Professional Opportunities In Central Excise

Professional opportunities in Central Excise Indirect Taxes contributes nearly 70% of the tax revenue of the Central Government. Central Excise is one of the indirect taxes imposed by the Central Government and being the highest source of revenue yielding tax, this tax law is amended from time to time for strict compliance by the assesses. It is a highly procedure oriented law and involving cumbersome documentation at every stage i.e. purchase of raw material , production of goods, storage of excisable goods & removal of excisable goods from place of manufacture or storage. Professional opportunity for us lies in the providing consultancy regarding ever changing law and ensuring the strict compliance with procedure of excise law as well as tax planning aspects of excise law to minimize the impact of excise duty. Before we discuss the tax planning aspects of central excise duty we must know the basic concepts of central excise law as well as where the law is. The law relating to levy, assessment and collection is provided in The Central Excise Act, 1944. The procedures regarding receipt of raw material, production, storage and removal of excisable goods from the place of storage is provided in : Central Excise Rules, 2002,  Cenvat Credit Rules, 2002  Central Excise Valuation ( Determination of price of Excisable Goods) Rules, 2000. ,  Central Excise ( Removal of goods at concessional rate od duty for manufacture of Excisable Goods) Rules, 2001,  Central Excise Valuation ( Determination of price of Excisable Goods) Rules, 2000  Consumer welfare Rules, 1992. The goods which are excisable goods & rate of duty is defined in the Central Excise Tariff Act, 1985. There are about 80 exemption notifications issued granting exemption from excise duty providing full or partial exemption subject to conditions imposed under that particular notification. These notifications provide relief in the tariff rate specified in the Central Excise Act subject to certain conditions. The various types of exemption notifications can be broadly categorized as under : • Based on category of manufacturers i.e SSI / Handicapped Persons/ State / Central Government Factories. • Based on location of manufacturer i.e. Rural Areas / 100% EOU/FTZ/ EPZ/ TECH/ EDU. Research Institutions / Specified states in eastern India. • Based on value of clearances / quantity of clearances. • Based on end use of products i.e. ONGC / Defence / Government of India/ Agricultural products / Ship Stors / Pollution Control.

• • •

Based on Type of Clearances i.e. Export / Supply of Capital goods/ Captive Consumption /Job work. Based on method of manufacture i.e. without aid of power / if specified raw material is used / if ISI mark is affixed. Procedural concessions / relaxations.

Apart from above mentioned Act & Rules there are various departmental circulars Trade notices & notifications explaning the various provisions of central excise law. Notifications & Circulars have applicability throughout India but trade notices are generally issued by a commissioner have applicability to the jurisdictional boundry of the commissionerate by which it is issued. From the legal point of view, trade notices are not binding on the assessee though they are binding on departmental officers. Though it is right of the assessee to avail the benefit of concession in procedural relaxations. So it is important to be aware of the trade notices issued by the various commissionerates to enable the assesses to avail the benefit of a trade notice. Now let us discuss some of basic concepts of central excise before we discuss some of the important exemption notifications. Levy & collection of Central Excise Central excise is a tax levied on manufacture of excisable goods. Excisable goods have been defined as “ Goods specified in the first schedule and second schedule to the Central Excise Tariff Act, 1985 as being subject to duty of excise. The word ‘goods’ is not defined in the Excise law. It has been defined in the Supreme court judgement UOI Vs DCM as an article which must be something which can ordinarily come to the market to be bought and sold. As per various judgments of the Apex Court, in order to constitute ‘excisable goods’, the following ingredient must be present : The goods should be movable  The goods should be marketable  The goods should arise out of manufacturing process  The goods should be mentioned in the Central Excise Tariff Act, 1985. Excise Duty is an unique tax as compared to other taxes. For example Income Tax is a tax levied on income earned, Sales Tax is a tax on goods sold, Service Tax is a tax on services rendered whereas Excise is a tax on goods manufactured – whether sold or not. In other words liability to pay duty arises as soon as manufacturing is complete even though assesses are permitted to pay duty at the time and place of removal. Manufacture The event attracting the levy of central excise duty is ‘manufacture’ but unfortunately the word ‘ manufacture’ is also directly not defined under Central Excise Law. Section 2(f) of the Central Excise Act, 1944 gives an inclusive definition as under :-

“ Manufacture includes any process,i) ii) iii)

incidental or ancillary to the completion of a manufactured product; which is specified in relation to any goods in the Section or Chapter notes of The First Schedule and which is specified in relation to any goods by the Central Government, by notification in the Official Gazette, as amounting to manufacture”.

