MANUFACTURE AND EXCISIBILITY

Section 3 of Central Excise Act, 1944. Basis of Levy. What is Manufacture?. CE Law gives only a truncated definition for manufacture Includes Deemed Manufacture. Widest definition is available in Foreign Trade Policy but that is not applicable to CE Law. contd

The statutory definition of manufacture in central excise act

(i)

(ii)

Manufacture includes any process Incidental or ancillary to he completion of a manufactured product; Which is specified in relation to any goods in the section or chapter notes of the First Schedule to the central excise tariff as amounting to manufacture

Continued..

(iii) Which in relation to the goods specified in the Third Schedule involves packing or repacking of such goods in a unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer

Continued

And the word manufacturer shall be construed accordingly and shall include not only a person who employs hired labor in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

contd

Leading

cases Decisions of Supreme

Court.
- Formation of a new Article Vide Hawkins Cookers Ltd Vs Collector [1997 (96) ELT 507 SC. - A new distinct and commercial commodity. Vide TISCO V.O.I[2004(164) ELT 372 SC.

The accepted wisdom about manufacture in central excise

Manufacture implies a change; but not every change is a manufacture. A new product should emerge from the raw material stage with a new name, new use and marketability.

2) Ingredients of excisablity
Fact

of Manufacture. Entry availability in CE Tariff. Marketability.

Manufacture in central excise

Two concepts Actual substantive manufacture & Deemed manufacture Actual substantive manufacture does it include mere processing? Deemed manufacture

What is deemed manufacture?

Process or activity specified in section or chapter notes for example: Labeling or re labeling of containers Repacking from bulk packs to retail packs Adoption of any other treatment to render the product marketable to the consumer

Continued.

Addition of chemicals and other ingredients to certain products of tariff heading 3808 In relation to products of heading no 3920 & 3921 process of metallization or lamination or lacquering In relation to some products of heading 7013 the process of printing , decorating or ornamenting

Continued.
In relation to flat-rolled iron & steel products under chapter 72 the process of hardening or tempering In relation to articles of iron and steel under chapter 73 the process of galvanization

Continued.

In relation to motor vehicles under chapter no 87 building a body or fabrication or mounting or fitting of structures or equipment on the chassis falling under 8706

3) Select Decided cases in Manufacture

Affixing

Information stickers on goods imported does not amount to Manufacture. -CCE Vs Proctor & Gamble Home Products 2004 [167] ELT 173 [TRI D]. Erection of imported Power Plant does not amount to manufacture. -Spectrum Power Generating Co. Ltd VCCE 2004(177)ELT 968 [Tri-D]. Conversion of old, diesel operated Buses into CNG Buses does not amount to Manufacture.
contd

contd
-Nugas

Technologies India (P) Ltd. VCCE [171 ELT 376 Tri-D]. Gold Plating of watch cases does not amount to Manufacture. -Commissioner Vs Divya cases 2004[169]ELT225[Tri-D] Mixing of chocolate Powder with Sugar and Skimmed Milk to form drinking chocolate does not amount to Manufacture CCE Vs Fountain Consumer Appliances Ltd 2004 [171] ELT 329 (Tri Chennai)

contd
Branding, polishing and affixing MRP on locks acquired from artisans does not amount to Manufacture. Key locks (I) P Ltd Vs CCE 2004(165) ELT,74 (TriD). Printing of date of Manufacture is a Legal requirement and hence it is a Process of manufacture. - Surat Beverages (P) Ltd Vs Commissioner 2004 (165) ELT313 [Tri- Mumbai]. Rubber lining/ Painting/ Cutting/ Welding/of Iron and Steel pipes and Tanks does not amount to manufacture.- Tega (I) Ltd Vs CCE 2004(164)ELT390 [SC]

contd
Transformation

of Catalyst into spent Catalyst does not amount to Manufacture. -CCE Vs Deepak Fertilizers & Petro Corp.Ltd.2004 (178)ELT 686 [Tri-M]. The Test of Marketability is a Burden of Revenue. -FGP(I) Ltd Vs U.O.I 2004(168) ELT 289 [SC] Testing/ Gardening/ Certification of Helium gas cylinders before Sale is an activity amounting to manufacture. - Commissioner Vs Air liquide North (I) P. Ltd 2004[174]ELT 201 [Tri - Del].

