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TAXATION

Assignment no.02

Submitted By:

Vivek Rathore

Roll No.:11

Executive MBA (08-11)

SIMS, PUNE

http://www.dateyvs.com/cenex09.htm
Q1. A) State the 4 basic conditions for levy of excise duty along with the examples.

Ans. Excise is a duty on excisable goods manufactured or produced in India. Power to levy excise duty is
derived from Constitution. There are four basic conditions for levy of Central Excise duty, they are as:

(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.

So, the above mentioned are basic conditions to be fulfilled for levy of Central Excise Tax, unless all of
these conditions are satisfied, central Excise Duty cannot be levied.

Person liable to pay excise duty - Once duty liability is fixed, the duty can be collected from a person at
the time and place found administratively most convenient for collection.
B) Define the term “Goods” for the purpose of central excise along with the examples.

Ans. The word “goods” has not been defined under the Central Excise Act. Article 366(12) of the
Constitution defines ‘goods’ as ‘goods that include all materials, commodities and articles’.

Sale of Goods Act defines that “Goods” is every kind of movable property other than actionable claims
and money; and includes stocks and shares, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before sale or under the contract of sale.

The word “goods”, for purpose of levy of Excise duty, must satisfy two requirements

i.e. (a) they must be movable and (b) they must be marketable.

Goods must be movable - They must be movable. Thus, immovable property or property attached to
earth is not ‘goods’ and hence duty cannot be levied on it.

Goods must be Marketable - The item must be such that it is capable of being bought or sold. This is
the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is
satisfied, duty cannot be levied as these will not be goods. It was held that to become ‘goods’ an article
must be something which can ordinarily come to market to be bought and sold.

Actual sale is not necessary - Marketability is an essential ingredient in order to be dutiable. Marketability
is a decisive test for dutiability. It only means ‘saleable’ or ‘suitable for sale’. It need not in fact be
marketed. The article should be capable of being sold to consumers, as it is - without anything more. -

Mere mention in Tariff is not enough - Mere mention of an item in tariff is not enough. Simply because a
certain article falls within the schedule (of Central Excise Tariff), it would not be dutiable if the article is not
‘goods’ known to the market.

Duty leviable on captive consumption - Since excise is a duty on manufacture, duty is leviable even if
goods are consumed within the factory and not sold. However, the goods must be marketable in the
condition in which they are manufactured and further consumed within the factory.

Everything that is sold is not 'marketable' - 'Marketability' implies regular market for a product.

Occasional, stray or distress sales do not mean that the product is 'marketable'.

Marketability to be decided on the basis of the state in which it is produced - The commodity which is
sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a
commodity that may, by further processing, be made marketable

What are “Goods” - Some examples will clarify the legal position.

GAS, STEAM ETC. - Gas and Steam are goods as it is a tangible property. It is marketable. It is held that
‘steam is ‘goods’ as it can be weighted, measured and marketed.

ELECTRICITY – In case of electrical energy, generation or production coincides almost instantaneously


with its consumption. Sale, supply and consumption takes place without any hiatus. - - Electricity is
movable property though it is not tangible. It is ‘goods’

DRAWING, DESIGNS ETC. ARE GOODS – Drawing and designs relating to machinery or technology are
‘goods’, even if payment is made for technical advice or information technology, which is intangible asset.
MACHINERY - Will be ‘goods’ if it is in marketable condition at the time of removal from factory of
manufacture, even if subsequently, it is to be fastened to earth.

WASTE AND SCRAP NOT GOODS IF NOT MARKETABLE - Carbide sludge arising in manufacture of
acetylene gas is not marketable and hence not liable to

WASTE AND SCRAP EXCISABLE ONLY IF MENTIONED IN CETA - The waste and scrap will not be
‘excisable goods’ unless they are specified in CETA. it was held that waste termed as 'dust collector fine'
emerging during grinding is merely an industrial waste and even if it fetches some price, it is not
'excisable goods' as there is no tariff entry in CETA.

What are not “Goods” - Some examples where the product was held as not ‘goods’ are illustrated here.

Goods having very short life are not ‘goods’, if not marketable in that short period – Yeast having short
shelf life is not ‘goods’ when there is no proof about its marketability, even if the product is specified in

Immovables are not ‘goods’ - Articles which are attached to earth are not goods as goods means a
movable property.

Excisability of plant & machinery assembled at site - Plant and Machinery or structure assembled and
erected at site cannot be treated as 'goods' for the purpose of Excise duty, if it is not marketable and
movable.

The word ‘goods’ applies to those which can be brought to market for being bought and sold, and it is
implied that it applies to such goods as are movable. Goods erected and installed in the premises and
embedded to earth cease to be goods and cannot be held to be excisable goods. –

Assembly at site is not manufacture, if immovable product emerges it was held that if an article has to be
assembled, erected and attached to the earth at site and if it is not capable of being sold as it is, without
anything more, it is not 'goods'. Erection and installation of a plant is not excisable.

'The marketability test requires that the goods as such should be in a position to be taken to market and
sold. If they have to be separated, the test is not satisfied'. Thus, if machinery has to be dismantled before
removal, it will not be goods.

Following is also clear - (a) Duty cannot be levied on immovable property (b) If plant is so embedded to
earth that it is not possible to move it without dismantle, no duty can be levied. (c) If machinery is
superficially attached to earth for operational efficiency, and can be easily removed without dismantling,
duty is leviable (d) Turnkey projects are not dutiable, but individual component/machinery will be dutiable,
if marketable.