The word manufacture was defined by the Supreme court in the Case of DCM vs. UOI. As per the definition of supreme court following aspects must exist to attract the definition of manufacture : A process to be carried out.  The process carried out must result in the manufacture of a new product than what was originally before.  The product so produced must have a marketability and commercially known and sold as such.  The product must be movable in nature. Types of rates of excise duty The rates of duty are of following three types :a) Specific. b) Advalorem c) Duty on production capacity. Valuation under Central Excise. In case the excisable goods attracts duty on advalorem basis then goods are valued for determination of quantum of duty of excise which is payable. Valuation is done under the following concepts :i)

Tariff Value – Under section 3(2) of The Central Excise Act The Central Government has the power to fix the tariff value for a particular product in which case the assesses task is easy, viz, to find out the tariff value for the particular variety from the relevant notification and pay duty thereon. But tariff values are rarely fixed by the Government.

ii)

M.R.P. Value – in respect of pacakaged commodities which are under any law are required to be marked with MRP the Central Government has the powerer to notify them for assessment on the basis of MRP less such abatement from MRP as may nbe notified. Now there are 92 commodities on which excise is leviable on the basis of MRP.

iii)

Transaction Value – if a product is not notified under MRP value or under tariff value than it has to be assessed on the basis of transaction value. For applicability of transaction value in a given case, the following requirements should be satisfied : a) The Goods are sold by an assessee for delivery at the time and place of removal. The term “ place of removal “ has been defined basically to mean a factory or a warehouse. b) The Assessee and buyer are not related c) The price is the sole consideration for sale.

If any of the above requirement is not satisfied, then the goods shall be valued according to the Central Excise Valuation ( Determination of price of Excisable Goods) Rules, 2000. Following deductions are permissible from the transaction value as per APEX Court’s decision in MRF Ltd. Case :a) The normal trade discount. b) Secialised pacaking at the request of the customer. c) Sales tax, octroi etc. d) Other discounts being known prior to removal of goods. The Central Excise Valuation ( Determination of price of Excisable Goods) Rules, 2000. is annexed herewith for reference which we shall be discussing in detail. Cenvat Credit Cenvat credit is the new name given to the Modvat credit with effect from financial year 2000-2001 . The basic purpose of Cenvat credit is elimination of cascading effect of duty. Under the cenvat credit scheme which now covers inputs as well as capital goods the manufacture is allowed credit of duty on the purchase of raw materials as well as capital goods against liability of duty on the finished product manufactures by him. A manufacturer availing cenvat credit is required to follow the procedures prescribed under the Cenvat Credit Rules, 2002 which is annexed herewith for reference & discussion. Now we shall discuss the tax planning aspects of central excise. The central excise law offers various exemtions on the various basis which has been cited above. Now we will discuss some important exemtion notifications which offers the scope of tax planning. Exemption on the basis of value of clearance There are two alternative set of schemes under central excise which enables manufacturing units to either make clearance upto a turnover of one crore under nil rate of duty( without availing cenvat credit on inputs) or they can make clearance upto a turnover of one crore on payment of sixty percent of normal rate of duty ( by availing cenvat credit on inputs). These schemes are guided by notification 8/2002 & notification 9/2002 respectively. These are both mutually exclusive schemes & a manufacture can

