CENTRAL EXCISE

1. LEVY OF EXCISE DUTY The power to levy a duty of excise manufactured or produced in India derives its authority from entry 84 of the Union List (List I) of Seventh Schedule read with Article 246 of the Constitution of India. Thus, Central Excise is a tax on the act of manufacture or production. Section 3 of the Central Excise Act, 1944 (hereinafter referred to as "the Act") is the charging section, which specifies the conditions under which Excise Duty is leviable on all excisable goods which are manufactured or produced in India. Education Cess is a duty of excise which is to be levied @ 2% of the aggregate duty of excise (vide Finance Act, 2004). As Education Cess and Higher Education Cess is a new levy it will not be payable on the opening stock of finished goods as on day 8-7-2004. The Secondary and Higher Education cess is payable at the rate of 1% on excise duty payable under section 3 of Central Excise Act with effect from 1-3-2007. 2. MEANING OF "MANUFACTURE" 2.1 The taxable event for Central Excise duty to be attracted is manufacture or production in India of excisable goods. Section 2(f) of the Act defines the term "manufacture" in an inclusive manner so as to include any process: (i) Incidental or ancillary to the completion of a manufactured product; and (ii) Which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; and (iii) Which in relation to goods specified in the Third Schedule to the Central Excise Tariff Act, 1985, involves packing or repacking of such goods in a unit, container or labelling or re-labelling of containers or declaration or alteration of retail sale price or any other treatment to render the product marketable to consumer. (The clauses (ii) and (iii) above are termed as deemed manufacture.) The aforesaid definition gives a wider content to the expression "manufacture" as several processes which would not ordinarily be understood as amounting to manufacture are specifically included therein. However, the most commonly used test for ascertaining "manufacture" for the purpose of attracting Central Excise duty has taken place was evolved by the Supreme Court in the case of Delhi Cloth and General Mills 1977 (1) ELT (J 199). In terms of this decision, the activity or process in order to amount to "manufacture" must lead to emergence of a new commercial product, different from the one with which the process started. In other words, it must be an article with different name, character or use. Thus, a process which simply changes the form or size of the same article or substance would not ordinarily amount to manufacture and no excise duty would be payable unless it is deemed to be manufacture as follows: In a particular case by a section or Chapter note of the Tariff; or

In relation to goods, which are specified under MRP based assessment under section 4A, packing or repacking of such goods, labelling or re-labelling of containers including declaration or alteration of retail sales price shall amount to manufacture.

2.2. MEANING OF "GOODS" Central Excise duty is levied on goods which are manufactured or produced. The understanding of term goods is of vide importance in determining the leviability of Excise Duty. The Act does not define the term "goods". The judgment of the Supreme Court in the case of Delhi Cloth and General Mills (supra) is considered to be the landmark judgment in this regard, where it is held that an an article can be called "goods" if it is known to the market as such and can ordinarily come to the market for being bought and sold. Actual sale of the article is not important but it must be capable of being bought and sold. The marketability element of goods was enumerated in Union of India and Others, Appellants vs. Sonic Electro Chem (P) Ltd. 2002 (52) RLT 878 (SC) where the Supreme Court held that the essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold. Whether immovable things are goods or not, was clarified in the case of Triveni Engg. vs. CCE 2000 (120) ELT 273 by the Supreme Court where it was observed that immovable property or articles embedded to earth, erections, turnkey projects are not generally termed as "goods" because they cannot ordinarily come to the market to be bought and sold. The Explanation is added by Finance Act, 2008 under section 2(d) provides that goods includes any article, material or substance which is capable of being sold for consideration and such goods shall be deemed to be marketable. 2.3. MANUFACTURER DUTY LIABILITY The definition of manufacturer under the Act is an inclusive one and broadly specifies two categories of manufacturer; i.e., one who manufactures on his own account or one gets the goods manufactured through hired labour. Thus we can construe the meaning of the word manufacturer as understood in common terminology. Manufacturer may be understood as any person who is the creator, initiator and architect of the activities and the processes, which bring in existence a new and identifiable product/goods in the market. Thus a manufacturer is the one who undertakes manufacturing activity in reality. A purchaser of goods does not become manufacturer, he can only be termed as a supplier of raw material, if applicable or a person who gets goods manufactured according to his specifications or with his brand name. Here, it is worthwhile to mention that such contracts are on a principal to principal basis. A person supplying the raw material cannot be considered as hiring the job worker if he does not supervise and control the activities of the job worker. However if the manufacturer is a dummy or fake unit, then the raw material supplier or the brand name owner is deemed to be the actual manufacturer. Section 3A incorporated in the Statute by Finance Act, 2008 provides power to the Central Government to charge excise duty on the basis of capacity to manufacture by manufacturer himself in respect of notified goods. Till today, the product under

