What is Central Excise Law?

The Central Excise Law  made up of Acts, Rules, case laws apart from analysis of Notifications, Circulars and Trade Notices can be used in determining the excise duty implications on the activity of manufacture. This can help the indirect taxes practitioner to advise the manufacturer/, professional manager on the procedures to be followed and compliances to be ensured where central excise is applicable on the product/ process/ trading.

In advising the manufacturer, several questions would arise, which would require to be answered. The suggested steps have been deliberately kept free of too many sections and case laws to serve the purpose of being reader friendly. The definitions, case laws and explanations are available at the end of this chapter. The detailed list of important formats, and notifications, has been set out in the appendix at the end of the book. The bird’s eye view of processes and procedures under central excise have been provided for ease of understanding as under.

Why have Excise levy?

The power to levy excise duty is derived from Constitution. The Indian Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution. (Called ‘Union List’). Entry No. 84 of list I of Seventh Schedule to the Constitution reads as follows : “Duties of excise on tobacco and other goods manufactured or produced in India, except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics. ”The Products under List II (State List) or List III ( Concurrent List) of the VII Schedule of the Constitution of India are not covered by Central Excise. The products like opium, narcotic drugs, and alcoholic liquors for human consumption are outside the scope of Central Excise. The medicinal and toilet items which contain alcohol are covered by central excise and subject to duty of excise. 

Where is the levy applicable?

In short, the duty liability arises when there are goods which are moveable, marketable, and more critically find a mention in the First or Second Schedule to the Central Excise Tariff Act 1985. To get elaborate details refer to chapter 3.

On whom the levy is applicable?

The levy is applicable to the following persons:

i.   Every person, who produces, manufactures, carries on trade, holds private store-room or warehouse or otherwise uses excisable goods, shall get registered.

ii.   Therefore, any person who engages in the manufacture, production or any process of production or manufacture of any specified products which are finding a place in the First Schedule to the Central Excise Tariff Act 1985 or carries on trading activities intending to pass on credit has to be registered under excise.

iii.   However, Notification No.36/2001 dated 26.6.2001 gives an exemption to manufacturers producing goods wholly exempted from duty of excise.

iv.   Under this notification, those claiming the benefit of nil rate of duty clearances or exemption from the whole of duty based on value/quantity of clearances/process of manufacture/on the ground that raw material has suffered duty of excise subject to conditions specified in the Tariff or in the Notification would have to give a declaration. This declaration would be sufficient if given one time.

v.   However, a manufacturer claiming benefit of any SSI exemptions or other exemption based on value or quantity of clearances in a financial year would have to give a declaration every year when clearances touch Rs. 90 lakhs.

On which event is the levy applicable?

The levy of central excise is applicable on the manufacture of goods. Though the  taxable event of manufacture happens at a particular point of time the levy and collection is postponed for administrative convenience.

1. Manufacture requires a process and not every process results in manufacture.
2. The term ‘Manufacture’ and was defined as a process resulting in commercially different article or commodity having distinctive name, character and use
3. If the use has not altered, then it would be advisable to seek an opinion from experts in the field or err on the side of revenue. There have been a large number of decisions of the Tribunal and the courts with regard to manufacture of innumerable products, which may shed light.

However it should be ensured that processes not amounting to manufacture are not described as manufacture as the department may at a later date take the view that there is no manufacture. This could result in denial of credit along with consequent demand for interest and penalty.

Lastly excisable goods must be manufactured or produced in India in order to attract duty of excise.

Valuation Methods under Central Excise?

The valuation of goods under Central Excise is done under any of the following four main methods. They are the transaction value method, MRP method, Tariff Values, Valuation under Central Excise Valuation Rules.

i.   Firstly the transaction value under Section 4. (for definition see chapter 6 on classifications & valuation) This value is applicable when the goods are sold to by the assessee for delivery at the time and place of removal, where the buyer and assessee are not related and price is sole consideration for the sale. . “Assessee” means the person who is liable to pay the duty of excise under this Act and includes his agent.

ii.   Here the clarity of the order and its independence with other orders to the same client could be very important. The place and time of delivery is also important. In these cases the invoice value would be accepted. Most of the goods fall into this category.

