excise
This query is : Resolved
08 February 2010
please any one give me faundamental of excise taxation?
09 February 2010
Indian Constitution has given powers to Central Govt. and State Govt. to levy various taxes and duties. Powers of Central and State Govt. are enlisted in Seventh Schedule to our Constitution. Entry No. 84 of list I of Seventh Schedule to the Constitution reads as follows : “Duties of excise on tobacco and other goods manufactured or produced in India, except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.â€
In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence, central excise duty is presently levied under entry 84 and 97.
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is called ‘State Excise’. The Act, Rules and rates for excise on liquor are different for each State (this is the reason why price of liquor varies widely from Goa to MP to Punjab. In some States, it is officially not available.).
Basic conditions of excise liability - Section 3 of Central Excise Act ( often called the ‘Charging Section’ ) states that ‘There shall be levied and collected in such manner as may be prescribed duties on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India - . - . -'. The words ‘goods which are manufactured or produced in India’ are same as those used in Entry No 84 to list I. Thus, the power to levy Central Excise duty is derived from the Constitution. This definition of charging section of Central Excise is vital, because it clearly signifies that there are four basic conditions for levy of Central Excise duty. (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced (4) Such manufacture or production must be in India. Unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Each of these requirements needs close scrutiny.
Goods manufactured in SEZ are ‘excluded excisable goods’ – A per section 3(1) of CE Act, duty is leviable on all excisable goods (excluding goods manufactured or produced in Special Economic Zones). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’ [The revised definition is made effective from 15-8-2003].
Taxable Event for Excise Duty - ‘Taxable event’ is that on happening of which the charge is fixed. It is that event, which on its occurrence creates or attracts the liability to tax. Such liability does not accrue at any earlier or later point of time - Goodyear India Ltd. v. State of Haryana (1990) 76 STC 71 (SC) = 1990 UPTC 198 = AIR 1990 SC 781. Tax becomes payable when liability to pay tax arises and liability to pay tax arises by the happening of the taxable event. - Kalwa Devadallain v. UOI (1963) 49 ITR 165 (SC) * M A Co. v. Asstt Commissioner (1964) 15 STC 487 (All HC).
In Re Sea Customs Act, 1878 - AIR 1963 SC 1760 = (1964) 3 SCR 787 (SC 9 member full bench), it was observed - 'Excise duty is not directly on the goods, but manufacture thereof. - . - . - Though both excise duty and sales tax are levied with reference to goods, the two are very different imposts. In one case, the imposition is on the act of manufacture or production, while in the other it is on act of sale. In neither case, therefore, can it be said that the excise duty or sale tax is directly on the goods, for in that event, they will really become the same tax' - confirmed in Shinde Brothers v. Dy Commissioner - AIR 1967 SC 1512 = (1967) 1 SCR 548, where it was held that excise duty is on goods and taxable event is manufacture or production of goods.
It has been held that in Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989 (44) ELT 598 (SC) = 1989(2) SCALE 804 = (1989) 4 SCC 592 that ‘manufacture or production in India’ of an 'excisable article’ is a ‘taxable event’ for Central Excise, though duty can be levied and collected at a later stage for administrative convenience - quoted with approval and followed in Shree Synthetics Ltd. v. UOI 1999(113) ELT 774 (SC 3 member bench). Removal from factory is not the 'taxable event'. In CCE v. Vazir Sultan Tobacco Co. Ltd. - 1996 (2) SCALE 603 = (1996) 13 RLT 291 = JT 1996 (3) (2 ?)112 = AIR 1996 SC 3025 = 1996 AIR SCW 1353 = 63 ECR 359 = 1996 (83) ELT 3 = (1996) 3 SCC 434 (SC - 3 member bench), Supreme Court has confirmed that the levy is and remains upon the manufacture or production alone. Only the collection is shifted to stage of removal. It is also confirmed that the removal of goods is not a taxable event. In Empire Industries v. UOI (1985) 20 ELT 179 (SC) = AIR 1986 SC 662 = (1985) 1 SCALE 1269 = (1987) 64 STC 42 (SC) = (1985) 3 SCC 314 = 1985 Supp (1) SCR 292 = (1986) 162 ITR 846 (SC), it was observed - 'Taxable event in Central Excise is the manufacture of excisable goods. - . - . - The sale or the ownership of the end-product is absolutely irrelevant for the purposes of 'taxable event' under Central Excise'.
Person liable to pay excise duty - Once duty liability is fixed, the duty can be collected from a person at the time and place found administratively most convenient for collection.
The Duty liability in case of manufactured goods - Rule 4(1) of Central Excise Rules makes it clear that excise duty is payable by the manufacturer or producer of excisable goods. In case where goods are allowed to be stored in a warehouse without payment of duty, the duty liability is of the person who stores the goods. Rule 4(1) makes it clear that goods can be removed from the place where they are manufactured or produced or warehoused, only on payment of duty.
Ownership of raw material is not relevant for duty liability. – CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT). Duty demand is payable by manufacturer, even if it cannot be recovered from customer. – Snap Chem v. CCE 2001(137) ELT 235 (CEGAT).
Duty liability in case of goods stored in warehouse - Rule 20 of CE Rules permit warehousing of certain goods in warehouses without payment of duty. These goods are coffee, petroleum products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the goods.
Duty liability in case of molasses produced in khandsari sugar factory - The other exception is in case of molasses produced in a khandsari sugar factory, the duty liability is of the procurer (i.e. purchaser) of such molasses. The duty is payable on the date of receipt of such molasses in the factory of procurer. The duty on molasses produced in khandsari sugar factory is payable only when the procurer procures the molasses for use in the manufacture of any commodity. Such commodity may or may not be excisable. [Rule 4(2) of CE Rules]. - - Validity of this rule has been upheld in Ranson Industries v. UOI 2003(151) ELT 53 (J&K HC DB).
Duty liability in case of job work - Even in case of job work, the duty liability is of actual manufacturer and not of the raw material supplier.- GTC Industries v. CCE 2001(132) ELT 74 (CEGAT). - - However, a job worker manufacturing goods under notification No 214/86 is exempt from excise duty, as the raw material supplier undertakes that he will use these goods further to manufacture final product or clear for export or pay duty on such goods. [The only exception is in case of textile articles, as explained below].
Rate of duty as applicable on date of removal relevant - Though taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance from factory. In Wallace Flour Mills Co. Ltd. v. CCE 1989(44) ELT 598 = 1989(2) SCALE 804 = 186 ITR 440 = 1989(4) SCC 592 (SC), goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty. It was held that duty is payable as applicable on date of removal.
State of goods at the time of removal is relevant - Goods have to be classified and valued in the state in which goods are removed from the factory. Any further processing done after removal is not relevant.
Duty payable even when not collected - An assessee is liable to pay sales tax and the question whether he has collected it from consumer or not is of no consequence. His liability is by virtue of being an assessee under the Act. - American Remedies P Ltd. v. Govt of AP 1999(1) SCALE 30 = 113 STC 400 (SC 3 member bench).
Duty is a manufacturing expense from accounting point of view - Excise duty should be considered as a manufacturing expense and should be considered as an element of cost for inventory valuation, like other manufacturing expenses. Excise duty cannot be treated as a period cost. - Guidance Note of ICAI on Accounting Treatment for Excise Duty - Chartered Accountant - July 2000.
Types of excise duties - Excise duties are of following types -
Duties under Central Excise Act - Basic duty is levied under Central Excise Act.
Basic excise duty to be termed as Cenvat - Basic excise duty (also termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. – [section 3(1)(a) of CEA].
Basic excise duty is levied u/s 3(1) of Central Excise Act. The section is termed as ‘charging section’. The duty rate is generally 8% w.e.f. 24-2-2009 i.e. total 8.24% including education and SAH cess [earlier, it was 14% i.e. total 14.42%].
Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is 1% of basic excise duty.
Education Cess and SAH EDUCATION CESS on excise duty - If excise duty rate is 8%, education cess will be 0.16% and SAH Education cess will be 0.08%. A provisions of Central Excise Act, including those relating to refunds, exemptions and penalties will apply to education cess and SAH cess.
Excise duty in case of clearances by EOU – The EOU units are expected to export all their production. However, if they clear their final product in DTA (domestic tariff area), the rate of excise duty will be equal to customs duty on like article if imported in India. [proviso to section 3(1)]. Note that even if rate of customs duty is considered for payment of duty, actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only as a measure. The EOU unit can sale part of their final products in India at 50% of customs duty or normal excise duty in certain cases.
National Calamity contingent Duty – A ‘National Calamity Contingent Duty’ (NCCD) has been imposed vide section 136 of Finance Act, 2001 [clause 129 of Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies from 10% to 45%. - - NCCD of 1% was imposed on PFY, motor cars, multi utility vehicles and two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide section 169 of Finance Act, 2003.
Duties under other Acts - Some duties and cesses are levied on manufactured products under other Acts. The administrative machinery of central excise is used to collect those taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and collection of these duties / cesses.
Duty on Medical and Toilet preparations - A duty of excise is imposed on medical preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
Additional duty on mineral products - Additional duty on mineral products (like motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of Excise and Customs) Act, 1958.
Cess - A cess has been imposed on certain products.
Goods
The word “goods†has not been defined under the Central Excise Act. Article 366(12) of the Constitution defines ‘goods’ as ‘goods includes all materials, commodities and articles’. Sale of Goods Act defines that “Goods†means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. These definitions are quite wide for purpose of Central Excise Act. However, case law on this is well developed and as per judicial interpretation, the word “goodsâ€, for purpose of levy of Excise duty, must satisfy two requirements i.e. (a) they must be movable and (b) they must be marketable.
Goods must be movable - They must be movable. Thus, immovable property or property attached to earth is not ‘goods’ and hence duty cannot be levied on it - Kailash Oil Cake Industries v. CCE - 1993 (63) ELT 693 (CEGAT). Duty cannot be levied on immovable property - National Radio v. CCE - 1995 (76) 436 (CEGAT).
Goods must be Marketable - The item must be such that it is capable of being bought or sold. This is the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is satisfied, duty cannot be levied as these will not be goods. [This is also termed as 'Vendibility Test']. This view, expressed in UOI v. Delhi Cloth Mills - AIR 1963 SC 791 = 1963 (Suppl.) (1) SCR 586 = 1977 (1) ELT (J 177) (SC 5 member Constitution bench), has been consistently followed by Supreme Court in subsequent cases and by all High Courts. It was held that to become ‘goods’ an article must be something which can ordinarily come to market to be bought and sold.