this sub-section has not been notified. Once the product has been notified, excise duty will be payable on the basis of capacity. 3. PRINCIPALS OF CLASSIFICATION 3.1 The charging section; i.e., section 3 specifies that the rates of Central Excise Duty shall be the rates as are specified in the Schedules to the Central Excise Tariff Act, 1985 (hereinafter referred to as "the Tariff"). The classification of goods in the Central Excise Tariff Act is comprised in two schedules; the First Schedule specifies the basic rate of excise duty and the Second Schedule specifies the special rate of excise duty. The first contains 96 Chapters grouped into 20 sections and has been selectively aligned with the Harmonised System of Nomenclature (The International Nomenclature adopted by more than 130 countries for international trade). The correct classification of goods is necessary to ascertain the rate of duty on it. Thus, it is essential to determine the right heading or sub-heading of the Tariff under which the goods fall. This process of determining the right place of the goods in the tariff is called classification of goods. The chapter description read along with the section and chapter give us the classification statutorily, and in absence thereof the classification has to be done on trade or commercial parlance. The schedule to the Central Excise Act provides the following rules for interpretation of the tariff to aid in the classification of goods: (i) A reference to a product includes an incomplete or unfinished product provided that the incomplete or unfinished product has the essential character of complete or finished goods. (ii) A reference in heading to a material includes the reference to a mixture or combination of that product. The classification of goods consisting of more than one material shall be decided on the basis of the material which gives the essential character to the product. (iii) A specific heading should be preferred to the more general heading. (iv) In case the classification cannot be decided on the basis of above principle, the product shall be classified under a heading, which occurs last in the chapter/heading/sub-heading. 3.2 Importance of notification The rate of duty prescribed against each of sub-heading specified in schedule to the Central Excise Tariff Act is known as tariff rate. The effective rate of duty must be ascertained by considering the various notification issued from time to time. The tariff rate read with the rate prescribed in the notification determined the effective rate of duty payable on clearance of goods. 4. VALUATION 4.1 Introduction

The levy of duty requires the valuation of the goods under consideration after establishing the duty liability and the classification of the goods. Except in cases where specific duty has been provided for on the basis of certain unit like weight, length, etc. as in case of goods like cigarettes (length basis), cement clinkers (per ton basis), for most of the goods the rates are specified on an ad valorem basis; i.e., expressed as a percentage of value of goods. Thus for calculating the amount of duty payable, first the assessable value of the goods has to be determined under the provisions. 4.2 The modes of valuation of goods under the Excise Act are: (A) Tariff value The Central Government is authorized under the provisions of section 3(2) of the Act, to fix the tariff value for any goods which may be different for different classes of goods. This is also termed as the notional value. The duty in such cases is the % of such tariff value and not the Assessable Value. (B) M.R.P. value The Central Government under section 4A of the Act can notify goods on which excise duty will be payable on the MRP less % of abatement. Such value shall be deemed to be the assessable value in such cases. The provisions of this section are applicable to products which are statutorily required to put MRP under the Standards of Weight and Measures Act, 1976, or any other law and in respect of which specific notification has been issued. (C) Transaction value (i) In respect of all other goods which are not covered by the abovementioned provisions, their assessable value would be in terms of "transaction value" as provided in section 4 of the Act. The assessable value would be the transaction value when the goods are sold by an assessee for delivery at the time and place of removal, where the assessee and the buyer are not related and price is the sole consideration. In all other cases, which do not fulfil the aforesaid conditions, value shall be determined as per the Central Excise Valuation Rules, 2000. The definition of transaction value as per section 4(3)(d) means the price actually paid or payable for the goods when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to or on behalf of, the assessee by reason of or in connection with the sale, whether at the time of sale or any other time. The definition gives an inclusive but not exhaustive list of additions and deductions from the invoice price in respect of certain amounts. (ii) The valuation rules have to be followed when transaction value cannot be determined under section 4(1); which are enumerated below: (a) If goods are not sold at the time of removal, the value of excisable goods shall be value of goods sold by the manufacturer for delivery at any other time nearest to the time of removal of goods except in cases

of stock /branch transfer, sale to related person, job work where specific provisions have been made. (Rule 4) (b) In case goods are sold for delivery at any other place other than the place of removal, the value will be the price less the actual cost of transportation from place of removal to the place of delivery. (Rule 5) (c) In case the price is not the sole consideration in respect of any transaction, the value of goods shall be the aggregate of such transaction value and the amount of money value of additional consideration flowing directly or indirectly from buyer to the assessee. (Rule 6) (d) In case where goods are cleared to depot, consignment agent etc., transaction value shall be the normal transaction value of such goods sold from such other place at or about the same time. The normal transaction value is the price at which the greatest aggregate quantity of goods are sold. (Rule 7) (e) In case of consumption of goods captively; i.e., consumed by the assessee or on his behalf, the value shall be 110% of the cost of production. (Rule 8) (f) In case of sale of goods to a related person, the value shall be the price at which the related person has sold the goods to an unrelated person. In case a related person does not sell the goods but uses or consumes the goods in production or manufacture of the article, the value shall be 115% of the cost of production. (Rule 9) (iii) The following deduction can be made from the transaction value for determination of value under section 4 (a) Trade discount The Board has clarified as follows: "Discount of any type or description given on any normal price payable for any transaction will not form part of the transaction value for the goods; e.g., quantity discount for goods purchased or cash discount for the prompt payment etc. will therefore not form part of the transaction value. However, it is important to establish that the discount has actually been passed on to the buyer of the goods. The different type of discounts extended as per commercial considerations on different transactions to unrelated buyers if extended is also permissible and different actual prices paid or payable for various transactions are to be accepted." "The Larger Bench of Tribunal in the case of Arvind Mills Ltd. 2006 (204) ELT 570 (Tri LB) has held that even the new section 4 introduced w.e.f. 1-7-2000, quantum of cash discount offered to the customer should be allowed as deduction even if some of the

