis of production capacity, without any reference to actual
production. Pan masala and gutkha and chewing tobacco are covered under these
provisions.

Tariff value - In some cases, tariff value is fixed by Government from time to time.
This is a Notional Value for purpose of calculating the duty payable. Once 'tariff
value for a commodity is fixed, duty is payable as percentage of this 'tariff value' and
not the Assessable Value fixed u/s 4. This is fixed u/s 3(2) of Central Excise Act.
Government can fix different tariff values for different classes of goods or goods
manufactured by different classes or sold to different classes of buyers.

When tariff value is prescribed under the law, that value will form the basis for
assessment (and not any other value) S Chakravorty v. CCE 2001(129) ELT 797
(CEGAT).

Value based on Retail Sale Price

Section 4A of CEA empowers Central Government to specify goods on which duty

will be payable based on 'retail sale price'. The provisions are as follows - (a) The
goods should be covered under provisions of Standards of Weights and Measures
Act (b) Central Government can permit reasonable abatement (deductions) from the
'retail sale price'. While allowing such abatement, Central Government shall take into
account excise duty, sales tax and other taxes payable on the goods (c) If more than
one 'retail sale price' is printed on the same packing, the maximum of such retail
price will be considered (d) The 'retail sale price' should be the maximum price at
which excisable goods in packaged forms are sold to ultimate consumer. It includes
all taxes, freight, transport charges, commission payable to dealers and all charges
towards advertisement, delivery, packing, forwarding charges etc. (e) Central
Government has to issue a notification in Official Gazette specifying the commodities
for which the provision is applicable and the abatements permissible.

For example, Government had issued a notification No. 18/97-CE(NT) and 19/97-CE
(NT) both dated 19.6.97 to the effect that excise duty on 'cosmetics and toilet
preparations' will be payable on the basis of MRP printed on retail carton after
allowing abatement of 50%. In such case, if MRP printed on carton is Rs 50 and if
the duty on 'cosmetics & toilet preparations' is 20%, the duty @ 20% will be payable
on Rs 25 (i.e. after allowing 50% abatement on MRP of Rs 50). Thus duty payable
per pack will be Rs 5.00.

MRP provisions are overriding provisions Section 4A(2) uses the words
notwithstanding section 4. Hence, when section 4A is applicable, provisions of
section 4 for determination of assessable value are not applicable. In Mona
Electronics v. CCE (2001) 135 ELT 1293 (CEGAT), it was held that provisions of
section 4A are mandatory and assessee has no choice to determine value u/s 4.

CVD DUTY RATE ON IMPORTED GOODS WHEN PRODUCT COVERED UNDER

MRP - If goods covered under MRP provisions are imported, CVD will be payable
on basis of valuation u/s 4A i.e. on basis of MRP printed on carton.

Provision applicable only when product is statutorily covered both under

Weights and Measures Act and notification issued under CEA - It has been
clarified that provisions in respect of payment of duty on MRP are applicable only in
cases where specific notification has been issued and manufacturer is statutorily
required to put MRP under Weights & Measures Act. The provisions do not apply in
cases where manufacturer voluntarily affixes MRP on the product - CBE&C circular
No 411/44/98-CX dated 31-7-1998. It is further clarified that where provisions of
Weights & Measures Act do not apply, duty is payable on basis of AV as per section
4 - Chandigarh Commissionerate TN 16-CE/99 dated 5-5-1999.

Provision applicable even if goods manufactured on job work basis - Normally,

if assessee is engaged in manufacture on job work basis, he has to pay duty on
material cost plus job charges. However, if a product covered under MRP provisions
is manufactured on job work basis, duty will be payable as per provisions of section
4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job
work charges. This is because section 4A has overriding effect over section 4.

Provision when more than one retail price declared - MRP printed on package is
required to be inclusive of taxes. Rate of taxes vary from State to State. Hence, in
some cases, a manufacturer may print different prices for different States. In some
cases, manufacturer earmarks different packages for different areas and marks
different prices for different areas.

If a package bears more than one retail sales price, maximum out of these will be
deemed to be retail price for purpose of section 4A. [Explanation 2(a) to section
4A]. If retail price declared on the package at the time of removal is subsequently
altered to increase the price, such increased retail price will be retail price for
purpose of section 4A. [Explanation 2(c) to section 4A]. Where different retail sale
prices are declared on different packages, each such retail price shall be the 'retail
sale price' for purposes of valuation of excisable goods intended to be sold in area to
which the retail price relates. [Explanation 2(c) to section 4A]. Thus, if different prices
are printed on different packages, each such price will be 'retail price'.

If retail price not indicated or wrongly indicated at the time of removal - If retail
price is not declared on the package at the time of removal, or retail price is declared
which is not the retail price as required to be declared as per provisions of Central
Excise Law or any other law, the goods are liable to confiscation. [section 4(4)(a)]. In
such case, the retail sale price will be ascertained in the prescribed manner and
duty will be payable as per the retail price so determined.

What is 'retail sale price' As per Weights and Measures Act, retail price indicated
on the retail package should be inclusive of all taxes. However, in case of drugs, the
retail price to be indicated is required to be exclusive of taxes. Section 4A provision
can be made applicable in either case.

MRP INCLUSIVE OF ALL TAXES - Explanation 1 to section 4A(4) of Central Excise

Act defines 'retail sale price' as the maximum price at 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, and all
charges towards advertisement, delivery, packing, forwarding and the like, as the
case may be, and the price is the sole consideration for such sale. - - It may be
noted that under Weights & Measures Act, 'Maximum Retail Price' (MRP) has to be
printed on packaged commodity for retail sale. The 'MRP' has to be inclusive of all
duties and taxes, including local taxes. In view of different rates of taxes in different
States, a manufacturer can print different rates for sale in different States / areas. A
retailer can sell the goods below MRP printed on the package.

RETAIL PRICE EXCLUSIVE OF TAXES As per proviso to Explanation 1 to section

4A(4), if as per provisions of any other law, retail price excluding taxes (local or
otherwise) is required to be declared on the package, such retail price will be the
retail price for purpose of section 4A. - - In case of scheduled drug or formulation
covered under Drug Price Control Order (DPCO), price is required to be displayed
as Retail price not to exceed . . local taxes extra. In such cases, the retail
price declared as per provisions of DPCO will be the retail price for purpose of
section 4A. [In case of non-scheduled formulations (i.e. on which there is no price
control), price is required to be displayed as Maximum Retail Price . .
inclusive of all taxes].

Increase in retail price after clearance from factory - If retail price declared on
the package at the time of removal is subsequently altered to increase the price,
such increased retail price will be retail price for purpose of section 4A.
[Explanation 2(c) to section 4A]. It may be noted that the provision applies only when
retail price is increased after clearance. However, as per section 2(f)(ii), putting
label of altered price will be deemed manufacturer and hence excise duty will
become payable. - - Really, as per rule 23 of Packaged Commodities Rules,
alteration of MRP on the package is prohibited.
Deemed manufacture in case of goods covered under MRP provisions - In
respect of goods specified in third schedule to Central Excise Act, any process
which involves packing or repacking of such goods in a unit container or labelling or
re-labelling of containers including the declaration or alteration of retail sale price on
the container or adoption of any other treatment on the goods to render the product
marketable to consumer will be manufacture. [section 2(f)(iii) effective from 14-5-
2003].

The goods included in Third Schedule of Central Excise Act are same as those on
which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package.
Thus, in case of goods on which duty is payable on basis of MRP, if any of the
process as specified (like labelling, re-labelling, repacking in unit container, alteration
of MRP etc.), it will be manufacture and duty will become payable. [This aspect has
been discussed in earlier chapter].

Products covered under the scheme - So far, 98 articles have been covered
under this scheme.

Ad valorem Duty

Fixing specific duty or tariff value is possible only for few selected items like Sugar,
pan masala, consumer goods, Cigarette etc. Generally, it is not practicable to fix
specific duty or tariff value for numerous products produced. Similarly, paying duty
on the basis of MRP is possible only in respect of a few selected commodities. In
other cases, Central Excise is payable on the basis of value. This is called ad
valorem duty. The 'assessable value' is arrived at on the basis of Section 4 of the
Central Excise Act and duty is payable on the basis of such value.

Assessable Value (AV) - Assessable Value (AV) is the Value on which duty is
payable as a percentage. Generally, by Value, we understand the price as
mentioned in Bill or Invoice. However, for excise purposes, it is not possible to fully
rely on such price as (a) Duty is payable even if goods are not sold (b) It is desirable
to have uniform policy in fixing the AV (c) Chances of manipulation in such price
should be minimum.

Basis of Assessable Value - As per new section 4 w.e.f. 1st July, 2000, excise duty
is payable on basis of 'transaction value', if the goods are sold at the factory gate to
an unrelated buyer when price is the sole consideration. If these requirements are
not satisfied, valuation will be done as per Valuation Rules. - section 4(1)(b)

Earlier, Assessable Value was fixed, as per old section 4, on the basis of Normal
wholesale price to independent buyer/s at the factory gate, inclusive of packing cost,
but exclusive of (a) all taxes and duties payable (b) Trade Discounts and (c) Cost of
durable and returnable containers. However, the section has been replaced by
entirely new section 4 w.e.f. 1-7-2000.

The basic provisions of new Section 4(1)(a) state that 'assessable

value' when duty of excise is chargeable on excisable goods with
reference to value will be 'transaction value' on each removal of
goods, if following conditions are satisfied -
 The goods should be sold at the time and place of removal.
Buyer and assessee should not be related
Price should be the sole consideration for the sale.
Each removal will be treated as a separate transaction and 'value' for each
removal will be separately fixed.

Cost of Manufacture not relevant - It may be noted that Central Excise Valuation can
be below manufacturing Cost. If there is no allegation of flow-back of money from
buyer to assessee, if price is the sole consideration and if dealings between
assessee and buyer are at arms length, Assessable Value will be decided on basis
of selling price, even if it is below manufacturing cost.

Full intrinsic value should be considered, ownership is irrelevant - In Burn Standard

Co. Ltd. v. UOI - AIR 1991 SC 1784 = 60 ELT 671 (SC) = 35 ECR 289 = 1991(3)
SCC 467, it was held that cost of material supplied free by buyer has to be added to
arrive at full intrinsic value of goods. It was observed, The fact that the petitioners
are not the owners of the end-product are irrelevant. Taxable event is manufacture -
not ownership.

Time and Place of removal Section 4(1)(a) states that transaction value shall be
assessable value when goods are sold by assessee, for delivery at the time and
place of removal.

TIME OF REMOVAL - As per section 4(3)(cc), in case of sale from depot/place of

consignment agent, time of removal shall be deemed to the time at which the goods
are cleared from factory.

PLACE OF REMOVAL - 'Place of removal' has been defined in section 4(3)(c).

Since this concept is related to outward freight this aspect has been discussed
later.

Goods must be sold at the time and place of removal - Transaction Value is relevant
for valuation only when goods are 'sold' at the time and place of removal.

State in which goods are removed is relevant for valuation - Goods are to be
assessed at the time of removal from factory. Thus, the stage in which they are
removed is highly relevant for valuation.

Essentials of valid sale - As per section 2(h) of CE Act, 'sale' and purchase' within
their grammatical variations and cognate expressions, means any transfer of goods
by one person to another in the ordinary course of trade or business for cash or
deferred payment or other valuable consideration.

Note that consideration can be paid by or to third party also. The definition does not
say that consideration must be paid to the assessee himself.

Sale under Central Excise would include hire purchase and lease. When goods are
given on hire purchase, there is transfer of possession for consideration but there is
no transfer of property.

However, 'sale' will not include job work, stock transfer, branch transfer or free
samples.
Buyer should not be known in stock transfer - It may be noted that 'stock transfer' or
'branch transfer' envisages dispatch of goods of standard size and specifications to
the depots / branches. Goods should not be dispatched or identified for a particular
buyer. If the buyer is identifiable before removal of goods from the factory (e.g. in
case of tailor made goods), it is a sale and not a stock transfer, even if goods are
dispatched to depot and sold from depot.

Price must be sole consideration - Price should be sole consideration of sale.

Price is the consideration given for purchase of a thing.

Transaction Value as Assessable Value

New section 4(3)(d) defines transaction value as the price actually

paid or payable for the goods, when sold, and includes in addition to
the amount charged as price, any amount that the buyer is liable to
pay to, or on behalf of, the assessee, by reason of, or in connection
with the sale, whether payable at the time of sale or at any other time,
including, but not limited to, any amount charged for, or to make
provision for, advertising or publicity, marketing and selling
organization expenses, storage, outward handling, servicing, warranty,
commission or any other matter; but does not include the amount of
duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods. Thus, following are main
requirements of transaction value.

Price actually paid or payable

Price is for the goods
It includes any amount that the buyer is liable to pay to, or on behalf of assessee.
Thus, payment made by buyer to another person, on behalf of assessee, will be
includible. Thus, payment made by buyer to third party is includible only if it is
made on behalf of assessee.
The payment should be by reason of, or in connection with the sale. As
explained later, these terms have always been construed strictly in judicial
interpretation.
The amount may be payable at the time of sale or at any other time. Such time
may be before or after sale. However, normally, it should be quantifiable at the
time of removal, as goods are normally expected to be assessed before
clearance from the factory.
Any amount charged for, or to make provision for, advertising or publicity,
marketing and selling organization expenses, storage, outward handling,
servicing, warranty, commission or any other matter is includible. However, these
expenses are includible only when aforesaid conditions are satisfied i.e. (a) The
amount should be paid or payable to assessee or on behalf of assessee and (b)
Payment should be by reason of sale or in connection with sale.
Amount of duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods is to be excluded while calculating transaction
value. The amount may be payable any time in the future.

Amount payable by buyer to or on behalf of assessee - Any amount that the

buyer is liable to pay to the assessee or to a third person on behalf of assessee is
includible in transaction value.

Payment should be By reason of or in connection with' - The payment by the

buyer should be by reason of or in connection with sale of goods which are under
assessment.

BY REASON OF - As per Blacks Law Dictionary 1979 edition, by reason of means

because of, by means, acts or instrumentality of. As per Concise Oxford Dictionary,
reason means motive or cause. This indicates a cause and effect relationship.

IN CONNECTION WITH - Connect means join. Connection means act of

connecting or state of being connected - Concise Oxford Dictionary. As per Blacks
Law Dictionary 1979 edition, connection means the state of being connected or
joined, union by junction, by an intervening substance or medium, by dependence or
relation, or by order in a series. The term in connection with has always received a
strict interpretation from Court. - - The term connected with means that connection
must be direct and clear as between cause and effect and not remote and doubtful.
Connected with must be considered to imply a substantial or direct connection and
not a fanciful or highly problematical connection. - Basudev v. Rex 1949 ALJ 397 =
AIR 1949 All HC FB 513 - view confirmed in Rex v. Basudeva AIR 1950 FC 67 ( 5
member bench).

Connection is required - mere relation not enough - The legislature has used the
terms by reason of and in connection with and not in respect of or in relation to.
Both these phrases viz. by reason of and in connection with have always received
a strict construction. Thus, for inclusion in transaction value, there should be direct
and immediate connection with the price paid / payable and the sale of goods. Mere
relation is not enough - connection is required. A 'casual relation' is not enough,
there should be 'cause and effect' type connection between the price paid / payable
and the sale of goods.

Inclusions in Transaction Value

'Transaction Value' as defined in section 4(3)(d) states that any amount charged for
(by assessee to buyer), or to make provision for (presumably by buyer), advertising
or publicity, marketing and selling organisation expenses, storage, outward handling,
servicing, warranty, commission or any other matter; is includible in 'transaction
value'. However, the payment or provision will be includible only if (a) Buyer is liable
to pay to assessee or on behalf of assessee and (b) It is by reason of or in
connection with the sale.

Packing charges - New section 4 has made no specific provision for packing
charges. Cost of normal packing will be covered, as in most cases, it is 'in
connection with' or 'in respect of' sales.

Packing supplied by buyer should also be includible, just like cost of any other
material supplied by buyer to seller is includible. CBE&C, vide its circular No.
643/34/2002-CX dated 1-7-2002, has clarified that cost of packing supplied by buyer
should be added. In case of durable packing supplied by buyer, which can be used
repeatedly, cost will have to be amortised over the life span of the packing material.

Department, vide its circular No. 354/81/2000-CE dated 30-6-2000 has confirmed
that all packing charges, whether normal or special, will form part of the transaction
value. Same view is reiterated in Chapter 3 Part III Para 2.5(vi) of CBE&Cs CE
Manual, 2001 and CBE&C circular No. 643/34/2002-CX dated 1-7-2002.

Design and Engineering Charges - Design and Engineering Charges are essential
for purpose of manufacture and hence have to be included in Assessable Value.

Consultancy charges relating to manufacturing - These were includible under

old section 4 and should be includible in new section 4 as well, as such payment is
'by reason of sale'.

Compulsory after Sales Service / service in warranty period is includible - The

heads 'servicing' and 'warranty' have been specifically included in definition of
payments includible in 'transaction value'.

Manufacturers often give free after sale service during warranty period. Though
these are called free services, cost of such services is already included in the price
of product. Promise for provision of after sale service certainly increases its
marketability, it is in connection with sale and its cost is includible.

Loading and handling charges within the factory - These are in by reason of sale
and are includible. These were includible earlier also.

Price at the Time of Removal - Price relevant is at the time of removal. Thus, any
subsequent increase or reduction in prices after goods are cleared from the factory
is not relevant.

Question : Price of a machine was Rs. 3 lakhs on 28th September, 2002 when the
machine was removed from the factory at Pune and sold to a buyer. The buyer
refused to take delivery of the machine. In the meanwhile, the machinery
manufacturer increased the price of machinery to Rs 3.30 lakhs w.e.f. 1st October,
2002. The machinery manufacturer then sold the machine to another buyer on 12th
November, 2002 at increased price of Rs 3.30 lakhs. What is the excise duty
payable. The excise duty rate is 15%. (The prices are exclusive of all taxes)

Answer : The price prevalent at the time of removal was Rs. 3 lakhs. Hence, duty
payable is Rs. 45,000. The duty is payable on 28th September 2002 when the
machine was removed from the factory after manufacture.

Additional consideration should be added to the price paid by buyer to

assessee - The additional consideration flowing directly or indirectly from the buyer
shall be added to the price actually paid to assessee. This will be cum-duty price.
The cum-duty price, exclusive of sales tax and other applicable taxes, if any, will be
deemed to include the duty payable on such goods. Explanation to section 4(1)
[inserted w.e.f. 14-5-2003].

Thus, additional consideration will be added to the price paid by buyer to assessee.
This will be treated as cum-duty price and assessable value will be worked back
after allowing admissible deductions (i.e. by back calculations). confirmed and
clarified in CBEC DO letter No. 334/1/2003-TRU dated 28-2-2003 issued on Budget
day to all Excise Commissioners.
Exclusions from Transaction Value

Section 4(3)(d) of Central Excise Act provides that 'transaction value' does not
include amount of duty of excise, sales tax and other taxes, if any, actually paid or
actually payable on such goods. Moreover, any other payment made by buyer to
assessee will be includible only if it is by reason or sale or in connection with sale.

Deduction of Taxes from AV Any tax which is payable in connection with sale,
is includible in Assessable Value. However, definition of transaction value specifically
provides that sales tax, Excise duty and other taxes payable on finished product are
to be excluded for purpose of valuation. [This was allowable as deduction under old
section also, and earlier case law discussed below is fully relevant].

If any excise duty or other tax is paid (payable ?) at concessional rate for a particular
transaction, the amount of excise duty or tax actually paid at concessional rate shall
only be allowed to be deducted from price. - Chapter 3 Part III Para 2.5(v) of
CBE&Cs CE Manual, 2001.

EQUALISED DEDUCTION NOT PERMISSIBLE Since each clearance is a

separate transaction for assessment, tax deduction on basis of average taxes paid
is not permissible. CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002,
has also stated that taxes are deductible only on actual basis and not on average
basis.

Formula for calculation of AV - In GOI v. MRF Ltd. - 1995 (77) ELT 433 (SC) = JT
1995(4) SC 512 = 1995 (58) ECR 385 (SC) = 1995 AIR SCW 2654 = (1995) 3
SCALE 299 = (1995) 4 SCC 349 (SC 3 member bench), it was held that Assessable
Value = (Cum Duty price - Permissible Deductions) / (1 + rate of duty)

Trade Discounts - Trade discounts are allowable as deduction for valuation

purposes. Trade discount means discount usually expressed as a percentage
deduction given to wholesale buyers. Since quantum of trade discount is not
payable by buyer to seller, it will not form part of 'transaction value'. Note that
'commission to agent' will not be allowed as deduction, while trade discount given to
buyer is not a 'commission'. It will not be added for purpose of Central Excise
Valuation.

It is clear that 'transaction value' is only after deducting the trade discount as
'transaction value' means price actually paid or payable for goods. Thus, 'trade
discount' is allowable as deduction. It can also include cash discount, turnover
discount or any other discount. There is no condition or provision that such discount
should be known at the time of removal of goods from factory. Definition of
'transaction value' vide section 4(3)(d) makes clear that payment by buyer to
assessee can be at the time of sale or at any other time. (i.e. it may be either before
or after the sale).

CASH DISCOUNT PERMISSIBLE - Department has confirmed that cash discount is

allowable as deduction, if actually passed on to buyer, if transaction is on principal to
principal basis. CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

Any trade discount permissible - The trade discount need not be uniform. Trade
discount may be called by different names like cash discount, quality discount,
turnover discount, etc. Such discount will be allowed on actual basis.

Discount can be given at any time - There is no provision that discount should be
known or given at the time of removal of goods. Definition of 'Transaction Value'
makes it clear that any amount the buyer is liable to pay to assessee at the time of
sale or at any other time is includible in 'Assessable Value'. Such 'any other time'
can be either before the sale or after the sale. Thus, year end discount or turnover
discount given on basis of turnover achieved during a prescribed period should be
allowable as deduction.

DEPARTMENT'S CLARIFICATION - Department, vide its circular No. 354/81/2000-

TRU dated 30-6-2000 that and has clarified as follows - The duty is chargeable on
the net price paid or payable and discount of any description actually given will not
be includible in transaction value. Thus if in any transaction a discount is allowed on
declared price of any goods and actually passed on to the buyer of goods as per
common practice, the question of including the amount of discount in the transaction
value does not arise. Discount of any type or description given on any normal price
payable, e.g. quantity discount for goods purchased or cash discount for the prompt
payment etc. will, therefore, not form part of the transaction value for the goods.
Differential discount is also permissible. Where the assessee claims that the
discount of any description for a transaction is not readily known but would be
known only subsequently e.g. year-end discount, the assessment for such
transactions may be made on a provisional basis. However, the assessee has to
disclose the intention of allowing such discount to the department and make a
request for provisional assessment. Same view is reiterated in Chapter 3 Part III
Para 2.5(iv) of CBE&Cs CE Manual, 2001.

Commission to Selling Agents not allowed as deduction - Commission means a

percentage paid to the agent from the profits of goods sold or business obtained -
Concise Oxford Dictionary. Sometimes, goods are sold directly to a buyer and
overriding commission is paid to selling agents/commission agents. Sometimes
(particularly in international transactions), buyer is asked to make payment of
commission directly to the agent. Such commission is not deductible from
'transaction value'. If it is paid separately by buyer, it is clearly includible, as
obviously, it is paid by buyer on behalf of seller.

Outward handling, freight and transit insurance charges As per section 4(1)
(a), transaction value is considered as value if goods are sold at place of
removal.

PLACE OF REMOVAL - 'Place of removal' means - (i) a factory or any other place or
premises of production or manufacture of the excisable goods from where such
goods are removed or (ii) A warehouse or any other place or premises wherein the
excisable goods have been permitted to be deposited without payment of duty from
where such goods are removed or (iii) A depot, premises of a consignment agent or
any other place or premises from where excisable goods are to be sold after their
clearance from factory. [section 4(3)(c)].

Thus (i) If excisable goods are removed for sale from factory of manufacture or
place of production, that will be 'place of removal'. (ii) If goods are cleared for sale
from warehouse where goods were allowed to be kept without payment of duty, that
will be the 'place of removal'. (iii) If goods are cleared from factory to depot or branch
or place of consignment agent, then such depot/branch/place of consignment agent
will be place of removal.

Department has clarified that if any value addition is done by assessee by

processing the goods after removal from factory, cost of such processing is not to be
added in Assessable Value, if such process does not amount to manufacture
CBE&C circular No. 138/08/2000-CX.4 dated 3.1.2001.

DEPOT SALE - In case goods are sold from depot/place of consignment agent,
goods will have to be valued on the basis of price prevailing at the depot, but on the
date of removal from factory of manufacture.

Sale at factory gate - If the contract is for delivery at the factory gate, sale is
complete at the factory gate itself, as the transporter gets possession of goods on
behalf of buyer as the transporter will be agent of buyer. The buyer will be incurring
the expenditure on transport and insurance charges. However, the expenditure will
be on his own and not 'on behalf of the assessee' as required vide definition of
'transaction value' u/s 4(3)(d). Moreover, the payment is not 'in connection' with sale
or 'by reason of' sale as the sale is completed at the factory gate itself. The payment
made by buyer will be on his own and 'by reason of' or 'in connection with' outward
handling charges.

Delivery and sale at other place - It is possible that contract is ex-destination or FOR
destination and assessee is under obligation to deliver the goods to destination. In
such case, there is no sale at factory gate and hence, valuation cannot be done on
basis of transaction value.

As per explanation 2 to rule 5 of Central Excise Valuation Rules, if goods are sold at
a place other than the place of removal (factory gate is normally considered as place
of removal), cost of transportation from place of removal upto place of delivery of
such goods will not be includible.

EQUALISED FREIGHT Some times, manufactures fix uniform all India price of the
goods. The actual cost of transport will obviously vary from place to place. In such
case, though the invoice shows the uniform price, deduction will be available on the
basis of average freight i.e. equalized freight.

Notional Interest on security deposit/advances - The manufacturer may often

ask for advance/deposit from buyers. The purpose may be to ensure security of
payment from buyers and/or to get working capital. Such deposit may be with or
without interest. Such advance is 'in relation to sale'. If the advance obtained is
without interest or with lower quantum of interest, there will be benefit to the buyer
by way of reduction in his cost. The 'connection' between the selling price and
reduced cost by way of reduction in interest cost is only 'indirect'. Thus, 'notional
interest' on advances may not be includible if relation between advance and selling
price is only casual. There is 'relation' but no 'connection'. 'Cause and effect'
relationship is absent.

However, if there is evidence that selling price has been lowered due to receipt of
advance / deposit, then price is not the 'sole consideration of sale', as required u/s
4(1)(a). In such case, there is 'cause and effect' relationship. There is 'connection'
between advance received and the price charged. In such cases, notional interest
on advance should be includible.
Explanation 2 to rule 6 of Valuation Rules (inserted w.e.f. 1-3-2003) provides that
notional interest on advances is includible in assessable value only if there is
evidence with Central Excise Officer that such advance has influenced the fixation of
prices by way of charging lower price or by offering a special discount to the buyer
who has made the advance deposit. Thus, when the price is same to all buyers
whether they have paid advance to seller, notional interest is not includible in
assessable value. - - As per Illustration 2 to Explanation 2, even in cases where
there is only one buyer from whom advance has been obtained and comparable
price to other buyer is not available, notional interest is includible only if there is
evidence with Central Excise Officer that such advance has resulted in lowering the
prices. - - In other words, burden of proof that price has been lowered or special
discount has been offered on account of receipt of advance from buyer, is on the
department.

Installation and Erection Expenses - Installation and erection expenses are

incurred after the goods are removed from the factory. There may be an
independent contract for erection or even a composite contract. In the opinion of
author, erection and commissioning charges should not be includible. [However, now
8% service tax is being imposed vide Finance Act 2003, on erection and
commissioning charges].

CLARIFICATION BY CBE&C The Board has clarified as follows (a) If final

product is not excisable, question of including erection and commissioning charges
does not arise. (b) If a machine is cleared from a factory on payment of appropriate
duty and later taken to premises of the buyer for installation/erection and
commissioning into an immovable property, no further duty will be payable (c) If
parts/components are brought to site and the machine is erected/installed and
commissioned, if the product (generator as per Board circular) is excisable
commodity, cost of erection, installation and commissioning would be included in
assessable value. In other words, if the expenditure on erection, installation and
commissioning has been incurred to bring into existence any excisable goods, these
charges would be included. If these costs are incurred to bring into existence some
immovable property, they will not be included in the assessable value of such
resultant property. -CBE&C circular No. 643/34/2002-CX dated 1-7-2002 . [The
clarification indeed confirms many of the views expressed above].

Interest on Receivables - The manufacturer may recover interest from buyer, if he

does not make payment as per agreed terms. Such interest should not be includible.

DEPARTMENTAL CLARIFICATION - Department has confirmed that delayed

payment charges will not be includible, if shown or indicated separately in invoice
and charged over and above the sale price. CBE&C circular No. 643/34/2002-CX
dated 1-7-2002. Departmental circular No. 354/81/2000-TRU dated 30-6-2000 has
clarified that interest on delayed payment shall not be regarded as part of the
assessable value provided that: (a) the interest charges are clearly distinguished
from the price actually paid or payable for the goods; (b) the financing arrangement
is made in writing; and (c) where required, assessee demonstrates that such goods
are actually sold at the price declared as the price actually paid or payable. Same
view is reiterated in Chapter 3 Part III Para 2.5(iii) of CBE&Cs CE Manual, 2001.

Bank charges for collection of sale proceeds - The principle discussed above will
apply in respect of bank charges for collection of sale proceeds and these should
not be includible.
Some areas where no case law under new section 4

New section 4 of Central Excise Act is radically different from old section 4. Thus,
most of case law in respect of earlier section 4 has become redundant and all
settled law has been unsettled. In some cases, principles of earlier section can be
applied, but in many cases, disputes seem inevitable.

Some areas where presently there is neither case law nor any specific provisions in
new provisions are discussed below. Authors view in respect of each head are also
given. These areas will get settled through case law in due course.

Advertisement and sale promotion Expenses incurred by buyer - Manufacturer

incurs advertisement expenditure. These are obviously built in the cost for
determining his selling price. In addition, often dealers also advertise the product at
their own cost.

Definition of 'transaction value' includes charges for 'advertisement, publicity and

marketing expenses'. However, these are includible only if buyer is liable to pay the
amount to assessee or on behalf of assessee. Thus, advertisement and Sales
promotion expenses incurred by dealer/distributor, if done on his own, are not to be
included, if transaction between buyer and seller is on principal to principal basis.
This is because the buyer is not incurring these expenses 'on behalf of the
assessee'.

Training charges to customer - Training charges to customer will be includible if

they are in connection with sale or by reason of sale. If the transaction of providing
training to employees of customer is an independent transaction, it may be 'in
relation to sale', but not 'in connection with sale'

Inspection charges / addition testing charges paid by buyer -

Assessee carries out his own inspection and its cost is obviously
included in his selling price. However, sometimes, customer carries
out additional inspection either himself or through another inspection
agency. Some times, expenses of such additional inspection / testing
are borne by assessee while, in other case, the expenses may be
borne by the buyer himself. This inspection is in addition to normal
inspection and quality checks of the manufacturer himself. Following
points need consideration.

If the inspection charges are to be borne by assessee and goods can be sold
only if approved by the inspection agency, the payment is in connection with sale
and by reason by sale. It should be includible.
If such testing is a mandatory requirement, it should be includible whether borne
by assessee or buyer. This is because there is no sale without such testing.
If assessee has agreed that buyer can reject the goods if not approved by the
testing agency, the payment will be 'by reason of sale' and should be includible,
whether paid by assessee or buyer.
If the inspection is done by buyer on his own only to satisfy himself about quality
of the product, the cost should not be includible, as in such case, the payment
made by buyer or expenditure incurred by buyer is not 'on behalf of assessee' but
on his own.
 This was held as not includible under earlier case law. However, in view of the
changed definition, validity of the earlier decisions seem doubtful.

Subsidy / Rebate obtained by assessee - A general subsidy / rebate is obviously

not be includible as it has no connection with individual clearances of goods.

Profit earned on post removal activity - Profit earned on post removal activity is
not to be added unless there is any deliberate attempt to divert a part of the genuine
price and show it as other charges - ratio of Empire Industries Ltd. v. CCE 1997(95)
ELT 653 (CEGAT). In Baroda Electric Meters Ltd. v. CCE 1997(94) ELT 13 (SC 3
member), it was held that profit earned by manufacturer on transportation cannot be
included in Assessable Value. - followed in S R Jhunjhunwala v. CCE 1999(114) ELT
890 (CEGAT) - also in Sri Kaliswari Fireworks v. CCE 1998(98) ELT 93 (CEGAT) in
respect of insurance charges.

Manufacture under brand name of others - Some Companies get the goods
manufactured from others and sell them under their brand name (e.g. Batas get
chappals manufactured from small units, Bajaj Electricals get their electrical
products manufactured from other units, Philips/Crompton and others get many
products manufactured under their brand name). In such cases, selling price of Bajaj
or Bata will naturally be higher than the purchase price. Normally, the buyer will get
the goods manufactured as per his specifications and will inspect the final product to
ensure that quality is maintained. Even then, the buyer, who is a brand name owner,
is not the actual manufacturer.

Naturally, the brand name owner sales the goods at higher rates. Even then, 'value'
for purpose of excise will be based on the price at which the manufacturer sales the
goods to brand name owner. The actual manufacturer and brand name owner
cannot be termed as 'related person' as long as relations between them are on
'principal to principal' basis and price is the sole consideration.

If the manufacturer of product manufactures goods with 'MRP' printed on the goods
at the time of removal and if goods are covered under section 4A, duty will be
payable on basis of MRP printed on the product, as section 4A has overriding effect
over other provisions in respect of valuation. However, if the goods are cleared in
bulk, without printing 'MRP', the goods will not be covered under section 4A i.e. MRP
provisions and duty will be payable on basis of section 4, i.e. 'transaction value'.

Valuation Rules to determine Assessable Value

Section 4(1)(b) of the Central Excise Act states that if Assessable Value cannot be
determined u/s 4(1)(a), it shall be determined in such manner as may be prescribed
by rules. Under these powers, Central Excise Valuation (Determination of Price of
Excisable Goods) Rules 2000 have been made effective from 1-7-2000. These rules
are discussed below.

Value nearest to time of removal if goods not sold - If goods are not sold at the
time of removal, then value will be based on the value of such goods sold by
assessee at any other time nearest to the time of removal, subject to reasonable
adjustments. [Rule 4]. This rule applies when price at the time of removal is not
available as the goods are not sold by the assessee at the time of removal. Thus,
this rule should apply in case of removal of free samples or supply under warranty
claims. In case of removal of samples or free replacement under warranty claims,
duty will be payable on price of identical goods sold by assessee near about the
time of removal of the samples.

This rule should not apply in respect of depot transfer or branch transfer or in case
of sale to related person as specific provisions have been made. This provision
should also not apply for job work as indeed in case of job work there is no sale of
goods.

In case of free parts supplied during warranty period, excise duty is payable on the
parts but not on labour cost involved in fitting such free parts. [case law discussed in
this chapter at another place].

VALUATION OF SAMPLES CBE&C has clarified that in case of samples

distributed free, valuation should be done on basis of rule 11 along with rule 8 i.e.
cost of production plus 15%. [In the opinion of author, rule 8 applies to captive
consumption. In case of free samples, rule 4 seems to be more appropriate, i.e.
value of similar goods cleared at or around the same. Of course, the difference in
many cases may be negligible and not worth fighting. In some cases (like
pharmaceutical samples), it is reported that it is, in fact, advantageous to assessee
to value samples on the basis of cost of production plus 15%].

Goods sold at different place - Some times, goods may be sold at place other than
the place of removal e.g. in case of FOR delivery contract. In such cases, actual
cost of transportation from place of removal upto place of delivery of the excisable
goods will be allowable as deduction. Cost of transportation can be either on actual
basis or on equalized basis. [rule 5]. - . This aspect has already been discussed
earlier.

Provision when price is not the sole consideration - If price is not the sole
consideration for sale, the Assessable Value will be the price charged by assessee,
plus money value of the additional consideration received. The buyer may supply
any of the following directly or indirectly, free or at reduced cost.

(i) Materials, components, parts and similar items

(ii) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar
items used

(iii) Material consumed, including packaging materials

(iv) Engineering, development, art work, design work and plans and sketches
undertaken elsewhere than in the factory of production and necessary for the
production of the goods

In such cases, value of such additional consideration will be added to the price
charged by assessee to arrive at the transaction value. [Rule 6].

Valuation in case of job work - Some times, the buyer (trader) supplies raw
materials and manufacturing operations are carried out by Job worker/processor as
per requirements of buyer/trader and the material is returned to buyer after job
work/processing. (Note : The term Job Work is used in Engineering Industry while
the term processing is used in Chemical/Textile industry). Since excise is a duty on
such goods, it is immaterial who has supplied the raw material.
No specific provision has been made in case of job work. Strictly speaking, there is
no sale in case of job work and rule 6 should not apply. Even rule 4 or rule 5 cannot
apply as goods are not sold by assessee in case of job work.

In Ujagar Prints v. UOI - 1989 (38) ELT 535 (SC) = 1989 (21) ECR 1 (SC) = 42
Taxman 151 (SC) = AIR 1989 SC 516 = (1989) 74 STC 401 (SC) = (1989) 3 SCC
488 = 1988(2) SCALE 1115 = 179 ITR 317 (SC 5 member bench), [further clarified in
1989(39) ELT 493 = 21 ECR 1 = AIR 1989 SC 972 = 1989(3) SCC 531 = 1989(1)
SCALE 195] - followed in Pawan Biscuits v. CCE 2000(5) SCALE 263 = 2000 AIR
SCW 2690 = AIR 2000 SC 2565 = 120 ELT 24 (SC), it was held that the Assessable
Value will be equal to cost of the raw material plus value of job work done plus
manufacturing profits. It is necessary to include processors (job workers) expenses
and profit, but not the traders profit, who gets the goods manufactured. It is
necessary to include processors (job workers) expenses and profit, but not the
traders profit, who gets the goods manufactured - explained same way in CCE v.
Pharmasia Ltd. - (1996) 13 RLT 1 = 63 ECR 380 (CEGAT).

Though these judgments are under old section 4, CBE&C has clarified that valuation
under new section 4 will be done on the same principle as laid down in Ujagar
Prints, i.e. on basis of cost of raw material plus job charges. Assessable Value will
not include profit or expenses (like advertisement, publicity, overheads) incurred by
buyer, who is supplier of raw material. Valuation will be done on basis of rule 11 read
with rule 6 CBE&C circular No. 619/10/2002-CX dated 19-2-2002 view reiterated
in CBE&C circular No. 643/34/2002-CX dated 1-7-2002 .

In a further circular No. 65/2002 dated 30-9-2002 issued by Commissioner of CE,

Mumbai-IV, it has been clarified that question of adding any further amount towards
profit (of 15%) does not arise. If there is shrinkage of gray fabrics, value of raw
material will be suitably enhanced on basis of shrinkage factor.

Thus, raw material supplied by the buyer will be considered as additional

consideration and will be added to job charges, as provided in Rule 6.

Job worker is responsible for payment of correct duty In CCE v. Bhilwara

Processors 2002(146) ELT 455 (CEGAT 3 member bench), it was held that job
worker cannot escape liability to pay duty on correct valuation of goods. Revenue is
not bound by the value of inputs declared by the raw material supplier, if found to be
mis-declared.

Duty payable on MRP basis if product covered under MRP provisions - Normally, if
assessee is engaged in manufacture on job work basis, he has to pay duty on
material cost plus job charges. However, if a product covered under MRP provisions
is manufactured on job work basis, duty will be payable as per provisions of section
4A, i.e. on basis of MRP less abatement and not on basis of material cost plus job
work charges, as section 4A overrides provisions of section 4.

Sale at depot / consignment agent Section 4(3)(c)(iii) [amended w.e.f. 14-5-

2003] provides that in case of sale at depot/consignment agent, the depot/place of
consignment agent will be the place of removal. As per section 4(3)(cc), in case of
sale from depot/place of consignment agent, time of removal shall be deemed to
the time at which the goods are cleared from factory. - - In other words, in case of
sale from depot/place of consignment agent, duty will be payable on the price
prevailing at the depot as on date of removal from factory. Price at which such goods
are subsequently sold from the depot is not relevant for purpose of excise valuation.

When goods are sold through depot, there is no sale at the time of removal from
factory. In such cases, price prevailing at depot (but at the time of removal from
factory) shall be the basis of Assessable Value. The value should be normal
transaction value of such goods sold from the depot at the time of removal or at the
nearest time of removal from factory. [rule 7 of Valuation Rules].

For example, if an assessee transfers a consignment of paper to his depot from

Delhi to Agra on 5-7-2000, and that variety and quality of paper is normally being
sold at the Agra depot on 5-7-2000 at transaction value of Rs. 15,000 per tonne to
unrelated buyers, where price is the sole consideration for sale, the consignment
cleared from the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis
of Rs. 15,000 per tonne as the assessable value. If assuming that on 5-7-2000 there
were no sales of that variety from Agra depot but the sales were effected on 1-7-
2000, then the normal transaction value on 1-7-2000 from the Agra depot to
unrelated buyers, where price is the sole consideration shall be the basis of
assessment. [Illustration given in the departmental circular dated 30-6-2000].

In short, price ruling at the depot, but at the time of removal from the factory will be
relevant. It does not matter if subsequently the goods are actually sold from depot at
higher or lower price.

Meaning of 'normal transaction value' - As per Valuation Rule 2(b), normal

transaction value means the transaction value at which the greatest aggregate
quantity of goods are sold. The term 'GREATEST AGGREGATE QUANTITY' is used
in rule 7 of Customs Valuation Rules. This rule states that while considering selling
price of imported goods in India, unit price at which greatest aggregate quantity of
identical or similar goods are sold to unrelated persons in India should be the basis.
e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold
@ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit,
which will be the basis for valuation. This principle should apply in deciding 'normal
transaction value' under rule 2(b) also.

Freight and insurance from depot onwards is not includible In Prabhat Zarda v.
CCE 2002(146) ELT 497 (SC), it was held that freight and insurance from depot to
the customer is not includible. [The Counsel of Assessee agreed that freight and
insurance from factory to depot is includible in Assessable Value and hence SC did
not decide the issue].

Valuation in case of captive consumption - In case of captive consumption,

valuation shall be done on basis of cost of production plus 10% (Rule 8 of Valuation
Rules). Captive consumption means goods are not sold but consumed within the
factory.

CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002, has clarified that if
same goods are partly sold by assessee and partly consumed captively, goods sold
have to be assessed on basis of transaction value and goods captively consumed
should be assessed on basis of rule 8. The reason is, as per new section 4,
transaction value has to be determined separately for each removal.

In case goods are supplied to a related person but consumed by the related person
and not sold, valuation will be done on the basis of cost of production plus 15%.
[Proviso to rule 9]. - - CBE&C, vide its circular No. 643/34/2002-CX dated 1-7-2002,
has clarified that this proviso applies when goods are transferred to a sister unit or
another unit of the same factory for captive consumption in their factory.

The simplified provision has been probably made as in most of the cases, the buyer
will be able to get Cenvat credit of duty paid on inputs and there is hardly any
incentive to avoid any payment of duty.

Thus, the formula for determining value is simple. If the cost of production based
upon general principles of costing of a commodity is Rs. 10,000 per unit, the
assessable value of the goods shall be Rs. 11,500 per unit.

Principles of cost analysis Institute of Cost and Works Accountants of India

(ICWAI) has issued Cost Accounting Standard CAS-4 titled Cost of Production for
Captive Consumption. The standard deals with determination of cost of production
for captive consumption. CBE&C, vide circular No. 692/8/2003 dated 13-2-2003, has
clarified that in case of captive consumption, cost calculation should be as per CAS-
4 standard only.

Best judgment Assessment - If assessment is not possible under any of the

foregoing rules, assessment will be done by best judgment. If the value of any
excisable goods cannot be determined under the foregoing rules, the value shall be
determined using reasonable means consistent with the principles and general
provisions of these rules and sub-section (1) of section 4 of the Act. [Rule 11]

Bought out goods / spare parts supplied along with own manufactured goods

Often some articles are supplied along with the goods, which are
bought out, i.e. not manufactured by the assessee. These bought out
components broadly fall in following categories -

Components / parts which are essential for functioning of the main product.
However, these are not manufactured by the assessee. These are bought out
and supplied along with the main product. e.g. a manufacturer of UPS buys a
battery and supplies it along with his product. These should be addible in
Assessable Value.
Consumables which are required for use of the equipment e.g. ribbon for
typewriter. These get used up in due course by the buyer.
Some times, essential spares are supplied along with main product. Some of
these may be bought out.
Often manufacturer supplies some bought out accessories along with main
product. These accessories are not essential for functioning of the main product,
but do help in better and efficient use of the product or add to its beauty / utility.
e.g. seat cover for car seats.
Some times, buyer supplies an article and expects manufacturer to fit / assemble
his product on the article supplied by him so that he gets assembly duly tested -
e.g. buyer supplies tractor and asks manufacturer of compressor to fit the
compressor on the tractor.
As per earlier case law, value of essential bought out components was required
to be added to 'Assessable Value', butvalue of bought out accessories or
consumables was not required to be added. The same principle will apply in new
valuation rules also.
Following need consideration - (a) Excise is a duty on manufacture. Duty should not
be levied on an activity which is not manufacturing activity, unless it is incidental or
ancillary to main manufacturing process. (b) There is no levy on 'trading activity'. (c)
Goods are to be assessed in the stage in which they are cleared from the factory of
production. (d) Any payment by buyer to assessee 'in connection with' or 'in respect
of' sale is includible, while payment which is only 'in relation to' the sale is not
includible. (e) Principles of classification or Cenvat are not directly relevant for
valuation u/s 4.

Value of essential bought out items - Value of essential bought out items, fitted to
the main article at the time of removal should be includible in assessable value, as
(a) Goods should be assessed in the stage in which they are removed. (b) Payment
for such item is 'in connection with' the sale and the main article cannot work without
this bought out part. (c) Value of essential part or component should be added even
if it is supplied by buyer. The reason is that if such part is supplied by buyer, 'price' is
not 'sole consideration'. Thus, the additional consideration, i.e. value of parts
supplied by buyer should be includible, as per rule 6 of Central Excise Valuation
Rules, 2000.

Value of optional bought out items - Some times, some bought out items are
supplied on optional basis. These are not essential parts of the main article. Value of
these should not be includible as - (a) It is a purely trading activity. Even reasonable
profit of sale of such items should be permissible. (b) Supply of such bought out item
may be 'in relation' to sale but not 'in connection' with sale or 'by reason' of sale. The
sale of main article is independent of sale of optional bought out items.

Profit earned on such bought item should not be includible in Assessable Value of
manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386
(CEGAT).

Case of computer software where bought out item required for main article
but considered as an independent article - Some times, manufacturer supplies
some bought out items as a composite contract. This bought out item is necessary
for functioning of main article, but has a different identity of its own. e.g. software
supplied duly loaded on computer. Here, the hardware (computer) cannot function
without software, but still 'software' is not part of 'hardware'. It has been held that
cost of software is not includible in value of software even if loaded at the time of
delivery from factory.

Bought-out goods supplied with manufactured equipment, but no

manufacturing activity - Some times, manufacturer supplies some bought out
parts with his own manufactured parts - may be as assembly or as a set. However,
there is no manufacturing activity. In such case, duty should not be leviable.

Value of bought out consumables supplied with main Article - A 'consumable' is

not 'essential part' of main article, even if the main article cannot function without
such consumable. Value of such consumables should not be includible. The
reasoning would be same for non-inclusion of optional bought out articles.

Cost of bought out Accessories supplied with main article - If the aforesaid
principles are valid, value of bought out accessories supplied along with main article
should not be includible.
Profit earned on such bought accessory will not be includible in Assessable Value of
manufactured product, in view of Triveni Engineering v. CCE 2000(122) ELT 386
(CEGAT).

Sale to a Related Person

Transaction Value' can be accepted as 'Assessable Value' when buyer is not related
to buyer. As per section 4(3)(b), persons shall be deemed to be 'related' if - (i) They
are inter-connected undertakings (ii) They are relatives (iii) Amongst them, buyer is a
relative and a distributor of assessee, or a sub-distributor of such distributor or (iv)
They are so associated that they have interest, directly or indirectly, in the business
of each other.

The definition of 'related person' includes 'inter connected undertaking'. Only 25%
control is enough to make to buyer and assessee as inter connected undertakings.
This would have affected many assessees. However, the provisions in respect of
'inter connected undertaking' have been made almost ineffective in valuation rules.
Now, the 'inter connected undertakings' will be treated as 'related person' only if they
are holding and subsidiary or they are 'related person' under any other clause. In
other cases, they will not be treated as related person'. If they are not treated as
related person, price charged by assessee to buyer will be accepted as 'transaction
value'.

Thus, for all practical purposes, previous definition of 'related person' continues,
which was any way totally ineffective.

Inter Connected Undertakings - Buyer and seller are 'related' if they are inter-
connected undertakings, as per section 2(g) of Monopolies and Restrictive Trade
Practices Act, 1969 (MRTP). - Explanation (i) to section 4(3)(b) of Central Excise
Act.

As explained above, provisions in respect of 'inter connected undertaking' as 'related

person' have been made almost ineffective in the Valuation Rules, 2000.

INTERCONNECTED UNDERTAKING - Section 2(g) of MRTP Act gives definition of

interconnected undertaking. It is possible to have inter-connection between two
Companies, two firms, a Company and a firm, a Company and a trust, etc. Just 25%
common control is sufficient to call two units inter connected undertakings.

Interest in business of 'each other' - As per section 4(3)(b)(iv), buyer and seller
are 'related' if they are associated that they have interest, directly or indirectly, in the
business of each other. It is not enough if only buyer has interest in seller or seller
has interest in buyer. Both must have interest, directly or indirectly, in each other -
Atic Industries Ltd. v. UOI (1984) 3 SCR 930 = 1984 (17) ELT 323 (SC) = AIR 1984
SC 1495 = (1984) 3 SCC 575. If buyer holds shares of manufacturer assessee, but
the assessee does not hold shares in the buyer company, there is no mutual
interest. - CCE v. Kersons Mfg Co. of India Ltd. 1998(100) ELT 194 (CEGAT) *
Beacon Neyrpic v. CCE 2001(133) ELT 590 (CEGAT).

Relative and a distributor of Assessee - Hon Supreme Court, in Bombay Tyre

International v. UOI (1984) 1 SCR 347 = 1983 (14) ELT 1896 = (1984) 1 SCC 467 =
AIR 1984 SC 420 = 1983 ECR 1627D = 1984 (2) ECC 102 (SC) = (1986) 59 Comp
Cas 460 - (Para 44 of order) held that all distributors are not to be treated as
relatives. The term relative and distributor should be read down and understood
to mean as distributor who is a Relative of assessee. In commercial parlance,
Distributor is one who acts as agent of manufacturer for purpose of distribution of
goods. The distinction between distributor, dealer or agent is not clear cut and often
these words are inter-changeably used. Generally, distributor is not a buyer of goods
from manufacturer on his own account. Distributor has more obligations towards
principal and a specified territory may be assigned to him. However, if the relations
between manufacturer and buyer are on Principal to Principal basis and if the buyer
buys the goods outright, he cannot be treated as Distributor.

DEFINITION OF 'RELATIVE' IS AS PER COMPANIES ACT - The term Relative

carries the same meaning as in Companies Act. [Explanation (ii) to section 4(3)(b) of
Central Excise Act]. As per Companies Act, relative means (a) Members of HUF
(Hindu Undivided Family) (b) Husband and Wife (c) Any of the 22 relations defined
in the Act (like Father, Mother, Son, Sons wife, Daughter, Fathers Father, Sons Son
etc.). It is clear that only an individual can be a relative of other. If the manufacturer
or distributor is a Company or a partnership firm, it cannot be a relative as naturally
a Company or partnership firm cannot be wife, husband, etc. of somebody else !

Valuation when sale is through related person - If sale is made through related
person, price relevant for valuation will be normal transaction value at which the
related buyer sales to unrelated buyer.

As per Valuation Rule 2(b), normal transaction value means the transaction value
at which the greatest aggregate quantity of goods are sold. The term 'GREATEST
AGGREGATE QUANTITY' is used in Rule 7 of Customs Valuation Rules. This rule
states that while considering selling price of imported goods in India, unit price at
which greatest aggregate quantity of identical or similar goods are sold to unrelated
persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are
sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is
80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This
principle should apply in deciding 'normal transaction value' under rule 2(b) also.

Goods sold exclusively through related person other than 'inter-connected

undertaking' - As explained above, definition of related person has four sub-
clauses i.e. (i) Inter-connected undertaking (ii) Relatives (iii) Relative and Distributor
or (iv) Interest in each other. If goods are sold by assessee exclusively to or
through related person as defined in clause (ii), (iii) or (iv) above (i.e. except inter
connected undertaking'), relevant price will be normal transaction value of the
related person to unrelated buyer. The normal transaction value shall be considered
as on date of removal from the factory. Thus, the actual price at which such goods
are sold later by related person will not be relevant. The price of related person
ruling at the time of removal from factory of assessee will be relevant.

Goods sold only through inter-connected undertakings - If goods are sold only
through inter connected undertaking, as per rule 10, the provision applies only when
sale is to inter connected undertaking which is a holding or a subsidiary, or it is
related person under other provisions of section 4(3)(b). In other cases, it is treated
as sale to unrelated person.

Thus, even if buyer and assessee are inter connected undertaking, price charged
by assessee to buyer will be the transaction value if (a) the buyer is not a holding or
subsidiary of assessee or (b) if it is not related as per sub-clause (ii), (iii) or (iv)
above.