In case of DCM, they were manufacturing ‘Vanaspati’. Raw material was groundnut and til oil. During manufacture, ‘refined oil’ got produced at intermediate stage which was consumed within factory for manufacture of ‘Vanaspati’. Excise department demanded duty on this ‘refined oil’. [During the relevant period, there was no excise duty on ‘Vanaspati’, but ‘refined oil’ was excisable.] This stand was negated by Supreme Court. It was observed that process of deodorisation was not carried out on the ‘refined oil’. In the market, the product is not known as ‘refined oil’ unless it is deodorized. Applying this ‘marketability test’, it was held that the ‘refined oil’ which is not ‘deodorized’ is not ‘goods’. [Deodorisation was carried out in the manufacturing process after hydrogenation only.]
Actual sale is not necessary - Marketability is an essential ingredient in order to be dutiable. Marketability is a decisive test for dutiability. It only means ‘saleable’ or ‘suitable for sale’. It need not in fact be marketed. The article should be capable of being sold to consumers, as it is - without any thing more. - Indian Cable Co. Ltd. v. CCE - 1994 (74) ELT 22 (SC) = JT 1994 (6) SC 243 = (1995) 97 STC 307 (SC) = 1994 AIR SCW 4071 = AIR 1995 SC 64 = (1994) 6 SCC 610 = 1994 (4) RLT 437 (SC 3 member bench).
Mere mention in Tariff is not enough - Mere mention of an item in tariff is not enough. Simply because a certain article falls within the schedule (of Central Excise Tariff), it would not be dutiable if the article is not ‘goods’ known to the market. - Bhor Industries Ltd. v. CCE (1989) 40 ELT 280 (SC) = 1989 (1) SCC 602 = 1989(1) SCALE 226 = 1989 (1) SCR 382 = AIR 1989 SC 1153 = (1989) 73 STC 145 (SC) = (1990) 184 ITR 129 (SC) - In this case, it was found that crude PVC films (intermediate product) manufactured by the assessee for captive consumption, for further manufacture of leather cloth were not marketable in that stage and hence not dutiable.
Mere specification in tariff is not proof of marketability. - Ion Exchange (India) Ltd. v. CCE 1999(4) SCALE 345 = 1999 AIR SCW 2606 = AIR 1999 SC 2457 = 1999(112) ELT 746 (SC).
The aforesaid judgments that goods are not dutiable if they are not marketable, even when they are specifically mentioned in Central Excise Tariff, were under review and the matter was referred to large bench in UOI v. Delhi Cloth and General Mills (DCM) 1997(91) ELT 23 = 19 RLT 475 = 1998 AIR SCW 2300 = 1997(2) SCALE 609 = AIR 1998 SC 2917 = 1997(4) SCC 203 (SC 2 member bench). A three member bench in UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = 109 STC 113 = (1997) 92 ELT 315 = AIR 1997 SC 2429 (SC 3 member bench) has reiterated and confirmed the present view that even if a commodity is specifically mentioned in tariff, duty is not payable if the commodity is not marketable. In this case, it was also observed that the commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable.
Duty leviable on captive consumption - Since excise is a duty on manufacture, duty is leviable even if goods are consumed within the factory and not sold. However, the goods must be marketable in the condition in which they are manufactured and further consumed within the factory.
However, mere fact that goods have been captively consumed (i.e. consumed within the factory) is no evidence of its marketability (or non-marketability). Even transient items can be ‘goods’ provided that the article is capable of being marketed even during that short period. Goods which are unstable can be theoretically marketable if there was market for such transient article - but one has to take a practical view on the basis of available evidence. - Ambalal Sarabhai Enterprises v. CCE (1989) 43 ELT 214 (SC) = JT 1989 (3) SC 741 = 1989 (3) SCR 784 = (1990) 77 STC 190 = AIR 1990 SC 59 = (1989) 4 SCC 112.
Every thing that is sold is not 'marketable' - 'Marketability' implies regular market for a product. Occasional, stray or distress sales do not mean that the product is 'marketable'.
Marketability to be decided on the basis of the state in which it is produced - The commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable - UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = (1997) 92 ELT 315 = 109 STC 113 = AIR 1997 SC 2429 (SC 3 member bench) - same view in Wochardt Ltd. v. CCE 1999(105) ELT 573 (CEGAT) * Eastern Coils v. CCE 2001(132) ELT 369 (CEGAT).
What are “Goods†- Some examples will clarify the legal position.
Gas, Steam etc. - Gas and Steam are goods as it is a tangible property. - . - It is marketable - Ambalal Sarabhai Enterprises Ltd. v. UOI 1991 (54) ELT 30 (Guj HC). It is held that ‘steam is ‘goods’ as it can be weighted, measured and marketed.
Electricity – In case of electrical energy, generation or production coincides almost instantaneously with its consumption. Sale, supply and consumption takes place without any hiatus. - - Electricity is movable property though it is not tangible. It is ‘goods’. – State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). The ‘electricity’ is ‘goods’ - CST v. MPEB - (1970) 25 STC 188 (SC) = (1969) 2 SCR 939 = AIR 1970 SC 732 (partly overruled in 2002 only to the extent that it was held in 2002 judgment that electricity cannot be stored). - followed in Indian Oil Corpn v. CTO (1997) 107 STC 463 (Raj TT)
Drawing, designs etc. are goods – Drawing and designs relating to machinery or technology are ‘goods’, even if payment is made for technical advice or information technology, which is intangible asset. But the moment it is put on a media, whether paper or diskettes or any other things, that what is supplied becomes chattel. – Associated Cement Companies Ltd. v. CC 2001 AIR SCW 559 = 128 ELT 21 = 124 STC 59 = AIR 2001 SC 862 = 2001(1) SCALE 436 = JT 2001(2) SC 141 (SC 3 member bench). Knowledge in the form of drawing and design relating to machinery are ‘goods’ – Prerna Textiles v. CCE 2000(117) ELT 241 (CEGAT) – civil appeal dismissed by SC (2001) 134 ELT A169.
Machinery - Will be ‘goods’ if it is in marketable condition at the time of removal from factory of manufacture, even if subsequently, it is to be fastened to earth.
Waste and Scrap are ‘goods’ - In Khandelwal Metal and Engg Works v. UOI - 1985 (Supp) 1 SCR 750 = 1985 (20) ELT 222 (SC) = AIR 1985 SC 1211 = (1985) 3 SCC 620, Apex Court held that scrap would be liable to duty, if it is known in commercial parlance by that name and has an established market - followed in Dhrunal Chhotalal Patel v. UOI - 1993 (63) ELT 27 (Bom HC). In Greysham v. CCE 2000(117) ELT 350 (CEGAT), it was held that waste and scrap of steel arising during manufacture is dutiable as it is marketable and specifically mentioned in tariff.
Waste and scrap not goods if not marketable - Carbide sludge arising in manufacture of acetylene gas is not marketable and hence not liable to duty – CCE v. Bansal Indus. Gases 2003(151) ELT 4 (SC 3 member bench). Spent Nickel Catalyst arising during manufacture of soap is not an excisable commodity as department failed to prove that it is a marketable commodity. – CCE v. Hindustan Lever 2003(151) ELT 10 (SC).
Waste and scrap excisable only if mentioned in CETA - The waste and scrap will not be ‘excisable goods’ unless they are specified in CETA. In CCE v. Carborandum Universal Ltd. 1998(103) ELT 363 (CEGAT), it was held that waste termed as 'dust collector fine' emerging during grinding is merely an industrial waste and even if it fetches some price, it is not 'excisable goods' as there is no tariff entry in CETA.
What are not “Goods†- Some cases where the product was held as not ‘goods’ are illustrated here.
Goods having very short life are not ‘goods’, if not marketable in that short period – Yeast having short shelf life is not ‘goods’ when there is no proof about its marketability, even if the product is specified in tariff. CCE v. Jagjit Industries 2002 AIR SCW 1277 = 141 ELT 306 (SC)
Immovables are not ‘goods’ - Articles which are attached to earth are not goods as goods means a movable property.
Excisability of plant & machinery assembled at site - Plant and Machinery or structure assembled and erected at site cannot be treated as 'goods' for the purpose of Excise duty, if it is not marketable and movable.
The word ‘goods’ applies to those which can be brought to market for being bought and sold, and it is implied that it applies to such goods as are movable. Goods erected and installed in the premises and embedded to earth cease to be goods and cannot be held to be excisable goods. - Quality Steel Tubes (P.) Ltd. v. CCE - 1995 (75) ELT 17 (SC) = 1994(5) SCALE 183 = (1995) 2 SCC 372 = 6 RLT 131 = 1995 AIR SCW 11 = JT 1995 (1) SC 99 = (1995) 56 ECR 209 (SC) - in this case, it was held that tube mill and welding head erected and installed in the premises and embedded in the earth for manufacture of steel tubes and pipes are not ‘goods’.
In Municipal Corporation of Greater Bombay v. Indian Oil Corporation - JT 1990 (4) SC 533 = 1990(2) SCALE 1140 = AIR 1991 SC 686 = 1991 Supp (2) SCC 18, it was held that if the chattel is movable to another place in the same position (condition?), it is movable property. If it has to be dismantled and re-erected at later place, it is attached to earth and is immovable property.
Assembly at site is not manufacture, if immovable product emerges - In Mittal Engg Works v. CCE - 1996 (8) SCALE 452 = 1996 (88) ELT 622 (SC) = 17 RLT 612 = (1997) 106 STC 201 (SC) = (1997) 1 SCC 203 = JT 1996(10) SC 722, it was held that if an article has to be assembled, erected and attached to the earth at site and if it is not capable of being sold as it is, without any thing more, it is not 'goods'. Erection and installation of a plant is not excisable - followed in CCE v. Hyderabad Race Club - 1996 (8) SCALE 468 = 1996 (88) ELT 633 (SC), where it was held that an article embedded in the earth was not 'goods' and hence excise duty is not leviable.
Present legal position – There were some conflicting judgments. All Supreme Court judgments were of division benches, i.e. 2 member benches. In case of conflicting decisions of coordinate benches (i.e. judgments given by same number of judges), the later judgment prevails. The latest judgment on the issue is of Triveni Engineering judgment dated 8-8-2000, which has been practically accepted by Board vide its circular dated 15-1-2002. Hence, the present legal provision is, as decided in Triveni Engineering, i.e. 'The marketability test requires that the goods as such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied'. Thus, if machinery has to be dismantled before removal, it will not be goods. Following is also clear - (a) Duty cannot be levied on immovable property (b) If plant is so embedded to earth that it is not possible to move it without dismantle, no duty can be levied. (c) If machinery is superficially attached to earth for operational efficiency, and can be easily removed without dismantling, duty is leviable (d) Turnkey projects are not dutiable, but individual component/machinery will be dutiable, if marketable.
