INDIRECT TAXES

July 06, 2010

Types of Indirect Taxes

1. Customs Act, 19622. Central Excise Act, 19443. Central Excise Tariff Act, 19854. Central Tariff Act, 19755. Central Excise Rules, 20026. Cenvat Credit Rules, 20047. Customs Tariff (Identification, Assessment and Collection of damages for Dumped Goods) Rules, 8. Customs Valuation Rules, 20079. Central Excise (Determination of Retail Sale Prices) Rules, 200810. Finance Act, 199411. Central Excise Valuation Rules, 200012. CESPAT Procedure Rules, 1982

Scheme of Taxation under the Constitution of India

In the basic scheme of taxation in India, it is envisaged that (a) Central Government will get tax revenue from Income Tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs (b) State Government will get tax revenue from sales tax, excise on liquor and tax on Agricultural Income (c) Municipalities will get tax revenue from octroi and house property tax.

Income Tax, Central Excise and Customs are administered by Central Government. As regards sales tax, Central Sales Tax is levied by Central Government while State Sales Tax is levied by individual State Governments. Though Central Sales Tax is levied by Central Government, it is administered by State Governments and tax collected in each State is retained by that State Government itself.

Powers of taxation under the Union List

Entry 82 - Tax on income other than agricultural income.

Entry 83 - Duties of customs including export duties.

Entry 84 - Duties of excise on tobacco and other goods manufactured or produced in India except

alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet

preparations containing alcoholic liquor, opium or narcotics.

Entry 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase

takes place in the course of Interstate trade or commerce.

Entry 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade

or commerce.

Entry 92C - Service Tax

Entry 97 - Any other matter not included in List II, List III and any tax not mentioned in List II or List

III. (Residual Powers’.)

July 07, 2010

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Excise Duty is charged on goods manufactured or produced in India. Section 2(d) defines excisable goods.

Section 2A of the Act states that excise duty also known as CENVAT. (Central VAT) Section 3 is the charging section of the Act. SEZs are non excisable. Excise Duty is levied and collected in such manner as prescribed:

All excisable goods which are produced or manufactured in India at the rate applicable in the first schedule (of the Tariff Act), Basic Excise Duty (12%)

Special duty of excise in addition to the BED on goods mentioned in the second schedule (of the Tariff Act) at the rates prescribed in the second schedule.

Excisable Goods is defined in section 2(d): all goods mentioned in first and second schedule of the Tariff Act. Supreme Court: goods must be marketable, mere production/mention in the Tariff act is not enough.

There was controversy until the 2008 amendment which added the following explanation to Section 2(d): for the purpose of this clause goods includes articles and substances which are capable of being bought and sold for a consideration. Actual sale is not required just commercial capability.

(Tariff Act contains 10 to 12 sections, there are certain broad categories like Animal Products and these goods are contained in this section, Each section has chapters, chapters have headings, headings have sub headings, sub headings have sub-sub headings. This is not a mere list of items, often it is chemical components or a manufacturing process.)

Conditions for goods to be subject to excise duty

1. The subject of duty must qualify as “Goods”i. Must be movableii. Must be marketable

2. Excisable goods (must be mentioned in the tariff act)3. Goods must be manufactured or produced (manufactured is not defined, only deemed manufacture

is, manufactured is taken from court decisions.) 4. Manufactured in India

All these features must be there for the goods to be subject to excise duty.

Sale and Marketability are not connected in any way. If a substandard (unmarketable good) is sold, it does not make it marketable. Similarly if a marketable good is given as a free sample (i.e. not sold) it is still marketable.

If you have to dismantle something in order to move it, it is not movable. Goods must be marketable in the condition is which they have been produced. If further processing is required then it is not marketable as yet.

1989: Bhor Industries v CCE - Mere mention of goods in tariff act is not enough for an item to be excisable, it must be marketable. Essential Test: is the product capable of being bought and sold in the market.

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8TH JULY, 2010

Ambalal Sarabhai v CCE 1989 43 CLT 214 (SC): in the course of production of dextrose they also produced starch hydrolysate (intermediate product). In the Tariff Act “lysate of starch” is mentioned as an entry. The CCE issued a notice to the assessee for payment of duty. However the assesseecontended that this intermediate product has a very short shelf life of 28-32 hours, thus it is not marketable and not subject to excise duty. Supreme Court upheld the contention of the assessee.

Union of India v GCM 1997 (5) SCC 767: If the goods are not upto standard, they are not marketable. Assessee was manufacturing calcium carbide further used to produce acetylene gas. Contention of the assessee was that calcium carbide was not of the purity prescribed by the ISI. Thus the calcium carbide sold in the market is of a different quality, and the Calcium Carbide being produced by the assessee is not marketable. Supreme Court agreed with the contention of the assessee.

Moti Laminates v CCE 1995 (3) SCC 23: crude products are unstable products and not marketable.

CCE v Mann Structurals Ltd. (2001) 44 ELT 113 – The Court in this case, accepted the tests for excisable goods laid down in the earlier cases and laid down the following principles:-

1. An item will not be excisable unless it is marketable2. The test does not depend on the actual sale of the product. Probability of sale is sufficient.3. Goods having short shelf life/unstable are not excisable.4. Goods which are part of a continuous process and cannot be sold as such are not excisable.

Following these cases came the 2008 amendment adding an explanation to Section 2(d).

Cadilla Laboratories v CCE AIR 2003 SC 1700 – It is not required that goods must be actually bought or sold in the market. The goods in the crude or unstable form and which require further processing to be marketable are not subject to excise duty.

Gujarat Narmada Valley Fertilisers v CCE (2005) 7 SCC 94 – Sale is not necessary for goods to be marketable. Even if the goods are for capital consumption, they may be subject to excise duty.

UOI v DCM AIR 1963 SC 791: to become goods an article must be something which can be ordinarily bought and sold in the market. There was the manufacture of vanaspathi oil and the raw materials used were groundnut oil and til oil. In between this process and independent product was refined oil. Contention of the assessee was that refined oil in the market is always dehydrogenated/de-orderised which this one is not thus it is not marketable.

Indian Cables company Ltd. V CCE AIR 1995 SC 64: marketable only means suitable for sale it need not even be marketable. Market does not mean open market, even if there is one purchaser that is enough.

Associated Cement Companies v CC (Collecter of Customs) AIR 2001 SC 862: Drawings and designs are also goods. Even if payment is made for technical services, it may be included in the value of goods.

CCE v TISCO (2004) 9 SCC 1: Zinc dross and skinning are merely refuse, they are rubbish. It is not the result of any treatment, labour or manipulation, even if it fetches some price in the market it is not marketable. Everything which is sold is not necessarily a marketable commodity.

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However in 2005, Dross and skinnings were added to the schedule in the Central Excise act by an amendment.

Molten iron which requires 1400-1600 degree Celcius heat to keep it in molten form is not marketable.

TCS v State of Andhra Pradesh: Canned and uncanned softwares are mentioned in heading 8523 of the Tariff Act. 12% excise duty is levied on canned software. No excise is leviable on uncanned (customized) software. Uncanned software is subject to service tax.

CCE v Pentamedia Graphics 2006 198 ELT 164 (SC): The motion picture animation file recorded in the machine readable format and capable of being manipulated by a data processing machine is also software. There is no custom duty on canned or uncanned software. But there is CVD (counterveiling duty) on canned software if imported at par with excise.

State of AP v NTPC; Electrical energy or goods specified in Heading 2716 of the Customs Tariff Act and Excise Tariff Act are goods.

9th JULY, 2010

Waste and Scrap: Excisable if they are marketable and manufactured. If the final product is exempted then so is the waste and scrap. (Notification no. 89 of 1995 mentions this)

Plant and machinery erected at sight: Immovable (cannot be removed without dismantling parts) and hence there is no excise duty. (Order no 58 of 2002 dated 15.1.2002)

Triveni Eng. V CCE: Goods should be in a position to be taken to market and sold. Movable property is subject to excise duty and not immovable property. Big plants and machineries are not subject to excise duty. However if it can be removed without dismantling the parts, it is movable and subject to excise duty and it becomes marketable.

CCE v Solid and Correct Eng. Works (2010) 252 ELT 481 (SC): Meaning of “embedded in the earth” was explained in this case. Respondent was engaged in manufacture of asphalt, hot mix for construction of roads, and the machine was embedded with nuts and bolts. SC held that the machine is moveable; it can be moved without dismantling the parts. It is not immovable property as once the road is made, it will be moved. Hence it cannot be said to be embedded in the earth.

Burden of proof

CCE v United Phosphorus Ltd: onus of proving always on the department. Gujarat Narmada Valley Fertilizer Co. Ltd. v CCE: Hypothetical possibility of sale and purchase

is not enough, product must be commercially known. Bata India Ltd. v CCE: burden of proof on revenue department, department had not shown

enough evidence to prove marketability.

Shakti Tubes v CCE 2002 51 RLT 463 – State of goods at the time of removal is important. The assessee was manufacturing pipes in 1 unit and galvanizing the same in another unit. It was held that galvanization does not amount to manufacture. There is no change in the value of the pipes. It is a simple value addition. Hence there could be not question of excise duty.

Indica Laboratories v CCE 2007 213 ELT 20(AT) – Excise duty is payable even if goods are given as free sample. Sale is not necessary condition for levy of excise duty.

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Kerala State Road Transport Corporation v CCE - They purchase the chassis from a company and assemble it themselves. It was held that it is subject to excise duty even though it is not sale and used for capital consumption.

Karya Palak Engineers v Rajasthan Taxation Board (2004) 177 ELT 3 (SC) – restrictions under Article 284-289 of the Constitution of India are only on taxes which directly affect income or property and not indirectly. Hence excise duty may be leviable on any Central or State Government undertakings.

CCE v Indian Aluminium (2006) 203 ELT 3(SC) – Aluminum dross and skinning are not subject to excise duty.

Wastes and scraps are manufactured products. But if the final product is exempted from Schedule, the wastes and scraps are also exempted.

12th JULY, 2010

Manufacture: What is manufacture for the purpose of Excise duty?

Section 2(f) defines deemed manufacture, Section 2(29)BA of Income Tax act also defines manufacture. In a number of Supreme Court judgments a reference is made to the Income Tax act definition.

Deemed Manufacture:

Any process which is incidental or ancillary to the completion of the finished product. The Supreme Court had earlier excluded this from the purview of manufacture, thus an amendment was made and SC upheld the validity of this amendment. It was challenged on the ground that Entry 84 uses the terms “manufactured or produced”, however SC said that it fell within Entry 97.

Any process which is mentioned in the Central Excise Tariff Act. Any process of packing, repacking, labeling or relabeling, alteration of retail price, anything which

makes it fit to be taken to the market. However this applies only to those goods which are mentioned in Schedule 3 (MRP Valuations) of the Tariff Act.

Excise duty will be charged on just the cost of repackaging etc. Value addition.

If you import any item from outside India: you will pay custom duty. Then you repack the shirts. If Shirts are within MRP Valuation: then excise duty will also apply. Also CVD will apply. Thus to avoid the excise duty all alterations are done at the dock itself, before it clears the customs barrier.

UOI v DCM AIR 1963 SC 731: Every change is not manufacture. Something more is required: transformation; Transformation from raw material to final product. It should be something distinct and entirely changed from the raw material. The assessee was a manufacturer of vanaspati from groundnut oil and the intermediate product was refined oil. Vanaspati was not classified in the tariff Act but refined oil was. A show cause notice was issued for payment of duty. It was held that the refined oil was not subject to duty as even though the refined oil was deodorized, it was still in raw form and hence not marketable.

Manufacture- Change is manufacture but every change does not amount to a manufacture. All changes ate subject to treatment manipulation or labour but that is not enough. There must be transformation. The finished product must be different by nature, name and use.

We need to know this definition because repacking, relabeling etc. is applicable only to the 100 or so goods mentioned in MRP valuation and not to the others. However can a good not mentioned in MRP valuation but repacked be brought within the ambit of clause 1?

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CIT v Arihant Tiles and Marbles Pvt Ltd. (2010) 321 ITR 79 (SC) – Converting marble slabs into tiles and polishing them was not held to be “manufacture” by the Revenue department. However the SC stated that it is manufacture.

Nestle India v CCE, 2009 235 ELT 537: Company was manufacturing Infant goods (which are exempt) Lactogen and Cerelac. They purchased various Vitamins from other manufacturers and mixed them on the basis of a predetermined ratio using electromagnetic means. This is called an intermixture of vitamins. Intermixture of vitamins is mentioned in the Tariff act. However the contention was that such a product is not known to the market and more importantly there is no change to the vitamins only a mixing, thus no manufacture. This contention was upheld by the SC.

13th JULY, 2010

Hyderabad Industries v UOI 1995 5 SCC 338: If an item is mentioned in the Tariff Act, it does not mean that it is excisable. The Tariff act is only for classification of goods. If a good is mentioned in the tariff act but is not marketable, then it is not excisable. In that case, the process will not be treated as a manufacturing process for the purpose of taxation. So excise duty may be levied if:-

1. Goods are manufactured and marketable2. They are produced in India3. They are mentioned in the Tariff Act

CIT v N.C. Budharaja and Co. AIR 1993 SC 2529: Difference between manufacture and production. Production has wider connotation than manufacture.

Production Manufacture

Natural Process involved Mechanical or manual process involved

Every production can’t be a manufacture Every manufacture is a production

When production is used in juxtaposition with manufacture then it takes in bringing into existence, new goods which may or may not be “manufactured”. Refuse/residential products are also produce which may be excised.

SR Tissues v CCE (2005) 6 SCC 310: The Assessee purchased jumbo roles of tissue paper on which excise duty was paid under the heading 4803. The Assessee cut the size to make it into 36 cm size. The question was whether this activity amounted to manufacture.

Now Heading 4803 mentioned Jumbo Roles while 481890 mentioned Small tissue paper. SC held that tissue is base paper and not subject to any treatment. SC held that nothing new has emerged and is just convenience for which the size has been reduced. So no excise duty should be levied on small tissue if jumbo rolls have been excised already.

CCE v Kabuli International Pvt. Ltd. (2002) SC 142 ELT: cotton fabric made into bed sheets, held to be manufacture. Manufacturer purchased cotton fabrics from different manufacturers. They made bed sheets and pillow covers. The Court said that here, it is a different product and hence excise duty should be charged. The Court has basically differentiated the products on the basis of “use”

CIT v Arihant Tiles and Marble Ltd.: Revenue department contended that while converting big slabs into marble, polishing process is not manufacture under IT act (exemption under s. 801B) but it is manufacture under the excise act. SC rejected the contention.

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CCE v Tata Iron 2003 154 ELT 343 (SC): is coal produced or manufactured? SC said neither, as it is a natural resource and it is extracted from the earth. Hence it is not subjected to excise duty However coke is excisable as it is raised from the earth.

CIT v Sesa Goa pvt. Ltd. 2005 271 ELT 331(SC): Iron ore is a produce and is extracted from the earth. Hence they are exempted under the IT Act Overruled Tata Iron. This was a three judge bench and hence more binding.

14th JULY, 2010

India Cine Agencies v CIT (2008) 233 ELT 8(SC) – Whether conversion of jumbo rolls of photographic films into small rolls of desired size is manufacture or not. SC held that it is manufacture. There is a distinct difference between the character, use and name.

UOI v IG Glass Industries AIR 1998 SC 839: Manufacture of glass bottle. Excise duty was already paid on the glass bottles. They used to put glass bottles in another unit which added ceramic colors. SC held that it is not manufacture. However it held that there was a value addition to the bottles. SC gave a two-fold test to decide whether a process is manufacture.

1. Whether the identity of the previous commodity ceased to exist or whether by the said process, a different commodity comes into existence.

2. Whether the commodity which was in existence will be no commercial use but for the said process.

Sterling Foods v State of Karnataka (1986) 3 SCC 469: Commercial identity must be known to market. Change in the product has to be proved by the market person dealing with the product. The burden of carrying out a market survey lies on the revenue department. The test is whether in eyes of those dealing in the commodity or in commercial parlance, the proposed commodity is distinct from the original product. This is also called “Trade Parlance Theory”. It determines how does the consumer identify the product? What is in his mind? Whether in commercial parlance commodity has a distinct character and identity from the original commodity? The consumer while buyer the product always has some intention in his mind.

Cipla Ltd v CCE (2008) 155 ECR 66 (SC) – Marketability of BMS (Benzyl Methyl Salicylate). The question was whether BMS is marketable or not. Section 2(d) was questioned. BMS was an intermediary product. It was transported from one division to another. It was mentioned in the Chemical Wash Directory in the journal as intermediary products and was hence subject to Excise duty by the revenue. SC held that mere mention of the product in the Directory does not make it marketable. The manufacturing activity does not prove its marketability. The Directory is no authority to state its marketability. There is no evidence of buying and selling or of its capability of being bought and sold. Hence its is not marketable and not excisable

SKB Dryfruits Marketing Pvt Ltd v CCE (2008) 224 ELT 339 (SC) – Assessee carried on the activity of selling dry fruits, peanuts and also activity of cleaning of dalia, wheat, roasted spice, chana and chana daal. The dry fruits were cleared in small pouches. It was alleged that this was a manufacturing process. SC held that it was manufacture as the final product was distinct and the characteristic was also changed as there was flavour addition and also a distinct product was formed.

