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Basics of Excise duty. Conditions for imposition of excise duty Entry No.

No. 84 of List I of Seventh Schedule to Constitution empowers Central Government to impose levy of excise on goods manufactured or produced in India. In case of deemed manufacture, imposition of excise duty can be justified under entry 97 of List I. Excise is a duty on manufacture. Manufacture or production of excisable goods in India is the taxable event in Central Excise. [Section 3(1) of Central Excise Act] Ownership of inputs or final products is irrelevant for purpose of liability of excise duty. Excise Duty liability is generally on manufacturer, but in some cases, duty is collected from others also. Duty liability is no manufacturer, though he can collect it from buyer. He will be liable even if he does not collect [rule 4(1) of Central Excise Rules] In case of goods stored in warehouse under rule 20, the duty liability is on person who stores the goods in warehouse [rule 4(1) of Central Excise Rules] In case of molasses produced in khandsari sugar factory, duty liability is of procurer i.e. purchaser if he is procuring it for manufacture of any commodity [rule 4(2) of Central Excise Rules]. In case of job work, duty liability is of job worker, even if he is not owner of manufactured goods. However, if inputs are sent under Cenvat provisions or under notification No. 214/86-CE, duty liability is of raw material supplier. 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% w.e.f. 27-2-2010 i.e. total 10.3% including education and SAH cess [earlier, it was 8.24% and 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. NCCD and Cess is payable on some products. As per judicial interpretation, for purpose of levy of Excise duty, an article must satisfy two requirements to be goods i.e. (a) it must be movable and (b) it must be marketable. However, actual sale is not necessary. 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 Central Excise Act]. Marketability is to be decided on the basis of condition in which goods are manufactured or produced. 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 erected and installed machinery has to be dismantled before removal, it will

Person liable to pay excise duty

Rate of excise duty

Goods and excisable goods

not be goods - Triveni Engineering v. CCE AIR 2000 SC 2896 120 ELT 273 (SC). Software is excisable goods. However, presently, excise duty/service tax as well as Vat is payable on branded (packaged) software and service tax and Vat is payable on customised software. 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. Thus, unless an article is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable. 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. Thus, some articles like cement structures and trusses, scrap etc. will be goods even if otherwise they are not marketable.

Dutiability of waste and scrap

Waste and scrap is final product for excise purposes. Waste and Scrap can be goods but dutiable only if manufactured, are capable of being sold and are mentioned in Central Excise Tariff.

Manufacture Taxable event for central excise duty is manufacture or production in India. The word produced is broader than manufacture and covers articles produced naturally, live products, waste, scrap etc. Manufacture can be (a) as defined by Court or (b) Deemed manufacture. Manufacture as defined by Courts, takes place only when the process results in a commercially different article or commodity. There can be manufacture if both inputs and final product fall in same tariff heading. In Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 = 1977 (1) ELT (J199) (SC) (SC five member constitution bench) it has been held that the manufacture means bringing into existence a new substance. 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. However, this test does not apply in case of deemed manufacture. Assembly can be manufacture. Putting two items together for making a set is not generally manufacture.

Deemed manufacture Deemed manufacture is (a) process as specified in CETA. Over 35 processes have been specified or (b) Repacking, relabelling, putting or altering MRP in case of articles covered under MRP valuation provisions [clauses (ii) and (iii) of section 2(f) of Central Excise Act]

In case of deemed manufacture as specified in CETA, simple repacking is not deemed manufacture. It has to be from bulk pack to retail pack. However, in case of products covered under MRP valuation, it can be manufacture. Simply putting manufacturers mark is not labelling. Mere putting name of goods, consignor and consignee is not labelling. Mere putting bar code is not manufacture.

Who is manufactu rer

Manufacturer is who manufactures [Section 2(f) of Central Excise Act] He is the person who actually brings new and identifiable product into existence or undertakes process defined as deemed manufacture. Duty liability is on manufacturer, except in few cases of reverse charge. Mere supplier of raw material or brand name owner is not manufacturer. Loan licensee is not manufacturer. Ownership is not relevant to determine who is manufacturer. If relationship between brand name owner/raw material supplier and the actual person bringing the new and identifiable product into existence are on Principal to Principal basis, the brand name owner/raw material supplier will not be manufacturer.

Classification of goods for Central Excise and Customs Background of Central Excise Tariff Rate of duty is determined based on Classification of goods read with relevant exemption notification. Classification is done on basis of Central Excise Tariff and Customs Tariff. Both the tariffs are based on HSN (Harmonised System of Nomenclature) developed by WCO. Goods are classified in 20 sections (21 in case of customs). Each section consists of various chapters. Tariff is based on 8 digit classification of goods. First two digits indicate chapter, next two digits indicate heading and next two are sub-classification. Single, double and triple dashes are used to groups and subgroups. Eight digit classification is termed as tariff item. Rate of duty is indicated only against tariff item. Classification is done on basis of GIR (General Interpretative Rules) which are part of Tariff. Titles of sections and chapters are only for reference. Section notes and chapter notes have overriding effect.

Steps in classification of an article

(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 (Rule 1 of GIR). You do not have to look to classification rules or trade practice or dictionary

meaning. If classification is not possible, then only go to GIR. The rules are to be applied sequentially. (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. (8) 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. (9) Packing material is classified along with the goods except when the packing is for repetitive use Rule 5

General Principles of classification of an Article

Words used in Tariff are to be understood in the sense these are understood in the trade. This is trade parlance theory. The trade parlance is more important than dictionary or technical meaning, unless the word is specifically defined in the Tariff itself. HSN is very important guide in classifying a product and it should be normally followed. End use is generally not relevant for classification, except when the tariff description so requires and

classification is relating to function of the product. Basis of calculation of duty payable i.e. Valuation Modes of calculation of excise duty Duty can be payable on basis of specific duty (based on weight, length, volume etc.), MRP based duty [section 4A], compounded levy, tariff value [section 3(2)], production capacity [section 3A] or on ad valorem basis [section 4]. MRP based valuation [section 4A] Products covered under In case of about 110 products, duty is payable u/s 4A of Central MRP provisions on basis of MRP printed on the package, after allowing abatement at specified rates. MRP should be inclusive of all taxes and duties. The provision applies only when product is package intended for retail sale and is specified in a notification issued u/s 4A. MRP provisions u/s 4A are overriding provisions. Even in case of products covered u/s 4A, where MRP provisions are not applicable, valuation will be on basis of value u/s 4 i.e. Assessable Value.

MRP provisions are overriding Assessable value when MRP not applicable

MRP provisions do not apply to free samples, package less than 10gm/10 ml, wholesale package or package above 25 Kg (50 Kg in some cases) Deemed manufacture of In case of goods covered under section 4A, packing or repacking products u/s 4A and re-labelling is deemed manufacture. Incorrect MRP Department can ascertain MRP if MRP not declared or incorrectly declared or obliterated. Penalty can be imposed [section 4A(4)(a) of Central Excise Act]. Basic requirement of Assessable Value [section 4] Transaction value as When duty is payable on ad valorem basis, it is payable on assessable value assessable value as defined in section 4 of Central Excise Act. Transaction Value is taken as Assessable Value only if goods are sold at the time and place of removal, buyer is unrelated and price is sole consideration [Section 4(1)(a) of Central Excise Act]. Transaction value is the price paid or payable for the goods at the time and place of removal, by reason of, or in connection with sale, inclusive of all expenses but excluding taxes [section 4(3)(d) of Central Excise Act].

What is transaction value

Transaction value does not include duty of excise, sales tax and any other taxes on goods. Only taxes actually paid or payable are allowed as deduction. Price to be taken as If goods are cleared without payment of duty, the price is taken inclusive of excise duty as cum duty price and excise duty payable should be calculated by back calculations CCE v. Maruti Udyog 122 Taxman 105 = (2002) 3 SCC 547 = 141 ELT 3 (SC 3 member bench). If there is additional consideration, it will be added to invoice price and then duty payable is calculated by making back calculations [Explanation to section 4(1) of Central Excise Act] Inclusions and exclusions in transaction value By reason of or in Any amount charged is includible in assessable value if it is by

connection with sale of such goods. Packing and design charges Price escalation

reason of or in connection with sale of such goods.

