excise rapid revision material

8/10/2019 Excise Rapid Revision Material

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Rapid Revision on

Central ExciseFor CA Final(Nov 2014 Exams)

By

THARUN RAJ B.Com, ACMA

For Queries [email protected]


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CHAPTER - 1 TAXABLEEVENT FOR EXCISE

RE: WALLANCE FLOOR MILLS LTD. CASE Goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty.

Held that the duty is payable.

RE: VAZIR SULTHAN TOBACCO LTD. CASE The company was engaged in manufacture of cigarettes. Levy of special Excise duty on cigarettes were removed between 1.3.1978 and 12.3.1978. Cigarettes were manufactured during that period i.e., Prior to 12.3.1978 Held that the duty is on manufacture and not upon removal. When the goods weremanufactured, there was no levy of special duty so it cannot be attached at the stage ofremoval.

1. DEFINITION OF GOODS UNDER EXCISE

Based on Sale of Goods Act Goods must be Movable Based on UOI V. DCM Goods must be Marketable Explanation to Sec. 2(d) of Excise Goods includes any article, material or substance whichis capable of being bought or sold for a consideration [I.e. Deemed Marketability]


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Actual sale is not necessary to prove marketability Either marketability/deemed marketability must be satisfied Goods having short shelf life are excisable, if they are capable of being sold during that shortshelf life Nicholas Piramal India Ltd. Case Waste and scrap is dutiable either if it has an established market or it is sold for consideration

Levy Point ofpayment

Collection

Sec. 3

Manufactureorproductionof excisablegoods inIndia

Rule 4 of

CentralExciseRules, 2002

Date ofactualremoval ofgoods

Rule 8 of Central Excise Rules, 2002

In case of SSI NNoorrmmaa ll ppaa yymmee nntt - 5 th of the month following every quarter EE PPaayymmee nntt -- 6 th of the month following every quarter In case of others NNoorrmmaa ll ppaa yymmee nntt - 5 th of the month following every month EE PPaayymmee nntt - 6 th of the month following every month

Note: For the month ending march and quarter ending march, the due date ofpayment is March 31st. For the purpose of e- payment ,the above amount of 10 lakhshas been revised to 1 lakh vide notification No. 15/2013 CE


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1.1 Is waste and scrap goods and excise duty payable?

1.2 When Deemed marketability will not be applicable? Deemed marketability implies that goods are marketable if they are sold for consideration. If the intermediate goods are captively consumed, it cannot be sold as such for consideration

and hence, deemed marketability does not apply. In case of captive consumption only marketability [Not deemed marketability] test should be

applied to make intermediate product dutiable

2. DEFINITION OF MANUFACTURE

SC decision in Union of India Vs. Delhi Cloth and General Mills co. Ltd. 1977 Manufacture is a process, but every process is not a manufacture Manufacture implies a change & every change does not amount to manufacture.

Taxability of Waste and scrap (4 M s hasto be satisfied)

If Marketable

Waste andScrap isdutiable

If Not Marketable

If it is Deemedto be

Marketable (i.e.Sold for a

Consideration)

Waste andScrap isDutiable

If it is notdeemed to be

marketable

Waste andScrap is Not

Dutiable.

Manufacture - Sec. 2(f)

Process -Incidental/

ancilliary for thecompletion ofmain product

Land Mark Case- UOI V. DCM

DeemedManufacture

Any processamounting to

manufacture asspecified in

section notes/chapter notes

Labelling (or) Re-labelling, Packing/

repacking from bulkpacks to retail packsand adoption of any

other process tomake Schedule III

products marketableand saleable


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By virtue of a process, a new & different article must emerge having a distinctive name,character and use. The new product must be commercially different, identifiable product, and then onlymanufacture has taken place.

2.1 When is it said that manufacture has taken place (not deemed manufacture)?

2.2 What is the acid test to determine, who is manufacturer?

2.3 Case Laws on Manufacture:Case Judgment

MedleyPharmaceuticals Ltd. V.CCE (2011)

(SC)

Even though Drugs and Cosmetics Act, 1940 bars the sale of physician s samples,however, excisability of a product is not dependent on its saleability. Excise dutyis a levy on production or manufacture and is payable whether or not the goodsare sold.

Further, such prohibitions on sale of physician s samples under Drugs Act doesnot affect the marketability of such samples. Restrictions under Drugs Act cannotaffect imposition of excise duty under the Central Excise Act thereby causing lossof revenue. Th erefore, physician s samples are liable to excise duty.

NicholasPiramalIndia Ltd.

V. CCE

1. Short shelf-life could not be equated with no shelf-life and would not mean thatit could not be marketed.

2. A shelf-life of 2 to 3 days was sufficiently long enough for a product to becommercially marketed.

2 tests should be satisfied

Identity Test

A new and distincecommercial product

should come intoexistance

Utility Test

Such new productmust serve a distincepurpose than that of

raw material

2 tests should be satisfied

Relation ship Test

If the relationship betweenraw material supplier and

job worker is on principal toprincipal basis, then JOBWORKER is themanufacturer

Profit test

If the entire profit isenjoyed and retained by

raw material supplier,then the RAW MATERIALSUPPLIER will be the

manufacturer


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(2010) (SC) 3. Shelf-life of a product would not be a relevant factor to test the marketability ofa product unless it was shown that the product had absolutely no shelf-life orthe shelf-life of the product was such that it was not capable of being broughtor sold during that shelf-life.

Hence, product with the shelf life of 2 to 3 days was marketable and hence,

excisableBata IndiaLtd. V. CCE(2010) (SC)

The mere theoretical possibility of the product being sold is not sufficient butthere should be commercial capability of being sold. Theory and practice will notgo together when one examine the marketability of a product.

GrasimIndustiresLtd. V UOI(2011) (SC)

Generation of metal scrap or waste during the repair of the worn outmachineries/parts of cement manufacturing plant does not amount tomanufacture.

CCE V.Solid andcorrect

Engineeringworks(2010) (SC)

The expression attached to the earth has three distinct dimensions, viz.(a) rooted in the earth as in the case of trees and shrubs(b) Imbedded in the earth as in the case of walls or buildings or

(c) Attached to what is imbedded for the permanent beneficial enjoyment of thatto which it is attached. If machine is attached 1 feet deep, intended to provide stability to theworking of the plant and prevent vibration or wobble free operation does notqualify for being described as attached to earth under any of the three clausesabove and hence not an immovable property

Commissioner V. Steel

Authority ofIndia Ltd.(2012) (SC)

Process of washing of iron ore for removal of foreign materials from such oredoes not bring into existence a new and different article having a distinctivename, character or use. The use of iron ore as mined or iron ore after the processundertaken by the assessee remained the same. Hence, the said process is notmanufacture.Comment: Both Identity test and utility test not satisfied in the present case.

CCE V.OnsarChemical P.Ltd. (2012)(SC)

The process of mixing and additives to heated bitumen, which results inemergence of Polymer Bitumen (PMB) and crumbled Rubber Modified Bitumen(CRMB) does not amount to manufacture, as the said process did not result intransformation of bitumen into new product having different identity,characteristic and end use. The end use also remained the same viz. mixing ofaggregates for constructing roads.

UshaRectifierCorp. (I)Ltd. V. CCE

(2011) (SC)

Testing equipments manufactured instead of importing the same and usedcaptively, amount to manufacture and liable to excise duty.

CCE V.TARPAULININTERNATIONAL(2010) (SC)

The process of stitching and fixing eyelets would not amount to manufacturingprocess, since tarpaulin after stitching and eyeleting continues to be only cottonfabrics. The purpose of fixing eyelets is not to change the fabrics, even thoughthere is value addition. To sum up, the conversion of Tarpaulin into Tarpaulin made-ups would notamount to manufacture. Therefore, there can be no levy of Central Excise dutyon the tarpaulin made-ups.


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CCE V. SonyMusicEntertainment (I) P.Ltd. (2010)

(HC)

the activity of packing imported Compact discs in a jewel box along with inlaycard would not amount to manufacture under Section 2(f) of the Central Excise Act, 1944

BalrampurChini MillsLtd. v.Union ofIndia 2014(All.)

Bagasse which is a marketable product but not a manufactured product is notsubjected to excise duty.The High Court concluded that though bagasse is an agricultural waste ofsugarcane, it is a marketable product. However, duty cannot be imposed thereonsimply by virtue of the explanation added under section 2(d) of the Central Excise Act, 1944 as it does not involve any manufacturing activity.

CBEC issued a Circular dated 28-10- 2009 clarifying that bagasse and other likematerials would be covered under the definition of excisable goods andchargeable to payment of excise duty post Finance Act, 2008. The Circular

further clarified that in case, the rate of duty in respect of such products is nil orthey are exempted from duty vide any notification and if CENVAT credit has beentaken on the inputs which are used for manufacture of dutiable and exemptedgoods and no separate accounts have been maintained in this regard, then interms of rule 6(3) of CENVAT Credit Rules, 2004 (CCR), proportionate creditwould be reversed or 5% (now 6%) amount would be paid.