Empire Industries v UOI: process and manufacture distinguished. Mere processing does not mean manufacturing. Some new product must emerge out of the process. Processing fabric by bleaching, dying or printing amounts to manufacture.

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Kores India Ltd. v CCE: Jumbo roles of ribbon cut into small pieces amounts to manufacture. (contradicts the tissue case)

ASSEMBLY OF PRODUCTS

Circular No. 479/45/79 – Assembly of the parts of an AC is not manufacture.

CKD/SKD (Completely Knocked Down) products do not fall under the ambit of manufactured products. The general principle is that assembled products are not manufactured. E.g. car, A/C, computer, etc.

Decorating Laminates v CCE: Conversion of commercial plywood into Slip Proof commercial plywood used for flooring is manufacture. This amounts to change in name, character and use and hence is manufacture. Just because the input and output are mentioned in the same heading of tariff act does not mean that it is not manufacture.

Century Spinning and Weaving Company. v UOI (1981) 8 ELT 676 (Bom HC): Remelting/moulding of a plastic article to rebuild the same is not manufacture.

National Metal Works v CCE (2005) 179 ELT 189 (AT) – Melting of scrap to make Aluminum slab is manufacture as it is a new product altogether by name, character and use.

CCE v Goyal Gases (2000) 119 ELT 5(SC): Mixing of O2 and N2 with inert gasses is not manufacture as there is no change.

CST v Bechu Ram (1976) 38 STC 236 (All) – Mixing of scent in oil is not manufacture. However, in a Calcutta High Court case, it was held that mixing of scent in coconut oil to make it into hair oil is manufacture as the purpose changes. (Ordinarily coconut oil may be used for cooking as well)

19th JULY, 2010

CST v Dunkin Coffee Manufacturing Company Ltd. (1975) 35 STC 493 (Bom): Mixing coffee powder with chicory to make French coffee, results in a new product, new use, new character and thus is manufacture.

GAIL India v CCE (2004) 163 ELT 37(AT): Mixing of butane and propane leads to a new product LPG, thus this is manufacture.

State of Karnataka v Kothari Industries: Mixing of urea, ammonium sulphate to make NPK mixtures is not manufacture as the end result is also fertilizer.

SUPPLYING 2 OR MORE ITEMS TOGETHER

Hawkins Cooker v CCE (1997) 96 ELT 507(SC): Putting two or three items together into one packet is not manufacture. Putting together various parts at the user’s end does not amount to manufacture.(e.g. the rubber ring, steel vessel, whistle etc of a pressure cooker)

Bonny Baby Care v CCE (2005) 184 ELT 101 (AT): Purchasing plastic bottles, attaching rubber nipples and packaging them does not amount to manufacture.

Eureka Forbes v CCE (2000) 125 ELT 195 (AT) – Assembling of filter, purifier and re filter at user’s end is not manufacture.

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Gramophone Company of India Ltd. v CCE AIR 1989 SC 4501 – Recording of songs in blank audio cassettes amounts to manufacture as pre recorded audio cassettes are sold separately in the market.

Extracting oil from oil seeds, stitching clothes, building concrete from ready mix, etc. amount to manufacture. Polishing of diamond is not manufacture. Also cutting boulders to make smaller stones is not manufacture

CBEC Circular No. 454/20/99 – Upgradation and modification of computers is not manufacture.

Pujan Banerjee v State of Kerala (2003) 131 STC 538 (Ker HC) – Purification of water is not manufacture.

However after this case, the process was included in the schedule to bypass the court ruling.

Repair is not manufacture.

Connaught Plaze Restaurant v CCE (2003) 154 ELT 187 (AT) - Instant Softy Ice cream process amounts to manufacture. It involves pumping of liquid (soft serve) into the machine, freezing, incorporation of air and putting the semi solid substance into a cone.

MEANING OF “INCIDENTAL AND ANCILLARY” PROCESS IN MANUFACTURE

ITC Ltd. v CCE (2002) 151 ELT 246 (SC) – Packing of cigarettes is not an incidental or ancillary process to manufacture of cigarettes as cigarettes are saleable in the market without the packing. The process may be ancillary to sale.

Calcutta Clinical Research Industries v UOI (1999) 109 ELT 506 (Cal HC) – Labeling is a process incidental to the manufacture of medicines and drugs. Without labeling, the products cannot be sold. It is required within the law itself to provide information about the drug.

JULY 20, 2010

Manufacturer: Who pays the duty?

Section 2(f): Manufacturer includes

1. One who employs hired labor, principal-agent relationship not an independent contractor2. One who engages in production on own account

Loan license under Drugs and Cosmetics Act – He takes a license from the Controller and provides it to the person having infrastructure. Here the manufacturer is not the loan license but the actual manufacturer.

CCE v MM Khambadwala AIR 1996 SC 3319: There was supply of raw materials to various household ladies who were manufacturing Agarbattis in their houses. The final product was sold from their houses. There was supervision and price control done by Mr. Khambadwala. Here the ladies were held to be the actual manufacturers.

21st JULY, 2010

Wallace Flour Mills v CCE (1989) 4 SCC 592(SC) - Excise duty is levied on the date the goods are removed from the factory. Section 4(c) of the Central Excise Rules deals with excise duty leviable on the manufacturer.

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Shree Agencies v Revenue iAIR 1972 SC 780: The assessee would supply cotton to power looms for conversion to fabric and then they would purchase the fabric back and sell it themselves. Contention of Sri Agencies was that they were selling Cotton Yarn and purchasing Fabric and since sale and purchase are independent transactions, they are not liable to pay duty for manufacture of fabric. However the looms were found to be dummy agencies and it was held that Sri Agencies are liable to pay tax.

Ujagar Prints v UOI (1989) 39 ELT 493 (SC) – Whether the raw material supplier is the manufacturer or the workers? SC said that ownership is not the test for manufacture. One who transforms the goods is the manufacturer.

Pawan Biscuit v CCE : The Company was making biscuits for Britannia. Britannia was responsible for supply of raw materials and quality check. It was held that Britannia is not the manufacturer.

22nd JULY, 2010

Dasti Sugar Mills v CCE (2000) 115 ELT 826 – Independent contractor had assembled a crane in the factory of the company. Hence the manufacturer is the contractor and not the company.

Labelling, packaging and other value additions are deemed manufacture.

Philips India v UOI (1980) 6 ELT 263 (All) – Section 2(f) uses the term “on his own account” which means supervision and control of the company. So if a person has supervision and control over manufacture of goods and the other factory owner is a dummy, then the actual person would be the manufacturer.

Maruti Udyog v CCE (2001) 134 ELT 188 (AT) – Maruti was providing raw material to the person and he was manufacturing the same in the factory of Maruti. All goods under the Standards of Weights and Measures come under the MRP Scheme. They are covered under “deemed manufacture”.

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23rd JULY, 2010

VALUATION OF EXCISABLE GOODS

Methods of valuation:-

1. Specific Duty method2. Tariff Value method (Under section 3(2))3. Compound levy Scheme – Rule 15 of Central Excise Rules4. Production capacity under Section 3(a)5. MRP Valuation – Under Section 4(a)6. Transaction value method also ad valorem duty under Section 4 of the Central Excise Act.

Specific Duty – Duty on the basis of weight, volume, thickness. E.g. Sugar, cigarettes (length basis), match box (per hundred boxes), cement, marble, molasses (per ton basis) etc. Even if the price of goods increases, the duty on the goods will not increase.

Tariff Value – The Central Government may by notification in the Official Gazette alter the tariff value on different classes, description, etc. of goods. E.g. Pan masala, readymade garments, etc. Hence these goods have a fixed duty levied by the Government.

Compound Levy Scheme – (Rule 15) – This is optional. Assessee may/not opt this scheme. Its applicable to stainless steel, aluminum articles, pan masala, etc.

Advantages of this are that if one chooses this scheme then the other formalities towards the Government will get reduced. E.g. Rate of duty is Rs 30,000 per gold rolling for machines. Earlier it was Rs 15,000. They fix the value “per machine”. They look at the production capacity. CCE v Venus Casting Ltd. AIR 2000 SC 1568 – The assessee can’t claim relief for reduction of duty on less production. One can’t change the scheme that frequently. One has to follow it at least for a year.

Production Capacity Method – Applicability from 10th May, 2003. Duty levied on the basis of average production capacity of the manufacturers.

28th JULY, 2010

MRP Valuation Scheme – Section 4A – For goods under the MRP Scheme, the valuation is done on the basis of the retail/sale price. The following are the conditions for goods to be valued under this scheme.

1. Central Government/notification – goods covered under MRP Scheme.2. Goods are excisable goods and are subject to excise duty.3. Section 4A has overriding effect on Section 44. Rate of abatement [Deduction on value of the goods]5. Covers only hundred 100 goods mentioned6. Applicable to goods which are for retail sale only.7. MRP valuation is applicable only on sealed packs.8. Showrooms shall be the place of removal and the excise shall be leviable there. 9. MRP is declared in consonance with Central Excise (MRP Valuation) Rules. In cases of deemed

manufacture, a third person alters the MRP by re-packaging or re-labelling. Explanation to Section 4A states that “retail sale price” means the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport

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charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like and the price is the sole consideration for such sale.

10. If the goods are under 10 grams then they are not covered under the MRP Scheme (Standards of Weights and Measures Act)

11. It is compulsory to declare the price of goods while importing them. Section 4A(4) states that if the manufacturer clears goods without declaring the retail sale price or incorrectly declares the retail sale price then the goods shall be seized.

Explanation 2 to Section 4A states that where more than one retail sale price is declared on packaging then the higher MRP shall be taken as the value.

If the price mentioned on packaging at the place of removal is later altered then the altered price shall be taken as the MRP. If different prices are declared on different packaging in different areas then the price of the particular area shall be taken.

29th July, 2010

Cases on MRP Valuation

Free Samples

1. Circular No. 915/05/2010 – states that in case of free samples, the transactional value is applicable and not the MRP of the product as it is not for retail sale.

2. Indian drugs Manufacturer’s Association v UOI (2008) 222 ELT 22 (Bom) – Physicians samples are not covered under section 4A of the Act but is covered under Section 4.

3. Cadilla Pharmaceuticals v CCE (2008) 232 ELT 245 (CESTAT) – Free samples given to doctors are not covered by MRP Valuation

4. Sony India v CCE (2004) 167 ELT 385 (SC) – Assessee was giving free gifts with television. The question was whether free gifts are subject to MRP Valuation. It was held that transaction value and not MRP valuation shall be applicable.

5. Indica Laboratories c CCE – In case of extra supply of the product in the same packet, the MRP value of the product written on the packet shall apply.

6. Icon Household Products v CCE (2007) 216 ELT 579 (CESTAT) – A mosquito repellant device was being sold as a combo pack along with the liquid. It was held that the price declared on the combo pack shall be applicable for MRP valuation and not the individual prices.

7. CCE v Godrej Soaps (2006) 198 ELT 450 – Godrej was selling 3 soaps with one soap free in the same wrapper. It was held than only if the free soap could be separated then it can be subject to MRP valuation separately.

If the item is separable then the MRP of that free product becomes applicable. If the free product has “not for sale’ written on it then for transaction value to apply, it must be attached to the product,

Jayanti Food processing v CCE MANU/SC/3474/2007 - Manufacturer used to pack 12 200 ml mineral water bottles in a single package and used to mention the MRP on the package. Bottles did not have any MRP. Held, after the first sale, bottles go directly to the “ultimate consumers”. “Package” containing 12 bottles cannot be viewed as a “wholesale package”. Valuation should be under Section 4A. (VERY IMPROTANT CASE ON GENERAL SCHEME OF SECTION 4 and 4A)

CCE v Krafttech Products Ltd. AIR 2008 SC 2238 – Multi-piece packaging – There are certain exemptions given under Standard of Weights and Measures Act which state that goods below 10 grams or measuring less than 10 mm are exempt from excise duty. In this case there was a string of 72 sachets

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of lip smoothener. All of them were packed in a single carton and price was declared on both the carton and on the single piece. The Revenue considered them as one whole piece rather than 72 sachets. SC held that it is a multi-piece packet and not one packet and hence not subject to tax and subject to exemption. The entire carton is meant for wholesale and not retail sale as no one will purchase the whole sale pack.

Whirlpool India Ltd. v UOI AIR 2008 SC 397 – Refrigerators fell under the MRP Valuation scheme and hence the same was challenged as it was not a packed commodity. SC held that it was an open packaged commodity i.e. it can be tested by consumers and then repacked and hence it falls MRP valuation scheme.

In all cases of goods for export the MRP valuation shall not be applicable and only transactional value shall be applicable.

Air Light Electronics Pvt. Ltd. v CCE (2002) 145 ELT 686 (CEGAT) – If 2 products are sold together in the same product where one is covered under MRP and the other is not then the transactional value under Section 4 shall be applicable for both products.

Non applicability of MRP Scheme

Rule 2A and 3A of Standards of Weights and Measures (Packaged Commodity) Rules state that MRP valuation shall not apply to:-

1. Packages above 25 Kg/litre/50Kg/litres except for cement and fertilizers.2. Industrial or institutional customers3. Packages up to 10 gm/ml4. Scheduled drugs or cosmetics5. Agricultural farm produce above 50 Kg.6. Bidis for retail sale.

ITC Ltd. v CCE AIR 2005 SC 1370 – Cigarettes were under specific duty scheme. The government applied the MRP scheme vide a notification to cigarettes as well. This mandated that the MRP shall be printed on the packets of cigarettes. The revenue challenged this on the ground that cigarettes are often sold separately by shopkeepers and dealers and hence it is not possible to verify the correctness of the MRP printed on the packet. SC said that the MRP cannot be challenged as after the removal of the goods from the factory, the manufacturer has little or no control over them. However in 2005 – Government came out with an Ordinance saying that the effective price is to be considered and not the MRP. But later there was a compromise with the Government and even this position was changed. The basis of valuation became Specific Value i.e. on the basis of length of cigarette.

Rule 40 of the above rules states that MRP valuation shall not apply if:-

1. MRP is not declared on the product2. MRP is not declared as per the required law3. If the MRP is obliterated or changed after removal then the goods will be confiscated and price shall

be determined by the Department.

Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008 – This came into effect on 1st March, 2008.

Rule 4 states that:-

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1. If the manufacturer has removed identical goods within, before or after one month by declaring the MRP then such value is to be taken for the purpose of valuation.

2. The fair market value shall be taken as MRP when there are similar or identical goods in the market or by conducting and inspection in the market.

Proviso – The highest value should be taken if both these methods are adopted.

Explanation – For the purposes of this rule, when retail sale price is required to be ascertained based on market inquiries, the said inquiries shall be carried out on sample basis.

Rule 5 states that when the manufacturer alters or tampers with the MRP after removal which results in the increase of the MRP such value will be taken as MRP for all goods removed from the factory in the preceding one month and the month following such alteration.This is an offence and also liable to penalty. The goods will be liable for confiscation.

Rule 6 states that if the retail sale price of any excisable goods cannot be ascertained under these rules, the retail sale price shall be ascertained in accordance with the principles and the provisions of section 4A of the Act and the rules aforesaid. Hence it is the discretion of the Assessing Officer to decide the MRP using best judgment assessment on the basis of similar or identical goods in the market.

30th JULY, 2010

Section 4 – Transaction value/Assessable value/Ad valorem duty/Price-cum-duty – After the 2000 amendment, value is assessable on each transaction. However before 2000, it was assessed on the wholesale value. This is the residuary method. If no other method is applicable, then this method is resorted to.

Section 4(3)(d) – defines “Transaction Value” – The price actually paid or payable for the goods, when sold, and includes any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale ny amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.

Conditions for application of Transaction Value

1. Sale2. Sale must be at the time and place of removal3. Buyer and seller must not be related4. Price must be the sole consideration.

If the buyer and seller are related then the Valuation Rules will be applicable. It states that whatever is the actual price at the time the sale is excisable.

Price must be the sole consideration – If there are other considerations like some advance money paid by the buyer the same also is includible. All transactions must be at arm’s length.

If there is no sale then transaction value method shall not be applicable. Excise Valuation Rules, 2000 shall be applicable.

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Section 4(3)(b) – Related Person – The following are included under the definition of related persons:-

1. Inter-connected undertakings as defined under Section section 2 of the Monopolies and Restrictive Trade Practices Act, 1969

2. Relatives as defined under Section 2(41) of the Companies Act, 19563. Amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such

distributor; 4. They are so associated that they have interest, directly or indirectly, in the business of each other.

Presumption is that the business is not at arm’s length. “Each other” means that both of them should have an interest in each others’ business.

2 AUGUST, 2010

Cases on Section 4: Transaction Value

CCE v Guru Nanak Refrigeration Corporation 2003 153 ELT 249 (SC) - SC held that even if the value is below the manufacturing cost, revenue cannot challenge the MRP. If there is no instance of flow back of money from the buyer (e.g buyer provides some other benefit as well) then the MRP can’t be challenged. If the transaction is at arm’s length, it cannot be challenged as well. However, this may be challenged under any other act like Competition Act but not under the Central Excise Act, 1944.

GKN Driveshaft v CCE 2003 154 ELT 177 CAT – It states that each removal is a different transaction. Hence the seller may fix a price for each transaction. Hence if goods were removed on different dates, different prices may be fixed on those different days. They can also fix different price for different buyers. (e.g. price for selling to whole seller and to manufacturer may be different)

Proctor and Gamble Hygiene and Health Care Ltd v CCE 2005 190 ELT 289(SC) – The concept of manufacture and the concept of value addition are different. Taxable event is that of manufacture and the removal of the goods. Now if there is another processing of the product like Galvanization. If it takes place in the same unit, then the value will be considered for valuation. If it takes place in different units, it won’t be considered as it is not manufacture.