customers has not availed the benefit of cash discount. Cash discount in such case will not be passed on to the customers as the customers has not paid within the stipulated period". (b) Tax and duties The definition of transaction value stipulate that excise duty, sales tax and other taxes paid or payable shall be excluded from the transaction value. (c) Freight The cost of transportation can be excluded even when freight is averaged and also there is no condition that the cost of transportation should be shown separately in the invoice. The cost of transportation will include the cost of insurance during transportation of goods. (d) Interest for delayed payment Interest for delayed payments is a normal practice in industry. Interest under a financing arrangement entered between the assessee and the buyer relating to the purchase of excisable goods shall not be regarded as part of the assessable value provided that: The interest charges are clearly distinguished from the price actually paid or payable for the goods. The financing arrangement is made in writing; and Where required, assessee demonstrates that such goods are actually sold at the price declared as the price actually paid or payable. (e) Erection, installation and commissioning charges If the product after erection, installation and commissioning is not excisable the question of including these charges in the assessable value of the product does not arise. (iv) Inclusion in the price Some of the expenditures like packing charges, designing and engineering charges, handling charges incurred within the factory are required to be included in the price if they are not already included. 5. REGISTRATION Section 6 provides that any person who is engaged in the production or manufacture of specified goods or the wholesaler engaged in purchase or sale or the storage of any specified goods shall be liable to get himself registered with the proper officer as per provision contained in Rule 9 of the Central Excise Rules.

Thus manufacturers or dealers who intend to issue cenvatable invoices should get registered themselves. Application for registration has to be made in Form A-1 in the office of the jurisdictional AC/DC. The assessee will be issued a 15 digit registration number and a registration certificate on completion of the registration procedure. The notification No. 36/2001 (NT) provides exemption from registration to the following persons: (i) Person who manufactures those goods which are chargeable to NIL rate of duty or remains fully exempt from whole of duty. However if the exemption from payment of whole of duty is based on the value of clearance made in a financial year, the value of clearance shall not exceed Rs. 1.5 crore. Such manufacturer shall file the declaration in prescribed form with the jurisdictional AC/DC if his value of clearance in the previous financial year exceeds Rs. 90 lakhs. (ii) Person manufacturing excisable goods by following the warehousing procedure as provided in the Custom Act, 1962. (iii) Person engaged in the wholesale trade except first stage dealer and second stage dealer. (iv) Person who uses excisable goods in any purpose other than processing or manufacture of any goods availing benefit of exemption. 6. PROCEDURE FOR CLEARANCE OF GOODS FROM FACTORY As per Rules 8, 10, 11 & 12 of Central Excise Rules, 2002, registered person is required to follow the following procedure for clearance of goods: (a) Maintain Daily Stock Account (DSA) indicating the opening balance, quantity produced, inventory of goods, quantity removed, assessable value, the amount of duty payable and duty paid on manufactured goods. (b) The goods should be removed under invoice. The invoice shall be prepared in triplicate. Original for buyer, duplicate for transporter and triplicate for assessee. It shall be serially numbered and shall contain the registration number, name of the consignee, description, classification, time and date of removal, mode of transportation, vehicle registration number, rate of duty, quantity and value of goods and duty payable thereon. (c) The excise duty on the goods removed shall be paid by 5th of the following month but the goods removed during the month of March the duty shall be paid by 31st March. However, in case of small scale manufacturer the duty is payable by 5th of the following month after end of the quarter. In this case also the duty for quarter Jan to March is payable by 31st March.

(d) The ER-1 return shall be filed within 10 days from the close of the month to which the return relates. However where the assessee has availed the benefit of the notification providing exemption based on value of clearance in a financial year, he shall file the return within 10 days after the end of quarter. 7. RULE 7 Rule 7 of the Central Excise, 2002 provides that where assessee is unable to determine the value of excisable goods or the rate of duty he shall request the Assistant Commissioner or Deputy Commissioner for permitting him to make the assessment provisional. The Assistant Commissioner will ask the assessee to execute bond supported by Bank Guarantee to make the assessment provisional. 8. SMALL SCALE BENEFIT 8.1 This notification provides exemption from whole of duty leviable on goods specified in annexure to the notification up to the aggregate value of clearance of Rs. 1,50,00,000/- . In computing 1,50,00,000/- the following clearance shall not be taken in account: a) Clearances, which are exempt from the whole of the excise duty leviable thereon ( other than an exemption based on quantity or value of clearances) under any other notification or on which no excise duty is payable for any other reason; b) Clearances bearing the brand name or trade name of another person, which are ineligible for the grant of this exemption in terms of paragraph 4; c) Clearances of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods; 8.2 The benefit is available to small scale manufacturer where: a) The value of clearance in the previous financial year shall not be exceeds Rs. 4 crore b) The goods have not been affixed with the brands name of other person. In computing the value of clearance of Rs. 4 crores. The following clearance shall not be considered : a) Clearance of excisable goods without payment of duty i) To a unit in a free trade zone or ii) To a unit in a special economic zone; or iii) To a hundred percent export oriented undertaking; or