However, Supreme Court in the case of Balrampur Chini Mills Ltd. in Civil AppealNo. 2791 of 2005, decided on 21-7-2010 held that bagasse is a waste and not amanufactured product.

The high court held that Bagasse is never manufactured, but it only emerges as awaste from the crushing of sugarcane for the manufacture of final product,namely, sugar and thus, rule 6(2) and rule 6(3) would not be applicable.

High court also held that Explanation added to section 2(d) deems the goods,which are capable of being bought and sold, to be marketable. Earlier also,bagasse was being bought and sold for a consideration and even after theamendment in 2008 it is being bought and sold for a consideration. Hence, it wasmarketable earlier also and no difference has been made about the marketabilityof bagasse on account of addition of explanation to section 2(d) of CEA, 1944inasmuch as it does not cease to be waste and it does not become a

manufactured final product for the purposes of rule 6 of CENVAT Credit Rules.

The High Court quashed the CBEC s Circular


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CASE LAWS ON INTERPRETATION : How will a cream which is available across the counters as also on prescription ofdermatologists for treating dry skin conditions, be classified if it has subsidiarypharmaceutical contents - as medicament or as cosmetics?

CCE V. Ciens Laboratories (2013) (SC)Facts of the Case:

The assessee manufactured a cream called as Moisturex which was prescribed by dermatologists fortreating dry skin conditions. However, the same was alsoavailable in chemist or pharmaceutical shops withoutprescription of a medical practitioner. The pharmaceuticalcontent of the cream included urea (10%), lactic acid (10%)and propylene glycol (10%). The assessee classified the creamas medicament under Heading 30.03 of the Central ExciseTariff.

The Department contended that the product Moisturex is mainly used for care of the skin and thus, t hesame ought to be classified as cosmetic or toilet preparationsunder Heading 33.04. The assessee on the other handcontended that the very presence of pharmaceutical

substances changes the identity of the product since such constituents are not used for care ofthe skin, but for cure of certain diseases relating to skin.

Decision: When a product contains pharmaceutical ingredients that have therapeutic or

prophylactic or curative properties, the proportion of such ingredients is not invariably

the decisive factor in classification. The relevant factor is the curative attributes of suchingredients that render the product a medicament and not a cosmetic. Though a product is sold without a prescription of a medical practitioner, it does not

lead to the immediate conclusion that all products that are sold over / across thecounter are cosmetics. There are several products that are sold over-the-counter andare yet, medicaments.

Prior to adjudicating upon whether a product is a medicament or not, it ought to beseen as to how do the people who actually use the product, understand it to be. If aproduct s primary function is "care and not "cure, it is not a medicament.

Medicinal products are used to treat or cure some medical condition whereas cosmeticproducts are used in enhancing or improving a person's appearance or beauty.

A product that is used mainly in curing or treating ailments or diseases and containscurative ingredients, even in small quantities, is to be treated as a medicament.

The Supreme Court held that owing to the pharmaceutical constituents present in thecream Moisturex and its use for the cure of certain skin diseases, the same would beclassifiable as a medicament under Heading 30.03.


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CCE V. CONNAUGHT PLAZA RESTAURANT P. LTD. (2012) (SC)

An extract from CETA:

Heading Sub-Heading Description of Goods Rate of duty

21.05 2105.00 Ice-cream and other edible ice, whether ornot containing cocoa

16%

21.08 Edible preparations, not elsewhere specifiedor included

2108.91 Not bearing a brand name Nil04.04 Other dairy produce, edible products of

animal origin, not elsewhere specified orincluded

- Ghee0404.11 Put up in unit containers and bearing a brand

nameNil

0404.19 Other Nil0404.90 Other Nil

Under which heading Soft serve served at McDonalds India be classified? What isthe applicable rate of duty?

Assessees Submission Whethersupreme courtis justifiedwith thissubmission?

What is supreme courtsargument?

1. As per the definition of ice creamunder Prevention of Food Adulteration Act, 1955 the milk fatcontent of ice cream shall not beless than 10%. But the fat content of

Soft serve contains 5% milk fat

No The definition of one statute (i.e.PFA, 1955) should not be appliedmechanically to another statute(i.e. CEA, 1944). The object ofExcise Act is to raise revenue forwhich various goods are differently


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content. Hence Soft serve is not Ice cream as per PFA Act, 1955.

classified in the Act whereas theprovisions of PFA are for ensuringquality control. Hence, thissubmission is not acceptable byapex court.

2. Soft serve shall not be consideredas ice cream as it was marketedthroughout the world as Soft serve

No The manner, in which a productmight be marketed by amanufacturer, did not necessarilyplay a decisive role in affecting thecommercial understanding of sucha product. What matters was theway in which the consumerperceived the productnotwithstanding marketingstrategies. Customers in generaltreat the said product as Icecream

3. In the matters pertaining toclassification of a commodity,technical and scientific meaning ofthe product was to prevail over thecommercial parlance meaning

No None of the terms in the headingshas define d ice cream or Softserve. SC based on various judgments concluded that in theabsence of a statutory definition ortechnical description, interpretationought to be in accordance withcommon parlance principle and notaccording to scientific and technicalmeanings.

4. As per Rule 3(a) of General

Interpretative Rules, Specific headingshould be preferred over generalheading. Therefore, Soft servewould fall under heading 04.04 sinceit was a specific entry.

No Ice cream under heading 21.05

could not be classified as dairyproduct under heading 04.04.Heading 21.05 was clearly aspecific entry

Decision: In light of the aforesaid discussion, the court decided that Soft serve wasclassifiable under heading 21.05 as ice cream: and not under heading 04.04 as Other dairyproduce


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CHAPTER - 2 VALUATION UNDER EXCISE

1. MRP BASED VALUATION (4A)

AV = MRP Abatement

1.1 When a product is covered under MRP based Valuation?a) The product must be covered under third schedule to CETA, 1985b) The product must be covered under the provisions of Legal Metrology Act, 2009c) The product must be notified by CG under sec. 4A with a rate of abatement.

1.2 When Retail Selling Price Rules, 2008 will be applicable?

1. Clearing goods without declaring RSP2. By declaring RSP, which is not the RSP required to be declared3. By declaring RSP but obliterating (i.e. removing) the same after their removal4. Tampering/ altering RSP after their removal.

Consequences:a) Such goods are liable for confiscation.b) RSP shall be deter-mined as per the said rules.

1.3 When MRP based valuation not applicable? 4A not applicable to institutional and industrial sales.

When different MRP s are marked on the same pack, highest MRP shall be considered. When different MRP s are marked on different packages, every MRP w.r.to such sales

are considered. Free samples not packed along with main product are also liable for MRP based

valuation. MRP based valuation equally applicable for quantity discounts. Crossed out MRP does not have any relevance in valuation.

1.4 Determination of Retail Selling Price (RSP) rules, 2008Rule 4(i): When goods are removed without RSP or wrong RSP or obliteration of RSP, RSPof identical goods sold within one month prior or later of the goods in question shall beconsidered. [If more than one RSP is ascertained, highest RSP is taken into account]Rule 4(ii): When RSP cannot be ascertained as per above rule, enquires in retail marketshould be conducted to ascertain RSP. [If more than one RSP is ascertained, highest RSP istaken into account]Rule 5: When RSP is tampered/ altered after removal, such increased RSP shall be takenas RSP of all goods removed during one month prior and after.


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2. TRANSACTION VALUE [4(3)(d)]

2.1 What is the definition of transaction value?MEANS

Price paid or payable by the buyer to the assessee or any other person on a ssessee s behalf

The above payment should be by reason of sale (or) in connection with sale. The above payment can be made before sale, at the time of sale, after sale. Includes all other pay-ments made indirectly, which is charged by assessee in the form of

expenses. But the above value does not include taxes

EXCLUSIONS:1. All taxes, duties, cess by whatever name called.2. Trade discount and regional discount, if these are in the normal course of business.3. All transportation costs after place of removal and post removal expenses incurred by

assessee and later collected from buyer (i.e. Carriage outwards)4. Interest on advance, if assessee is not charging lower price to those buyers giving advance.5. Interest collected from buyer on account of delayed payment.

2.2 Whether all items are included in the transaction value other than thoseexcluded?Special points on inclusions:1. All packing costs will be included, except durable and return-able packing as such. [But its

amortized cost is included]2. Optional warranty charges is not included, when buyer does not opt for warranty.3. Dharmada charges incurred as per statutory provisions is not included.4. Loading and unloading charges incurred by buyer on his own account is not includible.

Note: While deciding as to inclusions, check whether buyer has made any payment and it is inby reason of sale i.e. that payment will not arise, if there is no sale.

