Central Excise duty is an indirect tax which is levied and collected on the goods/commodities manufactured in India. Generally, manufacturer of commodities is responsible to pay duty to the Government. This indirect taxation is administered through an enactment of the Central Government viz., The Central Excise Act, 1944 and other connected rules- which provide for levy, collection and connected procedures. The rates at which the excise duty is to be collected are stipulated in the Central Excise Tariff Act, 1985. It is mandatory to pay Central Excise duty payable on the goods manufactured, unless exempted eg., duty is not payable on the goods exported out of India. Further various other exemptions are also notified by the Government from the payment of duty by the manufacturers.
Principles of Excise Control
1. CONSTITUTIONAL BACKGROUND
Constitution of India is foundation and source of powers to all laws in India. India is a Union of States. The structure of Government is federal in nature. Government of India (Central Government) has certain powers in respect of whole country. India is divided into various States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Article 246 of our Constitution indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called "Union List''). Entry 84 in Union List reads as follows :-
Entry No. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics.
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under entry No. 51 of list II of Seventh Schedule to the Constitution and it is called 'State Excise'. The Act, Rules and rates for excise on liquor are different for each State.Thus, power to levy Central Excise duty by Union Government is clearly based on constitutional authority.
2. BASIC CONDITIONS FOR 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 other than salt which are produced or manufactured in India - . - . -'. These words are same as those used in Entry No 84 to list I. This definition of Central Excise duty is vital, because it clearly signifies that there are four basic conditions for levy of Central Excise duty.
(1) The duty is on goods.
(2) The goods must be excisable.
(3) The goods must be manufactured or produced
(4) Such manufacture or production must be in India. Unless all of these conditions are satisfied, Central Excise Duty cannot be levied.
3. TYPES OF EXCISE DUTY
Excise duties are of following types
- Duties under Central Excise Act - Basic duty and special duty of excise are levied under Central Excise Act. Basic excise duty (also termed as Cenvat as per section 2A of CEA added w.e.f. 12-5-2000) is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption notification, if any. The general rate is 16% w.e.f. 1-3.2001. There is partial exemption of 8% and 4 % to a few products. Some commodities like pan masala, cars etc. are leviable with special duty.
- National Calamity Contingent Duty (NCD) - A 'National Calamity Continent Duty' has been imposed on cigarettes, biris, pan masala and miscellaneous tobacco products w.e.f. 1-3-2001.
- Additional Duty on goods of special importance - Some goods of special importance are levied Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
- Additional Duty on Textile Articles - Additional excise duty of 15% on certain textile and textile articles like articles of silk / wool / cotton, man-made filaments, metallised yarn etc. is imposed under Additional Duties of Excise (Textile and Textile Articles) Act, 1978. The revenue from these levies goes fully to Central Government.
- Duty on Medical and Toilet preparations - A duty of excise is imposed on medical preparations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
- Additional duty on mineral products - Additional duty on mineral products (like motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products (Additional Duties of Excise and Customs) Act, 1958.
- Cess - A cess has been imposed on certain products.
CLASSIFICATION OF GOODS
There are thousands of varieties of manufactured goods and all goods cannot carry the same rate or amount of duty. It is also not possible to identify all products individually. It is, therefore, necessary to identify the numerous products through groups and sub-groups and then to decide a rate of duty on each group/sub-group. This is called 'Classification' of a product, which means determination of heading or sub-heading under which the particular product will be covered. Excise is a duty on excisable goods manufactured or produced in India. The liability of payment of excise is on the Manufacturer. Once the liability of payment is established, the next question is what is the amount of duty payable. The two step process is
(a) Correctly classify the goods
(b) Find its assessable value.
The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 91 chapters (in fact 96 chapters out of which 5 are blank) and specific code is assigned to each item. There are over 1,000 tariff headings and 2,000 sub-headings. This classification forms basis for classifying the goods under particular Chapter head and Sub-head to prescribe duty to be charged on that particular product. Salient features of the tariff are as follows.
(1) CETA is Based on HSN - CETA is based on International convention of Harmonised System of Nomenclature (HSN), called Harmonised Commodity Description and Coding System. This is an International Nomenclature standard adopted by most of the Countries to ensure uniformity in classification in International Trade. Though CETA generally follows HSN pattern, it is not a copy of HSN. Often, there are wide variations between HSN and CETA. The CETA also varies significantly from Customs Tariff, though both are based on HSN.