iv) To a unit in an Electronic Hardware Technology Park or Software Technology Park; or v) Supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification No. 108/95. b) Clearance bearing the brand name or trade name of another person, which are ineligible for the grant of this exemption in terms of paragraph 4 of the notification. c) Clearance of the specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of the specified goods. d) Clearance, which are exempt from the whole of the excise duty leviable thereon under notification No. 214/86-Central Excise or No. 83/94-Central Excise or 84/94- Central Excise. 8.3 If a manufacturer clears the specified goods from one or more factory the exemption shall applicable to the aggregate value of clearance of all the products cleared by the manufacturer from all the factories. 8.4 Where the specified goods are cleared by one or more manufacturer from the facto the exemption shall apply to aggregate value of clearance of specified goods by all the manufacturers. The exemption will not available separately to each manufacturer. 9. RECOVERY OF DUTY As per the provision of section 11A the show cause notice for recovery of duty short paid, short levied or not paid or not levied or refunded erroneously shall be served by the proper officer within a period of one year from the relevant date. In case the demand for duty arises on account of fraud, collusion, misstatement or suppression for facts or contravention of any of the provisions of the Act or rules with intent to evade payment of duty the period of one year will be extended to 5 years. The Central Excise Officer after considering the submission made in reply to show cause notice as well as during personal hearing shall pass the order called Order-InOriginal either confirming the demand or dropping the demand or partly confirming the demand and levy of penalty and interest. An appeal can be filed by the aggrieved person against order-in-original. 9.1 Interest is also payable on the demand of duty under section 11AB of Central Excise Act. The interest on demand of duty is payable from the date of the month succeeding the month in which duty ought to have been paid under this Act or from the date of erroneous refund granted as the case may be. 10. APPELLATE PROCEDURE

10.1 Powers of Committee of Chief Commissioner of Central Excise or Commissioner of Central Excise The Committee of Chief Commissioner of Central Excise shall examine the records of any order passed by the Commissioner of Central Excise as Adjudicating Authority under this Act and if they are not satisfied as to the legality or proprietary of any such decision or order, they shall direct the Commissioner to file an appeal to the Appellate Tribunal for determination of such points arising out of the decision or order. The Committee of Commissioner of Central Excise shall examine the records of any proceedings in which officer subordinate to him has passed the adjudicating order under this act for the purpose of satisfying as to the legality or proprietary of such decision. In case the Commissioner of Central Excise is not satisfied, he shall direct such authority or any Central Excise officer to appeal to the Commissioner of Central Excise (Appeal) for decision. 10.2 Time Limit and appellate authority The time limit for filing an appeal before Commissioner of Appeals will be sixty days against the order-in-original passed by an officer of Excise/Customs below the rank of Commissioner. In the case of an appealable order passed by the Commissioner (Additional Commissioner is not regarded as Commissioner for this purpose) or by Commissioner of Appeals, appeal can be filed before the CESTAT within three months. The Larger Bench of the Tribunal has held in Eicher Motors vs. Commissioner 2000 (116) ELT 306 that only one appeal to the Tribunal need be filed where the impugned order is one irrespective of the number of show cause notices or bills of entry it relates to. 10.3 Appeal to Customs, Excise and Service Tax Appellate Tribunal An appeal against the order passed by the Commissioner of Excise/Customs as an adjudicating authority or an order passed by the Commissioner (appeals) lies to the Customs, Excise and Service Tax Appellate Tribunal [earlier CEGAT (Customs Excise and Gold (Control) Appellate Tribunal)] which is formed under the provisions of the Act. However, under Excise in matters of loss of goods occurring in transit from factory to warehouse, rebate on duty of goods exported and goods exported without payment of duty, and similarly under the custom provisions in matters of order in relation to baggage, goods short-landed, or payment of duty drawback by the Commissioner (Appeals), the Tribunal is not empowered to admit the appeal. In such cases, a revision application has to be filed to the Government under the provisions of section 35EE of the Central Excise Act, 1944 (parallel section 129DD of the Customs Act). Section 35G of the Central Excise Act, 1944 (parallel section 130 of the Customs Act) is amended regarding appeals from the orders of the CESTAT. 10.3.2 Appeals against the orders of the Tribunal on matters other than relating to the determination of any question having a relation to the rate of duty of customs or to the value of goods shall be filed in the High Court. The High Court will formulate the question of law after satisfying itself that substantial question of law is involved. The new provision shall apply to the orders of the Tribunal on or after 1st of July, 2003. The appeal is to be filed within 180 days of the receipt of the order appealed against by the Commissioner or the other party. The amendment in the Central

Excise Act empowers the High Court to condone the delay in filing of the appeal in cases where the appeal is filed beyond 180 days and there is sufficient cause for non filing of appeal within time. 10.3.3 An appeal shall lie to the Supreme Court from Any judgment of the High Court delivered (a) (i) In an appeal made under section 35G of the Central Excise Act, 1944 (parallel section 130 of the Customs Act); (ii) On a reference made under section 35G of the Central Excise Act, 1944 by the Tribunal before 1st July, 2003 (parallel section 130 of the Customs Act); (iii) On the reference made under section 35H of the Central Excise Act, 1944 (parallel section 130A of the Customs Act), In any other case, which on its own motion on an oral application made by or on behalf of the party aggrieved, immediately after passing of the judgement, the High Court certifies to be a fit one for appeal to the Supreme Court. (b) in an appeal against any order passed by the Appellate Tribunal relating, among other things, to the determination of any question having a relation to the rate of duty of Excise/ Customs or to the value of goods for purposes of assessment under either acts. 10.4 Procedure to be followed The Appellate Tribunal is required to hear and decide every appeal within a period of three years from the date on which the appeal is filed, where it is possible to do so (vide the Finance Act, 2002). But where the Appellate Tribunal has made an order of stay in any proceedings relating to an appeal, the Appellate Tribunal shall dispose of the appeal within a period of one hundred and eighty days (six months approximately) from the date of the stay order. If the appeal is not so disposed of the stay order shall, on the expiry of the said period, stand vacated. However in the case of IPCL vs. CCE Vadodara, 2004 (63) RLT 1, the Honble CESTAT-LB has held that the Tribunal has the jurisdiction to grant stay even after the expiry of 180 days from the date of initial order of stay. 11. SETTLEMENT COMMISSION The procedure for settlement of any dispute with Settlement Commission under the Central Excise Act is as follows: (A) Application for settlement of case The assessee shall make full and true disclosure of his duty liability which has not been disclosed before the Central Excise Officer by filing the application form declaring the additional excise duty accepted to be payable by him. The application shall be admitted if the applicant has (a) filed return showing production, clearance of excise duty paid in the prescribed manner (b) Received Show cause notice for recovery of duty (c) Additional amount of duty accepted is not less than Rs. 3 lakhs with effect from 1-6-2007, (d) Paid admitted duty liability and the amount of interest if the application is made after 1-6-2007. (e) Made payment of fee of Rs. 1,000/-.