Duty is payable on packing charges and design charges related to manufacture. Duty is payable in case of price escalation after clearance, but not when price was final at the time of clearance. If there is price rise after clearance of goods from factory, differential excise duty and interest @ 13% is payable. Trade discounts Trade discount is allowable as deduction from assessable value. Cash discount is allowable. Discount need not be uniform. Notional interest on Notional interest on advances is includible only if there is advances evidence that it has depressed the selling price. Warranty charges Compulsory charges for after sale service during warranty period are includible. After sale service charges which are optional are not includible. PDI and after sales Pre-delivery charges (PDI) and after sale service charges are not service includible if these are incurred by dealer out of his commission. Outward freight after place of removal not includible in assessable value Place of removal Transport charges upto place of removal are includible in assessable value. Ownership transferring at If delivery is ex-works and property is transferred to buyer at factory gate factory gate, outward freight is not includible in assessable value as factory gate is the place of removal. This will be so even if transport is arranged by manufacturer and charged to buyer. Contract FOR Even if contract is F.O.R. destination basis, there can be sale at factory gate, since as per section 39 of Sale of Goods Act, delivery of goods to carrier is prima facie delivery to buyer. If contract is F.O.R. basis and sale takes place only when goods are delivered to buyer (i.e. property in goods passes to buyer at destination only), transport charges are includible in assessable value. Profit on transport If assessee himself provides transport services, reasonable profit activity permissible on the transport activity should be permissible i.e. it is not includible in assessable value. Equalised freight Equalised freight is also allowable as deduction, if there is sale at factory gate. Bought out goods and accessories when includible in assessable value Price of essential bought Price of Bought out goods supplied along with manufactured goods out goods is includible, if these are essential parts of manufactured goods. Price of parts not fitted Since goods are to be assessed in the condition in which cleared at time of removal from factory, value of components not fitted is not required to be added in assessable value, even if they are essential Price of accessories not Price of accessories and optional bought out items is not includible includible in Assessable Value Accessory means an object not essential in itself but adding to beauty, convenience or effectiveness of something else. Valuation rules Transaction value not acceptable Value of similar goods If transaction value is not acceptable, valuation is required to be done as per Valuation Rules [Section 4(1)(b) of Central Excise Act and Valuation Rule 3] Valuation can be done on value of such goods (i.e. goods of same class of same manufacturer) [Rule 4]

Transport upto place of removal Money value of other consideration includible

Cost of transport upto place of removal is includible in assessable value but not beyond that [Rule 5] If price is not sole consideration, money value of other consideration should be added e.g. cost of material, patterns, dies, designs etc. supplied by buyer is required to be added to Assessable Value [rule 6]. Value of patterns, dies etc. should be added on pro-rata basis. Captive consumption In case of captive consumption, duty is payable on basis of cost of production plus 10%. Cost of Production should be calculated on basis of CAS-4 [Rule 8] Job work In case of job work, duty is payable by job worker. Valuation is done on the basis of price at which raw material supplier (Principal Manufacturer) sales the manufactured final product in market [Rule 10A]. If goods are covered under MRP valuation provisions, duty is payable on MRP basis. Valuation in case of sale from depot/branch Depot price at the time In case of depot sale, duty is payable on basis of depot price of removal prevailing at the time of removal of final product from the factory [Rule 7]. Subsequent sale price not Price at which the goods are actually sold subsequently is not relevant relevant. Differential duty is not payable even if goods are sold later at higher price from depot. Similarly, refund is not available if prices are goods are subsequently actually sold at lower price. Transport charges after Transport charges upto depot and depot expenses are not depot allowable as deduction (These are already included in depot price). Transport charges from depot onwards are not includible in assessable value. Value addition done at Any value addition done at depot is not includible in assessable depot value, if activity is not manufacture (the reason is that goods are to be assessed in the condition in which they are removed from factory). Deemed manufacture in In case of products covered under MRP provisions, if packing in case of MRP retail pack and labelling of MRP is done at depot/place of consignment agent, it will be deemed manufacture and excise duty will be payable. Valuation when sale through related person Price to unrelated buyer If goods are sold through related person, value for purpose of relevant excise will be the price at which the related buyer sales goods to unrelated buyer. Inter connected An inter-connected undertaking will be treated as related undertaking person for excise valuation only if there is holding subsidiary relationship [Inter-connected undertaking means 25% common control] Holding and subsidiary A holding and subsidiary are related persons, Rate legal entities A mere distributor is not a related person. A company or firm is a separate legal entity and cannot be a related person of other company or firm. Even if the buyer does not fall within the definition of related person, sale price to him can be rejected by piercing the corporate veil. His selling price can be considered if it is found, by piercing corporate veil, that the transaction is not at arms length i.e. price is not the sole consideration.

Piercing corporate veil

Valuation in case of entire sale through related person Supply of goods to related person for captive consumption Partial sale through related person

If goods are sold solely through related person (except in case of inter connected undertaking, unless there is holding subsidiary relationship), valuation will be normal transaction value at which the related buyer sales to unrelated buyer [rules 9 and 10 of Valuation Rules] If goods are supplied to related person for captive consumption, valuation will be on basis of cost of production plus 10%. If sale is partly to related person and partly to unrelated person, valuation shall be done on reasonable basis by residual method under rule 11.

If related person is only one of the buyers and substantial sales are made to unrelated persons at same price, that price can be considered for valuation in respect of sale to related person also. Other provisions relating to valuation Residuary rule of If valuation is not possible under any of aforesaid rules, valuation valuation will be on basis of best judgment assessment, i.e. value shall be determined using reasonable means consistent with the principles and general provisions of Valuation rules and section 4(1) of section 4 of the Act [Rule 11] Duty based on production Section 3A of CEA provides for payment of duty on basis of capacity production capacity, without any reference to actual production. Production capacity will be determined as per Rules. Pan masala and gutkha are covered under these provisions. Compounded levy scheme Compounded levy scheme under rule 15 of Central Excise rules, provides for payment of duty on basis of production capacity. It is an optional scheme. The scheme is presently applicable to stainless steel pattas/patties and Aluminium circles. These articles are not eligible for SSI exemption. Tariff value [section 3(2) In some cases, tariff value is fixed by Government from time to of Central Excise Act] 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.

Administration of Central Excise

Registration

Daily Stock Account Clearance of goods under Invoice

Administration of Central Excise is under CBE&C (Central Board of Excise and Customs). The hierarchy is Chief Commissioner, Commissioner, Additional Commissioner, Joint Commissioner, Deputy Commissioner, Assistant Commissioner, Superintendent and Inspector. 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 A1. Manufacturer is required to maintain Daily Stock Account (DSA) of goods manufactured, cleared and in stock. [Rule 10 of Central Excise Rules] Goods must be cleared under Invoice of assessee. In case of cigarettes, invoice should be countersigned by Excise officer. [Rule 11 of Central Excise Rules]

Payment of excise duty

Returns of production, clearances and payment of excise duty

Annual Financial Information

Information about Principal Inputs

Monthly return of receipt and consumption of each of Principal Inputs

Annual Installed Capacity statement Submission of List of records

Changes in details of assessee Non-core procedures (to be followed when required)

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 quarterly basis by 5th/6th of month following the quarter. Assessee paying duty through PLA more than Rs 10 lakhs per annum is required to make epayment only [Rule 8]. 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 Ereturn is mandatory where duty paid in previous year (by cash and/or through Cenvat credit) exceeded Rs 10 lakhs in previous year. 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]. 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. [rule 9A(1) to Cenvat Credit Rules]. 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]. 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. 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]. Only those assessees who are required to submit ER-5 return are required to submit ER-6 return. See chart below for various returns to be filed. Submit Annual Installed Capacity Statement in form ER-7 every year before 30th April. 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)]. 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] Export without payment of duty or under claim of rebate [Rules 18 and 19 of Central Excise Rules] Receipt of goods for repairs / reconditioning [Rule 16

of Central Excise Rules] Receipt of Goods at concessional rate of duty for manufacture of Excisable Goods. Provisional Assessment [Rule 7 of Central Excise Rules] Warehousing of goods. Adjudication, Appeals and settlement. See chart after following chart for summary of non-core procedures