Hence value addition done outside factory is not included – CBEC Circular No. 138/08/2000

CCE v. Akay Cosmetics 2005 182 ELT 294 (SC) – The condition in which goods are removed from the place of removal are very important. Section 4 states that there must be sale at the time and place of removal. Hence the condition during at the time and place of removal is important. Hence any change taking place after removal is not material.

J.K. Papers v CCE 2003 157 ELT 184 (AT) – The assessee had cleared the goods for export. Export is exempt from all kinds of duty. But subsequently they cleared the goods from the factory and diverted it into the local market as the importer refused to purchase. After a few days, there was deterioration in the product. Hence they charged a lower price. Hence the question to be determined is whether the price is what was charged in the local market or the one at which they were removed. SC said that price at time of removal will be considered.

After this, a Circular was issued in 2002 wherein it was stated that an exception can be made in case of exports. However as the settled law goes, circulars are not binding on the Courts.

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3rd AUGUST, 2010

Only one sided interest is sufficient for Income Tax Act but for excise, a mutual interest is essential.

Calcutta Chronotype Ltd. V CCE AIR 1998 SC 1631 – Price to the buyer will not be regarded as the normal price if they (2 enterprises) are related. Price is not the sale consideration (rebuttable presumption). This case is also on the lifting of corporate veil. If the same persons are behind the corporate veil then it is possible to lift the corporate veil if the entities are controlled by the same persons.

CCE v Acorn Engineering Ltd. (2005) 181 ELT 175 – Merely because the buyer is a holding company, a related person, it cannot be presumed that the price is not the sole consideration especially when the good is being sold to a third party at the same price. In such a situation it would be presumed that the transaction is at arm’s length.

Rules 9 and 10 of the Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008 talk about related undertakings. Rule 9 states that When the assessee so arranges that the excisable goods are not sold by an assessee except to or through a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail. Rule 10 states that the method used in Rule 9 for valuation applies if the assessee so arranges that the excisable goods are not sold by him except to or through an inter-connected undertaking and If the undertakings are so connected that they are also related in terms of sub-clause (ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holding company or subsidiary company of the assessee. Cup method of valuation takes into account, comparable and controlled price.

Interconnected undertakings – Section 2(g) of MRTP Act states that 25 % of controlling power of both undertakings is enough to prove that the undertakings are interconnected. In Competition Act, it is 20 %. Under DTC 10 % substantial interest is sufficient. Test for interconnected undertakings under MRTP Act (CHECK THE SECTION)1

1 (i) if one owns or controls the other. (ii) where the undertakings are owned by firms, if such firms have one or more common partners. (iii) where the undertakings are owned by bodies corporate, - (a) if one body corporate manages the other body corporate, or (b) if one body corporate is a subsidiary of the other body corporate, or (c) if the bodies corporate are under the same management, or (d) if one body corporate exercises control over the other body corporate in any other manner; (iv) where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more partners of the firm, - (a) hold, directly or indirectly, not less than fifty per cent of the shares, whether preference or equity, of the body corporate, or (b) exercise control, directly or indirectly, whether as director or otherwise, over the body corporate, (v) if one is owned by a body corporate and the other is owned by a firm having bodies corporate as its partners, if such bodies corporate are under the same management, (vi) if the undertakings are owned or controlled by the same person or by the same group, (vii) if one is connected with the other either directly or through any number of undertakings which are inter-connected undertakings within the meaning of one or more of the foregoing sub-clauses.

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Mutual Interest in each other’s business – UOI v Keira District Cooperative Milk Producers Union 2002 146 ELT 502(SC) – In this case, the assessee was a member of Gujarat Milk Cooperative Marketing Federation Ltd. The assessee was selling product to the federation. The federation was charging commission for marketing of the product. SC said that there is no interest of Gujarat Coop in business of the assessee. As per Section 4(b) and 4(c) there should be mutual interest to qualify as interconnected. Hence the commission charged should be deducted from the actual price.

UOI v Atic Industries Ltd 1984 17 ELT 323 SC- Buyer had 50% shareholding in Atic industries. But Atic industries had no stake in the other undertaking. SC said that mere shareholding in another undertaking does not show the undertakings are interconnected.

CBEC circular No. 137/3/2006 dated - The Cenvat provisions and the valuation provisions are the same. Proctor and Gamble case Supreme Court said that valuation provisions and Cenvat provisions are separate.

Principle of classification is irrelevant for valuation. CCE v. Frick India Ltd. 2007 216 ELT 497 SC . First there is classification then there is valuation.

Under Income Tax act one sided shareholding is enough to have a one sided stake to qualify as related parties for the purpose of transfer pricing mechanism.

Alembic Glass Industries v CCE 2000 143 ELT 244 (SC) - Even if two public companies have shareholding in each other, then they are not related. If they are private companies, then they are said to be related undertakings.

Inclusions and Exclusions in Transaction value

Section 4(d) defines transaction value – price to be paid or payable by buyer by reason or in connection of the sale. E.g. An amount charged for free after sales service in includable in transaction value. However in case of extended warranty, the same is not applicable. Also things like designing charges, royalty, etc are also part of the transaction value.

Pepsi Foods Ltd. V CCE 2003 158 ELT 552 (SC) – Royalty charged in any franchisee agreement is inclusive in transaction value. Hence the royalty is added along with the actual cost for manufacturing cold drinks.

CBEC Circular Number 643/34/2002 of 1st July, 2002 – It states that the cost of packing supplied by the buyer should be added in the transaction value. However, in case of durable packing supplied by buyer which can be used repeatedly, then the cost of packing must be amortized in the lifespan of the packing material.

Design, Engineering or technical knowledge – charges for these are inclusive in the value of the goods.

Advertisement expenses are also includible in the value of goods. They are also in connection with the sale. Hence they are included as well. However any commission to any agent is not included in transaction cost. Also shipping charges are to be excluded. (However charges up to the showroom are includible). If the factory gate is the place of removal, it is not included.

4th AUGUST, 2010

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India Tin Industries v CCE 2000 125 ELT 864 – Free after sales service and warranty is includible in the price.

CBEC Circular No. 643/34/2002 (READ). – Cost of after sales service, or warranty and pre-delivery inspection (PDI) charges are included in the price. This is due to the reason that all of them are in connection with the sale. However, if there is anything which is in relation to the sale, it is not includible.

Volvo India v CCE 2005 182 ELT 471 (AT) – Optional after sales service is not includible in the price.

Ford India v. CCE 2007 212 ELT 44 Optional after sales service is not included in the price as it is not connected with the sale but only in relation to the sale.

CBEC Circular No. 354/81/2000 – Trade Discounts –Trade discounts or quantity discount or cash discount or any other discount is not included in the transaction value. Therefore trade discount etc. would be reduced from the price of the goods.

CCE v DCM Textiles 2006 195 ELT 129 (SC) – Even if trade discount is provided after the removal of the goods, the deduction of the amount from the transaction value is permissible.

CCE v Hindustan Lever 2002 142 ELT 578 (SC) – Discount in the form of supply of additional quantity is also deductible from the transaction value. (e.g. Buy 1 get 1 free offers).

However if the manufacturer is providing different kinds of goods, one of which is not manufactured by them, then the same can’t be claimed as a discount and hence the same can’t be deducted from the transaction value. (e.g. Manufacturer provides a free cold drink with a shirt, then he can claim deduction on the basis of the free drink). This was held in the case of Pearl Drinks v CCE 2002 140 ELT 496 (AT).

DEDUCTION OF TAXES

Section 4(d) includes certain things but excludes all taxes from the transaction value. (Excise, sales tax and other taxes actually paid or payable). Only the actual amount paid or payable is deducted from the transaction value.

CCE v Kisan Sahakari Cheeni Mills 2001 255 ITR 57 (SC) – They have discussed the meaning of “other taxes” under 4(d) (2). However “other taxes” are not defined under the act. In the case State of U.P. some administrative tax was charged on the Cheeni Mills under U.P. Sheera Niyantran Adhiniyam, 1994 on the molasses sold by the occupier of a factory to any person. SC said that even if there is administrative levy under any enactment, the same is considered as “other taxes” under the CEA and is deductible from the transactional value.

5th AUGUST, 2010

Kirloskar Brothers Ltd. V CCE AIR 2005 SC 1523 – It said that the discounts should be uniform in all cases. It cannot be said that discounts shall be uniform all over the country. But it should comply with the normal practice. It may vary from buyer to buyer but such variation should be on rational basis. (Note that this is only manufacturer’s discount and not retailer’s discount)

In Elgi Equipments v CCE 2007 215 ELT 348 (SC) – SC said that variable discounts are permissible.

Advertisement Expenditure – Advertisement and sales promotion expenses incurred by buyer are part of the transaction value.

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CBEC Circular No. 643/34/2002 – It has clarified that even when the advertisement or the publicity charges are borne by the buyer, if there is an agreement (written or oral) that the buyer will incur certain advertisement expenditure, then the same will be included in the transaction value. If there is no such agreement, then the advertisement expenditure is not included in the value of the products manufactures.

e.g. The advertisement by Pepsi or Coca Cola will not be a part of the transaction value for the purpose of the glass bottle manufacturer.

CCE v Surat Textile Mills (2004) 5 SCC 201 – If there is an agreement between the buyer and the manufacturer and the same is enforceable by the manufacturer, then the expenditure for advertisement is to be included in the transaction value.

This was followed in the case of Alembic Glass Industries v CCE 2006 201 ELT 161 (SC).

The golden rule is that anything in connection with the sale is includible in the transaction value.

CENTRAL EXCISE VALUATION (DETERMINATION OF PRICE OF EXCISABLE GOODS) RULES, 2000

Section 4 of the Central Excise Act applies when the sale takes place at place of removal and other conditions mentioned therein. However if any one of these conditions are not satisfied, the Central Valuation Rules will apply.

Rules apply in sequential order.

Rule 3 of the Central Valuation Rules state that if the value of excisable goods for the purpose of sub

Rule 4 to 11 applied to various situations such as no sale at place of removal, intermediate product for capital consumption

Rule 4 – It is applicable in case of free samples or supply of goods under warranty scheme. Free supply or warranty is not sale. Hence Rule 4 of Custom Valuation Rules applies. The value of excisable goods shall be the value of goods as on the date of removal which is nearest to the date of assessment. However this is applicable on identical and similar goods. This is only when there is supply of free samples.

CCE v Rajasthan Spinning and Weaving Mills 2007 218 ELT 641 – Valuation is not an exact science. There is guesswork involved in it. On the general observation of VAT Rules, it was held that valuation is not an exact science and there is a reasonable, rational basis on which it needs to be applied.

7th AUGUST, 2010

Indian Drugs Manufacturing Association Ltd. v UOI (2008) 222 ELT 22 (Bom) – Define meaning of “such goods”. Goods must be similar or identical in relation to quality, quantity, use or characteristics etc. It includes same quality goods by the same manufacturer.

Rule 4 – It shall apply when price at the time of removal is not available in case of free supply and in case of free samples given.

Circular CBEC No. 813/10/2005 – Verified that in case of sample distributed for free and supply under warranty scheme, Rule 4 will be applicable.

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CCE v. Universal Glass (2005) 182 ELT 3 (SC) – Definition of “such goods”/“comparable goods”. Must be as far as possible identical goods and of the same quality. Compare value of the product of that manufacturer.

Rule 5 – When goods sold at difference place, except where goods are sold at a place other than place of removal different from place of delivery then Transaction Value should exclude the cost of transportation from the place of removal to the place of delivery.

Explanation – Cost of transportation from the factory to the place of removal shall not be excluded (in case the place of removal is different from the factory gate)

Rule 6 – When the price is not the sole consideration – When the assessable goods are sold except where the price is not the sole consideration then the consideration shall be determined by adding the value of the goods provided for free. Advance payment made by buyer to manufacturer – Notional interest shall be added if there is any influence in the prices. No notional interest shall be added unless the department has evidence to prove that advance money has influenced the fixation of the price.

Tax Maco Ltd. v CCE AIR 1992 SC 1801 – Assessee was manufacturing wagon for the Railways. Railways were supplying wheels and axel. The price of wheels and axel needed to be added to determine the value of the wagon. The fact that the petitioner is not the owner of the wagon is irrelevant.

HBL Aircraft Batteries v CCE (2004) 167 ELT 483 – Cost of material to the buyer and not the fair market value should be added to the value of the goods.

CCE v Dai Ichi Karkama Ltd. (1999) 112 ELT 353 – The Retail Market price must be exclusive of CENVAT Credit.

9th AUGUST, 2010

Rule 7 – When the excisable goods are not sold by the assessee at the time and place of removal i.e. sale is from any other place other than the place of removal, where assessee and buyer are not related persons and where price is the sole consideration, the value shall be the normal transactional value at the time and place of removal or any time nearest to the time of removal.

Rule 7 of the Custom Valuation Rules: Normal Transaction value is defined under Rule 7 of the Custom Valuation Rules, 2007. It says that when the goods are sold at the greatest aggregate quantity. Greatest aggregate quantity – e.g. is 65 units are sold at Rs. 100. Or 55 units of goods are sold at Rs 95 and 80 units are sold at Rs 90

Rule 8 – It applies in case of capital captive consumption. It means goods used by the manufacturer himself. Rule 8 says that where the excisable goods are not sold by assessee but are consumed by him, the value of goods shall be 110 % of the cost of production or manufacture. This is also as per the Cost Accounting Standard – 4.

Rule 9 – Where the transaction is between relatives. Relative is defined in Section 4(3)(b) sub clause (2), (3) and (4) as a) Interconnected undertakings or b) both have mutual interest or c) If distributor is relative of buyer etc. Rule 9 is applicable in case of:-

a) Relative as per income tax act e.g. father, mother, etc

b) If distributor is relative of buyer

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c) If sub-distributor is relative of buyer.

d) mutual interest in each other’s business.

Interconnected undertakings come under Rule 10.

Value of goods shall be the Normal Transaction value when the goods are sold to buyer who is not relative or the value charged if sale is made to a non-relative or price is charged on retail sale. If buyer uses goods for capital captive consumption, then Rule 8 shall be applicable.

Rule 9 states that where the assessee so arranges that the goods are not sold to any other person other that a related person as mentioned above and the person to whom the goods is sold is not a relative, then the value charged to the non relative shall be the transaction value. This is shown by the following example. A sells goods to his relative, B at Rs 100. B sells them to C who is not his relative for Rs 200. Then the transaction value is Rs 200 and not Rs 100.

Rule 10 – Interconnected undertakings. When the assessee so arranges that the capital goods are sold by him only to interconnected undertakings, then this section applies. Interconnected undertakings include:-

a) Undertakings are connected so that they are “relative” under Rule 9 i.e. Section 4(3)(b) sub clause (2), (3) and (4).

b) Buyer is holding or subsidiary company of the undertaking. Thus interconnected undertakings under Rule 10 only include holding or subsidiary companies.

Then the valuation would be as per rule 9.

Rule 10A – It applies when the production is by the job worker on behalf of the principal manufacturer.

In case where goods are sold by principle manufacturers from place of job worker to a person who is not related to principle manufacturer or price is not the sole consideration then value of excisable goods shall be the transaction value of the same goods sold by the principal manufacturer.

Sub clause 2 says that when the goods are not sold by the job worker from his factory but is transferred to another place and sold from there, then the normal transaction value shall be the value of goods at which they are sold from the other place. However, the transportation charge from the place of job worker to the place of removal, is not included in the transaction value.

Rule 11 – Best judgment assessment. If any of the above rules do not apply to the goods and the value of the goods are not determined, then the revenue department can use best judgment assessment to determine the value. Under this, they have to use the test of reasonableness. They may use any of the aforementioned rules or devise their own rule provided that the same is reasonable.

10th AUGUST, 2010

CLASSIFICATION OF GOODS

Why is classification important? Classification under Central Excise Tariff Act and Customs Excise Tariff Act are same. Only rates are different. Rate of duty depends on classification. Slight difference in classification changes rate of duty. Example a simple difference between an ayurvedic medicine and a

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cosmetic changes the rate of duty. Section of the Central Excise Act says that the rate set forth in the first schedule of the Tariff Act shall be applicable for the purpose of taxation.

Central Excise Tariff Act –

1. It has three schedules. Schedule 1 talks about basic excise duty. Schedule 2 talks about additional excise duty. Schedule 3 covers goods under MRP Valuation.

2. It has 4 columns.

Tariff Heading Description of the Goods Quantity Rate of Duty

3. It has 96 chapters.

4. It has 20 sections.

5. Under every section, there is more than one chapter. In each chapter there are a number of headings. Each heading has a number of sub-headings. Each sub-heading has a number of sub-sub-headings.

e.g. Chapter 50, heading 10 sub-heading 20 sub-sub-heading 30 Rate of duty depends on the 8 digit code i.e. 50102030. Initially we adopted the Harmonized System of Nomenclature which had a 6 digit Code and later extended it to an 8 digit code. This comes from the International Convention on Harmonized System of Nomenclature issued by the World Customs Organization.

e.g. Section XI of the Central Excise Tariff Act – Textile and textile Articles. Chapter 50 – Silk; Chapter 51 – Wool, Chapter 52 – Cotton. Every Chapter starts with Chapter notes which is very important as it states which kind of goods are covered under the act. Now for Chapter 50, there are a number of headings. Chapter 50-01 talks about the Silk Warp cocoons 50-02 – Raw silk; 50-03 is Silk Waste. Now each heading has a sub heading. So 500310 – Silk waste not corded. There are several sub-sub-headings 50039010 – mulberry silk waste; 50039020 – tusser silk waste. Hence the 8 digits specify the rate of duty. However if the six digit code is not available then the duty is charged upon the 6 digits itself.