(B) Settlement Commission, issue notice to the applicant to explain in writing as to why the application made by him should be allowed to be proceeded with and after taking into consideration of the explanation, allow the application to be proceeded with or reject the application as the case may be. If no notice is issued within 7 days the application is deemed to have been accepted. (C) The Settlement Commission shall call for report within 7 days after the application has been accepted from the Commissioner of Central Excise/Customs having jurisdiction over the assessee. The Commissioner shall furnish the report within 30 days from the date of communication. In case no report is received the Settlement Commission shall proceed further in the matter without report. (D) After receipt of report, the Settlement Commission may after examining the report ask / direct the Commissioner (Investigation) to make further enquiry. The Settlement Commission shall issue direction within 15 days from the date of receiving the report from Jurisdictional Commissioner who then shall furnish the report within 90 days from the receipt of communication from Settlement Commission. (E) The Settlement Commission shall grant opportunity, to the applicant and the Commissioner, of personal hearing. (F) The Settlement Commission shall pass final order within 9 months from last date of the month in which the application is made failing which the settlement proceedings will abate and the adjudicating authority shall have the power to dispose of the show cause notice. (G) Every order of the Settlement Commission passed under rule 32F will be final. The Settlement Commission has power to grant immunity of prosecution and penalty under the Central Excise Act or Customs Act. 12. REFUND Section 11B of Central Excise Act provides that any person claiming refund of duty of excise shall make an application for such amount to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise in such form and manner as may be prescribed. The application shall be accompanied by the documentary evidence which evidences payment of duty and also other documents to substantiate that incidence of duty has been borne by the applicant. In case it is not substantiated that the incidence of duty has not been borne by the applicant, the refund amount shall be credited to Consumer Welfare Fund. A refund application should be filed within one year firm the date of payment of Duty. By Finance Act, 2008 even interest paid by the manufacturer shall also refunded. The period of one year shall not apply where any duty has been paid under protest. 12.1 Interest on delay in granting fund In case the refund has not been granted within a period of 3 months from the date of application, the applicant shall be entitled to the interest @ 9% of the duty amount from the date immediately after the expiry of 3 months from the date of receipt of such application.

13. PENALTY 13.1 Section 11AC of the Act, provides for levy of penalty equal to the duty amount where the demand for duty has been confirmed by reason of fraud, collusion or any wilful missstatement or suppression of fact or contravention of any of the provision of Act. with intend to evade payment of duty. The Honble Supreme Court has in the case of Dhamendra Textile has held that the penalty in section 11AC shall be levied even if the duty and interest has been paid prior to issue of show cause notice. Where details of the transactions are available in the specified records, the maximum penalty amount under section 11AC shall be equal to 50% of the duty so determined. However, first proviso to section 11AC provides that if the duty/interest is paid within 30 days of the communication of the order, the amount of penalty shall be reduced to 25% of the duty determined provided penalty is also paid. 13.2 Rule 25 of the Central Excise Rules provides for levy of penalty on manufacturer, Registered person of warehouse or registered dealer where such person a) Removes any excisable goods in contravention of any of the provisions of these rules or the notification issued under these rules; or b) does not account for any excisable goods produced or manufactured or stored by him; or c) Engages in the manufacturer, production or storage of any excisable goods without having applied for the registration certificate required under section 6 of the Act; or d) Contravenes any of the provisions of these rules or the notifications issued under these rules with intent to evade payment of duty, Then the goods in respect of which the contravention has been made shall also be confiscated and penalty not more than the duty amount or Rs. 2000/- whichever is higher shall be levied. 13.3 Rule 26 of the Central Excise Rules, provides that any person who issues- i) An excise duty invoice without delivery of goods specified therein or abets in making such invoice or ii) Any other document or abets in making such document, on the basis of which user of said invoice or document is likely to take of has taken any ineligible benefit under the Act or the rules made there under like claiming of CENVAT credit under the CENVAT Credit Rules, 2004 or refund, shall be liable to a penalty not exceeding the amount of such benefit or five thousand rupees, whichever is greater.