(2) CETA contains two schedules - CETA consists of two schedules - the first schedule gives basic excise duties (i.e. Cenvat duty) leviable on various products, while second schedule gives list of items on which special excise duty is payable. Second schedule contains only few items. It has been clarified that the tariff headings given in second schedule will be interpreted in the same way as those in first schedule. Items included in second schedule are already covered and included in first schedule.
(3) Sections and Chapters of CEA - Tariff is divided in 20 sections. Each of 20 sections is related to a broader class of goods e.g. Section I is 'Animal Products', Section VII is 'Plastics and Articles thereof', Section XI is 'Textile and Textile Articles', Section XVII is 'Vehicles, Aircrafts, Vessels and associated transport equipment, etc. Section Notes are given at the beginning of each Section, which govern entries in that Section. These notes are applicable to all Chapters in that section.
Section divided in Chapters - Each of the sections is divided into various Chapters and each Chapter contains goods of one class. For example, Section XI relates to Textile and Textile Articles and within that Section, Chapter 50 is Silk, Chapter 51 is Wool, Chapter 52 is Cotton, Chapter 53 is other vegetable textile fabrics, Chapter 61 is Articles of Apparel and so on. There are 96 chapters out of which five are blank.
Chapter Notes - Chapter Notes are given at the beginning of each Chapter, which govern entries in that Chapter.
(4) Groups and Sub-groups within the Chapter - Each chapter is further divided into various headings depending on different types of goods belonging to same class of products. For instance, Chapter 50 relating to Silk is further divided into 5 headings. 50.01 relates to Silk worm cocoons, 50.02 relates to raw silk, 50.03 relates to silk waste, 50.04 relates to silk yarn and 50.05 relates to woven fabric of silk. The headings are sometimes divided into further sub-headings. For example 5004.11 means silk yarn containing 85% or more by weight of silk or silk waste, 5004.19 means containing less than 85% by weight of silk or silk waste.
Grouping of goods - The tariff is designed to group all goods relating to same industry and all the goods obtained from the same raw material under one Chapter in a progressive manner as far as possible. So far as practicable, Goods are classified beginning with raw materials and ending with finished products within the same chapter.
Six Digit classification - All excisable goods are classified using 4 digits system and 2 more digits are added for further sub-classification whenever required. In above example, first two digits i.e. '50' related to the Chapter Number, next two digits e.g. 01 or 02 relate to heading of the goods in that chapter and last 2 digits indicate sub-heading.
Coding of Single and Double dashes - Single dash (-) at the beginning of description indicates a group, while two dashes (- -) at the beginning indicate a sub-group. The single dash (-) indicates sub-classification of article covered by the heading, while double dash (- - ) is the sub-classification of the preceding article which has single dash (-) i.e. it is a sub-sub-classification.
(5) Broad grouping in CETA - Following is broad grouping of goods in CETA:
Animal Products (Section I - Chapters 2 to 5)
Vegetable Products (Section II - Chapters 7 to 14)
Animal or vegetable fats (Section III - Chapter 15)
Prepared foodstuffs, beverages (Section IV - Chapters 16 to 24)
Mineral Products (Section V - Chapters 25 to 27)
Chemicals, Fertilisers, soap etc. (Section VI - Chapters 28 to 38)
Plastics and Rubber and their articles (Section VII - Chapters 39 and 40)
Leather and articles (Section VIII - Chapters 41 to 43)
Wood, cork, straw and their articles (Section IX - Chapters 44 and 46)
Pulp, Paper, Paper-board and articles (Section X - Chapters 47 to 49)
Textile and Textile Products (Section XI - Chapters 50 to 63)
Footwear, Headgear, Umbrellas, Articles of human hair (Section XII - Chapters 64 to 67).
Articles of stone, plaster, ceramic, glass (Section XIII - Chapters 68 to 70)
Pearls, precious metals (Section XIV - Chapter 71)
Base metals and articles of base metal (Iron, Steel, Copper, Nickel, Zinc, Tin etc.). (Section XV - Chapters 72 to 83)
Machinery and mechanical appliances, electrical equipments, television etc. (Section XVI - Chapters 84 and 85)
Vehicles, Aircrafts, vessels ( Section XVII - Chapters 86 to 89)
Optical, photographic, medical, surgical instruments, clocks, musical instruments
(Section XVIII - Chapters 90 to 92)
Arms and Ammunition (Section XIX - Chapter 93)
(6) Steps of classification - Following are the steps of classification.