Price charged by buyer to an unrelated person will be considered only if (a) the
buyer is a holding or subsidiary of assessee or (b) if it is related as per sub-clauses
(ii), (iii) or (iv) above. In such cases, price will be normal transaction value of buyer
to unrelated person as per provisions of rule 9.

Background of Procedures under Excise

All assessees have to register with Central Excise authorities. They have to maintain
proper production and stock registers. Goods can be removed from factory only
under cover of an Invoice. Excise duty has to be paid through PLA or Cenvat credit
on monthly basis. Large assessees have to submit monthly return, while SSI units
have to submit quarterly returns.

The procedures prescribed under Central Excise Rules, 1944, have been
considerably simplified vide new rules w.e.f. 1.7.2001, which were later
supplemented by CBECs Central Excise Manual released on 1.9.2001.

Overall scheme of new rules - The old rules of 1944 were all
combined, i.e. the rules contained all the provisions in respect of all
the procedures. However, in case of new rules, separate rules are
made in respect of separate procedures. In some cases, powers have
been delegated to Central Government or CBE&C (Board) to issue
notifications. Thus, many provisions contained in old rules are now
contained in different rules and notifications. Thus now each separate
rule is small, but assessee will have to keep track of many rules and
notifications. The new rules are as follows -

Central Excise Rules, 2002

Cenvat Credit Rules, 2004
Central Excise (Appeal) Rules, 2001
Central Excise (Settlement) of Cases) Rules, 2001
Central Excise (Removal of Goods & Concessional Rate of Duty for Manufacture
of Excisable Goods) Rules, 2001

Various notifications Nos 35/2001-CE(NT) to 56/2001-CE(NT) have been issued

during the period 21-6-2001 to 29-6-2001. All these are effective from 1-7-2001.

CBE&Cs Central Excise Manual In the Budget Speech on 28-2-2001, Finance

Minister had stated A new Manual of Procedures on Central Excise and Customs
would be brought out by 1st September, 2001. The emphasis would be on simplicity,
brevity and transparency. I also propose to simplify the central excise rules to make
them user friendly.

Accordingly, new rules were made effective on 1.7.2001. Later, CBE&C has issued
new Central Excise Manual on 1.9.2001. This is mainly a compendium of previous
instructions given through trade circulars from time to time. The Manual is simple
and comprehensive. For an assessee, it is easier to keep track of one Manual rather
than innumerable trade notices and circulars.

The forwarding letter dated 31.8.2001 to the Manual states as follows, If there are
instructions which have not been expressly covered by this Manual, the same will
remain applicable, unless they are repugnant to provisions of the new Rules. It is
clarified that provisions of CE Act and Rules (including notifications issued
thereunder) shall precede. [It should be prevail]. It is stated that the Manual will be
revised / updated in September every year.

Rule 31 of CE Rules authorises Board, Chief Commissioner and Commissioner to

issue written instructions providing for any supplemental matters arising out of the
rules.

Thus, the instructions in the manual have statutory significance, though these
instructions cannot override provisions of Act or Rules. Some times, the rules /
notifications issued under rules state that procedure shall be prescribed by Board. In
such cases, the procedures prescribed in the Manual (or any other trade circular
issued by CBE&C) will be normally held as binding. In other cases, the instructions
in manual / trade circular are not strictly binding on assessee, though it is highly
advisable to follow them.

General provisions in respect of procedures Some general provisions in

respect of procedures are as follows

PRIVATE RECORDS BY ASSESSEE Earlier, rules specified various records to be

maintained in prescribed formats. Now, most of the statutory records have been
abolished, except a few like records by EOU. In some cases, like Daily Stock
Account (DSA) or Cenvat credit, requirements of records have been prescribed but
format is not prescribed. However, this does not mean that no records are required.
It only means that assessee can maintain his own private records as long as the
requirements as specified in the rules are satisfied. The records should be kept in
the factory to which they pertain. The records should be preserved for five years
immediately after the financial year to which such records pertain. Non maintenance
of records as specified in rules will mean contravention of specified rules and will
attract penal action. - Chapter 6 Part I Paras 2.1 and 2.4 of CBE&Cs CE Manual,
2001.

SELF PRE-AUTHENTICATION The DSA and even other records pertaining to

Central Excise shall be pre-authenticated by assessee on first and last page of the
book / register. - Chapter 6 Part I Para 2.1(v) and (vi) of CBE&Cs CE Manual, 2001.
- - Naturally, such pre-authentication is possible only if records are kept in book form.
Pre-authentication is not possible if (a) Records are maintained on computer (b)
Records are maintained in loose leaf form. Note that there is no statutory
requirement that the records must be kept in book form only.
SUBMISSION OF LIST OF RECORDS Every assessee should submit a list in
duplicate, of all records prepared or maintained by him for accounting of
transactions in regard to receipt, purchase, manufacture, storage, sale or delivery of
goods including inputs and capital goods to visiting Central Excise officer. [Rule
22(2) of Central Excise Rules].

SUBMISSION OF RECORDS The assessee is required to submit to his range

officer duly empowered by Commissioner or audit party or audit persons of C&AG
the following, for scrutiny (a) Records maintained or prepared in terms of rule
22(2) (b) Cost Audit Report u/s 233B of Companies Act (c) Income Tax Audit Report
u/s 44AB of Income Tax Act

MEANING OF RECORD The term 'record' means all records prepared or

maintained by assessee for accounting of transactions in regard receipt, purchase,
manufacture, storage, sales or delivery of goods including inputs and capital goods.
All accounts, agreements, invoice, price list, return, statement or any other source
document, whether in writing or in any other form shall be treated as records.
'Source document' are those documents which form basis of accounting
transactions. These include sales invoice, purchase invoice, journal voucher,
delivery challan and debit or credit notes. - Chapter 6 Part I Para 2.2 of CBE&Cs
CE Manual, 2001.

ELECTRONIC MAINTENANCE OF EXCISE RECORDS Provisions is specified in

Chapter 6 Part III of CBE&Cs CE Manual, 2001.

EXCISE AND CUSTOMS ON E-MAIL AND INTERNET - Information about excise is

available on internet at website http://www.cbec.gov.in and http://www.finmin.nic.in .
Notifications, Act, rules, Board circulars etc. in respect of Central Excise, Customs
and Service Tax are available on the site. Surprisingly, they are reasonably up-to-
date (though not always certainly you cannot expect that from Government).
Budget can be seen on finmin site.

Another Government site http://indiacode.nic.in gives text of many Central

Government Acts.

UPDATES ON INDIRECT TAXES Many internet sites are available which provide
regular updates on Indian laws. You may visit http://www.dateyvs.com to get regular
updates on Indian Indirect Taxes and Corporate Laws. The site provides * up-to-date
information about changes in law * Basic information about important laws * Links to
various useful sites. Free replies to queries are given.

Summary of Procedures - Some procedures are basic, which every assessee is

required to follow. Besides, some procedures are required to be followed as and
when required.

Basic Procedures

(1) Every person who produces or manufactures excisable goods, is

required to get registered, unless exempted. [Rule 9 of Central Excise
Rules]. If there is any change in information supplied in Form A-1, the
same should be supplied in Form A-1.
(2) Manufacturer is required to maintain Daily Stock Account (DSA) of
goods manufactured, cleared and in stock. [Rule 10 of Central Excise
Rules]

(3) Goods must be cleared under Invoice of assessee , duly authenticated

by the owner or his authorised agent. In case of cigarettes, invoice
should be countersigned by Excise officer. [Rule 11 of Central Excise
Rules]

(4) Duty is payable on monthly basis through GAR-7 challan / Cenvat

credit by 5th/6th of following month, except in March. SSI units have to
pay duty on monthly basis by 15th/16th of following month. Assessee
paying duty through PLA more than Rs 50 lakhs per annum is required
to make e-payment only [Rule 8].

(5) Monthly return in form ER-1 should be filed by 10th of following month.
SSI units have to file quarterly return in form ER-3. [Rule 12 of Central
Excise Rules] - - EOU/STP units to file monthly return in form ER-2
see rule 17(3) of CE Rules

(6) Assessees paying duty of Rs one crore or more per annum through
PLA are required to submit Annual Financial Information Statement for
each financial year by 30th November of succeeding year in prescribed
form ER-4 [rule 12(2) of Central Excise Rules].

(7) Specified assessees are required to submit Information relating to

Principal Inputs every year before 30th April in form ER-5, to
Superintendent of Central Excise. Return for 2004-05 was required to
be submitted by 31-12-2004 [rule 9A(1) to Cenvat Credit rules inserted
w.e.f. 25-11-2004]. Any alteration in principal inputs is also required to
be submitted to Superintendent of Central Excise in form ER-5 within 15
days [rule 9A(2) to Cenvat Credit rules inserted w.e.f. 25-11-2004]. Only
assessees manufacturing goods under specified tariff heading are
required to submit the return. The specified tariff headings are 22, 28
to 30, 32, 34, 38 to 40, 48, 72 to 74, 76, 84, 85, 87, 90 and 94; 54.02,
54.03, 55.01, 55.02, 55.03, 55.04. Even in case of assessees
manufacturing those products, only assessees paying duty of Rs one
crore or more (either through current account or Cenvat credit) are
required to submit the return.

(8) Assessee who is required to submit ER-5 is also required to submit

monthly return of receipt and consumption of each of Principal Inputs in
form ER-6 to Superintendent of Central Excise by tenth of following
month [rule 9A(3) to Cenvat Credit Rules inserted w.e.f. 25-11-2004].
Only those assessees who are required to submit ER-5 return are
required to submit ER-6 return.

(9) Submit Annual Installed Capacity Statement in form ER-7 every year
before 30th April.

(10) Every assessee is required to submit a list in duplicate of records

maintained in respect of transactions of receipt, purchase, sales or
delivery of goods including inputs and capital goods, input services and
 financial records and statements including trial balance [Rule 22(2)].

(11) Inform change in boundary of premises, address, name of authorised

person, change in name of partners, directors or Managing Director in
form A-1. [Refer Instructions given below form A-1]

These are core procedures which each assessee has to follow. There
are other procedures which are not routine.

The non-core procedures are as follows -

(a) Export without payment of duty or under claim of rebate [Rules 18 and 19 of
Central Excise Rules]

(b) Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules]

(c) Receipt of Goods at concessional rate of duty for manufacture of Excisable

Goods.

(d) Payment of duty under Compounded Levy Scheme

(e) Provisional Assessment [Rule 7 of Central Excise Rules]

(f) Warehousing of goods.

(g) Appeals and settlement.

Following are the returns to be filed

Following are the returns to be filed

Form of Description Who is Time limit for

Return required to file filing return
ER-1 Monthly Return Manufacturers 10th of
by large units not eligible for following month
[Rule 12(1) SSI concession
of Central
Excise
Rules]
ER-2 Return by EOU EOU units 10th of
following month
[Rule 12(1)
of Central
Excise
Rules]
ER-3 Quarterly Return Assessees 20th of next
 by SSI availing SSI month of the
concession quarter
[Proviso to
Rule 12(1)
of Central
Excise
Rules]
ER-4 Annual Financial Assessees Annually by
Information paying duty of 30th November
[rule 12(2) Statement Rs one crore or of succeeding
of Central more per year
Excise annum either
Rules] through PLA or
Cenvat or both
together (Till 29-
9-2008, the
provision was
applicable only
when payment
through PLA
alone was more
than Rs one
crore).
ER-5 Information Assessees Annually, by
relating to paying duty of 30th April for
[Rules Principal Inputs Rs one crore or the current year
9A(1) and more per annum (e.g. return for
9A(2) of (either through 2005-06 is to
Cenvat PLA or Cenvat be filed by 30-
Credit or both together) 4-2005].
Rules] and
manufacturing
goods under
specified tariff
headings (Till
29-9-2008, the
provision was
applicable only
when payment
through PLA
alone was more
than Rs one
crore).
ER-6 [Rule Monthly return of Assessees 10th of
9A(3) of receipt and required to following month
Cenvat consumption of submit ER-5
Credit each of Principal return
Rules] Inputs
ER-7 [Rule Annual Installed All assessees Annually, by
12(2A) of Capacity 30th April for
Central Statement the current
Excise year.
Rules]
Form as per Quarterly return Registered By 15th of
Notification of Cenvatable dealers following month
No. Invoices issued
 73/2003-
CE(NT)
[Rule 9(8)
of Cenvat
Credit
Rules]
ST-3 [Rule Half yearly return Person liable to Within 25 days
9(9) of of taxable pay service tax from close of
Cenvat services half year
Credit provided
Rules and
rule 7(2) of
Service Tax
Rules]
ST-3 [Rule Hal yearly return Input Service Within one
9(10) of of Cenvat credit Distributor month from
Cenvat distributed close of half
Credit year
Rules]

These are core procedures which each assessee has to follow. There are other
procedures which are not routine. These are as follows -

(a) Export without payment of duty or under claim of rebate [Rules 18 and 19 of
Central Excise Rules]

(b) Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules]

(c) Receipt of Goods at concessional rate of duty for manufacture of Excisable

Goods.

(d) Payment of duty under Compounded Levy Scheme

(e) Provisional Assessment [Rule 7 of Central Excise Rules]

(f) Warehousing of goods.

(g) Appeals and settlement

Administrative set up of Central Excise

Rules and procedures often prescribe designations of various officers of Excise and
it is essential to have an idea of administrative set up of department to understand
the powers and status of these authorities. Administration of Central Excise is under
Ministry of Finance, Government of India.

Board - CBE&C - A Central Board of Excise and Customs (CBE&C - called Board)
has been formed with headquarters at New Delhi. The Board is formed under
Central Boards of Revenue Act, 1963. This Board, consisting of six/seven members,
headed by Chairman, has powers to administer the Excise Act. Chairman of Board
is empowered to distribute work among himself and other members and specify
cases which will be considered jointly by Board.

Rule 3(1) of Central Excise Rules authorises Board to appoint Central Excise
Officers. Board can exercise all powers conferred on these officers under the Central
Excise Act.

Similarly, section 4(1) of Customs Act authorises Board to appoint officers of

customs. As per section 4(2) of Customs Act, Board can authorise Chief
Commissioner, Commissioner of Customs, Joint/Deputy/Assistant Commissioner to
appoint officers below Assistant Commissioner.

Section 37B of CEA [parallel section 151A of Customs Act] authorises Board to issue
orders, instructions and directions to Central Excise Officers for purposes of
uniformity in the classification of excisable goods or with respect to levy of excise
duties on such goods. Rule 31(1) of Central Excise Rules (Previous Rule 233)
authorises CBE&C, Chief Commissioner and Commissioner to issue written
instructions providing for any supplemental matters arising out of the rules. These
administrative orders are binding on lower officers.

DEPARTMENTAL CIRCULARS AND TRADE NOTICES NOT BINDING BUT

DEPARTMENT CANNOT TAKE A STAND AGAINST TRADE NOTICES - View of
Supreme Court is that departmental circulars and trade notices are not binding on
assessee or quasi-judicial authorities. However, department itself, which has issued
the circular, cannot take a stand contrary to the circular. Department can withdraw
the circular, but with prospective effect - view confirmed in Commissioner of Sales
Tax v. Indra Industries 2000(6) SCALE 392 (SC 3 member bench)].

Chief Commissioner of Central Excise - Country is divided in several zones. Each

zone is under supervision of Chief Commissioner of Central Excise. Rule 3(2) of
Central Excise Rules authorised Board to specify jurisdiction of Chief Commissioner,
Commissioner or Commissioner (Appeals).

Posts of 34 Chief Commissioners have been sanctioned vide Notification No.

14/2002-CE(NT) dated 8-3-2002 read with 14/2002-Cus(NT) dated 7-3-2002. [23 in
Excise and 11 in Customs]. The notifications have been made effective w.e.f. 1-11-
2002.

In the interior i.e. non-coastal areas, Chief Commissioner of Central Excise looks
after customs work also.

Commissioner of Central Excise - Each zone covers various Commissionerates

and Commissioner of Central Excise (CCE) is Administrative in-charge of the
Commissionerate.

As per Notification No. 14/2002-Cus(NT) dated 7-3-2002 (made effective from 1-11-
2002), there are 92 Commissioners and 71 Commissioner (Appeals).

Rule 3(1) empowers CBE&C to confer on any officer the powers of conferred by
Central Excise Rules by issue of notification.

There are 35 Commissioners of Customs [Notification No. 15/2002-Cus(NT) dated

7-3-2002] and 19 Commissioner of Customs (Appeals) [Notification No. 16/2002-
Cus(NT) dated 7-3-2002]. These notifications are effective from 25-10-2002.

In the interior i.e. non-coastal areas, Commissioner of Central Excise look after
customs work also.

Additional Commissioner of CE - There may be one or more Additional

Commissioner in a Commissionerate. Appeal against order of Commissioner lies
with CESTAT while appeal against order of Additional Commissioner lies with
Commissioner (Appeals). Restrictions on powers of Additional Commissioner have
been placed through administrative instructions. Commissioner has unlimited
powers of adjudication, while Addl Commissioner has restricted powers of
adjudication.

Joint Commissioner - This post has been created in May, 1999, subsequent to
implementation of report of fifth pay commission. [The post is equivalent to earlier
Dy Commissioner]

Deputy Commissioner, Assistant Commissioner and Superintendent - Each

Commissionerate of Central Excise is divided into divisions and each division is
under administrative control of Deputy Commissioner' or 'Assistant Commissioner of
Central Excise. Assistant Commissioner (Senior Scale) is designated as 'Deputy
Commissioner'. However, both Assistant Commissioner and Deputy
Commissioner have same powers. The post of Dy Commissioner has been
created in June 1999, subsequent to implementation of report of fifth pay
commission [Previous Dy Commissioners have been elevated as 'Jt
Commissioners'].

The division under each Deputy / Assistant Commissioner of Central Excise is

further divided into various ranges and each range is under control of
Superintendent of Central Excise, who is of the rank of a Gazetted Officer.
Inspectors work under Superintendent and some powers have been delegated to
them. Inspector is not a Gazetted Officer.

Registration of factory/warehouse

As per section 6 of CEA, registration is compulsory for (a) every manufacturer or

producer of excisable goods (b) warehouse where goods are stored without
payment of duty.

As per Rule 9 of Central Excise Rules (Earlier rule 174), every person who
produces, manufactures, carries on trade, holds private store-room or warehouse or
otherwise uses excisable goods shall get registered. The rule also authorises Board
to issue notifications (a) specifying conditions and procedures for registration and (b)
granting exemption to person or class of persons from provisions of registration.

Registration is compulsory as both section 6 of CEA and rule 9(1) use the words
shall. It has been clarified that registration granted in earlier old rule 174 will be
valid under new rules.

Application for registration should be made in prescribed form A-1

issued vide notification No. 35/2001-CE(NT). The requirements for
registration, as contained in Notification No. 35/2001-CE(NT) are -
 Separate registration is required for each separate premises, if person has more
than one premises. [However, in case of textile and textile articles, if a person has
more than one premises within the jurisdiction of one Commissioner, he can
obtain a single registration].
Registration is not transferable. If business is transferred, fresh registration has to
be obtained by the transferee.
Registration certificate shall be granted within seven days of receipt of duly
completed application. Registration Certificate will be issued in prescribed form
RC. [Earlier form R-2]
Change in constitution of partnership firm or Company should be intimated within
30 days of change. In case of such change, fresh registration is not required.
If the manufacturer ceases to carry on operations for which he is registered, he
should apply for de-registration.
Registration can be revoked or suspended if the holder of registration or any
person in his employment commits breach of any of the provisions of Central
Excise Act or Rules or has been convicted under section 161 of Indian Penal
Code.
If there is any change in information given in form A-1, the change should be
informed in form A-1 itself.

REGISTRATION OF DEALERS - As per Cenvat rules, dealers / importers can issue

invoices for Cenvat purposes, i.e. buyer can avail Cenvat on basis of such invoices.
Dealers who intend to issue Cenvatable Invoices need registration. Other dealers
(i.e. those who do not intend to issue Cenvatable Invoice) are exempt from
registration.

Procedure for obtaining registration. - Procedure for registration has been

prescribed vide CBE&C circular No. 662/53/2002-CX dated 17-9-2002 and
notification No. 35/2001-CE(NT) dated 26-6-2001.

Application for registration in form A-1 duly completed and signed should be
submitted in office of jurisdictional Assistant/Deputy Commissioner in duplicate. In
case of EOU located in port towns, application should be submitted to DC/AC
Customs, who is administrative in-charge of the EOU.

EOU units procuring goods from DTA or supplying goods to DTA are required to be
registered. EOU unit having no inter-linkage with domestic economy through sale or
purchase of goods need not register. [There will be hardly such a unit]. Unit in SEZ
is not required to be registered under Central Excise.

Application should be accompanied by self-attested copy of PAN issued by Income

Tax department. If PAN is not available, copy of application made for PAN should be
submitted. Temporary 15 digit registration number can be issued which will later be
converted into permanent number based on PAN.

The application will be scrutinized by inspector in the office of AC/DC and if found in
order, it shall be fed into computer through website SACER (System for Allotment of
Central Excise Registration). Suitable entry will be made of the action taken in the
record to be maintained. Registration Certificate bearing the 15 digit PAN based
registration number will be generated by computer system, which will be delivered to
assessee on the spot. Registration Certificate should be ready within 30 minutes on
completion of data entry. If it is not possible to issue Registration certificate
immediately, acknowledgment of application will be given on the spot. Later,
registration certificate shall be either sent by post or handed over personally to
assessee on the next working day.

After grant of registration certificate, original copy will be retained by divisional office
and duplicate copy will be sent to Range Superintendent for post facto verification.
The Range Officer and Sector Officer (i.e. Superintendent and Inspector) shall verify
the declared address and premises within 5 working days. If found in order, it will be
certified on the duplicate copy and sent to Divisional Office for record. Name of
officer doing verification and date of verification will be entered into system. In case
of EOU, verification is already done while granting Customs private bonded
warehouse. Hence, post facto verification may not be required.

Major variation like fake address, non-existence of factory etc. shall be intimated to
AC/DC for revoking the registration, after giving opportunity of hearing.

In case of company / partnership firm, the name of company / firm should be

mentioned as legal name of business and not of the person who is signing the
application.

Exhibition of registration certificate The registration certificate or a copy thereof

shall be exhibited by registered person in a conspicuous part of registered premises.
- Chapter 2 Part I Para 7.3 of CBE&Cs CE Manual, 2001.

Registration of different portions of same factory - Often a factory has different

portions located in adjoining premises, or premises separated by road, railway line
or canal. In such case, Commissioner can allow single registration, subject to proper
accountal of movement of goods from one premise to other and other conditions and
limitations as he may specify. - Para 3 of notification No. 36/2001-CE(NT) dated
26.6.2001.

Excise Control Code - ECC to assessee - Each registered person is given an

assessee code (Excise Control Code - ECC). New ECC code has been introduced
w.e.f. 1-1-2000.

In the new system, PAN of Income Tax will be common identifier by various agencies
like excise, customs, DGFT, RBI etc. PAN is a 10 digits alpha numeric code and can
identify upto 96 crores business entities. It is generated centrally by the computer
system. Advantage of the code is that it is not dependent upon office of registration
of the company. Common identifier by all departments will facilitate linkages,
exchange of information and verification. Assessee will have to obtain and quote
only one number to all departments.

Exemption from registration - Rule 9(2) of Central Excise Rules authorises Board
to grant exemption from registration in certain cases. Under these powers,
Notification No. 36/2001-CE(NT) grants exemption from registration, in various
cases as explained below.

When manufacturer is completely exempt from duty - If products of a manufacturer

are completely and unconditionally exempt from duty, he is required to file a
declaration in prescribed form to CE authorities. Mercifully, such declaration is
required to be filed only once and not every year.

Exemption from registration if goods conditionally exempt - Some goods are exempt
on basis of value of clearances e.g. goods manufactured by small scale units are
exempt upto turnover of Rs 100 lakhs. Such units are also exempt from registration.
An SSI unit has to submit a declaration in prescribed form, only in cases where its
turnover is more than 'specified turnover of Rs 90 lakhs. If clearances are more than
'specified turnover' (Rs 90 lakhs), a declaration has to be submitted. However, they
do not have to register with excise authorities. They do not have to follow any excise
procedures. Such declaration has to be filed only once and not every year. SSI units
whose clearances are less than Rs 90 lakhs in a financial year are not required to
submit any declaration. While calculating limit of Rs 90 lakhs, export turnover is not
required to be considered, as the limit of Rs 90 lakhs is only in respect of clearances
for home consumption.

EXPORT TURNOVER NOT TO BE CONSIDERED FOR PURPOSE OF

EXEMPTION FROM REGISTRATION - As per earlier instructions, while calculating
turnover of Rs 100 lakhs for exemption from registration, export turnover was not to
be considered. Thus, if clearance for home consumption (i.e. excluding export
turnover), are less than Rs 100 lakhs, it is not necessary to take registration and
follow excise procedures. - CBE&C circular No 284/118/96-CX dated 31.12.1996.
Since para (1)(b)(ii) of notification No 36/2001-CE(NT) dated 26.6.2001, which
grants exemption from registration, uses similar words as per earlier notification, the
instructions are still valid.

Exemption if goods got manufactured from others - If a person gets goods

manufactured on his account from others, he is the manufacturer and has to obtain
registration. However, he can be exempted from registration if (a) He authorises
actual manufacturer to comply with all excise procedural formalities (b) Agrees to
furnish information regarding selling price for determination of Assessable Value.

In case of textile and textile articles, the duty liability is on the raw material supplier.
Hence, he is not exempted from registration, unless the job worker himself, at his
option, agrees to register himself and pay excise duty.

Special provision in respect of textile articles including readymade garments - The

exception is that in case of textile articles (yarn and fabrics) and readymade
garments or made up textile articles, duty liability is on raw material supplier, even if
he is not really the manufacturer. He will have to register with central excise and pay
duty. [Rule 12B(1)] of Central Excise Rules].

Wholesale and retail traders and dealers - Persons carrying on wholesale trade or
dealers in Excise require registration only if they intend to issue Cenvatable Invoice.
Otherwise, they are exempt from registration.

Factory under Central Excise - Section 2(e) define factory as any premises,
including the precincts thereof, wherein or in any part of which, excisable goods are
manufactured; any part of manufacturing process connected with production of
these goods is ordinarily carried on. Thus, whole premises will be factory if in any of
its part, excisable goods are manufactured or manufacturing process connected with
production is carried out. - Bongaigaon Refinery and Petro Chemical Ltd. v. CCE -
1992 (57) ELT 383 (Cal HC). In Grauer Weil (I) Ltd. v. CCE - (1995) 1 SCC 77, it was
held that any premises including precincts thereof covers all buildings with its
surroundings which form part of the unit. In Superintending Engineer v. CCE
1992(59) ELT 610 (CEGAT), it was held that 'premises' is not restricted to buildings,
but it covers open land also.

CENVAT ALLOWED ONLY IF INPUTS / CG USED WITHIN FACTORY - Cenvat

credit is allowed only if inputs or capital goods are used within the factory as defined
in section 2(e). Hence, definition of 'factory' is very important for Cenvat purposes.
See case law under Cenvat.

Storage and Accounting of Goods

Since excise is a duty on manufacture of goods, duty liability is fastened as soon as

goods are manufactured. However, under Rule 4(1) of Central Excise Rules, goods
cannot be removed from the place they are produced or manufactured without
payment of duty. Thus, finished goods can be stored in place of manufacture without
payment of duty. This only defers the liability till clearance of goods from factory.

There is no time limit within which goods must be removed from the place of
manufacture or production (that time it was store room). Duty is payable only when
goods are removed and hence duty cannot be demanded in respect of goods
accounted for and lying in the store room. - Tirupati Cigarettes v. CCE 1998(101)
ELT 426 (CEGAT).

Daily Stock Account of stored goods - A daily stock has to be maintained by

every assessee. [Rule 10(1) of Central Excise Rules]. [earlier rule 53(1)]. [Till 30-6-
2000, the record was required to be maintained in prescribed form termed as RG-1
register. That register has been scrapped. However, records are required to be
maintained].

The records should be maintained on daily basis, in a legible manner, indicating

particulars regarding (a) Description of goods manufactured or produced (b)
Opening Balance (c) Quantity produced or manufactured (d) Inventory (i.e. stock) of
goods (e) Quantity Removed (e) Assessable Value (f) Amount of duty payable (g)
Particulars regarding amount of duty actually paid.

The first page and last page of such account book shall be duly authenticated by the
producer or manufacturer or his authorised agent. All such records shall be
preserved for 5 years.

Note that concept of store room and stock taking has been abolished w.e.f.
1.7.2001. Thus, now there is no restriction in storage of final products in factory and
these can be stored anywhere.

When entry is required in DSA - As soon as goods are manufactured, these

should be deposited in store room. In the opinion of author, the correct legal position
is that entry in Daily Stock Account (DSA) should be made only after goods are fully
manufactured, duly tested and packed by assessee.

Storage for trading - Some manufacturers may like to trade from their factory in
goods not manufactured by them. Manufacturers of consumer goods wish to
maintain a retail sale shop near the factory, which is open to public. So far, there
were restrictions, as the old rule 51A of Central Excise provided that no duty paid
goods shall be allowed to enter or retained in any part of premises of factory, except
with general or special order of Board or Commissioner. Now, that rule has been
deleted and there is no corresponding provision in new rules. Hence, in the opinion
of author, there is now no prohibition if manufacturer wants to trade in goods from
his factory. Of course, proper records will have to be maintained. The fact should be
disclosed in part II of form A-1 which is application for registration. However, as per
the present form of registration certificate (RC), amendment to registration certificate
is not required.

If the manufacturer intends to issue Cenvatable Invoice, separate registration

certificate as dealer should be obtained. Separate series of Invoices may be used
as Dealers Invoice and this fact should be informed to department.

Department has clarified that a manufacturer can bring duty paid goods in the
registered premises for trading activity and permission from excise department is not
required. However, a factory cannot receive goods from outside which are identical
to those manufactured by assessee, without permission from Commissioner. CCE,
Pune II instruction No. 2/2001 dated 12.11.2001 similar CCE, Indore TN 29/2002-
CE dated 7-10-2002. [The instruction that identical goods should not be brought
without permission does not seem to have any legal backing, in absence of any
statutory provision].

Remission of duty on lost/destroyed goods - Goods which are fully manufactured

and entered in Daily Stock Account (DSA) are liable for duty. However, if these are
lost or destroyed in storage, by natural causes or by unavoidable accident or are
unfit by consumption for marketing, remission of duty can be given by Commissioner
on application. Remission means waiver or cancellation of excise duty legally
payable. Section 5 of CEA provides that Central Government can provide for
remission of duty of excise payable on excisable goods, which due to any natural
cause, are found to be deficient in quantity, by making rules in that behalf.

If the goods were not entered in 'daily stock account' as they were not fully
manufactured, question of remission of duty does not arise at all as there is no duty
liability.

The application for remission has to be made before removal of the goods from
factory. [Rule 21 of Central Excise Rules].

Penalty for not maintaining records - Not accounting for excisable goods
manufactured, produced or stored by assessee is an offence under Rule 25(1)(b) of
Central Excise Rules. Penalty upto duty payable on goods can be imposed and
offending goods can be confiscated.

Goods can be confiscated and penalty can be imposed if DSA (daily stock account -
that time RG-1 register) is not maintained upto date and there is overwriting and
cutting in the accounts - Hawkins Cookers Ltd. v. CCE 1997(12) ELT 255 (CEGAT
SMB).

Difference in stock as per DSA and physical stock - Though the concept of store
room and stock taking have been deleted in new rules, not maintaining proper
records of excisable goods is an offence under rule 25(1)(b) of Central Excise Rules.
As per this rule, all such (contravening) goods are liable to confiscation, plus penalty
upto duty on the excisable goods in respect of which contravention has been
committed or Rs 10,000 whichever is more, can be imposed. Hence, in the opinion
of author, if difference is found between physical stock and book stock or if finished
goods are not entered in Daily Stock Account, penalty can be imposed and goods in
respect of which contravention is done can be confiscated.

Clearance of Goods from factory

'Clearance' means removal from the factory of excisable goods. Rule 11 of Central
Excise Rules [earlier rule 52A] provides that excisable goods can be removed from
factory only under an Invoice. Requirements of Invoice are as follows :

CONTENTS OF INVOICE - As per Rule 11(2) of Central Excise Rules, invoice shall
contain (a) Registration Number (b) Name of consignee (c) Description and
classification of goods (d) Time and date of removal (e) Quantity and Value of goods
(f) Rate of duty (g) Duty payable on the goods. [Obviously, other details like name
and address of assessee and consignee should be mentioned. Mode of transport
may also be indicated though not mandatory].

SERIAL NUMBERED - Invoice should be serially numbered. Earlier rule provided

for Printed Serial Number. Now, the word printed has been removed. However, the
serial number can be given either by printing or by franking machine. Hand written
serial numbers shall not be accepted. The serial number should start from 1st April
and will continue for the whole financial year. - Chapter 4 Part I Paras 3.1 and 3.2 of
CBE&Cs CE Manual, 2001.

INVOICE IN TRIPLICATE WITH SUITABLE MARKS - Invoice should be in triplicate

and should be marked as follows (i) Original shall be marked ORIGINAL FOR
BUYER (ii) Duplicate copy shall be marked DUPLICATE FOR TRANSPORTER (iii)
Triplicate shall be marked TRIPLICATE FOR ASSESSEE.

Each copy should be distinctively marked as aforesaid. In some cases, it is

observed that the copies are either stamped or all copies are printed with all the four
descriptions and one of them is ticked. This practice is illegal and should be stopped
forthwith to avoid detention of consignments or denial of Cenvat credit - Pune
Commissionerate TN 122/95 dated 3-1-1996.

ADDITIONAL COPIES OF INVOICE Assessee can make more copies of invoice

for other requirements. These should be clearly marked as NOT FOR CENVAT
PURPOSES.

SERIAL NUMBERS TO BE INFORMED - Before making use of the invoice book,

serial numbers shall be intimated to Range Superintendent. It is not necessary to
obtain dated acknowledgment. Hence, intimation though post, e-mail, fax or hand
delivery is sufficient. [What he does with that information is a mystery and closely
guarded secret].

ONE SET OF INVOICE BOOK AT A TIME, BUT SEPARATE SERIES FOR EXPORT
PERMITTED - There should be only one invoice book in use at a time. Separate
sets of invoices can be maintained with different serial numbers, with permission of
Assistant / Deputy Commissioner. He can permit use of more than one invoice
books of each type in special circumstances of each case. The Invoices should have
different numeric serial numbers for different sets.

However, general permission has been granted to use two different invoice books
one for removals for home consumption and other for removal for export. Assessee
has to just intimate AC / DC. No permission is required. - Chapter 4 Part I Para 5.2
of CBE&Cs CE Manual, 2001.

ROUNDING UP OF DUTY - As per section 37D, duty, interest, penalty etc. should
be rounded off to nearest Rupee. Part less than 50 Ps shall be ignored.

PRE-AUTHENTICATION OF INVOICE - Each foil of the Invoice shall be pre-

authenticated by the assessee - by owner, working partner, Managing Director or
Secretary or any person duly authorised for this purpose, before being brought into
use. [Rule 11(5) of CE Rules]. The company, owner or working partner can authorise
any person to authenticate the Invoice. Copy of letter of authority should be
submitted to Range Office. - Chapter 4 Part I Para 6.1 of CBE&Cs CE Manual,
2001.

INVOICE SHOULD BE IN BOOK FORM Rule 11(4) of Central Excise Rules

[earlier rule 52A(7)] refers to Invoice Book. Hence, invoices should be in book form
i.e. bound form. Original and duplicate should be delivered to the consignee and
triplicate copy should be retained in the Invoice Book. The invoices can be loose
leaf only if Invoices are computerised. Rule 11(3) [earlier rule 52A(3)] states that
Invoice shall be marked as ORIGINAL FOR BUYER etc.

CENVAT CREDIT CANNOT BE DENIED FOR MINOR DEFECTS Cenvat credit

cannot be denied for minor defects in invoice.

Provisions in respect of computerisation of Invoices - Computerisation of

Invoices is freely permitted and no permission is required. If running stationary is
used, the stationary should be pre-printed with distinctive names and marks of the
assessee. After invoices are prepared, triplicate copy shall be retained in bound
book form. - Chapter 4 Part I Para 5.4 of CBE&Cs CE Manual, 2001.

If invoices are prepared on computer, generation of serial number by computer at

the time of printing of invoice on blank stationery of computer is permitted. However,
this is so only if the software is such that computer automatically generates number
and same number cannot be generated more than once. - Chapter 4 Part I Para 3.3
of CBE&Cs CE Manual, 2001.

Supplementary Invoice for differential duty - Assessee may have to pay

differential duty as his assessment was provisional or he got price escalation from
buyer later or duty was short paid through mistake or for any other reason. In such
cases, he has to pay differential duty by preparing supplementary invoice. Buyer can
avail Cenvat credit on basis of such supplementary invoice, except when such
differential duty payment was on account of fraud, suppression of facts, collusion or
wilful misstatement. [Rule 7(1)(b) of Cenvat Credit Rules].

Though rules do not specify, such supplementary invoice should be from same
series of invoice. It should give cross reference to the original invoice under which
the goods were cleared.

Relevant Date for determination of duty and tariff valuation Rule 5 of Central
Excise Rules [earlier rule 9A] provides that rate of duty and tariff valuation applicable
for excisable goods shall be decided as follows :
DATE OF ACTUAL REMOVAL FROM FACTORY OR WAREHOUSE Duty will be
payable at rate and valuation as applicable at the time of actual removal from factory
or warehouse, except in case of khandsari molasses.

DATE IN CASE OF KHANDSARI MOLASSES Rate of duty applicable in case of

khandsari molasses shall be the rate in force on date of receipt of such molasses in
the factory of the procurer of such molasses. [The provision has been made as in
case of khandsari molasses, duty is payable by procurer and not the manufacturer] -
Rule 5(2) of Central Excise Rules. - - Validity of this rule has been upheld in Ranson
Industries v. UOI 2003(151) ELT 53 (J&K HC DB).

DATE WHEN GOODS CLEARED FOR CAPTIVE CONSUMPTION If excisable

goods are used within the factory (captive consumption), the date of removal will be
the date on which the goods are issued for such use within the factory.
Explanation to Rule 5(2) of Central Excise Rules.

GOODS CLEARED FOR EXPORT BUT NOT EXPORTED There is no specific

provision. As per rule 5, relevant date is date of removal from factory. Hence, it
appears that if goods cleared from factory are not exported, rate of duty or tariff
value applicable will be rate or value in force on the dates when the goods were
removed from the factory. Same principle should be applicable to goods cleared to
be re-warehoused at another place, but sold without re-warehousing.

DATE WHEN GOODS ARE CLANDESTINELY REMOVED New rules do not make
any provision in respect of cases when goods are clandestinely removed. Thus, it
will be necessary to estimate the dates/period during which the goods might have
been removed and apply rate as applicable during that period.

Payment of duty

Goods have to be cleared from factory (or under bond for export or Chapter X
procedure without payment of duty), under an Invoice. Duty is payable on monthly
basis. Duty can be paid through current account (PLA) and/or Cenvat credit. [Till 31-
3-2000, duty was required to be paid on daily basis or consignment basis through
PLA / Cenvat credit, before removal of goods from factory].

Goods have to be cleared from factory, under an Invoice. Duty is payable on

monthly basis. [Rule 8 of Central Excise Rules]

SPECIAL PROVISIONS FOR MONTH OF MARCH - Since Government accounts

close on 31st March, special provisions are made for payment of duty in March.
Duty in respect of clearances in the month of March are payable by 31st March only
and not in the following month.

CENVAT CREDIT AVAILABLE INSTANTLY - Even if the manufacturer pays duty on

monthly basis, the buyer of goods is entitled to get Cenvat credit as per Cenvat rules
as soon as goods are received in the factory, as if the duty has been already paid on
the goods. - Rule 8(2) of Central Excise Rules.

PAYMENT BEFORE REMOVAL EACH TIME IS ALSO PERMISSIBLE - Till 31-3-

2000, assessee was required to make payment of duty before clearance of goods. If
assessee wants to pay duty on daily basis or consignment basis, he is allowed to do
so Chapter 3 Part V Para 1.2 of CBE&Cs CE Manual, 2001.

EOU/SEZ HAVE TO PAY DUTY EACH TIME BEFORE CLEARANCE For some
unknown and obscure reasons, the facility of monthly payment of excise duty is not
available to EOU/SEZ units. They have to pay excise duty every time before
clearance of goods, as per clear provisions of rule 17 of Central Excise Rules.

recovery of duty self assessed under rule 6 and interest payable under rule 8(3)
[Rule 8(4)]. [Section 11 provides for recovery of amount due from assessee by
attachment and sale of excisable goods or by certification proceedings].

Maintenance of PLA Assessee should pay duty through account current

(Popularly known as PLA Personal Ledger Account). Any assessee who has
obtained 15 digit ECC number from Superintendent can operate a current account.
No specific permission is necessary.

The PLA is credited when duty is deposited in bank by TR-6 challan and duty is
required to be paid by making a debit entry in the PLA on monthly basis. PLA and
Cenvat credit should be used only for payment of excise duty and not for other
payments like rent, fines, penalties etc.

PLA contains following details : (a) Serial No. and date, (b) details of credit like TR-6
challan number, date and amount - separately for each subhead of excise duty like
basic duty, special duty, additional duty etc. (c) details of debit and (d) balance. PLA
has to be maintained in triplicate using indelible pencil and both sided carbon. Each
entry should be serially numbered and should be made on a separate line. The
running serial number should start from 1 every financial year. Both debit and credit
entry should not be on same line and there should be separate line for each debit or
credit entry. Mutilations or erasures of entries once made in PLA are not allowed. If
any correction is necessary, the original entry should be neatly scored out and
attested by assessee. Two copies of PLA and copies of TR-6 receipted challans
shall be submitted along with monthly / quarterly ER-1 return. Form of PLA has
been prescribed in Annexure 8 of CBE&Cs CE Manual, 2001.

It is not necessary that there must be some minimum credit balance in PLA. It is
sufficient if there is balance at the time of debit in PLA on monthly basis. - Chapter 3
Part V Para 3.4 of CBE&Cs CE Manual, 2001.

Debit to PLA is payment of duty - It has been held that debit of duty to PLA is
effective payment of duty and not mere adjustment entry - Samrat International (P.)
Ltd. v. CCE - 1992 (58) ELT 561 (SC) = AIR 1991 SC 369.

TR-6 Challan - The prescribed challan form TR-6 should be filled in giving details
like name and 15 digit ECC code number of manufacturer, code number of Excise
Commissionerate/Division/range and code of branch of Bank. The challans should
be serially numbered, from 1st April onwards - Belgaum Commissionerate TN
129/95 dated 13.12.1995.

Four copies are submitted to authorised Bank. These should be marked as Original,
Duplicate, Triplicate and quadruplicate. Two copies of challan are returned by bank
duly stamped after amount is paid and two copies are retained by bank. One copy is
to be submitted to excise authorities along with monthly return. (Out of two copies
retained by Bank, one copy is sent to Excise authorities directly for their accounting
and cross verification of the credit entries made by assessees.) If cash is deposited,
receipted challan is given immediately by bank. However, if payment is made by
cheque, challan is given duly receipted only after cheque is realised. Credit of
amount deposited in Bank can be taken only after the bank issues receipted challan.

COLUMNS IN TR-6 CHALLAN - The TR-6 challan requires details like (a) serial
number (b) Name, address and code number of assessee (c) Excise
Commissionerate, Division and Range (d) PLA number, name of commodity (e)
Account head of duty - this is computer code decided by Excise department (e)
Amount deposited in cash/cheque/demand draft.

COUNTERSIGNATURE OF EXCISE OFFICER NOT NECESSARY - Amount under

TR-6 challan for credit in PLA can be paid in bank with signature of authorised officer
of assessee. Countersignature of excise officer is not necessary - Meerut
Commissionerate Trade Notice No. 98/88 dated 18-7-88.

Account Head Code - The account head code has to be mentioned in TR-6 challan.
Major accounting head code is 0038 for Central Excise, 0037 for Customs duties
and 0044 for Service Tax. Some of the minor account head codes normally required
are as follows : * Basic Excise Duty - 00380003 * Additional excise duties in lieu of
sales tax - 00380335 * Other Receipts 00380453 * National Calamity Contingent
Duty - 00380106

In case of customs, minor account heads are : * Import duty - 00370002 * Export
duty - 00370052 * National Calamity Contingent Duty 00370060 * Other Receipts -
00370107 * Fees, fines, forfeitures and misc. items - 00370114.

Cenvat credit only of inputs received upto end of month - Duty can be paid
through PLA and/or Cenvat credit. Excise duty is payable on monthly basis. Duty for
clearances during the month is payable by 5th of following month. In case of SSI
units, the duty for whole month is payable by 15th of following month.

Proviso to rule 3(3) of Cenvat Credit Rules states that Cenvat credit available at the
end of the month only can be availed, even if duty is payable by 5th or 15th of
following month. Thus, even if some inputs / capital goods are received after end of
the month, only Cenvat credit available as on last day of the month can be utilised
for payment of duty, while paying duty by 5th or 15th of the following month.

Payment of rent, fines or penalties The account current (PLA) can be used only
for payment of excise duty. Other payments like rent, penalty, fine etc. should be
paid directly through TR-6 challan. Particulars of payments, account heads should
be specified in TR-6 challan. Such challan need not be countersigned by CE officer
(even if there is a column in TR-6 challan). If such dues are required to be paid
through current account, a separate account current under the group minor head E-
Miscellaneous 1 Miscellaneous may be opened with permission. - Chapter 3 Part
V Para 4.1 of CBE&Cs CE Manual, 2001.

Accounting Treatment of PLA - When the amount is deposited in Bank by TR-6

challan, it is an excise deposit, hence Excise Deposit account in General Ledger
should be debited and Bank/Cash Account should be credited. When duty is debited
in PLA on monthly basis, it is effective payment of duty. Hence, Excise Duty Paid
account should be debited and Excise Deposit account should be credited. After
this entry, balance in Excise Deposit account and closing balance in your PLA must
tally. Such entry may be passed twice in the month when PLA is debited. At the year
end balance in Excise Deposit account will be reflected as Current Asset, while
amount in Excise Paid account will be transferred to P and L account.

Periodic returns

Vide Rule 12 of Central Excise Rules a monthly return, is to be submitted to

Superintendent of Central Excise of production and removal of goods, by 10th of the
following month. [SSI unit availing concession on basis of annual turnover and small
units in textile sector manufacturing yarn, unprocessed fabrics and readymade
garments have to file return on quarterly basis within 20 days from close of quarter].
As per Notification No. 48/2001-CE(NT) dated 26.6.2001, the return is required in
quintuplicate, in form ER-1. [Earlier form RT-12]. Assessee will have sixth copy as
his record copy.

The return should be accompanied by (a) Two copies of PLA (b) Relevant TR-6
challans evidencing payment of duty. Since duty is required to be paid by 5th/15th of
following month, PLA extract should be submitted upto 5th/15th i.e. till payment of
duty of the relevant month. A summary extract could be put at end of PLA extract
indicating (a) Opening balance after discharging duty liability of previous month (b)
Credits during the month and upto 5th of following month (15th in case of SSI) (c)
Total duty discharged during the month (d) Closing balance after discharging duty
liability - Chapter 6 Part II Paras 2.3 and 2.7 of CBE&Cs CE Manual, 2001.

In addition, Cenvat Credit record in prescribed form is required to be submitted by

10th of the following month. Hence, both ER-1 and Cenvat Credit return may be
submitted simultaneously.

EOU unit has to file return in form ER-2. [Earlier form RT-13]

If there is delay in payment of duty, interest should also be deposited before filing
ER-1 return.

This return is acknowledged by Superintendent of Central Excise and one copy duly
acknowledged is returned to assessee.

REQUIREMENTS OF RETURN - Following are the requirement of returns -

1. Product description should tally with description actually used in invoices.

2. Production and removal details must be given for each commercially
separate product / group of products of similar nature falling under same
sub-heading having same rate of duty, based upon data maintained under
DSA (Daily Stock Account). For product group having separate classification
/ rate of duties, separate entries must be given. Commissioner can relax this
requirement by a general or special order.

3. Duty liability will be consolidated adjustment in current account (PLA) and

Cenvat credit account, as may be decided by assessee. [Thus, he can show
pro rata through PLA and Cenvat credit or in some products he can show full
payment through PLA and in some other products, he can show full payment
through Cenvat credit].
 4. If same product is cleared under different rates of duty under different
notifications, the details are required to be given separately.

5. Goods received for repairs , reconditioning or export return are required to

be shown in appropriate column.

6. Fine, penalties and interest cannot be paid through Cenvat credit. It must be
paid through PLA only. [In fact, they should be paid through TR-6 challan as
PLA is meant only for payment of duty].

7. If there is delay in payment of duty, interest should also be paid and details
of interest calculations should be shown along with return.

8. If duty on some invoices is paid under protest or on provisional basis, the

details are required to be given in the ER-1 return.

Export Procedures in Central Excise

In relation to Central Excise and customs, following are the concessions/incentives

for exports : (1) Exemption from duty on final products (or refund of duty paid). (2)
Exemption/Refund of excise and customs duties paid on inputs.

INPUTS FREE OF DUTY - Exporting units need raw materials without payment of
customs/excise duty, to enable them to compete with world market. Government has
devised following schemes for this purpose : (a) Special Economic Zones at various
places where inputs are allowed to be imported without payment of duty and finished
goods are exported. (b) Export Oriented Undertakings (c) Permission to avail Cenvat
on inputs for other similar products (d) Refund of duty on inputs if Cenvat credit
cannot be used (e) Duty Drawback Scheme. Elaborate procedures have been
prescribed for the above, to ensure that the benefits are not misused.

EXPORTS FREE OF DUTY ON FINISHED PRODUCT - Exports of almost all excise

goods except hides, skin and leather and salt and exports to all countries except to
Nepal and Bhutan are exempt from Central Excise Duties. Exports to Nepal and
Bhutan do not qualify for export incentives as payment is received in Indian rupees.
However, export rebate can be obtained if export to Nepal is made (a) on payment
of free convertible foreign exchange or (b) for specified capital goods to Government
of Nepal against global tender, even if payment is received in Indian currency.

Even inputs received by the factory can be exported as such without

payment of excise duty. If manufacturer had availed Cenvat credit of duty
on such inputs, it need not be reversed [The Cenvat credit can be utilised
for payment of duty on products cleared for home consumption].

Export can be made without payment of all types of duties like basic,
special, ADE(GSI) and ADE (TTA) - Chapter 7 Part I Para 1.1 of CBE&Cs
CE Manual, 2001.

EXPORT PROCEDURES FOR EXCISE - There are basically two procedures for
dispatching the goods out of India. (a) In the first procedure, duties are paid and
subsequently rebate (refund) is claimed after exportation of such goods.
Alternatively, rebate is granted of duty paid on inputs used in the exported final
product. (Rule 18 of Central Excise Rules). (b) Another procedure is to export goods
under bond without payment of excise duty. On actual exportation of goods and on
presentation of necessary proofs regarding exports, the bond is released. Regular
Exporters can have a running bond for this purpose. (Rule 19 of Central Excise
Rules).

CBE&C has clarified that exports under 'claim of rebate' and 'export under
bond' are at parity, since intention of both the procedures is to make duty
incidence 'Nil'. - CBE&C circular No. 283/117/96-CX dated 31-12-1996.

General procedures for exports Export can be under bond without payment of
duty or after payment of duty and then claiming rebate. Some procedures are
common. These are discussed first.

Documents for export - The goods have to be cleared from factory under Invoice. In
addition to the Invoice, a prescribed form ARE-1 has to be filled in by Exporter.
[earlier AR-4].

INVOICE FOR EXPORT Invoice for export can be from same series from which
goods for home consumption are cleared or a separate series of invoice can be
maintained for export. General permission has been given to maintain separate
series of Invoice for export purposes. The Invoice should be prominently marked as
FOR EXPORT WITHOUT PAYMENT OF DUTY.

COPIES AND COLOUR OF ARE-1 FORM - The copies of ARE-1 form should have
following colour : (i) Original : White. (ii) Duplicate : Buff (iii) Triplicate : Pink (iv)
Quadruplicate : Green. Assessee can optionally have quintuplicate form which can
be used for claiming other export incentives. - - It is sufficient if copies of ARE-1 (that
time AR-4) contain a colour band on the top or right hand corner as per the aforesaid
colour scheme. Thus, it is possible to take out copies on plain/computer stationery
and affix colour band.

The 'Assessable Value' as per section 4 of CEA should be mentioned on ARE-1 and
the Invoice. In view of new section 4, 'Transaction Value' is Assessable Value.
Hence, strictly legally, the value can be equal to, less or more than FOB Value.
[Practically, FOB Value is usually accepted as value]. The running bond account
should be debited by value as shown in the Invoice and ARE-1.

HANDLING OF ARE-1 FORMS - If export consignment is cleared under supervision

of Excise Superintendent or Inspector, the excise officer will make endorsement on
all copies of ARE-1. He will return original and duplicate copies to the exporter-
assessee. He will send triplicate copy of ARE-1 directly to officer to whom bond was
executed or letter of undertaking was given. This copy can also be handed over to
the exporter in a tamper proof sealed cover to be submitted to the authority.
Quadruplicate copy will be retained by excise officer. Exporter can have optionally
quintuplicate copy which will be dealt with in same manner as the original copy.

At the time of export, original, duplicate and quintuplicate (optional) will be submitted
to customs officer, along with the goods. These will be examined and then export will
be allowed. He will make endorsement of export on all copies of ARE-1. He will cite
shipping bill number and date and other particulars of export on ARE-1. Original and
quintuplicate (optional) will be returned to exporter. The duplicate copy will be sent
directly by customs officer to the officer with whom bond was executed or to whom
letter of undertaking was given. The duplicate copy can be sent either by post or by
handing over to the exporter in tamper proof sealed cover.