4]Valuation The Crux of the matter

Tending to become more like an opinion poll. Section 4 and 4A/ Valuation Rules 2000. What is Transaction value?. Requirements for acceptance of Transaction Price Sale of goods. For Delivery, at the time and place of removal Seller and Buyer not related. Price is the sole consideration for sale. The legal fiction created by the definition of time of removal let us note this

A tour of the valuation rules 2000

The official name for the rules is this Central Excise Valuation ( Determination of price of excisable goods) Rules, 2000 These rules apply when any of the ingredients of transaction value is missing The rules are used for ascertaining the normal transaction value at which the greatest aggregate quantity of goods are sold

The valuation rules.

They are 11 rules in all Rule 1 name & entry into force from 1-72000 Rule 2 definitions Rule 3 exhortation to decide the value (when the transaction value is unavailable or unacceptable)

The valuation rules.

Rule 4 ascertainable equivalent price of such goods nearest in time to the time of removal of goods from the factory margin adjustment on account of differences in dates of delivery allowed Rule 5 cases when the delivery of goods is at a place other than the factory

The valuation rules..

Rule 6 when there is additional consideration to the sale not reflected in the transaction price charged solution: monetize the additional consideration and add it up to the tax value Rule 7 Depot / branch sales solution: adopt the nearest prevailing depot price

Valuation rules.
Rule 8 captive /self consumption/use solution: tax value is 110% of the cost of production of the goods (as per CAS 4) Rule 9 sales to related persons solution: resale price of related person / 110% of the cost where the related person does not resell but consumes or uses for self

Valuation rules.
Rule 10 sales to inter-connected undertakings /holding company /subsidiary company solution:: do as per rule 9 above. Rule 10A job work on behalf of a principal manufacturer solution: resale price of the principal manufacturer Rule 11 residual method

5) Exclusions From Value

-By

Statute Excise Duty. Sales Tax. Other taxes such as Octroi, entry tax. -By Court / Tribunal Decisions Trade Discount. Cash Discount/ Prompt Payment discount. Turn over discount. Quantity discount. Year end/ Bonus discount. contd

contd Freight

and Freight insurance, including equalised Freight. Bought out items [not integral/ critical to Product]. Carry bags for Laptops. Syringe bought out and supplied with P & P medicines. Computer Software ( discuss with NCR case) Third party Inspection charges at the instance of and borne by the buyer. Excess of Freight collected over actual expenditure on freight. Interest on receivables contd

contd Erection,

Commissioning charges if products emerge as immovable property. Free items supplied with products. Advertising charges borne by the client buyer on his own account. Additional warranty charges. Notional interest on Advances/ deposits from buyers not influencing the price. Straw supplied with Juice. Rental paid on durable and returnable container Liquidated damages received for non- lifting of molasses

6) Inclusions into Value

-By

Statute Advertising. Publicity. Marketing/ Sales Promotion. Storage/ Outward handling. Servicing. Warranty. Commission. -By Tribunal/ Court Decisions Dharmada. Design/ Development/ Engineering.

contd

contd

Royalty. Amortised

Cost of tools/ dies/ moulds received from buyers. Interest on inventory. Value of waste retained by Jobworker. Packing. Cost of material supplied by Customer.

7) Valuation When goods are assembled at site

Is

it a Composite/ turnkey/ works contract? Excise duty is not leviable on immovable property but on Parts / Components/ goods already manufactured. Case Studies Lifts/ Boiler Plants/ Industrial Furnaces.

8) Valuation in Jobwork
When

does Jobwork amount to Manufacture?. Labor/ Jobwork charges + Raw material costs are includible in assessable value. Ujjagar Prints etc Vs U.O.I. Empire Industries Vs U.O.I. Pawan Biscuits Co. Vs CCE. Is buyers profit margin includible in Assessable Value in the hands of Jobworker?. Food Specialities Ltd Vs U.O.I.