Intermediate Product - Captive Consumption - Manufacture is possible at intermediate stage also. If a product which is complete, identifiable and which can be sold in market comes into existence during the manufacturing process at intermediate stage, it will amount to manufacture and will be dutiable even if it is not sold and it is used within the same factory. (In excise terminology, it is called ‘Captive Consumption). (Such intermediate products are exempt from duty if these are used in manufacture of final product which is dutiable. If such exemption is not available, duty liability is certain.) In A S Processors v. CCE 1999(112) ELT 706 (CEGAT), it was observed that once a new product comes into existence at intermediate stage, it is charged to duty if not exempted under any notification. In CCE v. Modern Mills 1999(113) ELT 822 (CEGAT), it was held that duty liability on intermediate product arises as soon as manufacture (of intermediate product for captive consumption) is complete as it is 'deemed to have been removed' under rule 9(1).
Excisable Goods
Other essential requirement is that the goods must be ‘excisable’. Section 2(d) of Central Excise Act defines Excisable Goods as ‘Goods specified in the Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt’. ‘Goods’ includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable [Explanation to section 2(d) of CEA].
Thus, unless the item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.
Goods ‘excisable’ even if exempt from duty - ‘Excisable goods’ do not become non-excisable goods merely because they are exempt from duty by an exemption notification -. Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989(2) SCALE 804 = 1989 (44) ELT 598 (SC) = (1989) 4 SCC 592.
If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be excisable goods and levy of duty is not erased. – CCE v. Smithkline Beecham Consumer Health Care Ltd. 2003(151) ELT 5 (SC).
Goods not included in CETA are ‘non-excisable goods’ - Some goods like wheat, rice, cut flowers, horses, soya beans etc. are not mentioned in Central Excise Tariff at all and hence they are not ‘excisable goods’, though they may be ‘goods’. These are ‘non-excisable goods’. Similarly, ‘waste and scrap’ will be ‘excisable goods’ only if specifically mentioned in CETA - CCE v. Amol Decalite Ltd. 1999(105) ELT 222 (CEGAT). In Western India Ceramics P Ltd. v. CCE 1998(9) ELT 425 (CEGAT), it was held that broken glazed tiles are not excisable as there is no specific entry (in Tariff) for it.
Mere mention in CETA not enough - Mere mention in the Excise Tariff will not attract duty, unless these are ‘goods’ i.e. unless test of marketability is satisfied - Bhor Industries Ltd. v. CCE - 1989 (40) ELT 280 (SC) = (1989) 73 STC 145 (SC) = (1989) 1 SCC 602 = (1989) 1 SCALE 226 = (1989) 1 SCR 382 = (1990) 184 ITR 129 (SC) = AIR 1989 SC 1153 = 1989 (21) ECR 273
Further, the ‘excisable goods’ are liable to duty only if they are ‘manufactured’ or ‘produced’.
Goods excisable even if duty is nil – If by virtue of an exemption notification, the rate of duty is reduced to NIL, the goods specified in the tariff would still be regarded as excisable goods on which NIL rate of duty was payable.
Goods removed under bond are not 'exempted goods' - Under Central Excise, the term 'exempted goods' has specific meaning. 'Exempted goods' means those exempted under notification issued u/s 5A of CEA. Goods removed under bond without payment of duty are neither goods 'exempt from duty' nor 'goods chargeable to Nil rate of duty'. - CBE&C circular No 278/112/96-CX dated 11.12.1996 - relying on law ministry opinion dated 29.10.1974.
Goods manufactured in SEZ are ‘excluded excisable goods’ – As per section 3(1) of CE Act, as made effective w.e.f. 15-8-2003, duty is leviable on all excisable goods (except goods manufactured or produced in Special Economic Zone). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’.
Meaning of 'Goods which have suffered duty' - In some cases, the wording used is 'goods which have suffered duty / tax'. In such case, it has been held that actual payment of tax / duty is necessary. Goods cannot be said to have 'suffered tax' when no tax is paid. - State of MP v. Indore Iron & Steel Mills 1998(4) SCALE 562 also 1998(5) SCALE 467 = AIR 1998 SC 3050 = 111 STC 261 = 1998(6) SCC 416 = JT 1998(6) SC 501.
Manufactured or produced
Excise is a duty on “manufacture or production†of goods. Excise is mainly levied on goods manufactured or produced. Thus, definition of ‘manufactured’ or ‘produced’ is important because excise is a duty on manufacture and if there is no manufacture, there is no liability of payment of Central Excise duty. In Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - (SC 3 member bench), it was held that even if Central Excise Tariff mentions an item, there is no duty liability unless the process is ‘manufacture’, i.e. if new and identifiable product does not emerge after the process.
Difference between Sales tax and Excise - Central Excise duty has to be distinguished from Sales Tax. The Sales Tax is a tax on sales and hence can be imposed only when there is a sale. On the other hand, excise duty is a duty on manufacture and the duty liability is fastened immediately after goods are manufactured ; whether these are sold or not is immaterial. For example, if a Company manufactures a machine or fabricates some furniture within the factory for its own use, there will be no sales tax on the machine or furniture manufactured as it is not sold. However, the machine or furniture will be liable to excise duty as it has been manufactured. However, for administrative convenience, the payment of duty may be deferred till removal of goods from the factory.
Produced - The word produced is used to cover items like tobacco, tea, coal, ores etc. which are produced, but no manufacturing process may be carried out. In CIT v. N C Budharaja and Co. - (1993) 204 ITR 412 (SC) = (1993) 91 STC 448 (SC) = AIR 1993 SC 2529 = JT 1993 (5) SC 346 = 1994 Supp (1) SCC 280 = (1993) 70 Taxman 312 = 1993 AIR SCW 3317, it has been held that the word ‘production’ has a wider connotation than the word ‘manufacture’. Every ‘manufacture’ can be characterised as ‘production’, but every ‘production’ need not amount to manufacture. When the word ‘produced’ or ‘production’ is used in juxtaposition with the word ‘manufacture’, it takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all by-products, intermediate products and residual products, which emerge in the course of manufacture of goods. Thus, waste, scrap and by-products are dutiable even if they are not manufactured, as they are ‘produced’.
Thus, the word 'produced' covers (a) Items like coffee, tea, tobacco, coal, dairy products, ores etc. which are 'produced' (b) The word 'produced' can also cover live products like horse, fish, flowers etc. which are 'produced' (c) By-products, scrap etc. which are not really 'manufactured' but they do get 'produced' (d) It will obviously cover goods 'manufactured'.
Manufacture - Section 2(f) of Central Excise Act merely states that “manufacture†includes any process - (i) incidental or ancillary to the completion of manufactured product or (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, or (iii) which, in relation to goods specified in third schedule to the CEA, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers or declaration or alteration of retail sale price or any other treatment to render the product marketable to consumer. [clauses (ii) and (iii) are called deemed manufacture]. - - Thus, definition of ‘manufacture’ is inclusive and not exhaustive. However, there is ample case law on this issue. ‘Manufacture’ means : (a) Manufacture as specified in various Court decisions i.e. new and identifiable product must emerge or (b) Deemed Manufacture.
‘Manufacture’ as defined by Courts, takes place only when the process results in a commercially different article or commodity. Following would be instances when ‘manufacture’ has taken place (a) manufacture of table from wood (b) conversion of pulp into base paper (c) conversion of sugarcane to sugar.
Deemed manufacture – Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003] - - These provisions are discussed later in this chapter.
Manufacture as defined by Courts - Some important Court decisions are discussed here.
New substance having distinct name, character or use must emerge - In Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 = 1977 (1) ELT (J199) (SC) and 1990 (27) ECR 151 SC]; a five member constitution bench of Supreme Court has held that the manufacture means bringing into existence a new substance. (This is a very important and leading case regarding definition of ‘Manufacture’). Manufacture is end result of one or more processes, through which original commodity passes. Thus, manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use.
There is no manufacture and hence no excise duty liability if a new and commercially different identifiable product does not result - Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - SC 3 member bench
(For example cutting of wood in small pieces or making small pieces of a long steel bars would not amount to manufacture as no new product emerges).
Mere mention in tariff does not mean manufacture – In CCE v. Markfed Vanaspati 2003(153) ELT 491 (SC)., it was held that even if an article is specified in tariff, there is no duty liability unless it is ‘manufactured’.
Trade Parlance is important - The test to be applied is whether a commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity. Nature and extent of processing may vary. With each process, the original commodity experiences change. But it is only when the change or series of change take commodity to a point where commercially it is recognised as a new and distinct commodity, then it can be said that new commodity has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial parlance, the processed commodity is regarded as distinct in character and identity from the original commodity - Sterling Foods v. State of Karnataka - 1986 (63) STC 239 = 1986(3) SCC 469 = AIR 1986 SC 1809 = 1986(2) SCALE 106 = 1986 (26) ELT 3 (SC). Similar views in Aditya Mills Ltd. v. UOI (1989) 1 CLA 137 (SC) = (1989) 73 STC 195 = 37 ELT 471 = AIR 1988 SC 2237.
Assembly can be manufacture - Assembly of various parts and components may amount to manufacture if new product emerges, which is movable and marketable.
Manufacture even if final product falls under same tariff - There can be ‘manufacture’ even if both inputs and final product fall under same tariff heading, if a different identifiable commercially known product comes into existence - Laminated Packings (P.) Ltd. v. CCE - 1990 (49) ELT 326 (SC) = 1990 (30) ECR 166 (SC) = 1990(2) SCALE 272 = (1990) 3 JT (SC) 493.
Deemed manufacture - Section 2(f), which defines ‘Manufacture’ has two deeming provisions. Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003].
Thus, the process may not amount to manufacture as per principles evolved by Courts, but these will be liable to excise duty if it is defined as amounting to manufacture under CETA, or if the product is included in third schedule to Act and any of specified process (like re-packing, re-labelling, alteration of retail sale price etc.) are carried out. - - This is called 'deeming provision' or a 'legal fiction'. e.g. process like labelling, re-labelling, re-packing is not 'manufacture' as no new product emerges. However, it will be 'deemed manufacture' and duty will be payable if the process is specified in Central Excise Tariff as 'amounting to manufacture' in relation to any goods. This amounts to charging excise duty on product which is not really manufactured as defined by Courts.