2.3 Whether all bought out items are included in transaction value?

Bought out items

Parts/Components

Which areessential for the

functioning ofthe main

product and aresupplied alongwith the main

product

Accessories

Which are notessential for the

functioning ofmain product,but adds value

to the mainprodcut

Optional boughtout items

These areneither

essential partsnor accessoriesbut supplied as

a tradingactivity


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Product Two Wheeler

Parts/components -Tyres Accessories SeatCover/Side stand

Optional bought outitems Grease/Engine oil

These are essential andhence INCLUDED inthe Assessable value

These are not essentialand hence NOTINCLUDED in the

Assessable value

These are trading activityand NOT COVERED underexcise duty but covered

under sales tax

3. VALUATION RULES: (CENTRAL EXCISE VALUATION RULES, 2000)

Price nearest to the time of removal when goods are not sold Rule 4When goods are sold at buyers premises, transportation cost should bededucted from TV at buyers premises

Rule 5

Money value of consideration to be included in AV, when price is not soleconsideration

Rule 6

For goods removed to depot/branch - Price prevailing there at the time of

removal from place of removal.

Rule 7

For, captive consumption, AV is cost of Production + 10% Rule 8When goods are sold to interconnected undertakings other than H&S, normalTV shall be taken

Rule 10

When goods are sold to other related per-sons (not covered in rule 10), AVshall be price at which such goods are sold to unrelated buyer by such relatedpersons, on that date.(Related wholesale buyer is also considered as unrelated buyer)

Rule 9

In case of goods under job-work, AV shall be price at RM supplier place at thetime of removal from factory of JW. If goods are sold directly from JW factory,that TV is AV.

Rule 10 A


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4. CAS on Cost of production for captive consumption (CAS 4)

Particulars Total Cost (in )

Cost perunit (in )

1 Material Consumed (See note 1 below) XXX XX 2 Direct Wages and Salaries (see note 2

below)XXX XX

3 Direct Expenses XXX XX 4 Works Overheads XXX XX 5 Quality Control Cost (see note 3 below) XXX XX 6 Research & Development Cost (see

note 4 below)XXX XX

7 Administrative Overheads (relating to production activity)

XXX XX

8 Subtotal (1 to 7) XXX XX

9 Add : Opening stock of Work - in Progress XXX XX

10 Less : Closing stock of Work -in- Progress

(XXX) (XX)

11 Subtotal (8+9-10) XXX XX 12 Less: Credit for Recoveries/Scrap/By-

Products / misc income(XXX) (XX)

13 Add: Packing cost (see note 5 below) XXX XX 14 Cost of Production (11-12+13) XXX XX 15 Add: Inputs received free of cost (see

note 6 below)XXX XX

16 Add: Amortised cost of Moulds, Tools, Dies & Patterns etc received free of cost XXX XX

17 Cost of Production for goods produced for captive consumption

XXX XX

Notes to above computation: 1) Cost of material consumed INCLUDES Purchase cost, duties and taxes,

carriage inwards, insurance and other direct attributable expenditure, butDOES NOT INCLUDE Discounts, rebates, Duties and taxes paid which isavailable as CENVAT credit or Input tax credit or duty drawback.

2) Direct wages and salaries INCLUDES all allowances and payments to THOSEEMPLOYEES DIRECTLY engaged in MANUFACTURING ACTIVITY.

3) Quality control costs are the expenditure incurred relating to quality controlactivities for adhering to quality standard. These expenses shall includesalaries and wages relating to employees engaged in quality control activity.

4) R&D cost of existing product or improvement in the processing of existingproduct should be considered.


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5) If product is transferred/dispatched duly packed for captive consumption, costof such packing shall be INCLUDED.

6) In case any input material, whether of direct or indirect nature, includingpacking material is supplied free of cost by the user of the captive product, theLANDED COST OF SUCH MATERIAL SHALL BE INCLUDED in the cost of

production.

5. CASE LAWS ON VALUATION:

Tata MotorsLtd. V. UOI(2012)(Bom HC)

The Pre delivery inspection (PDI) and free after sales service charges could beincluded in the transaction value only when they were charged by the assessee tothe buyer.

Point of doubt: What about the cost of after sales service charges and pre-delivery inspection (PDI) charges, incurred by the dealer during the warrantyperiod?

Clarification: Since these services are provided free by the dealer on behalf of theassessee, the cost towards this is included in the dealer s margin (or reimbursed tohim). This is one of the considerations for sale of the goods (motor vehicles,consumer items etc.) to the dealer and will therefore be governed by Rule 6 of the Valuation Rules on the same grounds as indicated in respect of Advertisement andPublicity charges. That is, in such cases the after sales service charges and PDIcharges will be included in the assessable value Circular No. 681/72/2012

CCE V. XerogrpahicLtd. (2010)

(SC)

Merely because two parties are related persons, the transaction value cannot berejected. In order to reject transaction value between related persons, it should beshown that the price at which the goods were sold to related persons was not the

normal price at which the goods were sold to other distributors/dealers, or was lessthan the market price at which it was being sold in the market, or, that there wasany extra commercial consideration in fixing the price to such related persons. Inabsence, thereof, the price discharged from the related persons shall beacceptable.

CCE V.CadburyIndia Ltd.(2006) (SC)

Advertising, insurance and other expenses of the final products shall not be addedto determine the value of intermediate goods.

RoyalEnfield V.CCE (2011)(SC)

Facts & issue involved:Whether the packing charges incurred to avoid scratch and breakage to motorcycles form part of Assessable value? Will the position be same if the saidexpenditure is separately collected from the buyer? Decision: Any Expenditure incurred upto the place of removal and any amount paid by the

buyer by reason of sale or in connection with sale shall be included in the valueof taxable service. Packing charges shall be included if it is necessary in theordinary course of trade. (My Opinion)

In case of motor cycles cleared in packed condition from the factory to the depot,the packing charges incurred to avoid scratch and breakage to motor cycles form


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part of the AV because such packing is necessary for putting the excisable goods(i.e. Motor cycles) in saleable condition.

Even though such packing charges are separately reimbursed by the buyer, thesame are includible in the value for the purpose of payment of excise duty.

ElectronicsandControlsPowersystem P.Ltd. V. CCE(2011) (SC)

Facts & Issue involved:Whether the value of bought out batteries supplied along with uninterrupted powersupply system (UPSS) as an option item should be included in the Value of UPSsystem for the purpose of charging excise duty as these batteries are part of UPSsystem?

Decision: Even if UPS cannot function without battery for conditioning power, but battery is

the essential pre-requisite. The source of power to the UPS system is the battery which is an essential and

integral part. Hence, the value of bought out batteries is includible in the value of UPS system. Conclusion: Battery is not an accessory but an essential part, which needs to be

included in the value of Final product (i.e. UPS system). However, themanufacturer can take the excise duty paid on the batteries as CENVAT credit forthe purpose of payment of excise duty on UPS system as the amended definitionof Inputs.

MARUTISUZUKI INDIALTD . V . CCE2010 ( TRI . LB)

Cost of after sale service and PDI charges incurred by dealer during warrantyperiod is includible. There need not be direct flow back of consideration toassessee. Even indirect benefit is includible in assessable value.

Esselpropack

Ltd. V. CCE(2011) (SC)

Facts: Assessee, a manufacturer of plastic tubes. It was receiving supply of plastic caps from its customers and after fitting themonto the plastic tubes, it was supplying the cap-fitted tubes to the customers. The assessee was paying duty on the value of plastic tubes, while the departmentincludes the value of caps in the value of tubes and demanded duty accordingly.

Decision: If caps are manufactured separately and not in the same factory in which the

tubes are being manufactured, the caps cannot form integral part of theassessable value of the tubes, manufactured and cleared from the factory, suchcaps are merely accessory.

Since, in the present case, the caps are not manufactured in the factory of theassessee but are being supplied by the customers of the assessee, the value ofcaps will not form part of the assessable value of the tubes manufactured by theassessee.

[Note: Caps is not packing material supplied by the customers]CCE V. FiatIndia P.Ltd. (2012)(SC)

When goods are sold at a price less than their cost of production, price could notbe considered as the sole consideration for sale. Supreme court held that o prudentbusiness person would continuously suffer huge loss only to penetrate market.They are expected to act with discretion to seek reasonable income, preservecapital and in general avoid speculative investments. Hence, the selling price couldnot be accepted as transaction value


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CCEx v.SuperSynotex(India) Ltd.2014 (301)E.L.T. 273(S.C.)

Facts: Assessee was a manufacturer of manmade fibre yarns which werechargeable to excise duty. The assessee availed the benefit of Sales Tax NewIncentive Scheme for Industries, 1989 (State Incentive Scheme ) whereby he couldretain 75% of the total sales tax collected from buyer and pay only remaining 25%to the State Government.

Point of dispute: While computing the transaction value for the purpose ofpayment of excise duty, assessee claimed 100% deduction of sales tax collectedfrom buyer.Department objected to this as effectively, the assessee did not pay excise duty onthe additional consideration received towards sales tax collected but not depositedwith the State exchequer.

Observations of the Court: Supreme Court observed that amount paid orpayable to the State Government towards sales tax, VAT, etc. is excluded as it isnot an amount paid to the manufacturer towards the price, but an amount paid orpayable to the State Government for the sale transaction. Accordingly, the amount

paid to the State Government is only excludible from the transaction value. What isnot payable or to be paid as sales tax/VAT, should not be charged from the thirdparty/customer, but if it charged and is not payable or paid, it is a part and shouldnot be excluded from the transaction value. This is the position after amendmentw.e.f. 01.07.2000 of section 4 of Central Excise Act, 1944, where actually paid issignificant.