Continued.
The impact of new valuation rule 10A The Central Board of Excise & Customs circular no 902/22/2009 dated 20-10-09 in the case of vehicle body builders Job work exemption under notification no 214/86

9) MRP based Valuation

Section

4A/ weights & Measurements Act. MRP minus prescribed abatement is the assessable value. Region wise MRP accepted If different MRPs are printed, the maximum MRP will be taken as the basis. Sale of phones with MRP fixed, to customer, by phone companies U/S 4A only. Multi Piece Packages.

10) Refunds & Rebates

Section

11B/ Rule 18/ cenvat Rule 5/ Section

11BB. One year time limit / Provision for Interest. Theory of unjust enrichment. Refund claim thro credit notes what happens? Mafatlal Industries Vs U.O.I. L&T Sargent Lundy Ltd Vs CCE

11)SSI Exemption
Notification

no: 8/ 2003 as amended. Basic ceiling Rs.1.5 Cr. Outer ceiling Rs. 4 Cr. Only listed goods benefit. Use of Trademark/ symbol/ brand of another person disentitles.

contd

issues Clubbing of Clearances and use of Brand name. Use of Foreign owned Trade mark/ Brand name by Indian SSI Units. Clearances Excluded / included for Computing Rs.1.5 Cr and Rs 4 Cr. Value Caps.
Perennial

Returns Raj in central excise

ER 1 monthly due by the 10th of the following month ER 2 monthly, for EOU due by the 10th of the following month ER 3 quarterly for SSI units due by the10th of the following quarter

Continued.
ER 4 Annual financial statement for units paying INR I crore in excise due by the 30th of April of the following year ER 5 CENVAT Annual Return of information relating to principal inputs due by 30th April of the following year some class of manufacturers given exemption

Continued
ER 6 monthly return of principal cenvat inputs due by the 10th of the following month some class of manufacturers given exemption ER 7 Annual Installed capacity statement due by the 30th April of the following year

Important procedures in central excise

Issue of invoice under Rule 11 of central excise rules 2002 Provisional assessment under Rule 7 & finalization Time and manner of payment of duty under Rule 8 Remission of duty under Rule 21 for damaged/defective/unfit/unmarketable goods

Important procedures in central excise

Credit of duty paid on sales returns under Rule 16 Rule 16-A removal of any inputs as such or partially worked outside the factory for testing, repair etc Rule 16-B removal of semi-finished products for further work / finishing and return

Important procedures in central excise

Rule -16C removal of finished goods outside for test etc & return Export without payment of duty as well under claim for rebate of duty LUT (UT1), Bond, ARE Removal of excisable goods without duty for export warehousing under Rule 20

Penal provisions in central excise simply draconian & colonial

Prosecution for select offenses under section 9 of the Act Demand of duty under section 11A with normal time limit of one year and 5 years for cases where suppression of facts by the assesses is alleged Time limit for adjudication of SCN

Penal provisions in central excise

Interest for delayed payment under section 11AB Penalty equal to duty under section 11AC in cases involving suppression of facts. Penalty under Rule 25 maximum upto duty or Rs 2000/-whichever is greater, with confiscation of the goods

Penal provisions in central excise

Rule 26 penalty for abettors , transporters, issuers of false invoices max upto duty or Rs 2000/- whichever is greater Rule 27 general penalty where no penalty is specified for any offense in the rules, max of Rs 5,000/- with possible confiscation of the goods

Penal provisions in central excise

Tax default penalty under rule 8 daily clearance on payment of duty in cash, plus prohibition of using cenvat credit, till dues are paid up. Rule 12CC blanket powers given to the department to impose restrictions on Manufacturers and Dealers involved in tax evasion

Penal provisions in central excise

Section 11DDA power to order provisional attachment of property to protect Revenue during he pendency of proceedings Section 14 power to issue summons Section 13 power to arrest

CENVAT CREDIT
The foundation of the value-added tax system Avoids cascading effect of tax on tax on tax Integrates goods and services Cenvat credit Rules 2004 apply to Manufacturers & Service providers

Cenvat credit rules what is the gain?

Input stage duty relief in the form of tax credit to Capital goods Inputs Input services

Cenvat credit Capital goods

All goods falling under the following chapters Chapter 82 tools etc Chapter 83 miscellaneous articles of base metals Chapter 84 machinery, equipment etc

Capital goods..