iii.   Secondly the MRP method of valuation under Section 4 A is applicable to the notified products ( Appendix 2) which are covered under the  Packaged Commodities Rules or the Standard of  Weights and Measures Act. This is applicable only for those goods, which are proposed to be sold in retail. The value is based on the MRP declared on the packages less the abatement allowed under the law. The retail sale price is the maximum price at which the excisable goods in packaged form maybe sold to the ultimate consumers inclusive of all taxes and expenses and price is sole consideration for such sale.  It should be noted that the goods covered under MRP based valuation will not get any deductions other than the abatements.

iv.   MRP based valuation is applicable to specified goods only. The FMCG as well as a few other products find a place in the list (Appendix - 2 for definition and detailed listing of all items covered by MRP as well as the abatement applicable to them) It is to be noted that excise duty is payable on removal and not on sale.

v.   Thirdly a few products fall under Section 3(2) called the valuation under Tariff Values where the Government itself has kept control for various purposes like political expediency, public interest, high tax revenue etc. In this segment the method could be specific ( per piece, based on length, per Kg, or based on Retail Sale price or even ad valorem). Examples could be pan masala, garments, and cigarettes.

vi.   Fourthly, the residuary category items which are not covered by the above three, the ones which are considered as ‘removals’ and not sale. This could also be the method applicable when the goods sold are consumed captively, sold to relatives, sold at the depots, additional consideration exists, job worker discharges the duty) and removals other than sale such as samples, warranty repairs, donations, captive consumption etc. In this case reference to the Valuation Rules 2000 would be required. (Alternative valuation methods refer chapter 6).

Note: There is a capacity based levy wherein the duty maybe based on the capacity of the machine rather than the value of the goods. The provisions for the same have been  notified. Pan masala is covered thereunder effective from 1st July 2008.

What are the set – off of credits that would be available?

The Cenvat Credit Rules, 2004 has unified the credits available on goods and services, the cenvat credit of duty on inputs and tax on taxable services would be available to both the ‘manufacturers’ and ‘output service providers’. The duty paid on almost all inputs which are used in the manufacture of final products leviable to duty is available as credit. This is called the cenvat credit (earlier Modvat). This amount can be used in lieu of cash to discharge the central excise duty (now also called cenvat).

Who can pass on Credit?

The manufactured goods could be cleared and dispatched either to:

i.   Industrial Consumer: An industrial consumer who would use it further in the manufacturing process. Where the industrial user procures the materials from a manufacturer who is registered under excise he can avail the benefit of cenvat credit of duties that are paid on the materials by the manufacturer to set off against his own duty liability on finished goods.  or

ii.   Ultimate Consumers: To the ultimate consumers for their personal use. The consumer who procures the goods for personal use would not be interested in cenvat credits since he is not in a position to utilise the same.

iii.   Dealer: Here it should be remembered that in order to pass on the duty paid by a dealer on goods that are procured by him from a manufacturer he has to be registered under excise law. Therefore the credits availability would not be available where such industrial user/ manufacturer buys goods from an unregistered dealer.

Conditions and obligations for availing the CENVAT Credit  in general:

The conditions to be fulfilled in order to avail Cenvat Credit are:-

i.   The credit can be availed only on / after receipt of goods by the receiver (  who need not be the buyer), except in cases where the materials are sent directly to the job worker.

ii.   Cenvat credit is to be availed  on specified duty paid documents listed in the provisions of Rule 9 of Cenvat Credit Rules like invoice, BOE, supplementary invoice etc., credit cannot be availed on debit notes, Xerox copies of invoices etc.

iii.   It should be ensured that that the inputs and capital goods meet requirements of definition as set out in CCR 2004.

iv.   The person availing the cenvat credit has to maintain proper stores records with regard to receipt, disposal, consumption and inventory of the inputs as well as capital goods. The materials should be accounted at the stores only after proper inspection.

v.   The person availing the cenvat credit has to maintain proper stores records with regard to receipt, disposal, consumption The manufacturer should ascertain purpose for which the goods are procured and ensure the purpose for which it would be used before recording details of cenvat credit.

vi.   The person availing the cenvat credit has to confirm that duty has been paid on the inputs or capital goods. ( This requirement may be impractical as the buyer will depend on the prima facie representation on duty paid document that the duty payable which has been indicated would be paid.

vii.   Cenvat credit is not available for the inputs which are used in the manufacture of exempted final products. Where the inputs are partially used for exempted activity manufacturer shall follow the provisions of Rule 6 of Cenvat Credit Rules 2004 for determining his duty liability.(where no separate records are  maintained-payment of 5% of price for exempted goods or ascertaining proportionate credits).