13.3.1 Any person who acquires possession of, or is in any way concerned in transporting , removing , depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules. 13.4 In case, any other penalty is provided under the rule, the penalty shall not exceeded beyond Rs. 5000/- and goods shall be confiscated. 14. PROCEDURE RELATING TO SPECIAL AUDIT Section 14A of the Act empowers the Chief Commissioner of Central Excise to appoint the cost accountant (now also Chartered Accountant) for auditing the records of any manufacturer in order to determine the value of the goods manufactured by him. As per the provisions if at any stage of enquiry, investigation or other proceedings before any Assistant Commissioner or Deputy Commissioner, it is felt that the value has been correctly declared or determined, the Assistant Commissioner or Deputy Commissioner may send the proposal for audit of the records at factory, office, depot, distributor etc. Similarly, if the Commissioner has reason to believe that the credit of duty availed or utilized is not within any normal limits, having regard to the nature of exciseable goods produced, he may appoint Cost Accountant (now also Chartered Accountant) for verifying the availment and utilization of credit. 15. PROSECUTION If a person commits any of the following offence a) Possesses the goods in excess of the quantity prescribed for the notified goods or of any variety of such goods. b) Transport the goods which are prohibited absolutely or with such exceptions or conditions notified by central government. c) does not obtain registration under the Act d) evade payment of duty e) Removes any excisable goods in contravention of provision of any of the Act or concerns himself with removal. f) acquires possession of, or in any way concerns himself in transporting, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with any excisable goods which he knows or has reason to believe are liable to confiscation under this Act or any rule made thereunder; g) contravenes any of the provisions of this Act or the rules made there under in relation to credit of any duty allowed to be utilized towards payment of excise duty on final products. h) fails to supply any information which is required by rules or supplies false information

i) attempts to commit or abet commission of any of the offence specified in (a) to (d) above. then the person shall be punishable 1) whether the duty exceeds Rs. 1 lac with imprisonment for a term which may extend to 7 years and with fine 2) in any other case for imprisonment which may extend to three years or with fine or both.

CENVAT CREDIT RULES

In order to remove the cascading effect of excise duty and service tax, the Excise Duty paid on the inputs, capital goods and input services, which are used in or in relation to the manufacture of final product or for providing output services is permissible to be set-off against the excise duty liability on the final products or paying service tax under the CENVAT Credit Rules, 2004. These rules have been notified to regulate the availment and utilization of the CENVAT credit. The salient features are as follows: I. "CAPITAL GOODS" MEANS (A) the following goods, namely: (i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act; (ii) Pollution control equipment; (iii) Components, spares and accessories of the goods specified and (i) and (ii) (iv) Moulds and dies, jigs and fixtures; (v) Refractories and refractory materials; (vi) Tubes and pipes and fittings thereof; and (vii) Storage tank. Used 1. in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or

1A. outside the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or 2. for providing output service; Explanation 1. The credit of duty paid on capital goods classifiable under specified chapter heading/ sub-heading is eligible for CENVAT credit. 2. The items specified on (ii) to (vii) in the definition are treated as capital goods irrespective of the classification. 3. The use of the said capital goods must be, in case of manufacturer, in his factory. If the same is used in office no CENVAT credit is available to manufacturer. However, capital goods used outside factory for generating of electricity for captive use within the factory is also eligible for credit. 4. In case of output service provider, capital goods should be used for providing the output service. (B) motor vehicle registered in the name of provider of output service for providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act; Components spares and accessories of Motor Vehicle is also considered as capital goods. Explanation The CENVAT of excise duty paid on motor vehicle is available only to the following output service providers as capital goods: 1. Courier Services. 2. Tour Operator Services. 3. Rent-a-Cab Services. 4. Cargo Handling Services. 5. Transport of Goods by Road Services. 6. Outdoor Catering Services. 7. Pandal or Shamiana Contractors Services. (C) Dumper or tripper falling under chapter 87 registered in the name of provider of output service which provides services taxable under the category of (a) site formation and clearance, excavation and earthmoving and demolition or similar activities (b) mining of mineral oil or gas.

(D) Conditions for availment of credit on capital goods. CENVAT Credit Rules also provide certain conditions for availment of credit on capital goods. These are: (i) The CENVAT Credit in respect of capital goods shall not be allowed on that part of the value of capital goods, which represents the amount of duty on such capital goods which the manufacturer claims as depreciation under section 32 of the Income-tax Act. (ii) The capital goods shall not be exclusively used for the purpose of manufacture of the exempted product. (iii) The credit of capital goods shall be allowed to the manufacturer even if the capital goods are acquired by him on lease, hire purchase or loan agreement from financing company. ( iv) The credit shall be taken only for an amount not exceeding 50% of the duty paid on capital goods in the same financial year in which capital goods is received. The balance 50% shall be taken in the subsequent financial year. The capital goods except for some of the capital goods shall be in the possession of the manufacturer. However, in case of small scale manufacturer the credit of 100% of the duty can be taken in the year of receipt of capital goods. II. INPUT (a) "Input" means (i) all goods used in the factory by the manufacturer of the final product; or (ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or (iii) all goods used for generation of electricity or steam for captive use; or (iv) all goods used for providing any output service; but excludes (A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol; (B) any goods used for (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of any taxable service specified in sub-

clauses (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act; (C) capital goods except when used as parts or components in the manufacture of a final product; (D) motor vehicles; (E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and (F) any goods which have no relationship whatsoever with the manufacture of a final product. Explanation For the purpose of this clause, "free warranty" means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer;] (b) The use of input must be: A) For manufacture in the factory : i) In the factory of the manufacturer ii) Accessories cleared along with the final product value of which is included in the manufacturer. iii) used in providing free warranty of final product. iv) used for generation of electricity of steam for captive use. B) For output service provider input must be used for providing output service. For example, paper used by CA, Photographic chemicals & paper used by photographer for providing services is treated as INPUTS III. INPUT SERVICE (a) Definition of Input Service (l) "input service" means any service, (i) used by a provider of taxable service for providing an output service; or