Chapter 85 electrical / Electronic machinery & equipment etc Chapter 90 optical, photographic, medical , checking, measuring equipment etc Abrasives under heading no 6805 Grinding wheels & the like under heading 6904

Capital goods
Pollution control equipment Components, spares & accessories of the goods for the above two categories Moulds, dies , jigs and fixtures Refractories, and Refractory materials Tubes, pipes and fittings thereof Storage tank

Capital goods
Used in the factory of the manufacturer of final products, but does not include any equipment or appliance used in the office Or, used for providing output service Motor vehicles registered in the name of the following service providers are allowed courier agency, GTA, Rent a cab operator , tour operator, outdoor caterer

Capital goods.
Ownership of capital goods is not required for a manufacturer or service provider except for the motor vehicle credit Credit to be taken for 50% of the duty in the first year and the rest in any subsequent year Depreciation under Income tax prohibited

Capital goods..

The 50% restriction does not apply to special CVD of 4% paid on imported capital goods Removal of capital goods requires reversal of credit 2.5% depreciation on credit for every quarter of use Removal on scrapping of capital goods requires payment of duty on transaction value

Capital goods.
Provision for removal of capital goods for test, repair etc Moulds, dies , jigs and fixtures can be deployed at the premises of the job worker Capital goods can be produced and used in the factory of production for manufacture of excisable goods duty exempt

Capital goods.
Capital goods on which credit is taken should not be solely used in the manufacture of exempted goods Capital goods which are not defined in the CCR but used in the factory of production will qualify for credit as Inputs. Benco Products Vs CCE CESTAT larger bench decision

INPUTS

Wide definition in the CCR Inputs means all goods except light diesel oil, high speed diesel and petrol Used in or in relation to the manufacture of final products Whether directly or indirectly Whether contained in the final product or not

Inputs.
Inputs include -- Lubricating oils Greases Cutting oils Coolants Accessories of the final products

Inputs
Goods used as Paint or packaging material or as fuel or for generation of electricity or steam Used in or in relation to the manufacture of final products or for any other purpose Within the factory of production

Inputs

For service providers: All goods except light diesel oil, high speed diesel , petrol and motor vehicles And used for providing output service Inputs will not include cement, angles and channels, CTD / TMT bars & other items used for construction in the factory / building or in laying of foundation or structural support of capital goods

Input services
For manufacturers: Any service used by a manufacturer Whether directly or indirectly In or in relation to the manufacture of final products And clearance of final products upto the place of removal

Input services..
For service providers: Any input service used by a provider of output service for providing an output service

Input services allowed to both manufacturers to service providers

Services used in relation to Setting up Modernization Renovation Repairs Of a factory or the premises of the service provider

Common services.
Or an office relating to such factory or the premises Advertisement Sales promotion Market research Storage upto the place of removal Procurement of inputs

Common services.
Activities relating to Business such as Accounting Auditing Financing Recruitment and quality control Coaching and training

Common services.

Computer networking Credit rating Share Registry Security Inward transportation of inputs & capital goods Outward transportation upto the place of removal

Important features of cenvat credit

Input credit can be availed immediately on receipt of the goods accompanied by the relevant invoice No one-to-one correlation between input and output Cenvat credit is a legal and vested right

Important features of cenvat credit

Input service tax credit should be taken only after settling the service supplier invoice with value and tax Transfer of credit on transfer of business allowed Transitional credit

Important features of cenvat credit

Importance of new rule 6 in CCR 2004 Options there under Maintain separate accounts Or pay 5% on the value of exempted goods and six % on the value of exempted services

Important features of cenvat credit

Or take credit proportionate to the taxable turnover as per formula prescribed Inputs & capital goods & input services should not be exclusively utilized in the manufacture / provision of exempted goods or exempted services Clearances to EOU/SEZ/BTP/STP/EHTP & exports will not require reversal of credit

Important features of cenvat credit

Storage of inputs outside the factory allowed subject to applying for the same Significance of tax invoice in CENVAT credit system First stage dealer/second stage dealer/input service distributor

Central sales tax

Current rate at 2% Expected to go when GST is introduced Retention of C Form Vat credit usage against CST Sale in the course of export and import CST & Works contract