excise clearance and procedures

Excise clearance and Procedures

Madan Lal

MANUFACTURE AND EXCISABILITY

• Section 3 of Central Excise Act, 1944.• Basis of Levy.• What is Manufacture?.• CE Law gives only a truncated

definition for manufacture – Includes Deemed Manufacture.

• Widest definition is available in Foreign Trade Policy – but that is not applicable to CE Law.

…contd

The statutory definition of manufacture in central excise act

• “Manufacture” includes any process—(i) Incidental or ancillary to the completion of a

manufactured product;(ii) Which is specified in relation to any goods in the

section or chapter notes of the First Schedule to the central excise tariff as amounting to manufacture

Continued……..

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

Continued……

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

…contd

• Leading cases – Decisions of Supreme Court. - ‘Formation of a new Article’ Vide Hawkins Cookers Ltd Vs Collector [- 1997

(96) ELT 507 SC. - ‘A new distinct and commercial commodity.’ Vide TISCO V U.O.I [2004(164) ELT 372 SC.

The accepted wisdom about manufacture in central excise

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

2) Ingredients of excisablity

• Fact of Manufacture.• Entry availability in CE Tariff.• Marketability.

Manufacture in central excise

• Two concepts• Actual substantive manufacture & Deemed

manufacture• Actual substantive manufacture – does it

include mere processing? Yes, if it leads to manufacture of a product

• Deemed manufacture

What is deemed manufacture?

• Process or activity specified in section or chapter notes – for example:

• Labeling or re labeling of containers• Repacking from bulk packs to retail packs• Adoption of any other treatment to render

the product marketable to the consumer

Continued….

• Addition of chemicals and other ingredients to certain products of tariff heading 3808

• In relation to products of heading no 3920 & 3921 – process of metallization or lamination or lacquering

• In relation to some products of heading 7013 – the process of printing , decorating or ornamenting

Continued….

• In relation to flat-rolled iron & steel products under chapter 72 – the process of hardening or tempering

• In relation to articles of iron and steel under chapter 73 – the process of galvanization

Continued….

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

4]Valuation – The Crux of the matter Tending to become more like an opinion poll. Section 4 and 4A/ Valuation Rules 2000. What is Transaction value?.

Requirements for acceptance of Transaction Price Sale of goods. For Delivery, at the time and place of removal Seller and Buyer not related. Price is the sole consideration for sale. The legal fiction created by the definition of time of

removal – let us note this

A tour of the valuation rules 2000

• The official name for the rules is this – Central Excise Valuation ( Determination of price of excisable goods) Rules, 2000

• These rules apply when any of the ingredients of transaction value is missing

• The rules are used for ascertaining the “normal transaction value” at which the greatest aggregate quantity of goods are sold

The valuation rules….

• They are 11 rules in all• Rule 1 – name & entry into force from 1-7-

2000• Rule 2 – definitions• Rule 3 – exhortation to decide the value

(when the transaction value is unavailable or unacceptable)

The valuation rules….

• Rule 4 – ascertainable equivalent price of such goods – nearest in time to the time of removal of goods from the factory – margin adjustment on account of differences in dates of delivery allowed

• Rule 5 – cases when the delivery of goods is at a place other than the factory

The valuation rules…..

• Rule 6 – when there is additional consideration to the sale not reflected in the transaction price charged – solution: monetize the additional consideration and add it up to the tax value

• Rule 7 – Depot / branch sales – solution: adopt the nearest prevailing depot price

Valuation rules….

• Rule 8 – captive /self consumption/use – solution: tax value is 110% of the cost of production of the goods (as per CAS 4)

• Rule 9 – sales to related persons – solution: resale price of related person / 110% of the cost where the related person does not resell but consumes or uses for self

Valuation rules….

• Rule 10 – sales to inter-connected undertakings /holding company /subsidiary company – solution:: do as per rule 9 above.