Chapter 50 - (One “-“denotes a chapter)

Heading 5001 – (Two “-“denotes a heading)

Sub Heading 500120 – (Three “-“denotes a sub-heading)

Sub-sub heading 50012033 – (four “-“denotes a sub-sub heading) General Interpretative Rules (6 rules) for Customs Tariff Manual.

Customs Tariff Act

1. It has 2 schedules. Schedule 1 covers import duty while Schedule 2 covers export duty. Export duty is exempted.

2. It has 5 columns.

Tariff No. Description Quantity Rate of duty Preferential Rate of duty.This is provided specifically for certain

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countries.

3. It has 2 chapters4. It has 21 sections

11th AUGUST, 2010

O.K. Play India Ltd. V CCE AIR 2005 SC 1023

In this case, the assessee was manufacturing toys. Generally a lower rate of duty is chargeable on toys. In this case, there were 11 items manufactured by them. First item was, play tables, activity chairs, etc. The assessee classified these goods as toys under Heading 9503 But Revenue classified it under heading 9401 as furniture. 15 % was chargeable for toys while 20 % was chargeable for furniture. The Court held that it was furniture. Court said that the mere fact that an article was made for the use of children, does not make it a toy. However 9503 refers to toys as “reduced size model”. Hence ideally such tables should have also qualified as reduced size models.

Next item included was rocker, fun fliers, swings, slides. Revenue wanted to classify them as articles for exercise. SC said that they are toys.

The third item was “play pools”. These pools had 5 feet diameter, 2.5 feet deep and the water capacity was 1000-1500 litres. Revenue classified it as “bath items” under 3922 while assessee classified it as toys. SC said that it was too big and even the adults could sit in it. Hence it was a bath item. SC has interpreted it in terms of “predominant use”.

SC has held:-

1. No one single and universal test can be applied for correct classification. There cannot be a specific parameter for correct classification.

2. The Scheme of central Excise Tariff is based on the Harmonized System of Nomenclature (HSN classification) and the explanatory notes therein. Therefore the explanatory notes provide a safe guide for classification.

3. Equal importance is to be given to the rules of interpretation of excise tariff. Hence equal importance should be given to GIR (general Interpretative rules). As per GIR, the heading providing a specific description has overriding effect over a general heading.

4. It is important to bear in the mind that the functional utility, design, sale and pre-dominant use has also to be taken into account for classification of an item.

5. The trade parlance shall only be taken into account if it is not possible to classify the items as per the GIR rules.

CCE v Wood Polymers Ltd 1998 97 ELT 193 – Classification should be done as per the rules of interpretation contained in the Tariff and not as per common parlance and trade parlance.

GIR Rules (General Interpretative Rules)

These rules are applied sequentially. This is as per Chapter IV Para 7 of the CBEC Custom Manual 2001.It states that the classification should be taken in light of Rule 1. If that is not possible then Rule 2 and so on should be applied. Hence GIR Rules are the part of the Act and they have binding effect.

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RULE 1 – It says that the title of the Sections, chapters and sub-chapters should determine the classification. They should be read with heading or chapter notes. Thus it says that one should refer to Heading Notes + Chapter Notes read with relevant Section.

Fenner India Ltd. V CCE 1995 97 ELT 8 (SC) – SC held that the Tariff shall be determined on the basis of the heading, chapter notes and the Section. Rules of interpretation are important for classification.

Saurashtra Chemicals v CCE 1986 23 ELT 283 (CEGAT) – Court says that the classification is to be determined on the basis of the chapter and heading of the Section.

RULE 2 (a) – Any reference in a heading to an article shall be taken to be a reference to that article which is incomplete or unfinished provided that the unfinished article has characteristics of the finished product. It includes unassembled products. E.g. CKD (Completely Knocked Down) Goods. They are classified as the finished item. E.g. parts of computer shall be classified as the Computer itself.

16th AUGUST, 2010

Thomson Consumer Electronics Ltd. 2004 164 ELT 292 (AT) – Assessee was importing SKD packs of audio system. Held that SKD needs to be classified as finished product if it has its characteristics.

Polar Appliances v CCE 2001 127 ELT 448 (AT) - However to classify as finished product, all the CKD products should be imported at one time or at one port. If they are imported at different points of time, it is not a finished product. However people take advantage of the exemption that Government gives to parts and not finished products by importing parts at different times.

Modi Xerox v CCE 2001 133 ELT 91 (SC) – The Supreme Court dismissed the Appeal of the assessee. It was held that if the components of the fax machine are imported in the CKD condition, it does not mean that fax machine has been imported even if as per Rule 2(a) it means that it resembles the finished product. There was a notification for exemption for the fax machine but not its parts. The Supreme Court held that the intention of the party was to avoid tax.

Circular 1 of 2005 – Mobile handsets imported in CKD condition are classified as complete products and not as parts.

Rule 2(b) – Rule 2(a) is not applicable then Rule 2(b) becomes applicable – Any reference to a material or substance will also include a reference to a mixture or combination of that material or substance with that material or substance. E.g. article or gold with some other article.

However this rule is very controversial. Hence in a number of cases, when rule 2(b) is not applicable, rule 3 becomes applicable.

Rule 3 – If classification is not possible as per Rule 2(b) or any other purpose, rules 3(a), (b) and (c) shall apply. They are also applied sequentially.

3a) Heading giving specific description shall prevail over heading giving general description. Hence heading stating “Suitcase” shall prevail over heading stating “plastic articles”.

3b) Mixture – Applies in case of 2 or 3 mixtures or composite goods. Mixtures made up of several components or set made of a number of articles and put up for sale shall be classified. e.g. Drawing instruments consist of eraser, pencil etc and make up a set of articles. Hence they will be classified as “drawing instruments” and not as pencil and eraser separately.

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3c) If goods can’t be classified as per 3a or 3b it shall be classified under the heading which occurs last in numerical order and those which equally merit consideration. It basically states that every chapter has a residuary heading. Hence if an item cannot be brought under any other heading, it must be brought under the residuary heading.

17th AUGUST, 2010

Judgments on 3a

CCE v. Simplex Mills Company Ltd. 2005 1 ELT 345(SC) – It was observed by the SC that Rule 3 must be resorted to if rule 2 is not applicable.

Pragati Silicon Pvt. Ltd. v CCE 2007 211 ELT 534 (SC) – Plastic name plate of a motor vehicle is to be classified as the accessory of the motor vehicle and not as “any other plastic article” as the specific article prevails over the general one.

V. Nagaraj Brothers v State of A.P. - “Suitcase” shall prevail over heading stating “plastic articles”.

Jyoti Industries v CCE 2000 115 ELT 559(AT) – Whether kitchen sink will be classified as sanitary ware or as “household articles of iron and steel”? Since “sanitary ware” is more specific, it prevails over “household articles of iron and steel”.

State of Maharashtra v Bradma AIR 2005 SC 956 – Resort can be had to residuary heading only when a specific heading cannot by liberal construction, successfully classify the goods.

CCE v Gujarat Perstorp electronics Limited – 2005 7 SCC 718 - Priority has to be given to the main entry and not the residuary entry.

Judgments on 3c

CCE v Acer India Pvt. Ltd . 2007 218 ELT 17 (SC) –It was held that a desktop computer is a combination of CPU, monitor, mouse and keyboard. Each of them can be used individually but are iused together as a set. Hence it is classified as a set of articles. Laptop comes in an integrated and inseparable form and CPU, keyboard etc are all integrated. Hence it is not a set of articles but has a different heading under which it

CCE v HP India Ltd. 2005 ELT 215 ELT 484 (SC) – Preloaded software in a laptop forms preloaded part of a laptop as it can’t work without the Operation System. Hence the software (which is otherwise exempted from excise duty), being an integral part of the laptop should be chargeable to excise duty.

SPIRIT RPG India Ltd v CCE 200 116 ELT 6 (SC) – The company was importing hard disk of 65,000 and software of 67 lakhs within it. SC said that essentially hard disk is the container but software is integrated to it. Hence the value of the software should be charged.

Circular 17/2007 – Mobile Handsets – Mobile phones with additional features (alarm, browser, computer) is still considered as mobile phone as the primary function of the mobile is that of a telephone.

Rule 4- Goods which cannot be classified as per the above rules then the same is classified under the heading which is most similar to it.

Rule 5(a) – Classification of the packing materials and the packing containers. Cases are generally classified with the goods itself. E.g. Camera cases shall be considered a part of the camera.

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Rule 5(b) – Subject to the provisions of rule 5a, the provision does not apply if the packing materials/containers are used repeatedly.

Rule 6 – For legal purpose, the classification of goods should be done under the appropriate subheading. Only sub headings at the same level are comparable.

Classification of the parts

CCE v Insulation Electricals 2008 224 ELT 512(SC) – A part is an essential component of the whole without which the whole cannot function. However accessory and spare part is not a part of the whole. Part is to be classified with the whole as the whole cannot function without it.

Eureka Forbes v CCE 2001 130 ELT 146 (AT) – hose/pipe of the aqua guard machine can only be used with the aqua guard and hence cannot be classified separately. It is not a general part and should be classified with the machine itself.

CCE v Aldic Corporation 2005 188 ELT 241 (SC) – The assessee was manufacturing aluminum grills which were used by buyer in air conditioner and were also used for general purpose. Hence SC said that it is a general part and not part of an AC as it can be used separately. Hence it will be classified as a general part “aluminum grills” and not as “AC”.

CCE v MP India Ltd. 1990 46 ELT 68 (SC) - Part of a part is a part of the whole- Tyre is a part of cycle and valve is a part of tyre hence valve is a part of a cycle.

18th AUGUST, 2010

Case presentation Vikram Cement v CCE, Indore (2006) 2 SCC 351

The last rule of classification is the trade parlance or commercial parlance theory. If it is not possible to classify the goods as per the rules or the chapter notes, the last resort is the trade parlance theory. This is based on the reason why consumers purchase goods and the commercial understanding of the same.

CCE v Vicco Laboratories 2005 179 ELT 78 – The question was whether Vicco Turmeric cream was a medicament or a cosmetic. Two items were in question i) Turmeric cream and ii) Vicco toothpaste. The Court said that the burden of proof that a good falls under a particular category is on the Revenue because the consumers are guided by the advertisement that it is “not a cosmetic’ and that the ingredients of the cream are found in Ayurvedic text books.

Dabur India Ltd. v CCE 2005 4 SCC 9 – Here the items in question were Dabur lal Tail and Janamgutti (i.e. whether they are medicament or ayurvedic medicine. The product must be classified by the popular meaning attached to it by those using the product. The assessee showed that they had drug controller’s license to manufacture Lal tail. They also showed prescriptions of ayurvedic doctors recommending Lal tail. Hence the SC held that Lal tail is a medicament. Regarding Janamgutti the question was whether it was aqueous distillate or aqueous solution or extraction of essential oil. They referred back to the lower authorities to verify the process of manufacture. The popular opinion amongst the public stated that it was an ayurvedic medicine.

Vaidyanath Medical Hall v CCE 1996 9 SCC 402 – Question whether Lal Dant Manjan is a medicament. They said that a medicine is prescribed be a medical practitioner for a limited use and not everyday use

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unless it is for diseases like diabetes. Hence it is not a medicament as it is not prescribed by doctors and not used for a limited time.

They discussed CCE v Pandit D.P. Sharma 2003 5 SCC __ – Question was whether the Himtaz oil was a medicament. In this case, the Court stated that people purchase this oil because it is supposed to cure medicaments and hence it is a medicament and not mere perfumed hair oil. Here it was said that a prescription of doctor is not required for a product to qualify as medicament. Here the SC clearly negated their own reasoning in Vaidyanath Medical Hall.

However even in 2009, in a similar case between Vaidyanath Medical hall and CCE it was again held that Lal Dant Manjan is a toothpowder and not a medicament.

Muller and Fipps v CCE 2004 167 ELT 374 – Prickly heat power is a medicament. For sales tax act, it has been treated as a drug. The court should be guided by classification of goods and not demolish the purpose of goods. The Court held that doctors also prescribed the power.

Thus common parlance needs to be taken into account. Parachute Hair Oil is classified as Hair Oil in West Bengal as no one uses it as edible oil in West Bengal. However it is classified as edible oil in Southern States as people use it as hair oil in those states. The bottle of the product does not mention “Hair Oil”. Hence its classification is based on common parlance/trade parlance.

19th AUGUST, 2010

In Dabur India, the case of CCE v Sharma Chemical Works was referred 2003 5 SCC 63 – The question that arose in this case was whether Banphool oil was a medicament. Court held that the onus on proving that the product falls within a certain category is on the Revenue. Generally the percentage or dosage of medicament is small to make it suitable for human use. It was said that medical practitioner’s opinion is not needed to make it fall under the class of medicaments. The ingredients of the oil find mention in the Ayurvedic books. The assessee showed that the product was used to cure headache, night blindness, etc. Ayurvedic medicines have lower duty than cosmetics.

CBEC has also issued a Circular No. 333/49/1997 that if the ingredients find mention in an Ayurvedic text book then even if the preparation is not as per the Ayurvedic textbook, it shall qualify as Ayurvedic medicine. Also, the perception and meaning of the product, the marketing and advertising of the product needs to be taken into account while classifying it.

CCE v ITC Ltd 2008 231 ELT 207 – The question was about non filtered and filtered cigarettes. Non – filtered cigarettes are non dutiable. In this case assessee was manufacturing a cigarette having a Tipper Gold Tip and it is a non filtered cigarette but it consists of a soft tip which is not meant to filter the tobacco. The Supreme Court agree on the point stating that the basic character and use of the product is more important than the basic character and use of the cigarette.

Puma Ayurvedic Herbal v CCE 2006 3 SCC 266 – Supreme Court laid down 2 tests to find out whether a product is a cosmetic or medicine.

i) Whether the item is commonly understood as a medicament.

ii) Whether ingredients used in the product are mentioned in an Ayurvedic textbook.

Medicament is used to treat some medical problem while a cosmetic is used to improve the appearance of a person. The use of a medicament might improve the appearance also but it does not make it a cosmetic.

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Natural Health Products v CCE 2003 158 ELT 257 – Vicks Vaporub and cough drops are Ayurvedic medicines.

CCE v Dabur India 2002 146 ELT 311 (SC) – SC held that Hajmola candy is an Ayurvedic medicine as 75% of it is Ayurvedic medicine while 25% is sugar.

However in case of Swad candy, the amount of sugar was 97% and 3% was Ayurvedic. SC classified it as a candy.

Handicrafts items (also exempted)

CCE v Louise Shoppe 1996 2 SCC 445 – The question arose whether wooden furniture is a handicraft or not. SC lid two tests for this purpose:-

i) It must be predominantly made by hand.

ii) It must be graced with visual appeal in the nature of ornamentation or in labour lending in an element of artistic improvement.

21st AUGUST, 2010

CENVAT Credit

They are governed by the CENVAT Credit Rules, 2004. In 1986 the Government had issued MODVAT (Modified Value added tax). In 2000 they introduced CENVAT (Central Value Added Tax). The schemes are same in both but CENVAT has more explanative definitions. In 2002, the Government came out with the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002 for service providers. In 2004 they merged these schemes together as the CENVAT Credit Rules.

This provided a scheme of interchangeability, thus Govt. introduced GST in 2004 partially. Thus the manufacturer could avail the credit on duty for both input services and goods. Similarly, a service provider availing input goods and services can avail duty on services and goods.

CENVAT taxes the difference between manufacturing price and sale price. Thus it taxes any kind of value addition.

Without CENVAT Credit With CENVAT Credit

Price of raw mat 110 110Value Addition 40 40Selling Price 150 140 (as Rs 10 is CENVAT credit)Duty 15 14 Tot 165 154 (Hence only 4 is paid as duty)

e.g. Say cost price of raw material is 100 and 10 % is duty on it. So the manufacturer purchases it for Rs 110. 40 is value addition total = 150;10% duty = 14; tot price is 154. Now 10 is the credit availed so 14-10 =4 is the duty payable.

The benefit of this is to prevent cascading effect and prevention of double taxation. So tax is paid only on the value addition.

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A is manufacturing goods. The duty is Rs 10 and the input services is Rs 20. Rs 10 is the duty on the export of the final goods. Hence in this case the Rs 10 duty on export can be set off against the duty on import. However there may be 2 situations. If the duty on import is 20 and there is no export duty, then a refund can be claimed from the government. If he is manufacturing goods for home consumption then he can claim a refund.

L1 and L2 are two input goods. Duty on L1 is 350 while that on L2 is 200. L1 is used to make F1 and L2 is used to make F2. Duty on F1 and F2 are 150 and 400. If both of these are manufactured in the same premises then the two can be clubbed and no credit needs to be obtained. Otherwise if it is done separately, then the manufacturer has to take credit on F2 of Rs 200. However this clubbing is not possible if the goods are manufactured by the same person but in different premises.