(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation up to the place of removal; but excludes services, (A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or (B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or (C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee (b) The definition can be bifurcated into following broad category i. Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products, ii. Any service used by the manufacturer whether directly or indirectly, in or in relation to clearance of final products from the place of removal,

iii. Services used in relation to setting up, modernisation, renovation or repairs of a factory, or an office relating to such factory, iv. Services used in relation to advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, v. Some of the other services like accounting, auditing, financing, recruitment and quality control, coaching and training, computer network, credit rating, share registry, security have been specified as input services. The manufacturer must substantiate that it is used in the manufacturer of final product and service provider shall substantiate that it is used for providing output services. The Honble Bombay High Court in case of Coca Cola has widely interpreted the definition of activity relating to business appearing in the definition of input services. This judgment may be referred for understanding the meaning of the word input services. However, from 1.4.2011, the word activities relating to business has been deleted from the definition of input services. Therefore, the ratio of the judgment shall not apply after 1.4.2011. (c) Conditions for availing the Cenvat Credit on Input Service 1. The input Service provided on or after 10-9-2004 is only eligible for CENVAT credit. 2. The credit on input services after 1.4.2011 can be taken on receipt of bill of input service provider subject to condition of payment specified in rule. IV. INPUT SERVICE DISTRIBUTOR (a) Meaning of Input Service Distributor (i) "input service distributor" means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be; (b) Manner of Distribution of the Credit The input service distributor may distribute the CENVAT credit in respect of the service tax paid on the input service to its manufacturing units or units providing output service,

Subject to the following condition, namely: (i) Distributing office must comply with registration formalities and compliances prescribed for first/second stage dealers under the Central Excise Rules, 2002; (ii) The credit distributed against a document referred to in rule 9 does not exceed the amount of service tax paid thereon; or (iii) Credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or provision of exempted services shall not be distributed. (c) Mandatory details in Input Service Invoice 1. Invoice Sl. No., date of document, 2. Input service providers service tax Registration No., Name and Address, 3. Description of taxable service, 4. Classification of the taxable service, 5. Assessable value of input service. 6. Amount of service tax (bifurcated into service tax and Education Cess on Service Tax separately.) 7. Be duly signed by the input service provider or his authorised person. V. UNDER THE CENVAT CREDIT RULES, 2004, THE CREDIT OF FOLLOWING DUTIES/TAX IS ALLOWED (i) The duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act; (ii) The duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act; (iii) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40 of 1978); (iv) The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957); (v) The National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001), as amended by section 169 of the Finance

Act, 2003 (32 of 2003) which was amended by section 3 of Finance Act, 2004 (13 of 2004); (vi) The Education Cess on excisable goods leviable under clause 81 read with clause 83 of the Finance Bill (No. 2), 2004, which by virtue of the declaration made in the said Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), has the force of law; (vii) The additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) and (vii) above; and (viia) The additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act. Provided that a provider of taxable service shall not be eligible to take credit of such additional duty. (viii) The additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003). (ix) The service tax (x) The education cess on service tax paid on the input or capital goods or input services received on or after 10-9-2004. VI. THE CENVAT CREDIT MAY BE UTILISED FOR PAYMENT OF (a) any duty of excise on any final product; or (b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or (c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or (d) an amount under sub-rule (2) of rule 16 of the Central Excise Rules; 2002 (e) Service Tax on any output services: Provided that while paying duty, the CENVAT credit shall be utilised only to the extent such credit is available on the last day of the month for payment of duty relating to the month. W.e.f. 1-3-2008 Goods Transport Agency are not considered "output service provider" and cannot utilise CENVAT credit for the service tax paid on their other inputs and hence have to pay service tax on value of services after abatement of 75%. VII. AVAILMENT OF CREDIT WHEN INPUT RECEIVED FROM EOU/EPZ

CENVAT credit in respect of inputs or capital goods produced or manufactured, by a hundred per cent export oriented undertaking or by a unit in an Electronic Hardware Technology Park or in a Software Technology Park other than a unit which pays excise duty levied under section 3 of the Excise Act read with serial numbers 3, 5, 6 & 7 of Notification No. 23/2003-Central Excise, dated 31st March, 2003, [G.S.R 266 (E) dated the 31st March, 2003] and used in the manufacture of the final products or in providing an output service, in any other place in India, in case the unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification No. 23/2003-Central Excise, dated the 31st March, 2003 [G.S.R. 266 (E), dated the 31st March, 2003], shall be admissible equivalent to the amount calculated in the following manner namely: Fifty per cent of [X multiplied by (1+BCD/100) multiplied by (CVD/100)], where BCD and CVD denote ad valorem rates, in per cent, of basic customs duty and additional duty of customs leviable on the inputs or capital goods respectively and X denotes the assessable value. Provided that the cenvat credit in respect of inputs and capital goods cleared on or after 1st March, 2006 from EOU on which the unit has paid the excise duty by availing exemption under notification no. 23/2003, the credit shall be equal to X multiplied by [(1+BCD/200) multiplied by (CVD /100)]. VIII. REMOVAL OF INPUTS OR CAPITAL GOODS FROM THE REGISTERED PREMISES 1. As and when inputs or capital goods are removed as such from registered premises, the assessee must prepare excise invoice and pay an amount equal to CENVAT availed in respect of same. If the capital goods are removed after being used, the manufacturer or provider of output services shall pay an amount equal to cenvat credit taken on such goods reduced by the percentage calculated by straight line method as specified below: For Computer and Computer peripherals (For each quarter) First Year Second Year Third Year Fourth and fifth year For any other capital goods 10% 8% 5% 1% 2.5%

2. The excise duty on scrap of capital goods is required to paid on the price at which such scrap has been sold. 3. Such payment shall not be made wherein inputs are removed for providing free warranty for final product.