viii.   The credit details along with all the other relevant details like invoice number, date, GRN Number, assessable value, excise duty thereon along with education cess and SHE cess are to be recorded in the cenvat credit register on the basis of duplicate for transporter copy of invoice.

ix.   Credit is available on inputs used for exempted  final products by reason of the unit being a EOU, FTZ, EHTP, STP, SEZ or exported under letter of undertaking or bond.

x.   Credit on capital goods is allowable up to 50% of the eligible credit in the year of receipt of the capital goods in the factory. The balance 50% is marked for availment in subsequent year and such bills are filed separately. The credit on capital goods can be availed fully in a single installment in the year of receipt in factory by SSI units w.e.f 1.4.2010 vide amendment brought in by Finance Act 2010.

xi.   The balance credit on the capital goods can be availed in the subsequent years if the assessee is in possession of the asset. The components, spares and accessories, moulds, tools and dies and refractories and refractory materials need not be in possession of assessee in second year for availing credit thereon .

xii.   In case of capital goods the credits would be denied if used exclusively for exempted activity.

xiii.   The cenvat credit on capital goods can be availed even if such assets are acquired on Lease, hire purchase or loan agreement basis.

xiv.   Cenvat credit is not allowable if depreciation under Income Tax Act is calculated including the amount of cenvat credit. ( This would amount to conferring a double benefit which is not allowable)

xv.   Cenvat credit can be claimed on the goods received in the factory and subsequently sent to the job worker for processing or otherwise.

xvi.   The goods so sent have to be received back within 180 days of the removal to job worker. Otherwise the duty availed has to be reversed. Re-credit is permissible on receipt any time later.

xvii.   Cenvat credit is allowable even in case of jigs, fixtures, moulds & dies sent to job worker by a manufacturer. There is no time limit as to its return to the factory. Rule 4(5)(b) is being amended by Finance Act 2010 to provide that cenvat credit shall be allowed in respect of jigs, fixtures, moulds and dies sent by a  manufacturer of final products to another manufacturer for production of goods or to a job worker for the production of goods on his behalf

What is meaning of exemptions under excise?

Option of Exemption? The manufacturer could avail the exemptions if any, which are available. These exemptions could enable the manufacturers to clear excisable goods at nil rate or may also provide for concession in the matter of levy of duty based on value of clearances etc.

 When would it be beneficial to claim exemptions?

 i.   If the final product is being sent to the consumer then exemption should be claimed.

ii.   If the item were an intermediate product then availing credit on the inputs and paying duty on the finished goods would be preferable when the customer is eligible for credit.

iii.   Where the orders is received as basic + taxes as applicable would mean that the manufacturer would benefit by opting for duty payment.

iv.   A comparative analysis of the two situations ( opting for registration and opting for exemption ) would highlight the benefit to the client. The manufacturer doing very low value addition could register. ( for comparative tables refer  chapter 5 – Provisions relating to SSI).

What are the kinds of exemptions?

i.   Conditional exemptions: These are exemptions that are available only where the manufacturer fulfills certain conditions. SSI exemption is one such exemption which provides exemption from excise duty upto Rs 150 Lakhs of clearances. However this is subject to the condition that the aggregate value of clearances of all excisable goods for home consumption by a manufacturer from one or more factories, or from a factory by one or more manufacturers, does not exceed rupees four hundred lakhs in the preceding financial year

ii.   Locational/area Based Exemptions: Locational exemptions can be availed only by units located in Himachal Pradesh etc If by virtue of an exemption notification, the rate of duty is reduced to NIL, the goods specified in the tariff would still be regarded as excisable goods on which NIL rate of duty was payable. However excisable goods on which normally duty would be payable and which are removed for export under bond cannot be considered as exempted goods nor goods subject to nil rate of duty. Where the final products are exempt from duty of excise the scrap arising in the course of such manufacture is also to be exempted from duty fully.

What is SSI Exemption?

The exemption notification could be availed only if the substantive conditions attached thereto are fulfilled.  The exemption based on the value of clearances for units who have had clearances not exceeding Rs. 400 Lakhs [also called the SSI Exemption] is available for specified products, which may be confirmed by reference to the Notification 8/2003 dt. 1.3.2003. The manufacturer who is eligible for the exemption can claim the exemption upto a clearance value of Rs.150 Lakhs. Clearance has to be differentiated from turnover as the former is the value of removals whereas the latter is the sale/ transfer of property.