CENVAT Credit is available for

1) Input goods – all materials used for manufacturing

2) Input services – all services availed for manufacturing process

3) Capital goods – machine for internal production. – If he has purchased the machine for 10 lakhs and 2 lakh is the duty then 50% of the duty can be availed in one year and the remaining in the next year. The entire amount need not be availed in one year. However motor vehicles should be used for service provider and not manufacturer. Since in capital goods, the duty is very high, and the duty on the final service is low hence the same cannot be set off. So under the CENVAT credit rules, they policy of 50% exemption is provided.

23rd AUGUST, 2010

Input Goods:-

Rule 2(k) defines input goods. However it uses the word “input”. It is an exhaustive definition and not inclusive. It says that input means all goods except a) light diesel oil ii) High speed diesel oil or iii) motor spirit used in or in relation to the manufacture of the final product whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, grease, cutting oils, coolant and accessories which is cleared along with the final product (Thus any duty paid on such accessories or the input is used to make the accessories then the CENVAT credit can be availed on the same). It also includes packing material, paint, or anything used to generate electricity or steam etc then CENVAT credit can be availed on the same or items used for any other purpose within the factory premises (e.g. electricity provided in the canteen since canteen is a part of the factory under the Factories Act). Under Central Excise Act, factory means any premises including the precinct thereof where the goods apart from salt are being manufactured.

Scope of “all goods”, “used in” or “in relation to” – There is a difference between “used in” and “used in relation to the manufacturing process directly or indirectly”. “Used in” suggests that the goods were a component of the manufacturing process. However, “used in relation to the manufacturing to” has a very wide meaning. This however does not include buildings as they have a different exemption that applies to them. However the Rajasthan HC has stated in CCE v Hindustan Zinc has stated that a plinth made by cement for fixing the machine cannot be said to be “in relation to the manufacturing process”. However this is a very debatable question.

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The CESTAT in J.K. Cotton Spinning and Weaving Mills v STO 2007 has said that building material used for factory, equipments like fans coolers etc are only to facilitate the manufacturing process and are not eligible for CENVAT Credit.

Sterlite Industries v CCE 2006 203 ELT 283 (CESTAT) - Steel used for construction of building, dispensary, generator shed etc is not eligible.

Lloyd’s Steel Industries v CCE 2007 211 ELT 275 (CESTAT) - The CENVAT credit for cement and steel used for making foundation for installation of plants machine or equipment is eligible for CENVAT Credit.

UOI CCE v Hindustan Zinc Ltd 2007 218 ELT 503 (Raj HC) – Cement and steel used for foundation of machinery is not eligible for CENVAT Credit as they are not used in relation to the manufacturing process.

Indian Copper Corporation Ltd. v CST State of Bihar AIR 1965 SC 891 – There was supply of equipments for mining purpose. SC said that hospital equipments, medical supplies, stationery etc are likely to facilitate the manufacturing process or mining but it cannot be said that it is a part of the manufacturing process.

Hence if goods are used in the process of manufacture then it is covered under CENVAT Credit but if it is used to facilitate the process, it cannot be said to be included under CENVAT Credit.

Bikram Cement v CCE 2006 194 ELT 3(SC) – Input need not be used within the premises of the factory. It may be inputs used in the captive mines or captive power plants which are at a distance from the factory.

CCE v. Ballapur Industries: Presence in of the input goods in the end product is not a necessity for claiming CENVAT credit.

Eastern Electro-chemicals Industries Ltd. v CCE 2005 181 ELT 295 (SC) – It was said that there are 4 kinds of input used in the manufacturing process which are eligible for CENVAT Credit.

i) Those inputs which retain their dominant individual identity and character throughout the process and they are present in the end product also.

ii) Those which as a result of interaction with other chemicals or ingredients might themselves undergo chemical or qualitative change and in such altered form find themselves in the end product.

iii) Those which act like catalytic agent while influencing and accelerating the chemical reaction and themselves remain uninfluenced and unaltered and remain independent of and outside the product.

iv)Those which might be burnt up or consumed in the chemical reaction but are not present in the end product.

J.K. Cotton AIR 1965 SC 1310: if the process is inextricably connected with the product that it is not possible to produce the goods without that process then whatever is used in this process is also input goods for this product.

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CCE v. Rajasthan Chemical Works, AIR 1991 SC 2222: discussed under manufacturing where integral process is discussed.

Indian Farmers Fertilizers Company v. CCE 1996 86 ELT 177 SC: Inputs used in the effluent treatment plant would also be inputs in the final product and duty paid in those inputs is also eligible for CENVAT credit. This is in relation to the manufacture of the final product and not directly in the product.

BPL display devices Ltd. v. CCE 2004 174 ELT 5: The goods may be used after siz months, but if they are intended to be used in the manufacturing or in relation to the manufacturing process then the CENVAT credit can be taken. i.e. CENVAT credit can be taken if the goods have been purchased.

However if CENVAT credit taken but goods are not used in the process then there is reversal of CENVAT credit.

Syndet India Ltd. v. CCE 2004 166 ELT 349 Mumbai Tribunal: If the activity does not amount to manufacture then there is no excise duty, but the manufacturer pays the duty and the department has accepted that duty, then can the person claim CENVAT credit as there is no provision for refund.

ACC v. CCE 1990 50 ELT 295 Tribunal: Inputs used in the maintenance of the machine or equipment is not eligible for cenvat credit. This is not in relation to the manufacturing process. It is only to maintain the machines used to manufacture goods.

Partial use of the input goods: even the partial use is sufficient for CENVAT credit. Veruna Sulphonatus v. UoI 1993, 68 ELT 42(All), Court held that the credit cannot be denied if the Sulphuric Acid is not fully used in the manufacture of the product.

If loss in the input is due to natural causes, then CENVAT credit can be taken, however if it is due to manhandling, then reversal of CENVAT credit is required.

25th AUGUST, 2010

Rule 2(k) 1st part of the section defines Input for manufacturer. It states that input includes:-

i) All goodsii) Used in oriii) In relation to the manufactureiv) Directly or indirectlyv) Whether contained in that product or not

2nd Part of the definition (2) – Input goods for service provider – All goods used for providing output services shall be regarded as input goods. E.g. stationery.

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CCE v. Rajasthan Chemical Works AIR 1991 SC 2222 – The Supreme Court defined “process” as the process used in the manufacture or in relation to manufacture and which employs not only production but also includes any change which the raw material is subject to in the process.

Input used in the process to make capital goods in order to make the final product would also be eligible for CENVAT Credit.

Duties eligible for CENVAT Credit:-i) Basic excise duty (Schedule 1)ii) Additional Excise Duty (Schedule 2)iii) Education Cessiv) Higher Education Cessv) CVD at par with excise dutyvi) CVD at par with sales tax – 4%vii) Additional duty like NCCD (National Calamity) 1 %viii) EC on CVDix) HEC on CVD

CCE v Eastend Paper Industries AIR 1989 SC 488 – SC held that anything required to make the goods marketable, all the processes required to do so will be considered as “in the process of manufacture”. If any process which is so connected with the manufacture that without it, it is inexpedient to market the goods, then such a process would be regarded as “in the process of manufacture”.

If the goods are remotely connected with the process i.e. facilitation of process, then they shall be ineligible for CENVAT credit.

The use of wrapping paper is necessary ro make the goods available in the market hence any goods used in the manufacturing process to make the goods marketable shall be eligible for CENVAT Credit.

JayCo India Ltd v CCE (2007) 220 ELT 123 (CESTAT) – No difference drawn between primary and secondary packing. In this case, 50% of the product was packed with a wrapper and put into jars. The rest was packed with tattoos and credit was claimed on the tattoos as they amount to secondary material. The Department did not allow CENVAT credit on this ground. However the Court allowed it on the ground of “secondary packing”.

CCE v Solaris Chemtech (2007) 214 ELT 481 (SC) – The assessee wanted to produce electricity for captive consumption. The fuel used for the same included Low Sulphur Heavy Stock (LSHS) which was also used in the manufacture of cement and caustic soda. The production of electricity was meant for the purpose of captive consumption for an uninterrupted process. The Court held that LSHS would fall under the definition of “used in or in relation to manufacturing process” and hence CENVAT credit can be claimed.

Hindalco Industries v CCE (2006) 201 ELT 44 (AT) – Electricity used for captive consumption is eligible for CENVAT Credit. In this case, 2% of the electricity was sold to the grid. Hence the Court stated that CENVAT credit can be claimed for electricity for captive consumption and in such cases apportionment needs to be done.

REVERSAL OF CENVAT CREDIT

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If goods are damaged during transport or in store house and if damage is due to Vis Major then CENVAT Credit can be availed. If due to accident, goods are damaged, then there is no CENVAT Credit and there is reversal of the same and the entry for the same is cancelled.

Even the defective final product is eligible for CENVAT Credit. If final product shall be treated for input of the changed product, there needs to be a value addition to the final product. (Rule 16 of the Central Excise Rules) – There needs to be some value addition in the goods.

30th AUGUST, 2010

Rule 3(5B) of the CENVAT Credit Rules – An important condition for availing CENVAT Credit reversal is that the value of the goods before being used in the process should be written off in the books of accounts. Provided that if input or capital goods is used in the manufacture/ production process then the CENVAT Credit can be claimed. No maximum limit of storing the goods.

Rule 3(5C) – Where any goods manufactured or produced by assessee, the duty paid on the goods has been remitted by the Central Government then the CENVAT Credit availed on the goods needs to be reversed.

CCE v Maruti Udyog Ltd. (2000) 120 ELT 580 (AT-CEGAT) – The Court held that an antenna assembly fitted into the deluxe model of a car is eligible for CENVAT Credit as input includes any accessories cleared with the final product. In case of bought out items, duty paid on purchase shall be availed when paying duty on the final product. Input used in ancillary/ preparatory process- CENVAT can be claimed.

Shree Varna Sehkari Doodh Utpadak Prakriya Sangh Ltd. v CCE (2007) 209 ELT 196 (Mum AT) – Appellant was the manufacturer of the product “Bournvita”. Under a promotional scheme, a 2 piece star chocolate with the product. MRP of the final product remained the same. Appellant’s claim of credit on the chocolate was not admitted. Tribunal held that as the chocolate was not used in the manufacturing process and MRP of the product was the same hence no credit can be claimed.

Lotte India v CCE 224 ELT 102 (CESTAT) – Assessee was selling a combo pack of Coffee Bite and Butter Scotch. Butter Scotch was bought out. CESTAT held that this combo pack was a manufactured item and hence Credit can be claimed.

CCE v Gupta Soaps (2007) 213 ELT 372 (AT) – Supply of soap along with the soap dish in one pack. Court held that whatever is the duty on the soap dish CENVAT credit can be availed.

Even after 2008- anything bought out then CENVAT Credit can be availed if it is used as an input good.

Inputs must be stored within the premises of the factory for CENVAT Credit to be availed.

Exceptions –

Rule 8 – 1) In case there is no space or the goods are of dangerous nature, input goods can be stored outside and the same shall be considered as an extension of the factory. However prior permission of the Assistant Commissioner or Deputy Commissioner must be taken.

31st AUGUST, 2010

INPUT SERVICES

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Rule 2(l)2 – Definition – 1) Any service used by the provider of taxable service for providing output services. 2) Used by the manufacturer 3) whether directly or indirectly or 4) in relation to the manufacture of the final product and for 5) clearance of the final product upto the place of removal.

This rule was amended in 2008 – The phrase “from the place of removal” was substituted by the words “upto the place of removal”. Thus prior to the amendment, the ambit of services which could avail CENVAT Credit was very wide as the word “from” indicated that any service after the final product is removed shall be considered. However this scope was restricted vide the amendment in 2008. The Credit could be availed on the duty that was paid.

For INPUT GOODS CENVAT Credit is on excise duty.

For INPUT SERVICES CENVAT Credit is on Service tax.

Explanation – Includes services used in relation to setting up, modernization and renovation of the factory, premises of output services provider or offices of the manufacturer, advertisement, sales promotion and market research.

CENVAT Credit can be availed if service tax is paid.

Meaning of “in relation to the business” – Business is a very wide term vis-à-vis “in relation to earning profit”. Thus any activity which is in relation to earning profits amounts to a business.

Coca Cola v CCE (2009) 15 STR 657 (Bom) – Definition of “business” says that all services must be used by the manufacturer in relation to the process or in the process. The advertisement of the soft drink was done by Coca Cola but the manufacturing was done by the bottling company. Royalty and price charged by Coca Cola plus the value of the concentrate formed the selling price. CENVAT Credit of the advertisement was availed on the value of the concentrate. CESTAT held that the CENVAT credit cannot be availed by the company as they are not manufacturing the product that is being advertised. The Bombay High Court held that CENVAT Credit could be availed on the duty paid on the concentrate as the advertisement is an essential service as the concentrate cannot be sold as it is.

Changes in the Definition applicable from 1st of April 2011: (i) CENVAT Credit relating to the setting up of the business would not be allowed. (ii) Now they have deleted any activity relating to the business. (iii) Service of Business Exhibitions and Legal Services has been included. (iv) Certain services have been specified which would be available only if they are used by the service provider to provide output service.

2ndSEPTEMBER, 2010

Telephone services at the residence of executives- Whether it is an input service? – If the service is at the office, it undoubtedly qualifies as input service as the activity carried out by then is for business. The controversy was regarding service installed at residence. The service amounts to a perquisite and is hired by the employer and hence it is also relatable to business.

Under the Old definition: (Note : now it would not be available) Indian Rayon Industries v. CCE 2007 6 STT 328 Mumbai Tribunal: Service tax paid on the mobile phone services is available as a credit to the service provider and the manufacturer.

Excel Corporation Care v CCE 2007 7 STR 451 (CESTAT); NICE Telecommunications v CCE 2007 8 STT 159 (CESTAT) – Mobile phones are eligible for CENVAT Credit.

2 Cenvat Credit Rules, 2004

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Universal Cables Ltd. v CCE 2007 7 STR 310 – Internet services at residence are eligible for Cenvat Credit.

Bhoruka Gases v CCE 2008 22 ELT 449 (CESTAT) – Commission paid to the commission agent is also eligible for Cenvat Credit.

GHCL Ltd v CCE 2007 10 STT 254 (CESTAT) – It was held that the services provided at the residence of the staff members is not eligible for CENVAT Credit.

However the case of Shaw Builders v CIT settles the law stating that the service provided at home amounts to a perquisite and is hired by the employer and hence it is also relatable to business.

Excel Corporation Care v CCE 2007 7 STR 451 (CESTAT) – Construction service for setting up garden and building a signboard. CESTAT held that it is not eligible for Cenvat Credit.

Rule 4(7) of Cenvat Credit Rules states that Cenvat Credit on input service can only be availed if the service tax had been paid for the input service.

Metro Shoes v CCE 2008 (CESTAT) – Place of removal is the showroom in this case. Hence CESTAT stated that whatever services were hired at the showroom were eligible for Cenvat Credit.

Input Services Distributor (ISD) – Rule 2(m) – If the Head Office of a company is at a particular place and factories are at other places, the HO can still be eligible for Cenvat Credit under the system of Input Services Distributor. This is because the HO hires these services and distributes it amongst the factories.

ISD means an office of the manufacturer which receives invoice towards purchase of input services and issues challan for the distribution of these services as per the proportion. However for this, it is necessary to register the HO with the Central Excise Department to avail these services.

CAPITAL GOODS – Rule 2(a) – Capital goods means

i) All goods under chapter 82, 84, 84, 85 and 90

ii) Pollution control equipment

iii) Components, spares and accessories of the goods of the goods falling under the chapters in (i)

iv) Moulds, dyes and fixtures

v) Refractory and refractory material

vi) Tubes and pipes and fittings thereof

vii) Storage tanks

The conditions for the above to qualify as capital goods is that

i) It must be used in the premises of the manufacturer

ii) Does not include any appliances used at the office

iii) Does not include any input service.

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If the same person is both a service provider and a manufacturer, he can avail CENVAT credit on the appliances used in his office.

Motor vehicles for providing services to the service provider are capita goods for the service provider. However they aren’t capital goods for the manufacturer. (Rule 2(a) B)

Thus anything which is not eligible under Capital Goods will be eligible as input goods (Rule 2(k))

4th SEPTEMBER, 2010

Basic Procedures for CENVAT Credit

Rule 3(1) of the CENVAT Credit Rules - Duties which are eligible for CENVAT Credit

i) Basic Excise duty

ii) Education cess and Higher education cess on basic excise duty

iii) Countervailing duty which is at par with basic excise duty as per Section 3(3) of the Custom Tariff Act

iv) Education cess and higher education cess on CVD

v) Additional custom duty as per Section 3(5) of the Custom Tariff Act (4%)

vi) Education cess and higher education cess on the above CVD

vii) NCCD (National Calamity contingent duty) 1%

viii) Service tax

ix) Education cess and higher education cess on the service tax.

Generally one to one correlation is not required however there are exceptions:-

Exceptions

i) Whatever education cess is availed on the input services or goods can only be availed against the education cess paid on the final product.

ii) Whatever NCCD is availed on the input services or goods can only be availed against the NCCD paid on the final product.

Rule 4 – Conditions for allowing CENVAT Credit –

Sub rule (1) CENVAT Credit on inputs is available as soon as inputs are received in the factory of the manufacturer or the premises of the output service provider.