Supreme Court further observed that unless the sales tax is actually paid to theSales Tax Department of the State Government, no benefit towards excise duty canbe given under the concept of "transaction value" under section 4(3)(d) of CentralExcise Act, 1944, for it is not excludible. As is seen from the facts, 25% of the salestax collected had been paid to the State exchequer by way of deposit and theremaining amount had been retained by the assessee.

Decision: The Apex Court held that such retained amount has to be treated as theprice of the goods under the basic fundamental conception of "transaction value"as substituted with effect from 1.7.2000 and therefore, the assessee is bound topay excise duty on the said sum.

Note This case establishes that retention of the specified sales tax amount underthe relevant State Sales Tax Incentive Schemes ought to be treated as additionalconsideration and subjected to central excise duty since deduction of sales tax isavailable only when it is actually paid to the Sales Tax Department (in terms of the

definition of transaction value as introduced from July 1, 2000). In other words, the Apex Court has negated the idea that such amounts are in the nature of a subsidyand do not form part of the sale proceeds.

The issue of includibility, or otherwise, of sales tax collected and retained, in termsof Incentive Schemes, in the assessable value has been dealt in the context of bothold (existing prior to July 1, 2000) and new section 4 (effective from July 1, 2000)in the above-mentioned case law. However, in the above summary only the


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observations and conclusion involving new section 4, based on transaction value,have been discussed and the ones relating to old section 4, based on normal price,have been avoided.

With effect from July 1, 2000 the definition of 'transaction value' reads as under:(d) transaction value means the price actually paid or payable for the goods,when sold, and includes in addition to the amount charged as price, any amountthat the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or inconnection with the sale, whether payable at the time of the sale or at any othertime, including, but not limited to, any amount charged for, or tomake provision for, advertising or publicity, marketing and selling organizationexpenses, storage, outward handling, servicing, warranty, commission or any othermatter; but does not include the amount of duty of excise, sales tax and othertaxes, if any, actually paid or actually payable on such goods.

CASE STUDIES ON VALUATION 1 Mr. Hanuman Prasad sold excisable goods to Ram Ltd. for 28,090

(inclusive of excise duty @ 12.36%) on 19.08.2013. The buyer, RamLtd., is related to Mr. Hanuman Prasad in terms of section 4(3)(b) ofthe Central Excise Act, 1944. It did not sell the goods, but used thesame as intermediary product for the manufacture of final product.The cost of production of the said goods determined as per CAS-4was 20,000. Determine the assessable value in the given case. What will be the assessable value, if in the aforesaid case, Ram Ltd.is not related to Mr. Hanuman Prasad? [RTP May 2014]

Ans:Case a) 22,000Case b) 25,000

2 M/s. Hiphop Ltd. is engaged in the manufacture and sale of Pressurecooker Hit, notified under section 4A of the Central Excise Act,1944. The notified rate of abatement for the pressure cooker is 25%.Determine the central excise duty payable by M/s Hiphop Ltd. fromthe following details:-

a) 500 pieces having retail sale price (RSP) of 1,200 per pieceare sold in retail packages to a wholesale dealer at 1,000 perpiece.

b) 100 pieces having two RSPs of 1,100 and 1,200 are sold inretail packages to ultimate consumers.

c) 1,000 pieces having RSP of 1,200 per piece are sold in retailpackages, but buyer is charged for 900 pieces only at 1,000

per piece (100 pieces have been given free as quantitydiscount).d) 25 pieces were given away as free samples, without any RSP on

the pack.e) 400 multi-packs were cleared at 1,100 per pack, each

containing one pressure cooker and one kg free rice (withoutany RSP on it). Each Pressure cooker had RSP of 1,200, whichwas scored out and each multi-pack had RSP of 1,500.

Ans:a) AV = 4,50,000b) AV = 90,000c) AV = 9,00,000d) AV = 22,500e) AV = 4,50,000


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Make suitable assumptions wherever required and show thecalculations with appropriate notes. [RTP May 2014]

3 Raj & Co. furnish the following expenditure incurred by them andwant you to find the assessable value for the purpose of paying

excise duty on captive consumption. Determine the cost of productionin terms of rule 8 of the Central Excise Valuation (Determination ofPrice of Excisable Goods) Rules, 2000 and as per CAS-4 (costaccounting standard)

(i) Direct material cost per unit (incl. of ED at 12%) - 1,320(ii) Direct wages - 250(iii) Other direct expenses - 100(iv) Indirect materials - 75(v) Factory Overheads - 200(vi) Administrative overhead (25% relating to productioncapacity) - 100(vii) Selling and distribution expenses - 150(viii) Quality Control - 25(ix) Sale of scrap realized - 20(x) Actual profit margin - 15%.

4 Thilagam Turbines Ltd. manufactured a steam turbine for Mr.Prem,who supplied special steel purchased by him from wholesale market(Cost 10,00,000 plus Central Excise 1,33,000).The normal price of such material is 12,00,000 plus Central Excise1,48,320. Mr.Prem is eligible to claim CENVAT Credit. ThilagamTurbines Ltd. incurred manufacturing cost of 23,00,000.

What is assessable value of the turbine? Briefly touch upon the issuesinvolved5 Surat Cloth Mills delivered 1000 meters of cloth to Purvanchal

Readymade Garments on 10.01.2012 from its depot located at Ahmedabad @ 110 per meter. The goods were dispatched to thedepot from the factory located in Surat on 05.01.2012. Ex-factoryprice on 05.01.2012 was 90 per meter. The sales of identicalvariety of cloth effected from Ahmedabad depot on the two relevantdates is as follows:-

On 05.1.2012 On 10.1.2012Cloth sold inmeters

Rate permeter ()

Cloth sold inmeters

Rate permeter ()

100 135 200 120850 125 1000 110500 120 550 115450 115 375 108

Calculate the AV of 1,000 meters of cloth sold by surat cloth mills.6 Having regard to the provisions of section 4 of the Excise Act, 1944,


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compute/derive the assessable value of excisable goods, for levy ofduty of excise, given the following information:

Cum-duty wholesale price incl. sales tax of 2,500 -15,000Normal secondary packing cost - 1,000Cost of special secondary packing - 1,500Cost of durable and returnable packing - 1,500Freight - 1,250Insurance on freight - 200Trade discount (normal practice) - 1,500

Rate of C.E. duty as per C.E. Tariff is 12% Ad-valorem. State in thefootnote to your answer, reasons for the admissibility or otherwise ofthe deductions.

7 Compute the assessable value under the Central Excise Act, 1944 in

the following case : (i) Production : 2,000 units on 1.1.2012 (ii)Quantity sold : 450 units @ 200 per unit, 650 units @ 190 perunit, Samples clearances 50 units (iii) Balance in Stock - 850 units (atthe end of factory day for 1.1.2012). Assume that the rate per unit isexclusive of Central Excise duty

8 Cool Drinks Ltd. manufactured three health drinks viz. A, B and C. Awas sold only to M Ltd., a subsidiary company of Cool Drinks Ltd. Bwas sold to N Ltd., where the Managing Director of Cool Drinks Ltd.was a manager. C was sold to O Ltd. who was the sole distributor ofCool Drinks Ltd. and was coming under the management of CoolDrinks Ltd.Determine the transaction value of the three products in the hands ofCool Drinks Ltd. on the basis of the following information:

Price of Cool Drinks Ltd. to M Ltd. 200Price of Cool Drinks Ltd. to N Ltd. 150Price of Cool Drinks Ltd. to O Ltd. 120Price of M Ltd. to Consumer 220Price of N Ltd. to Consumer 160


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CHAPTER - 3 CENVAT CREDIT

INTRODUCTION:For manufacturing any good (or) for providing any service, it requires inputs (Raw materials),capital goods (machineries), input services (consultancy, etc.,)

The excise duty paid on Inputs and capital goods and service tax paid on input services isavailed (i.e. taken) as credit, which can be utilised (i.e. Setoff) for payment of Excise duty onfinished goods and Service tax on output services.

1. AVAILMENT & UTILISATION OF CREDIT

1.1 How to compute net excise duty payable?Gross excise duty payable on finished goods(+) Gross service tax payable on output services(-) Excise duty paid on Inputs(-) Service tax paid on Input services (-) Excise duty paid on capital goods

1.2 When credit is available and what is the % of credit?Inputs Immediately on receipt of inputs into

factory of manufacturer or any premisesby service provider

100% of duties paid available as crediton the basis of invoice

InputServices

Immediately on receipt of invoice, evenif payment is not made by servicerecipient 1

100% of service tax mentioned in theinvoice 2

CapitalGoods

Immediately on receipt of inputs intofactory of manufacturer or any premisesby service provider

Upto 50% in the first financial year ofpurchase and balance in thesubsequent years

1.3 What are the duties available as Credit?Even Additional customs duty paid u/s. 3 (1) (known as CVD) of customs and additional dutypaid u/s. 3 (5) (known as SAD) of CTA, 1975 is available as CENVAT credit.