Returns to be filed under Central Excise Form of Return ER-1 [Rule 12(1) of Central Excise Rules] ER-2 [Rule 12(1) of Central Excise Rules] ER-3 [Proviso to Rule 12(1) of Central Excise Rules] ER-4 [rule 12(2) of Central Excise Rules] Description Who is required to file Manufacturers not eligible for SSI concession EOU units Time limit for filing return 10th of following month 10th of following month 10th of next month of the quarter

Monthly Return by large units

Return by EOU

Quarterly Return by SSI

Assessees eligible for SSI concession (even if he does not avail the concession) Assessees paying duty of Rs one crore or more per annum either through PLA or Cenvat or both together (Till 299-2008, the provision was applicable only when payment through PLA alone was more than Rs one crore). Assessees paying duty of Rs one crore or more per annum (either through PLA or Cenvat or both

Annual Financial Information Statement

Annually by 30th November of succeeding year

ER-5 [Rules 9A(1) and 9A(2) of Cenvat Credit

Information relating to Principal Inputs

Annually, by 30th April for the current year (e.g. return for 2005-06

Rules]

ER-6 [Rule 9A(3) of Cenvat Credit Rules] ER-7 [Rule 12(2A) of Central Excise Rules]

Monthly return of receipt and consumption of each of Principal Inputs Annual Installed Capacity Statement

together) and manufacturing goods under specified tariff headings (Till 299-2008, the provision was applicable only when payment through PLA alone was more than Rs one crore). Assessees required to submit ER-5 return All assessees, except manufacturers of biris and matches without aid of power and , reinforced cement concrete pipes Registered dealers

is to be filed by 30-42005].

10th of following month

Annually, by 30th April for the previous year (e.g. return for 2010-11 should be submitted by 30-4-2011 By 15th of following month

Form as per Notificatio n No. 73/2003CE(NT) [Rule 9(8) of Cenvat Credit Rules] ST-3 [Rule 9(9) of Cenvat Credit Rules and rule 7(2) of Service Tax Rules] ST-3 [Rule 9(10) of Cenvat Credit Rules]

Quarterly return of Cenvatable Invoices issued

Half yearly return of taxable services provided

Person liable to pay service tax

Within 25 days from close of half year

Hal yearly return of Cenvat credit distributed

Input Service Distributor

Within one month from close of half year

6 Other Procedures in Central Excise Export Procedures Exports are free from taxes and duties. Goods can be exported without payment of excise duty under bond under rule 19 or under claim of rebate of duty under rule 18. Container containing export goods should be sealed by excise officer. Self-sealing is permissible. Excisable Goods should be exported under cover of Invoice and ARE-1 form. Export should be within 6 months from date of clearance from factory. Merchant exporter has to execute a bond and issue CT-1 so that goods can be cleared without payment of duty. Manufacturer has to issue Letter of Undertaking. Export to Nepal/Bhutan are required to be made on payment of excise duty, except when supply is against international bidding. Rebate under rule 18 can be either of duty paid on final products or duty aid on inputs but not both. EOU has to issue CT-3 certificate for obtaining inputs without payment of excise duty. Final products cleared on payment of duty can be brought back for repairs etc., by following prescribed procedures. Duty paid goods can be brought in factory for being re-made, refined, reconditioned or for any other reason under rule 16. The goods need not have been manufactured by assessee himself. Cenvat credit of duty paid on such goods can be taken, on basis of duty paying documents of such goods. After processing/repairs, if the process amounts to manufacture, excise duty based on assessable value is payable. If process does not amount to manufacture, an amount equal to Cenvat credit availed should be paid [rule 16(2)]. If some self manufactured components are used, duty will have to be paid on such components. Buyer/recipient of such goods can avail Cenvat credit of such amount/duty. If the above procedure cannot be followed, permission of Commissioner is required [rule 16(3)]. Assessee is required to execute bond for various purposes like obtaining goods without payment of duty, clearance of seized goods etc. B-1 bond is for exporting without payment of duty, B-17 bond is for EOU. Goods can be obtained at concessional rate of duty concessional rate of duty under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, if prescribed conditions are satisfied and procedure is followed.

Bringing good for repairs

Bonds

Bringing goods on concessional rate of duty

Cenvat Credit in easy steps What is Cenvat? Avoid cascading effect Destination Principle

Credit of inputs, input services and capital goods Utilisation of Cenvat Credit Credit only if manufacture or provision of service One to one relation not required

Basic purpose of Vat is to eliminate cascading effect of taxes by tax credit system. This is done through mechanism of input tax credit. Cenvat is based on destination principle i.e. excise duty/service tax is paid only when goods are consumed. Till then, burden of duty gets passed on to the next buyer/customer [In case of sales tax, as per this principle, sales tax is payable in the State in which goods are consumed and not in the State in which goods are produced] Cenvat scheme allows credit of excise duty paid on inputs goods, capital goods and service tax paid on input services [Rule 3(1) of Cenvat Credit Rules] This credit can be utilised for payment of excise duty on dutiable final products and service tax on taxable output services [Rule 3(4) of Cenvat Credit Rules] Cenvat credit is available only if there is manufacture or provision of taxable output service.

Cenvat Credit Rules do not require one to one relationship [Rule 3(1) read with 3(4) of Cenvat Credit Rules] Entire Cenvat credit is common pool which can be utilised for payment of any eligible duty, service tax or amount. Input (goods) eligible for Cenvat credit Inputs used in or in Inputs which are used in or in relation to manufacture of taxable relation to final product and inputs directly used for provision of taxable manufacture output service are eligible for Cenvat credit [Rule 2(k) of Cenvat Credit Rules] Input may be used directly or indirectly in manufacture. Any input integrally connected with manufacturing process is eligible. Process loss is eligible. Consumables are eligible for Cenvat credit. Accessories, packing material and paints are eligible as inputs. LDO, HSD and petrol are not eligible for Cenvat credit [Explanation 1 to Rule 2(k) of Cenvat Credit Rules] Input does not include cement, angles, channels, CTD or TMT used for construction of factory shed, building or foundation or structures to support capital goods [Explanation 2 to Rule 2(k) of Cenvat Credit Rules] Definition of input is restricted for service providers. Only inputs used directly in providing taxable service are eligible. If service provider charges separately for material supplied while providing service, its cost is not includible. Correspondingly, duty paid on such material is not Cenvatable. Cenvat credit on input (goods) is instant, i.e. as soon as inputs are received in the factory. Cenvat credit is available of service tax paid on input services.

Consumables eligible Accessories, packing material, paint LDO, HSD and petrol not eligible Cement, angles, channels etc. not eligible Inputs directly used for providing service

Instant credit Input Service Input service eligible for Cenvat credit

Definition of input service is very wide [Rule 2(l) of Cenvat Credit Rules]. Inclusive part of the definition expands the scope much beyond manufacture or provision of taxable service. Any service in relation Decisions in Coca Cola (Bombay High Court) and ABB (LB of CESTAT) to business is input have cleared most of doubts about interpretation of input service service and it is clear that any relation with manufacture or provision of taxable service is not required. any service in relation to business of manufacturer or service provider is input service Credit only after Credit of service tax on input services is available only after payment of bill payment is made of bill including service tax to service provider for service [Rule 4(7) of Cenvat Credit Rules] Input Service Distributor and Input Credit Distributor Utilisation of credit of Service tax paid at Head Office, Regional/Branch office can be service tax paid at HO, utilised through mechanism of Input Service Distributor. They depots should be registered and pass credit through invoice [Rules 2(m) and 7 of Cenvat Credit Rules] Distribution of Credit The Input Service Distributor can distribute Cenvat credit of through Invoice service tax availed by it by issuing an Invoice to its manufacturing units or units providing output service. The invoice should have details as required in Rule 4A(2) of Service Tax Rules. Distribution can be in The distribution of credit can be in any ratio. However, total credit any ratio distributed should not be more than service tax paid on input services. If some input service is exclusively used for exempted final product/output service, its credit is not available for distribution by Input Service Distributor [Rule 7]. Credit of excise duty Input Credit Distributor can distribute credit on duty paid on inputs on input goods (goods) if invoice received at HO and distributed to other places [Rule 7A of Cenvat Credit Rules] Since Cenvat credit can be passed through mechanism of endorsement of invoice, this facility is not much used. Capital goods eligible for Cenvat credit Capital goods eligible Only capital goods as defined in Rule 2(a) of Cenvat Credit Rules for Cenvat credit are eligible for Cenvat Credit. Following capital goods are covered in clause (A)(i) of above definition - Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like, and parts thereof falling under sub-heading No 6804 * Abrasive powder or grain on a base of textile material, of paper, of paper board or other materials, falling under chapter heading 6805 Dumpers or tippers falling under chapter 87 are eligible as capital goods for Cenvat credit to providers of service of Site formation and clearance, excavation and earthmoving and demolition [section 65(105)(zzza)] and Mining of mineral, oil or gas services [section 65(105)(zzzy)], if these are registered in name of service provider and zre used for providing taxable service (amendment w.e.f. 22-62010). Other service providers and manufacturers are not eligible. This definition is quite different from capital goods as understood in conventional accounting or under income tax. Capital goods should be used in the factory of manufacturer or for

