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EXCISE DUTYINTRODUCTION In the Indian tax structure, there are a lot of taxes that people pay for different reasons. Income tax, sales tax, entertainment tax, value added tax etc. All these taxes are existent because in some way or the other it impacts and helps the economy. One such tax that is prevalent in any manufacturing sector is the excise duty.What is excise duty?An excise or excise tax (sometimes called an excise duty) is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country). It is a tax on the production or sale of a good. This tax is now known as the Central Value Added Tax (CENVAT).Though the collection of tax is to augment as much revenue as possible to the government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus it is one of the socio-economic objectives.What are the types of excise duty?There are three different types of central excise duties which exist in India which are as follows:Basic - Excise Duty, imposed under section 3 of the 'Central Excises and Salt Act' of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of basic excise duty in India.Additional - Section 3 of the 'Additional Duties of Excise Act' of 1957 permits the charge and collection of excise duty in respect of the goods as listed in the schedule of this act. This tax is shared between the central and state governments and charged instead of sales tax.Special - According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year.Which goods are excisable goods?The term 'excisable goods' means the goods which are specified in the first schedule and the second schedule to the Central Excise Tariff Act, 1985, as being subject to a duty of excise and includes salt.Who is liable to pay excise duty?The liability to pay tax excise duty is always on the manufacturer or producer of goods. There are three types of parties who can be considered as manufacturers:Those who personally manufacture the goods in questionThose who get the goods manufactured by employing hired labourThose who get the goods manufactured by other partiesPower of Taxation under Constitution of India is as follows :(a) The Central Government gets tax revenue from Income-tax (except on Agricultural Income), Excise (except on alcoholic drinks) and Customs.(b) The State Governments get tax revenue from sales tax, excise from liquor and alcoholic drinks, tax on agricultural income.(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and house property tax.LEVY, COLLECTION & EXEMPTIONS FROM EXCISE DUTYWhat is the Taxable Event?The taxable event is of great significance in levy of any tax or duty. Excise duty is leviable on all excisable goods, which are produced or manufactured in India. Thus, ‘manufacture or production in India’ of an ‘excisable goods is a ‘taxable event’ for Central Excise. It becomes immaterial that duty is levied and collected at a later stage i.e. at the time of removal of goods. Therefore, removal from factory is not the ‘taxable event’.Who is liable to pay duty?Rule 4(1) of the Central Excise Rules, 2002 provides that every person who produces or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in Rule 8 or under any other law, and no excisable goods, on which any duty is payable, shall be removed without payment of duty from any place, where they are produced or manufactured or from a warehouse, unless otherwise provided. It is provided that the goods falling under Chapter 61 or 62 of the First Schedule to the Tariff Act, produced or manufactured by a job worker may be removed without payment of duty leviable thereon and the duty of excise leviable on such goods shall be paid by the person referred to in sub-rule (3), as if such goods have been produced or manufactured by him, on the date of removal of such goods from his premises registered under rule 9.Explanation – Where such person has authorized the job worker to pay the duty leviable on such goods under sub-rule (3), such duty shall be paid by the job worker on the date of removal of such goods from his registered premises. Rule 4(2) provides that notwithstanding anything contained in sub-rule (1), where molasses are produced in a khandsari sugar factory, the person who procures such molasses, whether directly from such factory or otherwise, for use in the manufacture of any commodity, whether or not excisable, shall pay the duty leviable on such molasses, in the same manner as if such molasses have been produced by the procurer.Rule 4(3) provides that notwithstanding anything contained in sub-rule (1), every person who gets the goods, falling under Chapter 61 or 62 of the First Schedule to the Tarrif Act, produced or manufactured on his account on job work, shall pay the duty leviable on such goods, at such time and in such manner as may be specified under these rules, whether the payment of such duty be secured by bond or otherwise, as if such goods have been manufactured by such person:Provided that such person may authorize the job worker to pay the duty leviable on such goods on his behalf and the job worker so authorized undertake to discharge all liabilities and comply with all the provisions of these rules. From the above discussion it can be concluded that the following persons shall be liable to pay excise duty:(i) A person, who produces or manufactures any excisable goods,(ii) A person, who stores excisable goods in a warehouse,(iii) In case of molasses, the person who procures such molasses,(iv) In case goods are produced or manufactured on job work,(a) The person on whose account goods are produced or manufactured by the job work, or(b) The job worker, where such person authorizes the job worker to pay the duty leviable on such goods.Liability to Excise DutySection3(1) provides that there shall be levied and collected in such manner, as may be prescribed :(a) a duty of excise to be called the Central Value Added Tax (CENVAT), on all excisable goods which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the CentralExcise Tariff Act, 1985;(b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985, which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule :Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured :(i) in a free trade zone or a special economic zone and brought to any other place in India; or(ii) by a hundred per cent export-oriented undertaking