choose either of the two schemes. A manufacturer has to make a declaration about his choice at the beginning of the financial year. He also has the option not to avail the exemption & instead pay at the rate of normal rate of duty but such option cannot be withdrawn during the remaining part of the financial year to avail exemption under notification 8/2002. However he can opt for exemption under notification 9/2002 during a financial year withdrawing his option to pay at normal rate of duty or exemption under notification 8/2002. Once opted, option under notification 9/2000 however can not be withdrawn during financial year to opt for paying at normal rate of duty or avail exemption under notification 8/2002. Some popular misconceptions have developed about the above benefits which are presented below:Is the above benefit ( popularly so called) restricted to SSI units only? There is a myth prevailing that these benefits are available to SSI units only. But the notification 8/2002 & the notification 9/2002 which empowers a manufacturer to avail the above benefits nowhere uses the word SSI while defining the eligibility criteria. The Central Excise Act, 1944 & The Central Excise Rules, 1944 also does not define the word SSI. The condition prescribed by the notification 8/2002 & notification 9/2002 for availing the exemption is that:“The aggregate value of clearances of all excisable goods for home consumption by a manufacturer from one or more factories, or from a factory by one or more manufacturer should not exceed three crore in the preceding financial year”. It further specifies that for the purpose of determining the aggregate value of clearances for home consumption, the following shall not be taken into account, namely :a) clearances, which are exempt from the whole of 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 exemption under both the above notifications; c) Clearances of specified goods which are used as inputs for further manufacture of any specified goods within the factory of production of specified goods; d) Clearances of strips of plastics used within the factory of production for weaving of fabrics or for manufacture of sacks or bags made of polymers of ethylene or propylene. Hence even a large scale unit which is manufacturing both excisable & non excisable goods( or goods which attracts nil rate of duty) or a large scale unit which is manufacturing goods both under their brand name as well as the brand name of others are entitled for this benefit provided their sale of excisable goods or sale of goods of their own brand is less than three crores in the preceding financial year ( This benefit will however be restricted to the goods of their own brand & will not be extended to the branded product of others). Let us take an example of a unit manufacturing milk & milk products like milk powder, butter, cheese, ghee & condensed milk put up in unit containers. Milk powder, butter, cheese & ghee attracts nil rate of duty whereas condensed milk put up in containers

attracts 16% rate of duty. In this case even if the manufacturing unit is a large scale one but the clearance for home consumption of condensed milk put up in containers is less than three crores in the preceding financial, than it will be eligible for exemption described above. A export oriented large scale unit which also sells their product in the local market can also avail this benefit provided their sale from home consumption is less three crores. Moreover a large scale unit, whatever be their investment, can avail these benefits in the first year of their operation as there is no previous year as such. Is exemption under notification 8/2002 generally better than notification 9/2002? The second misconception is really a error of judgement committed by the manufacturers while making a selection between the alternative set of schemes under notification 8/2002 or notification 9/2002. The manufacturers generally prefer to go for benefit available under notification 8/2002 as it apparently looks attractive because a manufacturer is not required to pay any duty upto a clearance of one crore & also it is relatively hassle free considering the fact he is not required to obtain registration. But it has been seen in a number of cases that they looses a substantial sum of money if their turnover crosses the mark of one crore as they cannot avail cenvat credit on inputs under this scheme upto a turnover of one crore. A manufacturer should make a financial calculation, at the beginning of a financial year, of whether any surplus cenvat credit on inputs is remaining after utilisation of cenvat credit for making the payment of duty on turnover upto one crore, if he opts for notification 9/2002. If any surplus cenvat credit remains it can be utilised for paying the duty on turnover beyond one crore. The method which can be adopted to make the above financial calculation is illustrated below:Illustration Let us take for an example unit ‘A’ which manufactures an item ‘X’ attracting 16% rate of duty. Their turnover for financial year 2001-2002 is expected to be Rs. 2.5 crores. The sale price of the above item is Rs. 25/ per unit. The raw materials, on which cenvat credit can be availed, required for the manufacturing of above items is P, Q, R & S. They are used in the ratio of 0.5: 0.25: 0.15: 0.15 per unit of output. The price per unit of input is Rs. 19.50, Rs. 20, Rs 15, & Rs. 18 respectively. The rate of duty on all inputs is 16%. For a turnover of Rs. 1 crore no. of units sold will be Rs. 1crore/Rs. 25 i.e. 4 laks of units. The consumption of raw material for manufacturing of 4 lakh units will be :P – 4lakh units X 0.5 = 2 lakh units. Q – 4 lakh units X 0.25 = 1 lakh units. R – 4 lakh units X 0.15 = 0.6 lakh units. S – 4 lakh units X 0.15 = 0.6 lakh units. The cenvat available on the above will be :Rs. P – 2 lakh units X Rs.19.5 X 16% = 624000

Q – 1 lakh units X Rs. 20 X 16% R – 0.6 lakh units X Rs. 15 X 16% S – 0.6 lakh units X Rs. 18 X 16%

= 320000 = 144000 = 172800

Total Cenvat = 1260800 In the above case if the manufacturer opts for notification 9/2002 then duty which will be required to be paid for a turnover of 1 crore will be Rs. 960000 ( i.e.1 crore X 16% X 60%.) Which means a surplus of Rs. 300800 of cenvat credit remains after paying the duty of Rs. 960000 on a turnover upto one crore & the surplus may be utilised by him for paying duty on sale beyond one crore. So in this case opting for notification 9/2002 is better.