Thus, the officer where bond is executed will get two copies one from
Superintendent of Central Excise when goods are cleared from factory and other
from customs officer after export. This will enable him to keep track to ensure that all
goods cleared from factory or warehouse without payment of duty are actually
exported.

If the goods are sent under self sealing and self certification, the export goods along
with original, duplicate and quintuplicate (optional) copies of ARE-1 will be sent after
self sealing and self certification to the port for export. [There will be no endorsement
of excise officer on these copies]. Triplicate and quadruplicate copies will be
submitted to Superintendent or Inspector of Central Excise within 24 hours after
clearance from the factory. The excise officer will make endorsement on both the
copies and then hand over triplicate copy to exporter in sealed envelope for
submitting the same to authority to whom bond or letter of undertaking was given.
Further procedure at the port will be same as above.

In case of export after payment of duty, under claim of rebate, the basic procedure is
same as above, except that the triplicate copy (by excise officer) and duplicate copy
(by customs officer) will be sent to the officer to whom rebate claim is filed. If claim of
rebate is by electronic submission, these copies will be sent to excise rebate audit
section at the place of export.

SIGNING OF ARE-1 FORM The ARE-1 form is required to be signed by

manufacturer. If the export is under bond executed by Merchant Exporter, the form
should be signed by both manufacturer as well as Merchant Exporter.

Sealing of goods for export - Goods can be cleared from factory duly sealed. Goods
can be cleared for export without sealing also. Self sealing and self certification is
also permissible.

CLEARANCE WITH SEAL OF CENTRAL EXCISE - In this method, export goods

are examined before despatch by Central Excise Officers. In such case, the goods
are not examined by Customs Officers at the port or airport of shipment, unless
seals are found to be tampered or if there is specific information.

The CE officer will verify the goods, DSA and documents. If these are in order, he
will seal the consignment. Sealing can be done of each package or container.
Individual packages may be sealed by using wire and lead seals. An all side
container may be sealed by using one time lock / bottled seals. The officer will then
make necessary endorsement on ARE-1.

FACTORY STUFFING OF CONTAINERS - Now most of the exports are through

containers. Goods can be stuffed in containers at inland container depots (ICDs)
situated in various places. Stuffing of containers inside the factory, under supervision
of central excise officers is also permissible. Pre-shipment quality inspection, where
required, should be carried out before stuffing. After the inspection by Central Excise
Inspector and Superintendent, samples will be taken out as per guidelines. Then, the
container is sealed.

The Superintendent of Central Excise shall send an examination report of factory

sealed packages/containers in form Annexure C1 as given in CBE&C circular No.
6/2002-Cus dated 23-1-2002. It has been reiterated that the examination report must
accompany the export goods to port/airport of export. CBE&C circular No.
630/21/2002-CX dated 27-3-2002.

After such sealing, the containers are not normally opened at the port, unless the
seal is found to be tampered with or there is specific intelligence, in which case,
permission of AC/DC is required before checking.

CONSOLIDATION OF CARGO OF DIFFERENT EXPORTERS Often export goods

of more than one manufacturers is required to be consolidated. For this, export
goods of one factory have to be taken to another factory. This is permissible if done
under supervision of excise authorities. - Chapter 7 Part V Para 4.1 and chapter 8
part IV para 3 of CBE&Cs CE Manual, 2001.

CLEARANCE WITH SELF-SEALING -. Any exporter who is a manufacturer or

owner of warehouse can clear export consignment with self sealing and self
certification. Such sealing should be done under supervision of owner, working
partner, managing director or Company Secretary or a person duly authorised by
such owner, working partner or Board of Directors of the company.

He should certify on all copies of ARE-1 that goods have been sealed in his
presence. If such certification is not done, the packages may be opened at port for
detailed customs examination. CCE, Rajkot TN 91/2001 dated 25.10.2001.

At the gateway port, examination will be carried out as per norms. It is clarified that
self-certification and self-sealing is permissible, but these will be examined at the
port of export on the basis of examination norms prescribed under circular No.
6/2002-cus dated 23-1-2002. MF(DR) circular No. 31/2002-Cus dated 7-6-2002. - -
The permission for factory stuffing will be given on permanent basis and need not be
renewed every 6 months. CBE&C circular No. 60/2001-Cus dated 1.11.2001.

SELF SEALING EVEN IF EXPORT THROUGH MERCHANT EXPORTER Self

sealing is permitted even when goods are exported through merchant exporter. The
sealing will be done by manufacturer following the same procedure as above.

Removal under bond without payment of duty The basic procedures for
removal of goods without payment of duty under rule 19 are (a) Execute a bond (in
case of merchant exporter) or issue letter of undertaking (in case of manufacturer
exporter) (b) Clear goods from factory under bond without payment of duty (c)
Export the goods and obtain certificate of export on ARE-1 from customs authorities.
Submit the proof of export and get self-credit in Running Bond Account. - - The
procedures are prescribed in Notification No. 42/2001-CE(NT) dated 26.6.2001.

ALL DUTIES EXEMPT INCLUDING NCCD CBE&C has clarified that National
Calamity Contingent Duty (NCCD) is also exempt when goods are exported under
bond. It is policy of Government to grant relief from domestic taxes on goods which
are exported. CBEC circular No. 641/32/2002-CX dated 26-6-2002.

BOND BY MERCHANT EXPORTER Merchant exporter is required to execute a

bond. The bond can be executed by merchant-exporter in form B-1. Merchant
exporter registered with recognised Export Promotion Council and Status Holders
(Export House, Trading Hose etc.) do not have to furnish any security/surety while
executing bond, unless they have come to adverse notice of department. CBE&C
circular No. 613/4/2001-CX dated 31-1-2002, confirmed in CBE&C circular No.
711/27/2003-CX dated 30-4-2003. - - - If bond is executed by merchant exporter, he
will obtain certificates in form CT-1 from Superintendent of Central Excise.

The exporter shall ensure that debit in bond does not exceed the credit available in
the bond any time. Goods can be cleared by manufacturer on the strength of this
certificate, without payment of duty. Forms of bond, letter of undertaking and CT-1
certificate have been given in Notification No. 42/2001-CE(NT). If export is through
merchant exporter, ARE-1 form should be signed both by manufacturer as well as
merchant exporter.

TYPES OF BOND FOR EXPORT - The exporter has to execute B-1 bond. The bond
can be with surety or security or only guarantee. The bond should be at least equal
to the duty chargeable on the goods, with such surety or security as the excise
officer may approve. [For instructions about security / surety etc. see under Bonds]

WHERE BOND CAN BE EXECUTED The bond can be executed with any one of
the following (a) Maritime Commissioners (b) Asstt. / Dy Commissioner under
whose jurisdiction the factory is situated. (c) Assistant / Deputy Commissioner
(Export) as officer authorised by Board.

The ARE-1 should clearly indicate the full postal address of authority before whom
the bond is executed, so that documents are submitted / transmitted to him for proof
of export.

PROCEDURE OF CT-1 CERTIFICATE The merchant exporter can obtain CT-1

forms in lot of 25. Part I of the form is certified by Superintendent of CE regarding
bond executed. It is not necessary to obtain CT-1 for each consignment separately.
CT-1 forms in lot of 25 should be issued to merchant exporter covering period of one
to three months, depending on his track record. The merchant exporter shall send
CT-1 form to the manufacturer from whom goods are to be procured for export.
Before sending CT-1, the merchant exporter should debit estimated amount of duty
liability. This amount is required to be specified in part II form CT-1. On the basis of
this CT-1, the manufacturer can clear goods for export without payment of duty by
making suitable entries in part II of CT-1. This provisional debit will be converted into
actual debit after the goods are cleared from the place of manufacturer. - Chapter 7
Part II Para 6.2 and 6.2-1 of CBE&Cs CE Manual, 2001.

LETTER OF UNDERTAKING - The manufacturer exporter can furnish a letter of

undertaking (LUT) in form UT-1 as given in Annexure II of Notification No. 42/2001-
CE(NT). The manufacturer exporter need not execute a bond. The LUT once given
is valid for 12 calendar months. It is not necessary to submit LUT for each
consignment. Though manufacturer exporter is not executing bond, submission of
proof of export is required. If the manufacturer exporter repeatedly fails to comply
with conditions of LUT, he can be asked to furnish B-1 bond with security / surety.
The LUT will not be discharged unless proof of export is submitted or duty is paid
upon deficiency with interest. - Chapter 7 Part II Paras 3.3 and 3.5 of CBE&Cs CE
Manual, 2001.

PROCEDURE AT THE TIME OF EXPORT - The exporter or his agent will submit
copies of ARE-1 form to customs officer at the time of export. These will be
endorsed by him certifying export of goods. This will service as proof of export.

RUNNING BOND ACCOUNT The merchant exporter will maintain a Running

Bond Account (RBA). Once bond is executed, the RBA will be credited by the bond
amount i.e. the amount for which bond is executed.

A manufacturer exporter does not execute a bond and hence need not maintain
Running Bond Account. However, he should maintain similar record and submit
proof of export following same procedure.

EXPORT WITHIN 6 MONTHS - Goods must be exported within 6 months from date
of removal from the factory, unless extension is granted. Extension can be granted
by AC / DC / Maritime commissioner. - Chapter 7 Part II Para 2.2(i) of CBE&Cs CE
Manual, 2001.

PROOF OF EXPORT The exporter will get copy of ARE-1 with certificate from
customs authorities certifying export of goods. The duplicate copy of ARE-1 will be
obtained in sealed envelope to be submitted to the authority with whom the bond is
executed. The exporter is required to submit a statement at least once a month to
the authority with whom bond is executed. If bond was executed with jurisdictional
AC / DC, the statement should be submitted to him through range office. The
statement will be in form as given in Annexure 19 of CBE&Cs CE Manual, 2001.
Assessee should submit duly certified copy of ARE-1, self attested copy of Bill of
Lading and self attested copy of Shipping Bill (export promotion copy). This
statement will be immediately acknowledged by office of bond accepting authority.
On submission of the statement, the assessee can take credit in his running bond
account. It is not necessary to wait for their approval or permission. The excise office
will verify the correctness of statement and match ARE-1 sullied by range office with
triplicate copy which is already with them. If goods are not exported within 6 months
or extended period permitted, action for recovery should be initiated. - Chapter 7
Part II Paras 13.1 to 13.6 of CBE&Cs CE Manual, 2001.

CONTROL OF BOND - Control over bond is exercised by the authority before whom
the bond is executed and all proofs of export have to be submitted to that authority.
Any demand for duty in case goods are not exported will have to be raised by
authority before whom the bond is executed. Bombay Dyeing and Mfg Co In re
2001(134) ELT 591 = 45 RLT 860 (GOI) quoted and followed in Supreme
Industries Ltd. In re 2002(144) ELT 729 (GOI).

CHANGE OF DESTINATION OR BUYER If exporter intends to change destination

or buyer or port / place of export after goods were cleared for export, he can do so.
He should submit details to authority with whom bond was executed and make
necessary changes in ARE-1 and Invoices. Alternatively, he can cancel previous
invoice and ARE-1 and prepare fresh invoice and ARE-1 with permission and
authentication by bond / LUT accepting authorities. The serial number and date of
initial documents are endorsed on the fresh documents. - Chapter 7 Part V Para 1.2
of CBE&Cs CE Manual, 2001.

Export under claim of rebate - The rebate of excise duty paid on exported goods is
granted under rule 18. The procedure has been prescribed in Notification No
40/2001-CE(NT) dated 26.6.2001, supplemented in Chapter 8 Part I of CBE&Cs CE
Manual, 2001.

The rebate is available on all exports except exports to Nepal and Bhutan. In case of
Nepal, the rebate is granted to Government of Nepal. In case of export to Nepal,
Invoice in prescribed form has to be prepared and prescribed procedure has to be
followed.

CLEARANCE WITHOUT BOND, BUT UNDER FORM ARE-1 - Export under claim
for rebate should be made under ARE-1 form. Since the goods are being cleared
after full payment of duty, execution of any bond is not necessary. Copies of ARE-1
form and its distribution is same as that for export under bond. Export can be under
seal of Central Excise or without seal. Procedure for export and distribution of copies
of ARE-1 after export is also identical.

REBATE CLAIM - The rebate claim can be filed with Maritime Commissioner (if
there is one for the port/airport/post). As per section 11B of CEA, claim must be filed
within one year from date of export. Rebate claim can also be lodged with
jurisdictional Assistant / Deputy Commissioner of Central Excise. Authorities are
expected to point out deficiencies in application within 15 days. Rebate claim below
Rs 500 is not acceptable. No form has been prescribed for submitting application for
rebate. Application on letter head is sufficient. - - Supplementary Rebate Claim can
also be filed, but that claim also must be within time limit. - Chapter 8 Part IV of
CBE&Cs CE Manual, 2001.

DUTY CAN BE PAID BY CASH OR CENVAT CREDIT - It is not necessary that

rebate can be obtained only if duty is paid by cash. Duty on final products can be
paid either through cash or PLA or Cenvat credit ( that time RG23A part II or RG23C
part II) - CBE&C Circular No 262/96/96-CX 6 dated 6.11.1996.

RESTRICTIONS ON GRANT OF REBATE - The rebate will not be granted if (i) The
market price of goods exported is less than the amount of rebate. (ii) The amount of
rebate of duty is less than Rs. 500.

WHEN REBATE PROCEDURE MAY BE USEFUL - It is naturally

advisable not to pay duty, than to pay it and then wait for refund from
Government. However, in following situations, it may be beneficial to
pay duty and claim rebate -

If assessee has balance of duty in Capital Goods Cenvat Credit Account,

it will be advisable to pay duty and claim refund, as balance in Capital
goods Cenvat Credit Account is never refundable. This may happen
when duty paid on capital goods is heavy and assessee may not be
able to utilise the credit.
An SSI unit may pay 60% duty and claim rebate, as getting refund of
Cenvat credit of inputs is not an easy procedure. Moreover, he is not
entitled to get refund of duty paid on capital goods.
 When duty paid goods are proposed to be exported.

DUTIES ELIGIBLE FOR REBATE Following duties are eligible for rebate
(a) Basic Duty paid under Central Excise Act (b) Special excise duty (c)
ADE (GSI) and (d) ADE (TTA). Explanation I to Notification No. 40/2001-
CE(NT).

Rebate of duty on inputs used in manufacture of export goods - Some times,

final goods may be exempt from duty. In such case, the exporter can claim rebate of
duty paid on excisable materials used in manufacture of export goods, except in
case of export to Nepal and Bhutan. Provision for granting such rebate is made in
rule 18 of CE Rules.

Input output ratio has to be informed to AC/DC. Goods can be procured at

concessional rate of duty by following procedure prescribed under Central Excise
(Removal of Goods at concessional rate of duty for manufacture of excisable
goods), Rules. Inputs can be sent outside for job work and return. Export is required
to be made under form ARE-2. After export, rebate claim should be filed. Procedure
and form has been specified in Notification No. 41/2001-CE(NT) dated 26.6.2001.

Inputs free of Central Excise duty - A manufacturer of export goods can get his
inputs without payment of Central Excise Duty. Input output ratio should be informed
to Assistant / Deputy Commissioner. Goods can be procured without payment of
duty by following procedure prescribed under Central Excise (Removal of Goods at
concessional rate of duty for manufacture of excisable goods), Rules. Inputs
received can be sent outside for job work and return. Final product has to be
exported. Clearance for export is required to be made under form ARE-2. See
Notification No. 43/2001-CE(NT) and Chapter 7 Part VI of CBE&Cs CE Manual,
2001 for detailed procedure.

Exports to Nepal/Bhutan - India has Rupee trade with Nepal and Bhutan and
hence export incentives are not available if goods are exported to Nepal/Bhutan.
The clearance should be on normal Invoice on payment of duty. Invoice should
mention For Exports to Nepal/Bhutan (as the case may be) and make declaration in
prescribed form. Extra copy of Invoice should be made, which is to be used at India-
Nepal border. After the goods are exported to Nepal, rebate is given to Government
of Nepal (and not to the exporter). There is no rebate system for export to Bhutan.

Detailed procedure has been prescribed in para 4 of Notification No. 40/2001-CE-NT

dated 26.6.2001 supplemented in Chapter 8 Part II of CBE&Cs CE Manual, 2001.

Invoice in prescribed form has to be prepared in quadruplicate. This will be endorsed

by excise officer. Its copies should be submitted at land customs station at Nepal
border. Then, the goods along with Invoice will be handed over to Nepalese customs
officer. The Nepalese customs Officer will have to endorse details of effective rate of
duty if goods are imported from country other than India and the amount of import
duty assessed. After his endorsement on the Invoice, the duplicate copy will be sent
to Indian customs office who will then forward it to Director General of Inspection,
Customs & Central Excise (Nepal Refund Wing), New Delhi. After verification, the
rebate will be paid to His Majestys Government of Nepal (and not to the exporter).

Exports to Nepal / Bhutan without payment of duty - Export to Nepal/Bhutan are

allowed under bond without payment of duty if (a) payment is to be received in
convertible foreign exchange or (b) Export of specified capital goods exported to
Nepal against global tender issued by Government of Nepal or export against some
specified projects. The procedure and conditions are given in Notification No.
45/2001-CE(NT) dated 26.6.2001. It is further elaborated in Chapter 7 Part IV of
CBE&Cs CE Manual, 2001.

Export incentives through Cenvat - Cenvat credit availed on inputs used for
exported goods can be used for payment of duty on other similar products cleared
for home consumption (i.e. within India). If it cannot be used, refund can be
obtained. This aspect has been discussed under Cenvat.

Certificate regarding Non-availment of Cenvat on inputs if duty drawback to

be claimed (a) If the manufacturer-exporter or supporting manufacturer of
merchant exporter is registered with Central Excise, fact of non-availment of Cenvat
credit can be verified from ARE-1 form furnished (b) If the manufacturer-exporter or
supporting manufacturer of merchant exporter is not registered with Central Excise,
they have to submit self-declaration about non-availment of Cenvat. MF(DR)
circular No. 8/2003-Cus dated 17-2-2003.

The drawback rate consists of two components - customs portion (consisting of

basic customs duty, surcharge and SAD) and excise portion (consisting of basic
excise duty, special excise duty and CVD). The Cenvat credit is only in respect of
central excise. Hence, it has been clarified that even if Cenvat credit has been
availed, duty drawback in respect of customs portion will be available.

Export procedures by exempt SSI units and manufacturers of readymade

garments - Small Scale Industries and manufacturers of readymade garments
which are exempted from Central Excise Duty on account of their turnover below
prescribe limit, do not have to follow ARE-1 and bond procedure. However, they
have to follow simplified procedure as specified in Chapter 7 Part III Paras 1 to 4 of
CBE&Cs CE Manual, 2001. [The simplified procedure is really quite complicated].

The simplified procedure is applicable to exporters of readymade garments, i.e. they

can clear under their own documents and ARE-1 procedure is not required.
CBE&C circular No. 705/21/2003-CX dated 8-4-2003.

(a) Clearance should be under own invoice of the SSI unit. The SSI unit need not
have separate series of Invoice for export (b) The Invoice should be machine serial
numbered (or by franking machine) starting from 1 from 1st April every year (c)
Invoice should be pre-authenticated by the SSI unit himself (d) Invoice should
indicate name and address of buyer, destination, description, value, progressive
total of total value of excisable goods cleared for home consumption since beginning
of financial year, transport vehicle number, date and time of removal of goods from
his factory. (e) If the export is direct, the SSI unit should mention "FOR EXPORT" on
top and his own Export-Import Code Number, if any. If export is through merchant
exporter, manufacturer should mention at top of Invoice - 'EXPORT THROUGH
MERCHANT EXPORTER'. Export Import code No. of such merchant exporter
should be mentioned in such case.

The SSI unit should maintain a simple record of production and clearance. Entries in
production record should be made at close of the day or beginning of next day. No
entry is necessary on the days when there is no production. The SSI unit should file
a quarterly statement to jurisdictional Range Superintendent in prescribed form
given in Annexure 20 of CE Manual, 2001.
Bringing goods for repairs, re-making etc.

It is often necessary to bring the final products for various purposes like refining,
repairs, re-making, reconditioning, testing etc. Rule 16 of Central Excise Rules make
provisions in this regard.

Procedure for receipt and clearance - As per the provisions, if the goods are
brought for being re-made, refined, re-conditioned or for any other reason, assessee
should take Cenvat credit of duty paid as if such goods are received as inputs under
Cenvat Credit Rules.

Goods can be brought for any other reason. Thus, if goods are returned to
assessee by buyer as they were in excess or if buyer refuses to accept the goods,
the goods can be brought back. There is no time limit for bringing goods for repairs
and goods can be brought any time.

GOODS MANUFACTURED BY OTHERS CAN ALSO BE BROUGHT FOR

REPAIRS ETC. - Rule 16 uses the words, brought to the factory. Thus, the goods
brought for repairs/reconditioning /refining need not have been manufactured by
assessee. Goods manufactured by any other person can be brought in the factory
for repairs etc. However, if such goods brought are not accompanied by duty paying
document, permission from Commissioner under rule 16(3) will be required.

DOCUMENT FOR AVAILING CENVAT CREDIT - If the person sending the goods
sends goods under his invoice after payment of duty, Cenvat credit can be taken on
the basis of that invoice. However, such credit can be taken even on the basis of
own Invoice which was raised when the goods were originally cleared. In Gujarat
Containers Ltd. v. CCE 2000(125) ELT 495 (CEGAT), it has been held that assessee
can take Cenvat credit on basis of his own invoice on returned goods.

In the opinion of author, Cenvat credit can be availed even on the basis of triplicate
copy of invoice which is in record of assessee. The reason for the view is that
triplicate copy is also an invoice issued under Central Excise Rules. [However, a
Xerox copy is not an invoice issued under Central Excise Rules].

REMOVAL AFTER REPAIRS / RE-MAKING ETC. - At the time of clearance, duty

should be paid under Invoice as follows - (a) If the process carried out on the goods
brought amounts to manufacture, assessee should pay duty at the rate applicable
on date of removal. Value shall be determined under section 3(2), 4 or 4A as
applicable. (b) If the process does not amount to manufacture, an amount equal to
Cenvat credit taken at the time of receipt of final product is payable. The buyer can
avail Cenvat credit of this amount. [rule 16(2)]. - - The Cenvat credit available with
assessee can be utilised for payment of duty payable under rule 16(1) or amount
payable under rule 16(2). [Cenvat Credit Rule 3(3)(d)].

GOODS CAN BE SENT TO ANYONE AFTER REPAIRS - Note that after repairs,
reconditioning etc., goods can be sent to any one. There is no requirement that
goods must be sent only to the person from whom these were received.

GOODS BROUGHT THEMSELVES MUST BE REPROCESSED Note that the

goods brought must themselves be reprocessed and then sent. If the goods brought
are scrapped and fresh goods are sent, it is new manufacture. Fresh duty is payable
and Cenvat credit of goods returned cannot be availed.
CENVAT CREDIT OF AMOUNT The buyer can avail Cenvat credit of amount
paid under rule 16(2) Explanation to Rule 16(2).

If above procedure cannot be followed - At times, it may not be possible to follow

aforesaid procedure. e.g. (a) the Invoice on which original goods were cleared may
not be available, or (b) the invoice may be for full machine, out of which only some
components might have been brought back for repairs / reconditioning.

There might be any other reason too. If there is any difficulty in following the
procedure, permission has to be obtained from Commissioner for bringing the goods
for repairs, reconditioning etc.

PROCEDURE PRESCRIBED The assessee should obtain prior permission in

obtaining such goods. If obtaining prior permission is not possible, intimation about
receipt of goods should be given to Range Superintendent within 24 hours and then
apply for permission through Range Superintendent in triplicate, indicating reasons
for not applying in advance. Proper records should be maintained. The goods should
be re-cleared within six months or the extended period as may be permitted by
Commissioner. - CCE Pune-I TN 66/2001 dated 5.10.2001 * CCE, Ahmedabad II TN
20/2003 dated 6-2-2003 [152 ELT T46]

Bonds under Central Excise

The word bond is used quite often in excise and customs e.g. manufacture under
bond, clearance under bond, export under bond etc. Bond means an undertaking
given by the assessee to Government for due fulfilment of certain obligation e.g.
export under bond means a bond that goods cleared without payment of duty from
factory for export will be exported and if not, appropriate duty will be paid.

Bond is an instrument by which the obligation to pay money is created expressly. It

is also a legal agreement whereby a person undertakes to do or not to do anything
subject to conditions stipulated in the agreement. Primary purpose of the bond is to
secure due compliance with the rules and procedures laid down under CE Law. A
bond is a collateral security, which the department is securing to ensure payment of
appropriate duty, in addition to the statutory provisions available. - Chapter 14 Para
1.1 of CBE&Cs CE Manual, 2001.

NATURE OF BOND - Bond is an agreement where a person executing a bond

undertakes to fulfil certain conditions as per agreement. Bond does not need
registration unless it relates to immovable property. Primary purpose of bond under
excise is to secure due compliance with rules and procedures as per Act and Rules
and to provide for payments to be made if the conditions are not complied with.
Bond is a supplementary security which the Central Excise department can take in
addition to provisions of duty payment. Thus, duty can be recovered under law even
if bond is not executed or bond amount is not adequate.

Execution of Bonds - Assessee has to execute bond under various provisions of

Act. Form of bond has been standardised by excise department and numbers have
been given for identification. Bonds should be executed on a non-judicial stamp
paper. If adhesive stamps are affixed to any instrument chargeable to duty, the
stamps shall be cancelled so that it cannot be used again. Such cancellation may be
done by drawing two lines across or by signing on the stamp or in any other effectual
manner [If not cancelled, the instrument is treated as unstamped].- - Amount of
stamp depends on the State in which it is executed. Indian Stamp Act authorises
each State to prescribe stamp duty chargeable on various documents and hence it
varies from State to State.

Bond should be executed in favour of and in name of President of India.

SIGNING OF BOND - If the assessee is a Company, bond can be signed by a

person authorised by the Board of Directors by a resolution. In case of registered
partnership firm, any partner can sign on behalf of the firm.

ACCEPTANCE OF BOND As per earlier instructions, bond should be executed

before Superintendent of Central Excise or officer above that rank or Notary public
or Magistrate. Bond should be accepted by Assistant/Deputy Commissioner of CE.
[Presumably, the instructions are still valid].

RELEASE OF BOND Bond will be preserved by excise officers till all the
obligations are not discharged. After discharge of obligation, the bond can be got
released if the terms of bond are fulfilled. Securities offered can be released and
then encashed by guarantor. He can also get interest accrued on such securities.

Forms of Bonds - Bonds are of different nature and for various purposes. Forms of
bond etc. have been standardised. The main bonds are as follows :

B-1 GENERAL BOND - The bond is for due dispatch of excisable goods removed for
export without payment of duty. The bond can be with surety or security. New form of
B-1 bond has been given in Annexure-I of Notification No. 42/2001-CE(NT) dated
26.6.2001.

An exporter-manufacturer can execute simple Letter of Undertaking (LOU) in form

UT-1 without executing any bond. The UT-1 form is given in Annexure-II of
Notification No. 42/2001-CE(NT) dated 26.6.2001. It is clarified that if export is
through merchant exporter, execution of bond is necessary. Export on basis of LUT
of the manufacturer is not permissible in such case. - Chapter 7 Part II Para 5.4 of
CBE&Cs CE Manual, 2001.

B-2 BOND - This is a General Bond for provisional assessment. It can be with
security or surety.

B-4 BOND - The bond is for provisional release of seized goods. It can be only
security bond. Bond should be for whole value of seized goods. Amount of security
will be as determined by adjudicating authority taking into consideration of gravity of
offence (normally 25% ). [Earlier B-11 bond]. [The name B-4 has been mentioned in
Chapter 14 para 2.2 of CE Manual, 2001, but actually, no form has been prescribed.
Chapter 17 para 3.2 states that old form under previous rules may be used. This
para mentioned B-8 bond. Later it is clarified that it should be read as B-11
CBE&C circular No. 686/2/2003-CX dated 2-1-2003.].

B-8 BOND - This bond is for obtaining goods at Nil or concessional rate of duty
under Central Excise (Removal of Goods at Concessional Rate of Duty for
Manufacture of Excisable Goods) Rules. A bond is required to be executed under
these rules. Since no form of bond has been prescribed, earlier form B-8, which
was prescribed under earlier Chapter X procedure may be used after making
necessary changes.

B-11 BOND This is not prescribed under new rules. However, it has been clarified
that the old B-11 form should be used to clear seized goods on provisional basis.
CBE&C circular No. 686/2/2003-CX dated 2-1-2003. [Then what is B-4 bond which
is mentioned but not printed anywhere ?] or departmental instructions, read under
B-4.

B-17 BOND - This is a general surety / security bond to be executed by EOU, EHTP/
STP units. It is for provisional assessment of goods for export of goods to foreign
countries without payment of duty and for accountal / disposal of excisable goods
procured without payment of duty.

Types of Bond - Bonds are either surety or security type. Surety bonds are covered
under provisions of Contract Act. Under Surety Bond, another person stands as
surety to guarantee the performance on the part of obligor. Surety should be for full
value of bond and the person standing as surety should be solvent to the extent of
bond amount. Under the Contract Act, the liability of surety is co-extensive with that
of the principal debtor and hence the department is at liberty to enforce the recovery
of dues either from the obligor or from the surety. - Chapter 14 Paras 2.1 of
CBE&Cs CE Manual, 2001.

Security Bond - Security Bonds are executed where security is offered instead of
guarantee. Security can be in nature of Post Office saving deposit, National Saving
Certificate or similar realisable Government papers of Central or State Government.
Bank deposit receipt of large scheduled banks is also acceptable. Interest on such
securities will accrue to person making such deposit. Security can also be furnished
by cash deposit, but no interest will be receivable on such cash deposit (and hence
it is advisable to provide security by way of NSC, Bank FD etc.). Cash should be
deposited by way of TR-6 challan mentioning proper account head and other details.
- Chapter 14 Para 7.1 of CBE&Cs CE Manual, 2001.

Bank Guarantee as surety/security - Form of bank guarantee has been

prescribed, both for scheduled and un-scheduled banks. Bank guarantee form when
Court orders release of goods against bank guarantee has also been prescribed.

LEGAL POSITION OF BANK GUARANTEE - The bank guarantee is given is

respect of some contract. Such contract is called 'underlying contract', e.g. in case of
excise bond, the bond executed by assessee is the 'underlying contract'. Supreme
Court has consistently held that bank guarantee is independent of the underlying
contract. The bank must honour the bank guarantee except in case of fraud or
irretrievable injustice. The fraud should be of beneficiary and not of some one else. If
Banks do not honour their guarantees, trust in commerce would be irreparably
damaged.

Further, even if bank guarantee specifies a limited period for enforcement of bank
guarantee (e.g. one year etc.). The bank guarantee can be enforced any time during
the period of limitation, which is usually three years in most of the cases.

One sided conditions in Bond - Many of the conditions in the standard form of
bond are totally one sided, i.e. favouring revenue. Some times, the conditions are
even against the provisions of law. The assessee has to sign the bond as per
standard format as he has no option. These are dotted line contracts or contracts of
adhesion. Normally, standard forms of contract are binding on the person even if the
person has not read them. However, if the contracting parties do not have equal
bargaining power, these are often one sided. Such contracts are Adhesion
Contracts. These are standardised form of contract form offered on essentially take
it or leave it basis without affording consumer realistic opportunity to bargain. Court
can grant relief if clauses in such contract are unreasonable and unconscionable.
The aggrieved person can approach Courts for relief in case of such one sided
contracts [see discussions and case law under General Principles of Law].

Receipt of Goods at concessional rate of duty

Some users of excisable goods can obtain goods at nil or lower rate of duty, subject
to certain conditions. If they are entitled to obtain excisable goods at nil or
concessional rate of duty, they are required to follow prescribed procedure. The
provisions are contained in Central Excise (Removal of Goods at Concessional Rate
of Duty for Manufacture of Excisable Goods) Rules, 2001.

PROCEDURE PRESCRIBED IN SOME EXEMPTION NOTIFICATIONS - Some

exemption notifications prescribe that procedure as contained in Central Excise
(Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable
Goods) Rules shall be followed. In such cases, the exemption will be available only
if the required procedure is followed.

Procedure for availing the benefit - The manufacturer intending to avail the benefit
of exemption notification issued u/s 5A shall apply to Assistant / Deputy
Commissioner in quadruplicate in form specified at Annexure I to Central Excise
(Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable
Goods) Rules. Separate application shall be filed for each supplier.

BOND TO BE EXECUTED - A bond in prescribed form should be executed with

surety or security. Bond amount will be prescribed by Assistant / Deputy
Commissioner, considering duty liability estimated to be involved at any given time.
Form of new bond has not been prescribed. Hence, earlier B-8 bond form may be
used with suitable modifications. [See under Bonds for instructions about B-8
bond].

CERTIFICATE BY AC/DC - The AC / DC will countersign the application submitted,

certifying that necessary bond has been executed.

SUBSEQUENT PROCEDURE - Copy of this application duly signed by AC/DC will

be sent to supplier-manufacturer. [The earlier procedure of CT-2 certificate has been
discontinued]. The supplier can clear goods on receipt of the certificate duly
countersigned by AC / DC. The removal details will be recorded on the application
by the supplier-manufacturer.

ACCOUNTS AFTER RECEIPT OF GOODS - Goods obtained by the manufacture at

concessional rate of duty should be properly accounted for and should be used only
for the purpose for which they are brought. Simple account indicating quantity and
value of subject goods, quantity consumed for intended purpose and quantity
remaining in stock shall be maintained invoice wise.

CLEARANCE TO ANOTHER UNIT Goods received without payment of duty can

be sent to another eligible unit/manufacturer under the same procedure. However,
the another unit/manufacturer should be registered under rule 3 of Central Excise
(Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable
Goods) Rules, 2001. [CBE&C circular No. 617/8/2002-CX dated 6-2-2002].

RETURN OF GOODS TO SUPPLIER It may happen that goods received under

the rules without payment of duty, may be found to be defective, damaged,
unsuitable or surplus to the needs of manufacturer. In such case, the manufacturer
can return the goods to supplier, i.e. original manufacturer. The original manufacturer
will add this to his non-duty paid stock (in Daily Stock Account) and then deal with it.
[Proviso to rule 6 of Removal of Goods at Concessional Rate of Duty Rules].

MONTHLY RETURN - A monthly return in prescribed form should be submitted by

10th of following month. Form of monthly return has been prescribed in Annexure II
to Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture
of Excisable Goods) Rules.

Goods received at concessional rate not used for intended purpose - If the
material received at concessional rate of duty is not used for intended purpose,
manufacturer is liable to pay differential duty along with interest.

DUTY PAYABLE IF GOODS LOST OR DESTROYED DURING TRANSPORT - It

has been clarified that if the goods are lost or destroyed by natural causes or by
unavoidable accident during transport from place of procurement to the
manufacturers premises or from place of manufacturer to the place of procurer (if
goods are returned), during handling or storage in the manufacturers premises, it
will not be treated as used for intended purpose. In other words, in such case,
differential duty and interest will become payable. - Explanation to rule 6.

INTENTION TO USE IS NOT ENOUGH - ACTUAL USE NECESSARY - Goods

should be used for intended purpose. Mere intention to use is not sufficient. If the
goods are not used for intended purpose, duty is payable by the consignee along
with interest. Provisions of sections 11A and 11AB shall apply. Thus, demand has to
be raised within period prescribed u/s 11A.

LIABILITY IS OF CONSIGNEE - The bond is executed by consignee. He has to give

undertaking to pay differential duty. Thus, the duty liability is of the consignee.

No Cenvat to buyer in respect of goods received under the procedure - Since

goods are cleared by supplier-manufacturer without payment of duty, the buyer will
not be entitled to any Cenvat credit. - [Board Circular No. 33/33/94-CX-8 dated 4-5-
1994 in respect of earlier Chapter X].

Moreover, supplier will have to pay 8% amount of goods are removed at Nil rate of
duty. This amount cannot be utilised for Cenvat purposes.

Thus, the procedure of sending material at concessional rate of duty is not of use if
buyer wants to avail Cenvat on inputs.

Reversal of Cenvat on inputs or payment of 8% amount - If the final product is

cleared under Chapter X procedure, Cenvat credit taken on inputs will have to be
reversed or amount of 8% of price will have to be paid as per Cenvat provisions.
The buyer cannot avail Cenvat credit of this amount as Cenvat credit can be taken
only of duty. Hence, in the opinion of author, if buyer is in a position to avail
Cenvat credit, it is advisable to pay full duty instead of availing the
concession.

Rewarehousing certificate not required - In some cases, range superintendent

having jurisdiction over manufacturer's factory insist on rewarehousing certificate
from the user (to whom goods were despatched at concessional rate of duty). Rules
do not provide for any such requirement.

Warehousing

Normally, goods are removed from factory on payment of duty. However, in respect
of certain goods, provision has been made to store the goods in warehouses without
payment of duty. - - The provisions are also available for goods cleared for export on
payment of duty under claim for rebate of duty under rule 18 of CE Rules.

As per Rule 20 of Central Excise Rules, facility of warehousing can be extended for
removal of excisable goods from factory of production to a warehouse or from one
warehouse to another warehouse without payment of duty. CBE&C can prescribe
conditions, limitations and safeguards. The rule clarifies that responsibility for
payment of duty on the goods removed from factory or warehouse to another
warehouse is that of consignee. However, if goods do not reach the destination
warehouse, the duty liability is that of consignee.

At present, these provisions are applicable to following -

(i) Petroleum products (ii) benzene, toluene and xylene (iii) Goods transferred to
customs bonded warehouse as Stores. [These goods are cigarettes, aerated
waters, prepared and preserved foods, Aluminium foil covers, stainless steel
cutlery, butter and cheese]. These stores are issued to foreign going vessels
without payment of duty - Notification No. 47/2001-CE(NT) dated 26-6-2001.
Goods removed by export houses or star trading houses for subsequent exports
under rule 18 or rule 19 of Central Excise Rules - Notification No. 46/2001-
CE(NT) dated 26-6-2001.

The warehouses can be public or private. Permission for such warehouses has to be
obtained from Commissioner. The goods are in custody of officer-in-charge of the
warehouse. Goods can be removed from warehouse on payment of duty plus
penalty, godown rent etc. Transfer from one warehouse to another without payment
of duty is also permissible. Goods can be stored for maximum period of 3 years. [It
may be noted that provisions of customs bonded warehouse also exist in respect of
imported goods. That facility is available for all imported goods.]

PROCEDURES TO BE FOLLOWED - Procedure, as prescribed in CBE&C

circular No. 579/16/2001-CX dated 26-6-2001 supplemented in Chapter
10 Part I of CBE&Cs CE Manual, 2001, is briefly as follows -
1. Warehouse should be registered by Excise Commissioner.
2. Consignor is required to prepare application in quadruplicate in form
attached to aforesaid notification. [Earlier AR-3]. He is also required to
prepare invoice as required. Three copies of application and duplicate of
 invoice should be sent along with goods to consignee.
3. On arrival at destination, rewarehousing certificate will be sent duly
countersigned by Range superintendent to his counterpart at the end of
consignee.
4. If rewarehousing certificate is not received within 90 days, consignor shall
pay the duty.
5. Proper accounts shall be maintained at the warehouse. He will be
responsible for payment of duty, penalty etc.
6. Registered person can keep only goods belonging to him and not to
someone else. He can keep others goods only with permission of
Commissioner.
7. Owner of warehouse can sort, pack or repack the goods in warehouse and
make such alterations as may be necessary for preservation, sale or
disposal thereof.

Background of CENVAT
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is
common in West European Countries. Concept of VAT was developed to avoid cascading effect of taxes.
VAT was found to be a very good and transparent tax collection system, which reduces tax evasion,
ensures better tax compliance and increases tax revenue.

Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat
w.e.f. 1-4-2000). The system was termed as Modvat, as it was restricted upto manufacturing stage and
credit of only excise duty paid on manufacturing products (and corresponding CVD paid on imported
goods) was available.

System of VAT was introduced to service tax w.e.f. 16-8-2002.

VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However,
State Governments have agreed to introduce sales tax VAT and it is likely to be introduced from April
2005. Haryana Government has introduced sales tax VAT in April 2004 and the experience is reported to
be good.

Integration of goods and service tax - A task force was formed under Chairmanship of Shri Vijay Kelkar
on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee
submitted its report in July 2004. The Committee has strongly recommended Goods and Service Tax
(GST).

Full integration of goods and service tax will take considerable time, as it can be achieved only after
political consensus is achieved. However, a beginning has been made by proposing to make credit of
service tax and excise duty inter-chargeable. Finance Minister Shri P Chidambaram, in para 148 of his
budget speech on 8-7-2004, stated as follows, I propose to take a major step towards integrating the tax
on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods
and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and
services.

To give effect to this proposal, Cenvat Credit Rules, 2004 have been issued and made effective from 10-
9-2004.

Basic Concept of VAT

Generally, any tax is related to selling price of product. In modern production technology, raw material
passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made
in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture
from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who
carries out further processing and supply it to third manufacturer. This process continues till a final
product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it
reaches the ultimate consumer.

If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final
product passes from one stage to other. For example, let us assume that tax on a product is 10% of
selling price. Manufacturer A supplies his output to B at Rs. 100. Thus, B gets the material at Rs. 110,
inclusive of tax @ 10%. He carries out further processing and sells his output to C at Rs. 150. While
calculating his cost, B has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his
conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at
Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has
to pay tax again and again on the material which has already suffered tax. This is called cascading effect.

Cascading effect of conventional system of taxes - A tax purely based on selling price of a product
has cascading effect, which has the following disadvantages - (a) Computation of exact tax content
difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product
passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is
not possible (f) Exports cannot be made tax free.

VAT to avoid the cascading effect VAT was developed to avoid cascading effect of taxes. In the
aforesaid example, value added by B is only Rs. 40 (150110), tax on which would have been only Rs.
4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by
him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages,
as every person will pay tax only on value added by him to the product and not on total selling price.

Tax credit system - VAT removes these defects by tax credit system. Under this system,
credit is given at each stage of tax paid at earlier stage.

Illustration of tax credit system - In the example we saw above, B will purchase goods from A @ Rs.
110, which is inclusive of duty of Rs. 10. Since B is going to get credit of duty of Rs. 10, he will not
consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at
Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to C. (140 plus tax @ 10%). In the
Invoice prepared by B, the duty shown will be Rs. 14. However, B will get credit of Rs. 10 paid on the
raw material purchased by him from A. Thus, effective duty paid by B will be only Rs. 4. C will get the
goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, B
has to pay duty only on Rs 40, which is the value added by him.

Following example will illustrate the tax credit method of Cenvat.

Transaction Transaction With VAT

without VAT

Details A B A B
Purchases - 110 - 100
Value 100 40 100 40
Added

SubTotal 100 150 100 140

Add Tax 10 15 10 14
10%

Total 110 165 110 154

Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to
Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since
he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10%
of 'value added' by him.

ADVANTAGES OF TAX CREDIT SYSTEM - The Tax Credit Method has following advantages -
(a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-
policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c)
Useful in giving tax benefits on exports or other preferred end-uses like uses by common
man etc. Most of the countries have adopted tax credit method for implementation of VAT.

MEANING OF VALUE ADDED In the above illustration, the value of inputs is Rs 110, while value of
output is Rs 150. Thus, the manufacturer has made value addition of Rs 40 to the product. Simply put,
value added is the difference between selling price and the purchase price.

Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade
taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market
forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production
and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax
structure - as there are few variations in tax rates and exemptions from taxation are very few.

The disadvantage is that paper work required increases considerably and it is not as simple as a single
point sales tax.

New Cenvat scheme

MODVAT credit scheme was introduced in 1986 vide rules 57A to 57U. Since rules can be amended
easily by Central Government, the scheme remains flexible and hence can be modified quickly as per
changing requirements. Cenvat was introduced in place of Modvat w.e.f. 1.4.2000, vide new set of rules
57AA to 57AK. Later, separate Cenvat Credit Rules were introduced w.e.f. 1-7-2001. These were
replaced by Cenvat Credit Rules, 2002. These are now replaced by Cenvat Credit Rules, 2004 w.e.f. 10-
9-2004.

Service Tax Credit Rules, 2002 were issued effective from 16-8-2002, which are now merged with Cenvat
Credit Rules, 2004 w.e.f. 10-9-2004.

MERGING OF CENVAT AND SERVICE TAX RULES - Cenvat Credit Rules, 2004 have been issued by
superseding Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. The new rules are effective
from 10-9-2004.

Rule 16(2) of Cenvat Credit Rules, 2004 states that any reference in any notification, circular, trade
notice, rules etc. to Cenvat Credit Rules, 2002 or Service Tax Credit Rules 2002, shall be construed as
reference to Cenvat Credit Rules, 2004.

General highlights of Cenvat scheme General highlights of the scheme are as follows :

Credit of duty paid on input and input services - The Cenvat scheme is principally based on system of
granting credit of duty paid on inputs and input services. A manufacturer or service provider has to pay
excise duty and service tax as per normal procedure on the basis of Assessable Value (which is mainly
based on selling price). However, he gets credit of duty paid on inputs and service tax paid on input
services. Thus, he actually pays amount equal to duty/service tax as shown in invoice less the Cenvat
credit available to him.

No credit of service tax in J&K - Proviso to rule 1(2) of Cenvat Credit Rules provides that provisions
relating to availment and utilisation of credit of service tax shall not apply to State of J&K.

Input goods eligible for Cenvat to manufacturer - Credit will be available of excise duty paid on (a) raw
materials (excluding few items) (b) material used in or in relation to manufacture like consumables etc. (c)
Paints, packing materials, fuel etc. used for any purpose. The input may be used directly or indirectly in or
in relation to manufacture. The input need not be present in the final product. Inputs need not be used
within the factory. However, duty paid on high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor
spirit (petrol) is not available as Cenvat credit, even if these are used as raw materials or as fuel. [rule 2(k)
(i) of Cenvat Credit Rules]

Inputs goods eligible for Cenvat to service provider - In case of service providers, only inputs used
directly for providing output service are eligible for Cenvat credit. However, high speed diesel oil (HSD),
Light Diesel Oil (LDO) and motor spirit (petrol) are not eligible as inputs. [rule 2(k)(ii) of Cenvat Credit
Rules]

As per notification No. 12/2003-ST dated 20-6-2003, a service provider is not required to pay service tax
on goods and materials used by him for providing output services. Normally, service tax is not payable on
goods where property is transferred to buyer. Hence, Cenvat credit will be available mainly in respect of
consumables.

Inputs can be sent to job worker Inputs can be sent to job worker for processing. These should be
returned within 180 days [rule 4(5)(a)]. Final product can be cleared directly from premises of job worker
on obtaining permission of AC/DC [rule 4(6) of Cenvat Credit Rules]

Wide definition of input service A manufacturer/service provider will be entitled to credit of

service tax paid by him which are used by him directly or indirectly in or in relation to manufacture of final
product/provision of output services. This would include even services which are received prior to
commencement of manufacture/provision of output services. Even input services relating to setting up a
factory will be eligible.

In addition to this, services like advertising, activities relating to business like accounting, auditing,
storage, transport etc., which are not directly related to manufacture/provision of output services but are
related to the sale of manufactured goods/provision of output services would also be permitted for credit.
In fact, all input services relating to all activities relating to business are eligible for Cenvat credit. [rule 2(l)
of Cenvat Credit Rules]

Services Billed/received at Head Office/Regional Offices - In some cases, the bill/invoice is

raised in the name of head office/regional office etc., but services are actually received in the factory (or
factories) or premises of service provider. In addition, the Head Office/Regional Offices receive services
which are not specific for any factory/premises or service provider, such as advertising, market research,
management consultancy etc. Bills in respect of such services would be received only in these offices. To
enable the manufacturer/service provider to avail credit of such input services, a concept of input service
distributor has been introduced [rule 2(m) of Cenvat Credit Rules]

The HO/Regional Office will have to register as Input Service Distributor with Excise department. The
HO/Regional Office will have to issue Invoice to the factory/office providing service. The factory/service
provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he
distributes the credit among various factories or service providing units. He has to ensure that the total
credit allowed does not exceed the eligible credit amount. Such offices which distribute the credit would
have to obtain service tax registration [rule 7 of Cenvat Credit Rules].

Credit of duty paid on capital goods Capital goods (machinery, plant, spare parts of
machinery, tools, dies, etc.) as defined in rule 2(a), used for manufacture of final product and/or used for
providing output taxable service will be available. Capital goods should be used in the factory. 50% credit
is available in current year and balance in subsequent financial year or years [rule 4(2)(a) of Cenvat
Credit Rules]. Assessee should not claim depreciation on duty portion on which he has availed Cenvat
credit [rule 4(4) of Cenvat Credit Rules].

A service provider can take out capital goods from his premises without any time limit for bringing it back.

Removal of used capital goods as scrap or second hand capital goods - If capital goods are cleared
after use as scrap, an amount equal to duty on scrap value of capital goods is payable [rule 4(5A)]. If
capital goods are removed after use (not as scrap), amount is payable equal to Cenvat credit availed as
reduced @ 2.5% per quarter [third proviso to rule 3(5) of Cenvat Credit Rules, inserted w.e.f. 13-11-2007].
Credit on motor vehicles used to provide output service Motor vehicles are not capital
goods for purpose of manufacture, but credit on motor vehicles would be allowed as capital goods only
to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency,
outdoor caterer, pandal and shamiana operator and goods transport agency [rule 2(a)(B) of Cenvat Credit
Rules]. Motor vehicle will not be treated as capital goods for manufacturers or other service providers.

Credit on basis of specified documents - Credit is to be availed only on the basis of specified
documents as proof of payment of duty on inputs or tax on input services. These include Invoice of
manufacturer or registered dealer, Bill of Entry, Supplementary Invoice etc. [rule 9(1) of Cenvat Credit
Rules]. If there is any defect in duty paying document, specific permission of AC/DC is required [rule 9(2)
of Cenvat Credit Rules]

Credit available instantly in case of input goods - Credit of duty on inputs can be taken up instantly,
i.e. as soon as inputs reach the factory or premises of service provider [rule 4(1) of Cenvat Credit Rules].

Cenvat credit of capital goods in two stages - In case of capital goods, upto 50% credit is available in
current year and balance in subsequent financial year [rule 4(2)(a) of Cenvat Credit Rules].

Cenvat credit of service tax only after bill amount plus service tax paid - In case of input services, credit is
available only after the amount of Bill value with service tax is paid to the service provider [rule 4(7) of Cenvat
Credit Rules] (Mere payment of service tax amount is not sufficient).

Cenvat to manufacturer available only if there is 'manufacture' - Cenvat on inputs or input services is
available only if the process is 'manufacture'. Otherwise, Cenvat is not available [rule 3(1) of Cenvat
Credit Rules]. [In fact, in such cases, no duty is payable on the final product and question of Cenvat does
not arise at all].

Utilisation of Cenvat Credit - All taxes and duties specified in rule 3(1) of Cenvat Credit Rules form a
pool. This credit can be utilised by manufacturer of excisable goods or provider of taxable service, for
payment of any tax or duty as specified in rule 3(4) of Cenvat Credit Rules.

One-to-one correlation not required - Cenvat Credit Rules do not require input-output correlation to be
established.

No input credit if final product/output service exempt from duty/ service tax - No credit is available if
final product is exempt from duty or final service is exempt from service tax [rule 6(1) of Cenvat Credit
Rules].

If a manufacturer manufactures more than one product, it may happen that some of the products are
exempt from duty. Similarly, in case of service provider, some services may be taxable while some
services may not be covered. In such cases, duty paid on inputs and service tax paid on input services
used for manufacture of exempted products/services cannot be used for payment of duty or tax on other
final products/services which are not exempt from duty/tax.

If the manufacturer/service provider uses common inputs and input services both for exempted as well as
un-exempted goods/services, he should maintain separate records for inputs/input services used for
manufacture of exempted final products and should not avail Cenvat on such inputs/input services [rule
6(2) of Cenvat Credit Rules].

Partial manufacture/provision of exempted products/services Cenvat credit of inputs and input

services is not available if final product/output service is exempt from excise duty/service tax. In case of
manufacturer manufacturing both exempt and dutiable goods (or service provider providing taxable as
well as exempt services), it may happen that same inputs/input services are used partly for manufacture
of dutiable goods/taxable services and partly for exempted goods/services.

In such cases, the manufacturer/service provider has following three options (w.e.f. 1-4-2008)

(a) Maintain separate inventory and accounts of receipt and use of inputs and input services used for
exempted goods/exempted output services Rule 6(2) of Cenvat Credit Rules

(b) Pay amount equal to 5% of value of exempted goods (if he is manufacturer) and/or 6% of value of
exempted services (if he is service provider) if he does not maintain separate inventory and records, if he
is a manufacturer Rule 6(3)(i) [The amount payable was 10% of value of exempted goods and 8% of
exempted value of exempted services during the period 1-4-2008 to 6-7-2009. Prior to 1-4-2008, in case
of service provider, there was restriction in availing Cenvat credit to the extent of 20% of service tax
payable on output services].

(c) Pay an amount equal to proportionate Cenvat credit attributable to exempted final product/
exempted output services Rule 6(3)(ii) w.e.f. 1-4-2008.

Full credit in case of specified input services - In case of specified services such as
construction, erection/ commissioning/ installation etc. credit would be disallowed only when they are
used exclusively in relation to manufacture of exempted goods/ services. Otherwise full credit would be
allowed [rule 6(5) of Cenvat Credit Rules]

No cash Refund, except in case of export - In some cases, it may happen that duty paid on inputs and
service tax paid on input services may be more than duty payable on final products. In such cases,
though the Cenvat credit will be available to the manufacturer/service provider, he cannot use the same
and the same will lapse. There is no provision for refund of the excess Cenvat credit. However, the only
exception is in case of exports where duty paid on input material or services used for exported goods is
refundable. [rule 5 of Cenvat Credit Rules].