and brought to any other place in India, shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act, 1962 or any other law for the time being in force on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value.Collection of Excise DutyFor collection of Central Excise duty the following two procedure are followed by the Central Excise Department :(i) Physical Control Procedure: Applicable to cigarettes only. In this case, the assessment precedes clearance, which takes place under the supervision of Central Excise officers;(ii) Self-Removal Procedure: Applicable to all other goods produced or manufactured within the country. Under this system, the assesee himself determines the duty liability on the goods and clears the goods.Exemptions from Levy of Excise DutySection A of the Central Act, 1944 empowers the Central Government to grant Exemption form lay of excise duty and lays down the provisions relating thereto :(1) Power to Notify Exemptions in Public InterestSection 5A(1) provides that the Central Government is empowered to exempt in the public interest, any excisable goods from the levy of whole or any part of excise duty. Such exemption may be granted either absolutely or subject to such conditions, as may be specified in the Notification.Exceptions —However, unless specifically provided in such notification, no exemption shall apply to excisableExceptions —However, unless specifically provided in such notification, no exemption shall apply to excisable goods, which are produced or manufactured :(i) in a free trade zone or special economic zone and brought to any other place in India; or(ii) by a hundred per cent export-oriented undertaking and brought to any place in India.(2) Exemption in public interestSection 5A(2) provides that if the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order in each case, exempt from payment of duty of excise, under circumstances of an exceptional nature to be stated in such order, any excisable goods on which duty of excise is leviable.(3) Notification may provide for different method of levy of duty as wellSection 55A(3) provides that an exemption in respect of any excisable goods from any part of the duty of excise leviable thereon may be granted by providing for the levy of a duty on such goods at a rat expressed in a form or method different from the form or method in which the statutory duty is leviable and any exemption granted in relation to any excisable goods in the manner provided in this subsection shall have effect subject to the condition that the duty of excise chargeable on such goods shall in no case exceed the duty statutorily payable.Section 5A(2A) provides that the Central Government may, if it considers it necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued or order issued, insert an Explanation in such notification or order, as the case may be, by notification in the Official Gazette at any time within one year of issue of the notification or order, and every such Explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.Accounting Treatment For Excise DutyThe following is the text of the revised Guidance Note on Accounting Treatment For Excise Duty issued by the Institute of Chartered Accountants of India.INTRODUCTION1. The Institute of Chartered Accountants of India, had issued a Guidance Note on Accounting Treatment for Excise Duties m 1979. In order to bring uniformity in the accounting treatment of excise duty and inventory valuation, the Guidance Note was revised in 1988. Keeping in view further developments, viz., issuance of the revised Accounting Standard (AS) 2, "Valuation of Inventories" (which has come into effecting respect of accounting periods commencing on or after 1.4.1999 and is mandatory in nature), it has been decided to revise this Guidance Note again. This revised Guidance Notes being issued in supersession of the earlier Guidance Note issued in 1988 and is effective in respect of accounting periods beginning on or after April 1, 1999.2. This Guidance Note recommends accounting treatment for Excise Duty in respect of excisable goods produced or manufactured by an enterprise. A separate Guidance Note on Accounting Treatment for MODVAT sets out principles for accounting for MODVAT (now renamed as 'CENVAT'.3. At the outset, this Guidance Note briefly deals with normally accepted accounting principles for inventory valuation as prescribed in revised Accounting Standard (AS) 2 "Valuation of Inventories" issued by the Institute of Chartered Accountants of India, and nature of excise duty For details, reference should be made to revised Accounting Standard (AS) 2 and Central Excise Act, Rules, Notifications and Circulars.Normally Accepted Accounting Principles For Inventory Valuation4. Normally accepted accounting principles with regard to the valuation of inventories (i.e. materials or supplies to be consumed in the production process or in the rendering of services, workinprocess and finished goods), as prescribed in revised Accounting Standard (AS) 2,"Valuation of Inventories", are reproduced below: "5. Inventories should be valued at the lower of cost and net realisable value"."6. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.""7. The costs of purchase consist of the purchase price including duties and taxes (other than those subsequently recoverable by the enterprise from the taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks and other similar items are deducted in determining the costs of purchase.""8. The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred m converting materials into finished goods. Fixed production overheads ate those indirect costs of production that remain relatively constant regardless of the volume of production, such as depredation and maintenance of factory buildings and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour.""9. The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates; normal capacity. The amount of fixed production overheads allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities.""11. Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include overheads other than production overheads or the costs of designing products for specific customers in the cost of inventories."Nature Of Excise Duty5. Excise duty is a duty on manufacture or production of excisable goods in India. Section 3 of the Central Excise Act; 1944, deals with charge of Excise Duty This Section provides that a duty of excise on excisable goods which are produced or manufactured in India shall be levied and collected in such a manner as may be prescribed. This prescription is continued in the Central Excise Rules, 1944 which provide that excise duty shall be collected at the time of removal of goods from factory premises or from approved place of storage (Rule 49). Rate of duty and tariff valuation to be applied is the one in force on that date, ie., the date of removal (Rule 9A) and not the date of manufacture. This difference in the point of time between taxable event, viz., manufacture and that of its collection has been examined and discussed in a number of judgements. For instance, the Supreme Court m the case of Wallace Flour Mills Co. Ltd. vs. CCE 11989 (44) ELT 599 summed up the legal position as under:"It is well settled by the scheme of the Act as clarified by several decisions that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience. The Scheme of the said Act read with the relevant rules framed under the Act particularly Rule 9A of the said rules, reveals that the taxable event is the fact of manufacture of production of an excisable article, the payment of duty is related to the date of removal of such article from the factory."Supreme Court in another case, viz., CCE vs. Vazir Sultan Tobacco Co. [1996 (83) ELT 3] held as under:"We are of the opinion that Section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal."6. The levy of excise duty is not restricted only to excisable goods manufactured and intended for sale. It is also leviable on excisable goods manufactured or produced in a factory for internal consumption. Such intermediate products may be used in manufacture of final products or for repairs within the factory or for use as capital goods within the factory. Excisable goods so used for captive consumption may be eligible for exemption under specific notifications issued from time to time. Finished excisable goods cleared from the place of removal may also be eligible for whole or partial duty exemption in terms of notifications issued from time to time. Such exemption, subject to specified limits, if any, may relate to a manufacturer, e.g., a small scale industrial unit. Exemption may be goods specific, eg., handicrafts are currently wholly exempt from duty. The exemption may also be enduse specific, e.g., goods for use by defence services. Excisable goods can be removed for export out of India either wholly without payment of duty or under bond or on payment of duty under claim for rebate of duty paid.7. Excisable goods, after completion of their manufacturing process, are required to be kept in a storeroom or other identified place of storage in a factory till the time of their clearance. Each such storeroom or storage place is required to be declared to the Excise Authorities and approved by them. Such storeroom or storage place is generally referred to as a Bonded Storeroom. Dutiable goods are also allowed, subject to approval of Excise Authorities, to be removed without payment of duty, to a Bonded Warehouse outside factory. In such cases, excise duty is collected at the time of clearance of goods from such Bonded Warehouses.8. Amount of excise duty forming part of the sale price of the goods is required to be indicated separately in all documents relating to assessment of duty, e.g., excise invoice used for clearance of excisable goods (Section 12A). It is, however, open to a manufacturer to recover excise duty separately or not to make a separate recovery but charge a consolidated sale price inclusive of excise duty The incidence of excise duty is deemed to be passed on to the buyer, unless contrary is proved by the payer of excise duty (Section 12B).Excise Duty As An Element Of Cost9. In considering the appropriate treatment of excise duty for the purpose of determination of cost for inventory valuation, it is necessary to consider whether excise duty should be considered differently from other expenses.10. Admittedly, excise duty is an indirect tax but it cannot; for that reason alone, be treated differently from other expenses. Excise duty arises as a consequence of manufacture of excisable goods irrespective of the manner of use / disposal of goods thereafter, e.g., sale, destruction and captive consumption. It does not cease to be a levy merely because the same may be remitted by appropriate authority in case of destruction or exempted in case goods are used for further manufacture of excisable goods in the factory. Tax (other than a tax on income or sale) payable by a manufacturer is as much a cost of manufacture as any other expenditure incurred by him and it does not cease to be an expenditure merely because it is an exaction or a levy or because it is unavoidable. In fact, in a wider context any expenditure is an imposition which a manufacturer would like to minimise.11. Excise duty contributes to the value of the product. A "duty paid" product has a higher value than a product on which duty remains to be paid and no sale or further utilisation of excisable goods can take place unless the duty is paid. It is, therefore, a necessary expense which must be incurred if the goods are to be put in the location and condition in which they can be sold or further used in the manufacturing process.12 Excise duty cannot therefore be treated differently from other expenses for the purpose of determination of cost for inventory valuation. To do so would be contrary to the basic objective of carrying forward the cost related to inventories until these are sold or consumed.13 As stated in para 6 above, liability to excise duty arises even on excisable goods manufactured and used in further manufacturing process. In such a case excise duty paid (if the same is not exempted) on the intermediary product becomes a manufacturing expense. Excise duty paid on such intermediary products must, therefore, be included in the valuation of work-in-process or finished goods manufactures by the subsequent processing of such products.Provision For Unpaid Excise Duty14. Since the point of time at which duty is collected is not necessarily the point of time at which the liability to pay the duty arises, situations will often arise when duty remains to be collected on goods