Both repacking and labelling required and product should be made marketable – In many ‘deemed manufacture’ provisions, the wording used is ‘labelling or re-labelling of containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the products marketable to the consumer’. Since the word used is ‘and’, it can be argued that mere labelling without re-packing is not ‘deemed manufacture’, as activities of labelling/re-labelling and re-packing in small packs are inter-dependent and not mutually exclusive.
Mere re-packing is not manufacture – The words used in many ‘deeming provisions are ‘repacking from bulk packs to small packs’. Thus, mere re-packing is not ‘deemed manufacture’. If goods returned are re-packed, such re-packing is from one retail pack to another retail pack and hence cannot be termed as ‘manufacture’. - - Similarly, if goods returned for rectification are re-packed, it is not ‘any other treatment to render the product marketable’, as the product was already marketable.
When 'repacking and labelling'’ will amount to manufacture - In some cases, goods are bought in bulk and sold in retail. This will not amount to 'repacking'. Generally, the expression 'packing' is considered as a package containing pre-packed commodity and quantity of the product contained therein is also pre-determined. - . - Activity of simply transferring material from one container to another may not come under the description 'repacking and labelling' - . - . - However, facts should be ascertained and decision should be taken based on all relevant facts- CBE&C circular No 342/58/97-CX dated 8.10.1997.
Deemed manufacture in case of goods covered under MRP provisions - In respect of goods specified in third schedule to Central Excise Act, any process which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on the container or adoption of any other treatment on the goods to render the product marketable to consumer will be ‘manufacture’. [section 2(f)(iii) effective from 14-5-2003].
The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package. Thus, in case of goods on which duty is payable on basis of MRP, if any of the process as specified (like labelling, re-labelling, repacking in unit container, alteration of MRP etc.), it will be ‘manufacture’ and duty will become payable. - - Some times, a manufacturer of goods (which are covered under MRP provisions) clears goods from factory in bulk without putting MRP at the time of clearance. Duty is paid on basis of section 4. The goods are packed and labeled and MRP is put either by the buyer who buys the goods or in some godown or depot or C&F Agent of the manufacturer. Now, the process carried out by the buyer or by C&F Agent or at such depot or godown of manufacturer will be ‘manufacture’. Such depot/buyer/C&F Agent/godown will have to be registered under Central Excise as ‘manufacturer’. It will have to pay duty on the basis of MRP, but will get Cenvat credit of duty paid at the time of clearance from the factory.
Though the section provides that alteration of Retail Sale Price shall be ‘deemed manufacture’, rule 23(7) of Standards of Weights and Measures (Packaged Commodities) Rules, 1997 reads as follows – ‘The manufacturer/packer shall not alter the price on wrapper once printed and used for packing’. - - Thus, in any case, alteration of MRP printed on wrapper is not permissible.
Incidental or ancillary process - Section 2(f), which defines ‘Manufacture’ states that “manufacture†includes any process which is incidental or ancillary to the completion of manufactured product. Incidental means occasional or casual process. Ancillary means auxiliary, i.e. it is integral part of manufacturing. Manufacture is not complete unless all ancillary and incidental processes are complete. In border line cases, there can be ambiguity whether a particular process is incidental or ancillary process. For instance, painting or polishing may be essential process for manufacture of furniture. However, a machinery may be said to be finished without painting. It has been held that quality checking is not a process ancillary or incidental to manufacture, unless it is legally mandatory.
Manufacturer
The liability to pay duty is on ‘Manufacturer or producer’. Duty cannot be recovered from his purchaser - Mahindra & Mahindra Ltd. v. CCE - (1983) 13 ELT 974 (CEGAT) (though the manufacturer may recover the same from buyer). Hence, Excise demands, if any, are always raised on manufacturer and recovered from manufacturer. Hence, it is essential to decide who is to be termed as ‘Manufacturer’.
Who is the 'manufacturer' - The definition of ‘manufacture’ u/s 2(f) is not exhaustive. Hence, the word ‘Manufacturer’ has to be understood in its natural meaning, i.e. ‘Manufacturer’ is a person who actually manufactures or produces excisable goods, i.e. one who actually brings into existence new and identifiable product.
Person who transforms commodity into another commodity having a distinct name and character is the manufacturer. – Pearl Soap Co. v. CCE (2001) 138 ELT 1317 (CEGAT).
Simple Domestic Illustration - One domestic example might be helpful. It is common to send wheat to a Mill to grind the wheat and convert it into ‘Wheat Flour’. Now, even if the ‘wheat’ belongs to you, the ‘Mill Owner’ will be the manufacturer of ‘wheat flour’ as per definition of Central Excise. Thus, ‘ownership’ and ‘manufacturer’ may be different. If the cost of wheat is Rs. 12 per Kg and the Mill Owner charges one rupee as job charges (conversion charges for converting ‘wheat’ into ‘wheat flour’), ‘value’ of wheat flour for Central Excise valuation purposes would be Rs. 13/-. Similarly, when you give cloth to tailor to make shirt, the tailor will be the manufacturer of shirt even if cloth belongs to you and the shirt has been made as per your requirements.
Enlarging definition of ‘manufacturer’ - Section 2(f), which defines the word ‘manufacture’, after defining the word ‘manufacture’ states that “the word manufacturer shall be understood accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.†Here again, the definition is not exhaustive but inclusive. The definition enlarges definition of ‘manufacture’ to two categories of persons, besides actual manufacturers, namely : (a) Persons who get the goods manufactured through hired labour. (b) Persons who engage in manufacture of goods on their own account. - - These may be termed as ‘deemed manufacturers’.
Manufacture through hired labour - A person will be treated as ‘Manufacturer’ if he engages ‘hired labour’ who may be Employee or Contractor for manufacture of excisable goods. A hired labour is one who hires himself out to work for and under control of another for wages. However, if he undertakes manufacture on own account, he cannot be said to have hired himself out to another even if he manufactures for other - Techma Engineering Enterprise v. CCE - 1987 (27) ELT 460 (CEGAT).
Sub-contractor is manufacturer if relation to the main contractor is on principal to principal basis, even when job work is done at site, if relationship between sub-contractor and main contractor is on principal to principal basis. - Voltas Ltd. v. CCE 2002(139) ELT 223 (CEGAT) * Voltas Ltd. v. CCE 2002(144) ELT 108 (CEGAT).
Engages in Manufacture On his own account – The word ‘engages’ has to be read as ‘engages others’. This is because, if he is himself engaged in manufacturer, then he is actually the manufacturer. Extended or enlarged definition is not required to treat him as ‘manufacturer’. ‘On his own account’ has been interpreted to mean as ‘under his direction and control’ in Philips India v. UOI 1980(6) ELT 263 (All HC DB).
Manufacture at site of buyer - In Basti Sugar Mills v. CCE 2000(115) ELT 626 (CEGAT), it was held that an independent contractor who assembles the parts in a factory (assembly of crane in this case) will be the manufacturer and not the owner of factory. [In this case, contractor assembling the parts was independent contractor appointed by supplier of parts of crane. Obviously, he was not 'hired labour' of the factory owner.] – same view in Solid and Correct Engineering Works v. CCE 2002(145) ELT 673 (CEGAT). In this case, the marketing company assembled various parts at the site of buyer. It was held that the marketing company is the manufacturer.
Raw material Supplier is not the manufacturer - It is common in Industry to supply raw material to a Job Worker or Processor and get the goods manufactured from him in his factory e.g. Automobile Manufacturers like Bajaj, Maruti, Mahindra, Premier Automobiles or Hindustan Motor very often get many parts manufactured from outside on ‘Job Work’ basis. In such cases, they (Maruti, Bajaj etc.) will not be treated as ‘Manufacturer’ even if the Raw Material is supplied by them and right of rejection is retained by them. In Ujagar Prints v. UOI - AIR 1989 SC 516 = 42 Taxman 151 (SC) = 1989 (39) ELT 493 (SC) = (1989) 74 STC 401 (SC) = (1989) 3 SCC 488 = 179 ITR 317 (SC) (5 member constitution bench), it has been held that excise duty is on ‘manufacture and production of goods’ and liability to pay duty is not dependent upon whether the manufacturer is owner or not.
Brand Owner is not the Manufacturer - Some large units get their goods manufactured from others under their Brand Name, instead of manufacturing it themselves. They usually control quality and may even supply the design. e.g. Bajaj Electricals get many electrical goods manufactured from others; Batas procure some foot-wear from others and supply under their brand name. Some large pharmaceutical companies also get the goods manufactured from small scale units under their brand names. In such cases; Bajaj, Bata or the Pharmaceutical Companies will not be treated as ‘Manufacturer’ even if they exercise quality control, or allow use of their brand name, or provide financial help to the small manufacturers, or even supply the raw material, if their relation with the manufacturer is ‘Principal to Principal’ basis. Supreme Court in Cibatul Ltd. v. UOI - 1978 (22) ELT 302 (SC) - have held that if the goods are produced with Customer’s brand name under his quality control, it does not mean that the Customer is the Manufacturer. Same view was reaffirmed in Jt. Secretary to Government of India v. Food Specialities Ltd. - 1985 (22) ELT 324 (SC).
Brand name owner will not be manufacturer even if he supplies raw material. - Philips India Ltd. v. UOI - 1980 (6) ELT 263 (All HC DB) - quoted and followed in Cheryl Laboratories v. CCE - 1993 (65) ELT 596 (CEGAT - 3 member bench order).
Manufacture must be in India
Last operative word of section 3 of Central Excise Act is that excisable goods must be manufactured or produced in India. Thus, excise levy cannot be imposed on imported goods or goods manufactured in Nepal. This is also true if goods are imported in SKD or CKD condition and they are only assembled in India, as no new product emerges - Walchand Nagar Industries v. CCE - 1995 (79) ELT 485 (CEGAT - 3 member bench order). - same view in Indian Xerographic System Ltd. v. CC, Bombay - (1995) 80 ELT 337 (CEGAT) * CIT v. Telco (1968) 68 ITR 325 (Bom).
In addition, in some cases, duty is imposed on 'deemed manufacture' also. Hence, central excise duty is presently levied under entry 84 and 97.
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is called ‘State Excise’. The Act, Rules and rates for excise on liquor are different for each State (this is the reason why price of liquor varies widely from Goa to MP to Punjab. In some States, it is officially not available.).