• Rule 10A – job work on behalf of a principal manufacturer – solution: resale price of the principal manufacturer

• Rule 11 – residual method

5) Exclusions From Value-By StatuteExcise Duty.Sales Tax.Other taxes such as Octroi, entry tax.-By Court / Tribunal DecisionsTrade Discount.Cash Discount/ Prompt Payment discount.Turn over discount.Quantity discount.Year – end/ Bonus discount. … contd

…contdFreight and Freight insurance, including equalised

Freight.Bought – out items [not integral/ critical to Product].Carry bags for Laptops.Syringe bought out and supplied with P & P

medicines.Computer Software ( discuss with NCR case)Third party Inspection charges at the instance of and

borne by the buyer.Excess of Freight collected over actual expenditure

on freight. Interest on receivables …contd

…contdErection, Commissioning charges if products

emerge as immovable property.Free items supplied with products.Advertising charges borne by the client – buyer on

his own account.Additional warranty charges.Notional interest on Advances/ deposits from

buyers not influencing the price.Straw supplied with Juice.Rental paid on durable and returnable containerLiquidated damages received for non- lifting of

molasses

6) Inclusions into Value-By StatuteAdvertising.Publicity.Marketing/ Sales Promotion.Storage/ Outward handling.Servicing.Warranty.Commission.-By Tribunal/ Court DecisionsDharmada.Design/ Development/ Engineering. …contd

…contd

Royalty.Amortised Cost of tools/ dies/ moulds

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

9) MRP based ValuationSection 4A/ weights & Measurements Act.MRP minus prescribed abatement is the

assessable value.Region – wise MRP acceptedIf different MRPs are printed, the maximum MRP

will be taken as the basis.Sale of phones with MRP fixed, to customer, by

phone companies U/S 4A only.Multi – Piece Packages.

10) Refunds & RebatesSection 11B/ Rule 18/ cenvat Rule 5/ Section

11BB.One year time limit / Provision for Interest.Theory of unjust enrichment.Refund claim thro’ credit notes –permissible- Mafatlal Industries Vs U.O.I. L&T Sargent Lundy Ltd Vs CCE

Returns in central excise

• ER 1 – monthly – due by the 10th of the following month

• ER 2 – monthly, for EOU – due by the 10th of the following month

• ER 3 – quarterly for SSI units – due by the10th of the following quarter

Continued….

• ER 4 – Annual financial statement for units paying INR I crore in excise – due by the 30th of November of the following year

• ER 5 – CENVAT – Annual Return of information relating to principal inputs – due by 30th April of the following year – some class of manufacturers given exemption

Continued……

• ER 6 – monthly return of principal cenvat inputs due by the 10th of the following month – some class of manufacturers given exemption

• ER 7 – Annual Installed capacity statement – due by the 30th April of the following year

• ER 8 – Quarterly Return for assesses clearing goods at 1% duty

Important procedures in central excise

• Issue of invoice under Rule 11 of central excise rules 2002

• Provisional assessment under Rule 7 & finalization• Time and manner of payment of duty under Rule 8• Remission of duty under Rule 21 for

damaged/defective/unfit/unmarketable goods

Important procedures in central excise

• Credit of duty paid on sales returns under Rule 16

• Rule 16-A – removal of any inputs as such or partially worked outside the factory for testing, repair etc

• Rule 16-B – removal of semi-finished products for further work / finishing and return

Important procedures in central excise

• Rule -16C – removal of finished goods outside for test etc & return

• Export without payment of duty as well under claim for rebate of duty – LUT (UT1), Bond, ARE

• Removal of excisable goods without duty for export warehousing under Rule 20

Penal provisions in central excise

• Prosecution for select offenses under section 9 of the Act

• Demand of duty under section 11A with normal time limit of one year and 5 years for cases where suppression of facts by the assesses is alleged

Penal provisions in central excise

• Interest for delayed payment under section 11AB

• Penalty equal to duty under section 11AC in cases involving suppression of facts.

• Penalty under Rule 25 – maximum upto duty or Rs 2000/-whichever is greater, with confiscation of the goods

Penal provisions in central excise

• Rule 26 – penalty for abettors , transporters, issuers of false invoices – max upto duty or Rs 2000/- whichever is greater

• Rule 27 – general penalty where no penalty is specified for any offense in the rules, max of Rs 5,000/- with possible confiscation of the goods

Penal provisions in central excise

• Tax default – penalty under rule 8 – daily clearance on payment of duty in cash, plus prohibition of using cenvat credit, till dues are paid up.

• Rule 12CC – blanket powers given to the department to impose restrictions on Manufacturers and Dealers involved in tax evasion

Penal provisions in central excise

• Section 11DDA – power to order provisional attachment of property to protect “Revenue” during he pendency of proceedings

• Section 14 – power to issue summons• Section 13 – power to arrest

CENVAT CREDIT

• The foundation of the value-added tax system• Avoids cascading effect of tax on tax on tax• Integrates goods and services• Cenvat credit Rules 2004 – apply to

Manufacturers & Service providers

Cenvat credit rules – what is the gain?