which have been manufactured. The most common of these situations arises when die goods are stored under bond, i.e., in a bonded Store Room, and the duty is paid when the goods are removed from such bonded Store Room.15. Divergent views exist as to whether provision should be made in the accounts for the liability in respect of goods which are not cleared or which are lying in bond at the balance sheet date.16. The arguments in favour of the creation of liability are briefly summarised under:(a) The liability for excise duty arises at the point of time at which the manufacture is completed and it is only its collection which is deferred, and(b) failure to provide for the liability will result in the balance sheet not showing a true and fair view of the state of affairs of the enterprise.17. The arguments against the creation of the liability briefly summarised, are as under:(a) Though the liability for excise duty arises at the point of time at which the manufacture is completed, it gets quantified only when goods are cleared from the factory or the bonded warehouse,(b) The actual liability for excise duty may get modified by the time the goods are cleared from the factory or bonded warehouse,(c) Where goods are damaged or destroyed before clearance, excise duty may be waived by the competent authority and therefore the duty may never be paid, and(d) Failure to provide for the liability does not affect the profits or losses.18. Since the liability for excise duty arises when the manufacture of the goods is completed, it is necessary to create a provision for liability of unpaid excise duty on stocks lying in the factory or bonded warehouse. It is true that the recovery of the duty is deferred till the goods are removed from the factory ot the bonded warehouse and the exact quantification will, therefore, be at the time of removal and that estimate of duty made on balance sheet date may change on account of subsequent events, e.g., change in the rate of duty and exports under bond. But, this is true of many other items also, e.g., provision for gratuity and this cannot be an argument for not making a provision for existing liability on estimated basis.19. The estimate of such liability can be made at the rates in force on the balance sheet date. For this purpose, other factors affecting liability should also be considered, e.g., exemptions being availed by the enterprise, pattern of sales - export, domestic etc. Thus, if a small scale undertaking is availing the benefit of exemption allowed in a particular financial year and declares that it wishes to avail such exemption during next financial year also, excise duty liability should be calculated after taking into consideration the availability of exemption under the relevant notification. Similarly, if an enterprise is captively consuming all its production of a specific product and has been availing of exemption from payment of duty on that product, no provision for excise duty may be required in respect of nonduty paid stock of that product lying in factory or bonded warehouse. An auditor must, however, apply appropriate audit tests while verifying statements and declarations made by an enterprise in this regard.EXCISE DUTY LIABILITY Basic conditions of excise liability - Section 3 of Central Excise Act ( often called the ‘Charging Section’ ) states that ‘There shall be levied and collected in such manner as may be prescribed duties on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India. The words ‘goods which are manufactured or produced in India’ are same as those used in Entry No 84 to list I. Thus, the power to levy Central Excise duty is derived from the Constitution. This definition of charging section of Central Excise is vital, because it clearly signifies that there are four basic conditions for levy of Central Excise duty. (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced. (4) Such manufacture or production must be in India.Person liable to pay excise duty - Once duty liability is fixed, the duty can be collected from a person at the time and place found administratively most convenient for collection. Ownership of raw material is not relevant for duty liability. – CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT). Duty demand is payable by manufacturer, even if it cannot be recovered from customer. Duty liability in case of goods stored in warehouse - Rule 20 of CE Rules permit warehousing of certain goods in warehouses without payment of duty. These goods are coffee, petroleum products, benzene, tolune etc. In such cases, the duty liability is on the person who stores the goods. Duty liability in case of job work - Even in case of job work, the duty liability is of actual manufacturer and not of the raw material supplier.- GTC Industries v. CCE 2001(132) ELT 74 (CEGAT). - - However, a job worker manufacturing goods under notification No 214/86 is exempt from excise duty, as the raw material supplier undertakes that he will use these goods further to manufacture final product or clear for export or pay duty on such goods. [The only exception is in case of textile articles, as explained below].Duty liability in case of textile and textile articles manufactured on job work basis – In textile sector, often goods are manufactured on job work basis. The processors (job workers) are small units. It is difficult for them to pay excise duty and comply with all excise formalities. Hence, in case of yarns, fabrics (falling under chapter headings 50 to 60) or readymade garments falling under chapter 61 or 62 or textile articles under chapter 63, it has been provided that the duty liability will be of the raw material supplier. The raw material supplier will have to pay duty while clearing final product as if he is assessee. However, the job worker my, at his option, agree to pay duty. Thus, job worker cannot be compelled to pay duty [Rule 12B(1) of CE Rules]. This provision is not applicable to EOU or SEZ unit. [It may be noted that though duty liability is of the raw material supplier in case of textile and textile articles, job worker is really the manufacturer].Rate of duty as applicable on date of removal relevant - Though taxable event is 'manufacture', duty payable is as applicable on date of removal i.e. clearance from factory. In Wallace Flour Mills Co. Ltd. v. CCE 1989(44) ELT 598 = 1989(2) SCALE 804 = 186 ITR 440 = 1989(4) SCC 592 (SC), goods were fully manufactured and packed when goods were exempt from duty. These were cleared after the exemption was withdrawn and goods became liable to duty. It was held that duty is payable as applicable on date of removal. State of goods at the time of removal is relevant - Goods have to be classified and valued in the state in which goods are removed from the factory. Any further processing done after removal is not relevant. Duty payable even when not collected - An assessee is liable to pay sales tax and the question whether he has collected it from consumer or not is of no consequence. His liability is by virtue of being an assessee under the Act. - American Remedies P Ltd. v. Govt of AP 1999(1) SCALE 30 = 113 STC 400 (SC 3 member bench).Duty is a manufacturing expense from accounting point of view - Excise duty should be considered as a manufacturing expense and should be considered as an element of cost for inventory valuation, like other manufacturing expenses. Excise duty cannot be treated as a period cost. - Guidance Note of ICAI on Accounting Treatment for Excise Duty - Chartered Accountant - July 2000. PRACTICAL PROBLEMSProblem 1.M/s XYZ. are in the business of supplying “Turbo-alternators” to various customers. They manufacture steam turbines in the factory, which are removed to the customer’s site on payment of Central Excise Duty. They purchase duty paid alternators from the market which are delivered at the customer’s site. M/s XYZ assemble both the items and fix them permanently on a platform at the site. Department demands central excise duty payable on “@ Turboalternator” when it comes into existence after being assembled on the platform embedded to the earth. Is the view taken by the department correct. Discuss with the help of case laws, if any.Answer : In the present case two issues are involved:(1) Whether assembly of steam turbines and duty paid alternators amounts to manufacture of turbo alternators, and(2) Whether such assembly results in manufacture of excisable goods. The facts of the case are similar to the case of Triveni Engineering and Industries Ltd. v C. CEX, 2000 (120) El,T 273(SC) In the present case, the Appellants were, according to specified designs, combining steam turbine and alternator by fixing them on a platform and aligning them. As a result of this activity of the Appellants, an new product, turbo alternator, came into existence, which has a distinctive name and use different from its components. Therefore, the process involved in fixing steam turbine and alternator and in coupling and aligning them in a specified manner to form a turbo alternator, a new commodity, is nothing but a manufacturing process. Though the process of assembling results into a new commodity and therefore is a process amounting to manufacture, yet the turbo alternator set (known in the market as such) comes into existence only when a steam turbine and alternator with all their accessories are fixed at the site. Further, in order to be brought in the market the turbo would not remain turbo alternator. Thus, it is obvious that without fixing to the ground the turbo alternator does not come into being. The installation or erection of turbo alternator on the platform specially constructed on the land cannot be treated as a common base; therefore, such alternator would be immovable property. Accordingly, such activity could not be considered as ‘excisable goods’.Problem 2.Snow White Ltd. Manufactures paper and in the course of such manufacture, “wastepaper” is produced (paper being the main product and dutiable goods). The Central Excise Tariff Act, 1985 (CE7) was amended w.e.f. 1-3- 1995, so as to include waste paper. White Ltd. was issued a show cause notice by the Central Excise Officer, demanding duty of ` 2 lakhs on waste paper produced during October, 1994 to February, 1995, but cleared during April-May, 1995. A reply is due to be filed immediately to the notice. As Counsel of Snow White Ltd. You we required to advise the company about –(i) The legality and validity of the proposed levy and collection of duty on waste paper for the period prior to 1-3-1995; and(ii) State (with the help of decided cases) the reasons for your advice/opinion.Answer :The issue involve in the given case is determination of taxable event for the purpose of levy of excise duty. As per section 3 of the Central Excise Act, 1944, the taxable event for levy of Central Excise is “manufacture of excisable goods”. The date for determination for rate of duty and tariff valuation is the date of actual removal of the goods from the factory or warehouse. However, there must be a levy of duty of excise at the time of manufacture and only then, the duty can be collected at the time of removal as has already been held in Vazir Sultan Tobacco Industry’s case 1996 (83) ELT3(SC). Therefore, the waste paper produced prior to the levy will not be chargeable to duty of excise even though it has been cleared after such levy and the proposed show cause notice demanding ` 2 lakhs of excise duty on such waste paper is invalid and illegal and liable to be quashed.Problem 3.Regarding the applicability of excise duty, Computers are covered under heading no 84.71 of the First schedule to the Central Excise Tariff Act, 1985 which describes computers as automatic data processing machines. XYZ Ltd. has undertaken upgradation of its computers both in terms of storage capacity and processing speed by increasing the hard disc capacity, RAM, changing of processor chip from 386 to 486 and in certain cases from Pentium III to Pentium IV. The Department’s contention is that new goods with a different name character and use have come into existence and the upgraded products are chargeable to excise duty. Discuss in the light of provision of section 2(f) of the Central Excise Act, 1944 relating to “manufacture” whether this stand of theDepartment is justified.Answer :The computers covered under heading No. 84.71 of the Schedule to the Central Excise Tariff Act, 1985 are described as automatic data processing machines. An automatic data processing machine will be known by his name, irrespective of its capacity of storage and processing, which may be enhanced by increasing the hard disk capacity. RAM or by changing the mother board or the processor