Capital goods to be

used in factory Equipment or appliances used in office not eligible to manufacturer Eligibility of Motor vehicles Sending out capital goods

provision of output service. Capital goods does not include equipment or appliance used in an office of manufacturer (this restriction does not apply to service provider) Motor vehicle is capital goods only in respect of specified service providers [Rule 2(a)(B) of Cenvat Credit Rules] Capital goods should be used in factory. These can be sent outside for job work but should be brought back within 180 days [Rule 4(5)(a) of Cenvat Credit Rules] Moulds, dies, jigs and fixtures can be sent outside without restriction of return within 180 days [Rule 4(5)(b) of Cenvat Credit Rules Capital goods used exclusively for manufacture of exempted goods are not eligible for Cenvat credit. Thus, partial use for exempted goods is allowable i.e. full Cenvat credit is available. Capital goods obtained on hire purchase/lease / loan are eligible [Rule 4(3) of Cenvat Credit Rules] 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) e.g. if cost of 'capital goods' is Rs 1.16 lakhs, out of which Rs 0.15 lakh is duty paid, assessee can claim depreciation under Income Tax only on Rs one lakh, if he has availed Cenvat credit of Rs 0.16 lakh. The requirement gets satisfied only if the assessee follows accounting procedure specified in guidelines issued by Institute of Chartered Accountants of India Cenvat credit on capital goods is required to be availed in more than one year, i.e. upto 50% credit can be availed when these are received and balance in any subsequent financial year. The condition for taking balance credit is that the capital goods should be in possession of manufacturer of final products in subsequent years. SSI units can avail entire 100% Cenvat credit in first year itself Rule 4(2)(a) of Cenvat Credit Rules. Capital goods on which Cenvat credit was taken can be removed as such on payment of amount equal to Cenvat credit availed [Rule 3(5) of Cenvat Credit Rules] If capital goods on which Cenvat was availed are removed as scrap, an amount equal to duty on scrap value is payable [Rule 3(5A) of Cenvat Credit Rules]. If capital goods are cleared after use as second hand capital goods, amount is payable at reduced rate by reducing credit taken @ 2.5% per quarter.

Partial use of capital goods for exempted goods allowable Capital goods on hire purchase/lease/loan Duty paying documents Depreciation should not be availed on Cenvat portion

Credit to be availed in two instalments

Removal of capital goods as such, after use or as scrap

Availment of Cenvat credit What is Cenvat Cenvat Credit is a pool of duties and taxes paid on inputs, capital Credit goods and input services as specified in Rule 3(1) of Cenvat Credit Rules. Procurement of goods In respect of inputs / capital goods procured from EOU unit, Cenvat from EOU credit is available equal to CVD and special CVD paid and education

cess and SAH education cess w.e.f. 7-9-2009 (earlier, it was allowable as per a complicated formula) Rule 3(7)(a) of Cenvat Credit Rules. Utilisation of Cenvat credit Utilisation for any Cenvat credit is a pool. The credit in this pool can be utilised for eligible purpose payment of any excide duty on excisable final product and service tax on taxable output service. The credit can also be used for payment of certain amounts [Rule 3(4) of Cenvat Credit Rules] Credit only of inputs Credit can be utilised only of inputs and input services received and services received upto end of the month [First proviso to Rule 3(4) of Cenvat Credit upto end of month Rules] (even if excise duty/service tax is payable at a later date) Inter-changeability of Credit of Basic excise duty, CVD, Special CVD and service tax can credit of various duties be utilised for payment of any duty on final product or service tax on output services, except duty payable u/s 85 of Finance Act on pan masala and certain tobacco products [provisos to Rule 3(4) of Cenvat Credit Rules] Restrictions on Cenvat Credit of education cess, NCCD and additional excise duty interchangeability paid on inputs under section 85 of Finance Act (and corresponding CVD on imported inputs) can be utilised only for payment of corresponding duty on final product i.e. the credit is not interchangeable. Credit of special CVD Credit of special CVD (present rate is @ 4%) u/s 3(5) of Customs Tariff Act can be utilised by manufacturer but not by service providers [third proviso to Rule 3(4) of Cenvat Credit Rules] Credit of education Credit of education cess paid on input goods and paid on input cess and SAHE cess services is inter-changeable. Similarly, credit of SAH Education cess paid on input goods and paid on input services is inter-changeable. Duty paying document for availing Cenvat credit Eligible duty/tax paying document Cenvat credit can be availed on basis of eligible duty documents as specified in Rule 9(1). Invoice of Manufacturer, Bill of Entry, Supplementary Invoice, Dealers Invoice and GAR-7 challan when service receiver is liable to pay service tax are major eligible documents. Transit Invoice Credit can be availed on basis of transit invoice i.e. on basis of invoice of manufacturer when goods purchased through dealer and name of ultimate buyer is shown as consignee. There is no time limit for availing Cenvat credit can be taken even after 3/4 years There is ample case law that Cenvat credit cannot be denied for minor defects in duty paying document. Duty/tax paying document need not be in name of the manufacturer using the input/input services for manufacture/provision of taxable output service. It is sufficient if these are endorsed in his name with certificate that endorser has not availed Cenvat credit. Person taking credit must take reasonable steps while availing Credit. Burden of proof of admissibility of Cenvat credit is on him [Rule 9(5) of Cenvat Credit Rules]

No time limit for availing Cenvat credit Credit cannot be denied on account of minor defects Endorsement of duty paying document

Burden of proof

Dealers Invoice for Cenvat

First stage and second stage dealer can issue Cenvatable Invoice

Cenvat credit can be availed on basis of Invoice issued by dealer registered with Central Excise [Rule 9(1) of Cenvat Credit Rules]

First stage and second stage dealer registered with Central Excise can issue Cenvatable Invoice. First stage dealer means dealer purchasing goods from manufacturer or his depot or consignment agent. They have to submit quarterly return to department within 15 days from close of quarter [Rule 9(8) of Cenvat Credit Rules] Optional refund of 4% If the first stage dealer claims refund of special CVD of 4%, the special CVD buyer cannot avail Cenvat credit. (This is not compulsory on dealer. It is optional). Transit Invoice Transit Invoice is also permissible. In such case, dealer need not be registered, if name of ultimate buyer is shown as consignee in the invoice issued by manufacturer. Cenvat credit of CVD Cenvat credit can be availed in respect of imported goods and special CVD on purchased through dealer, by either issuing dealers invoice or by imported goods endorsement of Bill of Entry. Manufacture of Exempted as well as taxable goods and provider of both exempted and taxable services No credit if final Cenvat credit is available only if final product is dutiable or service product/output tax is payable on output service [Rule 6(1) of Cenvat Credit Rules] service exempted Options available to If assessee is manufacturing exempted as well as dutiable goods manufacturer of and/or providing taxable as well as exempt services, and availing exempted as well as Cenvat credit, he has three options (a) maintain separate records taxable goods and of inputs and input services used for exempt final products/services provider of exempted (b) If common inputs/input services are utilised for exempted as and taxable services well as taxable final product, assessee is required to pay 5% amount on exempted final product or 6% amount on exempt output services (b) Pay amount proportionate to credit on exempted final product/output service [Rule 6(2) and 6(3) of Cenvat Credit Rules] Option cannot be Option once availed cannot be changed in the financial year. The changed during the option is to all exempted goods/services [Explanation I to Rule 6(3) year of Cenvat Credit Rules] Entire credit without In case of 16 services covered under Rule 6(5) of Cenvat Credit proportionate reversal Rules, entire Cenvat credit is available without proportionate reversal. Supplies to SEZ, EOU, In case of supplies covered under Rule 6(6) of Cenvat Credit Rules exports, [exports, supplies to SEZ/EOU, specified projects], entire credit is available without proportionate reversal. Removal of inputs for sale or job work Removal of inputs as Inputs on which Cenvat credit was taken can be removed as such such on payment of amount equal to Cenvat credit availed [Rule 3(5) of Cenvat Credit Rules] Sending inputs for job Inputs on which Cenvat credit was availed can be sent outside for work job work. These should come back within 180 days [Rule 4(5)(a) of Cenvat Credit Rules] Direct despatch from Direct despatch of final product from place of job worker can be place of job worker done with permission of AC/DC for one financial year [Rule 4(6) of Cenvat Credit Rules] Removal of waste Waste is final product Waste is final product for excise purposes and duty is payable as if