Sub rule (2) States that CENVAT Credit on capital goods can be taken up to 50%in the same financial year and remaining 50% can be availed in the next year. This is provided that the capital goods are used in the process of manufacture or in relation to the same.

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Sub rule (3) CENVAT Credit on Capital goods is allowed even if they are acquired on lease, hire/purchase or loan.

Sub rule (4) Assesses should not claim depreciation on the excised portion of the capital goods. Suppose value of capital goods is 1 lakh and duty portion on the same is 15, 000. Hence total cost is 1, 15,000. Depreciation can only be allowed on the 1 lakh and not 15,000 as it is the excised value.

Sub rule (5) Inputs and capital goods can be sent outside for job work but should be brought back within 180 days.

Sub rule (6) – Components of jigs and fixtures are also eligible as capital goods.

Sub rule (7) – In case of service tax, only when the payment is made to the Service provider CENVAT Credit can be claimed.

Rule 6- If the manufacturer uses same inputs for the exempted and the dutiable goods then the following needs to be observed. (Rule 6 is applicable from 2008)

Separate inventory, invoice, and receipts for exempted and dutiable goods.

If the above is not maintained then either of the following conditions should be followed.

a) The manufacturer of goods shall pay 10% of the exempted goods and 8 % of the value of the exempted service

b) The manufacturer of the goods or provider of output service shall pay an amount equivalent to the CENVAT Credit taken on the input goods and services.

Tahir Ali Inductries v CCE 2006 195 ELT 2005 (CESTAT) – It is the option of the assessee to exercise either of the 2 above options.

Rule 6(4) – If the capital goods are partially used for exempted services and partially for the final dutiable product then the entire CENVAT Credit can be availed.

TRANSFER OF CENVAT CREDIT

Rule 10 (1) – If the manufacturer of the final product:-

i) Transfers his factory to another site OR

ii) Enters into a Joint Venture agreement OR

iii) Merges with another entity.

AND There is transfer of liability then the CENVAT Credit can be availed on the same.

Rule 10 (2) – If the output service provider:-

i) Transfers his factory to another site OR

ii) Enters into a Joint Venture agreement OR

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iii) Merges with another entity.

AND there is transfer of liability then the CENVAT Credit can be availed on the same.

Rule 10(3) – The transfer of CENVAT Credit under 10(1) and 10(2) shall be allowed only if along with the transfer, the input goods or capital goods which are lying in the store are also transferred to the transferee. The prior permission of the Deputy Commissioner or Central Excise should be taken for the same.

6th SEPTEMBER, 2010

Rule 12A of CENVAT Credit Rules– In 2005-2006 the Large Taxpayer Scheme (LTU) was introduced by the Finance Minister, P. Chidambaram. It is a single window clearance system designed to give benefit to a large taxpayer. It is present in most developing countries and has been started recently in India and Bangladesh. Thus large taxpayer units do not have to pay excise duty, and other taxes separately but at a single window.

Rule 2(ea) Central Excise Rules, 2002 means a person who has one or more registered premises under the Central Excise Act, one or more registered premises under the Finance Act, 1994 and is assessee under the Income Tax Act holding a PAN and satisfies the conditions and observed the procedure issued in Circular No. 834/11/2006.

Rule 12A of CENVAT Credit Rules Procedures and facilities for Large Tax payers with respect to CENVAT Credit. This prescribes an exclusive procedure for LTUs and the same overrides all the general rules stated under the CENVAT Credit Rules.

Exclusive benefits for LTUs- Ordinarily in order to avail CENVAT Credit, one cannot remove input and capital goods. However this restriction is absent for LTUs. Certain other benefits are conferred on LTUs such as certificate of removal is not required at the time of removal. Transfer of challan, invoice, inventory is not required at the time of removal. No challan, bills etc are required to distribute the services or input duties.

Eligibility- If the total tax Central Excise Duty = 5 crores, Service tax = 5 crores and Income Tax = 10 crores then the entity becomes a Large taxpayer Unit. These large taxpayer units are present in Bangalore, Chennai and Mumbai. A proposal for the same has been made for Delhi. If a unit wants to exit the scheme, 30 days notice must be given from the beginning of the financial year.

Administration of LTUs

1. Each LTU shall be controlled/ headed by the Chief Commissioner of CBDT or CBEC.2. Each LTU is assisted by the client executives. The Assistant Commissioner from Income Tax or

Excise and customs shall be the client executives. 3. This scheme is not available for tobacco and pan masala manufacturers.4. For application for an LTU one needs to make an application under Form 21 of 2006.

Rule 12(bb) of Central Excise Rules also talks generally about LTUs.

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Rule 14 of the CENVAT Credit Rules – Recovery of CENVAT Credit wrongly taken – If the CENVAT Credit has been wrongly taken, the same along with interest shall be recovered from the manufacturer or provider of service. For this, Section 73 and 74 of the Finance Act, 1994 and Section 11A and 11B of Central Excise Act shall be applicable.

Rule 15 – Confiscation and Penalty –

(1) If any person takes CENVAT Credit wrongly or in contravention of the rules, then all such goods shall be confiscated and a penalty not exceeding the duty equivalent to the excise duty on the goods or Rs 10,000 (changed to 10,000 from 2,000 in 2007) whichever is higher shall be charged.

(2) In a case where the CENVAT Credit in respect of capital or input goods has been taken wrongfully or fraudulently or utilized wrongly in contravention of the Central Excise Act or the rules thereunder then the goods may be confiscated and the provisions of Section 11AC of Central Excise Act shall apply

(3) CENVAT in respect of input service wrongly taken – Penalty not exceeding the duty equivalent to the excise duty on the services or Rs 10,000 whichever is higher shall be charged.

(4) In a case where the CENVAT Credit in respect of input services has been taken wrongfully or fraudulently or utilized wrongly in contravention of the Central Excise Act or the rules thereunder then the goods may be confiscated and the provisions of Section 11AC of Central Excise Act shall apply

(5) Any order issued by the Central Excise Department under the aforementioned rules shall follow principles of natural justice.

Rule 15A- General Penalty- If no penalty is prescribed in respect of a violation then a general penalty of Rs 5,000 will be charged.(Introduced in 2008)

OFFICES (Heirarchy)

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How are the goods removed from the place of removal? Before 1968 there was removal under physical control .Thus the supervision of the inspectors was required. This was a cumbersome procedure. Thus after 1968, we have a procedure for self removal and no counter sign of inspector was needed. Thus a challan or invoice is required only and not actual supervision.

8th SEPTEMBER, 2010

BASIC PROCEDURE UNDER THE CENTRAL EXCISE

When is duty payable? The taxable event is manufacture. However, rate of duty is determined at the time of removal. Rule 4 of the Central Excise Rules – In case of molasses, the incidence is on the procurer and not the manufacturer.

Rule 4(4) – Commissioner may, having regard to the nature of the storage goods allow the goods to be stored in any place outside the factory premises without payment of duty.

Rule 5 – Rate for determination of duty- The rate on the date on which goods are removed. In case of molasses the rate of duty is when it is received on the premises of the procurer.

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Finance Department

CBEC

Excise

Chief Commissioner

Commissioner

Additional Commissioner

Joint Commissioner

Assistant/Deputy

Commissioner

Superintendent

Inspector

Customs

Chief Commissioner

Commissioner

Additional Commission

erJoint

Commissioner

Assistant/Deputy

Commissioner

Appraiser

Examiner

CBDT

Rate of duty for goods in captive consumption – The date on which goods have been issued for the next process.

Rule 6 and 7 – Self Assessment – It is a form of self assessment. It is applicable in all cases except that of cigarettes.

Rule 7 – Provisional Assessment – If the assessee is unable to determine the value on the rate of goods, then he may request the Assistant Commissioner in writing to allow the payment of duty on provisional basis.

Rule 7(2) – Provisional duty payable is subject to execution of bond.

Rule 7(3) – Assistant Commissioner to pass an order of assessment within 6 months.

Rule 7(4) – If a differential amount is payable, then interest is also payable.

Rule 7(5) – Interest also payable on refund of excess amount.

9th SEPTEMBER, 2010

CCE v Hindustan National Glass 2005 182 ELT 12 – Provisional assessment is not to be conducted unless there is an express order of given by Assistant Commissioner or Deputy Commissioner as per Rule 3 of Central Excise Rules, 2002.

Ravi Mardia v CCE 2000 11 ELT 627 (5 member bench of CEGAT) – Once an assessment is provisional for one purpose, it is provisional for all other purposes. E.g. demand, refund, etc.

CBEC Manual- Chapter 3 Part IV Para 3.1 of CBEC Manual 2005 – Department cannot order provisional assessment if it is found that documents submitted by the assessee are not in order. Under Rule 7, provisional assessment can be filed for if the assessee:-

i) Is unable to finalize the value of the goods and rate of duty ORii) Is unable to classify the goods

RULE 8 – Manner of Payment – Duty on goods removed from the factory shall be paid by the 6th day of next month if the duty is paid electronically or else by the 5th day of next month in any other case. But for the month of March it has to be paid before 31st March (next financial year).

If the assessee are availing SSI scheme on the removal of goods, shall pay duty by 15 th of next month or 16th of next month for electronic. If the assessee is paying more than 50 lakh duties in one financial year by utilizing CENVAT Credit, they have to pay through electronic means only. The duty/liability to pay shall be discharged if it is credited to the account of the authorities.

If the assessee deposits the duty by cheque, the date of presentation of the cheque before the bank designated by the CBEC shall be the date for the payment subject to the realization.

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13th SEPTEMBER, 2010

RULE 9 – Registration of the dealers or manufacturers or the premises of manufacture – Without registration, one cannot start any kind of production. Section 6 of the Central Excise Act and Rule 9 of the Central Excise Rules deal with registration of dealers. Section 6 states that any person who is engaged in production or manufacture of any process or any goods mentioned in the Schedule or are wholesale purchasers, or dealers or stores specified goods are to be registered. This registration certificate has to be pasted at a visible place where anyone can see it.

Rule 9 gives the procedure of registration – Every person who produces, manufactures or carries on trade or otherwise uses excisable goods are to register themselves. The meaning of “otherwise uses” does not include individual consumers but only institutional consumers like hotels. Hence the wording of this rule should be reading with the object of the Act which is to regulate the traders and manufacturers.

The Proviso stated that the registration obtained under Rule 174 of Central Excise Rules shall be deemed to be as valid as registration obtained under Rule 9.

The Government may by notification exempt certain units from registration. E.g. SEZ Units

Rule 9(3) – Registration shall be subject to conditions as prescribed by the Government. Notification 35 of 2001 prescribes the form for the application of registration.

CBEC Circular No. 662/53 of 2002 – Procedure for obtaining the registration. SACER (System for Allotment of Central Excise Registration). There are three forms:-

i) A-1 – General Form

ii) A-2- Only for hand processing units or dealers of yarns or manufacturers of readymade units.

iii) A-3- Manufacturers of hand rolled tobacco.

Separate registration is required for different units if the same manufacturer has different units within the same premises.

If business is transferred, then a fresh registration is required i.e. registration is not transferrable.

Registration certificate shall be granted within 7 from date of application or else it will be deemed to be granted.

If there is any change in the constitution of the firm then they should inform within 30 days of the change to the excise department.

If the manufacturer ceases to manufacture, then deregistration shall be applied for within 30 days.

Registration can be revoked or suspended if the holder of registration or any person in his employment commits breach of any of the provisions of the act or the rules made there-under.

Registration certificate is permanent unless it is revoked or there is change in the nature of goods manufactured. There is no need for renewal. The Registration certificate is a 15 digit number. This code is called ECC (Excise Control Code). The first 10 digits constitute the PAN Number. The next two characters are either XM, which denotes manufacturer or XD which signifies dealer. The last three digits is the code given by the department.

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Exemption from registration – Rule 9(2) – It is notified every year in the official gazette. The following units are exempted.

i) Personally who are manufacturing excisable goods which are unconditionally exempt from Excise Duty

ii) SSI Units are also exempted. Thus if the value of goods is less than a particular amount then excise goods need not be paid.

iii) Persons getting goods manufacturer from others on his own account if he authorizes actual manufacturers to pay excise duty.

iv) Persons manufacturing excisable goods under custom warehousing procedures, if all the goods are subject to exports, are to be exempted.

v) SEZ units.

If the manufacturer manufacturers anything without obtaining registration, then he is liable under Rule 25(1c) of the Central Excise Rules, 2002. The duty on the contravening goods or Rs 10,000 whichever is higher shall be payable. Additionally the goods are liable to be confiscated under Section 9 and also imprisonment upto 7 years and minimum 6 months.

14th SEPTEMBER, 2010

Binding nature of circulars

CST v Indra Industries AIR 2000 SC 3442 – Circulars and Press Notes are no binding on assessee but the department cannot take a stand against it. It can only withdraw with prospective effect.

Azadi Bachao Andolan v UOI (2003) 263 ITR 706 (SC) – In this case, the Department challenged a circular. There was a DTAA between Mauritius and India. The Circular (Circular No. 789/April 2000) stated that goods or transactions that are chargeable under Mauritius law shall not be taxed again in India however for this purpose, there must be a company in Mauritius. There was a shell company in Mauritius which was exempted from tax. The assessee claimed no liability under Indian law by stating the circular and also stating that exemption from taxation does not mean that the goods were not chargeable to tax. However, the CBDT challenged the circular stating that this would amount to tax evasion in both countries. The Supreme Court held that the department cannot challenge its own circular. It can at the most withdraw the circular.

Rayon Glues v. UoI 2000 117 … the department cannot issue circulars contrary to the decision of the CESTAT or any other quasi judicial authority

Century Rayon v. Union of India 2002 149 ELT 319 (Bom), in case of conflict between judgment of CESTAT / quasi judicial authority and a circular the CESTAT or quasi judicial authority will prevail

CCE v Easwara and Sons Engineers AIR 20053 SC 613 – Department officers are bound by circulars as per Section 37B of Central Excise Act. Court and quasi judicial authority can challenge the circular. Assessee has right to claim on the basis of a circular and Court and the Court may consider the beneficial interpretation for the assessee.

CCE v. Maruti Foam 2002 6 SCC … even if there is contrary decision by the Supreme Court, the departmental circulars would be binding on the department until they are withdrawn.

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SAIL v CC (2000) 115 ELT 42 (SC) – Circular under Section 37B is binding on revenue even if it is contrary to law because they cannot challenge their own circular.

CCE v Dhiren Chemical Industries (2002) 2 SCC 127 – The Supreme Court held that “Regardless of interpretation of a circular that we had placed if there is a circular which places a different interpretation of the same phrase then that is binding on the revenue.

Kalyani Packaging v UOI (2004) 6 SCC 719 – An old case cannot be reopened for which, benefit is already provided on the basis of a new Supreme Court judgment against the circular but the SC judgment is binding on the pending matters in the Court and not the circulars.

Suchitra Components v CCE (2008) 208 ELT 321 (SC) – Oppressive circular will be applicable with prospective effect. Beneficial circular shall be applicable with retrospective effect.

Refund

Section 11B provides for claim of the refund and 11BB provide3s for interest on refund.

Mafatlal v. UoI 1997 5 SCC: Constitution Art. 265 says that no tax shall be levied or collected save as by authority of law. Therefore how can the state collect a tax which has not been levied by the authority of law. However the court said that the tax payer is the people of India the state can retain the same on behalf of the people of India.

Therefore unjust enrichment has to be considered. Similarly there is a case of unjust empoverishment.

Dunlup … AIR 1977 SC 597

Refund of cenvat credit INDO Nepo Chemicals v. Union of India 2005 185 ELT 59 (Guj.)

CCE v. Flock India Pvt. Ltd. 2000 6 SCC 650.

Union of India v. Ropeless Ltd. AIR 1989 Bom 183.

Appeals and Revision

(Sections 35-36 of the Central Excise Act, 1944 and Sections 128-129 of Customs Act, 1962)

Appeal - There may be two ways of appeal:-

i) If the matter comes before the Assistant/ Deputy Commissioner the first appeal lies to the Commissioner and the same has to be done within 60 days. The second Appeal from the decision of the Commissioner may lie to the CESTAT and then the procedure is followed as mentioned in ii). If there is no second appeal, a revision application may be filed to the Central Government. The decision of the Central Government cannot be appealed against but an SLP or a writ petition can be filed against it.

ii) If the matter first comes before the Commissioner, the first appeal may lie to the CESTAT and the limitation period for the same is 3 months. From the decision of the CESTAT (within 180 days) an appeal

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may lie to the High Court and then to the Supreme Court or directly to the Supreme Court only in cases pertaining to rate of duty, classification and value of goods.

Revision – A revision application may be filed under the following circumstances:-

i) Loss of goods in transit

ii) Rebate of duty on excise on goods exported outside India.

iii) Goods exported without payment of India except Nepal or Bhutan

iv) Matter related to baggage and duty drawback.

Chaudrana Steels Pvt Ltd v CCE (2009) 238 ELT 705 (SC); CCE v Hongu India Ltd (2009) 236 ELT 417 (SC) - High Court has no power to condone delay unless expressly provided by excise, custom or income tax laws.

After these two cases an amendment giving effect to the judgment above was brought about in the Excise Act but no amendment was brought in the Income Tax.