1 If payment towards invoice is not made within 3 months, credit should be reversed 2 If part payment is made by SR, proportionate credit is available.

Inputs

Process

Capitalgoods

Process

Finishedgoods

Outputservice

Inputservice

Process


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1.4 What are the restrictions on utilization of credit? EC availed should be utilized only for payment of EC. SHEC availed should be utilized only for payment of SHEC. SAD cannot be utilized for payment of service tax. NCCD should be utilized only for NCCD. As per Prag Bosimi Synthetics ltd. Case (2013), HC

held that it does not mean credit of any other duty cannot be utilised for payment of NCCD.Therefore CENVAT Credit w.r.to BED, CVD, Service tax etc., can be utilised for payment ofNCCD.

No restrictions on utilization of CVD. In case of SSI units, 100% credit on capital goods available in the same financial year.

2. NON AVAILMENT & REVERSAL OF CREDIT In case the capital goods are re-moved as such, CENVAT credit of 100% can be availed

and reversed accordingly. If inputs are destroyed/ damaged after issuing it to production, CC on inputs available.

If inputs are destroyed /damaged before issuing it to production and if it is normal loss, CCon inputs available

If inputs are destroyed /damaged before issuing it to production and if it is abnormal loss,CC on inputs not available.

If capital goods are destroyed, CC on capital goods available


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If output is dutiable,credit available on

Input. If output isexempted/not

dutiable, credit notavailable on Input

3. INPUTS/INPUT SERVICES & CAPITAL GOODS USED FOR EXEMPTED OUTPUT When Inputs, Input services and capital goods are exclusively used for dutiable finished

goods/ taxable services, CC available. When Inputs, Input services and capital goods are exclusively used for exempted finished

goods/ exempted services and if they are preferential removals, CC available.

When inputs, input services and capital goods are exclusively used for exempted finishedgoods/ exempted services and if they are other than for preferential removals, CC notavailable.

3.1 What are preferential removals?1. Exports to countries other than Nepal and Bhutan [Credit avail-able by way of refund]2. SEZ/EOU/EHTP/STP/UN or International organization and to projects funded by them3. Foreign diplomatic missions, consular missions, career consular officers4. International competitive bidding5. Power project through competitive bidding

3.2 What are exempted goods? Exempted goods means goods ex-empted as per exemption notification, nil rated goods and

goods tax-able as per notification 1/2011

3.3 What are exempted Services?Exempted services means ser-vices exempted under mega ex-emption notification, negative lostservices, Abatement services, Ser-vices under composition scheme


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4. REVERSAL OF CREDIT IN CASE OF REMOVAL OF INPUTS AND CAPITAL GOODS

Note: The amount calculated above or duty calculated on transaction value, whichever ishigher shall be the amount to be reversed or paid accordingly.

4.1 What is the treatment in case of capital goods removed as waste and scrap?With effect from 27.09.2013 , if the capital goods are cleared as waste and scrap , themanufacturer shall pay an amount equal to the duty leviable on transaction value.

4.2 Whether Credit is payable along with interest?In the following cases, recovery provisions under Rule 14 (i.e. recovery of CENVAT creditwrongly availed along with interest) will be applicable.

Removal of

Inputs - as such

Amount equal to CENVATcredit availed shall be paid

[See note below]

Capital goods

As such After use (i.e. as secondhand machinery BUTNOT as waste and

scrap)

Amount equal to CENVAT credit taken on capitalgoods

(-) percentage points calculated by straight linemethod for each quarter of a year or part thereof fromthe date of taking the CENVAT credit

% points calculated by straight line method

In case of Computers &Computes peripherals

For each quarter in 1st year - 10%For each quarter in 2nd year - 8%For each quarter in 3rd year - 5%

For each quater in 4th and 5th year - 1%[See note below]

In case of other capital goods

2.5% for each quarter[See note below]


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Inputs or capital goods removed as such from the factory/ premises of the outputservice provider Rule 3(5)

Capital goods removed after being used, whether as capital goods or as scrap or waste Rule 3(5A)

Inputs/ capital goods before being put to use written off fully or partially Rule 3(5B)

5. REFUND OF CENVAT CREDIT

The provisions are contained in new Rule 5 of CENVAT credit rules, which is as follows:

5.1 What is Net CENVAT credit ? Total CENVAT credit availed on inputs and input services as reduced by amount reversed wheninputs removed as such.

5.2 What is the meaning of export turnover of services? Payments received in respect of services exported (+) Advance received in respect of servicesto be exported and provision of services is complete (-) Advance received in respect of servicesto be exported and provision of services is not complete.

5.3 Will the refund be available, if duty drawback is allowed under customs? No refund of credit shall be allowed if the manufacturer or provider of output service avails the

drawback allowed under the customs and excise drawback rules, 1995 or claims rebate underexport of services rules, 2005


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PROCEDURE, SAFEGUARDS, CONDITIONS AND LIMITATIONS PRESCRIBED FOR REFUND OFCENVAT CREDIT TO SERVICE PROVIDERS COVERED UNDER PARTIAL REVERSE CHARGE [RULE5B VIDE NOTIFICATION NO. 12/2014 CE]

Services Covered under Partial Reverse Charge Mechanism (PRCM) ?

The following are the services covered under Partial reverse charge mechanism in lieu of Sec.68(2) of Finance Act, 1994

a) renting of a motor vehicle designed to carry passengers on non abated value, to anyperson who is not engaged in a similar business

b) supply of manpower for any purpose or security services (or)c) service portion in the execution of a works contract

Amendments in CENVAT Credit Rules, 2004


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What is available as Refund?

CENVAT Credit availed and unutilized w.r.to

Excise Duty paid on inputs used in the above mentioned services Services tax paid on input services used in the above mentioned services

What is the periodicity of Refund claim 3?

The claimant shall submit only one claim of refund under this notification for everyhalf year . The refund claim shall be filed after filing of service tax return asprescribed under rule 7 of the Service Tax Rules for the period for which refund isclaimed.

What is the amount of refund available?

The refund of unutilized CENVAT credit shall not exceed an amount of service tax liability paid

or payable by the recipient of service [REMEMBER! It is not the service tax paid by the serviceprovider BUT the service tax paid by the service recipient] with respect to the partial reversecharge services provided during the period of half year for which refund is claimed

How to compute unutilized CENVAT Credit?

Proportionate CENVATCredit on inputs and inputservices

CENVAT Credit takenon inputs andinput services

during the half year

X

Turnover of output service underpartial reverse charge during

the half yearTotal turnover of goods and services

during the half year

Less: Service tax paid by theservice provider for suchpartial reverse chargeservices during the halfyear

(XXX)

= Unutilised CENVAT credittaken on inputs and inputservices during the halfyear for providing partialreverse charge services

XXX

Accounting treatment for refund?

The service provider providing services underreverse charge mechanism can claimCENVAT Credit on inputs and input services

Purchases A/c ---- Dr.CENVAT Credit Receivable A/c ---- Dr.

To Accounts payable A/c

3 The Refund shall be admissible for the CENVAT Credit taken on input or input services received after1/07/2012


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Service Charges A/c ----- Dr.CENVAT Credit Receivable A/c ---- Dr.

To Accounts payable A/cThe amount claimed as refund shall bedebited by the claimant from his CENVATcredit account at the time of making theclaim

Refund Receivable A/c ---- Dr.To CENVAT Credit Receivable A/c

In case the amount of refund sanctioned isless than the amount of refund claimed,then the claimant may take back the creditof the difference between the amountclaimed and the amount sanctioned

Cash A/c ---- Dr.CENVAT Credit Receivable A/c --- Dr.

To Refund Receivable A/c

What is the procedure for claiming refund?

* The last date of filing of application in Form A, for the period 1.7.2012 to 30.9.2012 shall be30.6.2014, so that refund shall be claimed within 1 year from 30.6.2014 for the creditpertaining to 2012.