Other exception is Tribunal can order refund when Cenvat credit could not be availed due to fault / wrong
action of the department. Refund may also be granted if assessee could not utilise credit for some other
reason.

Reversal of Cenvat if final product or output service subsequently exempt Cenvat Credit is availed
as soon as inputs are received. If subsequently the final product or output service is exempt, there might
be some inputs lying in stock on date of exemption. Such inputs will then be used for manufacture of
exempted final products. In such case, Cenvat credit on such inputs will have to be reversed or equivalent
amount paid, if Cenvat credit was already utilised [rules 11(3) and 11(4) of Cenvat Credit Rules of Cenvat
Credit Rules].

Cenvat credit is indefeasible - In CCE v. Dai Ichi Karkaria Ltd. 1999(112) ELT 353 = 1999 AIR SCW
3205 = (1999) 7 SCC 448 = AIR 1999 SC 3234 (SC 3 member bench), it was held that Cenvat credit
validly taken is indefeasible. It was also observed that co-relation between final product and raw materials
is not required in Cenvat scheme quoted with approval in CCE v. Bombay Dyeing (2007) 10 STT 286 =
215 ELT 3 (SC) followed in HMT v. CCE (2008) 232 ELT 217 (CESTAT 3 member bench).

Cenvat credit is not income of assessee - Cenvat credit balance at the year end is not income of
assessee CIT v. Indo Nippon Chemicals (2003) 130 Taxman 179 = 155 ELT 452 = 261 ITR 275 (SC).

Persons eligible for credit

Rule 3(1) of Cenvat Credit Rules states that a manufacturer or producer of final products and a provider
of output service shall be allowed to take credit (hereinafter referred to as the Cenvat credit). EOU units
can also avail Cenvat credit.

The Cenvat Credit is of specified duties (basic, special, AED, NCCD, education cess, service tax, CVD on
imported goods etc. as discussed later) paid on inputs or capital goods received in the factory or premises
of service provider, and also service tax paid on input services.

Manufacturer eligible for Cenvat credit Cenvat credit can be availed by manufacturer or producer of final
products. Manufacture or production means new and identifiable product known in the market. Thus,
manufacturer or producer is the person who actually brings the final product into existence.

Final products eligible under the Cenvat scheme - Cenvat has been extended to all items included in
CETA.

As per rule 2(h), Final Product means excisable goods manufactured or produced from inputs, or using input
service.

Cenvat scheme has been extended to all manufactured final products. These goods cover food products,
chemicals, plastics and rubber products, tobacco products, leather and wood articles, textile articles,
paper, metals, engineering goods, matches, textile products, electrical and electronic goods and
automobile sector.

EOU are entitled to Cenvat credit EOU units have been allowed to avail Cenvat credit w.e.f. 6-9-2004,
by amending rule 17(1) of Central Excise Rules confirmed in CBE&C Circular Nos. 799/32/2004-CX
dated 23-9-2004 and 54/2004-Cus dated 13-10-2004.

Waste and scrap is final product for Cenvat - As per Cenvat provisions, waste or scrap is treated as a
final product within definition of rule 57AA(c) [Now new rule 2(h)] and its clearance is as if it is a final
product. - MFDR TRU No. 345/2/2000-TRU dated 29-8-2000.

No Cenvat if goods exported and exporter claims duty drawback An assessee can get export
incentives only once. Thus, if he avails Cenvat credit, he cannot claim excise portion of All India duty
drawback rate. However, he can avail customs portion of duty drawback rate even if he avails Cenvat.

No Cenvat if no manufacture

Cenvat credit is available only when 'manufacture' takes place. Cenvat provisions are available when
there is manufacture i.e. new and identifiable product known in the market emerges. However, if the
processing does not amount to manufacture Cenvat credit on inputs is not available.

Service Provider eligible for Cenvat credit

As per rule 3(1), provider of output service shall be allowed to take Cenvat credit of specified duties and
taxes.

As per rule 2(p), output service means any taxable service provided by the provider of taxable service,
to a customer, client, subscriber, policy holder or any other person, as the case may be, and the
expressions provider and provided shall be construed accordingly.

Thus, only a person who is providing taxable output service will be eligible to take Cenvat credit.
The words client, customer, subscriber etc. are used in definition of each taxable service under section
65(105) of Finance Act, 1994. Those words will be applicable for purpose of this definition.

Input Goods for Cenvat

Inputs which are goods are eligible for Cenvat credit by both manufacturer as well as service provider.

Statutory definition Rule 2(k) defines input as follows

Rule 2(k) Input means

1. all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in re
the manufacture of final products whether directly or indirectly and whether contained in the final product or not an
lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final produc
used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to m
of final products or for any other purpose, within the factory of production;
2. all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles
providing any output service.

Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated a
for any purpose whatsoever.

Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the fact
manufacturer but shall not include cement, angles, channels, Centrally Twisted Deform bar (CTD) o
Mechanically Treated bar (TMT) and other items used for construction of factory shed, building or laying of
or making of structures for support of capital goods [The words in italics have been inserted w.e.f. 7-7-2009].
Input for a manufacturer Definition of input as far as manufacturer is concerned, is in two parts

1. all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as
petrol, used in or in relation to the manufacture of final products whether directly or indirectly and
whether contained in the final product or not.
2. Input includes lubricating oils, greases, cutting oils, coolants, accessories of the final products
cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for
generation of electricity or steam used in or in relation to manufacture of final products or for any
other purpose, within the factory of production.

This has following implications (1) Second part of the definition is independent of the first part. In other
words, requirement of used in or in relation to manufacture is not applicable to inputs included in second
part of definition, as the words used are or for any other purpose (2) Inputs as defined in second part of
definition will be eligible as long as they are used within the factory of production (except accessories of
final products cleared along with the final product, as obviously, these cannot be used within factory of
production). The purpose for which these are used is immaterial. (This would be so, even if it is held that
the words for any purpose apply only to goods used for generation of electricity or steam. The reason is
rules do not state the purpose for which these are required to be used in the factory).

In Ballarpur Industries v. CCE 2000(116) ELT 312 (CEGAT 3 member bench), it was observed that
inclusive definition expands the scope of the expression and cannot be treated as restrictive in any sense.
Once a particular item is covered by the definition of input, one need not proceed further and examine
the question as to whether the goods (fuel in this case) are used in or in relation to manufacture of final
product.

Inputs eligible for Cenvat under first part of definition

The definition of input covers following -

All goods [except High Speed Diesel Oil (HSD), Light Diesel Oil (LDO) and petrol] used in, or in
relation to, the manufacture of the final products. The input may be used directly or indirectly in or in
relation to manufacture of final product. The input need not be present in the final product (first part of
the definition)
Input includes * lubricating oils, greases, cutting oils and coolants * accessories of final products
cleared along with the final product * Goods used as paint * Packing material * Fuel * Goods used for
generation of electricity or steam used in or in relation to manufacture of final products or for any
purpose. - - These can be used for any purpose. (second part of the definition)
Input also includes goods used in manufacture of capital goods which are further used in the factory of
manufacturer (Explanation 2 to the definition).
INPUTS SHOULD BE USED MERE INTENTION TO USE IS NOT SUFFICIENT Rule 2(k)(i) which
defines inputs for manufacturer states that these should be used in the factory. Thus, mere intention to
use is not sufficient to avail Cenvat credit.

In or in relation to manufacture of final product - The input must be used in or in relation to the
manufacture of final product, in respect of inputs which are not covered in second part of the
definition of inputs. Thus, if an input is used in the manufacture or in relation to the manufacture, it is
eligible for claiming Cenvat credit.

In the manufacture means the input is actually used in the manufacture of finished product, either directly
or indirectly. It may be present in the final product in same or similar or identifiable form or it might have
got converted during process and may not be seen or identified in the final product. In relation to the
manufacture means, the input has been used during a process while manufacturing the product like
consumable. The input need not form part of final product. Thus, the term 'in relation to manufacture' is a
very wide term and covers all inputs which have direct nexus with the manufacturing process.
'Manufacture' includes all processes incidental or ancillary to manufacture. Thus, the term 'inputs' is much
more wider than mere 'raw materials'.

The expression in relation to (so also pertaining to) is a very broad expression, which pre-supposes
another subject matter. These are words of comprehension which might both have a direct significance as
well as an indirect significance depending on the context. -. - Relating to is equivalent to or synonymous
with as to concerning with and pertaining to. The expression pertaining to is an expression of
expansion and not of contraction - Doypack Systems P Ltd. v. UOI (1988) 2 SCR 962 = 1988 2 SCC 299
= (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam
Association v. UOI 2004 (167) ELT 3 = 135 STC 480 (SC).

'In relation to' are words of comprehensiveness which might have both a direct significance or indirect
significance depending on the context. They are not words of restrictive content. - State Waqf Board v.
Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79.

The expression in relation to is of widest import. Thyssen Stahlunion GMBH v. Steel Authority of India
1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.

SMALL ILLUSTRATION - A small example will illustrate the position. While manufacturing wooden table,
wood, nails and paints are used in the manufacture of table, while sandpaper for polishing the table may
be said to be used in relation to manufacture of the product. Carpenters instruments are capital goods.
While cooking food, the vegetables, oil, wheat flour etc. are used in the manufacture. Cooking gas and
kerosene can also be said to be used in manufacture. However, electricity used in mixer or refrigerator
can be said to be used in relation to manufacture. The electricity for tube-light in kitchen may facilitate
cooking, but it cannot be said to be used in or in relation to manufacture of food.

One to one correlation not necessary

Rule 3(4)(a) states that Cenvat credit may be utilised for payment of any duty of excise on any final
product. Thus, there is no requirement of establishing relation between inputs/input services and final
product.

There is no correlation of the raw material and the final product; that is to say, it is not as if credit can be
taken only on a final product that is manufactured out of the particular raw material to which the credit is
related - CCE v. Dai Ichi Karkaria Ltd. 112 ELT 353 = AIR 1999 SC 3234 = 1999 AIR SCW 3205 = (1999)
7 SCC 448 (SC 3 member bench).

Input goods in respect of service providers

Duty paid on input goods used by service providers is also eligible for Cenvat credit, but in a restricted
way.

As per rule 2(k)(ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known
as petrol and motor vehicles, used for providing any output service is input.

Input Service for Cenvat

Manufacturer as well as service provider will be eligible to get Cenvat credit of input
services. Rule 2(l) of Cenvat Credit Rules reads as follows

Rule 2(l) - Input service means any service

1. used by a provider of taxable service for providing an output service; or

2. used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and c
final products, upto the place of removal;

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider
service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto
of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and
control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inpu
capital goods and outward transportation upto the place of removal
Wide coverage of input services The words used in the definition in relation to manufacturer are in
relation to.

INPUT SERVICES USED FOR PROVIDING OUTPUT SERVICES In case of service provider, the
words used in definition of input service in rule 2(l)(i) are used by a provider of taxable service for
providing output service. This appears to limit scope of input service in respect of output service
providers. However, as discussed later, the scope has been further widened by adding inclusive
definition to the rules, i.e. even to input services which have only remote or insignificant nexus with output
services will get covered as long as these are related to activities of business.

Service need not be received in factory or premises from where output service provided In case
of inputs and capital goods, Cenvat credit is eligible to manufacturer only if these are received in the
factory. However, in case of input service, there is no such requirement. Input service need not be
received in factory or premises of service provider.

In case of service provider, even there is no requirement that inputs and capital goods should be received
in premises of service provider.

Coverage beyond manufacturing/service provision stage

Inclusive definition clause of rule 2(l) extends scope of input services even beyond stage of
manufacture or provision of service. The inclusive clause makes it clear that services much earlier to
manufacture or even after manufacture will be eligible as service tax credit.

Credit only after payment is made to service provider

Credit of input services can be availed only after the output service provider makes payment of value of
input services and the service tax payable on it, as shown in invoice of input service provider. [Rule 4(7)].
[In case of excise duty, credit is available as soon as goods are received in the factory. There is no
condition that credit can be availed only after payment is made to supplier of goods].

Input Service Distributor

A manufacturer or service provider may have head office/regional office at different place/s. The services
may be received at head office/regional office, but ultimately, these will be indirectly used for manufacture
or providing output service. Provision has been made to avail Cenvat credit of services received and paid
for at head office/regional office. Such head office/regional office will be registered with central Excise and
it will have to issue invoice on the manufacturer or producer or service provider.

Who is input service distributor - As per rule 2(m), input service distributor means an office
managing the business of manufacturer or producer of final products or provider of output service, which
receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input
services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit
of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.

DOCUMENT ELIGIBLE FOR CENVAT CREDIT - As per rule 9(1)(g); invoice, bill or challan issued by an
input service distributor under rule 4A of Service Tax Credit Rules is an eligible document for purpose of
taking Cenvat credit.
Capital goods for Cenvat

'Capital Goods' for Cenvat

Cenvat credit is available on inputs as well as capital goods. Some provisions are common while there
are some specific provisions in respect of Cenvat on capital goods.

Capital Goods Eligible to a manufacturer or service provider Manufacturers and

service providers are eligible to avail Cenvat credit of capital goods used by them.

Following are the capital goods, vide Rule 2(a)(i) of Cenvat Credit Rules -

(i) * Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery un
chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods
under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under chapter heading 68.0

(ii) Pollution control equipment.

(iii) Components, spares and accessories of the goods specified above.

(iv) Moulds and dies.

(v) Refractories and refractory material.

(vi) Tubes, pipes and fittings thereof, used in the factory.

(vii) Storage Tank.

USE OF CAPITAL GOODS - The capital goods should be used (a) in the factory of the manufacturer of
the final products, but does not include any equipment or appliance used in an office ; or (2) for providing
output service.

Capital goods used exclusively for exempted final products and output services not eligible
Capital goods used exclusively for manufacture of exempted goods or providing exempt service are not
eligible [rule 6(4)]. [Thus, partial use of capital goods for manufacture of exempted goods or provision of
exempt output services is permissible, i.e. in such case, Cenvat credit on capital goods will be allowed].

Use of capital goods by manufacturer

Rule 2(a) provides that capital goods should be used (a) in the factory of manufacturer of the final
products or (b) for providing output service.

Capital goods manufactured within the factory

As per Explanation 2 to rule 2(k) of Cenvat Credit Rules, input includes goods used in manufacture of
capital goods which are further used in the factory of manufacturer. Thus, if a manufacturer manufactures
some capital goods within the factory, goods used to manufacture such capital goods will be eligible as
inputs. [i.e. 100% Cenvat credit will be available in the same financial year]. - - It may be noted that
capital goods manufactured within the factory and used within the factory are exempt from excise duty
vide notification No. 67/95-CE dated 16-3-1995.

Conditions for availing Credit on Capital Goods

The conditions for eligibility of Credit are as follows :

Duty paying documents eligible are same for Cenvat on inputs

Depreciation under section 32 of Income Tax Act should not be claimed on the excise portion of the
Capital Goods. Rule 4(4) of Cenvat Credit Rules (Otherwise, the manufacturer will get double
deduction for Income Tax - one credit as Cenvat and another credit as depreciation)
Utilisation of Cenvat Credit

Duties eligible for credit

Assessee can avail credit of duty/ service tax paid on inputs and input services. This credit is known as
Cenvat Credit.

Meaning of Cenvat Credit - Rule 3(1) states that following duties/taxes will be
available as credit (hereinafter referred as Cenvat Credit).
The term Cenvat Credit used in various rules means aggregate of following duties and taxes [Rule 3(1)].

1. Basic excise duty on indigenous inputs [Paid on goods specified in first schedule to CETA]. Corresponding CVD o
goods is allowable.

2. Special excise duty [paid on goods specified in Second Schedule to CETA]. Corresponding CVD on imported goo
allowable.

3. Additional Customs Duty paid u/s 3(5) of Customs Tariff Act w.e.f. 1-3-2005. This credit will not be available to ser
providers [This duty is payable @ 4% on imports of ITA (Information technology Agreement) bound items and on s
inputs/raw materials, for manufacture of electronic/information technology items, which are exempt from customs
duty will not be charged on information technology software.

4. Additional Excise Duty paid under Additional Duties of Excise (Goods of Special Importance) Act [AED(GSI)]. If th
imported, credit of corresponding CVD on imported goods can be availed [AED(GSI) on textile articles has been a
w.e.f. 9-7-2004].

5. Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This cred
utilised only for payment of education cess on final product or output services.

6. Additional Excise Duties paid on textile and textile articles [AED(TTA)]. If these are imported, corresponding CVD
eligible [AED(TTA) has been abolished w.e.f. 9-7-2004].

7. National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding C
imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.

8. Additional Customs Duty paid u/s 3(5) of Customs Tariff Act. This duty on imports is payable under clause 72 of Fi
2005 w.e.f. 1-3-2005. This credit will not be available to service providers, as provided in second proviso to rule 5
Credit Rules. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods on which this dut
are capital goods, full 100% credit will be available in first year itself [This duty is payable @ 4% on imports of IT
(Information technology Agreement) bound items and on specified inputs/raw materials, for manufacture of
electronic/information technology items, which are exempt from customs duty. This duty is not levied on informatio
technology software].

9. Additional Excise Duty (Tea and Tea Waste) levied under section 157 of Finance Act, 2003. This credit can be utili
payment of AED(TTW) on final product. This duty has been abolished w.e.f. 1-3-2005.

10. Service tax on input services.

11. Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product
services.

12. Additional Excise Duty paid under clause 85 of Finance Bill, 2005. This duty is payable w.e.f. 1-3-2005 on pan ma
certain tobacco products, as specified in seventh schedule to Finance Bill, 2005 [Credit of Additional Excise Duty
clause 85 of Finance Bill can be used for payment of this duty. Any other credit cannot be utilised and balance am
 required to be paid in case only].

Credit of basic duty, AED(GSI), special excise duty and service tax can be utilised for payment of basic
excise duty on final products and vice versa.

Basic duty, SED, service tax on inputs, Additional Customs Duty paid u/s 3(5) of Customs Tariff Act and
AED(GSI) are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of
duty under other head.
Credit of basic duty, SED, service tax, Additional customs Duty paid u/s 3(5) of Customs Tariff Act and
AED(GSI) can also be utilised for payment of Education Cess, AED(TTA), AED(TTW) and NCCD, but not
vice versa.

Education Cess paid on goods and paid on services is inter-changeable.

Restrictions on Cenvat credit in certain cases

Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are
provided in rule 3(7).

Taking and Utilisation of credit

Credit of the duty paid on eligible inputs can be taken by the manufacturer immediately on receipt of
inputs in the factory of manufacturer or in the premises of provider of output services - Rule 4(1) of
Cenvat Credit Rules.

In case of capital goods, upto 50% credit only can be taken at any point of time in a financial year and in
any succeeding year or years. Rule 4(2) of Cenvat Credit Rules.

Payment of duty through Cenvat credit is almost as good as payment of duty through PLA and refund is
permissible (if otherwise eligible) even if duty was paid through Cenvat credit.

Credit can be taken as soon as goods are received in the factory or premises of service provider. It is not
necessary to wait till the inputs / capital goods are actually utilised in production [Rule 4(1) of Cenvat
Credit Rules].

Manufacturer/service provider should maintain record of Cenvat credit availed and of credit utilised. (The
record should be similar to PLA where credit is taken of duty paid by Challan in Bank and when finished
goods are cleared, debit entry is made in PLA).

Utilisation of Cenvat credit The Cenvat Credit [as defined in rule 3(1)] can be utilised for payment of
any excise duty on :

Any duty on any final product manufactured by manufacturer [Rule 3(4)(a)]

Payment of amount if inputs are removed as such or after partial processing [Rule 3(4)(b)]

Payment of amount on capital goods if they are removed as such [Rule 3(4)(c)]

Payment of amount, if goods are cleared after repairs under rule 16(2) of Central Excise Rules [Rule
3(4)(d)]

Payment under Cenvat Credit Rule 6 of 10% amount on exempted goods or reversal of credit on
inputs when common inputs or common input services are used for exempted as well as dutiable final
products Explanation I to Cenvat Credit rule 6(3)

Reversal of Cenvat credit, if assessee opts out of Cenvat Rule 11(2)

 Payment of amount if goods sent for job work are not returned within 180 days Rule 4(5)(a).

If by-product, scrap or waste is dutiable as excisable goods, duty will be payable on these as if it is a
'final product'.

Duty paying documents for Cenvat

As soon as a manufacturer/service provider receives an input, he can avail Cenvat

credit of the duty paid on the inputs. However, in case of input service, he is entitled to
service tax credit only when he makes payment to service tax provider. Documentary
evidence is required regarding payment of duty on inputs/tax on input services.

Rule 9(1) of Cenvat Credit Rules prescribes that Cenvat Credit can be taken on the basis of -

Invoice of manufacturer from factory

Invoice of manufacturer from his depot or premises of consignment agent
Invoice issued by registered importer
Invoice issued by importer from his premises or consignment registered with Central Excise
Invoice issued by registered first stage or second stage dealer
Supplementary Invoice
Bill of Entry
Certificate issued by an appraiser of customs in respect of goods imported through foreign post offi
Challan of payment of tax where service tax is payable by other than input service provider
Invoice, bill or challan issued by provider of input service on or after 10-9-2004
Invoice, Bill or Challan issued by input service provider under rule 4A of Service Tax Rules.

Essential requirement of invoice As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as th
document contains essential aspects of duty/tax payment i.e.

(a) payment of duty or service tax

(b) description of goods or taxable service

(c) assessable value

(d) name and address of the factory or warehouse or provider of input service.

Thus, Cenvat cannot be denied if the documents contains these details and no permission/condonation is required if the
invoice/bill/challan contains these basic details
Note that Serial Number or name of user-manufacturer is not a essential detail specified in rule
9(2) of Cenvat Credit Rules.

Exempted final products/output services

As per basic principle of VAT, credit of duty or tax can be availed only for payment of duty on final product
or output services. As a natural corollary, if no duty is payable on final product or output services, credit of
duty/tax paid on inputs or input services cannot be availed.

As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input
service which is used in manufacture of exempted goods or exempted services.

Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit
of that portion of input/input service will not be available.

Partial manufacture/provision of exempted products/services

It may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable
services and partly for exempted goods/services. In such cases, the manufacturer/service provider has
following three options (w.e.f. 1-4-2008)

1. Maintain separate inventory and accounts of receipt and use of inputs and input services used for
exempted goods/exempted output services Rule 6(2) of Cenvat Credit Rules
2. Pay amount equal to 5% of value of exempted goods (if he is manufacturer) and/or 6% of value
of exempted services (if he is service provider) if he does not maintain separate inventory and
records, if he is a manufacturer Rule 6(3)(i) [The amount payable was 10% of value of
exempted goods and 8% of exempted value of exempted services during the period 1-4-2008 to
6-7-2009. Prior to 1-4-2008, in case of service provider, there was restriction in availing Cenvat
credit to the extent of 20% of service tax payable on output services].
3. Pay an amount equal to proportionate Cenvat credit attributable to exempted final product/
exempted output services Rule 6(3)(ii) w.e.f. 1-4-2008.

Meaning of exempted services

As per rule 2(e), exempted services means taxable services which are exempt from the whole of the
service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of
Finance Act.

Services on which no tax is payable are also exempt services - - For purpose of the definition of
exempted services, services on which no service tax is leviable are also exempted services. Thus, if a
particular service is not taxable under present provisions of Finance Act, 1994, it will be exempted
service for purpose of rule 6.

Payment of amount on exempted final products

If assessee opts not to maintain separate accounts in respect of inputs and input services utilised for
exempted final products/exempted output services, he has to pay amount of 5% of total price (excluding
taxes) of exempted final product or 6% of exempted services [rule 6(3)(b)].

When payment of amount is not required

In certain cases, payment of amount or reversal of Cenvat is not required.

Export of goods, deemed exports or gold manufacture - As per rule 6(6), a

manufacturer can avail Cenvat credit on inputs when final product is despatched without
payment of duty, in following cases

Final product is despatched to SEZ, EOU, EHTP or STP.

Final product is supplied to United Nations or an international organisation for their official use or
supplied to projects funded by them, which are exempt from duty.
When final product is exported under bond without payment of duty
Gold or silver arising in course of manufacture of copper or zinc by smelting.
Goods supplied against International Competitive Bidding in terms of Notification No. 6/2002-CE dated
1-3-2002, if such goods are exempt from customs duty when imported in India
In such case, assessee need not reverse Cenvat credit or pay any amount. In other cases, the
manufacturer is not entitled to avail Cenvat credit on inputs when final product is cleared without payment
of duty.

This provision does not apply to service providers. See discussions in a subsequent paragraph.

No payment of amount if intermediate product cleared for subsequent export - If intermediate

products are cleared to another manufacturer for manufacture of final products (and then final products
are exported by that another manufacturer), no duty is payable as per notification No. 43/2001-CE(NT)
dated 26-6-2001. In such cases, the intermediate products cleared are not exempted goods. Hence,
amount is not payable. This view has been confirmed in CBE&C circular No. 785/18/2004-CX dated 17-
5-2004. It is clarified in the circular that exporter of final product will not be entitled to duty drawback of
excise portion, as he has obtained inputs without payment of excise duty.
Inputs used in manufacture of capital goods used within the factory Notification No. 67/95-CE
exempts capital goods manufactured within the factory and used within the factory. In such case, a view is
possible that amount is payable on such capital goods. However, since the goods are not sold, there is
no question of any price and hence no amount should be payable.

Input/services used for exempted as well as taxable services

If input services are partly used for taxable services and partly for exempted services assessee should maintain
separate accounts of input and input services meant of exempted services and taxable services. He should take credit
only of inputs and input services intended for use of taxable output service [rule 6(2)].

Removal of goods as such

A manufacturer/service provider who obtains the inputs / capital goods gets immediate
credit of the duty paid by supplier on the inputs used by him.

The manufacturer/service provider uses these inputs / capital goods for manufacture of final products. However, occasion
have to remove the inputs from his factory or premises of output service provider for -

(a) sale or disposal if these are not required by him or

(b) job work/processing in an outside factory and return

(c) rejected inputs for rework and return. Since credit has been taken on the inputs, control over their removal is neces
Removal of inputs / capital goods as such for sale/disposal - If the manufacturer/service provider is
not able to use the inputs (on which he has availed Cenvat credit) for any reason (like rejection, quality
problems, excess supply, change in production plan, exports etc.), he can clear the inputs as such or after
partial processing or capital goods as such, from factory/premises of service provider after payment of an
amount.

AMOUNT PAYABLE EQUAL TO CENVAT CREDIT AVAILED The inputs or capital goods can be
removed as such from the factory of manufacturer or premises of service provider on payment of an
amount equal to Cenvat credit availed when the credit was taken. In other words, it amounts to reversal
of Cenvat credit taken [rule 3(5)].

If originally, education cess was paid, equivalent amount would be payable. If originally, no education
cess was paid, question of its payment does not arise even if goods are cleared now, as amount is not
excise duty.

Removal for job work/repairs/testing

In modern manufacturing technology, a manufacturer usually does not carry out all the processes himself.
It is common that some manufacturing processes are carried out by him from other manufacturer or
subcontractors on job-work basis.

Similarly, a manufacturer or service provider may also have to remove inputs as such or after some
processing for test, repairs etc. In such cases, he can clear the inputs received by him for further
processing/test/repairs etc. and obtain the same back after processing/test/repairs is carried out.

He can clear inputs/capital goods as such or after carrying out partial processing, without payment of
duty/amount.

PROCEDURE ALSO AVAILABLE FOR GOODS UNDER DEEC SCHEME - In case of inputs received
under DEEC scheme, CVD has been paid on the inputs. Hence, the inputs should be recorded as per
Cenvat procedures and these can be sent to job work as per usual Cenvat procedures - Hyderabad
Commissionerate Trade Notice No. 71/95 dated 5-7-1997 - Para 3.

Provisions for sending inputs / capital goods for job work/testing/repairs - Provisions contained in
Rule 4(5)(a) of Cenvat Credit Rules for this purpose are as follows :

REMOVAL FOR PROCESSING/TEST - The inputs / capital goods can be removed as such or after
partial processing to job worker for further processing, testing, repairs, reconditioning or any other
purpose.

JOB WORK AND JOB WORKER As per rule 2(n) of Cenvat Credit Rules, Job Work means processing
or working upon of raw materials or semi-finished goods supplied to job worker, so as to complete a part
or whole of the process resulting in the manufacture or finishing of an article or any operation which is
essential for the aforesaid process, and the expression job worker shall be construed accordingly. [The
definition of job work is same as given in Notification No. 214/86-CE dated 25-3-1986]

GOODS SHOULD BE RETURNED TO FACTORY/PREMISES OF SERVICE PROVIDER - After carrying

out the operation/test/repair etc., the goods should be returned to the factory or premises of service
provider within 180 days. If these are not received back within 180 days of their being sent out,
manufacturer/service provider should pay an amount equivalent to Cenvat credit attributable to inputs /
capital goods. Payment can be through Cenvat credit or PLA. If the inputs / capital goods come back after
180 days (say after 220 days), manufacturer/service provider can take Cenvat credit of duty paid by him -
rule 4(5)(a).

Procedures and Records for Cenvat

The main procedures are

Maintaining records of inputs and capital goods

Maintaining records of credit received and utilised
Submit returns of details of Cenvat credit availed, Principal Inputs and utilization of Principal Inputs in
forms ER-1 to ER-6 (Discussed in earlier chapter)
Returns by dealer/service provider/input service distributor
Record of inputs and capital goods - The manufacturer of final products or provider of output service or
input service distributor shall maintain proper records for the receipt, disposal, consumption and inventory
of the inputs and capital goods.

The record should contain relevant information regarding (a) value (b) duty paid (c) the person from whom
inputs / capital goods have been procured.

Burden of proof regarding admissibility of Cenvat credit is on the manufacturer or provider of output
service taking the credit Rule 9(5) of Cenvat Credit Rules.

Record of input services The manufacturer of final products or the provider of output service shall
maintain proper records for receipt and consumption of the input services. The record should contain
relevant information regarding

(a) Value of service

(b) Tax paid

(c) Cenvat Credit taken and utilised

(d) Person from whom input service has been procured

The burden of proof regarding the admissibility of Cenvat credit shall lie upon the person taking such
credit. [rule 9(6)]

Cenvat Credit Record - Cenvat Credit record should be maintained, which is similar to
PLA. It is a current account of Cenvat credit received, credit utilised and credit balance.
This should give details of (a) credit availed against each input / capital goods (b) credit
utilised against clearance of final products or removal of input as such or after
processing or removal of capital goods as such (c) Balance credit available.

Returns A manufacture has to be submit returns to Range Superintendent of Central Excise in the prescribed forms ER
ER-6 in respect of Cenvat Availed, Principal Inputs, utilization of Principal inputs etc.. These are discussed in earlier chapt
and hence not reproduced here. Others have to submit returns as follows -

Quarterly return by first stage/second stage dealer within 15 days from close of quarter [rule 9(8)]
Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]
Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)]

Assessment

Assessment means determining the tax liability. Duty is paid by the manufacturer on
his own while clearing goods from the factory/warehouse, on self assessment. The
assessee himself has to determine classification and valuation of goods and pay
duty accordingly.

Rule 2(b) of Central Excise Rules states that assessment includes self-assessment
of duty made by the assessee and provisional assessment made under rule 7.

Who is assessee - Rule 2(c) of Central Excise Rules states that assessee means
any person who is liable for payment of duty assessed or a producer or
manufacturer of excisable goods or a registered person of a private warehouse in
which excisable goods are stored, and includes an authorized agent of such
person. The word includes an authorised agent of such person have been added in
the revised definition.

The significance of this definition is that an authorised agent incurs same liability as
the assessee. There is distinction between authorised representative and authorised
agent. An employee will be authorised representative and not authorised agent
and cannot be held liable as assessee.

Self-assessment - The assessment under Central Excise is basically an invoice

based self-assessment, except in case of cigarettes. Rule 6 of Central Excise Rules
[earlier rule 173F] states that The assessee shall himself assess the duty payable
on excisable goods, provided that in case of cigarettes, the Superintendent or
Inspector of Central Excise shall assess the duty payable before removal of goods.

The assessee has to submit monthly return in ER-1 form (earlier RT-12 form). The
return has to be along with 'Self Assessment Memorandum', where Assessee
declares that (a) the particulars in ER-1 return are correctly stated (b) Duty has been
assessed as per provisions of section 4 or 4A of CEA (c) TR-6 challans by which
duty has been paid are genuine.

SCRUTINY OF RETURN - The departmental officers will scrutinize the return.

Scrutiny means close examination or examination of details. They will check the
returns and figures etc. for discrepancy if any. They may carry out surprise checks,
apart from critical audit of private and statutory records of assessees by spot visit.
However, the officers will not assess the duty i.e. they will not determine duty
payable on the basis of return submitted by assessee. Assessment order is not
issued. However, if the officers are of opinion that there is short payment, show
cause notice cum demand can be issued.

Provisional assessment - Rule 7 of Central Excise Rules make provisions in

respect of provisional assessment. Provisional assessment can be requested by the
assessee. Department cannot order provisional assessment.

Final assessment will be made later by Assistant / Deputy Commissioner after

getting the required details. In case of such provisional assessment, demand can be
raised within one year after the provisional assessment is finalised.

Department cannot order provisional assessment. If Central Excise Officer finds that
self assessment is not in order, he can ask assessee to produce additional
documents, records and other information and then issue a demand notice. Where
assessee fails to provide records or information and department is unable to issue
demand, best judgment method may be used to raise demand on collateral
evidence. Burden to provide information for re-determination of duty is on assessee.
Chapter 3 Part IV Para 3.1 of CBE&Cs CE Manual, 2001.

An assessee can request for provisional assessment in following circumstances (a)

Assessee is unable to determine the value of excisable goods in terms of section 4
of CEA on account of non-availability of any document or information or (b)
Assessee is unable to determine rate of duty applicable.

In aforesaid cases, assessee may request Assistant / Deputy Commissioner in

writing giving reasons for provisional assessment of duty. [Assessee should give
reason why he wishes to have provisional assessment.]. After such request, the
Assistant / Deputy Commissioner may by order allow payment of duty on provisional
basis. The Assistant / Deputy Commissioner shall also specify the rate or value at
which the duty will be paid on provisional basis.

Bond equal to difference between the duty payable on provisional assessment basis
and the probable duty payable applying the highest rate / value applicable to such
goods for a period of 3 months. If assessment cannot be completed in 3 months and
longer time is required, say a period of one year, in appropriate cases, differential
duty likely to arise shall be the basis. It should be backed by 25% security or bank
guarantee. In special cases, higher security may be asked. The bond for provisional
assessment shall be in form B-2. - Chapter 14 Para 4.1 of CBE&Cs CE Manual,
2001.

The monthly / quarterly return and Invoices should be marked as PROVISIONALLY

ASSESSED Vide Order No. - - dated - -. There is a declaration in ER-1 where
assessee has to mention the goods under provisional assessment.

Finalisation of provisional assessment - AC / DC is required to pass order of final

assessment after getting relevant information, within six months of date of
communication of his order allowing provisional assessment. The period of 6 months
can be extended by Commissioner of CE, on making a specific request, for reasons
to be recorded in writing. Extension beyond one year for further period can be
granted only by Chief Commissioner. [Rule 7(3) of Central Excise Rules].

Difference to be paid/refunded - In cases of provisional assessment, final

assessment will be done by Assistant / Deputy Commissioner. After final
assessment, the amount payable will be communicated to assessee. If the duty
payable is more, the difference will be paid by assessee. If the duty finally assessed
is less, difference will be refunded. [Rules 7(4) and 7(5) of Central Excise Rules]

If assessee does not pay duty within 15 days after final assessment is made, bond
should be enforced or bank guarantee should be enforced after due notice to
assessee. - Chapter 14 Para 4.1 of CBE&Cs CE Manual, 2001.

Interest payable / receivable - If differential duty is found to be payable, interest @

15% will be payable by assessee from first day of the month for which amount is
determined till date of payment thereof. Thus, interest is payable only after
assessment is finalised by Assistant/Deputy Commissioner.

If differential amount is found to be refundable to assessee, it shall be refunded with

interest @ 8% from first day of the month during the month in which refund is
determined till the date of refund.

Refund subject to provision of unjust enrichment Rule 7(6) of Central Excise Rules
clarifies that refund is subject to provisions of Unjust Enrichment, i.e. refund will be
granted to manufacturer if he has not passed on incidence of duty to another
person. [Tribunal had held in many decisions that that provision of unjust enrichment
does not apply in case of provisional assessment. However, in view of specific
provision in the rule, now these decisions are not valid].

Provisional assessment only from express order of AC - Assessment is not treatable

as provisional in absence of express order of provisional assessment. The earlier
case law is probably still valid.

Provisional assessment is provisional for all purposes - An assessment may be

provisional for a particular purpose. However, it has been held that once an
assessment is provisional, it is provisional for all purposes, i.e. both for demand and
refund. These views should be valid under new rules also.

As per section 11A(3)(ii)(b), demand for payment of duty can be raised within one
year after the duty provisionally assessed is finally adjusted against final
assessment. This section does not state that this demand can be only in respect of
issue under dispute. In Art Plywood Industries Ltd. v. CCE - 1991 (56) ELT 496
(CEGAT), it was held that if assessment is provisional on any ground, the whole
assessment is provisional and time limit for demand/refund will start only when the
assessment is finalised.

Hence it may not be in the interest of assessee to accept the assessment

provisionally as the protection of section 11A that demand can be raised only within
one year will not be available to him. It may be advisable to pay duty under protest
taking care that provisions of section 11D regarding refusal of refund in cases of
unjust enrichment are not attracted.

Monthly return should specify details of invoices provisionally assessed As per

ER1 form of monthly return [earlier RT-12], details of numbers of invoices
provisionally assessed are required to be given.

Best judgment assessment - Earlier Central Excise Rules provided for best
judgment assessment. New rules make no provision of Best Judgment
Assessment. However, CBE&C Manual envisages Best Judgment Assessment.

Where assessee fails to provide records or information and department is unable to

issue demand, best judgment method may be used to raise demand on collateral
evidence. Burden to provide information for re-determination of duty is on assessee.
Chapter 3 Part IV Para 3.1 of CBE&Cs CE Manual, 2001.

Demands of Central Excise Duty

Though the excise duty has to be assessed at the time of clearance of

goods from the factory or warehouse, it is possible that the duty paid
may be lower than the duty actually payable, or duty may be
erroneously refunded. This may happen for various reasons as follows
:

Assessable value declared is not acceptable to Excise authorities.

Classification and/or exemption notifications claimed by assessee is not
acceptable to excise authorities.
Excise duty paid at concessional rate though concession was not available.
Clandestine removal, non-accounting of goods etc.
Clearance in name of dummy units.
Duty erroneously refunded.
Any other reasons due to which the excise officer is of the opinion that the duty
paid is not correct due to difference in valuation, classification or rate of duty.

In any case when duty is not levied or paid or has been short levied or short paid or
erroneously refunded, a notice can be issued by Central Excise Officer, asking the
person why he should not pay the amount specified in the notice. [section 11A(1)].
The show cause notice asking to show reason why duty should not be paid must be
raised within one year from 'relevant date'. In case of fraud, collusion, wilful mis-
statement and suppression of facts, demand can be raised within 5 years.

NO PENALTY IF DEMAND ITSELF IS TIME BARRED If demand itself is time

barred, penalty cannot be imposed. Eveready Industries v. CCE (2001) 138 ELT
1287 (CEGAT).

Show Cause Notice - Under section 11A [parallel section 28 of Customs Act],
Excise Officer can ask the manufacturer to pay the difference of duty. The Central
Excise Officer has to issue a show-cause notice. After considering the
representation from the person concerned, the Central Excise Officer can determine
the amount of duty payable and then the person chargeable to duty has to pay the
amount.

Show cause notice is necessary but not issuing it is only irregularity, further,
assessee can waive his right - In CC v. Virgo Steels 2002 AIR SCW 1698 = 49 RLT
634 = 2002(3) SCALE 341 = 141 ELT 598 (SC 3 member bench), law provided for
issue of show cause notice before confirming any demand of duty. It was held that
though issue of show cause notice is a mandatory requirement, it can be waived by
assessee as the provision deals with individuals right. It is a notice to the person
concerned and not a public notice and right to receive show cause notice can be
waived.

NO NOTICE IF ASSESSEE VOLUNTARILY PAYS THE AMOUNT It is possible

that a person who is liable to pay the duty due, may like to pay the duty voluntarily
on his own, if he is convinced that duty is legally payable. In such case, he can pay
the duty on his own and inform the proper officer in writing. The assessee will also
have to pay interest for delayed payment as may be due u/s 11AB of CEA
[corresponding section 28AB of Customs Act].

If assessee pays duty due on his own, the officer shall not issue any show cause
notice. However, if the officer is of the opinion that there is short payment in respect
of the amount, he can issue notice for payment of balance amount. In such case, the
time limit for issue of show cause notice will be counted from the receipt of
information of payment. Further, the provision does not apply if the short payment or
non-payment or erroneous refund was due to collusion, wilful mis-statement or
suppression of facts. [In such cases, penalty proceedings can be initiated even if
assessee had paid the amount and interest due]. Section 11A(2B) of CEA inserted
w.e.f. 11-5-2001.

In corresponding provision in Customs Act section 28(2B), provision has been made
for voluntary payment of both duty and interest. The interest mentioned is the
interest u/s 47(2) of Customs Act, which is payable if the duty is not paid within five
working days after Bill of Entry is returned duly assessed, for payment of duty.

Time Limit for issue of Notice - The Show Cause Notice has to be served on the
person chargeable to duty within one year from relevant date. However, this period
will extend upto five years if the non-payment or short payment of duty (or refund of
duty) is by reason of fraud, collusion, wilful mis-statement or suppression of facts,
or contravention of any provision of Excise Act or rules is made with intention to
evade payment of duty.

TIME LIMIT APPLICABLE EVEN IF ACT AMENDED RETROSPECTIVELY - The

time limit of section 11A [parallel section 28 of Customs Act] is mandatory and
applies even in cases where Act is amended with retrospective effect - J K Cotton
Spinning Mills v. UOI (1988) 68 STC 421 (SC) = 32 ELT 234 = AIR 1987 SC 191 =
(1987) Supp 1 SCC 350 (SC 3 member bench) - followed in CCE v. Vapi Paper Mills
Ltd. 1998(104) ELT 780 (CEGAT) * Bajaj Auto Ltd. v. UOI 2003(151) ELT 23 (Bom
HC DB)..

Oral show cause notice under Customs Law- Show cause notice is required to be
given before confiscating goods and imposing any penalty. However, the person
concerned can waive the requirement of show cause notice. He can request issue of
verbal notice. - proviso to section 124 of Customs Act. [Rule 25(2) of Central Excise
Rules specifically provides that Central Excise Officer will follow principles of natural
justice while issuing order of penalty or confiscation. Thus, show cause notice will be
required, unless the department is able to justify that issue of oral notice did not
violate principles of natural justice].

It has been held by Supreme Court that receipt of show cause notice is a personal
right and can be waived by the assessee.

The provision of oral show cause notice in section 124 of Customs Act is only in
respect of confiscation of goods and imposition of penalty. However, in CC v.
Jagdish Cancer & Research Centre 2001(5) SCALE 11 = 132 ELT 257 (SC 3
member bench), it was held that the show cause notice u/s 124 for confiscation of
goods is independent of notice of demand of customs duty to be issued u/s 28(1). As
per section 125(2), customs duty and charges payable in respect of goods are also
payable in addition to confiscation of goods. Hence, notice u/s 124 can include
demand of customs duty also.

Thus, oral show cause notice for demand of customs duty will be valid, if it involves
confiscation of goods and imposition of penalty. [Notice of demand of duty and
interest u/s 28(1) has to be served. An oral notice cannot be really served].

Relevant date for issue of Show cause Notice - The prescribed period is one year or
5 years from relevant date.

Who can issue show cause notice - Section 11A specifies that show cause notice
should be issued by Central Excise Officer. Section 28 of Customs Act states that
notice should be issued by 'proper officer'. As per section 2(34) of Customs Act,
'proper officer' in relation to any function under Customs Act, means the officer of
customs who is assigned those functions by CBE&C or Commissioner.

Requirements of Show Cause Notice - Show Cause Notice (SCN) is the foundation
on which the demand is based and it is a prerequisite for any demand under section
11A. Any demand without issue of show cause notice is violation of a statutory
provision - Gokak Patel v. Volkart Ltd. - AIR 1987 SC 1161 = (1987) 2 SCC 93 =
1987 (28) ELT 53 (SC). Principles of natural justice fully apply to SCN e.g. all
evidence on which department wants to reply should be disclosed. Following are the
requirements of SCN and if these are not followed, the SCN is vitiated and may not
stand scrutiny of law.

Wrong mention of rule and notification will not vitiate Notice or order - Non-
mentioning or wrong mentioning of rule or section will not vitiate the SCN if all
essential ingredients of statute are mentioned and substance of notice is clear, and
no prejudice is caused, and when the power is available - State of Karnataka v.
Muniyalla AIR 1985 SC 470 * N B Sanjana v. Elphinstone Spinning and Wvg Mills
Co. Ltd. - AIR 1971 SC 2039 = 1978 (2) ELT J399 (SC).

Effect of notice for period beyond one year/five years - Supreme Court has held that
if a show cause notice is issued pertaining to period beyond five years, the whole
notice does not become invalid. The only effect is that the department will not be
entitled to collect duty beyond a period of five years from date of show cause notice.
- UOI v. Maheshwari Woollen Mills - AIR 1993 SCW 483 = AIR 1993 SC 1251 (3
member bench). Same principle applies if show cause notice is issued for a period
beyond one year (i.e. when fraud etc. is not alleged). In such case, notice will be
considered valid and enforceable for a period of one year.

Serving of Show Cause Notice - Section 37C(1) of CEA provides that the any
decision or order passed or any summons or notice under the Act shall be served (a)
by tendering the same or by sending it with registered post with acknowledgement
due to the person for whom it is intended or his authorised agent (b) If it cannot be
served as aforesaid, then by affixing a copy at a conspicuous space in factory or
warehouse. (c) If this is also not possible, then affixing a copy on the notice board of
the office or authority which issued the SCN. (These provisions are applicable to
issue of notices, order, summons or decisions issued under Central Excise Act or
rules). As per section 37C(2), the notice / order / summons / decision shall be
deemed to have been served on the date on which it is served or tendered or
delivered by post or copy is affixed on notice board.

Suppression of facts/fraud/collusion - Notice can be served for a period of five

years in case of fraud, collusion, suppression of facts, wilful misstatement etc. This
indeed is a terror as an unexpected demand for past five years can financially
cripple the assessee. However, it has to be noted that such suppression of facts,
misstatement must be with intention to evade duty to attract larger period of five
years. Supreme Court in Rainbow Industries v. CCE - 1994 (74) ELT 3 (SC) = 1994
(6) SCC 563 = AIR 1994 SC 2783 = 1994 AIR SCW 4465 have held that in order for
the extended period to apply, two ingredients must be present - wilful suppression,
mis-declaration etc., and the intention to evade duty - followed in ONGC v. CCE -
1995 (79) ELT 117 (CEGAT). Same view in Tamil Nadu Housing Board v. CCE -
1994 (4) SCALE 388 (SC) = 1995 Supp(1) SCC 50 = 1994 (74) ELT 9 (SC) =1994
(55) ECR 7 (SC). In this case, it was held that the powers to extend period from one
year to 5 years are exceptional powers and hence have to be construed strictly. It
was held that both fraud, collusion etc. and intention to evade duty must concur. In J
K Cotton Spg & Wvg Mills Co. Ltd. v. CCE 1998(99) ELT 8 = JT 1998(2) SC 293 =
1998(3) SCC 540 = 1998 AIR SCW 1123 = AIR 1998 SC 1270 = (1998) 13 CC
(Reports) 108 (SC 3 member bench) also, it was held that eventuality envisaged in
section 11A (parallel section 28 of Customs Act) for further lengthening of the
limitation period must be strictly construed.

Intention to evade duty - Intention to evade payment of duty is not mere failure to
pay duty. It must be something more, i.e. that assessee must be aware that duty was
leviable and he must deliberately avoid payment of duty. Evade means defeating
the provision of law of paying duty. It is made more stringent by the use of word
intent. In other words, the assessee must deliberately avoid payment of duty
payable under the law. Where there was scope of doubt whether duty was payable
or not, it is not intention to evade duty. - Tamilnadu Housing Board v. CCE - 1994
(4) SCALE 388 (SC) = 1995 Supp(1) SCC 50 = 1994 (74) ELT 9 (SC) = 1994(55)
ECR 7. In this case, it was held that the powers to extend period from one year to 5
years are exceptional powers and hence have to be construed strictly.

Mere inaction is not Suppression of Facts - Suppression means not providing

information which the person is legally required to state, but is intentionally or
deliberately not stated. Hon. Supreme Court, in Collector v. Chemphar Drugs 1989
(40) ELT 276 (SC) = 1989 (2) SCC 127 = 1989 (21) ECR 182 (SC) = AIR 1989 SC
832, has held that mere inaction or failure on part of manufacturer will not amount to
suppression of facts. Conscious or deliberate withholding of information when the
manufacturer knew otherwise, is required to be established, before saddling the
manufacturer with liability for a period beyond one year (that time 6 months)
[reiterated in Lubri-Chem Industries Ltd. v. Collector - 1994 (73) ELT 257 (SC) =
1994(2) Supp SCC III 258 = 1994 AIR SCW 3672 = AIR 1994 SC 2604 = 1994(4)
RLT 239 (SC)].

Fraud/Misstatement/Collusion - Demand can be raised for past 5 years in case of

fraud/misstatement or collusion.

FRAUD - This word is not defined in CEA. Basic element of fraud is deceit. Section
17 of Contract Act states that fraud means making a suggestion, as a fact, which the
person does not believe it to be true. Fraud also means active concealment of fact.
Generally, fraud means deceit, trickery or misrepresentation. Intention to evade
duty is built into the words fraud and collusion -Cosmic Dye Chemical v. CCE -
(1994) 95 STC 604 (SC) = (1995) 6 SCC 117 [(1) 502 ?] = 75 ELT 721 (3 member
bench). In Dr. Vimla AIR 1963 SC 1572, it was observed that 'defraud' includes an
element of deceit.

However, mere silence is not fraud, unless it is the duty of the person to speak or
silence itself is equivalent to speech.

MISSTATEMENT - A false statement becomes wilful if it is deliberate or intentional.

It is not wilful if the statement is accidental or inadvertent. A statement will not be
misstatement only because full facts were not disclosed. Wilful means with intent to
evade duty - Cosmic Dye Chemical v. CCE - (1994) 95 STC 604 (SC) = 75 ELT 721
= (1995) 6 SCC 117 [(1) 502 ?] (3 member bench)

Mere visits of offices does not mean there was no suppression of facts No
suppression cannot be pleaded on the ground that excise officers visited their
factory number of times, unless there is something on record to show that they
pointed out some fact to Revenue and even after the discovery of that fact, Revenue
has not taken any action. Agrico Engineering Works v. CCE 2000(122) ELT 891
(CEGAT).

Demand based on estimated production In cases of clandestine removal,

demand can be issued on basis of estimated production. Earlier rule 173E provided
that CE Officer can fix normal production based on installed capacity, raw material
utilisation, labour employed, power consumed and such other relevant factors as the
officer may consider appropriate. If sufficient cause is not shown for shortfall
compared to norms, the duty could be assessed on best judgment.

Now, there is no parallel provision in new rules, but it does not mean that demand
cannot be raised on estimate basis, as in case of clandestine removal, getting actual
production figures is practically impossible.

No demand from purchaser in open market - Goods purchased from open market
are presumed to be duty paid. Purchaser does not have to prove duty paid character
of such goods. It is not possible for the purchaser to prove the same - Calcutta
Paper Mills Mfg Co. v. CEGAT - 1986 (25) ELT 939 (Cal HC) * Vapson Products v.
UOI - 1987 (27) ELT 608 (Bom HC).

Reply, Hearing and Order CBE&C (Board) has prescribed a time limit of one
month for giving reply to show cause notice. Allowing shorter period for giving reply
is incorrect. The assessee should be allowed to produce supportive evidence and
should be allowed examination and cross-examination of witnesses.

PERSONAL HEARING - A personal hearing should be given and then appealable

speaking order should be passed by adjudicating authority (speaking order means
an order giving reasons). Provision of personal hearing is not specified in section
11A of CEA (parallel section 28 of Customs Act), but it is an essential requirement of
principles of natural justice. The order should give decisions on the points and
objections raised by assessee in reply to SCN or at personal hearing.

Cross-examination of persons whose statements relied upon - If a statement of a

person is relied upon, opportunity of cross-examining the person must be given if
demanded, if such opportunity is not given, the statement cannot be relied upon. -
Kalra Glue Factory v. Sales Tax Tribunal - 1987 (66) STC 292, followed in Indo Plast
v. CC 1994 (69) ELT 39 (CEGAT).

ORDER CANNOT GO BEYOND SHOW CAUSE NOTICE - Order must be based on

points alleged in show cause notice. An order based on point not alleged in show
cause notice is not sustainable [for case law, see under show cause notice].

ORDER MUST BE WITH REASONS - It is a principle of natural justice that an order

confirming demand mentioned in show cause notice must be with reasons.

Interest for late payment of duty If duty is not paid when it ought to have been
paid, interest is payable at the rates specified by Central Government by notification
in official gazette. Such rate cannot be less than 10% and not more than 36%. The
interest is payable from the first day of the month following the month in which the
duty ought to have been paid. The provision applies if the amount had become
payable or ought to have been paid after Finance Act, 2001 received assent of the
President, i.e. on or after 11-5-2001. [section 11AB(1) of CEA - similar section
28AB(1) of Customs Act] The actual rate of interest is 15% w.e.f. 13-5-2002
[Notifications 19/2002-CE(NT) and 27/2002-Cus(NT) both dated 13-5-2002].
[Earlier, the interest rate was 24%].