Departmental Appeals

Assistant Commissioner Commissioner Commissioner (Appeals)

Commissioner CBEC CESTAT

Duty under Protest – It is the prior deposit of duty pending appeal. So if one is appealing against duty levied on him, it does not mean that he is not liable to pay duty pending the adjudication. Application for stay of recovery to be filed along with the appeal as per Section 35F of Central Excise Act and Section 129E of Customs Act.

Siddharth Turbo v CCE (2000) 123 ELT 516 (AT) – Mere filing of appeal does not amount to stay of recovery.

HC has stated that all tax matters must be decided by at least a 2-Judge bench (Section 35T of central Excise Act)

CUSTOMS DUTY 16th SEPTEMBER, 2010

Applicable laws

i) Customs Act, 1962

i) Customs Tariff Act, 1975

iii) Custom Valuation Rules, 2007

History

Earlier we had the Sea Customs Act, 1878. It dealt with goods transported by air. In 1924, the Land Customs Act was passed which dealt with transport of goods by land. In 1911 the Aircraft Act was passed which dealt with the movement of goods by air. In 1962 all these acts were consolidated into the Customs Act, 1962.

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Entry 83 of List 1 – Duties of customs including export duty. Hence the power to make legislations levying customs duty vests with the Central Government.

Section 12 of the Customs Act is the charging section for import and export duty. Section 3 of the Customs Tariff Act is the charging section for countervailing duty. E.g. CVD under Section 3(3) is to protect the excise duty; CVD under Section 3(5) is to countervail the sales tax.

Central Government is also subject to the excise and custom duty. However the same may be exempted by notifications.

Jain Brothers v UOI AIR 1999 SC 2550 – It mentions the charging sections for import and excise duty (Section 12 of Customs Act) and countervailing duty (Section 3 of the Customs Tariff Act).

New Video Ltd. v CC 1996 87 ELT 509 (CEGAT) – Q: If an item is imported from outside India which is under warranty scheme and the goods need to be replaced and are replaced for free, will it be subject to import duty again? A: It is for personal use then it is exempted from excise duty in case of free replacement under warranty scheme. If it is for commercial use then it is not exempted.

Notification No. 80/70 – Exemption is not allowable for the import of goods under free warranty scheme for commercial purpose.

Indian Airlines v CC 2005 180 ELT 502 (CESTAT) – The fuel which was used for an international run would be used again in the domestic run. Hence the question was, since the fuel was bought outside India and was used outside initially, should the same be subject to custom duty when the same is used in India. The Court answered in the affirmative.

When is import completed?

India includes the territorial waters of India and includes 12 nautical miles from the baseline. The Exclusive Economic Zone is upto 12 nautical miles from the baseline. Hence once the consignment enters the EEZ, they come within jurisdiction of the Customs Authority. However an import completes when the consignment crosses the “Customs barrier”. A customs barrier is crossed when the bill of lading is shown to the port authorities or the airport authorities. The question whether customs duty can be levied when the ship crosses the territorial waters only is a very controversial issue. There may be a situation when the ship crosses the initial barrier and then sinks.

Finally, the SC settled the controversy regarding completion of import in Kiran Spinning Mills v CC AIR 2000 SC 3448 and Garden Silk Mills v UOI AIR 2000 SC 33 – SC said that import completes only when the goods cross the customs barrier and the duty is leviable on the date of crossing of the custom barrier and not on the date when it lands in India. Hence rate of duty applicable is on the date of crossing the custom barrier. In Garden Silk Mills, it was stated that import commences when the goods enters into the territorial waters and complete when it passes the customs barrier and is available for home consumption.

UOI v Rajendra Dyeing and Printing Mills 2005 180 ELT 433 (SC) – It was held that the export completes when the goods cross the territorial water of India. If the ship sinks within territorial waters then export is not completed. If export is not completed then duty drawback cannot be claimed. Hence this is quite different from the case of imports.

18th SEPTEMBER, 2010

Definition of Export is under Section 2(18), 2(23) defines import and 2(27) defines India. Export is defined as “taking out of India to a place outside India”.

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CC v Sun Exports 1988 35 ELT 241 (SC) – Supreme Court held that export is complete once the goods leave Indian waters. Thus even if vessels or ships turn due to engine problem, the export is complete once the goods leave the Indian waters.

When is export/import duty levied? The rate of duty applicable is when the goods to be exported cross the custom barrier. No import duty even when goods are lying on the dock. It must be cleared for home consumption in order to make import duty applicable. Even if goods are lying on the dock for the fault of Government, rent is charged by the Government!!!

Section 15 talks about date for determination of rate of duty in case of imported goods and 16 of the Customs Act talks about date for determination of rate of duty in case of Exported goods.

Section 15 – The date on which the bill of entry of goods is presented to the authority the same shall be taken as the date of application of rate of duty for the imported goods. Thus the rate of duty applicable is determined by the date on which the same is made applicable for home consumption.

Section 16 – The date on which the “Proper Officer” clears the goods for loading for the purpose of export, such date shall be the date for applicability of the rate of duty.

Section 2(22) – Definition of goods – (Inclusive definition) Goods includes:-i) vessels ii) aircrafts iii) vehicles iv) stores v) baggage vi) currency and negotiable instruments and vii) any other kind of movable property.

Digital Equipment v CC 2001 135 ELT 962 (AT) – CEGAT stated that transfer through email is not a transfer of movable property. Hence they are not goods and there is no question of custom duty.

20th SEPTEMBER, 2010

Types of Custom Duty

i) Basic Custom Duty – Section 12 of the Customs Act, 1962.

ii) Countervailing duties (CVD) Section 3 of Customs Tariff Act – This is duty on duty.

Section 3(1) - If the same or like article is manufactured in India then CVD is levied at par with Basic Excise Duty

Section 3(3) – CVD at par with Basic excise duty paid on raw material used in the final product.

Section 3(5) – CVD at par with other local taxes.

Process - Say value of goods is 10,000, customs duty is 10%. CVD is payable at 12% on (10000 + 1000) = 1,300. Education at par with Excise duty at 3% on this 1300 = Rs 40. Education cess CVD on custom duty on the total (Rs 22,340) Hence CVD is a duty on duty.

22nd SEPTEMBER, 2010

iii) Protective duty (Section 6 of Customs Tariff Act)

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iv) Safeguard Duty (Section 8 B of Customs Tariff Act)

v) Goods from China (Section 8C of Customs Tariff Act)

vi) Bounty fed duty (Section 9 of Customs Tariff Act)

vii) Anti Dumping duty (Section 9A of Customs Tariff Act)

Dumping Margin – Margin of injury = Anti dumping duty (mod value is taken)

There is no education cess on specific CVD.

Countervailing duty

Section 3(1) states that CVD is charged at par with excise duty. The object is to countervail the duty paid. If the goods are the same as mentioned in the Customs Tariff, the same rate would apply. If goods have different rates mentioned then the highest rate shall be applicable. For example when chalk is imported from outside it can be subject to 2 types of duty as in India chalk has 2 types of duty depending on the fact whether it is made with aid or without aid. However for the purpose of CVD, the higher of the 2 rates shall apply.

Goodyear India Ltd. v CCE AIR 1997 SC 1683 – The highest rate is applicable for CVD if an imported good of exactly the same description is manufactured in India.

CC v Indian Organic Chemicals 2000 118 ELT 3 (SC) – The Supreme Court stated that CVD is at par with excise duty but is not “duty as such” as it is charged under Section 3 of Customs Tariff Act and not Section 12 of the Customs Act. It is therefore additional custom duty.

Motiram Tolaram v UOI AIR 1999 SC 3121 – SC said that CVD must be levied on the effective rate of excise duty in India and not the rate mentioned in the Tariff Act. If the goods are exempted from excise duty in India, there will not be any CVD as well.

However if here is conditional exemption via notification on a particular good then CVD will be applicable if such goods are imported from outside India.

Priyesh Chemicals v CCE 2000 120 ELT 259 (CESTAT 5 member bench) – If the product is exempted subject to some conditions then CVD will not be exempted and the same will be imposed.

Rate of CVD in case of liquors – Liquors are subjected to State excise duty. Thus from 2007 there is no CVD on liquor. Thus the basic custom duty has been increased.

If like articles are under MRP provision, then CVD will also be imposed on the basis of the MRP declared in it. But if one is labeling that price in India after having imported it from outside India, it will amount to deemed manufacture and it will be subject to excise duty in addition to CVD. Hence it is always beneficial to alter the price or label goods outside India.

Protective Duty (Section 6)

When the Central Government, upon a recommendation made by the Tariff Commission is satisfied that conditions exist where necessary action must be taken to protect an Indian industry, then it may impose protective duty to safeguard the interest of any industry of India. However this notification must be laid before the Parliament within 6 months, it must become law or else the same shall lapse. However if any action has been taken in the time being on that notification, it shall be valid.

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Safeguard duty (Section 8A)

If the Central Government, after conducting such enquiry is satisfied that a material is imported in India in increased quantity to cause or threatening to cause damage to an Indian industry, they can levy safeguard duty. Section 8C talks about safeguard duty on goods coming from China. Provisional safeguard duty shall extend for 200 days. Generally safeguard duty is for 4 years to a maximum of 10 years. No safeguard duty shall be imposed on any goods coming from a developing country unless the imports exceed 3% of the total import. If imports are originating from several developing countries then the safeguard duty is not imposed unless they do not exceed 3% individually and the aggregate of them does not exceed 9%.

23rd SEPTEMBER, 2010

Dumping per se is not illegal. However it depends on the circumstances whether the dumping of the goods is harmful to the domestic market. It also depends on the NIP (Non injurious price). Even if the dumping causes material deterioration to the domestic market, it becomes illegal. E.g. A manufacturer is unable to start a business just because there are imports from another country which are available at a lower price.

Bounty Fed Duty (Section 9)

It is the subsidy upon manufacture/production/transportation. The Indian Govt. can impose CVD on their origin country/manufacturing country or third country.

Subsidy - Subsidy is a financial contribution by the Government. It is the Govt. due not collected. The Govt. provides goods free of cost. Any kind of benefit given by the Govt or bestowed by the Govt on the manufacturer amounts to subsidy.

Anti-dumping duty (Section 9A)

When an article is imported to India from any other country or exported from India to another country, at a price less than the market price, the authority shall impose anti-dumping duty not exceeding the margin of dumping or margin of injury. For the dumping to be illegal, it must cause injury to the domestic producer.

Margin of Dumping – The difference between the market price at the country of dumping and the export price. (Margin of Dumping = (Export price – normal price) (Mod value is taken)

Margin of Injury – The difference between the fair selling price in India and the landed cost of the product in India. (Margin of Injury = (Fair Selling Price – Landed Cost) (Mod value)

Anti-dumping Rules of 1995 Customs Tariff Act 9A, 9B, 9C, GATT Article 6 lay down the legal framework dealing with anti dumping. Director General Anti Dumping (Designated Authority) is a part of the custom department who deals with anti dumping. The order of the Central Government can be appealed against however DA’s recommendation is not appealable. There is no remedy apart from a writ petition. The powers of investigation and recommendation rest with the DA while that of imposition and collection rest with the Central Government. If there is a difference between the provisional duty imposed by DA and the duty imposed by Central Government, the extra amount is subject to refund. Duties are not subject to unjust enrichment. CESTAT has a separate bench for Anti Dumping Duty cases having at least a 3 judge bench.

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Reliance Industries v DA 2006 202 ELT 23 (SC) – SC said that once dumping of goods from a country is established, dumping duty can be imposed from all goods from that country. Hence the policy is exporting country oriented and not exporter oriented. However rate of duty may differ from exporter to exporter. This case also discusses as to how to calculate Non Injurious Price (NIP).

Exception to the above rule: New Shipper Review – If there is a new exporter from that country then they can file a requisition before the Indian authority for review of the duty.

However, the above question as discussed in Reliance case has been referred to a larger bench in DAV Indian Metal Ferro Alloy Ltd. (2009) SCC.

29th SEPTEMBER, 2010

There are few important terms under :-

i) Normal value – As per section 9(a), normal value is the comparable price at which goods are sold in ordinary course of trade. Price in the country of the exporting country. Article 14 of the Agreement for implementation of Anti Dumping and Rule 4 of the Anti Dumping Rules 1995 states that the designated authority can launch an investigation into dumping into India and causing injury to any other member of the WTO. Anti dumping duty shall be levied if there is an injury to the market linked with the dumping. However if the normal value cannot be determined as per the regular rules, we can determine the same by:-

a) Comparable representative export price through an appropriate third country

b) Cost of production in the originating country plus reasonable addition.

ii) Export price – Price paid or payable by the independent buyer. Exporter charges price from independent buyer in country of import. Dumping Duty is normal price less export price.

a. Arms length valuation (in case of related parties like associated industries)b. Resale c. Best Judgment

iii) Dumping Margin: Dumping Margin is the difference between the export price and the basic price of the goods produced domestically.

iv) Margin of Injury Margin of Injury refers to the difference between landing price (computed by adding customs duty on export price) and the basic price of domestic goods.

De minimis Margin -If the difference between NV and export price is less than 2% then goods are not subject to anti dumping. If the total exports from that country are less that 3% of the whole, then also goods are not subject to anti dumping duty.

Article 14 read with Article 6 of GATT states that Anti dumping duty shall not exceed dumping margin or margin of injury whichever is lower.

Related parties – There is Arm’s Length Price.

30th SEPTEMBER, 2010

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Margin of Dumping – If the export price has been determined

Whether or not the anti dumping duty should be exporting country model or exported country model is yet to be determined in the Reliance Industries case.

“Like Article” – Identical or similar article. Identical means alike in all respects. Similar means having closely resembling characteristics. Injury determination – There are 2 methods for determination of injury. There must be a causal link between dumping and injury.

i) Volume effect – The DA will examine the volume of the imports and also cases where a significant increase in the import is likely. They will take into consideration the actual consumption of an article in India.

ii) Price effect – There is price decrease or undercutting or when price of indigenous goods cannot be increased due to dumping. Loss of sales, decline in output and proper capacity utilization (where capacity of machine is to produce 1000 tonnes and due to dumping only 500 tonnes are produced) are some of the factors may lead to price or volume effect.

Application for investigation – The DA has the power to undertake suo moto investigation. However an application can be filed by domestic producers however there are 2 conditions:-

i) The domestic producers expressly supporting this application must account for not more than 25% of the total production of that like article in India.

ii) The domestic producers expressly supporting the application must account for more than 50% of the total production of the like article including producers supporting and opposing the application (since even the importers are domestic producers).

Lesser duty rate – Article 6 of GATT states that every country may impose a lesser duty rate. India follows this system. The anti dumping duty will not exceed the margin of dumping.

Price undertaking – If during the investigation the exporter has agreed to undertake the price (the margin between the normal value and export price which means that he has agreed to increase the normal value to the export price, then there shall be no duty payable in case of dumping.

6th OCTOBER, 2010

Application Procedure - Rule 5 of Anti Dumping rules

Under the ministry of Commerce an application for investigation process for anti dumping has to be filed by the domestic producers in the given format by furnishing a fee of 15,000. Period of investigation must not be less than 6 months and not more than 18 months.

Confidentiality - If there is any confidential information disclosed by a party, it cannot be disclosed to any third party unless authorized specifically by the party. The DA itself has no power to make information confidential. Only the party can make information confidential.

Investigation Process –

1) Preliminary screening – The application is scrutinized by the DA to find out if there is sufficient evidence and information and whether the application is properly documented. If such essentials are absent, the DA shall send a deficiency letter to the domestic producer to file or produce additional

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evidence within 20 days of the application. Hence sufficient evidence of the injury must be provided by the domestic producer. If the DA rejects the application, there is no remedy by way of appeal. Only a writ petition can be filed. The DA’s recommendation has to be ratified by the Central Government for the enforcement of the same.

2) Initiation – When the DA is satisfied of the material contained in the application, a public notice is issued initiating an investigation, within 45 of the filing of a properly documented noticeapplication.

3) Access to information – The DA shall provide access to the non confidential evidences presented to it by the concerned parties in the form of the public file.

4) Preliminary finding of the DA – The preliminary finding is normally made within 150 days from the date of initiation. After preliminary finding, the DA can impose provisional duty. Provisional duty can be imposed only after 60 days from the initiation of investigation. Thus provisional duty cannot be imposed before 105 days (60 days + 45 days for filing)

5) Final Determination – After consulting the concerned parties, the DA can make final determination. It has to be done within 150 days from Preliminary determination.

The designated authority will inform all the parties the basis of its investigation and finding. They are bound to disclose the reasons.

Termination of

1. Request of domestic producers2. If the injury is negligible3. In case of De minimis margin (If the volume of dump import is less than 3% and for more than one

country, less than 2 %)

Review of Anti Dumping duty

1. Mid-term Review – Review within the period of 5 years of imposing the duty (Rule 23)2. New Shipper review - If there is a new exporter from a country which generally has anti dumping duty

already existing on that country then they can file a requisition before the Indian authority for review of the duty. (Rule 22)

3. Sunset review – 5 years is the maximum time for imposing anti dumping duty. After 5 years there is a review whether the same should be continued. This is called sunset review.

Rishiroop Polymers v DA 2006 196 ELT 385 (SC) – It was held by the Supreme Court that the scope of review is subject to the satisfaction of the DA in continuing the anti dumping duty.

Kalyani Steels Ltd v DA 2006 203 ELT 418 (CESTAT) – It was held that the anti dumping duty cannot be revoked on the ground that the performance of the domestic industry has improved.