Illustration:Black panthers security agency is engaged in providing security services to various Companies,business entities, Individuals and with respect to some of the services, it is liable to pay servicetax under partial reverse charge mechanism to the tune of 25% if tax liability. During thefinancial year 2014-15, it has provided services to HDFC Financial Services Ltd. and to otherentities where partial reverse charge mechanism is not applicable. It is eligible to take CENVAT

Application in Form A (along with return pertainingto the said half year, documents and encl.) to

jurisdicational AC/DC of excise WITHIN 1 year fromthe due date of filing of return* for the half year

AC/DC may call for any document in case he hasreason to believe that information provided in therefund claim is incorrect or insufficient and funtherenquiry is necessary to sanction refund claim

Sanction of Refund claim by AC/DC (After gettinghimself satisfied about the corectness of the refundclaim)


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credit w.r.to service tax paid on manpower supply services, telecommunication services, Advertisement services etc.,

Category of service provider Scenario I Scenario - II A Value of service provided to HDFC

Financial Services Ltd., attracting reverse

charge, in an half year

15,00,000 10,00,000

B Value of service provided to others,where reverse charge is not applicable

1,00,000 1,00,000

C Total Value of taxable services providedby Blank panthers security agency

16,00,000 11,00,000

D CENVAT credit availed during the halfyear

2,00,000 1,00,000

E Service tax payable by the serviceprovider for (A) above (25 % of theliability)

15,00,000 X12.36% X 25% =

46,350

30,900

F Service tax payable by the serviceprovider for (B) above entire liability

12,360 12,360

G Total service tax payable by the serviceprovider (D) + (E)

58,710 43,260

H Unutilized CENVAT credit, after makingservice tax payments as above (C) (F)[For all services including reverse charge]

1,41,290 56,740

I Unutilized CENVAT credit as per Rule 5B= D X A/C E[with respect to reverse charge]

1,41,150 60,009

J Maximum amount available for refund =Service tax paid by service recipientw.r.to partial reverse charge subject to(I) above

15,00,000 X12.36% X 75% =

1,39,050

56,740 4

PROVISIONS RELATING TO DISTRIBUTION OF CREDIT IN CASE OF INPUT SERVICE DISTRIBUTORAMENDED [RULE 7 VIDE NOTIFICATION NO. 5/2014 - CE]With effect from 01.04.2014, rule 7 has been amended to simplify the mechanism of

distribution of CENVAT credit in case of input service distributor as under:

4 Even though the maximum refund is subject to proportionate unutilized credit, but the balance in CENVATcredit is less compared to the proportionate unutilized credit.


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S.

No.

Position as per

erstwhile rule 7

Position as per the

amended rule 7

Impact of such

amendment

1 In case of a unit

exclusively engaged in

manufacture of

exempted goods/

providing exempted

services, service tax

paid on input services

used IN such a unit

was not allowed to be

distributed as

CENVAT credit.

In case of a unit

exclusively engaged in

manufacture of exempted

goods/ providing

exempted services,

service tax paid on input

services used BY one or

more such units will not

be allowed to be

distributed as CENVAT

credit

With the substitution

of

word IN with BY ,

credit of services,

which

have been used by

such

units though not

actually consumed

within such units,

would

also not be

distributed.

2 Credit of service tax

attributable to service

used wholly IN a unit

was to be distributed

only to that unit.

Credit of service tax


used wholly BY a unit

shall be distributed only to

that unit.

Substitution of word

IN

with BY would

increase

the scope of servicespertaining to which

credit could be

distributed to a unit.

Resultantly, credit for

services like good

transport agency

services, rent-a-cab

service, testing and

analysis of the

product

etc. would now be

available to the unit


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availing them.

3 Credit of service tax


used IN more than one

unit was to be

distributed pro rata on

the basis of the turnover

during the relevant

period of the concerned

unit to the sum total of

the turnover of all the

units to which the

service related during

the same period.

Credit of service tax


used BY more than one

unit shall be distributed

pro rata on the basis of

the turnover of such units

during the relevant period

to the total turnover of

all its units, which are

operational in the

current year , during the

said relevant period.

In case of common

input services,

amount

of CENVAT credit

attributed to a unit

may

be reduced as now

turnover of all

operational units has

to

be taken in

denominator

instead of only the

units

to which the service

relates.

4 Relevant period was

the month/quarter

previous to themonth/quarter during

which the CENVAT

credit was distributed.

In case of an

assessee who did not

have any total

turnover in the said

period, the input

service distributor was

to distribute any credit

only after the end of

such relevant period

Relevant period shall be

the financial year

preceding to the yearduring which credit is to

be distributed for month/

quarter provided

assessee has turnover in

such preceding financial

year.

If the assessee does not

have turnover for some/

all the units in the

preceding financial year,

relevant period shall be

the last quarter for which

Distribution of credit

is

now based onprevious

financial year s

turnover

instead of previous

month s/quarter s

turnover.


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wherein the total

turnover of its units

was available.

details of turnover of all

the units are available,

previous to the month/

quarter for which credit is

to be distributed.

CENVAT CREDIT TAKEN ON INPUT SERVICES TO BE REVERSED IF DUTY PAID ON FINALPRODUCT REMITTED [RULE 3(5C) VIDE NOTIFICATION NO. 1/2014]Earlier, where on any goods manufactured or produced by an assessee, the payment of duty

was ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CENVAT credit

taken on the inputs used in the manufacture or production of said goods was required to be

reversed. Thus, earlier, reversal was only required in respect of inputs and not for inputservices.

Rule 3(5C) has been amended to provide that CENVAT credit taken on input services used in or

in relation to the manufacture or production of said goods is also required to be reversed.

AMOUNT PAYABLE UNDER SUB -RULES (5), (5A), (5B) AND (5C) OF RULE 3 TO BE PAID ONOR BEFORE THE 5TH DAY OF THE FOLLOWING MONTH BY UTILIZING CENVAT CREDIT OROTHERWISE As per explanation 1 inserted after rule 3(5C), the amount payable under following sub-rules of

rule 3 shall be paid by the manufacturer of goods or the provider of output service

(i) Rule 3(5) Reversal of credit in case of removal of inputs or capital goods as such from the

factory/premises of the output service provider

(ii) Rule 3(5A) Reversal of credit in case of removal of capital goods after being used,

whether as capital goods or as scrap or waste

(iii) Rule 3(5B) Reversal of credit in case of full or partial writing off of the value of input or

capital goods before being put to use

(iv) Rule 3(5C) Reversal of credit in case of remission of duty on final product

by debiting the CENVAT credit or otherwise

on or before the 5th day of the following month except for the month of March, where such

payment shall be made on or before the 31st day of the month of March.


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FAILURE TO REVERSE THE CREDIT TAKEN ON INPUTS AND INPUT SERVICES USED IN GOODS ONWHICH DUTY IS ORDERED TO BE REMITTED ALSO TO ATTRACT RECOVERY PROVISIONS UNDER

RULE 14 [EXPLANATION 2 TO RULE 3(5C)]Hitherto, as per explanation occurring after proviso to rule 3(5B), recovery provisions under rule

14 of the CENVAT Credit Rules, 2004 were applicable if the manufacturer of goods or the

provider of output service fails to pay the amount payable under sub-rules (5), (5A) and (5B) of

rule 3.

The said explanation has been omitted and a new explanation 2 has been inserted after rule

3(5C). As per the new explanation 2, in addition to sub-rules (5), (5A) and (5B) of rule 3,

recovery provisions under rule 14 will also apply to sub-rule (5C) of rule 3.

In other words, even in a case where the manufacturer of goods or the provider of output

service fails to reverse the CENVAT credit taken on inputs and input services used in goods on

which duty has been ordered to be remitted, it would be recovered, in the manner provided

under rule 14, for recovery of CENVAT credit wrongly taken.

Case Laws on CENVAT CREDIT:

KCP Ltd. V.CCE (2013)(SC)

Can CENVAT credit be availed on machineries purchased for being used insetting up a sugar plant in foreign country when (i) the same are not used in thefactory premises and (ii) no duty is paid on final product viz., the sugar plant?

The Supreme Court explained that if duty is not levied on the finalproduct, question of grant of any relief would not arise as in that casethere would not be any cascading effect on the duty imposed on inputs.

The Supreme Court pointed out that since the sugar plant was set up in Vietnam, it could not be said that the plant was manufactured in thefactory of the assessee. Thus, no duty was paid by the assessee on thefinal product i.e., on sugar plant which had been set up in Vietnam.Therefore, there would not be any question of availing credit of the dutypaid on the inputs

The Supreme Court further observed that the bought-out machinery wasnot used by the assessee in the manufacture of the machinery (whichhad been transported along with bought-out machinery to Vietnam for


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setting up the sugar plant) as the same was not even unpacked ortested, and transported in exact condition along with machinerymanufactured by the assessee. The assessee, therefore, merely acted asa trader or as an exporter in relation to the machinery purchased by it,which had been exported and used for setting up a sugar plant in aforeign country.

The Supreme Court held that CENVAT credit could not be allowed to theassessee as no duty was paid on sugar plant set up in a foreign country.Further, since the bought- out machinery was not used in the assessee sfactory premises, the necessary condition for availing CENVAT credit oncapital goods could not be fulfilled.

CCE V. Tata AdvancedMaterialsLtd. (2011)(HC)

Issue Involved: The capital goods purchased were destroyed by fire after 3 years from the dateof purchase. The Insurance Company reimbursed the amount to the assessee,which included the excise duty, which the assessee had paid on the capitalgoods and availed as CENVAT credit. Excise Department demanded the reversalof the CENVAT credit by the assessee on the ground that the assessee had

availed a double benefit.HC Decision:

As per CENVAT Credit Rules, 2004, CENVAT credit taken irregularly standscancelled and CENVAT credit utilised irregularly has to be paid for. In the instant case, the Insurance Company, in terms of the policy, hadcompensated the assessee. Merely because the Insurance Company had paid the assessee the value ofgoods including the excise duty paid, it would not render the availement of theCENVAT credit wrong or irregular. It was not a case of double benefit as contended by the Department. The High Court therefore answered the substantial question of law in favour ofthe assessee and against the Revenue.