• Input stage duty relief in the form of tax credit to –

• Capital goods• Inputs• Input services

Cenvat credit – Capital goods

• All goods falling under the following chapters –

• Chapter 82 – tools etc• Chapter 83 – miscellaneous articles of base

metals• Chapter 84 – machinery, equipment etc

Capital goods…..

• Chapter 85 – electrical / Electronic machinery & equipment etc

• Chapter 90 – optical, photographic, medical , checking, measuring equipment etc

• Abrasives under heading no 6805• Grinding wheels & the like under heading 6904

Capital goods……

• Pollution control equipment• Components, spares & accessories of the

goods for the above two categories• Moulds, dies , jigs and fixtures• Refractories, and Refractory materials• Tubes, pipes and fittings thereof• Storage tank

Capital goods…

• Used in the factory of the manufacturer of final products, but does not include any equipment or appliance used in the office

• Or, used for providing output service• Motor vehicles registered in the name of the

following service providers are allowed – courier agency, GTA, Rent a cab operator , tour operator, outdoor caterer

Capital goods….

• Ownership of capital goods is not required for a manufacturer or service provider except for the motor vehicle credit

• Credit to be taken for 50% of the duty in the first year and the rest in any subsequent year

• Depreciation under Income tax prohibited

Capital goods…..

• The 50% restriction does not apply to special CVD of 4% paid on imported capital goods

• Removal of capital goods requires reversal of credit – 2.5% depreciation on credit for every quarter of use

• Removal on scrapping of capital goods requires payment of duty on transaction value

Capital goods….

• Provision for removal of capital goods for test, repair etc

• Moulds, dies , jigs and fixtures can be deployed at the premises of the job worker

• Capital goods can be produced and used in the factory of production for manufacture of excisable goods – duty exempt

Capital goods….

• Capital goods on which credit is taken should not be solely used in the manufacture of exempted goods

• Capital goods which are not defined in the CCR but used in the factory of production will qualify for credit as “Inputs”. – Benco Products Vs CCE – CESTAT larger bench decision

INPUTS

• New definition in the CCR• “Inputs” means all goods used by the manufacture of

final products• Includes accessories cleared with the final products,

if their value is included in the assessable value• All goods used for generation of electricity or steam

for captive use

Inputs….

• All goods used for providing any output service:

• But excludes-• Light diesel oil, high speed diesel oil and petrol• Any goods used for – construction of a

building or a civil structure or part thereof

Inputs…• Or, for laying foundation or for making of structures

for support of capital goods• Capital good themselves unless these are parts and

or components in the manufacture of the final product

• Motor vehicles• Any goods for the personal consumption of the

employees, primarily• Any goods unrelated to manufacture

Input services

• For manufacturers:• Any service used by a manufacturer • Whether directly or indirectly• In or in relation to the manufacture of final

products• And clearance of final products upto the place

of removal

Input services…..

• For service providers:• Any input service used by a provider of output

service for providing an output service

Input services allowed to both manufacturers & service providers

• Services used in relation to –• Modernization• Renovation• Repairs• Of a factory or the premises of the service

provider

Common services….

• Or an office relating to such factory or the premises

• Advertisement• Sales promotion• Market research• Storage upto the place of removal• Procurement of inputs

Common services….

• Accounting• Auditing• Financing• Recruitment and quality control• Coaching and training

Common services….

• Computer networking• Credit rating• Share Registry• Security, business convention, legal services• Inward transportation of inputs & capital goods• Outward transportation upto the place of removal

Important features of cenvat credit

• Input credit can be availed immediately on receipt of the goods accompanied by the relevant invoice

• No one-to-one correlation between input and output

• Cenvat credit is a legal and vested right

Important features of cenvat credit

• Input service tax credit should be taken only after settling the service supplier invoice with value and tax

• Transfer of credit on transfer of business allowed

• Transitional credit

Important features of cenvat credit

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

and exempted services

Important features of cenvat credit

• Or take credit proportionate to the taxable turnover as per formula prescribed

• Inputs & capital goods & input services should not be exclusively utilized in the manufacture / provision of exempted goods or exempted services

• Clearances to EOU/SEZ/BTP/STP/EHTP & exports will not require reversal of credit

Important features of cenvat credit

• Storage of inputs outside the factory allowed subject to applying for the same

• Significance of tax invoice in CENVAT credit system

• First stage dealer/second stage dealer/input service distributor