Basic conditions of excise liability - Section 3 of Central Excise Act ( often called the ‘Charging Section’ ) states that ‘There shall be levied and collected in such manner as may be prescribed duties on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India - . - . -'. The words ‘goods which are manufactured or produced in India’ are same as those used in Entry No 84 to list I. Thus, the power to levy Central Excise duty is derived from the Constitution. This definition of charging section of Central Excise is vital, because it clearly signifies that there are four basic conditions for levy of Central Excise duty. (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced (4) Such manufacture or production must be in India. Unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Each of these requirements needs close scrutiny.
Goods manufactured in SEZ are ‘excluded excisable goods’ – A per section 3(1) of CE Act, duty is leviable on all excisable goods (excluding goods manufactured or produced in Special Economic Zones). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’ [The revised definition is made effective from 15-8-2003].
Taxable Event for Excise Duty - ‘Taxable event’ is that on happening of which the charge is fixed. It is that event, which on its occurrence creates or attracts the liability to tax. Such liability does not accrue at any earlier or later point of time - Goodyear India Ltd. v. State of Haryana (1990) 76 STC 71 (SC) = 1990 UPTC 198 = AIR 1990 SC 781. Tax becomes payable when liability to pay tax arises and liability to pay tax arises by the happening of the taxable event. - Kalwa Devadallain v. UOI (1963) 49 ITR 165 (SC) * M A Co. v. Asstt Commissioner (1964) 15 STC 487 (All HC).
In Re Sea Customs Act, 1878 - AIR 1963 SC 1760 = (1964) 3 SCR 787 (SC 9 member full bench), it was observed - 'Excise duty is not directly on the goods, but manufacture thereof. - . - . - Though both excise duty and sales tax are levied with reference to goods, the two are very different imposts. In one case, the imposition is on the act of manufacture or production, while in the other it is on act of sale. In neither case, therefore, can it be said that the excise duty or sale tax is directly on the goods, for in that event, they will really become the same tax' - confirmed in Shinde Brothers v. Dy Commissioner - AIR 1967 SC 1512 = (1967) 1 SCR 548, where it was held that excise duty is on goods and taxable event is manufacture or production of goods.
It has been held that in Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989 (44) ELT 598 (SC) = 1989(2) SCALE 804 = (1989) 4 SCC 592 that ‘manufacture or production in India’ of an 'excisable article’ is a ‘taxable event’ for Central Excise, though duty can be levied and collected at a later stage for administrative convenience - quoted with approval and followed in Shree Synthetics Ltd. v. UOI 1999(113) ELT 774 (SC 3 member bench). Removal from factory is not the 'taxable event'. In CCE v. Vazir Sultan Tobacco Co. Ltd. - 1996 (2) SCALE 603 = (1996) 13 RLT 291 = JT 1996 (3) (2 ?)112 = AIR 1996 SC 3025 = 1996 AIR SCW 1353 = 63 ECR 359 = 1996 (83) ELT 3 = (1996) 3 SCC 434 (SC - 3 member bench), Supreme Court has confirmed that the levy is and remains upon the manufacture or production alone. Only the collection is shifted to stage of removal. It is also confirmed that the removal of goods is not a taxable event. In Empire Industries v. UOI (1985) 20 ELT 179 (SC) = AIR 1986 SC 662 = (1985) 1 SCALE 1269 = (1987) 64 STC 42 (SC) = (1985) 3 SCC 314 = 1985 Supp (1) SCR 292 = (1986) 162 ITR 846 (SC), it was observed - 'Taxable event in Central Excise is the manufacture of excisable goods. - . - . - The sale or the ownership of the end-product is absolutely irrelevant for the purposes of 'taxable event' under Central Excise'.
Person liable to pay excise duty - Once duty liability is fixed, the duty can be collected from a person at the time and place found administratively most convenient for collection.
The Duty liability in case of manufactured goods - Rule 4(1) of Central Excise Rules makes it clear that excise duty is payable by the manufacturer or producer of excisable goods. In case where goods are allowed to be stored in a warehouse without payment of duty, the duty liability is of the person who stores the goods. Rule 4(1) makes it clear that goods can be removed from the place where they are manufactured or produced or warehoused, only on payment of duty.
Ownership of raw material is not relevant for duty liability. – CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT). Duty demand is payable by manufacturer, even if it cannot be recovered from customer. – Snap Chem v. CCE 2001(137) ELT 235 (CEGAT).
Duty liability in case of goods stored in warehouse - Rule 20 of CE Rules permit warehousing of certain goods in warehouses without payment of duty. These goods are coffee, petroleum products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the goods.
Duty liability in case of molasses produced in khandsari sugar factory - The other exception is in case of molasses produced in a khandsari sugar factory, the duty liability is of the procurer (i.e. purchaser) of such molasses. The duty is payable on the date of receipt of such molasses in the factory of procurer. The duty on molasses produced in khandsari sugar factory is payable only when the procurer procures the molasses for use in the manufacture of any commodity. Such commodity may or may not be excisable. [Rule 4(2) of CE Rules]. - - Validity of this rule has been upheld in Ranson Industries v. UOI 2003(151) ELT 53 (J&K HC DB).
Duty liability in case of job work - Even in case of job work, the duty liability is of actual manufacturer and not of the raw material supplier.- GTC Industries v. CCE 2001(132) ELT 74 (CEGAT). - - However, a job worker manufacturing goods under notification No 214/86 is exempt from excise duty, as the raw material supplier undertakes that he will use these goods further to manufacture final product or clear for export or pay duty on such goods. [The only exception is in case of textile articles, as explained below].
Rate of duty as applicable on date of removal relevant - Though taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance from factory. In Wallace Flour Mills Co. Ltd. v. CCE 1989(44) ELT 598 = 1989(2) SCALE 804 = 186 ITR 440 = 1989(4) SCC 592 (SC), goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty. It was held that duty is payable as applicable on date of removal.
State of goods at the time of removal is relevant - Goods have to be classified and valued in the state in which goods are removed from the factory. Any further processing done after removal is not relevant.
Duty payable even when not collected - An assessee is liable to pay sales tax and the question whether he has collected it from consumer or not is of no consequence. His liability is by virtue of being an assessee under the Act. - American Remedies P Ltd. v. Govt of AP 1999(1) SCALE 30 = 113 STC 400 (SC 3 member bench).
Duty is a manufacturing expense from accounting point of view - Excise duty should be considered as a manufacturing expense and should be considered as an element of cost for inventory valuation, like other manufacturing expenses. Excise duty cannot be treated as a period cost. - Guidance Note of ICAI on Accounting Treatment for Excise Duty - Chartered Accountant - July 2000.
Types of excise duties - Excise duties are of following types -
Duties under Central Excise Act - Basic duty is levied under Central Excise Act.
Basic excise duty to be termed as Cenvat - Basic excise duty (also termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. – [section 3(1)(a) of CEA].
Basic excise duty is levied u/s 3(1) of Central Excise Act. The section is termed as ‘charging section’. The duty rate is generally 8% w.e.f. 24-2-2009 i.e. total 8.24% including education and SAH cess [earlier, it was 14% i.e. total 14.42%].
Education cess is payable @ 2% of the basic duty and Secondary and High Education Cess is 1% of basic excise duty.
Education Cess and SAH EDUCATION CESS on excise duty - If excise duty rate is 8%, education cess will be 0.16% and SAH Education cess will be 0.08%. A provisions of Central Excise Act, including those relating to refunds, exemptions and penalties will apply to education cess and SAH cess.
Excise duty in case of clearances by EOU – The EOU units are expected to export all their production. However, if they clear their final product in DTA (domestic tariff area), the rate of excise duty will be equal to customs duty on like article if imported in India. [proviso to section 3(1)]. Note that even if rate of customs duty is considered for payment of duty, actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only as a measure. The EOU unit can sale part of their final products in India at 50% of customs duty or normal excise duty in certain cases.
National Calamity contingent Duty – A ‘National Calamity Contingent Duty’ (NCCD) has been imposed vide section 136 of Finance Act, 2001 [clause 129 of Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chewing tobacco and cigarettes. It varies from 10% to 45%. - - NCCD of 1% was imposed on PFY, motor cars, multi utility vehicles and two wheelers and NCCD of Rs 50 per ton was imposed on domestic crude oil, vide section 169 of Finance Act, 2003.
Duties under other Acts - Some duties and cesses are levied on manufactured products under other Acts. The administrative machinery of central excise is used to collect those taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and collection of these duties / cesses.
Duty on Medical and Toilet preparations - A duty of excise is imposed on medical preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
Additional duty on mineral products - Additional duty on mineral products (like motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of Excise and Customs) Act, 1958.
Cess - A cess has been imposed on certain products.
Goods
The word “goods†has not been defined under the Central Excise Act. Article 366(12) of the Constitution defines ‘goods’ as ‘goods includes all materials, commodities and articles’. Sale of Goods Act defines that “Goods†means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. These definitions are quite wide for purpose of Central Excise Act. However, case law on this is well developed and as per judicial interpretation, the word “goodsâ€, for purpose of levy of Excise duty, must satisfy two requirements i.e. (a) they must be movable and (b) they must be marketable.
Goods must be movable - They must be movable. Thus, immovable property or property attached to earth is not ‘goods’ and hence duty cannot be levied on it - Kailash Oil Cake Industries v. CCE - 1993 (63) ELT 693 (CEGAT). Duty cannot be levied on immovable property - National Radio v. CCE - 1995 (76) 436 (CEGAT).
Goods must be Marketable - The item must be such that it is capable of being bought or sold. This is the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is satisfied, duty cannot be levied as these will not be goods. [This is also termed as 'Vendibility Test']. This view, expressed in UOI v. Delhi Cloth Mills - AIR 1963 SC 791 = 1963 (Suppl.) (1) SCR 586 = 1977 (1) ELT (J 177) (SC 5 member Constitution bench), has been consistently followed by Supreme Court in subsequent cases and by all High Courts. It was held that to become ‘goods’ an article must be something which can ordinarily come to market to be bought and sold.
In case of DCM, they were manufacturing ‘Vanaspati’. Raw material was groundnut and til oil. During manufacture, ‘refined oil’ got produced at intermediate stage which was consumed within factory for manufacture of ‘Vanaspati’. Excise department demanded duty on this ‘refined oil’. [During the relevant period, there was no excise duty on ‘Vanaspati’, but ‘refined oil’ was excisable.] This stand was negated by Supreme Court. It was observed that process of deodorisation was not carried out on the ‘refined oil’. In the market, the product is not known as ‘refined oil’ unless it is deodorized. Applying this ‘marketability test’, it was held that the ‘refined oil’ which is not ‘deodorized’ is not ‘goods’. [Deodorisation was carried out in the manufacturing process after hydrogenation only.]