Is cenvat credit on capital goods available under notification 8/2002? The third misconception has arisen out of general use of term that cenvat credit is not available under notification 8/2002. The general understanding is that cenvat credit can not be availed on both inputs & capital goods if a manufacturer opts for notification 8/2002. However it has been stated in the notification 8/2002 that the manufacturer can not utilise the cenvat credit on capital goods for payment of duty on clearances upto one crore which means that though cenvat credit on capital goods can be availed from the beginning of the financial year itself but it can only be utilised for the payment of duty on clearances beyond one crore. Exemption notification in respect of Textile industry In relation to knitted or crocheted articles of apparel and clothing accessories i.e. knitted or crocheted garments falling under chapter 61 of central excise tariff the rate of duty has been enhanced to 16% from nil rate of duty. But simultaneously a exemption notification no 15/2002 has been issued, which is also applicable to woven fabrics of coarse animal hair or of horse hair not subjected to any process falling under chapter heading 5112.10 ( chargeable at 16% rate of duty as per Central Excise Tariff), woven fabrics of textile material other than jute not subjected to any process falling under chapter heading 5801.91, 5802.41, 5804.19, 5806.10 or 5806.39 ( chargeable at 16% rate of duty as per Central Excise Tariff), knitted or crocheted fabrics of textile material not subjected to any process falling under chapter heading 6001.19, 6001.29, 6001.99, 6002.41, 6002.49, 6002.91, or 6002.9939 ( chargeable at 16% rate of duty as per Central Excise Tariff), As per above exemption notification the manufacturer has the following two options available to him :-

i) ii)

Paying the duty at nil rate & not avail the Cenvat credit on input and capital goods or, Pay the duty at the rate of 12% & avail Cenvat credit on input & capital goods.

However the benefit of this exemption notification is applicable only up to 28th February, 2005. That means a manufacturer will have to pay duty at the rate of 16% from 1st March,2005. Now most of the manufacturer will opt for the first option of not paying the duty as it apparently appears to be more beneficial. But if they opt for first option then Cenvat credit on inputs and capital goods will not be available to them. However the option of paying duty @ 12% & availing Cenvat credit may prove to be more beneficial in many a cases. Let us suppose on a product of Rs. 100/- input cost is Rs. 90. So he can avail a Cenvat credit of Rs. on input whereas he has to pay a duty of Rs. 12 only on his finished product. That means he can annually accumulate Cenvat credit of Rs. 12.41 minus Rs. 12 i.e. Rs. 0.41 per Rs. 100. So if we assume that the annual turnover of a manufacturer is Rs.10 crore than annually he can save 10crore X 0.41/100 i.e. Rs. . which means for a period of three years i.e. up to 28th February, 2005 he can save Rs12,30,000/- which can be utilized by him for payment of his duty liability on finished product after 28th February, 2005. Now further suppose he will invests Rs. 50 lakhs in capital goods for expansion of his manufacturing unit before 28th February, 2005. Then he can further avail Rs. 50lakhs X 16% i.e 8,00,000/- as Cenvat credit on capital goods which can also be accumulated & utilised for the payment of his duty liability on finished product after 28th February, 2005. Exemtion to specified goods of factories in North East ( Assam, Tripura, Meghalaya, Mizoram, Manipur, Nagaland or Arunachal Pradesh is covered by the exemtion notification 33/99 marked as General Exemtion notification 75 which is annexed herewith for reference and discussion. There are many other exemption notification which we need to study and advise our clients for their benefit. So professional opportunity for lies in the analysis of excise law & various exemption notifications & enable assesses to comply with the various provisions of complex excise law and minimise their excise duty liability by availing the various exemptions offered by the excise law.