SintexIndustriesLtd. V. CCE(2013)(HC)

The High Court held that credit could be availed on eligible inputs utilized in thegeneration of electricity only to the extent the same were used to produceelectricity within the factory registered for that purpose (textile division).However, credit on inputs utilized to produce electricity which was supplied to afactory registered as a different unit (plastic division) would not be allowed. TheHigh Court rejected the contention of the assessee that separate registration oftwo units situated within a common boundary wall would not make them twodifferent factories.

CCE V.Primehealth careproducts(2011)(HC)


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The process of packing and re-packing the input, that was, toothbrush andtooth paste in a unit container would fall within the ambit of manufacture [asper section 2(f)(iii) of the Central Excise Act, 1944]. Further, the word input was defined in rule 2(k) of the CENVAT Credit Rules,2004 which also included accessories of the final products cleared along withfinal product. There was no dispute about the fact that on tooth brush, excise duty had beenpaid. The toothbrush was put in the packet along with the tooth paste and noextra amount was recovered from the consumer on the toothbrush. Considering the definition given in the rules of input and the provisionscontained in rule 3, the High Court upheld the Tribunal s decision that thecredit was admissible in the case of the assessee.

CCE V.BhuwalkasteelIndustries

Ltd. (2010)(Tri LB)

Tribunal held that each case had to be decided according to merit and nohard and fast rule can be laid down for dealing with different kinds ofshortages. Various factors have been laid to decide the denial. Whether thegoods under question

Have been diverted to other place or received and used in the factor Are hygroscopic (i.e. absorbs but will not evaporate) or prone to evaporation Are countable in terms of packages or pieces and have been received and

accounted Differs in weight on account of different scales and dispatch and receiving

ends.Tolerances in respect of hygroscopic, volatile and such other cargo has to beallowed as per industry norms excluding, however, unreasonable and exorbitantclaims. Similarly, minor variations arising due to weighment by differentmachines will also have to be ignored if such variations are within tolerancelimits.

CCE V.StelkoStrips Ltd.(2010)(HC)

The high court held that CENVAT credit can be taken on the strength of privatechallans provided Same were not found to be fake AND There was proper certification that duty had been paid

AshokKumar H.Fulwadhya

V. UOI(2010)(HC)

It was held that words any person used in rule 15(1) of the CENVAT CreditRules, 2004 clearly indicate that the person who has availed CENVAT creditshall only be the person liable to the penalty. The Court observed that, in the instant case, CENVAT credit had been availedby the company and the penalty under rule 15(1) was imposable only on theperson who had availed CENVAT credit [company in the given case], who wasa manufacturer. The petitioners-directors of the company could not be said to be manufactureravailing CENVAT credit.

CCE v.SatishIndustries2013 (298)E.L.T. 188(Bom.)

Facts of the case: In the instant case, the assessee availed 100% CENVATcredit on capital goods in the year of purchase, i.e. in first year itself. However,he utilized only 50% of the CENVAT credit so availed in the first year. As perRevenue, assessee was entitled to avail 50% of the credit of duty paid on capitalgoods in the first financial year and avail the balance 50% credit in subsequentfinancial year.


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Decision: The High Court held that if 50% CENVAT credit on capital goodspertaining to subsequent financial year which had been wrongly availed in thefirst year had not been not utilized till the commencement of the subsequentfinancial year, no prejudice was caused to the Revenue and thus, the samecould be upheld.

DEFINITION OF INPUT SERVICE - CCE V. CADILA HEALTH CARE LTD. (2013) (HC) -IMP. CASE

ISSUE INVOLVED:

The assessee was engaged in the manufacture of medicaments. Since, the medicament could be manufactured only upon approval of the regulatory

authority after the product undergoes technical testing and analysis, the assesseeavailed the services of various technical testing and analysis agencies for testing ofclinical samples prior to commencement of commercial production.

These samples were manufactured in small trial batches and removed after payment ofexcise duty.

The assessee availed CENVAT credit of service tax paid by it on such testing services. Further, the assessee also availed CENVAT credit of service tax paid by it on

commission paid to foreign agents for the sale of such medicaments. Credit wastaken as per the inclusive part of the definition of input service, which included servicesin relation to sales promotion.


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DECISION:

Service Departments argument High Court Observation & Decision

Technicaltesting and

analysis

Services

unless goods reachedthe commercial

production stage,

CENVAT credit was not

admissible

The activity of testing and analysis of the trail batcheswas in relation to manufacture of final product as

unless such trail batches were tested and approval from

regulatory authority was obtained, the final product

could not be manufactured. Hence, the said

services prior to commencement of commercial

production are eligible for CENVAT Credit

Services

providedby

foreign

commission

agents

The said services of foreign commission agents neither

used directly or indirectly in or in relation to manufactureof final products or clearance of final products upto

the place of removal nor the sad activities are

mentioned in the illustrative activities mentioned in the

definition i.e. accounting, auditing etc., Hence,

CENVAT Credit not available on the said activities

DEFINITION OF INPUTS - FLEXENGINEERING LTD. CASE(2012) (SC) - V. IMP CASE


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ISSUE INVOLVED:o The assessee, was engaged in the manufacturing of various types of packaging machines,

marketed as Automatic Form Fill and Seal Machines (F&S machines ). o The machines were made to order , in as much as all the dimensions of the

packaging/sealing pouches, for which the F&S machine is required, are provided by the

customer.o The purchase order contained following clause - Inspection/trial will be carried out at your

works in the presence of our engineer before dispatch of equipment for the performance ofthe machine.

o The testingmaterial to be used was Flexible Laminated Plastic Film in roll form & PolyPaper which were duty paid.

o As the machine ordered was customer specific, if after inspection by the customer it wasfound deficient in respect of its operations for being used for a particular specifiedpackaging, it could not be delivered to the customer, till it was re-adjusted and tuned tomake it match with the required size of the pouches as per the customer s requirement.

o On completion of the above process and when the customer was satisfied, the machinewas declared as manufactured, ready for clearance.

o The assessee claimed the CENVAT credit of the material used for testing of the packagingmachines. However, the Department contended that credit could not be availed anddenied the CENVAT credit on the same.

DECISION: The Supreme Court observed that the process of manufacture would not be complete if

a product is not saleable as it would not be marketable and the duty of excise would notbe leviable on it.

The Supreme Court was of the opinion that the process of testing the customized F&Smachines was inextricably connected with the manufacturing process, in as much as,until this process is carried out in terms of the afore-extracted covenant in the purchaseorder, the manufacturing process is not complete; the machines are not fit for sale andhence, not marketable at the factory gate.

The Court was, therefore, of the opinion that the manufacturing process in the presentcase gets completed on testing of the said machines.

Hence, the afore-stated goods viz . the flexible plastic films used for testing the F&Smachines are inputs used in relation to the manufacture of the final product and wouldbe eligible for CENVAT credit.


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[40] Tharun Raj

(i) Assessable value of dutiable goods 250 lakh (rate of duty 16%); (ii) Price of exempted goods cleared from the factory 200 lakh; (iii) CENVAT credit of input X (used only in the manufacture ofexempted good s)10 lakh; (iv) CENVAT credit of input Y (used only in the manufacture of dutiablegoods)15 lakh; (v) CENVAT credit of input Z (used commonly in manufacture ofexempted as well as dutiable goods but no separate accounts aremaintained in respect of such input Z) 20 lakh; and (vi) CENVAT credit of capital goods (used partly for manufacture ofexempted goods also) 2.5 lakh (total amount of duty).

Compute the amount of excise duty and any other amount payable byMaharaja for the month of January, 2007.


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[41] Tharun Raj

CHAPTER - 4SSI EXEMPTION

NOTIFICATION NO. 8/2003: The SSI exemption during the CY is available when the turnover of the assessee during the PY

is 400 lakhs. The exemption is upto 150 lakhs of turnover during the CY. For turnover > 150 lakhs excise

duty payable. The credit as standing on the first day of the financial year in which the exemption is availed

shall be lapsed. CENVAT credit on inputs purchased, Input services received not available upto the date when

turnover is 150 lakhs. Thereafter, credit available. CENVAT credit on capital goods is available but can be utilized only when turnover crosses 150lakhs.

The assessee can opt to pay normal duty and can avail CENVAT credit. Manufacturer of excisable goods (other than Tea, pan masala, some tobacco products, sandal

wood oil, weapons, travel sets for toiletries etc.) are eligible for SSI exemption. The option once availed, will be applicable for entire turnover of a financial year.