Actual sale is not necessary - Marketability is an essential ingredient in order to be dutiable. Marketability is a decisive test for dutiability. It only means ‘saleable’ or ‘suitable for sale’. It need not in fact be marketed. The article should be capable of being sold to consumers, as it is - without any thing more. - Indian Cable Co. Ltd. v. CCE - 1994 (74) ELT 22 (SC) = JT 1994 (6) SC 243 = (1995) 97 STC 307 (SC) = 1994 AIR SCW 4071 = AIR 1995 SC 64 = (1994) 6 SCC 610 = 1994 (4) RLT 437 (SC 3 member bench).
Mere mention in Tariff is not enough - Mere mention of an item in tariff is not enough. Simply because a certain article falls within the schedule (of Central Excise Tariff), it would not be dutiable if the article is not ‘goods’ known to the market. - Bhor Industries Ltd. v. CCE (1989) 40 ELT 280 (SC) = 1989 (1) SCC 602 = 1989(1) SCALE 226 = 1989 (1) SCR 382 = AIR 1989 SC 1153 = (1989) 73 STC 145 (SC) = (1990) 184 ITR 129 (SC) - In this case, it was found that crude PVC films (intermediate product) manufactured by the assessee for captive consumption, for further manufacture of leather cloth were not marketable in that stage and hence not dutiable.
Mere specification in tariff is not proof of marketability. - Ion Exchange (India) Ltd. v. CCE 1999(4) SCALE 345 = 1999 AIR SCW 2606 = AIR 1999 SC 2457 = 1999(112) ELT 746 (SC).
The aforesaid judgments that goods are not dutiable if they are not marketable, even when they are specifically mentioned in Central Excise Tariff, were under review and the matter was referred to large bench in UOI v. Delhi Cloth and General Mills (DCM) 1997(91) ELT 23 = 19 RLT 475 = 1998 AIR SCW 2300 = 1997(2) SCALE 609 = AIR 1998 SC 2917 = 1997(4) SCC 203 (SC 2 member bench). A three member bench in UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = 109 STC 113 = (1997) 92 ELT 315 = AIR 1997 SC 2429 (SC 3 member bench) has reiterated and confirmed the present view that even if a commodity is specifically mentioned in tariff, duty is not payable if the commodity is not marketable. In this case, it was also observed that the commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable.
Duty leviable on captive consumption - Since excise is a duty on manufacture, duty is leviable even if goods are consumed within the factory and not sold. However, the goods must be marketable in the condition in which they are manufactured and further consumed within the factory.
However, mere fact that goods have been captively consumed (i.e. consumed within the factory) is no evidence of its marketability (or non-marketability). Even transient items can be ‘goods’ provided that the article is capable of being marketed even during that short period. Goods which are unstable can be theoretically marketable if there was market for such transient article - but one has to take a practical view on the basis of available evidence. - Ambalal Sarabhai Enterprises v. CCE (1989) 43 ELT 214 (SC) = JT 1989 (3) SC 741 = 1989 (3) SCR 784 = (1990) 77 STC 190 = AIR 1990 SC 59 = (1989) 4 SCC 112.
Every thing that is sold is not 'marketable' - 'Marketability' implies regular market for a product. Occasional, stray or distress sales do not mean that the product is 'marketable'.
Marketability to be decided on the basis of the state in which it is produced - The commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable - UOI v. DCM 1997(4) SCALE 251 = 1997 AIR SCW 2344 = 1997(5) SCC 767 = (1997) 92 ELT 315 = 109 STC 113 = AIR 1997 SC 2429 (SC 3 member bench) - same view in Wochardt Ltd. v. CCE 1999(105) ELT 573 (CEGAT) * Eastern Coils v. CCE 2001(132) ELT 369 (CEGAT).
What are “Goods†- Some examples will clarify the legal position.
Gas, Steam etc. - Gas and Steam are goods as it is a tangible property. - . - It is marketable - Ambalal Sarabhai Enterprises Ltd. v. UOI 1991 (54) ELT 30 (Guj HC). It is held that ‘steam is ‘goods’ as it can be weighted, measured and marketed.
Electricity – In case of electrical energy, generation or production coincides almost instantaneously with its consumption. Sale, supply and consumption takes place without any hiatus. - - Electricity is movable property though it is not tangible. It is ‘goods’. – State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) 2002 AIR SCW 1956 = 127 STC 280 (SC 5 member bench). The ‘electricity’ is ‘goods’ - CST v. MPEB - (1970) 25 STC 188 (SC) = (1969) 2 SCR 939 = AIR 1970 SC 732 (partly overruled in 2002 only to the extent that it was held in 2002 judgment that electricity cannot be stored). - followed in Indian Oil Corpn v. CTO (1997) 107 STC 463 (Raj TT)
Drawing, designs etc. are goods – Drawing and designs relating to machinery or technology are ‘goods’, even if payment is made for technical advice or information technology, which is intangible asset. But the moment it is put on a media, whether paper or diskettes or any other things, that what is supplied becomes chattel. – Associated Cement Companies Ltd. v. CC 2001 AIR SCW 559 = 128 ELT 21 = 124 STC 59 = AIR 2001 SC 862 = 2001(1) SCALE 436 = JT 2001(2) SC 141 (SC 3 member bench). Knowledge in the form of drawing and design relating to machinery are ‘goods’ – Prerna Textiles v. CCE 2000(117) ELT 241 (CEGAT) – civil appeal dismissed by SC (2001) 134 ELT A169.
Machinery - Will be ‘goods’ if it is in marketable condition at the time of removal from factory of manufacture, even if subsequently, it is to be fastened to earth.
Waste and Scrap are ‘goods’ - In Khandelwal Metal and Engg Works v. UOI - 1985 (Supp) 1 SCR 750 = 1985 (20) ELT 222 (SC) = AIR 1985 SC 1211 = (1985) 3 SCC 620, Apex Court held that scrap would be liable to duty, if it is known in commercial parlance by that name and has an established market - followed in Dhrunal Chhotalal Patel v. UOI - 1993 (63) ELT 27 (Bom HC). In Greysham v. CCE 2000(117) ELT 350 (CEGAT), it was held that waste and scrap of steel arising during manufacture is dutiable as it is marketable and specifically mentioned in tariff.
Waste and scrap not goods if not marketable - Carbide sludge arising in manufacture of acetylene gas is not marketable and hence not liable to duty – CCE v. Bansal Indus. Gases 2003(151) ELT 4 (SC 3 member bench). Spent Nickel Catalyst arising during manufacture of soap is not an excisable commodity as department failed to prove that it is a marketable commodity. – CCE v. Hindustan Lever 2003(151) ELT 10 (SC).
Waste and scrap excisable only if mentioned in CETA - The waste and scrap will not be ‘excisable goods’ unless they are specified in CETA. In CCE v. Carborandum Universal Ltd. 1998(103) ELT 363 (CEGAT), it was held that waste termed as 'dust collector fine' emerging during grinding is merely an industrial waste and even if it fetches some price, it is not 'excisable goods' as there is no tariff entry in CETA.
What are not “Goods†- Some cases where the product was held as not ‘goods’ are illustrated here.
Goods having very short life are not ‘goods’, if not marketable in that short period – Yeast having short shelf life is not ‘goods’ when there is no proof about its marketability, even if the product is specified in tariff. CCE v. Jagjit Industries 2002 AIR SCW 1277 = 141 ELT 306 (SC)
Immovables are not ‘goods’ - Articles which are attached to earth are not goods as goods means a movable property.
Excisability of plant & machinery assembled at site - Plant and Machinery or structure assembled and erected at site cannot be treated as 'goods' for the purpose of Excise duty, if it is not marketable and movable.
The word ‘goods’ applies to those which can be brought to market for being bought and sold, and it is implied that it applies to such goods as are movable. Goods erected and installed in the premises and embedded to earth cease to be goods and cannot be held to be excisable goods. - Quality Steel Tubes (P.) Ltd. v. CCE - 1995 (75) ELT 17 (SC) = 1994(5) SCALE 183 = (1995) 2 SCC 372 = 6 RLT 131 = 1995 AIR SCW 11 = JT 1995 (1) SC 99 = (1995) 56 ECR 209 (SC) - in this case, it was held that tube mill and welding head erected and installed in the premises and embedded in the earth for manufacture of steel tubes and pipes are not ‘goods’.
In Municipal Corporation of Greater Bombay v. Indian Oil Corporation - JT 1990 (4) SC 533 = 1990(2) SCALE 1140 = AIR 1991 SC 686 = 1991 Supp (2) SCC 18, it was held that if the chattel is movable to another place in the same position (condition?), it is movable property. If it has to be dismantled and re-erected at later place, it is attached to earth and is immovable property.
Assembly at site is not manufacture, if immovable product emerges - In Mittal Engg Works v. CCE - 1996 (8) SCALE 452 = 1996 (88) ELT 622 (SC) = 17 RLT 612 = (1997) 106 STC 201 (SC) = (1997) 1 SCC 203 = JT 1996(10) SC 722, it was held that if an article has to be assembled, erected and attached to the earth at site and if it is not capable of being sold as it is, without any thing more, it is not 'goods'. Erection and installation of a plant is not excisable - followed in CCE v. Hyderabad Race Club - 1996 (8) SCALE 468 = 1996 (88) ELT 633 (SC), where it was held that an article embedded in the earth was not 'goods' and hence excise duty is not leviable.
Present legal position – There were some conflicting judgments. All Supreme Court judgments were of division benches, i.e. 2 member benches. In case of conflicting decisions of coordinate benches (i.e. judgments given by same number of judges), the later judgment prevails. The latest judgment on the issue is of Triveni Engineering judgment dated 8-8-2000, which has been practically accepted by Board vide its circular dated 15-1-2002. Hence, the present legal provision is, as decided in Triveni Engineering, i.e. 'The marketability test requires that the goods as such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied'. Thus, if machinery has to be dismantled before removal, it will not be goods. Following is also clear - (a) Duty cannot be levied on immovable property (b) If plant is so embedded to earth that it is not possible to move it without dismantle, no duty can be levied. (c) If machinery is superficially attached to earth for operational efficiency, and can be easily removed without dismantling, duty is leviable (d) Turnkey projects are not dutiable, but individual component/machinery will be dutiable, if marketable.