final product is being cleared. This applies only if waste is produced or manufactured and is excisable goods. Waste not mentioned If a particular waste is not mentioned in Central Excise tariff, in Tariff neither any amount nor duty is payable at the time of clearance. Records and returns under Cenvat Records of Cenvat Manufacturer/service provider is required to maintain records of credit inputs and capital goods, records of credit received and utilised. [Rule 9(5) of Cenvat Credit Rules] Return of Cenvat Returns of details of Cenvat credit availed, Principal Inputs and credit availed and utilization of Principal Inputs in forms ER-1 to ER-7 is to be utilised submitted [Rule 9A of Cenvat Credit Rules] Revised return Revised return of Cenvat credit can be submitted within 60 days [Rule 9(11) of Cenvat Credit Rules] Returns by dealers, Dealer/service provider/input service distributor is also required to input service submit returns [Rule 9(6) and 9(10) of Cenvat Credit Rules] distributor Other provisions relating to Cenvat SSI to reverse Cenvat SSI unit can opt out of Cenvat at end of the year. He has to reverse at end of year Cenvat credit on inputs in stock as on 31st March [Rule 11(2) of Cenvat Credit Rules] SSI can take Cenvat of When he starts payment of duty during financial year after duty on inputs in stock exemption is over, he can avail Cenvat credit of duty paid on inputs in stock Simultaneous Simultaneous exemption and availment of Cenvat is permissible by exemption SSI only in specified cases. Cenvat credit to Exporter of final product or taxable services can avail Cenvat credit exporter on inputs and input services. He can claim refund of Cenvat credit if he cannot utilise the Cenvat credit for payment of duty on sale made within India on payment of duty [Rule 5 of Cenvat Credit Rules] Refund of credit of Merchant exporter can claim refund of specified input services used input services while exporting final product. Transfer, If undertaking is transferred, merged or shifted, Cenvat credit can amalgamation of be transferred [Rule 10 of Cenvat Credit Rules] . undertaking Penalty for improper Penalty can be imposed for wrongfully taking or utilising Cenvat Cenvat credit credit [Rules 15 and 15A of Cenvat Credit Rules] Accounting for Cenvat Accounting for Cenvat should be as per guidance note issued by and stock valuation ICAI. Inventory valuation should be as per AS-2 which requires exclusion of Cenvat credit. However, for income tax purposes, Cenvat credit has to be added in valuation in view of section 145A of Income Tax Act. Basics of Customs Duty Customs duty on imports and exports Customs duty is on imports into India and export out of India. Section 12 of Customs Act, often called charging section, provides that duties of customs shall be levied at such rates as may be specified under The Customs Tariff Act, 1975', or any other law for the time being in force, on goods imported into, or exported from, India. There are many common provisions and/or similarities in provisions

Similarity between excise and

customs

Taxable event in imports

Taxable event in exports Territorial waters and exclusive economic zone

Central Excise and customs Law. Administration, Settlement Commission and Tribunal are common. Provisions of Tariff, principles of valuation, refund, demands, exemptions, appeals, search, confiscation and appeals are similar. In case of imports, taxable event occurs when goods mix with landmass of India - Kiran Spinning Mills v. CC 1999(113) ELT 753 = AIR 2000 SC 3448 (SC 3 member bench).In case of warehoused goods, the goods continue to be in customs bond. Hence, 'import' takes place only when goods are cleared from the warehouse - confirmed in UOI v. Apar P Ltd. 112 ELT 3 = 1999(6) SCC 118 = AIR 1999 SC 2515 (SC 3 member bench).- followed in Kiran Spinning Mills v. CC 1999(113) ELT 753 = AIR 2000 SC 3448 (SC 3 member bench). In case of exports, taxable event occurs when goods cross territorial waters of India - UOI v. Rajindra Dyeing and Printing Mills (2005) 10 SCC 187 = 180 ELT 433 (SC). Territorial waters of India extend upto 12 nautical miles inside sea from baseline on coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters. Exclusive economic zone' extends to 200 nautical miles from the base-line. Area beyond that is high seas. Indian Customs waters extend upto 12 nautical miles beyond territorial waters. Powers of customs officers extend upto 12 nautical miles beyond territorial waters.

Indian Customs Waters

Type of Customs Duties Basic customs duty Basic customs duty levied u/s 12 of Customs Act is generally 10% of non-agricultural goods, w.e.f. 1-3-2007. CVD equal to excise duty is payable on imported goods u/s 3(1) of Customs Tariff Act to counterbalance impact of excise duty on indigenous manufactures, to ensure level playing field. CVD is payable equal to excise duty payable on like articles if produced in India. It is payable at effective rate of excise duty. General excise duty rate is 10.30% w.e.f. 27-2-2010 (10% basic plus 2% education cess and SAH Education cess of 1%). CVD is payable on assessable value plus basic customs duty. In case of products covered under MRP provisions, CV duty is payable on MRP basis as per section 4A of Central Excise. CVD can be levied only if there is manufacture. CVD is neither excise duty nor basic customs duty. However, all provisions of Customs Act apply to CVD.

Countervailing Duty (CVD)

Special CVD

Education Cess

Special CVD is payable @ 4% on imported goods u/s 3(5) of Customs Tariff Act. This is in lieu of Vat/sales tax to provide level playing field to Indian goods. Traders importing goods can get refund. CVD is not payable if goods are covered under MRP valuation provisions/ Education cess of customs @ 2% and SAH Education cess of 1% is payable.

Total duty Other duties

Safeguard duty Anti dumping duty

Total import duty considering all duties plus education cess on nonagricultural goods is generally 26.85% NCCD (national calamity contingent duty)has been imposed on a few articles. In addition, on certain goods, anti-dumping duty, safeguard duty, protective duty etc. can be imposed. Cess is payable on some goods imported/exported. Safeguard duty can be imposed if large imports are causing serious injury to domestic industry. In addition, product specific safeguard duty on imports from China can be imposed. Antidumping duty is leviable u/s 9A of Customs Tariff Act when foreign exporter exports his good at low prices compared to prices normally prevalent in the exporting country. Dumping is unfair trade practice and the anti-dumping duty is levied to protect Indian manufacturers from unfair competition. Margin of dumping is the difference between normal value (i.e. his sale price in his country) and export price( price at which he is exporting the goods). Price of similar products in India is not relevant to determine margin of dumping. Injury margin means difference between fair selling price of domestic industry and landed cost of imported products. Dumping duty will be lower of dumping margin or injury margin. Benefits accruing to local industry due to availability of cheap foreign inputs is not considered. This is a drawback. CVD is not payable on antidumping duty. Education cess and SAH education cess is not payable on anti-dumping duty. In case of imports from WTO countries, antidumping duty can be imposed only if it cause material injury to domestic industry in India. Dumping duty is decided by Designated Authority after enquiry and imposed by Central Government by notification. Provisional antidumping duty can be imposed. Appeal against antidumping duty can be made to CESTAT.