(1) Refer the heading and sub-heading. Read corresponding Section Notes and Chapter Notes. If there is no ambiguity or confusion, the classification is final and you do not have to look to classification rules or trade practice or dictionary meaning.
(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be established, find technical or dictionary meaning of the term used in the tariff. You may also refer to BIS or other standards, but trade parlance is most important.
(3) If goods are incomplete or un-finished, but classification of finished product is known, find if the un-finished item has essential characteristics of finished goods. If so, classify in same heading.
(4) If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific heading
(5) If problem is not resolved, find which material or component is giving 'essential character' to the goods in question.
(6) If both are equally specific, find which comes last in the Tariff and take it -
(7) If you are unable to find any entry which matches the goods in question, find goods which are most akin.
Valuation under Central Excise
After duty liability is established and after the product is correctly classified, the next question is 'What is the Excise Duty payable ' If you refer to CETA, you will find that some rates are fixed on per Kg or per quintal basis, while some rates are based on '%' basis. This percentage is the % of 'Assessable Value' of goods fixed as per section 4 of Central Excise Act.
Excise duty is payable on one of the following basis :
Duty as % of Tariff Value fixed under Section 3(2).
Duty based on Maximum Retail Price printed on carton after allowing deductions - section 4A of CEA (added w.e.f. 14.5.1997)
Duty as % based on Assessable Value fixed under Section 4 (ad valorem duty)
(1) Specific Duty - It is the duty payable on the basis of certain unit like weight, length, volume, thickness etc. For example, duty on Cigarette is payable on the basis of length of the Cigarette, duty on sugar is based on per Kg basis etc. Presently, specific rates have been announced for - (a) cigarettes (b) Matches (c) Marble slabs and tiles (d) Colour TV when MRP is not marked on the package or when MRP is not the sole consideration.
(2) Tariff value - In some cases, tariff value is fixed by Government from time to time. This is a "Notional Value" for purpose of calculating the duty payable. Once 'tariff value for a commodity is fixed, duty is payable as percentage of this 'tariff value' and not the Assessable Value fixed u/s 4. This is fixed u/s 3(2) of Central Excise Act. Government can fix different tariff values for different classes of goods or goods manufactured by different classes or sold to different classes of buyers. Presently, tariff values have been fixed for pan masala packed in retail packs of less than 10 gm per pack, vide notification No 16/98-CE(NT) dated 2nd June 1998.
(3) Value based on Retail Sale Price - Section 4A of CEA (inserted w.e.f. 14.5.1997) empowers Central Government to specify goods on which duty will be payable based on 'retail sale price'. The provisions are as follows -
(a) The goods should be covered under provisions of Standards of Weights and Measures Act
(b) Central Government can permit reasonable abatement (deductions) from the 'retail sale price'. While allowing such abatement, Central government shall take into account excise
duty, sales tax and other taxes payable on the goods
(c) If more than one 'retail sale price' is printed on the same packing, the maximum of such retail price will be considered
(d) The 'retail sale price' should be the maximum price at which excisable goods in packaged forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges towards advertisement, delivery, packing, forwarding charges etc.
(e) Central Government has to issue a notification in Official gazette specifying the commodities for which the provision is applicable and the abatements permissible
(4) Ad valorem Duty - Fixing specific duty or tariff value is possible only for few selected items like Sugar, pan masala, consumer goods, Cigarette etc. Generally, it is not practicable to fix specific duty or tariff value for numerous products produced. Similarly, paying duty on the basis of MRP is possible only in respect of a few selected commodities. In other cases, Central Excise is payable on the basis of value. This is called "ad valorem duty". The 'assessable value' is arrived at on the basis of Section 4 of the Central Excise Act and rules made thereunder. Duty is payable on the basis of such value.
What is Assessable Value (AV)
Assessable Value (AV) is the 'Value' on which duty is payable as a percentage. Generally, by 'Value', we understand the price as mentioned in Bill or Invoice. However, for excise purposes, it is not possible to fully rely on such price as (a) Duty is payable even if goods are not sold (b) It is desirable to have uniform policy in fixing the AV (c) Chances of manipulation in such price should be minimum.