Interest payable during period of stay - It may be noted that interest is payable if
finally assessee loses in appeal, even if demand was stayed by Court/Tribunal
pending hearing of appeal. The interest will be payable right from the original
demand, and not from the date when appeal is decided. Supreme Court in Haji Lal
Mohd v. State of UP (1973) 32 STC 496 (SC), had, in a sales tax case, held that
running of interest is not prevented because of operation of any stay order.

However, penalty cannot be levied during period of stay, as assessee is not in

default during that period. A late payment surcharge / interest is necessarily
compensatory in character. A penalty is punishment. Consolidated Coffee Ltd. v.
Agricultural ITO 2000 AIR SCW 4173 = 248 ITR 417 = (2001) 1 SCC 278 = 113
Taxman 697 (SC) * Chitra Viranave v. CCE 2002(145) ELT 622 (CEGAT).
Settlement Commission

Central Excise and Customs law have made provision of 'Customs and Central
Excise Settlement Commission' on the lines of a similar Commission under the
Income-Tax Act, 1961. The provisions are incorporated in sections 31, 32 & 32A to
32P of Central Excise Act and sections 127A to 127N of Customs Act.

Provisions of settlement under customs and Central Excise are pari-materia to that
of provisions in direct taxes. - Santogen Textile Mills Ltd. In re 2002(141) ELT 580
(Sett Comm).

Settlement Commission is based on Wanchoo Committee Report. The report said,

There is delirious effect of frequent disclosure schemes on the level of compliance
among the tax paying public and the morale of administration. However, this does
not mean that the door for compromise with an errant tax payer should remain
forever closed. In the administration of fiscal laws, whose primary object is to raise
revenue, there has to be some room for compromise and settlement. A rigid attitude
would not only inhibit a one time tax-evader or an un-intending defaulter from
making a clean breast of his affairs, but would also unnecessarily strain the
investigation resources of the department in case of doubtful benefit to revenue
while needlessly proliferating litigation and holding up collections. We would,
therefore, suggest that there should be a provision in law for a settlement with a tax
payer at any stage of the proceedings. quoted in Rajshri Plastiwood Ltd. In re
2001(130) ELT 295 (Sett Comm).

Settlement Commission is constituted for settling complicated cases of chronic tax

evaders as an extraordinary measure, for giving an opportunity to such persons to
make a true confession and to have matters settled once for all, and earn peace of
mind. It is a forum of self surrender and not a forum of challenging the legality of
assessment order. N Krishnan v. Settlement Commission (1989) 180 ITR 585 = 47
Taxman 294 (Kar HC DB). similar view in Sheikh Mohd. Rawoothat v. Settlement
Commission (1999) 236 ITR 581 (Mad HC).

Settlement Commission has been constituted w.e.f. 9th June, 1999, vide notification
No. 40/99-CX(NT) dated 9-6-1999. The Commission consists of Chairman, three
Vice Chairmen and eight members, functioning under Department of Revenue,
Ministry of Finance. It has principal bench at Delhi and additional benches at
Mumbai, Chennai and Kolkata. Mr. D S Solanki is the first Chairman of the
Commission.

The provisions are mainly useful in major cases, where department has found some
evasion of duty and has initiated action by issue of show cause notice. In such case,
the assessee may like to settle the issue by payment of dues and avoid further
liabilities. The Settlement Commission can grant immunity from prosecution and can
also reduce or waive penalty, fine and interest. This is similar to 'out of court'
settlement of dues, to avoid lengthy and costly litigation.

Objective of Settlement Commission is to provide quick and easy settlement of tax

dispute of high revenue stake. This will save time and energy of both litigants and
department. It is expected that there will be only two hearings and issue will be
resolved within an outer limit of 6 months to 1 year. - Issued by Settlement
Commission - 1999(113) ELT T11.
Who can approach Settlement Commission - Any assessee (in case of Central
Excise) and any importer, exporter or any other person (in case of customs) can
approach the Settlement Commission. Application should be accompanied by
prescribed fees. Application once made cannot be withdrawn.

Disclosure to be made by applicant - Applicant has to make an application in

prescribed and manner stating, inter alia, a true and full disclosure of his duty liability
which has not been disclosed before the Central Excise / Customs Officer having
jurisdiction, the manner in which such liability has been incurred and the additional
amount of excise / customs duty accepted to be payable by him. He has to also
supply other information regarding dutiable goods in respect of which he admits
short levy. Application should be for settlement of the case.

Which issues can be taken before Settlement Commission - The case

can be taken up for settlement only in following cases -

Applicant should have filed the prescribed monthly returns showing production,
clearances and Central Excise Duty paid and a show cause notice should have
been issued. In case of customs, the applicant should have filed a bill of entry or
shipping bill, and a show cause notice should have been issued to him.
The additional amount accepted by applicant as payable shall be more than Rs 2
lakhs.
The Settlement Commission cannot entertain cases pending with the Appellate
Tribunal or any Court. Thus, cases at show cause stage or cases pending with
Assistant / Deputy Commissioner, Commissioner or Commissioner (Appeals) are
eligible. Even if order is passed by Commissioner or Commissioner (Appeals)
application can be made to Settlement Commission without filing appeal to
CEGAT. However, application for settlement must be made within the time
permitted for filing appeal.
Applications involving interpretation of the classification of excisable goods under
the Central Excise Tariff Act, or Customs Tariff Act cannot be taken.
In case of customs, application in respect of following cannot be entertained - (a)
Goods to which section 123 of Customs Act applies (b) Goods in respect of which
offence under Narcotic Drugs & Psychotropic Substances Act has been
committed.
If any excisable goods or dutiable goods, books of account or other documents
have been seized, application for settlement can be made only 180 days after
such seizure. In Chawla Enterprises Ltd. In re 2002(139) ELT 464 (Sett Comm), it
was held that applicant can approach Commission after 180 days even if no
show cause notice is issued to him.

Procedure before Settlement Commission - Application giving full disclosures along

with all relevant documents should be submitted in quintuplicate. It should be signed
and verified and should be accompanied by a fee of Rs 1,000/-. The fees are
payable by way of a TR-6 challan in authorised bank. Payment by cheques / drafts
are not accepted.

The account code is 00370058 in case of customs and 00380103 in case of Central
Excise. [CAO Office memorandum dated 24-1-2002].

PROCEDURE FOR APPLICATION - Application should be in form SC(E)-1 in case

of CEA and form SC(C)-1 in case of Customs Act. The application should be signed
and verified by * In case of individual the individual himself or if he is absent from
India, person authorised by him * Karta in case of HUF * Principal Officer in case of
company or local authority * Partner in case of firm * In case of any other person, a
person competent to act on his behalf. - Rule 2 of Central Excise (Settlement of
Cases) Rules, 2001.

On receipt of application, Settlement Commission will call report from jurisdictional

Commissioner of Excise / Customs u/s 32F(1) of CEA. Settlement Commission may
send copy of the application to Commissioner while calling for his report, without its
annexures, statements and other documents. - Rule 3 of Central Excise (Settlement
of Cases) Rules, 2001 (earlier rule 220(2) of CEA) - rule 4 of Customs (Settlement
of Cases) Rules, 1999.

If no report is received within one month from Commissioner, the Settlement

Commission should fix hearing within two months by giving notice to applicant as
well as jurisdictional Commissioner.

On receipt of such report, Commission can accept or reject the application for
settlement, having regard to nature and complexity. Commission cannot reject an
application without giving opportunity of personal hearing to the applicant.

If Commission decides to accept the application, the applicant must pay the amount
acceptable to him within 30 days. If amount is not paid, interest @ 18% is payable. If
the amount is not paid, it can be recovered as any other excise / customs due. If the
application is admitted, copy of the order allowing the application, along with all
annexures, statements and other documents will be sent to Jurisdictional
Commissioner of Excise / Customs.

Powers to grant immunity from prosecution - The Settlement Commission shall,

subject to certain provisions, have power to grant immunity from prosecution penalty,
fine and interest in respect of the case covered by the settlement, if the applicant
has cooperated with the Commission and has made full and complete disclosure. If
the payment is not made as per order, the immunity will be withdrawn.

Sending back the case - If the applicant does not cooperate, the Settlement
Commission can send the case back to the officer for further action as per law.
Similarly, if order is obtained by misrepresentation of facts or fraud, the order is void
and then matter can be sent back to the officer for decision. Such person then
cannot apply for settlement in any other matter. If the application is sent back, all
submissions made and all information given by applicant before Settlement
Commission can be used by the Excise/Customs Officer while deciding the case.

Recovery

Once the demand of duty, penalty or any other dues is confirmed by excise
authorities, the person liable to pay dues has to pay the amount within time
prescribed. The payment may be made either by TR-6 challan or by debiting PLA.

Mode of Recovery - If the assessee refuses to pay the amount, Excise Officers
have been given powers u/s 11 of CEA and section 142(1)(b) of Customs Act as
made applicable to Central Excise w.e.f. 2.9.1997.

Powers under section 11 - Excise authorities can recover excise duty under section
11 only by following means :

ADJUSTING AGAINST MONEY PAYABLE - By adjusting the amount against any

money payable to him e.g. a refund may be due to the assessee on some other
account, which can be adjusted against the money recoverable from him.

ATTACHMENT - By attachment and sale of excisable goods belonging to the

assessee.

AS ARREARS OF LAND REVENUE BY ISSUING A CERTIFICATE - By issuing

certificate to District Collector of Revenue, who is empowered to recover the amount
as arrears of land revenue. Collector can attach and auction the belongings (except
cooking utensils and personal clothing) and recover the amount. This is termed as
'certification proceedings' or certificate action.

Powers under section 142(1) of Customs Act made applicable to CE - Section

142(1)(b) and section 142(1)(c)(ii) of Customs Act have been made applicable to
Central Excise w.e.f. 2.9.1997, by amending notification No. 68/63-CE dated
4.5.1963. Under section 142(1)(b) of Customs Act as made applicable to Central
Excise, Assistant / Deputy Commissioner of Central Excise can detain and sale any
goods belonging to the person which are under control of Central Excise officer.
Under section 142(1)(c)(ii) of Customs Act as made applicable to Central Excise, the
Assistant / Deputy Commissioner, with prior permission of Commissioner, distrain
any movable or immovable property belonging to or under control of such person. If
the amount is not paid within 30 days, the property can be sold. These powers are
discussed in following paragraphs.

Provisions regarding recovery under section 11 - Provisions in respect of

recovery of duty under section 11 are as follows

RECOVERY FROM SURETY - The powers of recovery can be used against surety
or guarantor also.

GOODS SHOULD BELONG TO ASSESSEE - Attachment can be only of goods

belonging to person liable to make payment.

INSTALMENTS CAN BE GRANTED - Chief Commissioner of Central Excise can

grant instalments for recovery, but statutory interest will be payable. Upto 36 monthly
instalments can be granted on merits - CCE, Hyderabad TN 48/97 dated
17.12.1997.

LIABILITY OF PARTNER - Since liability of partners is unlimited, recovery can be

made from partner. If public notice of dissolution is given, then partner is liable only
for dues upto date of dissolution. However, dues recoverable from an individual
partner (in his individual capacity) cannot be recovered from the partnership firm and
goods belonging to a firm cannot be attached for recovery of dues from an individual
partner. In Third ITO v. Arungri Chettiar - AIR 1996 SC 2160, it was held that tax
arrears of partnership firm when assessee was partner can be recovered from
erstwhile partner, even after he retires.

LIABILITY OF LEGAL HEIR/REPRESENTATIVES - High Courts have held that

recovery can be made from legal representatives or heir from the movable or
immovable property inherited by the legal heirs.

GOODS PLEDGED CANNOT BE ATTACHED - If the goods have been pledged

(usually with Bank), they do not belong to the defaulter and hence are not liable for
attachment or detention.

Detention and sale of any property - If the amount due is not paid, Assistant /
Deputy Commissioner of Central Excise can, on authorisation by a Commissioner of
Central Excise, distrain any movable or immovable property belonging to or in
control of such person (from whom any sum is recoverable). The property can be
detained until the amount is paid along with cost of the distress or keeping the
property. If amount is not paid, the property can be sold by excise authorities.
[section 142 (1)(c)(ii) of Customs Act as made applicable to Central Excise].

Provisions under section 142(1)(c)(ii) of Customs Act permit detention of any

immovable and movable property. Goods not belonging to the person, but under his
control can also be detained and sold, if amount is not paid within 30 days. Prior
authorisation of Commissioner is necessary for detention and sale.

Stay of Recovery - Orders of demand are appealable and appeal can be filed
against the order for demand of duty/penalty. Under Central Excise as well as
Customs law, appeal can be filed only after the amount demanded is paid. However,
appellate authorities can grant stay for recovery pending final decision on appeal.
The stay may be unconditional or conditional subject to conditions like part payment,
bank guarantee, surety etc. If such stay is obtained, recovery proceedings will be
stayed. However, mere filing of appeal does not amount to stay order. A separate
application has to be made for stay order from appellate authorities.

Payment of Duty Under Protest

Sometimes it happens that the classification of goods done by excise authorities,

Assessable Value determined by the excise authorities in adjudication proceedings,
etc. are not agreeable or acceptable to the assessee. In such cases, the assessee
can file an appeal and in the meanwhile he can pay duty under protest {If no stay is
obtained from Appellate Authorities}

Following procedure, as prescribed in Chapter 13 Part III Para 4 of CBE&Cs CE

Manual, 2001 should be followed

(a) Write a letter to Assistant / Deputy Commissioner stating that he desires to pay
duty under protest and give grounds for paying duty under protest

(b) Obtain dated acknowledgement and it will be proof that assessee has paid
duty under protest from that date

(c) After submission of the aforesaid letter, he can pay duty under protest only till
his appeal or revision (as the case may be) is decided, but not after the
appeal/representation is decided. If he does not file appeal, he cannot pay duty
under protest after period of appeal is over.

(d) An endorsement duty paid under protest should appear on all excise invoices
or monthly / quarterly return. If lumpsum duty is paid in respect of past demand, fact
of duty payment under protest should be mentioned in PLA, Cenvat Credit Account
and Daily Stock Account (DSA) [Really, DSA is not relevant]

(e) As per ER-1 form of monthly / quarterly return, numbers of invoices on which
duty is paid under protest should be indicated in the return.

LETTER OF PROTEST IS NOT A CLAIM OF REFUND Even if letter of protest

was filed, it does not constitute a claim of refund. - Chapter 13 Part III Para 4.3 of
CBE&Cs CE Manual, 2001. Thus, separate refund application is required after the
issue is settled.

Letter of Protest is essential Protest must be registered before or at the time of

making payment. Thus, letter giving reasons of protest is essential. It is advisable to
mark on TR-6 challan or on debit entry to PLA itself that duty is being paid under
protest. Payment under protest cannot be an afterthought.

Doctrine of unjust enrichment applicable to refund - Even if duty is paid under

protest, doctrine of unjust enrichment will still apply to refund. The manufacturer
should charge only the excise duty to which he is agreeable as per his interpretation
and balance should be borne by him. The problem may arise that if he is required to
pay duty at a later stage, he may not be able to recover the amount from the buyer.
Hence, if possible, assessee may obtain deposit or bank guarantee from the buyer.

Refund of Duty

Just as it is possible that the assessee has paid lower duty, it is possible that the
manufacturer has paid higher duty than required. Such higher payment may be due
to mistake or urgency. Even if an assessee agrees to pay higher duty to clear goods
urgently, he can claim refund. There is no estoppel in law against a party in taxation
matters. If a party in order to clear goods from customs, has given classification
according to wishes of authorities or even under some misapprehension, he can
claim refund on proper appraisement - Dunlop India Ltd. v. UOI - AIR 1977 SC 597 =
1983 (13) ELT 1566 (SC).

Doctrine of Unjust Enrichment - If the manufacturer had charged excise duty to

his buyer, it is clear that he has passed on the burden to the buyer and has already
recovered duty from his customer. In such cases, refund of excess duty paid to the
manufacturer will amount to excess and un-deserved profit to him. It will not be
equitable to refund the duty to him, as he will get double benefit - first from the
customer and again from the Government. This is called unjust enrichment.
Refund, if any, should be paid to customer who has borne the burden of duty.
However, in majority of the cases, it is not practicable to identify individual consumer
and pay refund to him. At the same time, the duty is illegally collected and hence
cannot be retained by Government. In UOI v. Roplas Ltd. 1988(38) ELT 27 (Bom
HC), it was suggested that in such cases, the refund due should be transferred to a
Consumer Welfare Fund instead of paying it to the manufacturer. The fund may be
used for activities of protection and benefit of consumers. With this view in mind,
CEA was amended and the provisions in respect of 'unjust enrichment' were
incorporated w.e.f. 20th Sept., 91. As per these provisions, refund will be paid to
manufacturer only if he proves that he has borne the burden of duty. Otherwise, the
amount will be paid to Consumer Welfare Fund.

Prior to this amendment, there was no such provision in the Act and various Courts
had held that Government has no right to retain duty which is not legally payable
and it ought to be refunded even if it was recovered by assessee from buyer.

Refund claim - Refund claim should be lodged within one year from relevant date
in prescribed form. It can be lodged by manufacturer, if he has not passed on the
burden to buyer, or by a buyer, if he has not passed on its incidence to another
person. Refund claim should be lodged with Assistant / Deputy Commissioner and
not with Superintendent. - Bhubaneshwar Commissionerate Trade Notice No. 35-
GL-30-93 dated 28-9-1993.

Procedure for filing refund application Refund application should be filed in

form R which was prescribed in earlier CE Rules. - Chapter 9 Para 1.1 of CBE&Cs
CE Manual, 2001.

Refund application in duplicate must be filed only in the office of Assistant / Deputy
Commissioner, but copy should be submitted to Range Superintendent. It should be
signed by claimant and pre-receipted with revenue stamp. Claim should be
accompanied by all relevant documents. Refund claim of less than Rs 100 will not
be entertained.

Who can file a refund claim - A refund claim can be filed by assessee who has paid
the duty or the buyer on whom the burden of duty has been passed.

Refund to assessee/buyer - Under proviso to section 11B(2), [parallel

section 27(2) of Customs Act] a refund of excise duty can be made to
assessee/buyer only in following cases :

Rebate of excisable goods exported out of India (if he had exported on payment
of duty)
Rebate of excise on excisable materials used in manufacture of goods exported
out of India (if he has not availed Cenvat credit)
Refund of duty paid on inputs (if payable according to any rule or notification)
To Manufacturer, if he has not passed on incidence of the duty to another person
To Buyer, if he has borne the duty and if he has not passed on incidence of the
duty to another person
To any other class of applicant if borne by any such class of applicants, as may
be specified by Government of India, if the incidence of duty has not been passed
on to any other person

In addition, Tribunals and Courts have held that provisions of unjust enrichment do
not apply in following cases (a) When duty is paid under protest and only lower
amount of duty is charged to customer (b) Pre-deposit of duty pending appeal (c)
When duty is paid subsequent to clearance (d) When contract is for price inclusive
of all duties (e) When debit note is raised by buyer and amount deducted from bill (f)
When credit note issued to buyer (g) Refund of rebate/incentive. (h) Deposit taken
from buyer against possible liability of excise duty. [Case law discussed in later part
of this Chapter].

Thus, in effect, refund to a person will be made only when he has not passed on the
burden to another person. These provisions are overriding provisions and are
applicable irrespective of any contrary judgment of Appellate Tribunal or any Court
or any other provisions of Central Excise Act and Rules. Thus, refund provision in
any other rule will be always subject to the aforesaid provisions of section 11B(2).

Time limit for filing refund application - A refund claim u/s 11B has to be filed within
one year from the relevant date.

Presumption regarding Unjust Enrichment - There is statutory presumption that

duty burden has been passed on to customer. Refund is available to
manufacturer/buyer only if he has borne the incidence. Section 12B of CEA [parallel
section 28D of Customs Act] provides that every person who had paid duty shall be
deemed to have passed on the burden to buyer of the goods. The
manufacturer/buyer claiming refund will have to prove that he has not passed on
incidence of tax to any other person.

Duty collected from buyer must be paid - Every person, who is liable to pay duty
under Central Excise Act and Rules and has collected from buyer any amount in
excess of the duty assessed or determined and paid on any excisable goods under
CE Act or rules, representing as duty of excise; must pay the amount immediately to
the credit of Central Government. [section 11D(1) of CEA corresponding section
28B of Customs Act]. Thus, a person, who charges an amount in the invoice
representing as excise duty, must deposit the same with Central Government.

INTEREST PAYABLE IF EXCESS AMOUNT WAS RECOVERED If excess amount

becomes payable u/s 11D, interest will also be payable from the first day of
succeeding month in which the amount should have been paid. If such amount is
reduced in appeal, interest will be payable on the reduced amount. If the amount
payable is increased in appeal, the interest will be payable on such higher amount.
[section 11DD inserted w.e.f. 14-5-2003].

Duty to be shown separately in Invoice - It is presumed under section 12B of CEA

(Parallel section 28D of Customs Act) that the incidence has been passed on to the
buyer. To ensure that buyer knows what is the duty charged to him, section 12A of
CEA [Parallel provision in section 28C of Customs Act] provides that every person
liable to pay duty of excise, shall prominently indicate in all documents relating to
assessment, sales invoice and other like documents, the amount of duty, which
forms part of the price at which such goods are sold. [In a refund claim, the
manufacturer has to prove that he has not passed on incidence of tax to another
person. Once he has specified the amount in his invoice, it will be extremely difficult
to prove that he has not passed on the burden]. This provision is applicable only to a
person liable to pay duty on excise and customs. [Really, this provision is
meaningless in respect of customs duty, as customs duty is never paid on basis of
Invoice. However, provisions of section 12A have been copied in section 28C of
Customs Act without applying mind].

Interest on late disbursement of refund - Refund due must be sanctioned within

three months from date of application. If not so paid, Government will pay interest to
the assessee. The interest rate will be fixed by Central Government if Official
Gazette, which will not be less than 5%, but not more than 30% [section 11BB of
CEA, corresponding section 27A of Customs Act]. The rate prescribed is 8% w.e.f.
13-5-2002 [17/2002-CE(NT) and 25/2002-Cus(NT) both dated 13-5-2002] [It was 9%
w.e.f. 11th May, 2001, vide Notification No. 23/2001-CE(NT) parallel 21/2001-
Cus(NT) both dated 11.5.2001. The rate prescribed was 15% w.e.f. 26th May, 1995].
Of course, the refund is subject to provision of unjust enrichment and hence will not
be available in most of the cases.

Provisions of section 11BB are attracted automatically for any refund sanctioned
beyond three months. Jurisdictional Central Excise Officers are not required to wait
for instructions from any superior officers or look for instructions from higher
appellate authorities. Responsibility should be fixed by Commissioner for not
disposing of the refund claim within three months from date of receipt of application.
CBE&C circular No. 670/61/2002-CX dated 1-10-2002.

Unjust Enrichment - Validity of Section 11B - Legal validity of provisions of

section 11B of CEA (parallel section 27 of Customs Act) has been upheld by a nine
member bench of Supreme Court in Mafatlal Industries Ltd. v. UOI - 1996(9) SCALE
457 = (1997) 89 ELT 247 (SC) = (1997) 5 SCC 536 = 1997(68) ECR 209 = JT 1996
(11) SC 283 = 111 STC 467 = 1996(17) RLT 907 (SC 9 member Constitution bench).
There were separate judgments and final conclusions can be summarised as follows
- [these were later summarised in form of format order in ACC v. Anam Electrical
Mfg Co. 1997(90) ELT 260 (SC) = 1997(1) SCALE 716 (SC) = JT 1997 (2) SC 335.=
1997(5) SCC 744 - confirmed in Baroda Rayon Corpn Ltd. v. CC 1997(91) ELT 537
(SC 3 member bench).* CC v. Sangli Bank Ltd. 1997(93) ELT 3 (SC) * Zenith Tin
Works v. UOI 1998 AIR SCW 4124].

PROVISION IN RESPECT OF UNJUST ENRICHMENT VALID - Provision that

refund can be denied if the duty incidence has been passed on has been upheld.
Provision regarding presumption about passing of the burden are also valid - ( 8 v 1
decision)

WRIT JURISDICTION NOT AFFECTED - Writ jurisdiction of High Court remains

unaffected (unanimous view). However, these writ powers are subject to limitations
as explained below.

REFUND IN CASES WHERE LEVY IS DECLARED UNCONSTITUTIONAL - If the

levy has been declared as unconstitutional, refund claim can be made by way of suit
or a writ petition. Such refund claim will also be subject to provision of unjust
enrichment, i.e. refund can be made to the person only if the person proves that he
has not passed on the burden of duty to another person. Such refund claim can be
made only by a person who has already challenged the validity and the suit or writ
is pending. If the writ or suit was dismissed earlier, the decision has become final in
his case. He cannot file refund claim based on decision of legal invalidity in case of
some other person. Similarly, if a person had not challenged the validity earlier, he
cannot file refund claim based on decision of invalidity in case of other person (7 v 2
decision). Minority view was that if a levy is declared as unconstitutional, other
persons, who had not filed any writ or suit earlier, can also file refund claim/ writ/suit.
[In a subsequent decision, in UP Pollution Control Board v. Kanoria Chemicals Ltd.
2001 AIR SCW 439 = 128 STC 26 = 128 ELT 3 (SC), it was held that writ petition
can be maintained for a refund claim filed subsequent upon declaration of law that
the levy is unconstitutional, if there is no restriction similar to section 11B of Central
Excise Act. In this case, it was held that even those who had not challenged the levy
can file refund claim based on judgment of Supreme Court in another case]. In SRF
Ltd. v. ACCE 2001(134) ELT 324 = 2001(8) SCALE 132 = 2001 AIR SCW 4653 (SC
3 member bench), it was held that even if levy is unconstitutional, refund is still
subject to provisions of unjust enrichment.

JURISDICTION OF CIVIL COURT BARRED - Civil Courts have no jurisdiction in

case of refund claim filed under the Act. Thus, refund claim arising out of
misinterpreting or misapplying the provisions of Act and Rules can be made only as
per provisions of the Act. However, when the levy is declared unconstitutional, the
claim is outside the purview of Act. In such cases, refund can be claimed in suit or
writ, subject to limitations stated above. (5 v 4 decision). The minority view was that
in following cases, jurisdiction of civil court is not barred within normal period of
limitation - (a) Unconstitutional levy ( 3 members' view) (b) Where the provisions of
Act have not been complied with or the statutory tribunal has not acted in conformity
with fundamental principles of jurisprudence ( 2 members' view) (c) When authority
acts without jurisdiction ( 3 members' views). - . - However, there was 8 v 1
unanimity that even in case the levy is declared unconstitutional or there is mistake
of law or where order is passed without jurisdiction, the refund will still be subject to
provisions of unjust enrichment, i.e. refund will not be granted unless the person
proves that he has not passed on the burden to another.

Other important judgments Other important judgments are as follows -

PROVISION APPLICABLE TO CESS - In Jindal Solvent Extractions v. CCE

1999(113) ELT 159 (CEGAT), it was held that provisions of unjust enrichment are
applicable to cess also. same view in SRF Ltd. v. CC 2002(144) ELT 563
(CEGAT).

PROVISION APPLICABLE TO CAPTIVE CONSUMPTION - In UOI v. Solar

Pesticides P Ltd. 2000(1) SCALE 423 = 2000(2) SCC 705 = 2000 AIR SCW 444 =
AIR 2000 SC 862 = JT 2000(1) SC 577 = 116 ELT 401 = 26 SCL 115 (SC 3 member
bench), it has been held that provisions in respect of unjust enrichment are
applicable in respect of raw material captively consumed also. In case of captive
consumption, even if it is difficult to prove that incidence of duty has not been
passed to purchase of final product, refund will not be granted if manufacturer is not
able to show and prove that incidence has not been passed on to some body else. -
followed in CCE v. Usha Beltron Ltd. 2000(119) ELT 3 = 2000 AIR SCW 4658 (SC 3
member bench) * CC v. Borax India 2001(134) ELT 11 (SC 3 member bench) * CCE
v. Ahmedabad Packaging 2002(144) ELT 116 (CEGAT) * CCE v. Elgi Ultra
Industries 2002(146) ELT 396 (CEGAT).

WHEN DUTY PAID ON PROVISIONAL BASIS Rule 7(6) of Central Excise Rules
makes it clear that even in case of provisional assessment, refund is subject to
doctrine of unjust enrichment. Hence, in case of provisional assessment, assessee
should recover only lower duty from the buyer in the invoice. [If the buyer is in a
position to avail Cenvat, it is highly advisable to pay higher duty and forget about
refund. The reason is - section 11B(2) is applicable to all refund claims without any
distinction and has overriding effect as per section 11B(3)].

However, in case of customs duty, there is no parallel provision and provision of

unjust enrichment should not apply if customs duty is paid on provisional basis,
though as per CBEC circular No. 40/2002-Cus dated 17-7-2002, unjust enrichment
provisions will apply to provisional assessment also.
Provisions of General SSI exemption

Various concessions are given to small scale industries to encourage their growth
and also on account of administrative convenience. Since Excise is a duty on
manufacture, it is payable even by a small unit manufacturing the goods. However, it
is Governments policy to encourage growth of small units. Moreover, it is
administratively inconvenient and costly to collect revenue from numerous small
units. Applying ABC principle, the revenue collected from small units would be
negligible compared to the efforts and administrative costs involved. The Govt. has
therefore, given various concessions to small scale industries (SSI). The most
important notification giving these concessions is notification No. 8/2003 dated 1-3-
2003. SSI units whose turnover is less than Rs. 4 crores are eligible for the
concessions. If SSI unit does not avail Cenvat on inputs, turnover upto Rs 150 lakhs
is fully exempt (The limit was Rs 150 lakhs upto 31-3-2007). If SSI unit avails Cenvat
on inputs, it has to pay full normal duty on all its clearances.

Goods not Eligible for SSI concession - Many of goods manufactured by SSI are
eligible for the concession. However, some items are not eligible (some of the items
not eligible for SSI exemption are eligible for exemption under different notifications.
Some are not exempt at all). Thus, SSI exemption is available only if the item is
covered in this notification.

Broadly, items generally manufactured by SSI (except in tobacco, matches and

textile sector) are eligible for SSI exemption. Some items like pan masala, matches,
watches, some textile products, tobacco products, etc. are specifically excluded,
even when these can be manufactured by SSI. Some items like automobiles,
primary iron and steel etc. are not eligible, but anyway, these are beyond capacity of
SSI unit to manufacture.

Goods with others brand name not eligible - Goods manufactured by an SSI unit
with brand name of others are not eligible for SSI concession, unless goods are
manufactured in a rural area. These provisions are discussed later in this Chapter.

Duty payable on goods manufactured for captive consumption, if not eligible for SSI
concession - If goods which are not eligible for SSI concession are manufactured by
SSI unit for captive consumption, duty will be payable, even if final product is eligible
for SSI concession, as correctly held in Super Polyfabriks Ltd. v. CCE 1999(114) ELT
1019 (CEGAT).

SSI units eligible for SSI concession - All industries irrespective of their
investment or number of employees are eligible for concession. In fact, even a large
industry will be eligible for the concession if its annual turnover is less than Rs. 4
crores. The SSI unit need not be registered with any authority.

EXEMPTION AVAILABLE ONLY IF TURNOVER IN PREVIOUS YEAR WAS LESS

THAN RS 4 CRORES - A unit is entitled for exemption only if its turnover in previous
year was less than Rs. 4 crores. Units whose turnover was over Rs. 4 crores in
2004-05 are not eligible to any SSI concession in 2005-06. They have to pay full
normal duty from 1st April, 2005.

GOODS WITH OTHERS BRAND NAME NOT ELIGIBLE - Goods manufactured

with other's brand name are not eligible.

CLUBBING OF TURNOVER - (a) If the manufacturer has more than one factories
(even at different places), the turnover of all factories (belonging to same
manufacturer) have to be clubbed together for calculating the SSI exemption limits
of Rs 150 or 400 lakhs. (b) It is also possible that more than one manufacturers may
clear the goods from the same factory e.g. part of factory may be used by one
manufacturer and another part of same factory may be used by another
manufacturer. In such cases, all clearances from the factory has to be considered
even if the clearance is of different manufacturers for calculating the SSI exemption
limits of 150 or 400 lakhs. (c) Some times, a manufacturer may use the factory for
part of the year and then another manufacturer may use the same factory for
remaining part of the year. In such cases, the turnover of different manufacturers has
to be clubbed for calculating the SSI exemption limits of 150 or 400 lakhs, if it is from
the same factory. (d) Clubbing is also possible if two units are sham or bogus or if
there is unity of interest and practically they are one.

EXEMPTION TO BE AVAILED FOR ALL FACTORIES - If a manufacturer has more

than one factories, he has to avail the option in respect of all factories. He cannot
opt to avail Cenvat in respect of one factory and avail SSI exemption in respect of
other factory, as the slab-wise exemption is for all factories of manufacturer together.
- CBE&C Circular No. 172/6/96-CX dated 6-2-1996.

CHOICE OF VARIOUS TYPES OF EXEMPTION - SSI units have been given two
types of exemptions -

(a) Unit can avail full exemption upto Rs 150 lakhs and pay normal duty thereafter.
Such units can avail Cenvat credit on inputs only after reaching turnover of Rs 150
lakhs in the financial year. [The full exemption limit of Rs 150 lakhs was increased to
Rs 150 lakhs w.e.f. 1-3-2007].

(b) Unit intending to avail Cenvat credit on inputs on all its turnover have to pay
normal duty without any concession.

WHEN SECOND OPTION SUITABLE - Option of payment of duty may be suitable in

following cases - (a) When buyer intends to claim Cenvat credit. In such cases, the
effective cost will be lower as SSI unit can claim Cenvat on inputs (b) When SSI unit
intends to export the products and has huge balance in Cenvat credit account. In
such cases, he can pay duty and claim rebate after export of goods. Otherwise, the
balance may remain unutilised. There is provision to get refund of balance lying in
credit in Cenvat Credit account. However, such refund can be only of Cenvat on
inputs and not of capital goods.

OPTION MUST BE INDICATED, IF SSI UNIT INTENDS TO AVAIL CENVAT CREDIT

- The first option, i.e. Nil duty upto Rs 150 lakhs and normal duty for subsequent
clearances is automatic. However, if assessee wants to avail second option, he must
inform option to department. He should inform in writing to Assistant Commissioner
with a copy to Superintendent of Central Excise, the following - (a) Name and
address of manufacturer (b) Location / locations of factory / factories (c) Description
of specified goods produced (d) date from which option under the SSI exemption
notification has been exercised. (e) Aggregate value of clearances of specified
goods (excluding the value of clearances not covered under SSI exemption
notification e.g. goods exempted under any other notification, goods with brand
name of other, intermediate products and strips of plastics used for manufacture of
sacks or bags). The second option (of paying 150% duty) is available any time
during the year, but the option once availed cannot be withdrawn during the financial
year.

CENVAT TO BE REVERSED IF UNIT DECIDES TO OPT FOR EXEMPTION - If the

unit was availing Cenvat credit prior to 31st March, it will have to pay an amount
equivalent to Cenvat credit allowed to him on the inputs lying in stock or used in
finished excisable goods lying in stock as on 1st April. If any Cenvat credit on inputs
is balance on 31st March, it will lapse on 1st April [Rule 9(2) of Cenvat Credit Rules].
The amount is not duty and hence, strictly, Cenvat credit of such amount paid will
not be available.

CENVAT ON STOCK WHEN UNIT DECIDES TO START AVAILING CENVAT

CREDIT - The SSI unit can decide to start availing and utilising Cenvat on inputs
during middle of the year. When it decides to start availing Cenvat on inputs, it
should do following - (a) Submit a letter that it intends to avail Cenvat on inputs lying
in stock or contained in finished products on date of declaration. (c) Submit a
statement giving stock of inputs lying in stock on date of declaration and duty paid
on such stock. [These are not legally prescribed conditions, but it is highly advisable
to follow them].

Board has confirmed that Cenvat credit will be available in respect of duty on inputs
contained in on stock of raw material, WIP and finished goods when SSI unit
crosses the turnover limit and starts paying duty. SSI unit should keep proper
records.

The SSI unit cannot avail Cenvat credit in respect of inputs which are already used
in manufacture and final product from such inputs is already cleared.

Slabs in SSI excise exemption - Following are slabs in SSI excise exemption.

First slab of 150 lakhs - There is full exemption from excise upto the first clearances
of Rs. 150 lakhs, starting from 1st April every year, if the SSI unit does not avail
Cenvat credit on inputs. If an SSI unit manufactures goods of different varieties,
falling under different Chapter heads and/or in different factories, total exemption
considering clearances of all Chapters together and all factories of same
manufacturer together, will be Rs. 150 lakhs. An SSI unit can opt for paying full
normal duty also.

Second slab after initial 150 lakhs - After the turnover crosses Rs. 150 lakhs, full
normal duty is payable. The SSI unit can avail Cenvat credit on inputs in respect of
inputs used after turnover crosses Rs 150 lakhs. - . - . - Even if an assessee crosses
turnover of Rs. 4 crores, he has to only pay duty at normal rate. The SSI
manufacturer does not have to pay duty on earlier turnover for which he had availed
concession. [confirmed in Searsole Chemicals v. CCE 1999(113) ELT 435 (CEGAT)].
However, in next year, he will not be able to avail any concession and he has to pay
normal rate of duty from 1st April itself.

Excluded turnover for calculating exemption limit of Rs 150 lakhs - While calculating
exemption limit of Rs. 150 lakhs, some of turnover of SSI is not to be considered, as
explained below. [Note the differences in provisions in calculating limits of Rs 150
lakhs and Rs 400 lakhs].
CLEARANCES OF GOODS EXEMPTED UNDER ANY OTHER NOTIFICATION TO
BE EXCLUDED Some goods may be exempt under some other notification, i.e.
other than SSI exemption notification. In some cases, duty may not be payable on
such goods for some other reason. Turnover of such goods is not to be considered
for calculating exemption limit of Rs 150 lakhs. However, if some intermediate
product gets produced, its turnover may be held as includible. [However, this
turnover (except clearances to EOU, SEZ, STP, EHTP, UN etc.) will have to be
considered for calculating exemption limit of Rs 400 lakhs].

EXPORT TURNOVER TO BE EXCLUDED - The limit of Rs 150 lakhs is of

clearance for home consumption, i.e. within India. Export turnover should not be
considered for the purpose of calculating the turnover of 150 lakhs.

Exports to Nepal and Bhutan cannot be excluded, i.e. export turnover to Nepal and
Bhutan will have to be considered while calculating limit of Rs 150 lakhs. It will be
treated as 'clearance for home consumption', even if actually it is 'export'. Exports to
Nepal and Bhutan will have to be included whether payment is received in Indian
Rupees or in free foreign currency. [Same provision for calculating limit of Rs 400
lakhs].

EXPORT UNDER BOND THROUGH MERCHANT EXPORTER TO BE EXCLUDED

- If the exports are under bond without payment of duty through an export house,
these will not be considered for SSI exemption limit i.e. it will be excluded for
calculating exempted turnover. This is because, in such case, the clearance is not
for 'home consumption'. [Same provision for calculating limit of Rs 400 lakhs].

TURNOVER OF NON-EXCISABLE GOODS SHOULD BE EXCLUDED Some

goods are non-excisable, i.e. these are not included in Tariff at all. In such case, its
turnover cannot be considered for purpose of exemption limit. [Same provision for
calculating limit of Rs 400 lakhs].

GOODS MANUFACTURED WITH OTHERS BRAND NAME NOT TO BE

INCLUDED - A SSI unit can manufacture goods with brand name belonging to
others. Such goods are not exempt from duty and full duty is payable on such
goods. This turnover has to be ignored for calculating SSI exemption limits of Rs 150
lakhs. [However, if these goods are manufactured in rural area with others brand
name, these are exempt upto Rs 150 lakhs. In such case, that turnover will have to
be considered for calculating exemption limit of Rs 150 lakhs]. [Same provision for
calculating limit of Rs 400 lakhs].

INTERMEDIATE PRODUCTS - Value of intermediate products manufactured while

producing final products which are eligible for SSI exemption cannot be considered
for calculating limits of Rs 150 lakhs, if both intermediate product and final product
are eligible for SSI concession. Such intermediate product is fully exempt from duty.
- - However, if final product is exempt under any other notification, the value of
intermediate product will have to be considered, i.e. included for considering SSI
exemption [Same provision for calculating limit of Rs 400 lakhs].

STRIPS OF PLASTICS USED WITHIN FACTORY - Clearance of strips of plastics

used within factory of production for weaving of fabrics or manufacture of sacks or
bags made of polymers of ethylene or propylene are exempt. [Same provision for
calculating limit of Rs 400 lakhs].
JOB WORK WHICH DOES NOT AMOUNT TO MANUFACTURE TO BE
EXCLUDED - Job work of test, repairs, reconditioning etc. as this does not amount
to manufacture i.e. where new and identifiable product does not emerge. [Same
provision for calculating limit of Rs 400 lakhs].

Partial exemption if Cenvat on input availed - The full exemption upto Rs 150 lakhs
is available only if the unit does not avail Cenvat credit on inputs. However, once the
SSI unit starts to avail Cenvat credit and pay duty, he cannot then avail SSI
concessional rate of duty for the whole year. However, option to avail Cenvat and
pay duty can be availed any time during the year. - CBE&C circular No B-41/2/97-
TRU dated 14.7.1997.

Cenvat on capital goods permissible - The SSI unit can avail Cenvat credit on capital
goods even if it is availing SSI exemption and not availing Cenvat on inputs.
However, the Cenvat credit on capital goods can be utilised only after the turnover
reaches 150 lakhs. Even if the capital goods are received during the period when his
turnover was less than Rs 150 lakhs, he can take credit only after his turnover
crosses Rs 150 lakhs (He should make suitable entries in Cenvat credit on capital
goods account, but actually start debiting the account only after turnover crosses Rs
150 lakhs). If the unit pays duty, it can avail and utilise Cenvat both on inputs and
capital goods without any restrictions.

How to calculate the SSI exemption limit of Rs 400 lakhs - While calculating
turnover of Rs. 400 lakhs, some of turnover of SSI is not to be considered, while
some has to be considered, as discussed below. [Note the differences in provisions
in calculating limits of Rs 150 lakhs and Rs 400 lakhs].

Turnover to be excluded While calculating limit of Rs 400 lakhs, following is to be

excluded

EXPORT TURNOVER TO BE EXCLUDED - The limit of Rs 400 lakhs is of

clearance for home consumption, i.e. within India. Export turnover should not be
considered for the purpose of calculating the turnover of Rs 400 lakhs.

EXPORT UNDER BOND THROUGH MERCHANT EXPORTER TO BE EXCLUDED

- If the exports are under bond without payment of duty through an export house,
these will not be considered for SSI exemption limit i.e. it will be excluded for
calculating exempted turnover. This is because, in such case, the clearance is not
for 'home consumption'.

DEEMED EXPORTS TO BE EXCLUDED Goods can be cleared to EOU, SEZ,

EHTP or STP unit or to UN or an international organisation without payment of duty.
Such clearances are not to be considered for calculating the exemption limit of Rs
400 lakhs. [Same provision for calculating limit of Rs 150 lakhs].

TURNOVER OF NON-EXCISABLE GOODS SHOULD BE EXCLUDED Some

goods are non-excisable, i.e. these are not included in Tariff at all. In such case, its
turnover cannot be considered for purpose of exemption limit.

GOODS MANUFACTURED WITH OTHERS BRAND NAME NOT TO BE

INCLUDED - A SSI unit can manufacture goods with brand name belonging to
others. Such goods are not exempt from duty and full duty is payable on such
goods. This turnover has to be ignored for calculating SSI exemption limits.

However, goods manufactured in rural area under others brand name will have to
be included.

INTERMEDIATE PRODUCTS - Value of intermediate products manufactured while

producing final products which are eligible for SSI exemption cannot be considered
for calculating limits of Rs 400 lakhs, if both intermediate product and final product
are eligible for SSI concession. However, if final product is exempt under any other
notification, the value of intermediate products will have to be considered. [Same
provision for calculating limit of Rs150 lakhs].

JOB WORK OR ANY PROCES WHICH DOES NOT AMOUNT TO MANUFACTURE

TO BE EXCLUDED - Job work of test, repairs, reconditioning etc. is not to be
included, as this does not amount to manufacture i.e. where new and identifiable
product does not emerge. Similarly, if any processing or operation is done which
does not amount to manufacture, its value will not be included. - - Goods returned
and cleared after processing are not includible as value of goods for clearances can
be considered only once and not twice over. Kusum Chemicals v. CCE 2002(144)
ELT 346 (CEGAT).

STRIPS OF PLASTICS USED WITHIN FACTORY - Clearance of strips of plastics

used within factory of production for weaving of fabrics or manufacture of sacks or
bags made of polymers of ethylene or propylene are exempt. [Same provision for
calculating limit of Rs150 lakhs].

INPUTS BROUGHT BY ASSESSEE AND CLEARED AS SUCH NOT TO BE

CONSIDERED - A unit can clear inputs as such on payment of duty under rule 3(4)
of Cenvat Credit Rules [That time rule 57AB(1)(b) - earlier 57F(1)(ii)]. This turnover
is not to be considered for calculating clearances of Rs. 150/400 lakhs - Board
circular No. 263/30/88-CX.8 dated 27-10-88.

Turnover to be included While calculating limit of Rs 400 lakhs, following is to be

included -

TURNOVER OF GOODS EXEMPTED UNDER OTHER NOTIFICATION TO BE

INCLUDED If SSI unit clears goods under some other exemption notification, its
turnover will have to be considered i.e. included for calculating exemption limit of Rs
400 lakhs. - - Thus, job work done by SSI unit is exempt under notification No.
214/86-CE or 83/94-CE. This turnover will have to be considered i.e. included for
considering exemption limit of Rs 400 lakhs. The valuation will have to be done on
basis of material cost plus job charges. - - Similarly, goods exempted under any
other notification i.e. other than SSI exemption notification will have to be included. -
- However, clearances to EOU, SEZ, EHTP, STP, UN or other international agency
without payment of excise duty will not be considered for calculating exemption limit
of Rs 400 lakhs. [If goods are excluded under any notification other than SSI
exemption notification, that turnover has to be excluded for calculating limit of Rs
150 lakhs].

GOODS MANUFACTURED IN RURAL AREA WITH OTHERS BRAND NAME TO

BE INCLUDED - If goods are manufactured in rural area with others brand name,
these are exempt upto Rs 150 lakhs. In such case, that turnover will have to be
included for calculating exemption limit of Rs 400 lakhs [Same provision for
calculating limit of Rs150 lakhs].

Option to pay full duty to SSI without availing concession - An SSI unit is
allowed to pay full duty even if it is entitled to pay concessional duty. He can avail
and utilise Cenvat on inputs as well as capital goods. Option once exercised cannot
be changed during the year. It is not permissible to pay full duty on part clearance
and concessional duty on part of the clearance. The option must be informed in
writing to Assistant Commissioner with copy to Superintendent.

This option is useful to SSI units which supply goods to other units which can avail
Cenvat of duty paid by SSI. If such option is not available to SSI, the duty paid on
inputs used by SSI units is not available for Cenvat credit.

No concession if previous years turnover was over four crores - SSI exemption is
available only to those units whose turnover was less than Rs. 4 crores in previous
financial year (i.e. April to March). If turnover had exceeded Rs. 4 crores in previous
year, there is no excise exemption at all and full excise is payable right from the
beginning. If turnover exceeds four crores in current year, concession availed during
current year need not be refunded, but next year, there will be no SSI concession -
confirmed in Searsole Chemicals v. CCE 1999(113) ELT 435 (CEGAT). [Note : the
ceiling was Rs. 2 crores in 94-95, which has been increased to Rs. 4 crores in 95-
96. Thus, SSI units whose turnover was less than Rs. 4 crores in 2000-01 can avail
SSI exemption in 2001-02.]

ONLY PREVIOUS YEAR'S TURNOVER RELEVANT - In Karnataka Gears v. CCE

1999(110) ELT 529 = 29 RLT 543 (CEGAT), it was held that only previous year's
turnover is relevant for purposes of SSI exemption. Turnover in respect of any other
past year is not to be considered.

SSI exemption available in respect of goods exported to Nepal & Bhutan - The SSI
exemption is available for home consumption, i.e. for consumption within India.
However, explanation to SSI exemption notifications make it clear that clearances
for home consumption shall also include clearances for export to Bhutan & Nepal.
Thus, exports to Nepal & Bhutan will qualify for SSI exemption. In Unitherm
Inductoweld v. CCE 2000(123) ELT 1162 (CEGAT), it was held that exports to Nepal
will be includible even if the export is under bond without payment of excise duty.

Other Exemptions to small sector - Besides the aforesaid general exemption,

there are specific exemptions.

Goods manufactured without aid of power - Some goods are exempt if no process in
or in relation to manufacture of these goods is ordinarily carried on with aid of power.
Some of these are mentioned in CETA itself and some in a Notification No. 167/86
dated 1-3-86. Apex Court in CCE v. Rajasthan State Chemical Works - 1991 (55)
ELT 444 (SC) = (1991) 4 SCC 473 = 1991(2) SCALE 602 have held that process in
manufacture or in relation to manufacture implies various stages through which the
raw material is subjected to change by different operations. Thus, handling of raw
materials or filling of pans are so interrelated that without these manufacturing
process is impossible to be completed. Hence, if power is used in any of these
operations, it is a case where, in or in relation to the manufacture, the process is
carried on with aid of power.

Goods in rural area by cooperatives - Some goods manufactured by registered

cooperatives or institutions recognized by Khadi and Village Commission or Board
are exempt. These are : preparations of vegetable or fruits, sauces, laundry soap,
foot-wears, calculators, cassettes, radios, black and white TV sets, electric iron and
toaster, electronic clocks and watches, synthetic detergents, jute yarn and fabrics.
This exemption is available to un-branded goods. If the goods are branded, the
exemption is available only if the brand or trade name belongs to (a) the
manufacturer producing the goods himself or (b) if it belongs to Khadi & Village
Industries Commission or Board, (c) National Small Industries Corporation or State
Industries Development Corporation or (d) a State Small Industries Development
Corporation. In other words, the exemption is not available if the brand name
belongs to a private trader who is not manufacturing those goods (Notification No.
88/88 dated 1-3-88 as amended).

Genuine specified products of village industry - Certain items produced by village

industry and marketed by or with assistance of Khadi & Village Industries
Commission are exempt from duty. The products include - lac, gum, vegetable
products, fireworks, resin acids, articles of vulcanised rubber, articles of leather,
articles of wood, ceramic products, furniture etc. [Notification No 198/87-CE dated
28.8.1987].

Procedural concessions to SSI - Following are some procedural concessions to

SSI.

QUARTERLY RETURN - The SSI unit availing SSI concession need not submit
monthly ER-1 return. They have to submit a quarterly ER-1 return, by 20th of
following month.

PAYMENT BY 15TH OF FOLLOWING MONTH - SSI units have to pay duty by 15th
of following month, while large units have to pay duty by 5th of following month. Both
have to pay duty in March by end of the month.

EXPORT PROCEDURES FOR SSI - The SSI units not covered under excise
provisions have to follow simplified export procedures. They do not have to prepare
ARE-1 form etc. The procedure has been discussed in a previous chapter.

Sending material for job work by exempt SSI unit - SSI unit can send his raw
materials or semi-finished material to another unit for job work. Such another unit
can carry out job work and return to SSI unit without payment of duty. The SSI unit
can do further processing on these inputs and clear his final product without duty if
his total turnover is below Rs. 150 lakhs.

The SSI unit has to file two declarations with Assistant / Deputy Commissioner for
this purpose. The job worker may be a small unit or large unit. The job worker does
not have to pay duty if the SSI unit sending goods for job work follows prescribed
procedure. - refer notification Nos 83/94 and 84/94 dated 11.4.1994.

Exempted small units Exempt from registration - Exempted small units, having
turnover below Rs. 150 lakhs, which are exempt from duty, are also exempt from
provisions of registering their unit with excise authorities.

These small units, which are exempt from registration, do not have to follow any
other excise formality. However, they have to maintain their own records of
manufacture and clearance, to prove that their turnover is less than Rs. 150 lakhs
per year.

While calculating the turnover, the export turnover is not to be considered. Thus,
even if the export turnover exceeds Rs 150 lakhs, no registration is necessary if
domestic turnover ('home consumption' in excise terminology) is less than Rs 150
lakhs - [MF(DR) circular No 284/118/96-CX dated 31.12.1996].

Visit of officers only with prior approval - Excise inspectors, preventive parties and
audit parties can visit SSI unit only with specific permission of Assistant
Commissioner and for a specific purpose. They have to enter relevant particulars in
Visitors book maintained by registered person - CBE&C Circular No. 19/92-Cx.6
dated 18-12-1992. - similar earlier telex F No 233/17/86-CX dated 10.3.1986.

Audit of SSI unit once in two to five years - Audit of SSI units should be done only
as per following frequency - (a) Units paying duty of Rs one crore or above (PLA) in
financial year should be audited every year. (b) Audit of units paying duty of Rs 10
lakhs (PLA) and above but less than Rs one crore (PLA) in financial year, should be
normally audited once in two years. (c) Not more than 20% of units paying duty less
than Rs 10 lakhs in a financial year shall be audited every year. Selection will be
based on risk pattern as above. [Thus, such small units may be audited only once in
five years]. CBE&C circular No. 580/17/2001-CX dated 29-6-2001.

Branded Goods and SSI

Some large units get their goods manufactured from small unit under their brand
name or trade name. For example, Bata gets many of their Chappals made from
small units. Similarly, Bajaj Electricals/Philips India etc. get many electrical goods
made from small units with Bajaj/Philips brand name. In such cases, the small unit
will not be eligible for excise exemption. However, if the small unit manufactures
goods under his own brand name, SSI exemption is available. If he manufactures
goods bearing brand name of any other person, SSI exemption is not available.