Calculations of customs duty General customs duty rate for non-agricultural goods s 10%. Total customs duty payable w.e.f. 27-2-2010 is 26.85% as excise duty rate is generally 10%. Assessable value = CIF Value of imported goods converted into Rupees at exchange rate specified in notification issued by CBE&C plus landing charges 1% (plus some additions often arbitrarily and whimsically made by customs). Calculation of customs duty payable is as follows Duty % (A (B (C (D (E (F) (G (H Assessable Value Rs Basic Customs Duty Sub-Total for calculating CVD '(A+B)' CVD 'C' x excise duty rate Education cess of excise - 2% of 'D' SAH Education cess of excise - 1% of 'D' Sub-total for edu cess on customs 'B+D+E+F' Edu Cess of Customs 2% of 'G' 10 10 2 1 2 Amount 10,000 1,000.00 11,000.00 1,100.00 22.00 11.00 2,133.00 42.66 Total Duty 1,000.00 1,100.00 22.00 11.00 42.66

(I) (J) (K (L) (M)

SAH Education Cess of Customs - 1% of 'G' Sub-total for Spl CVD 'C+D+E+F+H+I' Special CVD u/s 3(5) 4% of 'J' Total Duty Total duty rounded to

1 4 Rs

21.33 12,196.99 487.88

21.33 487.88 2,684.87 2,685

Notes Buyer who is manufacturer, is eligible to avail Cenvat Credit of D, E, F and K above. A buyer, who is service provider, is eligible to avail Cenvat Credit of D, E and F above. A trader who sells imported goods in India after charging Vat/sales tax can get refund of Special CVD of 4% i.e. K above Value for Imports Assessable Value for customs Customs duty is payable as a percentage of Value often called Assessable Value or Customs Value'. The Value may be either Transaction Value for customs valuation Valuation in case of high seas sale Exchange rate for customs valuation Valuation Rules CIF value plus landing charges is AV Additions to Assessable Value Value as defined in section 14(1) of Customs Act or Tariff value prescribed under section 14(2) of Customs Act.

Transaction value at the time and place of importation or exportation, when price is sole consideration and buyer and sellers are unrelated is the basic criteria for value u/s 14(1) of Customs Act. Thus, CIF value in case of imports and FOB value in case of exports is relevant. In case of high sea sale, price charged by importer to assessee would form the assessable value and not the invoice issued to the importer by foreign supplier. National Wire v. CC 2000(122) ELT 810 (CEGAT) * Godavari Fertilizers v. CC (1996) 81 ELT 535 (CEGAT). Exchange rate as applicable on date of presentation of bill of entry u/s 46, as determined by CBE&C (Board) or ascertained in manner determined by CBE&C should be considered. Valuation for customs is required to be done as per provisions of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. These rules are based on WTO Valuation Agreement. CIF value of goods plus 1% landing charges (for loading, unloading and handling) is the basis for deciding Assessable Value. Commission to local agents, packing cost, value of goods and toolings supplied by buyer, design/engineering work done outside India, royalty relating to imported goods, insurance, transportation upto port, ship demurrage are addible. However, royalty or technical know-how unconnected with goods under imported cannot be added to assessable value. If buyer has made, directly or indirectly, any payment to seller as a condition of sale, such payments should be included. Interest on deferred payment, demurrage at port is not required to be added. However ship demurrage is to be added. Value of computer software loaded on machine is to be added to value of machinery. Old machinery and old cars are often valued on basis of depreciated value, though such method has no sanction of law. Transaction Value, i.e. the price at which the goods are actually sold is the

Interest, demurrage not addible Addition of value of computer software Valuation of old machinery and old cars Conditions for

accepting transaction value as assessable value

primary method and is expected to be used in majority of cases. It can be rejected only for special circumstances in section 14(1) and rule 3(2). The special circumstances in section 14(1) are (a) Buyer and seller should not be related and (b) Price should be the sole consideration for the sale. As per rule 3(2) of Valuation Rules, conditions for accepting transaction value are - (a) There should be no restriction on buyer for disposal of goods (b) sale or price should not be subject to a condition or consideration for which value cannot be determined (c) There should be no further consideration to seller of which adjustment cannot be made (d) Buyer and seller should not be related unless the transaction value is acceptable under rule 3(3). The methods of valuation for customs methods are as follows - Transaction Value of Imported goods [Section 14(1) and Rule 3(1)], Transaction Value of Identical Goods [Rule 4], Transaction Value of Similar Goods [Rule 5], Deductive Value which is based on identical or similar imported goods sold in India [Rule 7], Computed value which is based on cost of manufacture of goods plus profits [Rule 8] and Residual method based on reasonable means and data available [Rule 9]. The methods are to be applied sequentially. The major distinction between 'identical goods' and 'similar goods' is that the 'identical goods' should be same in all respects, except for minor differences in appearance, while in case of 'similar goods', it is enough if they have like characteristics and like components and perform same functions. In both the cases, quality and reputation (including trade mark reputation) should be same, goods should be from same country, engineering/development work should not be free.

Methods of valuation in customs

Distinction between identical goods and similar goods

Valuation of Export goods Transaction value for export goods FOB Value to be normally considered Exchange rate as determined by CBE&C Conditions for accepting transaction value for assessment Methods of valuation, if transaction value not acceptable Customs value of export goods is to be determined under section 14 of Customs Act, read with Customs Valuation (Determination of Value of Export Goods), Rules, 2007. Transaction value is the main criteria for valuation. FOB value is normally considered as value for export valuation. However, this can be rejected if there is over valuation (often done to get excess export benefits). Exchange rate as applicable on date of presentation of a shipping bill or bill of export u/s 50, as determined by CBE&C (Board) or ascertained in manner determined by CBE&C should be considered. If there is no sale or buyer or seller are related or price is not the sole consideration, value of the goods will be determined as per Valuation Rules. If valuation is not possible on basis of transaction value, valuation will be done by proceeding sequentially through rules 4 to 6 The methods are - Export value by comparison [Rule 4}, Computed value [Rule 5] and Residual method [Rule 6].

General Provisions about Customs Procedures Basic document is Entry Loading and unloading at specified places only Computerisation of customs procedures Amendment to documents Entry in relation to goods means entry made in Bill of Entry, Shipping Bill or Bill of Export. In case of import by post, label or declaration accompanying goods is entry Imported goods can be unloaded only at specified places. Goods can be exported only from specified places. Customs procedures are largely computerised. Most of documents have to be e-filed. Documents submitted to customs can be amended with permission In case of bill of entry, shipping bill or bill of export, it can be amended after clearance only on the basis of documentary evidence which was in existence at the time the goods were cleared, warehoused or exported, and not on basis of any subsequent document. [proviso to section 149]. Imported and export goods are usually handled in containers. These can be stored in Inland Container Depot (ICD) or Container Freight Station (CFS). They function like dry port for handling and temporary storage of imported/export goods and empty containers. Boat Notes are used for transferring small cargo from ship to shore, or from shore to ship, without berthing the ship. Goods can be transshipped from one conveyance to other after following required procedure. Such transhipment may be to any major port or airport in India. The goods can be transshipped to any other customs station in India if Customs Officer is satisfied that the goods are bona fide intended for transhipment to any customs station. The facility is available at all customs ports and Inland Container Depots (ICDs). Procedures have been prescribed for coastal goods, even if there is neither import nor export.

ICD and CFS

Boat Notes Transshipment of goods

Coastal goods

Import Procedures e-filing of documents Import manifest or Import Report Entry Inwards Risk Management System Bill of Entry for home consumption on payment of customs duty Goods should arrive at customs port/airport only. Most of customs procedures are computerised. E-filing of documents is required. Person in charge of conveyance is required to submit Import Manifest or Import Report. Goods can be unloaded only after grant of Entry Inwards. Self Assessment on basis of Risk Management System (RMS) has been introduced in respect of specified goods and importers. Importer has to submit Bill of Entry giving details of goods being imported, along with required documents. Electronic submission of documents is done in major ports. White Bill of Entry is for home consumption. Imported goods are cleared on payment of customs duty. Yellow Bill of Entry is for warehousing. It is also termed as into bond Bill of Entry as bond is executed. Duty is not paid and imported goods are transferred to warehouse where these are stored. Green Bill of Entry is for clearance from warehouse on payment of customs duty. It

Bill of Entry for warehousing

Noting, examination and assessment Bond Out of customs charge order Demurrage if clearance from port delayed Export Procedures Entry Outward Export manifest/Export report Registration with DGFT and EPC Third party exports

is for ex-bond clearance. Bill of Entry is noted, Goods are assessed to duty, examined and preaudit is carried out. Customs duty is paid after assessment. Bond is executed if required if assessment is provisional (PD bond) or concessional rate of customs duty is subject to certain post import conditions. Goods can be cleared outside port after Out of Customs Charge order is issued by customs officer. After that, port dues, demurrage and other charges are paid and goods are cleared. Demurrage is payable if goods are not cleared from port/airport within three days. Goods can be disposed of if not cleared from port within 30 days.