Intermediate Product - Captive Consumption - Manufacture is possible at intermediate stage also. If a product which is complete, identifiable and which can be sold in market comes into existence during the manufacturing process at intermediate stage, it will amount to manufacture and will be dutiable even if it is not sold and it is used within the same factory. (In excise terminology, it is called ‘Captive Consumption). (Such intermediate products are exempt from duty if these are used in manufacture of final product which is dutiable. If such exemption is not available, duty liability is certain.) In A S Processors v. CCE 1999(112) ELT 706 (CEGAT), it was observed that once a new product comes into existence at intermediate stage, it is charged to duty if not exempted under any notification. In CCE v. Modern Mills 1999(113) ELT 822 (CEGAT), it was held that duty liability on intermediate product arises as soon as manufacture (of intermediate product for captive consumption) is complete as it is 'deemed to have been removed' under rule 9(1).
Excisable Goods
Other essential requirement is that the goods must be ‘excisable’. Section 2(d) of Central Excise Act defines Excisable Goods as ‘Goods specified in the Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt’. ‘Goods’ includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable [Explanation to section 2(d) of CEA].
Thus, unless the item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.
Goods ‘excisable’ even if exempt from duty - ‘Excisable goods’ do not become non-excisable goods merely because they are exempt from duty by an exemption notification -. Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989(2) SCALE 804 = 1989 (44) ELT 598 (SC) = (1989) 4 SCC 592.
If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be excisable goods and levy of duty is not erased. – CCE v. Smithkline Beecham Consumer Health Care Ltd. 2003(151) ELT 5 (SC).
Goods not included in CETA are ‘non-excisable goods’ - Some goods like wheat, rice, cut flowers, horses, soya beans etc. are not mentioned in Central Excise Tariff at all and hence they are not ‘excisable goods’, though they may be ‘goods’. These are ‘non-excisable goods’. Similarly, ‘waste and scrap’ will be ‘excisable goods’ only if specifically mentioned in CETA - CCE v. Amol Decalite Ltd. 1999(105) ELT 222 (CEGAT). In Western India Ceramics P Ltd. v. CCE 1998(9) ELT 425 (CEGAT), it was held that broken glazed tiles are not excisable as there is no specific entry (in Tariff) for it.
Mere mention in CETA not enough - Mere mention in the Excise Tariff will not attract duty, unless these are ‘goods’ i.e. unless test of marketability is satisfied - Bhor Industries Ltd. v. CCE - 1989 (40) ELT 280 (SC) = (1989) 73 STC 145 (SC) = (1989) 1 SCC 602 = (1989) 1 SCALE 226 = (1989) 1 SCR 382 = (1990) 184 ITR 129 (SC) = AIR 1989 SC 1153 = 1989 (21) ECR 273
Further, the ‘excisable goods’ are liable to duty only if they are ‘manufactured’ or ‘produced’.
Goods excisable even if duty is nil – If by virtue of an exemption notification, the rate of duty is reduced to NIL, the goods specified in the tariff would still be regarded as excisable goods on which NIL rate of duty was payable.
Goods removed under bond are not 'exempted goods' - Under Central Excise, the term 'exempted goods' has specific meaning. 'Exempted goods' means those exempted under notification issued u/s 5A of CEA. Goods removed under bond without payment of duty are neither goods 'exempt from duty' nor 'goods chargeable to Nil rate of duty'. - CBE&C circular No 278/112/96-CX dated 11.12.1996 - relying on law ministry opinion dated 29.10.1974.
Goods manufactured in SEZ are ‘excluded excisable goods’ – As per section 3(1) of CE Act, as made effective w.e.f. 15-8-2003, duty is leviable on all excisable goods (except goods manufactured or produced in Special Economic Zone). Thus, goods manufactured or produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as ‘excluded excisable goods’.
Meaning of 'Goods which have suffered duty' - In some cases, the wording used is 'goods which have suffered duty / tax'. In such case, it has been held that actual payment of tax / duty is necessary. Goods cannot be said to have 'suffered tax' when no tax is paid. - State of MP v. Indore Iron & Steel Mills 1998(4) SCALE 562 also 1998(5) SCALE 467 = AIR 1998 SC 3050 = 111 STC 261 = 1998(6) SCC 416 = JT 1998(6) SC 501.
Manufactured or produced
Excise is a duty on “manufacture or production†of goods. Excise is mainly levied on goods manufactured or produced. Thus, definition of ‘manufactured’ or ‘produced’ is important because excise is a duty on manufacture and if there is no manufacture, there is no liability of payment of Central Excise duty. In Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - (SC 3 member bench), it was held that even if Central Excise Tariff mentions an item, there is no duty liability unless the process is ‘manufacture’, i.e. if new and identifiable product does not emerge after the process.
Difference between Sales tax and Excise - Central Excise duty has to be distinguished from Sales Tax. The Sales Tax is a tax on sales and hence can be imposed only when there is a sale. On the other hand, excise duty is a duty on manufacture and the duty liability is fastened immediately after goods are manufactured ; whether these are sold or not is immaterial. For example, if a Company manufactures a machine or fabricates some furniture within the factory for its own use, there will be no sales tax on the machine or furniture manufactured as it is not sold. However, the machine or furniture will be liable to excise duty as it has been manufactured. However, for administrative convenience, the payment of duty may be deferred till removal of goods from the factory.
Produced - The word produced is used to cover items like tobacco, tea, coal, ores etc. which are produced, but no manufacturing process may be carried out. In CIT v. N C Budharaja and Co. - (1993) 204 ITR 412 (SC) = (1993) 91 STC 448 (SC) = AIR 1993 SC 2529 = JT 1993 (5) SC 346 = 1994 Supp (1) SCC 280 = (1993) 70 Taxman 312 = 1993 AIR SCW 3317, it has been held that the word ‘production’ has a wider connotation than the word ‘manufacture’. Every ‘manufacture’ can be characterised as ‘production’, but every ‘production’ need not amount to manufacture. When the word ‘produced’ or ‘production’ is used in juxtaposition with the word ‘manufacture’, it takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all by-products, intermediate products and residual products, which emerge in the course of manufacture of goods. Thus, waste, scrap and by-products are dutiable even if they are not manufactured, as they are ‘produced’.
Thus, the word 'produced' covers (a) Items like coffee, tea, tobacco, coal, dairy products, ores etc. which are 'produced' (b) The word 'produced' can also cover live products like horse, fish, flowers etc. which are 'produced' (c) By-products, scrap etc. which are not really 'manufactured' but they do get 'produced' (d) It will obviously cover goods 'manufactured'.
Manufacture - Section 2(f) of Central Excise Act merely states that “manufacture†includes any process - (i) incidental or ancillary to the completion of manufactured product or (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, or (iii) which, in relation to goods specified in third schedule to the CEA, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers or declaration or alteration of retail sale price or any other treatment to render the product marketable to consumer. [clauses (ii) and (iii) are called deemed manufacture]. - - Thus, definition of ‘manufacture’ is inclusive and not exhaustive. However, there is ample case law on this issue. ‘Manufacture’ means : (a) Manufacture as specified in various Court decisions i.e. new and identifiable product must emerge or (b) Deemed Manufacture.
‘Manufacture’ as defined by Courts, takes place only when the process results in a commercially different article or commodity. Following would be instances when ‘manufacture’ has taken place (a) manufacture of table from wood (b) conversion of pulp into base paper (c) conversion of sugarcane to sugar.
Deemed manufacture – Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003] - - These provisions are discussed later in this chapter.
Manufacture as defined by Courts - Some important Court decisions are discussed here.
New substance having distinct name, character or use must emerge - In Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791 = 1963 Suppl (1) SCR 586 = 1977 (1) ELT (J199) (SC) and 1990 (27) ECR 151 SC]; a five member constitution bench of Supreme Court has held that the manufacture means bringing into existence a new substance. (This is a very important and leading case regarding definition of ‘Manufacture’). Manufacture is end result of one or more processes, through which original commodity passes. Thus, manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use.
There is no manufacture and hence no excise duty liability if a new and commercially different identifiable product does not result - Hyderabad Industries Ltd. v. UOI - 1995 (78) ELT 641 (SC) = 1995 AIR SCW 3367 = (1995) 5 SCC 338 - SC 3 member bench
(For example cutting of wood in small pieces or making small pieces of a long steel bars would not amount to manufacture as no new product emerges).
Mere mention in tariff does not mean manufacture – In CCE v. Markfed Vanaspati 2003(153) ELT 491 (SC)., it was held that even if an article is specified in tariff, there is no duty liability unless it is ‘manufactured’.
Trade Parlance is important - The test to be applied is whether a commodity subject to processing retains its original character and identity or whether the processed commodity is regarded in the trade by those who deal in it, as distinct identity from original commodity. Nature and extent of processing may vary. With each process, the original commodity experiences change. But it is only when the change or series of change take commodity to a point where commercially it is recognised as a new and distinct commodity, then it can be said that new commodity has come into being. The test is whether in the eyes of those dealing in the commodity or in commercial parlance, the processed commodity is regarded as distinct in character and identity from the original commodity - Sterling Foods v. State of Karnataka - 1986 (63) STC 239 = 1986(3) SCC 469 = AIR 1986 SC 1809 = 1986(2) SCALE 106 = 1986 (26) ELT 3 (SC). Similar views in Aditya Mills Ltd. v. UOI (1989) 1 CLA 137 (SC) = (1989) 73 STC 195 = 37 ELT 471 = AIR 1988 SC 2237.
Assembly can be manufacture - Assembly of various parts and components may amount to manufacture if new product emerges, which is movable and marketable.
Manufacture even if final product falls under same tariff - There can be ‘manufacture’ even if both inputs and final product fall under same tariff heading, if a different identifiable commercially known product comes into existence - Laminated Packings (P.) Ltd. v. CCE - 1990 (49) ELT 326 (SC) = 1990 (30) ECR 166 (SC) = 1990(2) SCALE 272 = (1990) 3 JT (SC) 493.
Deemed manufacture - Section 2(f), which defines ‘Manufacture’ has two deeming provisions. Deemed manufacture is of two types – (a) CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are carried out, goods will be said to be manufactured, even if as per Court decisions, the process may not amount to ‘manufacture’ [section 2(f)(ii)] (b) In respect of goods specified in third schedule to Central Excise Act, repacking, re-labelling, putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package. [section 2(f)(iii) w.e.f. 14-5-2003].