In CCE v. Fine Industries 2002(146) ELT 53 (CEGAT 3 member bench), it was

observed that the exemption to SSI is designed to enable the small manufacturer to
survive in the market in competition with the ineligible manufacturer (i.e. who sales
under a brand name). But if he (i.e. small scale manufacturer) joins or identifies
himself with the ineligible manufacturer, his goods become one with the goods of
such ineligible manufacturer. In the market they will be understood as one and the
same goods. They no longer need the benefit under (SSI exemption) notification. [In
this case, it was held that SSI exemption can be denied only if he uses brand name
of another manufacturer on the same goods, but he will be eligible to SSI exemption
if he manufactures different goods under the same brand name].

SSI exemption is not available if brand name or trade name belongs to a foreign
person or a non-manufacturing trader - Namtech Systems Ltd. v. CCE 2000(115)
ELT 238 = 36 RLT 35 (CEGAT 5 member bench - 3 v. 2 order). followed in Ashwin
Enterprises v. CCE 2002(147) ELT 1143 (CEGAT) assessees appeal admitted by
SC but no stay 151 ELT A183.

SSI exemption is not available if brand name belongs to a company belonging

brother of appellant companys director. Alaska Tyres v. CCE 2002(145) ELT 329
(CEGAT).

SSI units manufacturing goods bearing a brand name of another are exempt from
duty, if these goods are manufactured in rural area.

SSI exemption is not available only if the brand name or trade is of another person.
Thus, if the brand name or trade name does not belong to any another person, SSI
exemption will be available to the manufacturer. It is not requirement that the brand
name must belong to the SSI manufacturer. The only requirement is that it should
not be of another person.

DISTINCTION BETWEEN HOUSE-MARK AND TRADE MARK - A house mark

indicates the name of person manufacturing the goods while a trade mark indicates
the product by which it is identified or sold. For example, Hindustan Lever has a
logo identifying it with the company, while it has various brands like Lux to identify
various products manufactured by it. Of course, some times, both can be same e.g.
Godrej is house mark, which is also used as brand name on the steel furniture of
the company.

A house mark is an emblem of manufacturer projecting the image of manufacturer

generally. Such house mark may be in the form of emblem, word or both. It is used
on all the products of manufacturer. On the other hand, a product mark or brand
name is used which is invariably a word or combination of word and letter or
numerical by which the product is identified and asked for.

Provisions in respect of brand name - Brand name or trade name means any
name or mark such as symbol, monogram, label, signature, or invented word or
writing which is used in relation to the goods for the purpose of indicating, or so as to
indicate a connection in the course of trade between such goods and some person
using such name or mark. The name or mark may or may not indicate identity of that
person. The brand name or mark or trade name may or may not be registered.
[Definition as per SSI exemption notifications].

Thus, the definition is very wide. Even name of person who markets the goods, if
used on the product, may attract the provision, as such name or mark indicates the
connection between the goods and person using that name or mark.

Provision applicable in respect of Brand name of final product only - Some SSI units
manufacture a component or part which bears the brand name or trade name.
These parts are for use by the large manufacturer as a part (Original Equipment
part) e.g. (a) a glass bottle may be manufactured by an SSI unit where the name
Pepsi or Coca-Cola is engrossed (b) a SSI unit may manufacture a small
component bearing Telco mark, where the part will be used by Telco while
manufacturing their truck (c) a SSI bag manufacturer may make bags with ACC or
L&T mark and supply it to ACC/ L&T. (d) A small manufacturer may manufacture
lock with VIP mark, which will be used by manufacturer of VIP Bags as a part of the
bag. In such cases, the manufacturer of such parts/components will be eligible for
SSI concession.

BRAND NAME IS OF THE GOODS, NOT ITS PART - Goods which are only part of
an article sold as OE (Original Equipment) to the manufacturer of final product are
not covered under the provision of branded goods, as the brand name is in relation
to the goods and not to its component or part e.g. Coca-Cola is trade name of the
cold drink and not of the bottle.

Brand name should be in course of trade - There are two conditions to bring goods
in the mischief of SSI exemption notification (a) such brand name must indicate
connection with the branded goods and (b) Such connection should be in course of
trade. If there is no trade of such goods, the brand name provisions will not apply.

GOODS BEARING FOREIGN BRAND NAME NOT ELIGIBLE - Use of foreign brand
name would dis-entitle the manufacturer of the SSI concession - India Reprographic
Systems (P.) Ltd. v. CCE 1995 (75) ELT 112 (CEGAT) - quoted and followed in
Sonoma Aromatics (P.) Ltd. v. CCE 1995 (78) ELT 285 (CEGAT) - finally confirmed
in Namtech Systems Ltd. v. CCE 2000(115) ELT 238 = 36 RLT 35 (CEGAT 5
member bench - 3 v. 2 order).

MERE MARKING 'IN TECHNICAL COLLABORATION WITH - - -' OR 'UNDER

LICENCE FROM - - ' IS NOT BRANDING - In Weigand India (P) Ltd. v. CCE
1997(94) ELT 124 (CEGAT), the assessee was manufacturing goods showing his
name as manufacturer. The name plate declared that the goods were manufactured
in technical collaboration with 'GEA Wiegand GMBH Ltd., West Germany'. This was
as per terms of technical collaboration agreement. It was held that this does not
amount to use of brand name of another person and SSI exemption is available.
followed in Sonnenflex Abrasives v. CCE 2002(145) ELT 165 (CEGAT), where in
fact, Sonnenflex was the name of Indian manufacturer as well as foreign
collaborator. However, logo of foreign collaborator was not adopted.

Putting name and address of Marketer / distributor - In DCI Pharmaceuticals P Ltd.

v. Superintendent 2000(115) ELT 45 (Bom HC DB), it has been held that if SSI unit
manufactures goods under his brand name, he will be entitled to SSI concession
even if distributor's name and logo are printed on cartons, unless it is established
that the distributor also manufactures goods under same brand.

PUTTING NAME OF SERVICE AGENCY - In Demech Erectors v. CCE 1999(110)

ELT 831 (CEGAT), it was held that putting name of service agent is not branding. In
this case, the manufacturer was putting his own brand 'Pride' on the washing
machine. In addition a plate marked Serviced by Racold was put.

Brand name for a particular product can be used by another for other product only
if registered - If a brand name is registered for a particular product, other
manufacturer can use it for another product and in such cases, he will be eligible for
normal SSI concession only if the brand name is registered. Similarly, it may happen
that a person may be using a brand name or trade name, (belonging to other), for a
different product with same brand name. In such cases, the provisions regarding
brand name will not apply e.g. Maruti is brand name of car, but same brand name
may be used by some independent person for oil or soap. In such case,
manufacture of oil or soap by an SSI unit under Maruti brand name will be eligible
for SSI concession only if his brand name is registered.

Assignee of brand name is eligible for SSI concession In P&B Pharmaceuticals v.

CCE 2003(153) ELT 14 (SC), it was held that once a logo is assigned, the assignee
is entitled to SSI exemption, even if third party or assignor is also using the logo.
There is no obligation on owner of a logo to make a roving enquiry to ascertain
whether any other person is using his logo and then disclose it to department to
avert a possible allegation of suppression of facts.

Concession if goods under brand of Khadi Board - The provision regarding brand
name is not applicable if the brand belongs to Khadi and Village Industries
Commission or State Khadi and Village Industries Board. Thus, SSI unit making
goods under brand name of Khadi and Village Board or Commission will be entitled
to the SSI concession.

Brand name not belonging to any one eligible for SSI concession - In lock industry,
there is a practice to use a mark or name even though it is not owned by any
particular person. Provision of brand name apply if the trade name indicates a
connection between specified goods and some person using such name or mark. If
there is no person to claim ownership of that mark or name, it does not belong to
any person and any body is free to use the name or mark. In such case, units using
trade name or brand name, not belonging to any person, are eligible for SSI
exemption. - MF(DR) Circular No. 52/52/94-CX dated 1-9-1994]. The principle
should be applicable to all goods which are eligible for SSI concession.

Valuation in respect of branded goods manufactured by SSI - The valuation

aspect has been discussed in an earlier chapter. However, the summary is
highlighted here - (a) If the brand name does not belong to the manufacturing unit, it
is not entitled to any SSI concession. It has to pay full normal duty. (b) The duty is
payable on the basis of price charged by SSI unit to the brand name owner, if the
relationship between the SSI manufacturer and the brand name owner is on
'principal to principal' basis. (c) If the goods are covered under section 4A, i.e.
valuation on basis of Maximum Retail Price printed on the carton, the manufacturing
unit has to pay duty on basis of MRP printed on the product package, irrespective of
the price at which he is selling the product. (d) Brand name owner will not be treated
as manufacturer if relations between actual manufacturer and brand name owner
are on 'principal to principal' basis.

Exemption if branded goods manufactured in rural area - Excise duty on goods

manufactured under others brand name will be exempt if these are manufactured in
rural area. 'Rural area' means the area comprised in a village as defined in the land
revenue records, excluding (i) Area under any municipal committee, municipal
corporation, town area committee, cantonment board or notified area committee or
(ii) Any area that may be notified as an urban area by State Government or Central
Government.

It is highly advisable to obtain certificate from State Government Revenue

Authorities that the factory is within the rural area as per land revenue records.

It must be noted that this exemption is only in respect of first turnover of Rs 150
lakhs. Full duty is payable for subsequent clearances. Further, if turnover of the SSI
manufacturer during previous year was over Rs four crores, he is not entitled to SSI
exemption at all and full duty is payable on all clearances during the following
financial year without availing exemption.

Clubbing of Clearances of SSI

If the same manufacturer (i.e. firm with same partners or same limited company or
same proprietor) has more than one factories, turnover of all the factories will be
clubbed together for calculating the limit of Rs. 150 lakhs or 4 crores. Thus, if a
manufacturer has one unit at Mumbai with 1.2 crores turnover and another unit at
Delhi with 2.1 crores turnover, he will not be entitled to Excise exemption in any of
the factories.

Some times, as a tax planning, a manufacturer may start another unit, instead of
increasing production in his own factory, so that both units can avail SSI concession.
If the other unit belongs to same proprietor or same company or same partnership
firm, the turnover of both these units will be added together for purpose of SSI
concession. To avoid this, the other unit may be started under different partnership
or under different companies. If such other unit is genuinely separate and
independent, their turnover will not be clubbed. However, if the other unit is a sham
or a facade i.e. deceptive front or a bogus unit, the turnover of these two units will
be clubbed i.e. considered in total for calculating SSI exemption limit. This is called
clubbing of turnover.

No clubbing of units belonging to Government, Khadi and Village Commission

etc. - Central Government, State Government, State Industries Corporation, State
Khadi and Village Industries Board, National Small Industries Corporation, State
Small Industries Development Corporation or Khadi and Village Industries
Commission may hold more than one factories. However, their turnover will not be
clubbed and turnover of each factory will be considered separately for calculating
the limit of 150/400 lakhs.

Clubbing if more than one manufacturer in same factory - In some cases, more
than one manufacturer manufactures the goods in one factory. This usually happens
in following cases -

ONE MANUFACTURER MANUFACTURES FOR PART OF YEAR AND THEN

OTHER - One manufacturer manufactures goods for some part of the year and then
sells/transfers the unit. The other manufacturer manufactures in remaining part of
the year in the same factory.

MORE THAN ONE MANUFACTURERS IN ONE SHED - One large shed is hired by
numerous small units for manufacturing purposes and each small manufacturer
uses a small portion of it. In such case, clubbing provisions will apply. [However, in
case of small textile units, such clubbing provision will not apply see discussions
later].

FACILITIES OF ONE FACTORY USED ON SHARING BASIS - Facilities of one

factory are shared by different manufacturers on time sharing or other basis. In such
cases, turnover of all those manufacturers will be clubbed together for calculating
the excise exemption limits. - Indica Laboratories v. UOI - 1990 (50) ELT 210 (Guj).

CLUBBING IF CHANGE OF OWNERSHIP DURING THE YEAR - If ownership of

factory changes during the year, clearances of previous owner as well as new owner
during the year will be clubbed for calculating the value of clearances for purpose of
SSI exemption - Gaurav Equipments (P.) Ltd. v. CCE - 1993 (66) ELT 438 (CEGAT).

No Clubbing provisions if two factories belong to different owners - There are

various forms of ownership of an industrial unit i.e. (a) proprietorship (b) partnership
firm (c) limited or private limited Company (d) Hindu Undivided Family (HUF) (e)
Family Trust. All these forms of ownership have separate and distinct existence.
Clubbing provisions are applicable if two or more SSI units belong to same
proprietor or to same partnership firm or to same private limited company. However,
if one unit A belongs to a proprietor P and other unit B belongs to a partnership
firm where P is one of the partners, turnover of A and B cannot be clubbed as the
partnership has independent legal status different from its partners. Similarly, if A
belongs to one partnership firm and B belongs to another partnership firm where
some partners are common in both firms, both the units i.e. A and B will be entitled
to separate excise exemption. Same thing holds true if one unit is a firm and other is
a limited Company where some partners of the firm are directors.

No Clubbing if two units are independent and no financial flow back - Clubbing
provisions do not apply if both units namely A and B are genuinely independent
units. Often more than one factories are established to avail of excise concession
and real owner is same. As explained above, if there are more than one factories
and various combinations of ownership are : (a) one belonging to a Proprietor and
other to a partnership firm, where proprietor is one of the partners (b) One belongs
to a partnership firm and other also to another partnership firm, where some
partners are common and some are close relatives (c) One to partnership firm and
other to limited Company, where relatives of some partners of the firm are directors
in the limited Company. (d) one belongs to HUF and other to firm where Karta of
HUF is a partner - Shakti Engg Works v. CCE - 1989 (40) ELT 95 (CEGAT). (e) two
belong to limited companies with some common directors - Cosmos (India) Rubber
Works (P.) Ltd. v. UOI - 1988 (36) ELT 102 (Bom HC) * ITEC (P.) Ltd. v. CCE - 1992
(57) ELT 639 (CEGAT) (f) Two companies with related directors and common
product Padma Packages P Ltd. v. CCE 1997(90) ELT 175 (CEGAT).

Other similar combinations are possible. In all these and similar cases, if these two
units are truly independent their turnover cannot be clubbed. However, if the two
units are formed with sole or main purpose of saving on excise, these would be
sham i.e. bogus units.

Totality of circumstances should be seen - Tribunal has held that the most important
test is that if there is no financial control by one over the other and if there is no flow
back of profits, the two units will be treated as independent units. Other tests to
establish that the two factories are independent are : separate power connection,
separate financial arrangements, separate material procurement, separate
registration with Government authorities like sales tax, income-tax etc., separate
employees etc. In short, if the two units are really independent, their turnover will not
be clubbed solely because some partners/directors/their relatives are common.

Common funding and financial flow back are important. Mere circumstance of
functioning in adjacent premises and partners being related to one another is not
sufficient to warrant clubbing. The factors which would be necessary to consider
clubbing are common control of production and sales, management control and
special financial inter-linking other than normal commercial transactions. If the
combination of circumstances create a pattern indicative of clearances from plurality
of units being made by a manufacturer, clubbing would be warranted.- Vir Industries
v. CCE 1999(109) ELT 322 (CEGAT). [The decision summarizes major case law in
this regard].

Identity of interest should be considered - In H T Bhavnani Chemicals P Ltd. v. CCE

1997(92) ELT 502 (CEGAT), it was held that it is not that financial flow back should
be established to justify clubbing of clearance, but the identity of interest among the
firms and the intention of partners. In this case, another firm was started when the
turnover limit of existing unit was reaching the limit. There was no other reason for
establishing another unit.

In Naresh Shroff v. CCE 1997(92) ELT 180 (CEGAT), it was held that two units can
be regarded as one only when there is mutuality of interest and both units are
functioning as one and also financial flow back and integrity of operations between
the two units. Unless these factors are established by evidence on record, it cannot
be held that both the units are one and the same entity. In CCE v. Kesharbai
Electronic P Ltd. 2000(122) ELT 851 (CEGAT), it was held that two private
companies having some common directors cannot be treated as related persons
unless there is mutuality of interest.

Exemption from Duty

CETA / Customs Tariff prescribe the rate of duty for each Chapter head and
subhead. This rate is called Tariff Rate and the duty payable is Statutory Duty. The
rates are fixed by Parliament and changing these rates is time consuming. However,
Government needs flexibility in operations of taxing statute. As the circumstances
change, quick adoption to changing situations is required. CEA and Customs Act,
have, therefore, granted powers to Central Government to modify rates as per
requirements, by issuing a notification. The duty actually payable as per the
notification (usually referred to as exemption notification) is called effective rate of
duty.

EXEMPTED FROM DUTY AND CHARGEABLE TO NIL RATE OF DUTY - If the tariff
itself specified duty as Nil, the goods are chargeable to Nil rate of duty. If the
goods are exempt by way of a notification, they are called exempt from duty. Thus,
there is difference between goods chargeable to Nil rate of duty and goods exempt
from duty. -Arun Auto Spinning and Mfg. Co. v. CCE - 1990 (48) ELT 543 (CEGAT).
It may be noted that Nil duty is still a duty. - CCE v. Vazir Sultan Tobacco Co. Ltd. -
AIR 1996 SC 3025 = 1996 AIR SCW 1353 = 1996 (2) SCALE 603 = (1996) 13 RLT
291 = JT 1996 (3) SC 112 = (1996) 83 ELT 3 = (1996) 3 SCC 434 = 63 ECR 359
(SC 3 member bench).

EXEMPTION DOES NOT ERASE DUTY In Hico Products v. CCE (1994) 71 ELT
339 (SC), it was held that exemption by notification does not take away the levy or
has effect of erasing levy of duty. The object of exemption notification is to forego the
duty and confer certain benefits upon the manufacturer or buyer or consumer
through manufacturer, as the case may be.

If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be
excisable goods and levy of duty is not erased. CCE v. Smithkline Beecham
Consumer Health Care Ltd. 2003(151) ELT 5 (SC).

General exemption from duty Central Excise Rules grant exemption from duty if
goods are exported under bond, except exports to Nepal and Bhutan. Similarly,
goods manufactured in Special Economic Zone (SEZ) are excluded excisable
goods and hence no excise duty can be levied on goods manufactured in SEZ.

Further, section 5A(1) of CEA authorises Central Government to exempt the

excisable goods, (a) generally (b) either absolutely or subject to such conditions (to
be fulfilled before or after removal), (c) from whole or any part of excise duty
leviable. Such exemption should be in public interest and it should be by way of a
notification published in Official Gazette. similar provision in section 25(1) of
Customs Act in respect of customs duty.

The exemption notification issued u/s 5A is not applicable in respect of DTA

clearances by EOU/SEZ unit, unless specifically provided in the notification. [proviso
to section 5A(1)].

Method or form of granting exemption - The typical notification granting exemption

reads as follows : In exercise of the powers conferred by sub-section (1) of section
5A of the Central Excise Act, 1944 (1 of 1944), the Central Government being
satisfied that it is necessary in the public interest so to do, hereby exempts goods
falling under heading No. . . . . of the Schedule to the Central Excise Tariff Act, 1985
( 5 of 1986) from whole of the duty of excise leviable thereon under section 3 of
Central Excise Act, 1944 (1 of 1944). In case of partial exemption, the wording is
exempts, from so much of the duty of excise leviable thereon which is specified in
the said schedule, as is in excess of the amount calculated at the rate of . . . per
cent ad valorem. or as is in excess of the amount calculated at the rate of
Rs. . . . . . per Ton and so on. The rate at which duty is actually payable is called
effective rate.

Public Interest is essential - The exemption notification can be issued only in public
interest. Public interest means greatest happiness of greatest number. It is not
necessary to disclose the exact nature of public interest of each notification. In India
Cement v. State of AP - (1988) 69 STC 305 (SC) = AIR 1988 SC 567, it was
observed that exercise of power to tax may be normally presumed to be in public
interest. Court will presume that the notification has been issued in public interest.
Person challenging the tax has the heavy burden to prove that it is not in public
interest.

Different exemptions to different categories or classes permissible - It is permissible

to grant different exemptions to different classes, as long as all those within a
particular class are treated equally and uniformly. Statute can be declared invalid
only when it is shown that the impugned statute is based on discrimination and that
such discrimination is not referable to any classification which is rational and which
has nexus with the object intended to be achieved by the Statute. Thus, granting
exemption to small scale units, or to units manufacturing goods without aid of power,
or to Government undertakings or to a class of consumers will be permissible.
However, such classification should be in public interest and powers should be used
bona fide. It is well recognised that State enjoys the widest latitude where measures
of economic regulations are concerned. State can pick and choose districts, objects,
persons, methods and even rate for taxation if it does so reasonably.

Exemption notification has statutory force - All exemption notifications are issued
under delegated legislative power and have full statutory force and validity. Since it
has a legislative character, question of hardship to anyone is irrelevant. Persons
affected are not entitled to opportunity of hearing before issue of notification.
Conditional exemption at option of assessee - Some exemptions are subject to
some conditions e.g. following Central Excise (Removal of Goods at Concessional
Rate of Duty for manufacture of Excisable Goods) Rules [earlier Chapter X]
procedure or not claiming Cenvat etc. In such cases, the assessee may or may not
avail of the concession or exemption.

Option to assessee if two exemption notifications available - When there are two
provisions under which an assessee could claim some benefit, it is for the assessee
to choose one. - CIT v. Mahendra Mills (2000) 2 SCALE 384 = 2000 AIR SCW 1016
= AIR 2000 SC 1960 = (2000) 109 Taxman 225 (SC). Where there are two
exemption notifications that cover the goods in question, assessee is entitled to the
benefit of that exemption notification which gives him greater relief, regardless of the
fact that notification is general in its terms and the other notification is more specific
to the goods. HCL Ltd. v. CCE 2001(130) ELT 405 (SC 3 member bench order).

Exemption in exceptional circumstances - General Exemptions can be granted

under section 5A (1) by issuing a notification. However, section 5A(2) authorises
Central Government to grant exemption, in public interest, in exceptional
circumstances by a special order. The exceptional circumstances should be
specified in the order. - similar provision in section 25(2) of Customs Act.

This is ad hoc exemption and can be granted even retrospectively. - CBE&C circular
No. 12/97-Cus dated 12-5-1997.

Retrospective insertion of clarification to exemption notification - Sometimes it

is found that there is some drafting mistake or ambiguity in (a) the general
exemption notification issued u/s 5A(1) of CEA or 25(1) of Customs Act or (b)
Special exemption order issued u/s 5A(2) of CEA or section 25(2) of Customs Act.
Sometimes, assessee gets unintended benefit while in some cases even intended
benefit cannot be obtained due to drafting error in the exemption notification or
exemption order. To overcome this problem, section 5A(2A) of CEA and section
25(2A) of Customs Act have been inserted w.e.f. 11-5-2002.

As per these inserted sections, Central Government, for the purpose of clarifying the
scope or applicability of exemption notification or exemption order, may insert an
explanation to the exemption notification or order within one year of such notification
or order. Such Explanation to an exemption Notification will have retrospective effect
from date of exemption notification. Such Explanation can be inserted in exemption
notification only within one year of date of issue of notification and not thereafter.

PURPOSE AND MEANING OF EXPLANATION The section itself clarifies that

purpose of explanation is to clarify the scope or applicability of an exemption
notification or exemption order. Thus, the retrospective insertion can be made only to
explain or clarify.

As per Concise Oxford dictionary, explain means to make clear or intelligible with
detailed information etc. Clarify means to make clearer, make transparent.

Thus, the clarification to exemption notification/order cannot be added with

retrospective effect to restrict the scope of notification/order or to insert a condition
which was not there.

Exemption for past general practice - At times, the assessees and excise
department treat a provision of excise law or classification/valuation of particular
goods in a particular way. Duty is levied or exempted accordingly. However, the
settled and mutually accepted position of duty liability may get disturbed for some
reason like (a) Supreme Court/High Court/Tribunal decision on classification or
mode of valuation or any other decision having effect on duty liability (b) Rethinking
of excise department regarding correct legal interpretation of tariff item or
interpretation of a notification which might affect duty liability of particular excisable
goods (c) any other reason where earlier general understanding about duty payable
on particular goods may be found to be incorrect. If it is found that higher duty was
legally recoverable, the same can be recovered for past period also within the
limitations of law. However, this might seriously affect industries as they had not
considered this unexpected burden while deciding their price structure. Some units
may even become bankrupt. Hence, section 11C of CEA provides that if (a) there
was a generally prevalent practice of levy or non-levy of any excisable goods and (b)
such goods were actually liable for duty at higher rates; Central Government may, by
notification in Official Gazette, direct that such excess duty payable, need not be
paid. - similar provision u/s 28A of Customs Act in respect of customs duty.

Captive consumption - Intermediate product

Since excise duty is on manufacture of goods, duty is payable as soon as goods are
manufactured within the factory. Such goods are called intermediate products and
its use within the factory is termed as captive consumption. Duty is payable even
when goods are despatched from one factory to another factory of the same
manufacturer. In A S Processors v. CCE 1999(112) ELT 706 (CEGAT), it was held
that once a new marketable intermediate product comes into existence, it is to be
charged to duty if not exempted by a notification. same view in CCE v. Citric India
2001(127) ELT 539 (CEGAT).

However, this will obviously cause inconvenience to manufacturers and hence

exemptions have been given in many cases. These exemptions are discussed here.

Exemption to intermediate products used for captive consumption - The

intermediate product manufactured within the factory is exempt from duty, if is
consumed captively for manufacture of (a) Capital goods as defined in Cenvat Credit
Rules i.e. those which are eligible for Cenvat credit or (b) Used for in or in relation to
manufacture of final products eligible for Cenvat, made from inputs which are eligible
for Cenvat. [Notification No. 67/95 dated 16-3-1995].

The exemption is to basic duty as well as AED(GSI). The exemption is available for
all intermediate products, except LDO, HSD and petrol. [These articles are same
which are not entitled for Input Cenvat credit].

INPUTS ELIGIBLE FOR CENVAT CREDIT EVEN IF INTERMEDIATE PRODUCT

EXEMPT - CBE&C had clarified vide para 5 of circular No. B4/7/2000-TRU dated
3.4.2000, that Cenvat credit should not be denied if the inputs are used in any
intermediate of final product, even if such intermediate product is exempt from
payment of duty. The idea is that Cenvat credit is available so long as the inputs are
used in or in relation to manufacture of final product, and whether directly or
indirectly view reiterated in Chapter 5 Para 3.9 of CBE&Cs CE Manual, 2001.
same view in CCE v. Hindustan Sanitaryware 2002(145) ELT 3 (SC), in respect of
earlier notification 217/86.
FINAL PRODUCT SHOULD NOT BE EXEMPT FROM DUTY - This exemption is not
available if final product is exempt from duty or is chargeable to Nil rate of duty. In
other words, if no duty is payable on final products, duty will be payable on
intermediate products.

EXEMPTION IF FINAL PRODUCT CLEARED FOR DEEMED EXPORT - As per

excise provisions, no duty is payable if final product is cleared * to EOU * to a unit in
Electronics Hardware Technology Park * to a unit in Software technology park. In
such cases, duty on intermediate product is not payable even if final product is
cleared without payment of duty. provisos (i) to (iv) to Notification No. 67/95-CE
dated 16.3.1995.

GOODS CLEARED TO UN, WHO ETC. Final products cleared to ILO, WHO,
UNDP, UNIDO programme etc. are exempt under Notification 108/95-CE dated
28.8.1995. In such case, intermediate product will be exempt from duty. - proviso
(v) to Notification No. 67/95-CE dated 16.3.1995.

CAPITAL GOODS MANUFACTURED AND USED WITHIN FACTORY As per

notification No. 67/95-CE dated 16-3-1995, capital goods (as defined in Cenvat
Credit Rules) manufactured in a factory and used within the factory of production are
exempt from excise duty. Further, as per explanation 2 to rule 2(g) of Cenvat Credit
Rules, inputs include goods used in manufacture of capital goods which are further
used in the factory of manufacturer. Thus, if capital goods are manufactured and
used within the factory, Cenvat credit can be availed of goods which are used to
manufacture such capital goods. Moreover, no duty will be payable on such capital
goods.

CENVAT CREDIT ON CAPITAL GOODS USED IN MANUFACTURE OF EXEMPT

INTERMEDIATE PRODUCT It may happen that capital goods may be used in
manufacture of an exempt intermediate product, but final product may be dutiable. In
such case, Cenvat credit is available on such capital goods, if final product is
chargeable to duty. CBE&C circular No. 665/56/2002-CX dated 25-9-2002.

EXEMPTION IF GOODS CLEARED UNDER RULE 6 OF CENVAT RULES If final

product is exempt from duty, normally duty is payable on intermediate product.
However, if final product is cleared as per provisions of rule 6 of Cenvat Credit Rules
[i.e. after paying 8% of price as amount or after reversing Cenvat credit],
intermediate product will be exempt from duty. proviso (vi) to Notification No.
67/95-CE clarified and confirmed in CCE, Cochin TN 68/2001 dated 24.7.2001].

PROVISIONS NOT APPLICABLE TO MATCHES AS FINAL PRODUCTS - The

provisions of notification No 67/95 dated 16.3.95 is applicable to all final products
except matches [This item is also excluded from Cenvat provisions].

Parts manufactured within the factory for repairs - Goods manufactured in a

workshop within the factory for use within factory for repairs or maintenance of
machinery installed within the factory are exempt from duty - [Notification No. 65/95
dated 16-3-95]. Thus, no duty is payable on parts manufactured within the factory for
repairs or maintenance of machinery within the factory.

Intermediate products used captively for exported goods - Intermediate

products manufactured and used within the factory for manufacture of final products
are exempt from duty, even if CT-3 certificate is not issued and Central Excise
(Removal of Goods at Concessional Rate of Duty for manufacture of Excisable
Goods), Rules [earlier Chapter X] procedure is not followed, subject to the condition
that documents / records are available with manufacturer that the intermediate
goods have been used for export purpose only - CBE&C circular No. 229/63/96-CX
dated 8-7-1996, amended vide 303/19/97-CX dated 11-3-1997.

Goods manufactured for defence/Government, etc. - Some goods are exempt

from duty if they are supplied to defence, railways, defence stores, Indian Navy, or if
manufactured in ordnance factories, mint, prison, mine, Government tool rooms, etc.
In such cases, if an intermediate product gets produced while manufacturing final
product, such intermediate product is also exempt from duty - Notification No. 83/92
dated 16-9-92.

Job work under Central Excise

It is common for Industries to get some processing done from outside on job work
basis. Job work means supplying the material by a Customer (often a Large Scale
Unit) to a job worker who carries out certain processes [like machining, drilling,
welding, painting etc. for engineering goods; bleaching, dyeing, printing etc. in
textiles etc.], and returns the material to the customer after carrying out the
processes. This is particularly common in Engineering and textile Industries. This is
usually called job work or sub-contracting in engineering industry and processing
in chemical or textile industry. In drug industry, a system of loan licensee is in
vogue, where one unit gets the drugs manufactured from another small unit under
his own brand name by supplying the raw material.

JOB WORK DEFINITION - Notification No. 214/86 dated 25-3-86 defines that Job
Work means processing or working upon of raw materials or semi-finished goods
supplied to job worker, so as to complete a part or whole of the process resulting in
the manufacture or finishing of an article or any operation which is essential for the
aforesaid process. - - Thus, job work is possible even if it results in manufacture of
an article.

USE OF OWN MATERIAL BY JOB WORKER NOT A BAR UNDER CENTRAL

EXCISE - As explained above, normally, a 'job worker' can use only minor items.
However, as rightly observed in Shakti Insulated Wires Ltd. v. CCE 1999(114) ELT
424 (CEGAT), excise exemption notification No. 214/86-CE does not prohibit a job
worker from utilising other inputs in addition to raw material received by him and
recover charges therefor from the principal manufacturer. Thus, there is no bar
under Central Excise from using own material in addition to material supplied by
principal manufacturer.

INPUTS WHICH CAN BE SENT FOR JOB WORK All inputs can be send for job
work. However, high speed diesel oil, LDO and petrol cannot be sent for job work to
a job worker, under this notification. - - The job worker can manufacture any final
product included in Central Excise Tariff.

USE OF GOODS AFTER JOB WORK - After the job work, the material should be
normally returned to person who had sent it for job work. The person who had sent
the material, can either use it for further manufacture or clear the product (as
received from the job worker). He can clear the product received from job worker
without any further processing (a) On paying duty (b) On payment of 8% amount on
exempted products under rule 6 of Cenvat Credit Rules (c) Export under bond (d)
clear to SEZ, EOU, EHTP or STP unit without payment of duty (e) Clearance to UN
or international organisation or a project funded by them. - - Goods can be cleared
directly from the place of job worker with permission of Commissioner. This aspect is
discussed under Cenvat.

Who can send the material for job work - The manufacturer can send inputs for
job work. Following are eligible to send materials for job work (a) Manufacturers (b)
Exporters (c) Units in SEZ, EOU, EHTP & STP (d) Who are supplying final product
to United Nations or international organisation for their official use or to project
funded by them.

Thus, a trader cannot send goods for job work under this notification. In such case,
the job worker will be treated as manufacturer. - Sonder Technologies v. CCE
2002(146) ELT 597 (CEGAT SMB).

Duty liability of goods manufactured under job work - Since excise duty is on
manufacture, duty liability arises only when the goods are manufactured during job
work. Thus, if an item is only repaired or reconditioned, no duty liability arises as no
new product emerges. Similarly, if some operation is carried out which does not
amount to manufacture, there is no duty liability. However, if goods are
manufactured during job work, excise liability will arise, as duty is on manufacture
and who has supplied the raw material is immaterial.

Valuation for Job Work - Once it is established that duty liability has arisen, it has to
be determined what is the assessable value of the product for purpose of
determining excise duty. It has been held by Supreme Court in the case of Ujagar
Prints v. UOI that value for this purpose means cost of material supplied to the job
worker plus job work charges of the job worker, plus profit of job worker. [Profit of
trader/supplier of raw material is not to be taken into account.] This is because the
excise duty is on goods and who is the supplier or raw material is irrelevant. For
example, if the cost of material is Rs. 100 and job work charges are Rs. 20,
assessable value for excise purposes will be Rs. 120 (i.e. excise duty will be
payable on Rs. 120) [assuming that job work charge of Rs. 20 include the profit of
job worker]

Exemption for items received for job work if raw material supplier undertakes
to discharge duty - Payment of duty on material cost plus job work charges will
create a very big excise liability which will seriously hamper job work and hence
exemption is given in many of the cases for job work.

EXEMPTION FOR MATERIAL RECEIVED UNDER CENVAT PROVISIONS -

Material received by a manufacturer under CENVAT can be sent to a job worker for
processing and can be brought back by the manufacturer for further processing. In
such cases, there is no duty liability on the job worker and he is exempted from the
same.

CLEARANCE UNDER 214/86 - Notification No. 214/86 dated 25-3-1986 has been
issued for exemption from job work. The exemption is available even if the job
worker manufactures an intermediate product. Notification No. 214/86 provides that
a declaration has to be given by person sending material for job work to jurisdictional
Assistant Commissioner having jurisdiction over the factory of job worker.

ALL FINAL PRODUCTS ELIGIBLE UNDER NOTIFICATION 214/86 All final

products are eligible under notification No. 214/86-CE.

Exemption for job work for inputs received from SSI unit - A SSI unit having
turnover below Rs. 100 lakhs does not have to pay excise duty and hence he is not
covered under Cenvat. He cannot send material to another unit under Cenvat
procedure, but still he is allowed to send goods to another unit and bring them back
after job work to his factory, subject to condition that the material received back after
job work should be used in manufacture of his final product.

Goods falling under 74.17, 84.36, 84.37, 87.14, 96.08, 7321.90, 8424.10,
8424.91, 8481.20, 8481.92, 9017.10 or 9405.10 are completely exempt
from duty, irrespective of turnover. Manufacturers of these goods can also
send their inputs outside for job work and return. In their case, there is no
question of SSI exemption limit of Rs 100 lakhs.

The SSI unit sending the material for job work has to file a declaration to Assistant
Commissioner of his division that goods returned after job work will be used in his
factory for manufacture of products exempt from duty (Notification No. 84/94 dated
11th April, 94). He also has to file another declaration to Assistant Commissioner of
division having jurisdiction over factory of job worker that the goods will be used by
him after job work in manufacture of final product which is exempt from duty. This
exemption is not available to products which are not eligible for SSI exemption.
However, this exemption has been extended to certain products as specified in the
notification. (Notification No. 83/94 dated 11th April, 94).

The job worker getting such material does not have to pay any duty, but should
maintain proper records. The job worker may be even a large scale industry.
Procedure has been prescribed for this purpose.

Budget and Central Excise

Every year, Govt. introduces its taxation proposals at the time of annual budget
which is presented usually on last day of February every year, by way of a Finance
Bill. Major changes in excise duties are announced on budget day and hence budget
is an important day for persons dealing with excise.

Increased rates become effective immediately - Normally, any provision of

legislation, takes effect only after it is passed by the Parliament. However, in case of
excise provisions, this might create complications. Finance Bill is normally presented
on last day of February, but it is passed by Parliament only after a few months. If the
assessees know the changes in advance before new rates are effected, they will
either clear the goods or will stop clearances for some time, as may be suitable to
them.

Provisional Collection of Taxes Act - To avoid these problems, it is provided vide

section 4 of Provisional Collection of Taxes Act, 1931 that budget provisions in
respect of imposition or increase in excise and customs will take effect immediately if
a declaration is inserted in the Bill that it is expedient in Public interest to have
immediate effect to the provisions of the Bill. This provision is not applicable for
reduction in duty. Once this declaration is given, the new rates become effective on
the expiry of the day when the bill is introduced. Accordingly, every year, the
declaration is given and budget provisions come into effect immediately. Such
declaration is valid only for 75 days or the date when the Finance Bill is passed,
whichever is earlier. If rates are reduced when the bill is passed, refund will be
granted of excess duty collected [subject to provisions of refund of Unjust
Enrichment of section 11B (2) of CEA].

Thus, if budget is presented on last day of February [28 or 29 as the case may be],
new rates will become effective on 1st March itself.

Provision not applicable for change in classification or reduction in duty - The

aforesaid provision is applicable only in case of imposing increase in duty. It is
applicable for change in classification of product, only if the change in classification
has effect of imposing or increasing the rate of duty. Similarly, the provisions are not
applicable when there is reduction in duty - Shri Har Chemical Enterprises (P.) Ltd. v.
CCE - Indore - 1990 (49) ELT 377 (CEGAT).

Duty liability of Pre-budget Stock - Some goods in stock on the budget day are
cleared subsequent to presentation of budget. If there is change in duty at budget, it
was felt that these goods should be cleared at the rate applicable before the budget.
The thinking was that duty liability is fastened as soon as goods are manufactured
and since goods were already manufactured before budget, rate as applicable at the
time of manufacture should be applied. However, Supreme Court in Wallace Flour
Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989 (44) ELT 598 (SC) = (1989) 4
SCC 592; have decided that rate applicable at the time of clearance from the factory
will be applicable for payment of excise duty.

In CCE v. Surat Cotton Spg 1997(92) ELT 313 (SC 3 member bench), it was held
that when excise exemption is withdrawn, duty is payable on final products lying in
stock.

The only exception is that if the goods were not included in tariff at all before budget,
such goods manufactured before budget will be exempt e.g. some goods like wheat,
rice, oil seeds, cut flowers etc. are not included in the Excise Tariff at all. If excise
duty is imposed on these goods in budget, no duty will be payable on pre-budget
stock.

Similarly, if goods were brought under excise net by amending the definition of
manufacture, goods manufactured prior to such amendment will not be liable to
duty, even if cleared subsequently - Ganesh Extrusion Industries v. CCE - 1993 (66)
ELT 639 (CEGAT) * CCE v. National Tubes 2000(118) ELT 716 (CEGAT) * Lao Pala
RG v. CCE 2002(140) ELT 405 (CEGAT).

No Restrictions on clearances on budget day Goods can be cleared from

factory on budget day without any restriction on its movements.

Brand Name under Central Excise

Many products are produced under some brand name for easy marketability. In
some cases, the brand name belongs to the manufacturer himself, while, in other
cases, brand name belongs to somebody else and the manufacturer puts his brand
name on goods produced by him. For example, Bata gets many chappals made
from small units under the brand name Bata and are sold by Bata. Similarly, Bajaj
Electricals gets many electrical goods manufactured from small industries under
brand name Bajaj, which are then marketed by Bajaj Electricals. There are many
such Companies e.g. Philips, Crompton etc. who get the goods manufactured from
others. In drug and pharmaceutical industry, system of loan licensing is common,
where a brand owner gets the drugs manufactured from a small loan licensee unit.
In such cases, following are the main provisions of Central excise.

NO SSI EXEMPTION TO THE SMALL MANUFACTURER - If the small scale unit

manufactures goods which bears a brand name which does not belong to him, there
is no excise exemption and the small scale industry will have to pay duty at full rate.
However, the turnover of small unit of such branded products will not be considered
for granting exemption for the SSI unit for his other products which may be un-
branded or under his own brand name.

Brand name Owner is Not the Manufacturer - It has been held in several cases
that the Small Scale Manufacturer is the real manufacturer for the purpose of
Central Excise. Thus, in above examples, Bajaj or Bata will not be treated as the
manufacturer, but the duty liability will be on the actual manufacturer manufacturing
the goods [see case law discussed under Manufacture].

MANUFACTURER SHOULD NOT BE DUMMY - However, if the manufacturer is not

an independent entity, but is only dummy, the brand name owner will be treated as
the manufacturer. The test is that relation between the manufacturer and brand
name owner should be on principal to principal basis. The manufacturer should be
independent. Even if brand name owner exercises control over quality or supplies
his design or specifies sources for procurement of raw material by the manufacturer,
the SSI unit will be treated as manufacturer, if the relations between manufacturer
and brand name owner are on principal to principal basis.

Duty on the price of the actual manufacturer - It is obvious that the brand name
owner purchases goods from small unit at lower price and sells the same at higher
prices. For example he may purchase the goods under his brand name for Rs. 100/-
from the manufacturer and sell the same at Rs. 150/-. In such cases, the duty will be
payable by the manufacturer on Rs. 100/- and not on Rs. 150/-, if the manufacturer
and the brand name owners are independent persons, and the price is the sole
criteria for the sale.

However, if the manufacturer and brand name owner are related persons as per the
definition u/s 4 or if the manufacturer is dummy or if their relationship is not on
principal to principal basis, duty will be payable on Rs. 150/-. Moreover, if the final
product is covered u/s 4A (MRP valuation), duty will be payable on the basis of MRP
printed on packing and not on basis of section 4. Similarly, if tariff value has been
fixed, section 4 is not applicable.

House Mark and Brand Name A house mark indicates the name of person
manufacturing the goods while a trade mark indicates the product by which it is
identified or sold. For example, Hindustan Lever has a logo identifying it with the
company, while it has various brands like Lux to identify various products
manufactured by it. Of course, some times, both can be same e.g. Godrej is house
mark, which is also used as brand name on the steel furniture of the company.

A house mark is an emblem of manufacturer projecting the image of manufacturer

generally. Such house mark may be in the form of emblem, word or both. It is used
on all the products of manufacturer. On the other hand, a product mark or brand
name is used which is invariably a word or combination of word and letter or
numerical by which the product is identified and asked for.

This distinction is vital in case of patent and proprietary medicines [P&P medicine].
Drugs are basically classified as drug with genetic name and patent and
proprietary medicines. The drugs with genetic name carry a name specified in
Pharmacopoeia Formulatory. Patent and Proprietary Medicine is (a) which is not
specified in Pharmacopoeia or (b) which bears a brand name. Supreme Court has
held that if a product is sold with name as specified in Pharmacopoeia Formulatory,
it will not become a P&P medicine only because it bears a house mark. In a case
decided by SC, the manufacturer was making 20% Dextrose Injection (which is a
name specified in Pharmacopoeia Formulatory) However, the product carried mark
AP-ASTRA on the carton. It was held that this is a house mark to identify the
manufacturer, which is compulsory under the Drug Rules. This is not a brand name.
Brand name should be such that it should establish relationship between the mark
and medicine e.g. it would have been a brand name if the product was described as
Astra Injections or Astra Dextrose Injections, instead of 20% Dextrose Injections.
Thus, putting a house mark side by side with the name contained in
Pharmacopoeia will not make it a P&P Medicine - Astra Pharmaceuticals (P) Ltd. v.
CCE 1995 (75) ELT 214 (SC) = JT 1995 (1) SC 276 = (1995) 2 SCC 84.

Excise Audit/Checks

Most of the factories are under Self Removal Procedure and there is no physical
control over production and clearance of goods. Assessment is mainly based on
returns submitted by assessee. Department has evolved various checks and
counter-checks to ensure that excise duty is not evaded.

Checks by Departmental authorities - Various checks have been devised to

reduce leakage of revenue.

VISITS OF OFFICERS - Every factory comes under jurisdiction of Range

Superintendent. The Superintendent and Excise Inspectors working under him do
occasionally visit factories. However, they are not expected to have day to day
checks.

STOCK TAKING New Central Excise Rules make no provision for store room or
stock taking. However, it does not mean that stock taking by excise authorities is
prohibited. In the opinion of author, stock taking can be done of finished goods and
Cenvat goods.

ROAD CHECKS - Surprise road checks are carried out to see that all goods moving
are accompanied by duty paying documents.

INFORMATION FROM INFORMANTS - Like all tax departments, department can

and does collect information from secret informants (some times he is a disgruntled
employee of the Company). In R K Ranganathan v. UOI 2001(131) ELT 321 (Mad
HC), payment of such reward was ordered when information was found to be
accurate and was furnished at earliest point of time.

PREVENTIVE SECTION - Each Commissionerate has a preventive section to have

surprise checks and raids when evasion is suspected.
DRI - Directorate of Revenue Intelligence under Central Board of Excise and
Customs, gathers information from various sources (including informants) about tax
evasion and take suitable action.

Departmental Excise Audit Audit means scrutiny and verification of documents,

events and processes in order to verify facts and draw conclusions regarding
correctness of recording the facts and the efficiency of a system under study. For
Central Excise purposes, Audit means scrutiny of the records of the assessees 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 is following the Central Excise procedures. - Chapter 15 Para 1.1 of
CBE&Cs CE Manual, 2001.

An Audit section is attached to each Commissionerate. Some audit parties are

functioning under Commissionerate headquarters, while some may function at
important industrial centres where Joint Commissioner or Addl Commissioner has
been posted. Audit of assessees factory is carried out by visit by audit party. The
Audit Party usually consist of 2/3 inspectors and a Deputy Office Superintendent,
headed by a Excise Superintendent. AC / DC and senior officers are also associated
with the audit of large units. These audit parties visit factories periodically. Audit by
these audit parties is called 'departmental audit'.

New audit system, termed as EA-2000 [Excise Audit 2000] has been introduced
with help of Revenue Canada. This is part of various projects Ministry of Finance
has taken up with aid of Canadian International Development Agency (CIDA).

SUBMISSION OF RECORDS BY ASSESSEE - Vide Rule 22(3) of Central Excise

Rules [earlier rule 173G (6)], assessee is required to produce to audit parties (i)
records maintained by him in respect of accounting of transactions in regard to
receipt, purchase, manufacture, storage, sales or delivery of goods including inputs
and capital goods as required under rule 22(2) of CE Rules (ii) cost audit reports u/s
233B of Companies Act (iii) Income Tax audit report u/s 44AB of Income Tax Act.

Frequency of audit Audit of assessees paying duty of over Rs one crore through
PLA is normally carried out once in a year. Those units which pay cash duty between
Rs 10 lakhs to one year are audited once in two years. In case of units paying cash
duty less than Rs 10 lakhs per annum, not more than 20% of the units are audited
every year. [This works out to about once in five years]. Selection of small units is
done for prioritization, by applying risk assessment technique.

The audit parties check records, see the operations of factory and carry out test
checks. Excise returns are checked with other records and returns like balance
sheets, bank statements, store ledger, buyer-wise ledger, return to department of
industries and other Government authorities etc. These checks are done on
selective basis. If their queries are not replied satisfactorily, show cause notices cum
demands are issued and adjudicated as per Excise Rules.

CERA - Audit of C and AG - Comptroller and Auditor General of India also carries
out audits of all assessees. These are called CERA i.e. Central Revenue Audit.
These audit parties audit accounts of excise as well as customs assessees. C& AG
is an authority appointed under Article 148 of Constitution of India. Article 151 of
Constitution specifies that reports of C&AG shall be submitted to President of India,
who causes these to be laid before each House of Parliament. CERA audits are
conducted as a part of audit of Government accounts. Thus, these audits are
conducted under Constitutional authority and are in no way connected or related to
internal audits carried out by staff of excise department. Frequency of CERA Audits
is as per the importance they attach and availability of time to CERA audit parties.

Assessee is required to produce to audit parties (i) Records (ii) cost audit report (iii)
Income Tax audit report.

Scrutiny of monthly returns - Every assessee has to submit a monthly return to

Superintendent, Central Excise. This will be acknowledged by him on the assessees
copy. No assessment order will be issued. These returns will be only scrutinised.
Some returns will be studied in details and further investigation may be made.

Valuation Audit - Special Audit - Valuation is one of the most vital and important
aspect of assessment of excise duty payable. In order to ensure that duty is being
paid correct Assessable Value, a provision has been made to order a Special Audit
in some specified cases, vide section 14A of CEA. The audit can be ordered only
with prior approval of Chief Commissioner of CE.

Cenvat credit audit - Special Audit - As per section 14AA of CEA (added w.e.f.
14th May, 1997), special audit of Cenvat credit availed or utilised can be ordered by
Commissioner of Central Excise. Such audit can be ordered if the Commissioner of
CE has reason to believe that (a) Cenvat credit availed or utilised is not within the
normal limits, having regard to nature of final products and type of inputs (b) Cenvat
credit has been availed or utilised by reason of fraud, collusion or any wilful
misstatement or suppression of facts. Such audit can be done by practising 'Cost
Accountant', to be appointed by Commissioner of CE. Expenses of and incidental to
such audit, including the remuneration payable to the cost accountant shall be paid
by Central Government (i.e. excise department)

Accounting Treatment of Central Excise

Accounting treatment of Central Excise is mainly related to accounting in respect of

Cenvat.

Accounting for Cenvat needs following consideration (a) Since credit is available of
excise duty paid while purchasing inputs, duty paid on inputs while purchase is not
an expense but an asset. (b) Un-availed Cenvat is not available as refund (except
when it is a case of exports). This may happen when duty paid on inputs is more
than duty payable on final product. (c) Cenvat is available instantly on receipt of
inputs and Cenvat credit may be utilised even before inputs on which Cenvat is
availed are actually used in production. (d) Valuation of stock of finished goods also
needs consideration.

Institute of Chartered Accountants of India has published a guidance note. It has

been published in Chartered Accountant - September, 2000 issue. [earlier note was
published in August 1995 issue]. and is as per legal position as of 1-4-2000,
including Cenvat credit. This note replaces the earlier guidance note.

Accounting Treatment of Inputs received - When inputs are purchased, Purchase

price (net of Excise) should be debited to Purchase Account and excise on inputs
should be debited to Cenvat Credit Receivable (Inputs) account. Total Invoice
amount (i.e. net purchase price plus excise) will be credited to Suppliers Account
(as the supplier has paid Excise and his Invoice is inclusive of excise paid by him on
the material supplied). When duty is debited in Input Cenvat Credit Account towards
payment of duty on final product, Excise Duty Paid on Final Products account
should be debited and Cenvat Credit Receivable (Input) account should be
credited. [Authors suggestion : This entry could be on monthly basis as duty is
payable or once at the end of the month]. Balance in Cenvat Credit Receivable
(Input) account in General Ledger and credit in 'Input Cenvat Credit Account' as per
excise records (that time RG23 A Part II) should tally, or reconciled.

If there is debit balance at the end of year in Cenvat account, it means that credit is
not fully utilised and should be shown under Current Assets under Loans and
Advances. Closing stock of inputs should be valued Net of Excise Duty. However,
since Cenvat on stock which has not been used is also utilised for payment of duty,
purchases are understated to that extent. If balance in credit of Cenvat cannot be
utilised for any reason, the same must be written off.

Write off of non-utilisable balance in Cenvat credit receivable account - Some times,
Cenvat Credit Receivable Account may have balance, but it may not be possible to
utilise the balance. This may happen in cases where credit on inputs is higher than
duty payable on final products. Thus, though credit is available, it may be lying idle,
as there is no scope for utilising the same.

As per guidance note of ICAI, the balances in Cenvat credit receivable account
should be reviewed at end of the year. If it is found that balances in Cenvat credit
are not likely to be used in normal course of business with a reasonable time, the
non-usable excess credit should be adjusted in financial accounts i.e. purchase
price of raw materials should be increased to that extent. If it is not possible to
identify the excess credit to a particular lot or lots of materials purchased, the excess
credit may be apportioned over entire purchases of raw materials, components etc.
entitled to Cenvat credit during the year, on pro-rata basis. Valuation of closing stock
will also increase to that extent.

Adjustment of excess credit related to capital goods should be made to concerned

capital goods account. Excess Cenvat credit which relates to fixed assets acquired,
should be added to cost of relevant fixed asset. If value of capital goods is
enhanced, depreciation on revised un-amortised depreciable amount should be
provided over residual useful life of the asset.

If the asset does not exist, the relevant amount should be written off in the P&L
account. In case of capital goods acquired on lease, excess Cenvat credit should be
written off on a pro-rata basis along with lease rentals.

In relation to capital goods other than fixed assets (i.e. those which are 'capital
goods' as per excise definition, but are not capitalised in books of account of the
company), the accounting treatment is same as per accounting treatment of inputs.
It is advisable the Cenvat Credit Receivable (Capital Goods) account is maintained
separately for fixed assets (which are capitalised) and other capital goods.

If entry in Cenvat Credit available account is reversed, credit available in 'Cenvat

Credit Account' as per excise records and balances in Cenvat Credit Receivable in
financial accounts will not tally. Hence, reconciliation statement will have to be
prepared as this difference will continue in subsequent years also.