Background of changes in respect of valuation - The original section 4 of the Act provided for a 'deemed value' for purpose of valuation. The duty was based on normal wholesale price at factory gate. Section 4 was completely revamped in 1975. However, controversies continued even after amendments to section 4 of the Act. The valuation mechanism was made simple, user-friendly and also on commercially acceptable lines from 1st July, 2000, The existing section 4 of Central Excise Act, which is based on concept of 'normal price', was replaced by a new section based on 'transaction value' for assessment. This is a path breaking departure from the traditional approach.
Concept of valuation is a radical departure from past - Practically, it may be true that new section 4 is not radically different from old section 4. However, conceptually, the old section 4 and new section 4 are radically different. Old section 4 was based on 'normal whole at which such goods are ordinarily sold at the factory gate to an unrelated buyer'. Thus, it was a 'deemed value', which may or may not tally with the Invoice price. However, new section 4 has scrapped that concept totally. The price in respect of each removal of goods will be 'transaction value'. Provisions in earlier section 4 in respect of packing charges, durable and returnable packing, class of buyer and trade discount are completely absent in new section 4.
Thus, most of the case law under old section 4 has become of doubtful validity. Each item of payment and expenditure will now be freshly scrutinised.
Basis of Assessable Value - As per new section 4 w.e.f. 1st July, 2000, excise duty is payable on basis of 'transaction value', if the goods are sold at the factory gate to an unrelated buyer when price is the sole consideration. If these requirements are not satisfied, valuation will be done as per Valuation Rules. - section 4(1)(b)
The basic provisions of new Section 4(1)(a) state that 'assessable value' when duty of excise is chargeable on excisable goods with reference to value will be 'transaction value' on each removal of goods, if following conditions are satisfied -
The goods should be sold at the time and place of removal.
Buyer and assessee should not be related
Price should be the sole consideration for the sale.
Valuation Rules to determine Assessable Value
Section 4(1)(b) of the Central Excise Act states that if Assessable Value' cannot be determined u/s 4(1)(a), it shall be determined in such manner as may be prescribed by rules. Under these powers, Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 have been made effective from 1-7-2000.
1. Value nearest to time of removal if goods not sold - If goods are not sold at the time of removal, then value will be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject to reasonable adjustments. [Rule 4]. This rule applies when price at the time of removal is not available as the goods are not sold by the assessee at the time of removal. Thus, this rule should apply in case of removal of free samples or supply under warranty claims. In case of removal of samples or free replacement under warranty claims, duty will be payable on price of identical goods sold by assessee near about the time of removal of the samples.
This rule should not apply in respect of depot transfer or branch transfer or in case of sale to 'related person' as specific provisions have been made. This provision should also not apply for 'job work' as indeed in case of 'job work' there is no 'sale' of goods.
2. Goods sold at different place - Some times, goods may be sold at place other than the place of removal e.g. in case of FOR delivery contract. In such cases, actual cost of transportation from place of removal upto place of delivery of the excisable goods will be allowable as deduction, if these are charged separately in invoice on actual basis. [rule 5]. - . - In short, if transport charges are collected separately in the Invoice on actual basis, these will be allowed as deduction.
3. Provision when price is not the sole consideration - If price is not the sole consideration for sale, the 'Assessable Value' will be the price charged by assessee, plus money value of the additional consideration received. The buyer may supply any of the following directly or indirectly, free or at reduced cost.
(i) Materials, components, parts and similar items
(ii) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used
(iii) Material consumed, including packaging materials
(iv) Engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of the goods
4. Sale at depot / consignment agent - When goods are sold through depot, there is no 'sale' at the time of removal from factory. In such cases, price prevailing at depot (but at the time of removal from factory) shall be the basis of Assessable Value. The value should be 'normal transaction value' of such goods sold from the depot at the time of removal or at the nearest time of removal from factory. [rule 7]
For example, if an assessee transfers a consignment of paper to his depot from Delhi to Agra on 5.7.2000, and that variety and quality of paper is normally being sold at the Agra depot on 5.7.2000 at transaction value of Rs. 15,000 per tonne to unrelated buyers, where price is the sole consideration for sale, the consignment cleared from
the factory at Delhi on 5.7.2000 shall be assessed to duty on the basis of Rs. 15,000 per tonne as the assessable value. If assuming that on 5.7.2000 there were no sales of that variety from Agra depot but the sales were effected on 1.7.2000, then the normal transaction value on 1.7.2000 from the Agra depot to unrelated buyers, where price is the sole consideration shall be the basis of assessment. [Illustration given in the departmental circular dated 30-6-2000].