Computation of Small Service provider Exemption for the year _________:

S.No Particulars

Dutiable goodsExempted

goods

Nondutiable

goodsWith SSIexemption

Without SSIExemption

1 Clearance of goods for domesticconsumption XXX

2Clearance of goods with ownbrand name for domesticconsumption

XXX

3Clearance of goods with thebrand name of others - In urbanarea (not eligible for exemption)

XXX

4Clearance of goods with thebrand name of others - In Rural Area

XXX


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[42] Tharun Raj

5

Clearance of plastic bottles andplastic containers manufacturedunder the brand name of others(Even though manufactured withthe brand name of others,exemption available providedthey are used as packingmaterial)

XXX

6 Export to countries other thanNepal and Bhutan XXX

7

Exports to Nepal and Bhutan(Though exports to Nepal istreated as normal exports, theSSI exemption notification hasnot been amended)

XXX

8 Sale to SEZ/EOU/EHTP/STP/ UNor International organisations

XXX

9

Outright sale to a buyer, whothen exports i.e. Penutimate sale- Sale before export sale isexempted under CST but notunder excise

XXX

10 Export under bond to merchantexporter XXX

11 Sale of non exsiable goods XXX

12

Value of intermediate productwhen final product is eligible forSSI exemption (If final product iseligible for SSI exemption, it isdutiable before SSI exemptionand as per notification no. 67/95,intermediate product isexempted)

XXX

13

Value of goods captivelyconsumed for manufacture offinal product which is exemptedunder a notification other thanSSI Exemption notification.

XXX

14

Value of job work done under

notification no. 214/86, 83/94and 84/94 (In this case, the rawmaterial supplier will pay exciseduty)

XXX

15 Job work or any process whichdoes not amount to manufacture

XXX

Total XXX XXX XXX XXX


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[43] Tharun Raj

Less: Small Service providerexemption

(XXX) Not available Already

Exempted,hence no

dutypayable

Notdutiable,

hence dutynot leviableTurnover on which excise

duty payable XXX XXX

Notes to above: When the goods are already exempted/not taxable, it is not considered for SSI exemption. When final product is covered under SSI exemption, intermediate product is already included

in it, so don't include again for exemption. When final product is exempted under othernotifications, intermediate product is taxable as per Notification. No. 67/95, but assessee canavail SSI exemption on such intermediate product.

If the manufacturer has more than one factory, the clearances of all such factories will haveto be clubbed together.

If more than one manufacturer clears goods from the same factory, all clearances from thefactory will have to be clubbed together.

CASE LAWS ON SSI EXEMPTION:

CLUBBING PROVISIONS - CCE V. DEORA ENGINEERING WORKS (2010) (HC)

Decision of the case:

The High Court held that indisputably, in the instant case, that the partners of both the firmswere common and belonged to same family. They were manufacturing and clearing thegoods by the common brand name, manufactured in the same factory premises,


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[44] Tharun Raj

having common management and accounts etc. Therefore, High Court was of theconsidered view that the clearance of the common goods under the same brand namemanufactured by both the firms had been rightly clubbed .

COMPUTATION OF SSI E XEMPTION - BONANZO ENGG . & CHEMICAL P. LTD. C ASE (2012) (SC) The Supreme Court opined that the value of clearances in the SSI exemption

notification needs to be computed after excluding the value of exempted goods. Merely because the assessee by mistake paid duty on the goods which were exempted

from the duty payment under some other notification, did not mean that thegoodswould become goods liable for duty under the Act.

Further, merely because the assessee had not claimed any refund on the duty paidby him would not come in the way of claiming benefit of the SSI exemption.

Accordingly, the high court allowed assessee to exclude exempted goods forcomputation of SSI exemption.

BRAND NAME RESTRICTIONS - ELEX K NITTING M ACHINERY CO. (2010) (HC)ISSUE INVOLVED:

The assessee was engaged in the manufacture of flat knitting machines. They hadbeen availing the SSI exemption.

They were found using the brand name ELEX on those machines. The said brandname belonged to M/s. Elex Engineering Works. The proprietor of Elex KnittingMachinery Co. was a partner in M/s Elex Engineering Works.

The Department denied the benefit of the SSI exemption notification solely on theground that they had manufactured and cleared the goods under the brand name

ELEX which belonged to M/s. ELEX Engineering Works.

DECISION: Held that the appellant was eligible to claim benefit of the SSI exemption as the

proprietor of Elex Knitting Machinery Co. was one of the partners in ElexEngineering Works.

Thus, being the co- owner of the brand name of ELEX, he could not be said to haveused the brand name of another person, in the manufacture and clearance of the goodsin his individual capacity.


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[45] Tharun Raj

CCE V. Australian Foods India (p) Ltd. (2013) (SC)

Facts & Issues involved: The assessee was engaged in the manufacture and sale of cookies from branded retail

outlets of "Cookie Man". The assessee had acquired this brand name from M/s Cookie Man Pvt. Ltd, Australia.

The assessee was selling some of these cookies in plastic pouches/containers on whichthe brand name described above was printed.

No brand name was affixed or inscribed on the cookies. Excise duty was duly paid, onthe cookies sold in the said pouches/containers.

However, on the cookies sold loosely from the counter of the same retail outlet, withplain plates and tissue paper, duty was not paid.

The retail outlets did not receive any loose cookies nor did they manufacture them. Theyreceived all cookies in sealed pouches/containers.

Those sold loosely were taken out of the containers and displayed for sale separately. The assessee contended that SSI exemption would be available on cookies sold loosely

as they did not bear the brand name.

Decision:(i) Physical manifestation of the brand name on goods is not a compulsory requirement. Goods

would continue to be branded good, as long as its environment conveys so viz.,packaging/wrapping, accessories, uniform of vendors, invoices, menu cards, hoardings anddisplay boards of outlet, may convey that goods is a branded one.(ii) The test of whether the goods is branded or unbranded, must not be the physical presenceof the brand name on the good, but whether it is used in relation to such specified goods forthe purpose of indicating a connection in the course of trade between such specified goods andsome person using such name with or without any indication of the identity of the person.(iii) Once it is established that a specified good is a branded good, whether it is sold withoutany trade name on it, or by another manufacturer, it does not cease to be a branded good ofthe first manufacturer. Therefore, soft drinks of a certain company do not cease to bemanufactured branded goods of that company simply because they are served in plain glasses,without any indication of the company, in a private restaurant.(iv) The supreme court held that it is not necessary for the goods to be stamped with a tradename or brand name to be considered as branded goods for the purpose of SSI exemption. Ascrutiny of surrounding circumstances is necessary to decide. In the present case, the SSIexemption not available on account of brand name restrictions.


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[46] Tharun Raj

Where clearances of a dubious company are clubbed with clearances of the originalcompany, whether penalty can be imposed on such dubious company if all theclearances have been made by the original company?CCEx v Xenon 2013 (Jhar.)

Facts & Issue Involved: The Department found that the assessee had set up a dubious company of another

company to mis-utilize the benefits of SSI exemption notification. It was established that the dubious company did not manufacture and clear any goods

and that all the transactions shown by it were, in fact, the transactions undertaken bythe original company.

Thus, the manufacture and clearances shown by the two units separately were clubbedtogether as manufacture and clearances of a single unit viz. original company in termsof the applicable SSI exemption notification and the differential duty and penalty wasimposed on such original company.

At the same time, penalty was also imposed on the dubious company.

Decision: The High Court observed that merely because the dubious company was in existence, it

could not be said that it undertook the transactions. Its existence could not itself create any liability; the liability could arise only when the

transactions were actually undertaken by the dubious company. If the transactions shown by the dubious company were not undertaken by the same

but by the original company, then such transactions would be taken to be thetransactions of the original company and clubbed with the transactions of the originalcompany.

The High Court held that when it had been established that dubious company did notundertake any transactions, penalty could not be levied on the same for the transactionsundertaken by the original company. The High Court emphasized that penalty could notbe imposed upon the company who did not undertake any transaction.

CASE STUDIES:1 Chinu Ltd. started manufacturing excisable goods in June, 2013. It

availed small scale exemption in terms of Notification No. 8/2003 C.E.dated 1-3-2003 as amended for the financial year 2013-14. Thefollowing details are provided by Chinu Limited: 18,000 kg of inputs purchased @ 985.60 per kg(inclusive of central excise duty @ 12.36%)

1,77,40,800

Capital goods purchased on 24.07.2013 (inclusive ofexcise duty at 12.36%)

45,15,000

Finished goods sold [at uniform transaction value(exclusive of excise duty) throughout the year]

3,00,00,000

Ans:Excise dutypayable in cashafter availingCENVAT Credit is3,81,558


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[47] Tharun Raj

Calculate the amount of excise duty payable by Chinu Ltd. in cash, ifany, during the year 2013-14. Rate of duty on finished goods soldmay be taken at 12.36%. There is neither any processing loss norany inventory of input and output. Show your workings and noteswith suitable assumptions as required.

2 [SSI Exemption] SSI & Co. is eligible for exemption in terms ofNotification No. 8/2003 for the year 2010-11. It provides thefollowing particulars with regard to the clearances of goods effectedduring the said year. Determine the duty payable in respect of theyear 2010-11:

Value of domestic clearances of goodswith own brand name

120 lakhs

Value of clearances of goods with thebrand name of others (including30lakhs in respect of goods manufactured

in a rural area)

100 lakhs

Value of clearances for exports 50 lakhs Value of clearances for captive 40 lakhs

Value of clearances of exempted goods 20 lakhsShow your workings with explanations where required

3 [Computation of eligibility for SSI exemption] Aggarwal&Company is a manu

excise rapid revision material

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