Reversal of Cenvat credit - In some cases, Cenvat credit on inputs is not available,
e.g. when final product is fully exempt, or when inputs are rejected even before they
are issued to production. In such cases, Cenvat credit will have to be reversed. In
such case, appropriate adjustments in cost of inputs and value for purposes of stock
will have to be made.

Accounting of Duty paid on Capital Goods purchased - It has to be remembered

that if Cenvat credit on capital goods is availed, depreciation under section 32 of
Income Tax is not available. Moreover, Cenvat credit on capital goods is available in
two stages i.e. 50% in current year and balance 50% in subsequent year.

Capital Goods for Cenvat purposes include tools, spare parts etc., which are
treated as consumables and normally not capitalised in financial accounts. Hence,
question of claiming depreciation on these does not arise. When credit is availed of
duty paid on machinery or equipment which is capitalised, it will be necessary to
reduce cost of asset by the amount of duty claimed as credit.

If the assessee follows the accounting system as suggested by Guidance Note of

Institute of Chartered Accountants of India, the condition gets satisfied.

Visit and Inspection by Central Excise Officers

As per rule 22(1) of Central Excise Rules, an officer empowered by Commissioner

shall have access to any premises registered under CE Rules for purpose of
carrying out any scrutiny, verification and checks as may be necessary to safeguard
the interest of revenue. All officers in the rank of Inspector and above are authorised
for this purpose. All officers of rank of an Inspector and above have been authorised
under rule 22(1) within their jurisdiction.

They should be in uniform or carry their identity card. The officers should carry their
identity cards and should produce them on demand. The officers can check the
records and verify the stock under these rules. Under rule 22(2) of CE Rules; the
assessee is required to produce account books and returns (whether maintained
under Central Excise rules or otherwise) for scrutiny of excise officers or audit
purposes. The inspection can be done of registered premises only.

Visit Book of Excise Officers - Each factory is required to maintain a visit book in
prescribed form. Inspector and Superintendent visiting the factory are required to fill
in the book. The visit book should contain name and address of the factory,
excisable items manufactured, Central Excise Commissionerate, division and range
at the top. - [CBE&C Circular No 3/90-CX dated 24-1-1990].

Restricted visits to SSI Units - Excise Officers and departmental audit parties can
visit small scale industries (SSI units) for specific purposes only and on specific
written permission of Assistant / Deputy Commissioner. Assessee can ask for the
written permission. The visiting officer should make entry in visit book. However,
these restrictions are not applicable to visits of audit parties of Comptroller and
Auditor General of India (CAG). This audit, called CERA audit (Central Revenue
Audit), is under Constitutional authority and hence obviously, their powers cannot be
curtailed by any executive instructions.

Power to Stop conveyance, search and seize

Excise officers are empowered under Rule 23 of Central Excise Rules [earlier rules
199] to search any conveyance carrying excisable goods in respect of which he has
reason to believe that the goods are being carried with the intention of evading duty.

POWER TO DETAIN OR SEIZE THE GOODS If Central Excise Officer has reason
to believe that any goods, which are liable to excise duty but no duty is paid thereon
or the said goods are removed with intention of evading the duty payable theron, the
Central Excise Officer may detain or seize the goods - Rule 24 of Central Excise
Rules [earlier rule 200].

Vehicle carrying the goods can also be seized under section 110 of Customs Act as
made applicable to Excise.

For a registered premises or for stopping and searching any conveyance in transit,
no search warrant is required. - Chapter 17 Part I Para 2.3 of CBE&Cs CE Manual,
2001. [Visit to registered premises is permissible, but search without warrant ?]

Powers to search premises and arrest a person are discussed later in this chapter.

Power to Summons

Section 14 of CEA authorises Excise Officers to issue summons. The term

'summons' means asking a person to appear before the named authority and give
evidence and produce documents or other things. Person summoned is bound to
attend and state the truth upon any subject respecting which they are examined.
[section 14(2) of CEA - similar section 108(3) of Customs Act]. The enquiry are
judicial proceedings.

Exceptions u/ss 132 and 133 of CPC (Code of Civil Procedure) are applicable to
requisitions for attendance under this section.

Excise Officers of Superintendent and above rank are empowered to issue

summons - Notification 9/99 - CE (NT) dated 10-2-1999.

These power of 'summons' are different than powers of Courts to issue summons
under CPC or CrPC. The power of 'summons' to investigating officer only means
demand presence of or call upon a person to appear. The investigation officer
cannot administer oath to person being interrogated.

As per section 174 of Indian Penal Code, non-attendance in obedience of an order

from public servant is an offense punishable with imprisonment upto 6 months and
fine upto Rs 1,000/-
Summons for documents should specify the documents called - Summons for
producing documents should specify which documents are required. Authority
issuing summons should apply his mind with regard to necessity to obtain and
examine documents mentioned in the order. - Barium Chemicals v. A J Rana - AIR
1972 SC 591 - in this case, summons was set aside on ground of vagueness. All
documents pertaining to appellant were called, which were in custody of Registrar of
Court and also those which had no bearing on the matter.

Provisions regarding taking a statement - Statement can be recorded during

such enquiry. It should be recorded before a Gazetted Officer. (Superintendent is the
lowest rank of Gazetted Officer in excise department. Inspector is not a Gazetted
Officer). Such statement can be used against the person during any legal
proceedings. Statement should be signed by the person - Amba Lal v. UOI AIR 1961
SC 264 = 1984(13) ELT 1321 (SC). The statement should be in writing and signed
by the maker, as it safeguards interests of the maker as well as department and
eliminates the possibility of making a complaint subsequently that the statement was
not correctly recorded by the authorities - C Sampath Kumar v. Enforcement Officer
1997(6) SCALE 140 = 1997(96) ELT 511 = (1998) 92 Comp Cas 313 (SC).

Statement should be voluntary - Excise officer cannot compel a person to give

incriminating statement without reasonable, fair and just procedure. Statement
should be voluntary and not under threat. However, a warning that giving false
evidence will attract penalty under section 193 of Indian Penal Code does not
amount to threat and that provision is made in the statute itself.

No right to advocates presence - In Poolpandi v. Superintendent, C Ex, [ (1992) 62

Taxman 447 = AIR 1992 SC 1795 = 1992 (1) SCALE 1114 = 1992 (60) ELT 24 (SC)
= (1992) 75 Comp. Cas. 504 = (1992) 3 SCC 259 = JT 1992 (4) SC 119 = (1992) 3
SCR 247 = 1992 AIR SCW 2012 (SC 3 member bench) it has been held that person
being interrogated is not an accused nor can he plead that there is a possibility of
his being made an accused in future. Hence, he has no right to ask for his
Advocates presence during the enquiry. Interrogating officer may permit presence of
advocate, but even in such case, the advocate cannot interrupt the investigations.
(This decision is applicable in all matters under Customs Act, FEMA, Income-tax
etc.) - followed in Prakash Kumar v. UOI - (1996) 83 ELT 45 (Ker HC DB).

Power to arrest

An Excise Officer not below the rank of Inspector, to arrest a person whom they
have reason to believe to be liable to be punished under provisions of the Act. Such
arrest can be only with prior approval of Commissioner of Central Excise. [section
13]. - - There is no specific provision that the approval letter should be shown to the
person being arrested.

In case of customs, as per section 104 of Customs Act, an officer of customs who
has been empowered by Commissioner of Customs by general or special order, can
arrest a person whom they have reason to believe to be liable to be punished under
section 135 - i.e. for evasion of duty or importing prohibited goods or dealing in
goods liable to confiscation.

Forward to magistrate or Police custody - The person arrested has to be

forwarded to the Central Excise Officer who is empowered to send the arrested
person to a Magistrate. If such empowered excise officer is not available within
reasonable distance, the person may be sent to Officer-in-Charge of nearest Police
Station [section 19 of CEA]. Superintendent of CE has been empowered for this
purpose.

Arrested person must be produced before Judicial Magistrate within 24 hours of

arrest. Power to grant bail is normally exercised by a Judicial Magistrate.

Granting a 'Bail' - 'Bail' means a 'security for prisoner's appearance, on giving which,
he is released pending trial'. If offence is 'bailable', grant of bail is automatic and can
be given by police officer in charge of police station or by Court, on bond or without
bond. Court has no discretion in the matter. In case of non-bailable offence, accused
can be released on bail, unless the offence is punishable with death or imprisonment
for life. Court has discretion whether to release on bail or not, in respect of non-
bailable offences.

The basic rule is in favour of granting a bail, except where the course of justice
being affected, gravity or heinous of the crime, risk of nonappearance at the trial,
influencing or intimidation of witnesses and similar other possibilities exist - State of
Rajasthan v. Balchand AIR 1977 SC 2447. - similar views in State of Delhi v. Jaspal
Singh AIR 1984 SC 1503.

Enquiry after arrest - The Excise Officer can also make enquiry after arrest (section
21 of CEA). The procedures as prescribed under Criminal Procedure Code have to
be followed after the arrest.

Offences non-cognizable - Offences under section 9 of CEA are non-cognizable. As

per section 155 of Criminal Procedure Code, a police officer cannot investigate a
non-cognizable case without the order of a Magistrate. A police officer cannot arrest
a person who has committed a non cognizable offence, without a warrant, as per
section2(1) of Code of Criminal Procedure.

Powers of Search

Search and seizure are coercive measures designed to be enforced forcibly against
persons unwilling to be subjected to these operations.

SOME PROVISIONS OF CUSTOMS ACT APPLICABLE - Section 12 of CEA

authorises Central Government to apply provisions of Customs Act regarding levy,
exemption, drawback, warehousing, offences, penalties, confiscation and procedure
relating to offences and appeal to Central Excise, making suitable modifications and
alterations to adapt them to circumstances. Under these powers, notification dated
4th May, 1963 has been issued making some provisions of Customs Act applicable
to Central Excise subject to some modifications. These are (a) section 105(1) -
Powers of search (b) section 110 - seizure of goods, documents and things (c)
section 115 - confiscation of conveyances (d) section 118(a) - confiscation of
packages containing goods (e) section 119 - confiscation of goods used for
concealing goods (f) section 120 - confiscation of goods even if form changes (g)
section 121 - confiscation of sale proceeds of contravening goods (h) section 124 -
issue of show cause notice before confiscation of goods (i) section 142(1)(b) -
Recovery of duty (j) section 150 - procedure for sale of goods.

Search as per CrPC - Section 18 of CEA provides that all searches and seizures
must be as per provisions of Code of Criminal Procedure. Under section 165 of
CrPC, the requirements are : (a) The officer making investigation should have
reason to believe that anything necessary for investigation may be found in a place
within his jurisdiction (b) such thing cannot be otherwise obtained without undue
delay (c) grounds of such belief should be recorded in writing and specifying the
things for which search is to be made (d) the officer should search himself, if
practicable or require any officer subordinate to him to make the search (e) authority
to subordinate officer should be in writing, specifying the place to be searched and
things for which search is to be made (f) copy of record made should be sent to
Magistrate and should be furnished to the owner or occupier of the place searched,
if he applies for the copies. The copies should be supplied free of cost.

Power to Search - Under section 105 of Customs Act (as modified to Excise),
Assistant / Deputy Commissioner of Central Excise, who has reasons to believe that
any goods liable to confiscation or any document or thing relevant to any proceeding
under CEA are secreted in any place, can authorise any Central Excise Officer upto
rank of Inspector to search or he may himself search for such goods, documents or
things ( in common discussions search is called raid ). Such authority will be by
way of a search warrant signed by him under his seal. However, in urgent necessity,
search can be carried out without a search warrant. Search warrant should be
shown to the person in charge of the premises and his signature should be obtained.
Search warrant should indicate the place to be searched, but name of person need
not be mentioned as the search warrant is in respect of place and not person.

Search before magistrate or gazetted officer - In case of search of a person under

Customs Act, Narcotics Act, COFEPOSA etc., if the person requires, the search
should be before a gazetted officer or magistrate. However, this provision has not
been made applicable to searches under Central Excise Act.

Vexatious search - Section 22 of CEA provides that in case of vexatious search

and seizure, the officer is punishable upto Rs. 2,000/-. Vexatious search means (a)
searching without any reasonable ground (b) unnecessarily detaining, searching or
arresting a person (c) unnecessarily seizing any movable property (d) committing
injury to a person without reason. The wordings are such that this charge is almost
impossible to prove.

Any person giving false information causing such search or arrest is also punishable
with fine upto Rs. 2,000 and imprisonment upto two years or both.

Powers of Seizure

If, during search, some goods are found, which are liable for confiscation, the same
can be seized by excise officers. Seizure means to take possession of goods in
pursuance of demand under legal right. Seizure is only taking goods in custody or
detention. Ownership of goods remains with the owner even after seizure and he
can get the goods released under bond. [Confiscation means the goods become
property of Central Government].

Seizure under the Act - Vide section 110 of Customs Act, as made applicable to
Central Excise, Excise Officer is empowered to seize the goods if he has reasons to
believe that such goods are liable for confiscation under Central Excises Act, 1944.
Vehicle carrying the contraband goods can also be seized. Goods can be seized by
officer of rank of Superintendent and above.

List of seized goods must be prepared. These should be signed by independent

witnesses (called panch in Hindi. The document prepared after seizure is called
panchanama). Copy of panchanama must be handed over on the spot to the person
from whom goods were seized.

Seized goods should be carried away and handed over to Police Station. If police
station does not have enough space, these can be kept in the custody of officer of
Central Excise department. If they are bulky, they can be kept in possession of the
owner himself on obtaining guarantee from him regarding safe custody. In such
cases, at least 4 samples should be taken.

SEIZURE OF HEAVY GOODS - If it is not practicable to seize the goods, Excise

Officer can order that the goods should not be removed or dealt with; without
previous permission of the officer.

DETENTION AND SEIZURE - Detention and seizure are not same. Detained goods
can be released without any formality after excise officer is satisfied that goods are
not contraband. The release can be made by Superintendent also. However, after
goods are seized, these can be released only after following proper procedure.
Goods can be seized even if they are bulky. In such cases, the seized goods,
instead of physically carrying to excise custody, are handed over and kept in the
possession of the owner for safe custody, by way of a supurta-nama. After the
goods are seized and handed over to the owner for safe custody, he cannot deal
with them without permission of Excise officer.

Provisional Release of seized goods - Seized goods and vehicles can be released
by the Excise Officer on such conditions as he may deem fit. Normally cash security
of about 25% of value of goods may be asked for release of goods under bond.
However, this percentage can vary widely depending on gravity of offence. Bond in
form B-4 (earlier B-11) should be executed. Bond amount is to be decided by
adjudicating authority, while bond can be accepted by Superintendent. Vehicle can
be released by Assistant / Deputy Commissioner while goods can be released on
bond by the Adjudicating Authority (depending on value - it may be Assistant /
Deputy Commissioner, Additional Commissioner or Commissioner).

In case of conveyance, as per departmental instructions, bond amount should be

equal to estimated value of vehicle and security deposit will depend on gravity of
offence. Department has clarified that u/s 112 of Customs Act, penalty can be heavy.
Hence, security deposit should depend upon gravity of the offence. - MF(DR) letter
No. 591/40/98-Cus (AS) dated 1-9-1999.

Return goods within 6 months if no SCN - If goods are felt to be liable for
confiscation, a show cause notice has to be served giving him grounds for
confiscation, asking his representation and giving him opportunity of personal
hearing as per section 124 of Customs Act, as made applicable to Central Excise.
Vide section 110(2) of Customs Act, as made applicable to excise, if no show cause
notice is issued within six months, the goods shall be returned to person from
whose possession they were seized. This period can be further extended by six
months on sufficient cause, by Commissioner of Central Excise. Since the words
used are shall be returned, it has been held that it is a mandatory requirement. The
owner of goods gets a civil right and goods must be returned even if no application
is made. In Overseas Paints Linkers v. UOI 2001(127) ELT 42 (All HC DB), it was
held that notice must be given i.e. served. Mere issue of notice is not enough. If
not so served, goods must be returned, unless time is extended by Commissioner.

This period of 6 months can be further extended by six months on sufficient cause
by Commissioner of Customs.

Departmental Adjudication

Excise authorities are empowered to determine classification, valuation, refund

claims and the tax/duty payable. They are also empowered to grant various
permissions under rules and impose fines, penalties, etc. This is called
departmental adjudication. Adjudicate means to hear or try and decide judicially
and adjudication means giving a decision.

These are 'quasi judicial authorities' and they are not bound by any trade notice or
instructions of superiors.

Uncontrolled authority may cause great damage to an assessee and hence

opportunity of appeal against the order has been provided. The topmost authority of
departmental appeal is Tribunal in excise and customs. The decision of the
Tribunal is final as far as the departmental remedy of appeal is concerned.
Provisions are available for appeal/reference to High Court/Supreme Court in limited
cases. Needless to mention, writ jurisdiction of High Court and Supreme Court is
independent of any provision/s of the Excise Act and Writ Petition can be filed in
High Court/SLP in Supreme Court irrespective of any provision of Excise Act.

PRINCIPLES OF NATURAL JUSTICE - The adjudicating authorities are quasi

judicial authorities. [Quasi means 'not exactly', 'almost' or 'as if it were']. Adjudication
is a quasi-judicial process and principles of natural justice must be followed. Section
11A for recovery of duty specifically provide for issue of show cause notice and
considering representation of assessee. Even otherwise, principles of natural justice
(giving show cause notice indicating charges against him and proofs available,
giving personal hearing, giving reasoned order, same person who heard the matter
should pass the order etc.), must be followed unless they are specifically excluded in
relevant Act. These principles have been discussed in a separate chapter.

Summary of Original Jurisdictions - Departmental authorities have original

adjudication powers as briefed below : [refer - Chapter 13 Part II Para 2 of CBE&Cs
CE Manual, 2001. earlier MF(DR) circular No 299/15/97-CX dated 27.2.1997 as
amended vide circular No 328/44/97-CX dated 13.8.1997]

SUPERINTENDENT OF CENTRAL EXCISE - Remission of duty for loss of goods if

duty involved is up to Rs. 1,000/-. [The only power with his is to issue frivolous
show cause notices to assessee and cause the assessee lot of harassment, costs
and troubles. This nuisance value is still with him].

DEPUTY/ASSISTANT COMMISSIONER OF CENTRAL EXCISE - (a) Refund

claims, permissions under various rules (b) If amount of duty involved is upto Rs.
2,00,000/- and demand is for less than one year where there is no allegation of
fraud, suppression of facts etc. (c) Demand of duty or differential duty without any
ceiling on amount when the show cause notice is raised within one year, for demand
of duty on account of determination of valuation and / or classification, when no
issue of suppression of facts or intention to evade duty is involved (d) Demands on
account of Cenvat disputes without any limit on amount if demand raised within one
year and no issue of suppression of facts or intention to evade duty or collusion is
involved [vide CBE&C circular No. 592/29/2001-CX dated 19.10.2001] (e)
Remission of duty for loss of goods if duty involved is upto Rs. 2,500/-. [Note : The
demand can be adjudicated by Assistant / Deputy Commissioner only if it is raised
within one year of relevant date].

JOINT COMMISSIONER OF CENTRAL EXCISE - (a) Demand raised within One

year, if amount of duty involved is above 2 lakhs and upto Rs. 20,00,000/-, when no
issue of suppression of facts or intention to evade duty is involved and show cause
notice is issued within One year same limit in case of customs CBE&C circular
No. 87/2002-Cus dated 17-12-2002 (b) If amount of duty involved or Cenvat credit
involved is upto Rs. 10,00,000 (if the demand pertains to fraud, suppression of facts,
wilful misstatement etc., where notice can be issued within a period of five years)
same limit in case of customs CBE&C circular No. 87/2002-Cus dated 17-12-2002
(c) cases relating to export under bond or under claim of rebate - without upper
monetary limit - presumably the SCN has to be issued within One year (d)
Remission of duty for loss of goods if duty involved is upto Rs. 5,000.

ADDITIONAL COMMISSIONER OF CENTRAL EXCISE - (a) If amount of duty

involved or Cenvat credit involved is upto Rs. 20,00,000/- (the demand may pertain
to fraud, suppression of facts, wilful misstatement etc. or the demand may be
without any such allegation) - (Same limit in customs cases - CBE&C circular No
87/2002-Cus dated 17-12-2002) (b) cases relating to export under bond or under
claim of rebate - without upper monetary limit - Board Circular No. 13/93-CX.6 dated
15.10.93 (c) remission of duty for loss of goods if duty involved is upto Rs. 5,000.

COMMISSIONER OF CENTRAL EXCISE - (a) Demand of duty or differential duty or

demand Cenvat credit of any amount (without upper limit) when the demand is
raised within a period of one year and there is no allegation of suppression of facts,
fraud etc. (b) Demand of duty or differential duty or demand Cenvat credit of any
amount (without upper limit) when the demand is raised beyond a period of one year
but within five years for suppression of facts, fraud etc. (c) remission of duty for loss
of goods without any limit in respect of duty involved.

[Note - It has been clarified that value of goods/conveyance, plants, machinery,

land, building etc. liable to confiscation will not alter the powers of adjudication as
the powers solely depend upon the amount of duty/Cenvat credit involved on the
offending goods].

ADJUDICATION POWERS IN CUSTOMS Adjudication powers in case of Customs

Act are specified in section 122 of Customs Act.

DIFFERENT CASES OF SAME ASSESSEE INVOLVING SAME ISSUE - If there are

simultaneously different cases of the same noticee involving the same issue, all
such cases will be adjudicated by an officer competent to decide the cases where
duty involved is of highest amount. - CBE&C circular No 362/78/97-CX dated
9.12.97 - similar TN 162/97 dated 31.12.97 of Pune Commissionerate. [i.e. only
highest amount in all Show Cause Notices will be considered and not the total
amount of all notices].
Area Jurisdiction of Officers - In case of seizure of goods, case will be adjudicated
by officer in whose jurisdiction the offence is committed (i.e. where the goods were
actually manufactured) and not where the goods were seized (during raid or road
checking). Officer in whose jurisdiction goods were seized will have jurisdiction only
when the manufacturer is not traceable or cannot be identified. It may be noted that
authority granted to an officer can be exercised by any officer above that grade.

Offences under the Act

Law without provisions for punishment is like lion without teeth. Like any other law,
CEA provides for penalties and punishments for violation of excise law. The word
Offence is not defined in Excise law. Section 3(8) of General Clauses Act defines
Offence as any act or omission made punishable by any law for the time being in
force. The Central Excise Law envisages two types of punishments.

CIVIL LIABILITY - Penalty for violation of statutory provisions involving a penalty of

money and confiscation of goods. This is a civil penalty and can be adjudged in
departmental adjudication. This penalty can be imposed by excise authorities like
Commissioner, Dy. Commissioner, Assistant Commissioner, etc. within the powers
granted to them. These penalties are provided in various Central Excise Rules. In
Indo-China Steam Navigation v. Jaswant Singh 1983(13) ELT 1392 = AIR 1964 SC
1140 = 1964(6) SCR 594 (SC - 5 member Constitution Bench), it was held that the
adjudicating officer is not a Tribunal or Court, though he has to act in a quasi-judicial
manner.

CRIMINAL LIABILITY - Criminal punishment is of imprisonment and fine; which can

be granted only in a criminal court after prosecution. These are provided in Central
Excise Act itself.

Section 34A of CEA and section 127 of Customs Act specifically provide that
confiscation made or penalty imposed under the Act (by departmental authorities)
shall not prevent infliction of any other punishment to which the person affected is
liable. Thus, both departmental penalties and criminal prosecution for same offence
is permissible.

Penalties

Excise authorities are empowered to impose penalties like fines, confiscation of

goods, etc., which are provided in Central Excise Rules. Some rules themselves
provide penalty for violating those rules, while some are general penalties. Excise
Officers can impose (a) penalty for violation of law (b) Confiscate the goods (c) Give
option to pay fine in lieu of confiscation i.e. redemption fine. Court of Law can
impose fine, imprisonment as well as confiscation of goods.

General Penalty provisions Rule 25 of Central Excise Rules [earlier rules 173Q,
209 and 210] provide general provisions for breach of various rules.

Rule 25 [earlier rule 173Q or rule 209] is applicable only to manufacturer, producer,
registered person of a warehouse or registered dealer. Penalty on others (like
transporter, person concealing goods etc.) can be levied only under rule 209A (Now
rule 26) - confirmed in R K Induction Industries v. CCE - 1998(97) ELT 342 (CEGAT
SMB).

Under rule 25(1) of Central Excise Rules, [earlier rule 173Q or 209],
following are offences :

Removing excisable goods in contravention of Excise Rules or notifications

issued under the rules.
Not accounting for excisable goods manufactured, produced or stored
Engaging in manufacture, production or storage of excisable goods without
applying for registration certificate u/s 6 of CE Act
Contravening any provision of Central Excise Rules or notifications issued under
these rules with intent to evade payment of duty.

Penalties imposable under rule 25 - Penalty for violations prescribed in rule 25

(earlier rule 173Q) is (a) confiscation of contravening goods (b) penalty upto duty
payable on such contravening goods or Rs. 10,000 whichever is higher. [Till
12.5.2000, penalty upto three times value of goods could be imposed plus
confiscation of plant and machinery could be ordered].

SEPARATE PENALTY IN RESPECT OF VIOLATION OF CENVAT RULES

Provisions in respect of violation of Cenvat Credit Rules are now contained in
Cenvat Credit Rules. [Earlier, they were combined in rule 173Q / 209].

Mandatory penalty in case of fraud, suppression of facts etc. - Provisions of

Rule 25(1) are subject to section 11AC, which means that provisions of section
11AC prevail over provisions of rule 25(1).

MANDATORY PENALTY IN CASE OF FRAUD ETC. - A mandatory penalty equal to

the duty short paid or not paid or erroneously refunded is payable if such non
payment or short payment or erroneous refund was due to fraud, collusion, wilful
mis-statement or suppression of facts etc. [section 11AC of CEA, similar section
114A of Customs Act ]. In case of non payment or short payment of duty due to
fraud, wilful misstatement etc. there is mandatory penalty equal to duty evaded
under section 11AC - neither more nor less. CBE&C has confirmed that under
section 11AC, there is no discretion to adjudicating authority to impose penalty less
than or more than the amount of duty evaded.

Provisions of section 114A of Customs Act are similar, the only difference is that the
section provides both for duty and interest. The distinction has been made as
interest is payable under Customs Act if duty is not paid within five days from date of
assessment on Bill of Entry.

However, if the duty, interest and penalty is paid within 30 days from communication
of order, penalty payable will be reduced to 25%.

Mens Rea in Penalty provisions - Mens rea means guilty mind. Normally, penalty
is levied if violation is intentional. However, in almost all aforesaid provisions, the
liability is absolute, i.e. penalty is leviable irrespective of intention. Penalty is leviable
for violation of rules - it does not matter whether it is a genuine mistake, lack of
knowledge, negligence or intentional violation of rules. This can be considered only
while deciding quantum of penalty leviable. Rule 25(1)(d) of Central Excise Rules
provides penalty for contravention of rules if it is with intention to evade duty. Penalty
provision in Rule 13 of Cenvat Credit Rules also makes no mention of state of mind.
However, definition of reasonable steps [Explanation to Rule 7(2) of Cenvat Credit
Rules] states that the manufacturer should satisfy himself about identity of supplier
of goods on which Cenvat credit was taken. Except in these cases, other penalty
provisions do not describe any state of mind. Intention to evade, wilfully,
knowingly, satisfy himself etc. are states of mind. These are difficult to prove.

Hon. Supreme Court, High Courts and Tribunals have consistently held that mens
rea is not an essential ingredient for imposing a penalty unless statute specifically
prescribes so. In economic crimes and departmental penalties, mens rea is not
essential for imposing penalty - R S Joshi v. Ajit Mills - AIR 1977 SC 2279 = (1977)
40 STC 497 = 1979 UPTC 171 (SC 7 member bench)

Lenient view for technical lapses - Quantum of penalty can be (and in fact should
be) lower if there is no mens rea. Penalty is allowed by law, but it does not mean
that penalty must be imposed. Lenient view should be taken if the violation is
technical in nature.

Personal penalty on director / partner / employee/ transporter / driver etc -

Normally, penalty is imposed on the company / firm which has committed an offence.
The penalty under rule 25(1) is on the company or firm.

However, though Company is an independent legal person, it works through

Managing Directors, directors and employees. In case of firms, it works through
partners and employees. Hence, in addition to penalty that may be imposed on the
company / firm, personal penalty can be imposed on the person who was actually
involved in committing the offence.

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 rules, shall be liable to a penalty upto the
duty payable on such goods or Rs 10,000 whichever is greater. Rule 26 of Central
Excise Rules.

Thus, a director or partner or an employee will be personally liable to penalty if he is

personally involved in clandestine removal etc.

Note that rule 26 imposes personal liability only of penalty and not of duty involved.

INDIVIDUAL DIRECTORS NOT LIABLE TO PAY DUTY, BUT PENALTY CAN BE

IMPOSED - Liability of payment of duty and penalty is on the manufacturer. If the
assessee is a Company, liability is that of company which is a separate legal entity.
Liability cannot be imposed on individual directors of the company, in absence of a
specific provision in the statute. Rule 209A (now rule 26) makes any person liable to
penalty only if he is knowingly connected with goods liable to confiscation. Thus,
unless the directors are individually involved in clandestine removal etc., they are
not personally liable - S L Kirloskar v. UOI - 1993 (68) ELT 533 (Bom HC).

Penalty on transporter/driver/ owner - Often the vehicle carrying the goods is also
seized and penalty is sought to be imposed on driver/transporter. Usually, the drivers
are not (in fact they cannot be) conversant with excise formalities and are not aware
what documents are required for excise purposes. In Bhimraj Rathor v. CCE 1994
(74) ELT 810 (MP HC), it was held that a transporter or driver cannot be expected to
know technical nature of goods or had reason to believe that the goods they were
transporting were liable to confiscation. Thus, seizure of the vehicle was held illegal
and bonds and security furnished by transporter for release of vehicle was
discharged. In this judgment, the MP High Court followed the decision in B R Sule v.
UOI - 1990 (48) ELT 343 (Bom HC).

Residual Penalty Rule 27 of Central Excise Rules is a residual penalty, which is

that for breach of any excise rule, if no penalty has been prescribed, the penalty
would be Rs. 5,000 plus confiscation of goods in respect of which offence has been
committed. [The rule does not use the word notification. Hence, it can be argued
that no penalty can be imposed for violation of provision of any notification].

Confiscation of goods - Section 12 of CEA authorises Central Government to

apply provisions of Customs Act regarding levy, exemption, drawback, warehousing,
offences, penalties, confiscation and procedure relating to offences and appeal to
Central Excise, making suitable modifications and alterations to adapt them to
circumstances. Under these powers, notification No 68/63-CE dated 4th May, 1963
has been issued making some provisions of Customs Act applicable to Central
Excise subject to some modifications. These are (a) section 105(1) - Powers of
search (b) section 110 - seizure of goods, documents and things (c) section 115 -
confiscation of conveyances (d) section 118(a) - confiscation of packages containing
goods (e) section 119 - confiscation of goods for concealing goods (f) section 120 -
confiscation of goods even if form changes (g) section 121 - confiscation of sale
proceeds of contravening goods (h) section 124 - issue of show cause notice before
confiscation of goods (i) section 142(1)(b) and 142(1)(c)(ii) - Recovery of duty (j)
section 150 - procedure for sale of goods.

Goods that can be confiscated - Following can be confiscated

CONTRAVENING GOODS LIABLE TO CONFISCATION - Under rule 25 of CE,

following goods are liable to confiscation - * goods removed in contravention of
Central Excise rules, * goods not accounted for * goods on which Cenvat credit is
wrongfully taken * Goods manufactured without registration of the factory.

CONFISCATION OF CONVEYANCE - Following conveyances are liable to

confiscation under section 115(1) of Customs Act, as made applicable to Central
Excise : (a) any conveyance from which goods are thrown overboard or destroyed to
prevent seizure by officer of customs (b) conveyance which is required by Customs
Officer to land or stop for inspection but fails to do so. (d) conveyance by which
warehoused goods are cleared for export, but goods are unloaded without
permission. (e) Conveyance carrying imported goods which has entered India and is
afterwards found with the whole or substantial portion of such goods missing, unless
the master of vessel is able to account for the loss of or deficiency in goods.

CONFISCATION OF CONVEYANCE FOR TRANSPORT OF SMUGGLED GOODS -

Section 115(2) of Customs Act as made applicable to Central Excise provides that
conveyance used as transport for removal of excisable goods in contravention of
provisions of Central Excise Rules is liable for confiscation. However, conveyance
used for transport of contravening goods will not be liable for confiscation, if the
owner of conveyance proves that the conveyance was used without the knowledge
or connivance of the owner, his agent or person in charge of the conveyance.
Further, if the conveyance is normally used for hire, the owner shall be given option
to pay fine not exceeding the market price of contravening goods being removed
instead of confiscation of vehicle.

CONFISCATION OF PACKAGES - When the goods are liable for confiscation, the
packages in which contravening excisable goods are packed, such packages are
also liable for confiscation (section 118 of Customs Act as made applicable to CE).

NO CONFISCATION OF CONTAINER - It has been held that container obtained on

hire and in which goods are stuffed is not a package. - United States Lines Agency
v. CC (1998) 101 ELT 602 (CEGAT). * AP Muller v. CC 1994(69) ELT 425 (CEGAT) *
Orient Ship Agency v. CC 1993(63) ELT 489 (CEGAT) * Kamal Shipping Services v.
CCE 1999(113) ELT 723 (CEGAT). [This is quite fair and logical, as the person who
has given container on hire cannot have idea what the hirer will stuff in the
container.]

CONFISCATION OF GOODS USED FOR CONCEALING - Goods used for

concealing contravening excisable goods are liable for confiscation (except
conveyance, for which separate provisions have been made) [section 119 of
Customs Act as made applicable to CE].

CONFISCATION EVEN IF FORM CHANGES - Contravening goods are liable for

confiscation even if there is any change in its form. If the contravening goods are
mixed with other goods and they cannot be separated, whole goods are liable for
confiscation. If the owner proves that he had no knowledge that the goods included
contravening goods, only that part of goods, value of which is equal to value of
contravening goods shall be liable to confiscation [section 120 of Customs Act as
made applicable to CE]

CONFISCATION OF SALE PROCEEDS - If the contravening goods are found to

have been sold, sale proceeds of such sale are liable to confiscation [section 121 of
Customs Act as made applicable to CE].

Effect of wrong confiscation - If goods are confiscated by Customs authorities and

subsequently, the confiscation is set aside by Tribunal/Court; the person is eligible to
get back the goods. However, if in the meanwhile, goods have been sold by customs
authorities, market value of goods as on date of setting aside of the order of
confiscation by the judgment is payable e.g. assume that goods are confiscated in
June 90, goods sold by department in July, 1992 and after appeal, the confiscation is
set aside in October 93. In such case, what value should be considered ? In
Northern Plastics Ltd. v. CCE 1999(6) SCALE 9 = (2000) 1 SCC 545 = AIR 1999 SC
3643 = 1999 AIR SCW 3664 = 1999(113) ELT 3 (SC), it has been held that value at
time or date when clearance ought to have been allowed by customs should be
considered. Sale proceeds obtained by department (less customs duty payable)
cannot be considered for refund. In this case, value of goods was Rs 33.04 lakhs
when imported in January, 1989 and duty payable was Rs 47.07 lakhs. Department
sold the goods for Rs 48.50 lakhs in May, 1990. After confiscation was set aside,
department contended that after adjusting duty payable and storage charges of Rs
2.52 lakhs, nothing is payable to importer. It was held that department cannot be
permitted to take advantage of its own wrong. In this case, payment of Rs 33.04
lakhs plus interest @ 12% right from February, 1989 were ordered.

The principle is that, to the extent possible, the aggrieved party should be placed in
the situation as if no confiscation had taken place, if confiscation was found to be
wrong by appellate authorities. The broad principle was in fact laid out by Apex Court
in UOI v. SS Works - AIR 1976 SC 1414.

Redemption fine in lieu of confiscation - Section 125(1) of Customs Act provides that
whenever confiscation of goods is ordered, the adjudicating officer may give option
to owner of goods to pay fine in lieu of confiscation, if the importation or exportation
of goods was prohibited. However, if importation or exportation of goods was not
prohibited, the option to pay redemption fine shall be given to owner of goods. This
is called redemption fine. After payment of redemption fine, the goods are returned
to the owner of goods. Section 125(2) of Customs Act makes it clear that where any
fine in lieu of goods is imposed, the owner of goods or the person from whom the
goods were seized, is liable to pay duty and charges in respect of such goods, in
addition to the fine.

LIMIT FOR IMPOSING REDEMPTION FINE As per proviso to section 125(1) of

Customs Act, redemption fine upto market price of goods less duty chargeable
thereon can be imposed.

Procedure after confiscation - Rule 28(1) of Central Excise Rules makes it clear that
on confiscation, the goods shall vest in Central Government. The Central Excise
Officer adjudging confiscation shall take and hold possession of things confiscated.
Every Police Officer is required to assist excise officer in taking and holding such
possession. parallel provision in Customs section 126.

If the assessee exercises option to pay fine in lieu of confiscation, he may be asked
to pay storage charges as may be determined by adjudicating officer. [rule 30]

If the assessee does not pay fine in lieu of confiscation, the goods will be sold,
destroyed or otherwise disposed of in such manner as the Commissioner may
direct. [rule 29].

Prosecution for Offences

Excise Law provides stiff punishments of imprisonment and fines for violation of
excise law. These can be imposed only by Court of Law and these are independent
of penalties and confiscation that can be imposed by Excise Authorities through
departmental adjudication. Hon. Supreme Court has held that both can be imposed
simultaneously.

Offences under the Act - Section 9 defines following as offences

punishable:

Contravening provisions of restrictions of possession of goods in excess of

prescribed quantity as prescribed under section 8.
Contravening provisions of rules regarding transit of excisable goods framed
under clause (iii) of section 37(2).
 Contravening provisions of rules regarding registration of a unit (required under
section 6 of Act) framed under clause (xxvii) of section 37(2).
Evading payment of duty payable under CEA.
Removing excisable goods or concerning himself with such removal, in
contravention of provisions of Central Excise Act and Rules.
Acquiring or in any way concerning himself with transporting, depositing,
concealing, selling, purchasing or otherwise dealing with excisable goods where
he knows or has reason to believe that the goods are liable to confiscation under
Central Excise Act or Rules.
Contravening any provision of Central Excise Act or rules in relation to Cenvat
credit.
Failure to supply information or knowingly supplying false information.
Attempting to commit or abetting commission of an offence regarding evasion of
duty or transit of goods or restriction on storage of goods or non-registration of a
unit.

Punishment that can be imposed - Punishment imposable is imprisonment upto

seven years and fine (without limit) if (a) the duty leviable on the excisable goods
exceeds one lakh of rupees [section 9(1)] or (b) a person already convicted for
offence under Central Excise Act is convicted again [section 9(2)]. The imprisonment
should be minimum for six months unless there are special and adequate reasons
for granting lesser punishment. If the duty leviable on goods is less than Rs. 1 lakh,
imprisonment upto three years or fine (without limit) or both can be imposed.

FURTHER PUNISHMENTS - In addition to aforesaid, Court has powers to order

following punishment

(a) Forfeiture to Government of any goods in respect of which offence has been
committed and packages, vehicles or conveyance, or machinery used in
manufacture of the goods. - Section 10 of CEA. [The forfeiture is different than the
power of confiscation available to Excise authorities. The difference is that if the
goods are confiscated, option has to be given by departmental adjudicating
authorities to the offender to redeem the goods i.e. take back the goods, on payment
of prescribed penalty. In case of forfeiture, no such option is to be given by Court].

(b) Publication of names, place of business or residence, nature of contravention

etc., under section 9B of CEA parallel section 135B of Customs Act. Such
publication will be at the cost of accused and in newspaper or otherwise as directed
by Court.

MENS REA PRESUMED - State of mind (culpable mental state) like intention,
motive, knowledge of a fact or belief in a fact or reasons to believe in a fact are
difficult to prove. Section 9C of CEA [parallel section 138A of Customs Act],
therefore, provides that such mental state shall be presumed by Court. Prosecution
(here the Excise / customs department) need not prove the guilty state of mind of
the accused. If the accused claims that he did not have guilty mind, he has to prove
the same. In legal terminology, it is explained as burden of proof regarding non
existence of Mens rea is on the accused. This proof has to be beyond
reasonable doubt. This position has been reiterated in Bhanabhai Khalpabhai v.
CC JT 1994(2) SC 591 * Devchand Kalyan Tandel v. State of Gujarat JT 1996(7) SC
256 = 1997(89) ELT 433 (SC) = AIR 1996 SC 2787 - in this case, it was held that
once recovery of prohibited goods is made from accused within notified area, the
statutory presumption is available. In ITC Ltd. v. CCE 1998(104) ELT 151 = 28 RLT
323 (CEGAT), it was held that this provision is applicable only in case of prosecution
before Court and not to adjudication proceedings under the Act.

BURDEN OF PROOF - In excise law, the commitment of offence has to be proved

by department beyond reasonable doubt. However, the accused has to prove
beyond reasonable doubt that there was no culpable state of mind like intention,
knowledge, belief etc. In legal terminology, this means that burden of proof is on
prosecution (i.e. excise department) to prove the commitment of offence. Once this
is proved, burden of proof is on the accused to prove that he had no mens rea.
Both these proofs must be beyond reasonable doubt.

Relevancy of Statement before Excise / Customs Officer - Statement made and

signed before any Central Excise Officer / customs officer of gazetted rank is
allowed as evidence in the prosecution as follows : (a) in case of a person who is
dead or if he cannot be found or whose presence cannot be obtained without undue
delay or expenses, the statement will be allowed as evidence (b) In case of person
who is present before the Court and is examined as witness, Court may admit the
statement if it is of the opinion that the statement should be admitted in the interest
of justice. Thus, discretion is given to Court in case of statements made before
Excise Officer, only if such person is examined as witness. The provisions apply to
adjudication and appeal proceedings also. [section 9D of CEA parallel section
138B of Customs Act].

Person is not accused when he is giving statement - As per Article 20(3) of

Constitution No person accused of an offence shall be compelled to be a witness
against himself. It was contended that in view of this, statement made before
excise/customs authorities cannot be admitted as evidence. However, it was held
that at the time of enquiry, the person is not accused of an offence at that stage.
Hence, his statements are not protected under Article 20(3) and it is admissible as
evidence - Romesh Chandra Mehta v. State of West Bengal - AIR 1970 SC 940 =
1969 (2) SCR 461 = 110 ELT 324 (SC 5 member Constitution bench).

Excise officer is not a police officer - A statement made before police officer cannot
be admitted as an evidence. However, customs/excise officer is not police officer
though he is invested with some powers of a police officer. Hence, statement made
before customs/excise officer can be admitted as evidence - Illias v. CC - 1969 2
SCR 613 = 1983 (13) ELT 1427 = AIR 1970 SC 1065 (SC 5 member Constitution
Bench).

Statement must be voluntary - Statement should be voluntary. If it appears to be by

inducement, threat or coercion, it has to be outright rejected - KTMS Mohammed v.
UOI - 1992 (40) ECC 352 (SC) = JT 1992 (3) SC 129 = AIR 1992 SC 1831 = (1992)
3 SCC 178 = (1992) 1 SCALE 1006 = 197 ITR 196 = 1992 Cri LJ 2781 = 1992 AIR
SCW 2062 = (1992) 65 Taxman 130 (SC). Confession has to be affirmatively proved
to be free and voluntary - Hem Raj v. State of Ajmer 1954 SCR 1133 = AIR 1954 SC
462.

Statement must be voluntary as well as true - It must not only be established that
statement is voluntary but also it must be established that the statement is true. For
purpose of establishing the truth, it is necessary to examine the confession and
compare it with rest of the evidence on record - Sarwan Singh v. State of Punjab -
AIR 1957 SC 637.

Evidence by documents - Provisions regarding documentary evidence are as

follows.

PRESUMPTION REGARDING DOCUMENTS SEIZED FROM A PERSON - Any

document seized from a person shall be presumed to be true about the contents
therein. Signature and other part of hand written document on such seized
document, purporting to have been of a person or reasonably assumed to be of that
person shall be presumed to be of that person. If such person claims that the
document is not true or not signed by him, the burden of proof is on him [section
36A(a) of CEA parallel section 139(i) of Customs Act].

OTHER DOCUMENTS ADMISSIBLE - (a) A document which is required by law to

be stamped, will be admissible as evidence even if it is not duly stamped. [Section
36A(b) of CEA parallel section 139(b) of Customs Act] (b) Micro film or
Photostat/Xerox copy of document or reproduction of image is admissible, without
further proof of original [Section 36B(1)(a) & (b) of CEA parallel section 138C(1) of
Customs Act].

COMPUTER PRINT OUTS - Statement printed by Computer is admissible if (a)

Computer print out was produced during the period when the computer was used for
storing and processing the information (b) the information contained in the statement
was regularly supplied to computer during the period (c) computer was operating
properly during the period or breakdowns were not significant to affect accuracy of
documents (d) the print out is reproduced in ordinary course of activities. [Section
36B(2) of CEA parallel section 138C(2) of Customs Act]. The computer print outs
will be allowed as evidence even if multiple computers or different computers or
different combinations of computers were used. A statement or a certificate given by
a responsible person to the best of his knowledge and belief identifying the
statement or describing its contents or giving particulars of computers used in
production of documents shall be evidence of any matter contained in the certificate.

Ordering prosecution - CBE&C have issued instructions that prosecution can be

approved only by Chief Commissioner of Central Excise or in certain cases by
Director General of Central Excise Intelligence. - Chapter 17 Part II Para 2.6 of
CBE&Cs CE Manual, 2001.

OFFENCE NON-COGNIZABLE - Offences under section 9 of CEA are non-

cognizable. [Section 9A of CEA]. - . As per section 2(c) of CrPC, cognizable
offence means an offence for which a police office may arrest without warrant. As
per section 155 of Criminal Procedure Code, a police officer cannot investigate a
non-cognizable case without the order of a Magistrate [A police officer can
investigate cognizable case without order of Magistrate].

No time limit for launching prosecution - Economic Offences (Inapplicability of

Limitation) Act provides that there is no time limit for launching a prosecution.
Limitation bar contained in Criminal Procedure Code is not applicable to offences
under Central Excise and Customs Law.

Immunity from prosecution by Settlement Commission Settlement Commission

can grant immunity from prosecution under Excise Act, Customs Act, FTDR Act, IPC
etc. if required conditions are fulfilled. This aspect has been discussed in another
chapter.
Provisions of Appeal and Revision

Excise Law as well as Customs Act makes elaborate provisions for departmental
adjudication, appeals and revision. The provisions are almost identical in both the
Acts.

Excise Act has made elaborate provisions for appeals. There is only one appeal in
case of orders of Commissioner, while in case of other orders (i.e. orders of
Superintendent, Assistant Commissioner, Dy Commissioner, Jt. Commissioner, and
Additional Commissioner), first appeal is with Commissioner (Appeals) and other
with Tribunal. Appeal/reference against order of Tribunal can be made in certain
cases. In some matters, revision application lies with Government.

Civil Court has no jurisdiction in excise and customs matters - As per section 9 of
Code of Civil Procedure, civil court has a wide, all embracing jurisdiction to entertain
a claim. It can try all civil suits except those which are expressly or impliedly barred.

Excise and Customs Law provides remedies of appeal etc. and normally, assessee
does not approach Civil Court to get redressal in excise matters. Section 35C(4) of
CEA [Parallel section 129B(4) of Customs Act] prescribe that order of Tribunal is
final, subject to reference to High Court or appeal to Supreme Court. Section 11B(3)
of CEA [parallel section 27(3) of Customs Act] makes it clear that any refund will be
granted only as per provisions of section 11B(2) of CEA [parallel section 27(2) of
Customs Act]. Thus, these provisions effectively bar the jurisdiction of Civil Court in
excise matters, except in cases where the law is claimed or declared as invalid.

Excise Law is a complete code in order to seek redress in excise matters and
hence, jurisdiction of Civil Court is ousted. Vesting parallel jurisdiction in Civil Courts
would destroy the finality attached to orders passed by Central Excise authorities -
UOI v. Narasimhulu - 1969 (2) SCC 659 = 1983 (13) ELT 1534 (SC) followed in UOI
v. Urvish Snuff Factory - 1995 (77) ELT 823 (Guj HC).

Some provisions are common to appeals before Commissioner (Appeals) and

Tribunal. These are discussed first.

Time limit for filing appeal and Condonation of delay

Every Statute prescribes time limit within which appeal has to be filed. The time limit
is necessary as firstly, matters cannot be kept hanging indefinitely and secondly law
helps only those vigilant and careful about their rights and not those who are
negligent and careless. Excise and Customs law allows time of 60 days for filing
appeal to Commissioner (Appeals) and three months for filing of appeal to CEGAT,
after the order is communicated to him.

Calculating time provided for appeal - Legal provisions for calculating the time
prescribed for appeal are : (a) Section 35-O of CEA - parallel section 131A of
Customs Act - provides that time taken for obtaining a copy of order shall be
excluded, as a certified copy of order must accompany the appeal. (b) Day on which
order is received should be excluded. (c) As per section 29(2) of Limitation Act, if last
day is a gazetted holiday, appeal can be filed on next working day. (d) If appeal is
sent by registered post, date of actual receipt at the appellate authority will only be
considered.

Condonation of delay in filing appeal - Delay can be condoned if sufficient cause

is shown for not presenting appeal in time. Delay upto last date of filing of appeal
need not be explained, but delay thereafter has to be explained.

Power to condone delay - Delay may occur due to genuine reasons and hence
appellate authorities are empowered to condone delay. Commissioner (Appeals) can
condone delay only upto 30 days (that time three months). Commissioner (Appeals)
has no powers to condone delay beyond 30 days (that time three months). - Max
Machinery Mfg (P.) Ltd. v. CCE - 1991 (56) ELT 612 (CEGAT) * Jain Spinners Ltd. v.
CCE - (1996) 81 ELT 366 (CEGAT). There is no such restriction on Tribunal about
the period. Condonation is not a matter of right even for genuine reasons. Various
factors are considered and it may happen that even a one day delay may not be
condoned while in another case, delay of even months may be condoned.

Specific application for condonation required As per section 5 of Limitation Act,

application for condonation of delay is required.

Strict view has been modified - Earlier strict view about condonation of delay has
since been modified and a broad view is being taken.

In State of West Bengal v. Administrator, Howrah Municipality - AIR 1972 SC 749 =

(1972) 1 SCC 366, it was observed that in the matter in deciding whether a
particular case amounts to 'sufficient cause' or not, Courts have to use their judicial
discretion in the interest of justice. The words 'sufficient cause' should receive a
liberal construction so as to advance substantial justice when no negligence or
inaction or want of bona fide is imputable to party. same view in Vedabai v.
Shantaram Baburao 2001 AIR SCW 2809 = 2001(4) SCALE 506 = 125 STC 375 =
253 ITR 798 = 122 Taxman 114 = 132 ELT 15 (SC) * Ram Nath Sao v. Gobardhan
Rao 2002 AIR SCW 978 = (2002) 3 Comp LJ 274 = 2002(2) SCALE 334.

In M K Prasad v. P Arumugam 2001 AIR SCW 2810 = 2001(4) SCALE 600, also it
was held that sufficient cause should be liberally construed. However, in this case,
appellant was asked to make payment of Rs 50,000 to opposite side to mitigate
inconvenience caused by the delay.

In Collector, Land Acquisition, Anantnag v. Mst Katiji - 1987 (28) ELT 185 (SC) = AIR
1987 SC 1353 = 35 Taxman 17 = 1987 UPTC 2128 = (1987) 167 ITR 471 (SC) =
(1987) 66 STC 228 (SC) = (1987) 2 SCC 107 = (1987) 2 SCR 387 = (1987) 62
Comp. Cas. 370 (SC); the Apex Court has given some guidelines, which can be
summarised as follows : (1) Ordinarily a litigant does not stand to benefit by lodging
an appeal late (2) Refusing to condone delay can result in a meritorious matter
being thrown out at the very threshold and cause of justice being defeated. When
the delay is condoned, highest that can happen is that a cause would be decided on
merits after hearing the parties. (3) "Every day's delay must be explained", does not
mean that a pedantic approach should be made. Why not every hour's delay, every
second's delay ? The doctrine must be applied in a rational common sense
pragmatic manner (4) When substantial justice and technical consideration are
pitted against each other, cause of substantial justice deserves to be preferred for
the other side cannot claim to have vested right in injustice done because of a non-
deliberate delay. (5) There is no presumption that delay is occasioned deliberately or
on account of culpable negligence, on account of mala fides. A litigant does not
stand to benefit by resorting to delay. In fact he runs a serious risk. (6) It must be
remembered that judiciary is respected not on account of its power to legalise
injustice on technical grounds but because it is capable of removing injustice and is
expected to do so. It was held : "Law should be applied in meaningful manner which
subserves the ends of justice. There may be various reasons like sudden sickness
of appellant or his advocate, strike in factory etc. If delay is not condoned, appeal
will be dismissed without hearing on merit".

In respect of application for condonation from Government, it was observed : "All

litigants, including the State as a litigant, should be accorded same treatment and
law should be administered in an even handed manner. In fact, on account of
impersonal machinery, and bureaucratic machinery, delay on part of State is less
difficult to understand."

These views were fully endorsed in State of Haryana v. Chandra Mani - (1996) 2
SCALE 820 = (1996) 3 SCC 132 = 143 ELT 249 = JT 1996 (3) SC 371 = 1996 AIR
SCW 1672 = (1996) 14 RLT 245 = AIR 1996 SC 1623 = 64 ECR 15 (3 member
bench). In this judgment, the Apex Court observed : 'It is common knowledge that
this Court has been making a justifiably liberal approach in matters instituted in this
Court. But the message does not appear to have percolated down to all the other
courts in the hierarchy.'