Review is applicable Prospectively.

H & R Johnsons Ltd. v. UoI 2004 177 ELT 22 (Bom HC): In the case of new shipper review, it is possible only after preliminary finding.

DA v. Indian Metal and Ferro Alloys.

Shenyang Matsuchita Batteries v. Exide Industries Ltd. 2005 181 ELT 320 SC:

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Section 9B:

CUSTOM VALUATION

Custom is generally on the assessable value/ transaction value of the goods. If the transaction value method is not applicable then rules as per the Custom Valuation Rules, 2007. These are at par with the WTO Regulations. Section 14 of Customs Act has been amended in 2007 to bring it at par with the WTO regulations.

Under customs also the definition of transaction value is the same as in the excise act.

1) There must be sale

2) Price must be the sole consideration

3) Buyer and seller must not be related.

4) duty must be imposed at the time of importation

7th OCTOBER, 2010

Applicable laws for Custom Valuation

1. Section 14(1) of the Customs Act talks about transaction value method2. Section 14(2) talks about tariff value method.3. Rules under the Custom Valuation Rules, 2007 which are in consonance with Article 7 GATT

Kinds of methods of valuation

1. Transaction value method – Section 14(1) and Rule 3 of Custom Valuation Rules, 20072. Identical goods – Rule 4 of Custom Valuation Rules, 20073. Similar goods – Rule 54. Rule 6 says that if the above rules are not applicable then rules 7,8 and 9 will be applicable. 5.[4.] Deductive method – Rule 7 – It is the profit split method. 6.[5.] Computed method- Rule 8 The importer has a choice to choose between Rule 7 or Rule 8.

However there is no choice between rule 3,4,and 5. 7.[6.] Residual Method (fall Back method) - Rule 9: Best judgment method they can follow any one

method or a combination method to calculate the cost. 8. Rule 10 inclusions and exclusions in the customs value.

Globe entertainment v. CCE 2005 180 ELT 258 CESTAT : Valuation is the value of the information contained in the article. Warle Weams Pvt. Ltd. v. Union of India AIR 1996 SC 1543 Value of the goods means the value at the time and place of importation. So whatever is the price at the time of importation has to be considered. Therefore CVD will also be levied only on the value of the goods or the condition of the goods at the time of import of the goods. Stage subsequent to the import of the goods is not relevant. Jindal Photo Films v. CCE. 2002 141 ELT 202 Appellate Tribunal case on price must be sole consideration. Buyer purchased the machine from an exporter. The exporter was not charging license fee. The condition was also that the buyer purchased semi processed raw material from the seller.

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Therefore it was held that price is not the sole consideration and the value of the license will have to be added to the cost of the machine. The rate of exchange determined by the CBEC will be binding and not the value determined by the RBI. Third proviso of section 14 such price shall be derived as per the rate of exchange prescribed by the CBEC.

The methods have to be applied sequentially however the importer has a choice between the Deducted value and the Computed value method.

Rule 11 – Declaration by the importer – The importer or his agent shall disclose the full or accurate details of the goods imported and if goods are directly purchased from the manufacturer, then the invoice from the manufacturer needs to be shown. If purchase from an agent then invoice of agent has to be shown.

Rule 11(2) – Revenue can satisfy itself by asking for any information. Provisions of penalty, confiscation and prosecution shall apply in case of wrong information being given. It also amounts to improper imports.

Rule 12 – Rejection of declared value – The authority can reject the declared value of the goods when the officer has reason to doubt the summary of the information received. At the request of the importer, the officer may intimate the grounds of rejection and may hear the parties regarding the same.

Section 14(1) states that for the purpose of the Customs Tariff Act the value of imported goods shall be the the transaction value which is the price paid or payable for goods exported to India at the time and the place of importation. This definition was amended in 2007. Earlier, the normal value and not the transactional value was applicable. The conditions for application of Section 14 are:-

1. There must be sale2. Price must be sole consideration – Tie in consideration is excluded. For example A agrees to sell his

car if the buyer agrees to buy his bike also. In such case price is not the sole consideration and the transaction is not at arm’s length.

3. Buyer and seller must not be related – The transaction value will be accepted if the transaction is at arm’s length. However the burden of proving so shifts on the importer.

The proviso to Section 14 states that there are certain additions to the transaction value, e.g. Loading and unloading charges, transportation charges, etc.

Rate of exchange as devised by the CBEC shall be applicable on the date the Bill of entry is presented to the excise officer.

Tariff Value Method

The Government fixes the tariff value of goods. E.g. if the tariff value is fixed at 60%, then only 60% of the declared price of the goods shall be considered for charging duty. Tariff Value is fixed for brass scraps, crude iron, crude soybean oil, etc. in 2009. It is fixed for around 5 or 6 items.

Date of determination of duty – Section 15 of the Tariff Act states the rate of duty applicable is the duty on the date on which the Bill of Entry is presented before the excise officer. Even if the goods are cleared

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10 years after the filing of the bill of entry, the rate and the value applicable shall be the one of the date of filing the Bill of Entry.

MS Shoes v CC 2007 210 ELT 641 – Transactional value as on the date of filing of bill of entry shall be the rate of duty. Subsequent depreciation shall not be applicable.

Wareli Weras Pvt Ltd. v UOI AIR 1996 SC 1543 – Customs duty shall be levied on the goods in the stage and condition when they are imported. Subsequent processing and addition shall not be considered.

CCE v Indian Organic Chemicals – If the Goods are imported as a set, then they must be valued as a set and not individually.

13th October, 2010

Inclusion in Transaction Values

Rule 10(1)(b) – The following shall be includible in transaction value

1. Commission or brokerage except buying commission2. Cost of container included in the price3. Cost of packing4. Any feature supplied by buyer free of cost or reduced cost5. Any price and design paid by buyer

Rule 10(1)(c) - Royalties and license fee paid by or payable by the buyer must be included in the price charges by the imported goods. The royalty may be charged directly or indirectly.

Matsushika Televisions v CC 2007 211 ELT SC (SC) – Television was being imported to India and was being sold. 3% royalty was being charged for sale of the television in India. This was said to be includible in the price.

CC v J.K. Corporation Ltd. 2007 208 ELT 485 – In this case, SC held that any amount paid for post importation activity shall not be included in the value of goods. In this case, the importer paid some money in addition to the price for plant and machinery for obtaining the technical knowhow for operating the same. This was not included as a part of the value.

However, after this case, there was an amendment that the post importation charges shall also be included in the value of the goods.

CC v Toyota Kirloskar 2007 213 ELT 4 SC– There is no controversy regarding inclusion of pre importation charges. However post importation charges shall only be includible if the same is a condition for the import.

Circular No. 86 of 2002 - Any royalty related to a cinematographic film are includible in the price of goods.

Rule 10(2) – The value of imported goods shall be the value of goods as at the date and time of import. It shall include:-

i) Cost of transport from the place of export to the place of import.

ii) Loading, unloading and handling charges are to be included in the price.

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iii) The cost of insurance is to be included in the price.

Provided that if the cost of transport is not ascertainable then :-

i) Such cost shall be 20% of the Free on Board (FOB) value of the goods.

ii) The loading or unloading charges shall be 1% of the FOB value of the goods

iii) Where the cost of insurance is not ascertainable, it shall be 1.125 % of the FOB value of the goods.

Related Parties

Rule 2(2) defines related parties:-

1. If they are officers or directors of one and another’s business.2. Partners in business.3. The persons shall be deemed to be related if:-4. If they are employer and employees5. Any persons directly and immediately holding or controlling 5% of the outstanding stocks or shares of

both the companies6. In all cases of related parties, there should be mutual business.7. One of them directly or indirectly controls the others]8. Both directly or indirectly control a third party9. Both are directly or indirectly controlled by a third person10. They are members of the same family.

14th OCTOBER, 2010

Rules for valuation

1. Rule 3, Section 14 – Transaction value2. Rule 4 – Identical3. Rule 5 – Similar goods4. Rule 6 : if rules 3,4,and 5 cannot be used then the later rules i.e. rules 7 and 8 are to be used. 5. Rule 7 – Deduction value6. Rule 8 – Computed value7. Rule 9 – Residual method.

Identical goods - Rule 2(d) defines identical goods as goods which are:-

[1.] Same in all respects which include physical characteristics, quality and reputation1.[2.] It must belong to the same country 2.[3.] It must be manufactured by the same manufacturer. If he is not available, then any other

manufacturer may be considered.

In identical goods, there may be minor difference in appearance.

Similar Goods – Rule 2(f) defines similar goods as:-

1. It is not alike in all respect2. It must have same characteristic, function, same component material

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3. Commercially interchangeable3.[4.] It must belong to the same country 4.[5.] It must be manufactured by the same manufacturer. If he is not available, then any other

manufacturer may be considered.

Valuation methods of Identical Goods – Rule 4

1. Identical goods must be imported into India at the same time. (It may be before or after but the nearest time is taken as the date of import)

2. It must be imported at same quantity value and same commercial level3. Transaction value of identical goods sold at same commercial level or quantity then the same may be

found at different level and quantity provided they are identical.4. If there is different in the transportation, loading and unloading goods for the identical goods (e.g.

different transportation costs from different ports) then adjustment is made.

5. Same Commercial level and same quantity.6. Different commercial level and same quantity7. Same commercial level and different quantity8. Different commercial level and different quantity.

Valuation of Similar Goods – Rule 5

The method of valuation is same as that of identical goods, however the definitions of similar and identical goods are different. However goods of the same country are required to be compared and not different countries.

Rule 6 says that if rules 3, 4 or 5 do not apply, rules 7, 8 and 9 shall apply. Provided that at the request of application of the importer and approval of the customs authority, the order of application of rules 7 and 8 can be reversed.

Deductive Value – Rule 7 also called the profit split method.

This method can be followed depending upon the choice of the importer. He can choose between deductive value and computed value method. This method involves profit split. Hence cost such as transportation etc is deducted from the selling price. E.g. Rs 10 is the price at which the goods are sold, Rs 3 is deducted for commission, tax, etc, and therefore Rs 7 is the value of the goods under this method. For the selling price, the Greatest Aggregate quantity has to be considered.

Computed Value – Rule 8 (Cost plus method)

The cost of production in the exporting country plus additions to the same is considered as the value of goods. However the exporter has to disclose the cost of production in the exporting country

Residual method – Rule 9 (Best judgment method or fallback method)

If the valuation cannot be done as per the other rules, the prudence of the tax authority shall be used to arrive at the same.

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Rule 12: The authorities can reject value as per any of the rules if they are not able to accept the value or they have doubt regarding the suitability of the value.

18 OCTOBER, 2010

DUTY DRAWBACK

Section 74, 75, 76 of Customs Act deal with Duty drawback.

1. Re-export of goods - 742. Import-process-Export - 753. Where duty drawback is not applicable in some cases - 76

Drawback on imported material used in manufacture of goods which are exported - import duty paid on the raw material is subject to drawback

Three methods to determine duty drawback:

1. All India rate: fixed by govt on basis of avg rate of duty payable on particular types of goods (90% items are based on this)

2. Brand rate: on certain standard products, it is not possible to fix all India rate

3. Special brand rate: If the manufacturer shows that the actual duty paid on inputs is higher than the all India rate originally fixed by govt, then they can apply and seek special brand rate

Duty Drawback Rules 1995 + Cir No. 58/2002 – Duty Drawback = Custom Duty + Countervaling Duty + Excise Duty paid on indigenous goods + Duty paid on packing material

The amount paid on import if not claimed under CENVAT can be claimed as Duty Drawback.

In case of CENVAT credit, if the final product is exempt, then credit cannot be availed. In case those goods are being exported, then duty drawback can be availed. 

Custom Duty, CVD, all duty paid on packing material etc is eligible for duty drawback. If inputs are exempted from duty, then duty drawback cannot be claimed.

1. All Industry Rate: Rule 3 of Duty Drawback Rules - Avg rate is fixed for the entire industry by considering the average quantity of input imported into India. It is fixed on a % of FoB.

2. Brand Rate: Rule 6 of Duty Drawback Rules – It is fixed for a certain standard product, if it is not possible to fix all industry rate, then the brand rate is fixed by the govt. For fixing brand rate, the manufacturer has to submit an application 60 days from the export. Eg: softwares. 

3. Special Brand Rate: Rule 7 - For special brand rate, the manufacturer has to submit an application 30 days from the export.

4. Duty Drawback on Re-export: Section 74 - If goods are re-exported (as such or after use also - max 3 years limit for use), drawback is possible. Depending on how much it is used, there are % of drawback possible (6 months, 6-12 months etc). But this is only for commercial use. For personal use,there is a separate rate applicable. Rate of depreciation on quarterly basis shall be applied.

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20th OCTOBER, 2010

Improper Imports

Smuggling is defined under Section 2(39) while 2(33) defines prohibited goods. The other relevant sections are Sections 111,112,113,114, 133, 134. Smuggling may be defined but it is not used later on in the act. Section 2(39),which defines smuggling states that it is any act or omission which shall render such goods liable to confiscation under Section 111 or 113.

Section 111 (confiscation of improperly imported goods)

a) Goods imported by sea or air which are unloaded or attempted to be unloaded at any place other than customs port or airport

b) Goods imported by land or inland water through any route other than the ones specified through notification

c) Any dutiable or prohibited goods brought into any bay or tidal water. (Section 11 defines prohibited goods).(E.g. wildlife, natural resources, patents, prevention of deceptive practices, etc.)

d) Any goods which are imported or attempted to be imported contrary to any law imposed under the act.

e) Any dutiable goods found concealed in any manner in any conveyance.

f) Any goods which are required to be mentioned in the import manifest or import report and are not mentioned therein. In such cases, even the conveyance shall be seized by the Government.

g) Any dutiable or prohibited goods unloaded or attempted to be unloaded in contravention of section 33 and 34.

h) Any dutiable or prohibited goods found concealed in any manner in any package either before or after unloading of the goods.

25th OCTOBER, 2010

Section 2(33) – Prohibited goods – It states that all goods which are improperly imported or attempted to be exported improperly, then the goods are known are prohibited goods. After 2003, even non excisable and non dutiable goods came under the purview of prohibited goods if they have violated any import or export norms.

Section 11 of the Act gives the government, the power to restrict any export or import. The various reasons for the same are mentioned in 11(2):-

i) Security

ii) Prevention of injury to domestic produce

iii) Conservation of natural resources

iv) Protection of patent or trademark

v) Implementation of any treaty

vi) Prevention of dissemination of documents

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vii) Any other purpose conducive to the interest of the general public.

Improper Export – Section 113 – Attempt to improper export may result in confiscations of the goods. If the prohibited goods are present in a mixture, then the whole mixture, if inseparable, shall be confiscated.

Penalty for Improper Import- Section 112 – Any person who has committed an offence under Section 111 or has transported prohibited goods, shall pay a penalty amounting to the value of the goods or a fine of 5000, whichever is greater.

Carriers are subjected to confiscation –Since it is an economic offence the mens rea does not play an important role in the same.

CC v Elephanta Oil 2003 152 ELT 2007 – even if the goods are confiscated and the goods are reimported, penalty may be leviable even if the goods are cleared. The power to levy penalty under Section 112 is different from power to confiscate the goods.

Kusum Bhai Patel v CC 1995 79 ELT 292 (CEGAT) – Even if the goods are allowed to re-exported, redemption fine can be imposed.

Section 135, 134,133 and 123 contains the prosecution for offences under the Customs Act. Section 133 states that obstruction of the Customs officers exercising powers vested in him by the Customs Act 6 months or fine or both. Section 134 states that if any person refuses to take X-ray picture of his body or other suitable measures such as surgery under the supervision of any doctor then he shall be liable to imprisonment.

Section 117 prescribes a general penalty of Rs 10,000 if no penalty has been levied under any other section. A penalty “shall be” made applicable. Hence a penalty is mandatory in any case. The amount keeps differing.

Indo –China Steam Navigation v Jasjit Singh; CC v Swastik Woollen Mills - A penalty “shall be” made applicable. Hence a penalty is mandatory in any case. The amount keeps differing.

Penalties and Offences under the Customs Act

2(39): 111, 112, 113, 114, 116, 117, 132, 133, 134

Prohibited goods defined u/s 2(33)

Om Prakash Bhatia v. CC 2002 141 ELT 278: case relating to over-invoicing of exports.

Section 112 : Penalty for improper imports. :

CC v. Swastik Wollen mills 1999 112 ELT 156 CGAT 5 member bench: question was whether penalty is mandatory under the customs act. The word used in the section is shall and therefore the penalty is mandatory.

CC v. Elephanta Oil 2003 152 ELT 257 SC: Held that even if the goods are confiscated and are allowed to be re-exported, penalty can be levied.

Section 138A: mensrea is always presumed.

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Section 155 protects the customs officers.

CCE v. Super Cassette Industries 2008 129 ECC 63 (SC) Sec. 20 is very clear that if the goods are re imported in India after exportation, they would be liable for all the conditions and restrictions to which goods of the like kind and value are liable or subject. It was held that CVD can be imposed on the re-imports.

Circular 60/2000 of 12.7.2000, on the share certificate that is re-imported.

CC v. Pansari Grms 2005 179 ELT 253 CEGAT Special member bench. There is no condition that the goods must be reimported in the same packet. So either you can export in the same package.

Saurabhmni Gems v. CCE

Section 22 : Abatement of the custom duty.

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