The exemption notification could be availed only if the substantive conditions attached thereto are fulfilled.  The exemption based on the value of clearances for units who have had clearances not exceeding Rs. 150 Lakhs during the year also called the SSI Exemption is available for specified products, which may be confirmed by reference to the Notification 8/2003 dt. 1.3.2003.

Conditions to be fulfilled:

i.   The exemption notification could be availed only if the substantive conditions attached thereto are fulfilled. 

ii.   Here it has to be noted that this exemption is not available for Branded Goods of another.

iii.   However if such a branded goods manufacturer is situated in a rural area, manufactures for Khadi Board or is an Original Equipment Manufacturer then the exemption would still be available i’e when goods are manufactured bearing the brand name of manufacturer himself then the exemption would still be available.

iv.   Even where the raw materials received by manufacturers which may bear a brand name are entitled to benefit of Notification.

v.   Where the goods manufactured by the SSI unit are branded goods, payment of duty on such branded goods will not disentitle the other products from getting the benefits of the Notification.

Is the notification available to  all units of a manufacturer?

The benefit under the notification is available to the following:

 i.   A manufacturer who undertakes manufacturing operations from one or more factories

ii.   A factory where one or more manufacturers undertake manufacturing activity

When are clubbing provisions attracted?

The clearances of units could be clubbed by the department where the manufacturers set up new concerns by splitting the company, set up one more company with financial, managerial, production, marketing dependence. An example could be a manufacturer of packing bags made of PDPE/HDPE. As soon as the clearances reach close to Rs140 Lakhs he may set up another unit and then another. All such units may be using same machinery, located in same premises, with same partners. In such scenarios all the mutually interdependent units would be considered as one entity. The department could initiate litigation due to establishment of financial flowback.

What are the major Locational Exemptions?

Where industries are set up in/ located at specified areas of Kutch in Gujrat or North East of India and more recently Himachal Pradesh, Uttaranachal, Special Economic Zones (SEZs) set up by various States in India, and undertake manufacture specified products, these are exempt from duty of excise/ re-imbursement of duty paid. Income tax and CST benefits are also available in such areas. Since these duty exemptions are available only to units set up in certain areas these are called as area based exemptions.

Can units availing area based exemptions send goods for job work?

It may not be possible for such units to send goods on job work basis other than if permitted. This is because one of the main condition for availing the exemption under Central Excise Notification No.214/86 dt 25.3.1986 is that the final product must be cleared on payment of duty. Since the principal manufacturer who supplies the material is exempted from duty liability the benefit of this exemption would not be available.

It is expected that at the time of introduction of GST in April 2012, all such area based exemption would be replaced by a subsidy scheme in the balance period.)

Registration for manufacturer:

Where excise duty is payable, the manufacturer would have to register and he would have no option. Non-registration is not a valid defence. For the intermediate goods manufacturer who makes supplies to industrial customer, it is preferable not to claim the exemption and take the registration from the start of the enterprise to ensure competitiveness due to the concept of cenvat credit.

Registration for Dealers:

The trader who is registered under central excise can pass on the duty paid on goods traded by him/imported by him to  customers who can avail the credit for the same.

What are the Benefits of Registration?

The small manufacturers would find that in some cases it may be beneficial to opt for registration and payment of duty from day one. The factors which are relevant are as under:-

i.  The ancillary industries to manufacturers who pay excise would always find it beneficial. For instance suppliers of parts of automobiles. ( See table for cost benefit analysis)

ii.  The final product manufacturers or the dealers who sell to the consumers directly may find the exemption preferable.

iii.  The manufacturer who receives the orders in basic + duties as applicable would find the payment of duty preferable.

iv.  The manufacturer who gets an all inclusive price may find exemption preferable.

v.  The manufacturer who adds very low value (assembly, low margin, high turnover orders) may find registration preferable. ( See table for accumulation of credit below)

vi.  The manufacturer who engages in exports and local clearances may be able to utilise the credits on inputs used for exports for the payment of duty on local clearances.

Table – I : Comparative Analysis of availing and not availing exemption of a intermediate product

Note : The benefit may be shared between the customer and manufacturer. There is a possibility, though not probable that with the coming in of GST this exemption could be done away with totally.

Madhukar N Hiregange FCA