chip. However, it cannot be said that new goods with a different name, character and use have come into existence, which can be subjected to duty again. Accordingly, upgrading of old and used computer systems would not amount to manufacture, in so far as the upgradation does not bring into existence goods with a distinct new name, character and use.Problem 4.How would you arrive at the assessable value for the purpose of levy of excise duty from the following particulars-cum-duty selling price exclusive of sales-tax ` 10,000 – Rate of excise duty applicable to the product : 10.30% (including education cess) — Trade discount allowed – ` 1,200 – Freight ` 750.Answer :In computation of assessable value for the purpose of Levy of excise duty, trade discount and freight areallowed as deductions.Thus, —Net price = Selling Price – (Trade Discount + Freight)= ` 10,000 – (1,200 + 750)= ` 8,050Since the price is inclusive of excise duty @ 10.30%,Therefore,—Assessable Value = Selling Price x 100 100 Excise Duties = 8050 x 100 100 + 10.30 = 7,298.28Excise Duty will be ` 8,050 – 7,298.28 = ` 751.72Check : 10.30% of ` 7,298.28 is ` 751.72.Problem 5.X Ltd. is engaged in the manufacture of ‘paracetamol’ tablets that has an MRP of ` 9 per strip. The company cleared 1,00,000 tablets and distributed as physician’s samples. The goods are not covered by MRP, but the MRP includes 10.30% Excise Duty and 2% CST. If the cost of production of the tablet is 40 paise per tablet, determine the total duty payable.Answer :If the product is not covered under MRP provisions, valuation provisions under section 4A do not apply. In that case, valuation is required to be done as per Central Excise Valuation Rules. As per the CBEC’s circular, any physicians samples or other samples distributed free of cost are to be valued under Rule 11 read with Rule 8 of Central Excise Valuation Rules, 2000. As per Rule 8, such samples are to be valued at 110% of cost of production or manufacture. The given cost of production is 40 Ps, Assessable Value will be 44 Ps. Therefore, duty payable @ 10% on 46 paise = 10.30% × 0.46 = 0.047 paise per tablet.Problem 6.How would you arrive at the assessable value for the purpose of levy of excise duty from the following particulars:• Cum-duty selling price exclusive of sales tax ` 20,000• Rate of excise duty applicable to the product 10.30%• Trade discount allowed ` 2,400• Freight ` 1,500Answer:Trade discount of ` 2,400 and freight of ` 1,500 are allowed as deductions. Hence, net price will be ` 16,100 [` 20,000 – 2,400 – 1,500]. Since the price is inclusive of excise duty of 10.30%, Excise Duty will be ` (16,100 × 10.30)/110.30 i.e. ` 1,503.45 and Assessable Value will be ` 14,596.55 [16,100 – 1,503.45]Problem 7.H Ltd. purchased a Boring-Drilling machine at a cum-duty price of ` 32,14,476. The Excise duty rate charged on the said machine was @ 10.30%. The machine was purchased on 1-4-2009 and disposed of on 30-9-2010 for a price of ` 12 lakhs. The company was claiming depreciation @ 25% following Straight Line Method. Using the said information, answer the following questions :(i) What is the Excise duty paid on the machine?(ii) What is the Cenvat credit allowable under Cenvat Rules?(iii) What is the amount of Cenvat credit reversible or duty payable at the time of clearance of the said machinery?Answer:Cum-duty price ` 32,14,476Hence, Basic Price i.e. Assessable value = 32,14,476 × 100/110.30 = `29,14,303Excise duty paid = ` 3,00,173, i.e. 10.30% of ` 29,14,303.As per Cenvat Rules, 50% Cenvat credit can be availed in current financial year an balance 50% of Cenvat is allowable only in following financial year, if the capital Goods are in possession and use. Since the Capital goods were in use for six months in the year 2010-11, Cenvat of balance 50% is allowable.Cenvat allowable in the year 2009-10 ` 1,50,086.50 and Cenvat allowable in the year 2010-11 ` 1,50,086.50 As per Cenvat Credit Rules (as applicable upto 28-2-2003), an ‘amount’ equal to duty payable at the rate and value as applicable on the date of removal is payable. Hence, ‘amount’ payable at the time of disposal on 30-9-2010 is ` 12,00,000 × 10/100 i.e. ` 1,20,000. It may be noted that w.e.f. 1-3-2003, the Cenvat Credit Rules had been amended, and an ‘amount’ equal to Cenvat credit availed on goods is payable. Hence, in this case, an amount of ` 3,00,173 would have been payable, if clearance was after 1-3-2003.Problem 8.M/s. A.U.L. avail of CENVAT credit of the duty paid on the inputs namely, steel sheets. The scrap generated during the manufacture of their final product was cleared by them without payment of duty. Subsequently the Department raised a demand of Excise duty on waste and scrap. M/s. A.U.L. accepted the duty liability, but contended that the price at which waste and scrap had been sold should be considered to be cum-duty price and assessable value should be determined after deducting the element of excise duty. The contention of theDepartment is that as no central Excise duty was paid by them while clearing the scrap, no deduction on account of excise duty is available to M/s. A.U.L.Answer:The facts of the given ease are similar to those decided by the Supreme Court in C.C.Ex. v Maruti Udyog Ltd. (2002) 141 ELT 3 (SC) in the said case, the department raised duty demand on waste and scrap and the price realized by the assessee was taken as the assessable value. The assessee contended that the price of such waste and scrap was includive of excise duty. The Supreme Court decided the issue in favor of the assessee. Accordingly, in the given case, as the Department has raised duty demand on waste and scrap, the price collected by M/s. A.U.L. will be considered as the cum-duty price.THEORY QUESTIONS WITH SOLUTIONS:Q.1What is Excise Duty? Is it collected by the State Government or the Central Government? How is it different from Sales Tax?A.1Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called "State Excise" duty. The Excise duty on rest of goods is called "Central Excise" duty and is collected in terms of Section 3 of the Central Excise Act, 1944. Sales Tax is different from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act of manufacture or production of goods.Q.2Whether a manufacturer or producer of goods is required to obtain a license from the Central Excise department for payment of Central