Stay of Recovery Pending Appeal

Appeal is subject to pre-deposit of duty pending appeal. Further, even when appeal
is pending, actions for recovery of dues can be taken.

Prior deposit of duty pending appeal - Section 35F of Central Excise Act (similar
section 129E of Customs Act) provides that person desirous of appealing against the
order shall, pending the appeal, deposit the duty demanded or penalty levied.
However, the appellate authority [Commissioner (Appeals) or Appellate Tribunal] is
empowered to dispense with such deposit if it is of the opinion that the deposit of
duty or penalty will cause undue hardship to the person. Such waiver may be
subject to such conditions as may be imposed to safeguard interests of revenue.
This provision is only for hearing and deciding the appeal by the appellate authority
on merits. Normally, while admitting appeal without payment of dues, stay for
recovery is also granted as considerations for granting stay and dispensing of pre-
deposit are same. It will be futile to admit appeal without payment of duty and
penalty, if stay for recovery is not simultaneously granted. However, mere filing
appeal or admitting appeal does not amount to grant of stay.

Stay/Dispensing of Prior deposit - Order passed by adjudicating authority

becomes effective as soon as it is signed and issued to concerned person. Excise
authorities can take legally permissible steps to recover the duty and penalty as
confirmed in the order. There is no legal binding on them to wait till the decision of
appellate authority.

Decision of appeal may take time and recovery of amount pending appeal might
lead to injustice and hardship to party. Hence, appellate authorities can grant stay of
recovery of dues till appeal is decided, subject to conditions as they may deem fit.
Such powers are not specified in the Act, but Supreme Court, in ITO, Cannanore, v.
M K Mohammad Kunhi - AIR 1969 SC 430 = (1969) 71 ITR 815 (SC), has held that
these are incidental and ancillary powers of appellate authority, as without such
powers, appeal would be rendered nugatory even if successful.

A separate application should be made along with appeal requesting for stay of
recovery till appeal is decided.

Stay by Commissioner (Appeals) - Stay can be granted by Commissioner (Appeals)

in respect of appeals before him. He can grant stay subject to conditions as he
deems fit. However, appeal cannot be filed to Tribunal against this order, though
Commissioner (Appeals) can himself modify his own interlocutory order'.

SUGGESTED TIME TO DECIDE STAY APPLICATION Commissioner (Appeals)

should, wherever possible to do so, decide such application within 30 days from
filing. [second proviso to section 35F of Central Excise Act parallel 129E of
Customs Act]. No such time limit has been specified in respect of stay application by
CESTAT. Even the time limit prescribed in case of Commissioner (Appeals) is only
indicative, as the wording is wherever possible to do so.

Mere filing appeal does not amount to stay - Mere filing of appeal does not
amount to stay or dispensing of pre-deposit. Siddhartha Tubes v. CCE 2000(123)
ELT 516 (MP HC)

Tribunal can recall and restore order if conditions fulfilled late - It has been held that
if the party subsequently complies with requirement of payment of pre-deposit, the
Tribunal has powers to recall and restore the appeal, if ends of justice require such
action.

Stay application by departmental authorities - If the decision is in favour of the

assessee, department can also go in appeal. However, they are obliged to obey the
order unless they obtain a stay.

Criteria for granting stay/dispensing pre-deposit of duty - Wide discretion is

available to appellate authority in granting stay/dispensing pre-deposit of duty. The
Act only prescribes that pre-deposit may be dispensed if it would cause 'undue
hardship' to the person. The hardship can be any hardship and not only financial
hardship. While granting stay, interest of revenue should be safeguarded. There are
no hard and fast rules, but appellate authority do take following into consideration of
* Prima facie case * Balance of convenience * Financial Hardship * Irreparable Injury
etc. while granting stay and imposing conditions for stay/dispensing of pre-deposit.

The principles for waiver of condition of pre-deposit, well settled by a catena of

decisions of Supreme Court and High Court are (a) whether there is a prima facie
case in favour of assessee (b) the balance of convenience qua the deposit or
otherwise (c) irreparable loss, if any to be caused in case stay is not granted and (d)
safeguarding public interest. JCT Ltd. v. ITAT (2002) 125 Taxman 866 (Del HC
DB).

Validity of stay granted by Tribunal is only 180 days - Section 35C(2A) of Central
Excise Act and section 129B(2A) of Customs Act, (as amended on 11-5-2002)
provide that if stay is granted by Tribunal for recovery, appeal shall be decided by
Tribunal within 180 days. If appeal is not disposed of by Tribunal within 180 days,
the stay shall stand automatically vacated.

Thus if Tribunal does not pass final order in 180 days, department can start
proceedings for recovery of duty under section 142 of the Customs Act as made
applicable to Central Excise. The provision is probably made as it is felt that
assessees obtain a stay order and then try to delay the matter. However, if Tribunal
is unable to decide the issue within 180 days for reasons not attributable to the
assessee, the assessee will be put in a very difficult position for no fault of his. In
any case, assessee can apply for renewal of stay every 180 days. This will only
increase fruitless work of Tribunal.

Review application (Departmental Appeal)

Copy of order of Assistant / Deputy Commissioner as adjudicating authority is sent

to Commissioner. If Commissioner is of opinion that the order needs review, a
departmental appeal can be filed with Commissioner (Appeals). Similarly, Copy of
order of Commissioner as adjudicating authority is sent to CBE&C. If CBE&C is of
opinion that the order needs review, a departmental appeal can be filed with
CESTAT.

PURPOSE OF REVIEW - The review by Board/Commissioner is for the purpose of

satisfying itself (i.e. Board/Commissioner) as to legality or propriety of any decision
or order passed by Commissioner as adjudicating authority. [Practically, it is taken
as departmental appeal].

APPEAL AGAINST ORDER OF COMMISSIONER (APPEALS) Note that in case

of order of Commissioner (Appeals), department has to file a regular appeal with
Tribunal u/s 35B(2) of CEA [parallel section 129A(2) of Customs Act] within
prescribed time. It is a regular appeal, and not a review.

Order for review by Commissioner of order of officer lower than him -

Commissioner can order review of the order of DC / AC / Superintendent of Central
Excise (as adjudicating authority). Such order for review can be issued by
Commissioner under section 35E(4) of CEA [Parallel section 128D(4) of Customs
Act]. The Commissioner can instruct the adjudicating authority within a period of six
months (where it is possible to do so], but not beyond a period of one year from
decision or order of adjudicating authority to apply to Commissioner (Appeals).
[Thus, six months limit is only indicative and not binding].

On receipt of such order, the adjudicating authority (DC / AC / Superintendent)

should file application to Commissioner (Appeals) within three months (appeal
against his own order). This will be treated by Commissioner (Appeals) as appeal by
department against the decision of adjudicating authority. The appeal shall be in
respect of such points arising out of the order of adjudicating authority (DC / AC /
Superintendent) as may be specified by Commissioner.

APPEAL IS OF COMMISSIONER EVEN IF SIGNED BY DY / ASSISTANT

COMMISSIONER Even if the review application is signed by Assistant / Deputy
Commissioner under authorisation, the Commissioner continues to be appellant and
his name should be mentioned as appellant. CCE v. Coral Health (2001) 137 ELT
437 (CEGAT SMB).

Order for review by CBE&C of order of Commissioner - CBE&C can order

review of the order of Commissioner of Central Excise (as adjudicating authority).
Such order for review can be issued by CBE&C under section 35E(1) of CEA
[Parallel section 128D(1) of Customs Act]. The CBE&C can instruct any
Commissioner within a period of six months (where it is possible to do so), but not
beyond a period of one year from the order of Commissioner to apply to CESTAT.
[Thus, six months limit is only indicative and not binding].

On receipt of such order, the Commissioner should file application to CESTAT within
three months from communication of order to him. This will be treated by CESTAT as
appeal by department against the decision of Commissioner. The appeal shall be in
respect of such points arising out of the order of Commissioner as may be specified
by CBE&C. [Note that in case of order of Commissioner (Appeals), an appeal has to
be filed by Commissioner under section 35B(2) of CEA [Parallel section 129A(2) of
Customs Act], within three months as specified in section 35B(3) of CEA [Parallel
section 129A(3) of Customs Act], while in case of order of Commissioner as
adjudicating authority, application for review (which is in nature of departmental
appeal) can be filed within 15 months - 12 months for CBE&C to issue order for
review and further three months to Commissioner to file an application].

Review must arise out of order as may be specified - It may be noted that order
of CBE&C (for review of order of Commissioner) and that of Commissioner (for
review of order of Assistant / Deputy Commissioner) must satisfy two requirements
(a) The matter must arise out of the decision or order. Thus, review cannot be made
if the matter does not arise out of the order. New points not connected with order
cannot be raised. (b) The points to be determined have to be specified by CBE&C or
Commissioner as the case may be. Thus, in such departmental appeal, only points
specified can be determined. New point cannot be taken up.

Departmental Review against demand of duty is allowable In Asian Paints v.

CCE 2002(142) ELT 522 (SC 3 member bench), it has been held that recovery of
duty can be made pursuant to an appeal filed u/s 35E of CEA [corresponding to
section 128D of Customs Act] or by raising demand u/s 11A of CEA (parallel section
28 of Customs Act) as both operate under different field. [CEGAT order in CCE v.
LML Ltd. 2002(143) ELT 431 (CEGAT 3 member bench) also accepts the principle
that when two remedies are available, revenue can select either, though the point at
issue was different in this case].

Authorisation should be proper - Authorisation should be proper. Commissioner

should state that in his opinion the order being appealed against is not proper and
legal. Authorisation should be properly signed. Otherwise, departmental appeal can
be dismissed.

Appeal to Commissioner (Appeals)

Appeal against order of Superintendent, Assistant Commissioner, Dy. Commissioner

and Additional Commissioner lies with Commissioner (Appeals), u/s 35(1) of CEA -
parallel section 128(1) of Customs Act. [Appeal against order of Commissioner lies
directly to Tribunal.]

APPEAL CAN BE FILED AGAINST ANY ORDER - In Rashtriya Chemicals &

Fertilizers v. CCE 1997(90) ELT 362 (CEGAT), it was held that communication from
Assistant Commissioner (fixing different Assessable Value) even if passed without
hearing or without disclosing full reasons, is a 'decision'. It is appealable order and
appeal should be filed against such decision. In Shree Synthetics Ltd. v. CCE
1987(29) ELT 443 (CEGAT), it was held that a communication from Assistant
Collector that he has considered the representation of appellant and rejected his
contention, is an appealable order and appeal should be filed within prescribed limit.

TIME LIMIT FOR FILING APPEAL - Appeal must be filed within 60 days from date of
communication of order. Commissioner (Appeals) has powers to extend this period
by further 30 days if sufficient cause is shown. [Till 11.5.2001, the time limit for filing
appeal was 3 months and Commissioner (Appeals) could condone delay for further
3 months].

Commissioner (Appeals) cannot condone delay beyond the statutory limits.

Tamilnadu Tobacco v. CCE 1999(109) ELT 442 = 28 RLT 723 (CEGAT) followed in
Maruthi Industrial Carbohydrates v. CC (2001) 136 ELT 1331 (CEGAT).

Form of Appeal to Commissioner (Appeals) - Appeal should be in prescribed

form No. EA-1 (CA-1 in case of Customs) in duplicate and should be accompanied
by a certified copy of the decision or order against which appeal is filed. Rule 3(3)
of Central Excise (Appeals) Rules * Parallel rule 3 of Customs (Appeal) Rules, 1982.
The form requires to give name and address of appellant, details of order appealed
against, description of goods, whether duty or penalty is deposited, whether
appellant wants to be heard in person and relief claimed. Appeal should also state
statement of facts and grounds of appeal. It should be properly verified. For form
of appeal EA-1 - see Annex 15.1.

STAY APPLICATION - If duty demanded and penalty/fine imposed is not paid,

separate application for waiver of pre-deposit of duty and stay of recovery should be
filed. Though there appears to be no legal requirement that the application for stay
has to be filed along with appeal, it is highly advisable to do so. If appeal is filed but
stay application is not filed, appeal may be dismissed without hearing, as was done
in Shoor Industries v. CCE 1999(105) ELT 249 (CEGAT).

DEPARTMENTAL APPEAL - Departmental appeal should be in form EA-2 in

duplicate (form CA-2 in case of Customs), with two copies of decision or order
passed by adjudicating authority and a copy of order passed by Commissioner of
CE directing the authority to apply to Commissioner (Appeals). Rule 4(2) of
Central Excise (Appeals) Rules * Rule 4 of Customs (Appeal) Rules, 1982.

Affixing Court fee stamps - As per schedule 1 Article 6 of Court Fees Act, 1970, copy
of an order not having force of decree should bear court fee stamp of 50 Ps. Hence,
copy of order enclosed with appeal to Commissioner (Appeals) or CESTAT is
required to bear court fee stamp of 50 Ps.

As per Schedule II Article 11 of Court Fees Act, 1970, memorandum of appeal to

executive officer requires court fee stamp of 50 Ps, while memorandum of appeal to
Chief Controlling Executive or Revenue Authority requires court fee stamp of Rs 2/-.
Thus, in case of appeal to Commissioner (Appeals), the memorandum of appeal
should bear court fee stamp of 50 Ps, while appeal to CESTAT should bear court fee
stamp of Rs 2/-.
Thus, affixing of court fee stamps to appeal and copy of order is required while filing
of appeal before Commissioner (Appeals) or CEGAT.

ORDER THAT CAN BE PASSED The Commissioner (Appeals) shall, after making
such further enquiry as may be necessary, pass such order, as he thinks just and
proper, confirming, modifying or annulling the decision or order appealed against.
[section 35A(3) of Central Excise Act parallel section 128(3) of Customs Act as
amended w.e.f. 11.5.2001].

COMMISSIONER CANNOT REMAND The commissioner has to pass final order

and matter cannot be remanded to lower adjudicating authority. In Vipor Chemicals
v. CC 2002(144) ELT 385 (CEGAT), it was held that after amendment to section 35A
of CEA (corresponding section 128A of Customs Act), Commissioner cannot remand
the case. However, in CCE v. Indian Aluminium Co. 2002(144) ELT 97 (CEGAT
SMB), it was held that despite amendment to section 35A, power to remand a case
is inherent. Commissioner can pass such order as he thinks proper by annulling the
decision. By remanding the matter, he is annulling the decision. - - [Probably the
decision needs review]. - - It seems that though he cannot remand, he can ask for a
report from lower authority. - - After the amendment to section 35A, Commissioners
are finding various ingenious ways to remand the matter (pass the buck), without
actually using the word remand. For example, Commissioner orders that assessee
should submit calculation details to Assistant Commissioner and take Cenvat credit
as per calculations approved by him. Many more such ingenious ways of remands
by back door will be devised in due course.

ORDER OF COMMISSIONER (APPEALS ) - The order should be in writing, shall

state all points for determination, give decision and reasons for the same [section
35A(4)]. Copy of the order should be communicated to (i) Appellant (ii) the
adjudicating authority against whose order the appeal was filed and (iii)
Commissioner.

Revision by Central Government

The Act provides for appeal to Tribunal in most of the cases. However, in few
matters, appeal does not lie with CESTAT. In such cases, a revision application has
to be made with Central Government. [An officer of the rank of Joint Secretary hears
the issue and passes orders on behalf of Central Government].

Appeal from order of Commissioner or Commissioner (Appeals) lies with Tribunal

against all orders, except (a) loss of goods occurring in transit from factory to
warehouse or to another factory (b) rebate of duty on goods exported outside India
or excisable goods used in manufacture of goods which are exported and (c) Goods
exported without payment of duty.

In the aforesaid matters, Tribunal has no jurisdiction, but revision application can be
filed with Central Government under section 35EE of CEA [parallel section 129DD of
Customs Act] within three months. Central Government can annul or modify the
order. In all other matters, appeal lies with Tribunal. Revision application can be filed
by assessee or the Commissioner of CE.

In case of Customs, CESTAT has no jurisdiction in the matters of (a) baggage (b)
payment of duty drawback and (c) goods short landed in India. In these matters,
revision application lies with Central Government [section 129DD of Customs Act].

PROCEDURE FOR FILING APPLICATION - The revision application should be in

prescribed form EA-8 in duplicate (CA-8 in case of Customs). It should be signed by
principal officer of company / partner / Karta of HUF / authorised person and should
be accompanied by two copies of order of Commissioner (Appeals) and two copies
of original order [against which Commissioner (Appeals) had passed the order].
[Rule 10(1) of Central Excise (Appeals) Rules * rule 8A of Customs (Appeal) Rules,
1982]. The revision application should be submitted personally to Under Secretary,
Revision Application Unit, Government of India, Ministry of Finance, Department of
Revenue, 4th floor, Jeevan Deep Building, Sansad Marg, New Delhi - 110001, or
sent by registered post to him. The revision application will be deemed to have been
submitted on the date on which it is received in the office of Under Secretary. [Rule
10(2) of Central Excise (Appeals) Rules * Rule 8B of Customs (Appeal) Rules,
1982]. Application should be accompanied by prescribed fees.

TIME LIMIT FOR FILING APPLICATION - Revision application must be filed in 3

months from communication of the order. This period can be further extended by
three months on sufficient cause being shown. - . - section 35EE(2) of CEA - section
129DD(2) of Customs Act. In Abdul Hameed v. GOI 2000(123) ELT 416 (Ker HC
FB), it was held that Government of India has no powers to condone delay beyond
limitation period statutorily fixed.

REVISION APPLICATION BY COMMISSIONER - Application for revision can also

be made by Commissioner of Central Excise, if he is of the opinion that order of
Commissioner (Appeals) is not proper. He can direct an officer to file revision
application. [section 35EE(1A) of CEA - parallel section 129DD(1A) of Customs Act].
This is like departmental appeal against order of Commissioner (Appeals).

No fees are payable along with such an application. No time limit has been
prescribed for filing the application.

FEES PAYABLE WITH APPLICATION - The application should be in prescribed form

with fees of Rs 1,000 if the duty and interest demanded exceeds Rs one lakh and
Rs 250 if duty and interest and penalty is less than Rs one lakh. [section 35EE(3) of
CEA - parallel section 129DD(3) of Customs Act]. Mode of payment of fees has not
been specified. Hence, payment under TR-6 challan should be acceptable. No fee is
payable if revision application is made by Commissioner of CE.

NO PROVISION OF APPEAL AGAINST REVISION ORDER - There is no provision

of appeal against decision of Central Government in such revision applications (The
only remedy is writ petition to High Court or SLP in Supreme Court).

So far, revision applications are very few, compared to appeal to Tribunal.

Appeal to Tribunal

The present Tribunal CESTAT (Customs, Excise and Service Tax Appellate Tribunal)
has been formed under section 129 of Customs Act. The Tribunal was named as
Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT). It has been re-
named as CESTAT w.e.f. 14-5-2003.
Such Tribunal is a quasi-judicial body. This Tribunal hears appeals against orders of
Commissioner as adjudicating authority and Commissioner (Appeals). Its powers
are limited compared to the powers of Tribunal formed under Article 323-B of
Constitution. However, its orders are binding on lower authorities. Tribunal is final
fact finding authority. Finding of facts arrived at by Tribunal cannot be upset by
higher authority unless found to be based on no evidence or irrelevant evidence or
incorrect principles. Tribunal is creature of Statute and cannot traverse beyond
provisions of Statute.

Appeal against Commissioner's / Commissioner (Appeals)s Order - Section

35B(1) of CEA [parallel section 129A(1) of Customs Act] provides that any person
aggrieved by (a) Decision or order of Commissioner of Central Excise as
adjudicating authority (b) Order of Commissioner (Appeals) under section 35A of
CEA [parallel section 128A of Customs Act] (which are passed on appeal from order
of lower authorities); can file appeal. There are two parties to an appeal : one the
assessee and other the excise department. If one party files an appeal, another can
file cross-objections, in nature of cross appeal. Appeal to CESTAT should be in form
EA-3. For form of appeal. [In case of Customs, form No. is CA-3].

NO APPEAL IN RESPECT OF DUTY DRAWBACK, BAGGAGE, REBATE ON

EXPORTS ETC. As discussed in earlier chapter, in respect of certain matters
relating to duty drawback, baggage, rebates on export etc., appeal does not lie with
CESTAT, but revision application is required to be made to Government.

Departmental Appeal/ Review application - Excise Department can also file (a)
appeal against orders of Commissioner (Appeal) and (b) Review application against
order of Commissioner passed as adjudicating authority. This is called Departmental
Appeal, though technically, in case of review application, it is not an appeal.

It should be noted that departmental appeal cannot be filed on entirely new ground.
Plea must arise out of the order. New case cannot be made at appellate stage. [for
case law, see previous chapter].

Departmental Appeal against order of Commissioner (Appeals) - Vide section 35B(2)

of CEA [parallel section 129A(2) of Customs Act], Commissioner of Central Excise
may authorise any officer to file appeal against order of Commissioner (Appeals) if
he is of the opinion that the order is not legal or proper. [Note that Commissioner
(Appeals) has to forward a copy of his order to assessee as well as jurisdictional
Commissioner. Commissioner can file an appeal if the Commissioner (Appeals) has
given a decision favouring the assessee].

Review Application by CBE &C against order of Commissioner Review application

against order of Commissioner of Central Excise as adjudicating authority can be
filed by Board (Central Board of Excise and Customs) under section 35E(4) of CEA
[parallel section 129D(4) in Customs Act]. [This is often termed as departmental
appeal, though technically, it is not an appeal].

The Board can instruct any Commissioner within one year from decision of the order
to apply to Appellate Tribunal. The relevant date is one year from date of decision of
Commissioner and not one year from receipt of the copy of order by the Board. If
such instructions are issued beyond a period of one year, they would be time barred.
On receipt of such order, the Commissioner should file application to Tribunal within
three months in form EA-5. Rule 7(1) of Central Excise (Appeals) Rules [earlier
Rule 217]. [In case of Customs, form No. is CA-5]. This will be treated by Tribunal as
appeal by department against the decision of Commissioner.

Hon. Supreme Court in M M Rubber Co. v. CCE - AIR 1991 SC 2141, have held that
there is no provision for condonation of delay if such order is not issued within one
year from date of order and not from the date of communication of order, in view of
clear words used in the section. - also in CCE v. Azo Dye Chem 2000(120) ELT 201
(CEGAT) - followed in CC v. Sadiq Futehally 2000(121) ELT 815 (CEGAT) * CCE v.
Sampura Ceramics (2001) 135 ELT 513 (CEGAT).

EITHER APPEAL U/S 35E OR DEMAND U/S 11A In Asian Paints v. CCE
2002(142) ELT 522 (SC 3 member bench), it has been held that recovery of duty
can be made pursuant to an appeal filed u/s 35E or by raising demand u/s 11A as
both operate under different field.

Separate appeals if Commissioner (Appeals) files consolidated order - Some times,

Commissioner (Appeals) combines similar matters and passes consolidated order
covering appeals of various parties. In such cases, original orders are different and
manufacturers are different. In such cases, department has to file separate appeals
against each assessee even if order of Commissioner (A) is consolidated - CCE v.
Uni Deritend 1999(112) ELT 860 (CEGAT).

Cross Objections to appeal - There are two parties to an appeal - one the
assessee and other the excise department. If one party files an appeal, another will
get notice of such appeal with a copy of appeal. The other party (assessee or
department as the case may be) can file cross-objections. Provision of such cross
objection has been made u/s 35B(4) of CEA and section 129A(4) of Customs Act.

The cross objection should be filed within 45 days of receiving of such notice.
However, Tribunal can condone delay if sufficient cause is shown. The
memorandum of cross-objections should be in form EA-4 and should be duly
verified. [In case of Customs, form number is CA-4]. The cross-objections should be
serially numbered and under distinct heads without any argument or narrative. Cross
objections are in the nature of Cross Appeal and not in nature of opposing the points
raised in the appeal.

Constitution of CESTAT

Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has been formed
under section 129 of Customs Act. The Tribunal is empowered to hear appeals in
cases of Customs, Excise and Service Tax. [CESTAT was known as CEGAT upto
14-5-2003]. The Tribunal consists of Judicial Members and Technical members,
which gives the Tribunal a balanced overall view of legal background and practical
implementation of law.

Benches of Tribunal - Tribunal sits in benches. Presently, benches are at New

Delhi, Mumbai, Kolkata, Chennai and Bangalore. [Bangalore bench established
w.e.f. 30.11.2000]. Mumbai benches have been shifted to Jai Centre, 34, P D Mello
Road, Mumbai 400009 w.e.f. 16-4-2003.

TYPES OF BENCHES - The benches are (a) Principal Bench (b) Zonal Bench. The
Principal benches are situated at Delhi. Presently there are seven Principal
Benches. These benches can be assigned cases arising anywhere in India. (b)
Zonal benches : These are * Northern Bench at Delhi * Southern Bench at Chennai
and Bangalore * Eastern Bench at Kolkata and * Western Bench at Mumbai. The
benches at Chennai, Kolkata and Mumbai can hear all matters relating to Central
Excise and Customs and all matters relating to Import and Export Trade control and
FEMA as are related to Customs. Zonal Bench at Delhi can hear matter only relating
to matters other than classification and valuation. Principal Benches at Delhi will
decide on (a) All matters relating to classification and valuation in respect of
Northern Zone (b) All matters relating to classification or valuation filed anywhere in
India on or before 31st August, 1995.

Constitution of Bench - The bench should be of minimum two members - one

technical and other judicial. If the bench is of more than two members, there must be
at least one judicial member and one technical member in the bench. Formation and
benches and allocation of work to the benches is done by President of CESTAT.

In case of disagreement among two members, the matter will be referred to third
member by President, and decision will be on the basis of majority.

Appeals in case of anti dumping duty are required to be heard only by a 3 member
bench consisting of President, a technical member and a judicial member.

Single Member Bench - Vide section 35D(3) of CEA [parallel section 129C(4) of
Customs Act], President of CESTAT can authorise any member to hear case singly
when the duty involved or difference of duty involved or the fine or penalty involved
does not exceed Rs. 10,00,000 (ten lakhs). This is called a 'Single member Bench'
of Tribunal and legally, there is no difference between order passed by a single
member bench and a multi-member bench, as both are equally binding.

However, if the dispute is in relation to classification or rate of duty or valuation, the

matter cannot be decided by single member bench.

Large Bench - If a bench is unable to agree to a previous decision of another bench

consisting same number of members, it is usual practice that the bench refers the
matter to President for forming a larger bench e.g. if a two member bench is not able
to agree to decision of another two member bench on the same issue, the matter
may be referred to President and President may form a larger bench. By convention
and as judicial discipline, decisions of large bench are followed by smaller bench.

Procedure for Appeal to CESTAT

Some procedures are prescribed in Central Excise Rules. Besides, Tribunal is

empowered to regulate its own procedure vide section 129C(6) of Customs Act,
which has been made applicable to Excise Act. These procedures must be within the
provisions of Act and Rules of Central Excise. Under these powers, Tribunal has
framed CESTAT (Procedure) Rules, 1982 on 25-10-1982 and amended from time to
time.

REGISTRAR AND REGISTRY - Registrar means person appointed as Registrar and

Registry means office of Tribunal. They look after administrative work of Tribunal.

LANGUAGE OF TRIBUNAL IS ENGLISH - Language of Tribunal shall be English,

but documents may be filed in Hindi. Tribunal may permit use of Hindi in
proceedings, but final orders should be in English. If final order is passed in Hindi, it
should be accompanied by copy of order in English, duly attested.

ALLOCATION OF WORK - Work among various benches will be allotted by

President or in his absence Senior most Vice President by special or general order.

APPELLANT AND RESPONDENT - In appeal filed by person other than

Commissioner, Commissioner shall be respondent, while in case of appeal by
Commissioner, other party shall be respondent.

Filing of appeal Appeal / application / cross objection should be filed within

prescribed period. [In case of appeals, the period is three months from date of
receipt of order to be appealed against]. Appeal / application / cross objection can be
personally presented to Registrar of Tribunal or sent by registered post. However,
vide rule 11(2) of Central Excise (Appeals) Rules earlier rule 220 of Central Excise,
if appeal / application / cross objection is sent by post, date of its actual receipt at
the registrar's office will be deemed to be the date of filing an appeal. [Thus, postal
delay will not be a valid reason for late filing of an appeal. However, delay may be
condoned in such cases - see case law in previous chapter].

Fees payable for appeal - The appeal must be accompanied by a fee. The fee is Rs.
200/-, if the duty demanded and penalty levied is less than Rs. 1 lakh. Otherwise,
the fee is Rs. 1,000/-. Fees should be paid by way of demand draft in favour of
Assistant Registrar of the Bench of Tribunal on a nationalised bank payable at the
branch where place of bench is situated. No fee is payable if appeal is filed by
department.

Affixing Court fee stamps Court fee stamp of Rs 2/- is required to be affixed on
memorandum of appeal and 50 Ps on copy of order appealed against. However,
non-affixing court fee stamp is a curable defect.

Stay applications and its immediate hearing - Application for stay of requirement of
making deposit of any duty or penalty shall be presented in triplicate. One copy of
the application should be served on authorised Departmental Representative. Stay
application has to be filed separately, even if appeal has been filed. Stay application
should be neatly typed in double space in English. Application for stay should give
details of demand of duty/penalty, amount of duty and penalty disputed, date of filing
appeal, whether application for stay has been made before any other authority or
Civil Court, brief reasons for seeking stay, security the appellant is willing to offer
and prayers (with exact amount sought to be stayed). The documents should be
supported by an affidavit. Three copies of relevant order and appellate orders should
also be submitted, unless these are already submitted with main appeal. Contents of
application for stay must be supported by a verification regarding their correctness.
The Bench may, in a particular case, direct the filing of affidavit by the
applicant/respondent. [rule 28A (4) of CESTAT Rules].

Refusal of petty Appeals - Tribunal can refuse to admit an appeal if the duty involved
or difference of duty involved or penalty involved is less than Rs. 50,000. However,
such appeal cannot be refused if the issue pertains to valuation or rate of duty -
proviso to section 35B(1) of CEA [parallel section 129A(1) of Customs Act].

Appeal in prescribed form - Appeal should be in prescribed form No. EA 3 (CA-3 in

case of Customs) in quadruplicate with copy of order appealed against also in
quadruplicate. Rule 6(1) of Central Excise (Appeals) Rules. [earlier Rule 216]

Departmental appeal should be in form EA-5 (CA-5 in case of Customs) in

quadruplicate with equal number of copies of order appealed against and copy of
order of CBE&C (Board) directing Commissioner to file appeal to CESTAT. Rule
7(1) of Central Excise (Appeals) Rules [earlier Rule 217].

One of the copy of order should be a certified copy. The appeal can be in triplicate if
it is to be heard by a single member bench. Further, if appeal is to be heard by larger
bench, additional copies have to be supplied [CESTAT Procedures rule No 9]

The prescribed form asks for details like name, address, details of order appealed
against, whether duty demanded has been deposited etc. Grounds of appeal,
statement of facts and reliefs claimed are also to be given. Grounds of appeal
should be concise and without argument or narrative and should be numbered
consecutively.

Typing, indexing of appeal - The appeal should be neatly typed in double space on
foolscap paper. It should be paged, indexed and tagged firmly with each paper book,
put in a separate folder. [Appeal can be typed on both sides of the paper].
Memorandum of appeal should be filed in quintuplicate and accompanied by five
copies of order appealed against, out of which one should be a certified copy.
Certified copy means original order or a copy certified by excise departmental
authority. In case of appeal by department, copy of memorandum of appeal will be
served on other party. If the appeal is by other party, copy of appeal should be
submitted to Departmental Representative as well as concerned Commissioner of
Central Excise. (Permanent Departmental Representatives [called D R] are posted
by CBE&C in each Tribunal to represent department before the Tribunal).

Documents to be attached with Appeal - The appeal must be accompanied by (a)

Copies of order appealed against - one of the copies must be a certified copy (b)
Copies of original order appealed against, if appeal to CESTAT is a second appeal -
one copy must be a certified copy. - [CESTAT Procedure Rule 9(1).]

Grounds of Appeal - Applicant is expected to mention all grounds of appeal in the

appeal memorandum. A ground not mentioned in grounds of appeal can be
accepted only with permission of Tribunal.

Proviso to rule 10 of CESTAT Procedure Rules states that Tribunal is not bound by
the grounds of appeal mentioned in appeal. It can take other grounds. Party affected
will be given opportunity of being heard on those grounds. - - However, as seen in
previous chapter, appellate authority cannot go beyond show cause notice. An
entirely new case cannot be made out at the appellate stage. In view of these
judgments, scope and validity of the rule 10 appears to be restricted.

Paper Book - A Paper Book containing copies of documents, statement of witnesses

and other papers on which appellant wants to rely at the hearing of appeal should be
filed. The Paper Book should be filed in quadruplicate and should be filed along with
appeal or within one month from filing an appeal. This should be filed in
quintuplicate. Similarly, respondent can file paper book within two weeks after he
gets copy of the paper book submitted by appellant, or within one month of service
of notice on him regarding filing of appeal.

Paper book should be as far as possible in bound form and with index. These should
be duly page numbered. - CEGAT PN 8/99 dated 2-7-1999.

Multiple Appeals and Joint Appeals - Provisions can be summarised as follows -

ONE APPEAL AGAINST ONE ORDER IN ORIGINAL - Often, adjudicating authority

passes only one order against number of show cause notices, bills of entry, shipping
bills, refund claims, demands, letters or declarations. In such cases, only one
memorandum of appeal should be filed, along with four copies of original order and
four copies of order of Commissioner (Appeals). - Rule 6A of CESTAT Procedure
Rules.

MULTIPLE APPEALS IN CASE OF COMMON ORDER OF COMMISSIONER

(APPEALS) - In some cases, there are more than one orders in original (OIO) and
multiple appeals may have been filed. If the issue is common, Commissioner
(Appeals) may issue one single order against multiple appeals. In such cases,
number of appeals should be equal to number of orders in original (OIO) e.g. if there
were five original orders and Commissioner (Appeals) passes one single order
covering all the five original orders, five appeals will be required to be filed with
CESTAT. - Explanation 1 to Rule 6A of CESTAT Procedure Rules.

JOINT APPEAL IS NOT PERMITTED - One single order may be passed against
many persons e.g. firm and its partners or Company and some of its directors and
also against transporter / employees etc. In such cases, separate appeals are
required to be filed. Common appeals or joint appeals will not be entertained -
Explanation 2 to Rule 6A of CESTAT Procedure Rules.

Procedure after filing of appeal - Date of filing of appeal is important for purpose
of deciding time limit of filing an appeal. Common defects noticed in appeals filed
are - * Original Order or Order-in-appeal is not filed, or if copy is filed, it is not
attested * Copy of order filed is illegible * Some documents are in language other
than prescribed court language and its translation is not filed * Main documents like
statements, panchnamas or test reports on which the case mainly lies are not
submitted * Affidavit with proper verification is not filed * Proper authorisation or
Vakalatnama is not filed. The appeals filed are scrutinised by a Gazetted Officer.
After scrutiny, defects are informed to concerned party for removal of defects in
specified time. Date when finally defects pointed out are removed is considered for
the purpose of position in queue for hearing in turn. In other words, the appeal will
be taken in queue for hearing only after all defects are removed. If defects are not
removed in specified time, Bench of CESTAT may dismiss the matter for default and
the matter will be restored only if sufficient cause for delay is shown to the
satisfaction of CESTAT bench. [CEGAT Public Notice No. 4 of 1995 dated 29-5-
1995]

Procedure for hearing - Notice for hearing giving date and place of hearing will be
issued to both appellant and respondent. The appellant shall be heard and then
respondent shall reply. If the respondent is heard, the appellant will be again allowed
to reply to points raised by respondent.

HEARINGS OPEN TO PUBLIC - All proceedings of Tribunal are open to public,

unless Tribunal specifically orders in a particular case barring public or particular
person.

Time limit for passing of order by Tribunal - Section 35C(2A) of Central Excise Act
and section 129B(2A) of Customs Act, (as amended on 11-5-2002) provides that the
Appellate Tribunal shall hear and decide every appeal within a period of three years,
wherever it is possible to do so. Thus, the time limit is only indicative and not
mandatory. - - However, if stay is granted by Tribunal for recovery, appeal shall be
decided within 180 days. If appeal is not disposed of by Tribunal within 180 days,
the stay shall stand automatically vacated.

Powers and Limitations of Tribunal

Section 129C(7) of Customs Act, which has been made applicable to Excise Act,
prescribe powers of CESTAT. The Tribunal has powers of Court as prescribed in
Code of Civil Procedure for following matters (a) Discovery and inspection (b)
Enforcing attendance of any person and examining him on oath (c) Compelling
production of books of account and other documents (d) Issuing commissions.

Tribunal has trappings of court though it is not a 'civil court' - ratio of P Sarathy v.
State Bank of India 2000(5) SCALE 116 = AIR 2000 SC 2023 = 2000 AIR SCW
1978.

DECISIONS OF TRIBUNAL BINDING ON LOWER AUTHORITIES - Once a quasi

judicial body like Appellate Tribunal (in this case under Cinematograph Act)
consisting of a retired judge of High Court and other experts in the field give its
decision, the decision is binding so far as Executive and Government is concerned.
To allow executive to review and / or revise the decision would amount to
interference with exercise of judicial functions by a quasi-judicial body, which is
against the basic structure of Constitution. At the most, Government can apply to
Tribunal itself for a review. - UOI v. K M Shankarappa 2001(127) ELT 8 (SC).

Proceedings are judicial proceedings - Proceedings before Tribunal are deemed

to be judicial proceedings within meaning of sections 193 and 228 for purposes of
section 196 of Indian Penal Code. Section 193 of IPC provide punishment upto
seven years and fine for intentionally giving false evidence or fabricating false
evidence. Section 228 of IPC provide imprisonment upto six months and/or fine upto
Rs. 1,000/- for intentionally offering insult or causing interruption to a public servant
in the judicial proceeding.

Appellate Tribunal shall be deemed to be Civil Court for purposes of section 195 and
Chapter XXVII of Code of Criminal Procedure.

Power to issue orders to give effect to its orders As per rule 41 of CESTAT
(Procedure) Rules, Tribunal can make such orders or give such directions as may
be necessary or expedient to give effect or in relation to its orders or to prevent
abuse of its process or to secure the ends of justice. Since these powers are given
only under a Statute, these powers cannot be exercised to grant any relief beyond
the provisions of any Statute, particularly when Tribunal is a creation of Statute.

Inherent Powers of Tribunal - A Tribunal should be construed to be endowed with

such ancillary or incidental powers as are necessary to discharge its function
effectively to do justice between the parties, unless there is any indication in the
statute to the contrary - Grindlay's Bank Ltd. v. Central Govt Industrial Tribunal - AIR
1981 SC 606 = 1980 Supp SCC 420 = (1981) 2 SCR 341. [In this case, it was held
that if a party is prevented from appearing at the hearing due to sufficient cause, the
Tribunal not only has power but also duty to set aside the ex parte order and hear
the matter afresh].

GRANTING STAY FOR RECOVERY OF DUTY - Tribunal can grant stay for
recovery of duty and penalty pending appeal - ITO, Cannanore v. M K Mohd Kunhi -
AIR 1969 SC 430 = (1969) 1 SCC 591 = (1969) 71 ITR 815 (SC).

FORMING A LARGE BENCH - * Forming a large bench in case of difference of

opinion among different benches on a particular question - Paras Laminate's case
(supra). * Forming a large bench when an important question is involved.

RECALL OF ORDER PASSED EX PARTE - Tribunal can recall an order passed ex

parte, if sufficient cause is shown for absence of the party - J K Synthetics Ltd. v.
CCE - 1996 (6) SCALE 299 (SC) = 1996 (86) ELT 472 (SC) = AIR 1996 SC 3527 =
1996 AIR SCW 3682 = JT 1996(7) SC 674 = 66 ECR 417 = (1996) 6 SCC 92.

RECALL IF DEPOSIT OF DUTY AS ORDERED PAID LATE - Tribunal can dismiss

appeal if duty is not deposited. If assessee deposits duty though late, Tribunal can
recall and restore order of dismissal of appeal. [Case law discussed in previous
chapter].

RECALL IF GLARING MISTAKE - In Ragicut Tools v. CCE 2001(132) ELT 508

(CEGAT), order was recalled when it was found that a different issue was decided
and issue in appeal was not decided in final order at all. In Mangat Ram Kuthiala v.
CIT (1960) 38 ITR 1 (Punj HC), it was held that Tribunal can recall and quash its
own order in exceptional cases where it is shown that it was obtained by fraud or
palpable mistake or was made in utter disregard of statutory provision.

CORRECT AN ERROR SO THAT JUSTICE IS DONE - In Grindlay's Bank Ltd. v.

Central Govt Industrial Tribunal - AIR 1981 SC 606 = 1980 Supp SCC 420 = (1981)
2 SCR 341, it was held that review is used in two distinct senses namely (1) A
procedural review which is inherent or implied in a court or tribunal to set aside a
palpably erroneous order passed under a misapprehension by it (2) Review on
merits where the error is apparent on the face of record. It was held that inadvertent
error committed by Tribunal can be corrected. Quoting this, in Ram Kirpal v. UOI
1998(103) ELT 8 (Guj HC DB), it was held that Tribunal can recall an order to correct
any error committed by itself so that justice is done to assessee and the revenue. In
Sri Budhia Swain v. Gopinath Deb 1999(3) SCALE 528 = 1999 AIR SCW 1814, it
was held that tribunal can recall its order if there has been a mistake of the court
prejudicing the party.

LIMITATIONS ON INHERENT POWERS - In Shree Cement Ltd. v. Power Grid

Corporation (1998) 93 Comp Cas 854 (CLB DB), after reviewing case law, it was
summarised that Tribunal cannot use its inherent powers when (a) Alternate remedy
is available (b) If the order can be appealed against (c) If the power would conflict
with any specific provision of law which prohibits such a remedy. However, it can
exercise power if (a) Non-exercise of power may result in abuse of the process of
court (b) Non-exercise of power may result in failure of justice.

Tribunal is Final fact finding authority - Tribunal is the final fact finding authority.
High Court cannot go behind the facts found by Tribunal - Thiru Arooran Sugars Ltd.
v. CIT 1997 AIR SCW 3682 = AIR 1997 SC 3575 = 227 ITR 432 = 93 Taxman 579 =
(1997) 4 Comp LJ 1 (SC) * K S Subbiah Pillai v. CIT (1999) 103 Taxman 400 = AIR
1999 SC 1220 = 1999(2) SCALE 14 (SC 3 member bench) * State of Andhra
Pradesh v. Vatsavyi Kumara Venkata Krishna Verma 1999 AIR SCW 354 * J J
Enterprises v. CIT (2002) 122 Taxman 124 (SC).

Rectification of mistakes - Tribunal has no powers to review its orders. - Patel

Narshi Thakershi v. Pradyumansinghji Arjunsinghji - AIR 1970 SC 1273. However,
Tribunal can pass order for rectifying a mistake apparent from the records, within six
months of passing of order. - section 35C(2) of CEA - similar section 129B(2) of
Customs Act. [The period was four years upto 11-5-2002].

The mistake can be corrected only if it is apparent from records. The error could be
of fact or an error in law - K B Foams (P.) Ltd. v. Dy Commissioner of CT - (1986) 62
STC 233 (Kar HC).

The mistakes may be (a) typographical errors (b) calculation mistakes (c) order
based on inapplicable statutory provisions (d) point raised in appeal but not
considered (e) wrong application of judgment of High Court. (f) Subsequent binding
decision of Superior Court.

Limitations of Tribunal - Tribunal formed under a Statute is a creature of Statute. It

is not formed directly under Constitution. Hence, it has following limitations -

(a) Tribunal has no inherent powers to review its order - Patel Narshi Thakershi v.
Pradyumansinghji Arjunsinghji - AIR 1970 SC 1273 - also Tribunal cannot review its
order - Sahjanad Tobacco Co. v. CCE 1995 (76) ELT 600 (CEGAT) (review means
reconsideration or re-examination by same authority. Once an order is passed, it
cannot be reviewed, i.e. changed by same authority)

(c) Tribunal has to presume and accept legal validity of provisions of Central Excise
Act and Rules. The Tribunal is created by Statute and cannot challenge validity of
any provision of the statute itself. Tribunal cannot declare a provision of Statute as
ultra vires - Dhulbhai v. State of MP - (1968) 3 SCR 662 = 22 STC 416 = AIR 1969
SC 78 * K S Venkataraman v. State of Madras (1966) 60 ITR 112 = AIR 1966 SC
1089 = 17 STC 418 (SC) = (1966) 2 SCR 229 * West Bengal Electricity Regulatory
Commission v. CESC Ltd. 2002 AIR SCW 4212 (SC 3 member bench).

(d) Tribunal is not empowered to issue writs.

(e) Tribunal is not a Court, though it has been granted various powers. A Tribunal is
a Tribunal and cannot be equated to a court - State of Orissa v. Bhagan Sarangi -
(1995) 1 SCC 399. In ITO, Cannanore v. M K Mohammed Kunhi - AIR 1969 SC 430
= (1969) 1 SCC 591 = 71 ITR 815 (SC) also, it was observed that Tribunal is not
Court, but it exercises judicial powers.

(f) Tribunal is bound by judgments of High Court (and of course Supreme Court). In
case of conflicting decisions of High Courts, decision of High Court in which the
appellant is situated should be followed.
Appeal to High Court on substantial question of law

Appeal can be made to High Court against order of Tribunal if the case involves
substantial question of law, except in cases relating to rate of duty and valuation.
The revised provisions apply w.e.f. 1st July, 2003.

Appeal to High Court on substantial question of law - Tribunal is final fact finding
authority. However, if there is a substantial question of law arising out of order of
Tribunal (in cases other than relating to rate of duty and valuation); an appeal can be
made to High Court within 180 days. [section 35G(1) of CEA] - parallel section
130(1) of Customs Act] [Till 30-6-2003, reference application was required to be
made. That procedure was very lengthy and time consuming]. - - In case of question
relating to rate of duty and valuation, appeal lies with Supreme Court.

The appeal can be made either by the Commissioner of CE/Customs or the other
party. If the appeal is made by other party, the application should be accompanied
by fee of Rs 200/-. The memorandum of appeal shall clearly state the substantial
question of law involved. [section 35G(2)(c) of CEA - parallel section 130(2)(c) of
Customs Act].

APPEAL CAN BE MADE AGAINST INTERIM ORDERS OF TRIBUNAL ? Appeal

to High Court can be made against any order of Tribunal. Hence, in the opinion of
author, appeal can be filed even against interim order of Tribunal, if it involves
substantial question of law.

HIGH COURT HAVING JURISDICTION OVER ORIGINAL ADJUDICATING

AUTHORITY RELEVANT High Court having territorial jurisdiction over the original
adjudicating authority will have jurisdiction to deal with reference matter (and not
where appellate authority is situated) Seth Banarsi Dass Gupta v. CIT 1978(113)
ITR 817 (Del HC) followed in CCE v. Enkay HWS India 2002(139) ELT 21 (Del HC
DB).

HEARING OF APPEAL - The appeal will be heard by High Court bench of at least
two judges. [section 35G(7) of CEA parallel section 130(7) of Customs Act].
Decision will be by majority. If the judges are equally divided on the issue, matter will
be referred to third judge. He will hear only on the point on which the judges were
differing. The point will then be decided by majority, including those who had first
heard the appeal. [section 35G(8) of CEA - parallel section 130(8) of Customs Act].
Provisions of Code of Civil Procedure relating to High Court will apply in case of
such appeals.

COURT TO DECIDE WHETHER SUBSTANTIAL QUESTION INVOLVED If High

Court is satisfied that substantial question of law is involved, it will formulate the
question. Other party can argue that substantial question of law is not involved. High
Court can even answer question of law not formulated by it, if it is satisfied that the
case involves such substantial question of law. [section 35G(4) of CEA parallel
section 130(4) of Customs Act].

JUDGMENT OF HIGH COURT AND ACTION BY CONCERED EXCISE OFFICER -

The High Court will deliver the judgment on the substantial question of law either
formulated by it or even if not formulated by it. High Court may award cost as it
deems fit. [section 35(5) of CEA - section 130(5) of Customs Act]. The concerned
Central Excise Officer will give effect to the order passed by High Court in appeal, on
the basis of certified copy of the judgment of High Court. [section 35K(1A) of CEA
parallel section 130D(1A) of Customs Act].

PRESENT PROVISION SIMILAR TO INCOME TAX PROVISIONS The provisions

are similar to those under Income Tax Act. As per section 260A and 260B of Income
Tax Act, appeal to High Court can be made directly on question of law, if High Court
is satisfied that the case involves a substantial question of law.

Substantial question of law Appeal can be made only if there is 'substantial

question of law'. In Sir Chunilal V. Mehta v. Century Spinning AIR 1962 SC 1314,
following tests have been laid down to determine whether a substantial question of
law is involved - (i) whether directly or indirectly it affects substantial rights of parties
or (ii) the question is of general public importance or (iii) whether it is an open issue
in the sense that issue is not settled by Supreme Court or (iv) the issue is not free
from difficulty and (v) if calls for a discussion for alternate view. In Santakumar v.
Lakshmi Amma AIR 2000 SC 3009, it was held that construction of document is
substantial question of law.

Appeals and constitutional remedies

Appeal to Supreme Court can be made in following cases : * Judgment of High

Court in appeal, if High Court certifies it to be a fit case for appeal to Supreme Court
[section 35L(a)(i) of CEA - parallel section of 130E(a)(i) Customs Act] * Judgment of
High Court in reference (pertaining to matters prior to 1-7-2003), if High Court
certifies it to be a fit case for appeal to Supreme Court * Order of Appellate Tribunal
where it relates to question relating to rate of duty excise or value for purpose of
duty. [section 35L(b) of CEA - parallel section 130E(b) of Customs Act] * By Special
Leave Petition (SLP) under Article 136 of Constitution i.e. permission of Supreme
Court, even in cases where High Court does not certify it to be a fit case for appeal
to Supreme Court.

Appeal against order regarding valuation / classification - Appeal from order of

Tribunal relating to determination of rate i.e. classification interpretation of exemption
notification or valuation, can be made to Supreme Court as a matter of right. Such
appeal should be presented within 60 days from the date the order is
communicated. Appeal should be with seven extra sets and should recite all relevant
facts and set forth objections to the order and ground of appeal. An authenticated
copy of order appealed against should be attached. These are 'civil appeals'.

After filing of appeal, Supreme Court will first hear it ex parte and may either dismiss
it summarily or issue notices to parties or admit the appeal. Dismissing appeal ex
parte without hearing is called dismissal in limine'. Such dismissal does not mean
that the order has been approved by Supreme Court and is not to be taken as a
decision of Supreme Court on the issue. However, if decision is given on merits after
hearing parties, it will be binding on all even if no reasons were given.

Appeal provided u/s 130E of Customs Act (parallel section 35L of CEA) is essentially
to enable Supreme Court to oversee that the subordinate tribunals act within the law.
If the Tribunal and the authorities subordinate to it have considered all relevant
factors and then come to a bona fide conclusion and pass a speaking order, then it
would not be within the jurisdiction of Supreme Court to upset the finding of fact.
Aditya Mills v. UOI 1988(37) ELT 471 (SC) = 1988(4) SCC 315 * CC v. Swastic
Woollens 1988(Supp) SCC 796 = 1988(37) ELT 474 (SC) * APS Star Industries v.
CC 2001(132) ELT 513 (SC).

Norms for entertaining appeal - Normally, Supreme Court will entertain appeal
only if (a) substantial question of law is involved (b) question of general importance
is involved (c) when manifest injustice is done (d) conflicting observations of
Supreme Court on same issue (e) no authoritative ruling of Supreme Court on the
issue. Appeal will not be entertained if Tribunal has acted bona fide with speaking
orders and has considered all relevant factors even if other view may be possible.

Appeal to Supreme Court in other matters can be made only by its special leave
under Article 136 of Constitution. The aforesaid principles are also applied while
granting Special Leave by Supreme Court.

Constitutional remedies - Our Constitution has maintained a balance between

powers of Legislature, Judiciary and Executive. All actions of Government are
subject to judicial scrutiny of Supreme Court and High Courts, irrespective of
provisions of any particular statute. These judicial powers are conferred by
Constitution itself and hence cannot be curtailed by any legislation. Declaration in
any Statute that the order shall be final does not affect writ jurisdiction.

POWERS OF SUPREME COURT - Article 136 authorises Supreme Court to grant

special leave to appeal from any judgment, decree or order in any cause or matter
passed or made by any court or Tribunal in India. This is at the discretion of the
Supreme Court and applications under this Article are termed as Special Leave
Petitions (SLP) as these can be admitted only with special leave (permission) of
Supreme Court.

POWERS OF HIGH COURT - High Court, within the territory of its jurisdiction, has
powers, vide Article 226 of Constitution, to issue orders or writs for enforcement of
any fundamental right and for any other purpose. Article 227 confer powers on High
Court of superintendence over all courts and Tribunals in the territory in which the
High Court has jurisdiction. Thus, Tribunals in a State are subordinate to the High
Court of that State and decisions of the High Court are binding on the Tribunal
bench sitting in that State. - - In Suprabhat Steels v. CEGAT 2002(144) ELT 500
(CEGAT), it was held that even if Tribunal Bench is located at Kolkata, the Kolkata
High Court will not have territorial jurisdiction, when entire cause of action arose
outside jurisdiction of Kolkata. [In this case, property was attached in Bihar].

NORMS FOR INVOKING SPECIAL POWERS - Powers to issue high prerogative

writs are extraordinary discretionary powers and hence are to be exercised sparingly
and in fit case, on sound principles of law. Courts will invoke writ jurisdiction only in
exceptional cases. Thus, when alternate remedy like departmental appeal or
ordinary civil suit is available, writ jurisdiction will not be normally invoked.