IX. INPUTS/INPUT SERVICES USED IN EXPORT OF FINAL GOODS/OUTPUT SERVICES Where any input or input service is used in the final products which is cleared for export or used in the intermediate products cleared for export, or used in providing, output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of, (i) Duty of excise on any final products cleared for home consumption or for export on payment of duty; or (ii) Service tax on output service. And where for any reason such adjustment is not possible, the manufacturer or output service provider shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification. Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty. The Export of services shall be determined in terms of provisions contained in Export of Service Rule, 2005. X. OBLIGATION OF MANUFACTURER OF DUTIABLE AND EXEMPTED GOODS Where the manufacturer or output service provider avails of CENVAT credit in respect of inputs or input service and manufactures such final products or provide output service which are chargeable to duty as well as exempted goods or services, then the manufacturer or output service provider can except in cases of some specified items follow any of the following options given below: 1. He shall maintain separate accounts for (a) the receipt, consumption and inventory of inputs used (i) in or in relation to the manufacture of exempted goods; (ii) in or in relation to the manufacture of dutiable final products excluding exempted goods; (iii) for the provision of exempted services; (iv) for the provision of output services excluding exempted services; and (b) The receipt and use of the input services (i) in or in relation to the manufacture of exempted goods and their clearance up to the place of removal;

(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance up to the place of removal; (iii) for the provision of exempted services; and (iv) for the provision of output services excluding exempted services, and take credit to the extent of use of input or input services in the manufacture of dutiable goods or providing dutiable output service. 2. Pay an amount equal to 5% of the value of exempted goods or exempted services. 3. pay an amount attributable to use of inputs and input services in the manufacture of exempted goods or provision of exempted services as per the formula provided in sub-rule 3A The formula basically provides that the credit of excise duty on inputs and service tax on input services shall be reversed based on the proportionate turnover of exempted goods or exempted services compared to total turnover. 4. Maintain separate records as mentioned above for inputs and reverse the credit of service tax taken on input services on the basis discussed above. XI. DOCUMENTATION REQUIRED The CENVAT credit of excise duty or service tax paid would be available on the following documents viz: (A) An invoice issued by (I) A manufacturer for clearance of (i) Inputs or capital goods from his factory or depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer. (ii) Inputs or capital goods as such; (II) An importer; (III) An importer from his depot or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002.

(IV) A first stage dealer or a second stage dealer, as the case may be, in terms of the provisions of Central Excise Rules, 2002; or (B) A supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in case additional amount of excise duties has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non levy or short-levy by reason of fraud, collusion or any wilful misstatement or suppression of facts with intent to evade payment of duty. Explanation. For removal of doubts, it is clarified that supplementary invoice shall also include challans or any other similar document evidencing payment of additional amount of additional duty leviable under section 3 of the Customs Tariff Act; or (C) A bill of entry; or (D) A certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office; or (E) A challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii) and (v) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1944 or (F) An invoice, a bill or challan issued by a provider of input service on or after the 10th day of September, 2004; or (G) An invoice, bill or challans issued by an input service distributor under rule 4A of the Service Tax Rules, 1994. (H) Supplementary invoice, bill or challan issued by a provider of output services in terms of the provisions of Service Tax Rules except where the additional amount of tax became payable by the service provider on account of fraud, collusion, wilful mis- statement or suppression of facts or contravention of any of the provisions of the Finance Act or the rules made thereunder. XII. RECORDS/RETURN No prescribed form of maintaining the record has been specified. However, the assessee must maintain record to substantiate the consumption of input and input services in manufacture of goods or provision of output services. The private record like stores, ledger or batch records are sufficient to substantiate the same. The cenvat register giving details of invoice number of supplier, duty, description of input, quantity, assessable value, cenvat credit, opening balance, credit taken, credit utilized and closing balance shall be maintained. The same shall be submitted along with return.

The provider of output service availing CENVAT credit, shall submit a half yearly return in form specified, to the Superintendent of Central Excise, by 25th day of the month following the particular half year. The input service distributor, shall submit a half yearly Statement, giving the details of credit received and distributed during the said half year to the Superintendent of Central Excise, by the end of the month following the half year. XIII. PENALTY Sr. Description No . 1 Quantum

For wrong taking or Not exceeding the utilizing the CENVAT duty or service tax credit credit subjected to minimum of Rs. 2000/Wrong taking or Penalty equal to utilizing the credit credit amount. by reason of fraud, collusion, willful mis-statement or suppression of fact or contravention of any of the provision with intend to evade the payment of duty XIV. ABATEMENT IN VALUE CLAIMED BY OUTPUT SERVICE PROVIDER AS PROVIDED IN NOTIFICATION

The various notifications exempt certain category of services from payment of service tax to the extent of specified percentage of value. These notifications invariably provide conditions that the output service provider shall not avail the credit of service tax paid on input service or credit of excise duty on input or capital goods. In case, the provider of output service avails the benefit of the notifications he shall not avail the credit of duty on the service tax.