Registration of documents under Export Promotion Scheme Shipping Mill

Loading in conveyance can start after Entry Outward is given by customs officer. Person in charge of conveyance is required to submit Export Manifest or Export Report. Exporter has to be obtain IEC number from DGFT is advance. He should be registered with Export Promotion Council if he intends to claim export benefits. Export can be by manufacturer himself or third party (i.e. by exporter on behalf of another). Merchant exporter means a person engaged in trading activity and exporting or intending to export goods [para 9.40 of FTP] Advance authorisation, DEPB etc. should be registered if exports are under Export Promotion Scheme. Export is required to submit Shipping Bill with required documents for obtaining permission to export. There are five forms : (a) Shipping Bill for export of goods under claim for duty drawback - these should be in Green colour (b) Shipping Bill for export of dutiable goods - this should be yellow colour (c) Shipping bill for export of duty free goods - it should be white colour (d) shipping bill for export of duty free goods ex-bond - i.e. from bonded store room - it should be pink colour (e) Shipping Bill for export under DEPB scheme - Blue colour. GR/SDF/Softex form (under FEMA) is required to be submitted. The shipping bill is noted, goods are assessed and examined. Export duty is paid, if applicable. If export is under export incentives, relevant documents are checked and certified. Then proof of export is obtained on ARE-1. Conveyance can leave only after Let Export order is issued.

FEMA formalities Noting, assessment, examination Certification of documents for export incentives Let export order

Baggage, post and courier What is baggage Baggage includes unaccompanied baggage but does not include motor vehicles [section 2(3)].

Taking out foreign currency and Indian Rupees Green channel and red channel Customs duty on baggage General Free Allowance (GFA)

Baggage includes all dutiable articles imported by passenger or crew but does not include motor vehicles, alcoholic drinks (beyond limits) and goods imported through courier. Indians going out can take out any amount of foreign currency as long as it is obtained from authorised foreign exchange dealer. He can take out and bring in Indian currency only upto Rs 7,500. Incoming passenger with no dutiable goods can pass through green channel. Passenger with dutiable goods should pass through red channel. General rate of duty on import of baggage is 36.05% (35% basic customs duty plus 2% education cess plus 1% SAH education cess). One laptop computer is exempt. Bona fide luggage including used personal effects are exempt from customs duty. In addition to bona fide luggage and one laptop computer, Indian resident or foreigner residing in India over 12 years of age is allowed general free allowance (GFA) of Rs 25,000, after stay abroad for more than three days. GFA is lower when passenger comes from some countries like Nepal, Bhutan, Myanmar or China. GFA cannot be clubbed with other person. Besides GFA, one laptop can be imported free of customs duty. If a person comes after 6 months of stay, he can bring gold upto 10 Kg on payment of customs duty @ Rs 750 per 10 gms (plus education cess of 3%) and silver upto 100 Kg on payment of customs duty @ Rs 1,500 per Kg (plus education cess of 3%). Commercial samples can be brought in or taken out within prescribed limits. Additional concession is available if a person transfers his residence after stay abroad for two years. He is eligible for concessional rate of 15% duty (plus 2% education cess) of goods upto Rs 5 lakhs. In case of some goods, duty is Nil. He is also entitled to GFA. In case of mini TR (i.e. person returning after 365 days), used personal effects and household articles upto Rs 75,000 can be brought duty free, in addition to GFA. However, items specified in Annex I, II and III as specified in Baggage Rules are not allowed duty free. Foreign tourists can bring used personal effects and travel souvenirs free of duty. Articles upto Rs 8,000 can be brought as gifts duty free. If value of foreign currency notes exceeds US $ 5,000 or aggregate value of foreign exchange (in the form of currency note, bank notes, traveller cheques etc.) exceeds US $ 10,000, the passenger has to make declaration in Currency Declaration Form (CDF)

One laptop exempt Import of gold and silver as baggage Import of commercial samples Transfer of residence (TR)

Baggage by foreign tourist coming to India and currency he can being in

Unaccompanied baggage

Unaccompanied baggage can be brought. GFA is not allowed on unaccompanied baggage.

Import through courier and post

Import through Authorised Courier Export through Authorised Courier Import by post Assessment by customs

Import through authorised courier is treated as normal mode and usual customs duty is payable. Authorised Courier should be registered with customs. Courier has to file Courier Bill of Entry (in case of imports). Free gifts and samples upto Rs 10,000 per consignment are permitted through courier for imports. Authorised Courier has to file Courier Shipping Bill or Bill of Export (in case of exports). Free gifts upto Rs 25,000 per consignment permitted for export. Samples upto Rs 50,000 can be exported through courier. In case of import by post, label/declaration on postal article is treated as Entry. Separate Bill of Entry is not required. Postal articles are sent to Foreign parcel Department of Post Office. The list is handed over to Principal Appraiser of Customs. He will inspect mail. Packets suspected of dutiable articles will be opened and examined by him . He will assess the goods and then seal the parcel. Gifts upto Rs 10,000 are free. Post parcel is exempt if customs duty is upto Rs 100. Goods will be handed over by postmaster to addressee only on receipt of customs duty payable on the goods.

Payment of customs duty on postal articles Basics of SERVICE TAX

Service tax and GST are taxes of 21st century. Service tax was imposed for first time on 3 services w.e.f. 1-7-1994 and its scope is increasing every year. Highlights of service tax are as follows

Liability of service tax General background

Taxable event in service tax Taxable services Service requires two parties Tax only on value of services not on value of goods Rate of service tax

Service tax comes under powers of Entry 97 of List I of Seventh Schedule to Constitution of India. Service tax was introduced w.e.f. 1-7-1994 and its scope is being expanded every year. Service tax is not payable if service is provided in J&K or if provided outside India. Service tax is imposed under section 66 of Finance Act, 1994, which is the charging section [There is no separate Service Tax Act s such]. Service provided or to be provided is taxable event. Thus, service tax is payable when advance is received. Service tax is payable under Finance Act, 1994; on about 117 taxable services as defined in section 65(105) of Finance Act, 1994. Service requires two parties. One cannot give service to himself. Service tax cannot be levied on value of goods. Service tax and Vat are mutually exclusive. General rate of service tax is 10.30% (including education cess and SAH education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was 12.36%]. In some cases, abatement is available. Education cess and SAHE cess should be shown separately in invoice and should be paid under separate accounting head.

Education cess to be shown and paid separately Person liable to pay service tax

Liability of service provider Reverse charge

Service tax is payable by service provider. In few cases, tax is payable by service receiver, under reverse charge method [Section 68(2)]. In case of Goods Transport Agency (GTA), Import of Service, Sponsorship service and Agent of mutual fund and insurance, service tax is payable by service receiver. Value for purpose of service tax Service Tax on gross Service tax is payable on gross amount charged for taxable service amount charged provided or to be provided [section 67] (excluding material cost).. Tax on reimbursement Tax is payable on reimbursement of expenses which are part of service, of expenses but not on payments made by service provider as pure agent of service receiver Service tax not Service tax is not payable on amounts collected by service provider from payable if amount service receiver which are not part of service but are paid by service received only as agent provider to third parties for administrative convenience and then of service receiver recovered from service receiver, even if all requirements of definition of pure agent are not satisfied. Value on basis of If value is not ascertainable, valuation can be on basis of similar service similar service or cost or on basis of value which shall not be less than cost. Gross amount charged Gross amount charged for taxable service is taken as inclusive of service is inclusive of service tax and then tax should be calculated by making back calculations. tax Exemption from service tax Exemption to small Small service providers whose total value of services provided (including service providers exempt and non-taxable services) is less than Rs 10 lakhs in previous year are not required to pay service tax in current financial year till they reach turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is required if turnover exceeds Rs 9 lakhs per annum. No exemption if The exemption is not available if service is provided under brand name of service provided under other person. brand name of other No exemption when This exemption is not available when service tax is payable by service service tax is payable receiver under reverse charge method. under reverse charge method Abatement and In case of some services, abatement is available. In case of some services, simplified method of simplified method of calculating value of service has been prescribed. payment of taxes Services to SEZ and Services provided to SEZ unit or developer are exempt if wholly consumed SEZ Developer within SEZ. In case of services consumed by SEZ outside SEZ, refund claim has to be filed. Services provided by Services provided by RBI are exempt but service provided to RBI are not RBI exempt but exempt. services provided to RBI taxable Classification of service Service to be classified The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)]. Rules for classification of service If prima facie, a taxable service is classifiable under two or more subclauses of section 65(105), classification shall be effected as per following rules (a) Specific description to be preferred over a general description [section 65(2)(a)]