Thus, the process may not amount to manufacture as per principles evolved by Courts, but these will be liable to excise duty if it is defined as amounting to manufacture under CETA, or if the product is included in third schedule to Act and any of specified process (like re-packing, re-labelling, alteration of retail sale price etc.) are carried out. - - This is called 'deeming provision' or a 'legal fiction'. e.g. process like labelling, re-labelling, re-packing is not 'manufacture' as no new product emerges. However, it will be 'deemed manufacture' and duty will be payable if the process is specified in Central Excise Tariff as 'amounting to manufacture' in relation to any goods. This amounts to charging excise duty on product which is not really manufactured as defined by Courts.
Both repacking and labelling required and product should be made marketable – In many ‘deemed manufacture’ provisions, the wording used is ‘labelling or re-labelling of containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the products marketable to the consumer’. Since the word used is ‘and’, it can be argued that mere labelling without re-packing is not ‘deemed manufacture’, as activities of labelling/re-labelling and re-packing in small packs are inter-dependent and not mutually exclusive.
Mere re-packing is not manufacture – The words used in many ‘deeming provisions are ‘repacking from bulk packs to small packs’. Thus, mere re-packing is not ‘deemed manufacture’. If goods returned are re-packed, such re-packing is from one retail pack to another retail pack and hence cannot be termed as ‘manufacture’. - - Similarly, if goods returned for rectification are re-packed, it is not ‘any other treatment to render the product marketable’, as the product was already marketable.
When 'repacking and labelling'’ will amount to manufacture - In some cases, goods are bought in bulk and sold in retail. This will not amount to 'repacking'. Generally, the expression 'packing' is considered as a package containing pre-packed commodity and quantity of the product contained therein is also pre-determined. - . - Activity of simply transferring material from one container to another may not come under the description 'repacking and labelling' - . - . - However, facts should be ascertained and decision should be taken based on all relevant facts- CBE&C circular No 342/58/97-CX dated 8.10.1997.
Deemed manufacture in case of goods covered under MRP provisions - In respect of goods specified in third schedule to Central Excise Act, any process which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on the container or adoption of any other treatment on the goods to render the product marketable to consumer will be ‘manufacture’. [section 2(f)(iii) effective from 14-5-2003].
The goods included in Third Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A, i.e. on basis of MRP printed on the package. Thus, in case of goods on which duty is payable on basis of MRP, if any of the process as specified (like labelling, re-labelling, repacking in unit container, alteration of MRP etc.), it will be ‘manufacture’ and duty will become payable. - - Some times, a manufacturer of goods (which are covered under MRP provisions) clears goods from factory in bulk without putting MRP at the time of clearance. Duty is paid on basis of section 4. The goods are packed and labeled and MRP is put either by the buyer who buys the goods or in some godown or depot or C&F Agent of the manufacturer. Now, the process carried out by the buyer or by C&F Agent or at such depot or godown of manufacturer will be ‘manufacture’. Such depot/buyer/C&F Agent/godown will have to be registered under Central Excise as ‘manufacturer’. It will have to pay duty on the basis of MRP, but will get Cenvat credit of duty paid at the time of clearance from the factory.
Though the section provides that alteration of Retail Sale Price shall be ‘deemed manufacture’, rule 23(7) of Standards of Weights and Measures (Packaged Commodities) Rules, 1997 reads as follows – ‘The manufacturer/packer shall not alter the price on wrapper once printed and used for packing’. - - Thus, in any case, alteration of MRP printed on wrapper is not permissible.
Incidental or ancillary process - Section 2(f), which defines ‘Manufacture’ states that “manufacture†includes any process which is incidental or ancillary to the completion of manufactured product. Incidental means occasional or casual process. Ancillary means auxiliary, i.e. it is integral part of manufacturing. Manufacture is not complete unless all ancillary and incidental processes are complete. In border line cases, there can be ambiguity whether a particular process is incidental or ancillary process. For instance, painting or polishing may be essential process for manufacture of furniture. However, a machinery may be said to be finished without painting. It has been held that quality checking is not a process ancillary or incidental to manufacture, unless it is legally mandatory.
Manufacturer
The liability to pay duty is on ‘Manufacturer or producer’. Duty cannot be recovered from his purchaser - Mahindra & Mahindra Ltd. v. CCE - (1983) 13 ELT 974 (CEGAT) (though the manufacturer may recover the same from buyer). Hence, Excise demands, if any, are always raised on manufacturer and recovered from manufacturer. Hence, it is essential to decide who is to be termed as ‘Manufacturer’.
Who is the 'manufacturer' - The definition of ‘manufacture’ u/s 2(f) is not exhaustive. Hence, the word ‘Manufacturer’ has to be understood in its natural meaning, i.e. ‘Manufacturer’ is a person who actually manufactures or produces excisable goods, i.e. one who actually brings into existence new and identifiable product.
Person who transforms commodity into another commodity having a distinct name and character is the manufacturer. – Pearl Soap Co. v. CCE (2001) 138 ELT 1317 (CEGAT).
Simple Domestic Illustration - One domestic example might be helpful. It is common to send wheat to a Mill to grind the wheat and convert it into ‘Wheat Flour’. Now, even if the ‘wheat’ belongs to you, the ‘Mill Owner’ will be the manufacturer of ‘wheat flour’ as per definition of Central Excise. Thus, ‘ownership’ and ‘manufacturer’ may be different. If the cost of wheat is Rs. 12 per Kg and the Mill Owner charges one rupee as job charges (conversion charges for converting ‘wheat’ into ‘wheat flour’), ‘value’ of wheat flour for Central Excise valuation purposes would be Rs. 13/-. Similarly, when you give cloth to tailor to make shirt, the tailor will be the manufacturer of shirt even if cloth belongs to you and the shirt has been made as per your requirements.
Enlarging definition of ‘manufacturer’ - Section 2(f), which defines the word ‘manufacture’, after defining the word ‘manufacture’ states that “the word manufacturer shall be understood accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.†Here again, the definition is not exhaustive but inclusive. The definition enlarges definition of ‘manufacture’ to two categories of persons, besides actual manufacturers, namely : (a) Persons who get the goods manufactured through hired labour. (b) Persons who engage in manufacture of goods on their own account. - - These may be termed as ‘deemed manufacturers’.
Manufacture through hired labour - A person will be treated as ‘Manufacturer’ if he engages ‘hired labour’ who may be Employee or Contractor for manufacture of excisable goods. A hired labour is one who hires himself out to work for and under control of another for wages. However, if he undertakes manufacture on own account, he cannot be said to have hired himself out to another even if he manufactures for other - Techma Engineering Enterprise v. CCE - 1987 (27) ELT 460 (CEGAT).
Sub-contractor is manufacturer if relation to the main contractor is on principal to principal basis, even when job work is done at site, if relationship between sub-contractor and main contractor is on principal to principal basis. - Voltas Ltd. v. CCE 2002(139) ELT 223 (CEGAT) * Voltas Ltd. v. CCE 2002(144) ELT 108 (CEGAT).
Engages in Manufacture On his own account – The word ‘engages’ has to be read as ‘engages others’. This is because, if he is himself engaged in manufacturer, then he is actually the manufacturer. Extended or enlarged definition is not required to treat him as ‘manufacturer’. ‘On his own account’ has been interpreted to mean as ‘under his direction and control’ in Philips India v. UOI 1980(6) ELT 263 (All HC DB).
Manufacture at site of buyer - In Basti Sugar Mills v. CCE 2000(115) ELT 626 (CEGAT), it was held that an independent contractor who assembles the parts in a factory (assembly of crane in this case) will be the manufacturer and not the owner of factory. [In this case, contractor assembling the parts was independent contractor appointed by supplier of parts of crane. Obviously, he was not 'hired labour' of the factory owner.] – same view in Solid and Correct Engineering Works v. CCE 2002(145) ELT 673 (CEGAT). In this case, the marketing company assembled various parts at the site of buyer. It was held that the marketing company is the manufacturer.
Raw material Supplier is not the manufacturer - It is common in Industry to supply raw material to a Job Worker or Processor and get the goods manufactured from him in his factory e.g. Automobile Manufacturers like Bajaj, Maruti, Mahindra, Premier Automobiles or Hindustan Motor very often get many parts manufactured from outside on ‘Job Work’ basis. In such cases, they (Maruti, Bajaj etc.) will not be treated as ‘Manufacturer’ even if the Raw Material is supplied by them and right of rejection is retained by them. In Ujagar Prints v. UOI - AIR 1989 SC 516 = 42 Taxman 151 (SC) = 1989 (39) ELT 493 (SC) = (1989) 74 STC 401 (SC) = (1989) 3 SCC 488 = 179 ITR 317 (SC) (5 member constitution bench), it has been held that excise duty is on ‘manufacture and production of goods’ and liability to pay duty is not dependent upon whether the manufacturer is owner or not.
Brand Owner is not the Manufacturer - Some large units get their goods manufactured from others under their Brand Name, instead of manufacturing it themselves. They usually control quality and may even supply the design. e.g. Bajaj Electricals get many electrical goods manufactured from others; Batas procure some foot-wear from others and supply under their brand name. Some large pharmaceutical companies also get the goods manufactured from small scale units under their brand names. In such cases; Bajaj, Bata or the Pharmaceutical Companies will not be treated as ‘Manufacturer’ even if they exercise quality control, or allow use of their brand name, or provide financial help to the small manufacturers, or even supply the raw material, if their relation with the manufacturer is ‘Principal to Principal’ basis. Supreme Court in Cibatul Ltd. v. UOI - 1978 (22) ELT 302 (SC) - have held that if the goods are produced with Customer’s brand name under his quality control, it does not mean that the Customer is the Manufacturer. Same view was reaffirmed in Jt. Secretary to Government of India v. Food Specialities Ltd. - 1985 (22) ELT 324 (SC).
Brand name owner will not be manufacturer even if he supplies raw material. - Philips India Ltd. v. UOI - 1980 (6) ELT 263 (All HC DB) - quoted and followed in Cheryl Laboratories v. CCE - 1993 (65) ELT 596 (CEGAT - 3 member bench order).
Manufacture must be in India
Last operative word of section 3 of Central Excise Act is that excisable goods must be manufactured or produced in India. Thus, excise levy cannot be imposed on imported goods or goods manufactured in Nepal. This is also true if goods are imported in SKD or CKD condition and they are only assembled in India, as no new product emerges - Walchand Nagar Industries v. CCE - 1995 (79) ELT 485 (CEGAT - 3 member bench order). - same view in Indian Xerographic System Ltd. v. CC, Bombay - (1995) 80 ELT 337 (CEGAT) * CIT v. Telco (1968) 68 ITR 325 (Bom).
09 February 2010
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