In short, price ruling at the depot, but at the time of removal from the factory will be relevant. It does not matter if subsequently the goods are actually sold from depot at higher or lower price.At times, there are wide fluctuations in prices and depot prices may change frequently. This eventuality is indeed not envisaged in 'stock transfer' as 'stock transfer' or 'branch transfer' is envisaged only of standard products with fixed ex-depot prices. However, fluctuations in prices at depot is a practical reality. In such cases, assessee may resort to assessment on provisional basis.
Meaning of 'normal transaction value' - As per Valuation Rule 2(b), "normal transaction value" means the transaction value at which the greatest aggregate quantity of goods are sold. The term 'greatest aggregate quantity' is used in rule 7 of Customs Valuation Rules. This rule states that while considering selling price of imported goods in India, unit price at which greatest aggregate quantity of identical or similar goods are sold to unrelated persons in India should be the basis. e.g. if 65 units are sold @ Rs. 100, 55 units are sold @ Rs. 95 and 80 units are sold @ Rs. 90; then greatest aggregate quantity is 80 which is sold @ Rs. 90 per unit, which will be the basis for valuation. This principle should apply in deciding 'normal transaction value' under rule 2(b) also.
5. Buyer should not be known in stock transfer- It may be noted that 'stock transfer' or 'branch transfer' envisages despatch of goods of standard size and specifications to the depots / branches. Goods should not be despatched or identified for a particular buyer. If the buyer is known or identified before despatch of goods from the factory, it is a sale and not a stock transfer. In short, stock transfer of tailor made goods is a bogus stock transfer. (shown just to save sales tax).
6. Valuation in case of captive consumption - In case of captive consumption, valuation shall be done on basis of cost of production plus 15%. (Rule 8 of Valuation Rules). Captive consumption means goods are not sold but consumed within the factory.
In case goods are supplied to a 'related person' but consumed by the related person and not sold, valuation will be done on the basis of cost of production plus 15%. [Proviso to rule 9]
The simplified provision has been probably made as in most of the cases, the buyer will be able get Cenvat credit of duty paid on inputs and there is hardly any incentive to avoid any payment of duty.
Normally, certificate from Cost / Chartered Accountant in respect of cost of production should be obtained. As per normal costing principles, 'cost of production' should include production overheads and proportionate share of administrative overheads. However, since the term used is 'cost of production', sales overheads should not be considered. As per department's earlier circular No. 258/92-96-CX dated 30-10-1996, cost of production of goods should be determined so as to include cost of material, labour cost and overheads including administrative cost, advertising expenses, depreciation, interest etc. Board had advised that CA certificate and profit and loss statement should be scrutinised carefully and should not be accepted blindly or automatically. Other instructions in the circular regarding calculation of profit margin have now become redundant. [In the opinion of author, advertisement costs in relation to selling expenses should not form part of 'cost of production'].
Material Cost should be exclusive of duty paid on inputs and cost of as material handling of inputs should be included in view of case law discussed above.
Thus, the formula for determining value is simple. If the cost of production based upon general principles of costing of a commodity is Rs. 10,000 per unit, the assessable value of the goods shall be Rs. 11,500 per unit.
7. Goods sold solely through related person - If goods are sold solely through a 'related person', price at which such related person makes onward sale to an independent buyer will be the 'Assessable Value'. Definition of 'related person' as contained in section 4(3)(b) covered 'inter connected undertakings' as defined under MRTP Act. This would have affected many assessees. However, the definition has been made almost ineffective in Valuation Rules. Provisions in respect of sale to related buyer are covered in rules 9 and 10 of Central Excise Valuation Rules, 2000. For sake of convenience, these are discussed under 'Related Person' and hence are not discussed here.
8. Best judgment Assessment - If assessment is not possible under any of the foregoing rules, assessment will be done by 'best judgment'. If the value of any excisable goods cannot be determined under the foregoing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of section 4 of the Act. [Rule 11]