Excise duty?A.2No license is required and a simple registration with the Central Excise department would suffice.Q.3What categories of persons are required to obtain registration with the Central Excise department?A.3Subject to specified conditions, generally the following categories of persons are required to get themselves registered with the Central Excise department: (i) Every manufacturer of dutiable excisable goods; (ii) First and second stage dealers or importers desiring to issue Convictable invoices; (iii) Persons holding bonded warehouses for storing non-duty paid goods; (iv) persons who obtain excisable goods for availing end-use based exemption.Q 4: Whether there is any change in excise duty rates on packaged software after Ist January 2007? Ans: As per the existing provisions, there is no change in excise duty rate on packaged software after Ist January 2007. However, the classification of Information Technology software under the Central Excise Tariff will change after Ist Jan 2007. Q 5: What is the meaning of “Information Technology Software" under Excise or Customs law? Ans: As per supplementary Note to Chapter 85 of the Customs/Excise Tariff , " Information Technology Software" means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine. Q 6: Whether the SSI exemption benefit is available to Hardware or software manufacturer?Ans: Yes, the benefit of SSI exemption Notification 8/2003-CE dated 1-3-2003 is available to all manufacturers of Hardware or software whose annual turnover has not exceeded Rs. 4 crore in the preceding financial year.Q 7: Whether the activity of recording of software on the media or the Computer Hard disk amounts to manufacture under central excise? Ans: Yes, as per Chapter Note to Chapter 85 of the Central Excise Tariff, the activity of recording of sound or other phenomena on the media amounts to manufacture under Central Excise.Q8.Who is liable to pay Central Excise duty?Ans: The manufacturer who actually undertakes manufacturing activity is liable to pay Central Excise duty. A person does not become a manufacturer simply by supplying raw materials to the manufacturer or getting his goods manufactured according to his own specifications, brand name or trade name, etc. However, for the textile sector, the option is with the supplier of raw materials or with the job worker to pay duty.Q9.What is the rate of duty on various category of goods?Ans. The rate of duty on each item is specified in the Central Excise Tariff Act, 1985. In some cases, the statutory rates of duty have been lowered or reduced to Nil by the Central Government in terms of Section 5A of the Central Excise Act, 1944. Anyone interested in knowing the effective rates of duty in respect of any goods must refer to the Tariff or seek guidance from the nearest Central Excise Officer, if necessary.Q10. How and when Central Excise duty is to be paid?Ans. An SSI unit has to pay duty on monthly basis by 15th of the succeeding month (16th in case of e-payment). Other units are required to pay duty on monthly basis within 5 days (6 days in case of e-payment) of completion of the month in question. The assessee is required to deposit the amount of duty payable in the nominated bank along with the prescribed GAR-7 Challan and on this amount being credited in the government account, he can take credit in the PLA register. Such credited amount can then be utilized for discharging the duty on goods cleared from his factory. However, for the month of March, the duty has to be paid by 31st March, both for SSI and Non SSI units. Further, in case of default in payment of duty, the interest is leviable @ 13% starting from the date on which the duty was required to be paid till the date of payment (subject to the interest not exceeding the duty amount).Q11. What formality of Customs is to be fulfilled at the time of export from the factory or what is the procedure for export of goods?Ans. The assessee is required to inform the Superintendent/Inspector in the Range Office 24 hours in advance about the proposed consignment of export. The Central Excise officer remains present while stuffing the goods in the container. After completion of the stuffing, the container is sealed with the Central Excise seal in the presence of the said officer. Necessary documents such as ARE-1, invoice, packing list are also signed by the said officer. Self-sealing facility is also available under which the assessee himself stuffs the container and effects clearance. For more details, please contact the nearest Central Excise Range Office.Q12. What benefit does a 100% Export Oriented Unit get from the Central Excise?Ans. Subject to prescribed conditions, no Excise/Customs duty is payable on the capital goods, raw materials, spares, consumables, etc imported/indigenously procured by the 100% EOU.Q13. What is the procedure to be followed for setting up a 100% EOU?Ans. On obtaining LOP from the Development Commissioner; a manufacturer is required to approach the Commissioner of Central Excise for declaration of the place as a warehousing station under Section 9 of the Customs Act. Thereafter, the manufacturer is required to obtain private bonded warehouse licence under Section 58 of the Customs Act and permission to manufacture goods under Section 65 of the Customs Act from the jurisdictional Deputy/ Assistant Commissioner.Q14. What is the facility for mitigating the cascading effect of duty? What is CENVAT?Ans. In order to mitigate the cascading effect as a result of duty on duty, CENVAT Credit scheme is introduced under the CENVAT Credit Rules, 2004 facilitating the manufacturers/ Service providers to avail the credit of duties/Tax paid on the inputs/Capital goods/ Input services, subject to certain conditions. To avail the facility, the assessee has to obtain the documents specified in the CCR from the consignor and take credit of such duty amount in the account maintained for this purpose. The Credit can be utilized for the payment of the duty on the goods cleared from his factory. Please consult the nearest Central Excise Range Office for further information.Q15. What is the period for filing returns by the assessee?Ans. An SSI unit is required to file returns on quarterly basis within 20 days from the date of completion of the quarter, but non-SSI units are required to file returns on monthly basis within 10 days from the date of completion of the month.Q16. What is Excise Duty? Is it collected by the State Government or the Central Government? How is it different from Sales Tax?Ans. Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called “State Excise” duty. The Excise duty on rest of the goods is called “Central Excise” duty and is collected in terms of Section 3 of the Central Excise Act, 1944. Sales Tax is different from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act of manufacture or production of goods.Fill in the blanksDuty levied upon manufacturing of goods is known as excise duty.Basic excise duty is levied under section 3 of central excise Act at rates specified in first schedule to Central excise Tariff Act 1985.Goods manufactured in SEZ are excluded excisable.In case of goods stored in a warehouse under rule 20, duty liability is of the person who stores the goods.In case of job notification No. 214/86 CE , the raw material supplier under takes liability of duty.Education cess of 2% of duty has been imposed, which is payable on central excise, customs, service tax and income tax.Unless the test of marketability is satisfied the goods would not be subject to duty.The item should be capable of being bought or sold to test the marketability.Turnkey projects like steel plants, cement plants, power plants etc are excluded from excise duty.Raw material supplier can be treated as manufacturer when relation between manufacturer and supplier are on agency basis.Raw material supplier can be treated as manufacturer when there is no principal to principal relationship and job worker functions like a hired labor.Raw material supplier can be treated as manufacturer when person is employed by raw material supplier to manufacture the goods and returns it to himCentral excise tariff is divided in 20 sections.All goods are classified using 4 digit systemThe retail sale price should be the maximum price at which excisable goods in packaged forms are sold to ultimate consumer.Removing excisable goods without MRP or wrong MRP or tampering, altering or removing MRP declared on a package is an offence and goods are liable to confistication under section 4A (4)If some spare parts are supplied as free replacements for defective parts, excise duty is payable on such spare parts.Inputs for manufacturing pan masala cannot be procured without excise duty - Rule A of pan masala packing machines ( capacity determination and collection of duty) rules , 2008 w.e.f 5-3-2009As per section 4 excise duty is payable in basis of transaction value if the goods are sold at factory gate to an unrelated buyer when price is sole consideration. The basic act providing for charging of duty , valuation, penalty etc is central excise Act 1944( CEA).True or False:In Budget 2011-12 Standard rate of central exercise duty maintained at 10%. - TrueThe Concessional central excise duty rate of 4% is being increased to 5% and thus all goods currently attracting 4% duty will now attract 5% unless otherwise specified. -TrueExemptions from excise duty on Tooth Powder, is being withdrawn and concessional duty of 1% without CENVAT credit facility is being imposed on such good – True Excise Duty on LEDs reduced to 5% Full exemption from basic Excise Duty granted to enzyme based preparation for pre-tanning.- True Additional Duty of Excise on High Speed Diesel Oil is leviable by the Finance Act, 1999. This is commonly known as road cess. - TrueThe Central Board of Excise and Customs is the national agency responsible for administering Customs and Excise Laws in India –TrueCentral Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption.-TrueExcise duty is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers.-TrueIn India, Central Excise Act, 1944 Act which lays down the law relating to levy and collection of Central Excise duty.- TrueA manufacturer or producer of goods is required to obtain a license from the Central Excise department for payment of Central Excise duty – FalseCentral Excise registration is separately required by 100% EOU(Export Oriented Unit)-FalseIn Central Excise Tariff, against each item a rate of duty has been prescribed. These are normally termed as "tariff rates". –TrueExcise duty payable is based on the classification of goods given in the Central Excise Tariff Act, 1985 (CETA) the Act gives a list of items chargeable to Central Excise duty.- TrueThe term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985, as being subject to a duty of excise and includes salt.-TrueGenerally speaking, the Small Scale Units, who manufacture the goods specified in the relevant exemption notifications and fulfil the conditions specified in such exemption notifications, are exempt from payment of duty till their aggregate clearances do not exceed Rs.1 Crore in a financial year.-True Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called "Central Excise" duty- False(Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called "State Excise" duty)Supreme Court has asked manufacturers of laminated particle board will be liable to pay a higher excise duty as after processing, the product becomes a distinct marketable commodity different from the original one.-True Central Excise Commission rates deals with the tasks of formulation of policy concerning levy and collection of Customs and Central Excise duties, prevention of smuggling and administration of matters relating to Customs, Central Excise and Narcotics to the extent under CBEC's purview-False(Central Board of Excise and Customs (CBEC) deals with the tasks of formulation of policy concerning levy and collection of Customs and Central Excise duties, prevention of smuggling and administration of matters relating to Customs, Central Excise and Narcotics to the extent under CBEC's purview) Certain goods may also be subject to duty under some other Acts such as Additional Duty of Excise (Goods of Special Importance) Act, 1957 or certain Cess.-TrueThe valuation of the goods as per Central Excise Act 1944, can be determined on the following three basis Tariff Value, Transaction Value, Minimum Retail Sale Price-False (The valuation of the goods as per Central Excise Act 1944, can be determined on the following three basis Tariff Value, Transaction Value, Maximum Retail Sale Price)
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