Exception in case of port and airport services Service should be predominantly taxable Composite contract consisting of goods and services can be vivisected New service head means service was not earlier taxable Service excluded from one head Cenvat Credit Credit of tax/duty paid on input goods, input services and capital goods Any service in relation to business is input service Duty paying document for availing Cenvat credit Cenvat credit when taxable as well as exempted services provided Registration Procedure for registration

(b) Classification should be as per essential character in case of composite services [section 65(2)(b)] (c) Service which appears earlier in list of section 65(105), if service cannot be classified on above basis [section 65(2)(c)] Exception is made in case of port services and airport services, where, if service is rendered wholly in port or airport, the service will be classified as port/airport service irrespective of its classification as per section 65A, Service should be predominantly a taxable service. A composite contract consisting of various services cannot be vivisected. An indivisible/composite contract of goods and services can be vivisected and service part of it subjected to service tax. Introduction of new service head means the service was not taxable earlier. Service specifically excluded from one head cannot be classified under other head. Service provider can avail Cenvat credit of service tax paid on input services and excise duty paid on inputs and capital goods. The credit can be utilised for payment of service tax on output services. Definition of input service is wide. Any service in relation to business is input service. Credit can be availed on basis of proper and complete specified original duty paying documents. If assessee is providing both taxable and exempt services and if input services are common, Cenvat credit can either be taken on proportionate basis or 6% amount is required to be paid on value of exempted services.

Service provider should register within 30 days from date of commencement of providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income Tax PAN, address proof, evidence of constitution of firm/company, list of directors/partners are the most important document required. Registration will be deemed to have been granted if not received within seven days [Rule 4(5)]. Application for registration is to be filed electronically. The PAN based registration number is generated by system immediately. However, registration certificate is issued by Superintendent in form ST-2 after the documents are submitted. Centralised Person providing services from more than one premises or offices can registration apply for centralised registration, if he has centralised billing system or centralised accounting system [Rule 4(2)] Input Service Input Service Distributors (ISD) require registration. HO or branch or depot Distributor can register as ISD and distribute credit to centres which are providing taxable services Procedures to be followed Invoice by service Assessee should prepare invoice in respect of his services. The Invoice

provider Payment of service tax

should be prepared within 14 days from date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier. Invoice should contain prescribed details [Rule 4A] If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on quarterly basis within 5 days at the end of quarter (within 6 days in case of e-payment) except in March. Service tax is payable by other assessees by 5th of the month following the month in which payments are received toward value of taxable services (by 6th in case of e-payment) except in March [rule 6(1) of Service Tax Rules]. Service tax on value of taxable services received during month of March or quarter of March is required to be paid by 31st March in case of all the assessees. Notification No. 25/2011-ST dated 31.03.2011- recent..

Payment of service tax in March Payment of service tax Service tax payable on receipt basis for certain services only. New rule Exception in case of associated enterprises Advance payment of service tax

GAR-7 challan and epayment

Interest for late payment of service tax Returns under service tax Half yearly return Every person liable to pay service tax has to submit half yearly return in form ST-3 in triplicate within 25 days of the end of the half-year [Rule 7]. Late fees upto Rs 2,000 are payable if return is filed late. Self Assessment Assessment is basically self assessment. Provisional assessment is permissible. Demands Administration by The service tax is administered by excise department. Adjudication order excise department is issued by excise officer. Demand if tax short If service tax was short paid, demand can be raised within period of one paid year from relevant date. If the short payment or non-payment was on account of suppression of facts or wilful mis-statement with intention to evade, demand can be raised within period of five years. Rectification of order Order passed by Central Excise Officer can be rectified by him within two years. Only mistake apparent from records can be rectified [section 74]. Appeal against order of Both department or assessee can file appeal before Commissioner demand (Appeals) against order of demand of duty and penalty of officer lower than Commissioner. Penalties and appeals Penalty for late If service tax is not paid or belatedly paid, penalty will be minimum Rs.

The exception is that in case of service provided to associated enterprises, service tax is payable as soon as book entry is made in the books of service provider (when he is liable) or service receiver (when he is liable to pay service tax under reverse charge method). A person liable to pay service tax can pay any amount in advance towards future service tax liability. After such payment he should inform Superintendent of Central Excise within 15 days [Rule 6(1A)]. When he adjusts the advance, he should indicate details in the subsequent return filed Tax is payable by GAR-7 challan using appropriate accounting code. Epayment is compulsory to those who are paying service tax of more than Rs 10 lakhs per annum. For others, e-payment is optional. Mandatory interest for late payment of service tax is 13% [section 75]. It cannot be reduced or waived.

payment of service tax

No penalty if service tax and interest paid on own before SCN Penalty for contravention of rules

Penalty for fraud, suppression of facts. Wilful mis-statement

Appeals to Commissioner (Appeals) Next appeal to Tribunal Export of Service No tax on export of service Refund if tax paid on exported service Conditions to treat a service as export

200 per day or @ 2% per month, whichever is higher, starting with the first day after due date till date of actual payment of outstanding amount. Penalty cannot exceed the service tax which was payable [section 76]. Penalty can be reduced if sufficient cause is shown [section 80]. No penalty can be imposed if service tax and interest is paid before show cause notice, except in case of fraud, suppression of facts etc. [Explanation 2 to section 73(3)] There is heavy penalty for contravention of rules, not obtaining registration, not maintaining books of account, not paying tax electronically etc [section 77]. Penalty can be reduced if sufficient cause is shown [section 80]. No penalty can be imposed if service tax and interest is paid before show cause notice, except in case of fraud, suppression of facts etc. [Explanation 2 to section 73(3)] If non-payment was on account of fraud, suppression of facts etc., penalty shall not be less than amount of service tax but can be upto twice the amount of service tax amount of service tax not levied or not paid or erroneously refunded. Penalty will be reduced to 25% if paid with tax and interest within 25 days of receipt of order [section 78]. Penalty can be reduced if sufficient cause is shown [section 80]. Appeal against order of authority lower than Commissioner lies with Commissioner (Appeals), by assessee or as well as by department [section 85]. Appeal against order of Commissioner (Appeals) or Commissioner lies with Appellate Tribunal (Customs, Excise and Service Tax Appellate Tribunal) [Section 86]. Further appeal lies with High Court and Supreme Court. Appeals can be filed both by assessee and department. No service tax is payable if taxable service is exported as per Export of Service Rules. No tax is payable on export of service. If paid, it is refundable. Rebate/refund of service tax paid on input services is obtained if taxable service is exported Common condition in respect of all taxable services, for treating the service as export of service is that payment for such service is received by the service provider in convertible foreign exchange. In addition, there are some conditions based on the category of service (e.g. immovable property outside India, service performed outside India, recipient is located outside India). In case of import of service, tax is payable by recipient of services under method of reverse charge. Tax should be paid by cash i.e. GAR-7 challan and then Cenvat credit can be availed of the tax so paid, as it is his input service. Tax is payable only when service is received in India. Services provided and used outside India cannot be taxed in India. To determine the issue whether a provision of service is import of service, services have been classified in three categories. Criteria for each category has been specified e.g. immovable property India, service performed in India, recipient is located in India

Import of service Tax payable by recipient under reverse charge Tax only if service is received in India Conditions to treat a service as import

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