Excisable Goods

Other essential requirement is that the goods must be ‘excisable’. Section 2(d) of Central Excise Act
defines Excisable Goods as ‘Goods specified in the Schedule to Central Excise Tariff Act, 1985 as being
subject to a duty of excise and includes salt’. ‘Goods’ includes any article, material or substance which is
capable of being bought and sold for a consideration and such goods shall be deemed to be marketable

Thus, unless the item is specified in the Central Excise Tariff Act as subject to duty, no duty is leviable.

Goods ‘excisable’ even if exempt from duty - ‘Excisable goods’ do not become non-excisable goods
merely because they are exempt from duty by an exemption notification.
Goods not included in CETA are ‘non-excisable goods’ - Some goods like wheat, rice, cut flowers,
horses, soya beans etc. are not mentioned in Central Excise Tariff at all and hence they are not ‘excisable
goods’, though they may be ‘goods’. These are ‘non-excisable goods’. Similarly, ‘waste and scrap’ will be
‘excisable goods’ only if specifically mentioned in CETA

Mere mention in CETA not enough - Mere mention in the Excise Tariff will not attract duty, unless these
are ‘goods’ i.e. unless test of marketability is satisfied.

Further, the ‘excisable goods’ are liable to duty only if they are ‘manufactured’ or ‘produced’.

Goods excisable even if duty is nil – If by virtue of an exemption notification, the rate of duty is reduced to
NIL, the goods specified in the tariff would still be regarded as excisable goods on which NIL rate of duty
was payable.

Goods removed under bond are not 'exempted goods' - Under Central Excise, the term 'exempted goods'
has specific meaning. 'Exempted goods' means those exempted under notification issued u/s 5A of CEA.
Goods removed under bond without payment of duty are neither goods 'exempt from duty' nor 'goods
chargeable to Nil rate of duty'.

Goods manufactured in SEZ are ‘excluded excisable goods’ – Duty is leviable on all excisable goods
(except goods manufactured or produced in Special Economic Zone). Thus, goods manufactured or
produced in SEZ are ‘excisable goods’ but no duty is leviable, as charging section 3(1) excludes those
goods. Thus, the goods manufactured in SEZ are not ‘exempted goods’. They can be termed as
‘excluded excisable goods’.

Meaning of 'Goods which have suffered duty' - In some cases, the wording used is 'goods which have
suffered duty / tax'. In such case, it has been held that actual payment of tax / duty is necessary. Goods
cannot be said to have 'suffered tax' when no tax is paid.

However, if goods are classified as per rules of classification as complete machine as per legal fiction, but
actually components or sub-assemblies are imported, its assembly in India will amount to manufacture
and excise duty will be payable.
Q2. A) State and explain “Transaction Value.”

2. Transaction Value

The Section 4 of the Central Excise Act, as substituted by section 94 of the Finance Act, 2000, contains
the provision for determining the Transaction value of the goods for purpose of assessment of duty.

The definition of "transaction value" needs to be carefully taken note of as there is fundamental departure
from the erstwhile system of valuation that was essentially based on the concept of ‘Normal Wholesale
Price’, even though sales were effected at varying prices to different buyers or class of buyers from
factory gate or Depots etc. had to be determined.

For applicability of transaction value in a given case, for assessment purposes, certain essential
requirements should be satisfied. If any one of the said requirement is not satisfied, then the transaction
value shall not be the assessable value and value in such case has to be arrived at under the valuation
rules notified for the purpose. The essential ingredients of a Transaction value are:

(i) The goods are sold by an assessee for delivery at the time of place of removal. The term "place
of removal" has been defined basically to mean a factory or a warehouse;
(ii) The assessee and the buyer of the goods are not related; and
(iii) The price is the sole consideration for the sale.

Transaction value would include any amount which is paid or payable by the buyer to or on
behalf of the assessee, on account of the factum of sale of goods.

In other words, if, for example, an assessee recovers advertising charges or publicity charges
from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot
claim that such charges are not to be included in the transaction value. The law recognizes
such payment to be part of the transaction value that is assessable value for those particular
transactions.

The new section 4 essentially seeks to accept different transaction values which may be charged by the
assessee to different customers, for assessment purposes so long as these are based upon purely
commercial consideration where buyer and the seller have no relationship and price is the sole
consideration for sale. Thus, it enables valuation of goods for excise purposes on value charged as per
commercial practices rather than looking for a notionally determined value.

Certain other elements which are included in the Transaction value are, as follows:

(i) Receipts/recoveries or charges incurred or expenses provided for in connection with the
manufacturing, marketing, selling of the excisable goods. In other words, whatever elements
which enrich the value of the goods before their marketing and were held by Hon’ble Supreme
court to be includible in "value" under the erstwhile section 4 would continue to form part of
section 4 value even under new section 4 definition.
(ii) If in addition to the amount charged as price from the buyer, the assessee recovers any other
amount by reason of sale or in connection with sale, then such amount shall also form part of
the transaction value. For example if assessee splits up his pricing system and charges a price
for the goods and separately charges for packaging or warranty, the packaging charges will
also form part of assessable value as it is a charge in connection with production and sale of
the goods recovered from the buyer. In this context, it may be clarified that it is immaterial
whether the warranty is optional or mandatory. Since the value can be different for different
transactions, wherever warranty charges are paid or payable to the assessee, in those
transactions warranty charges shall form part of the assessable value. In those transactions
where warranty charges are not recovered, the question of including warranty charges in
transaction value does not arise.
(iii) Interest for delayed payments are 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:
(a) the interest charges are clearly distinguished from the price actually paid or payable for
the goods;
(b) the financing arrangement is made in writing; and

(c) where required, assessee demonstrates that such goods are actually sold at the price
declared as the price actually paid or payable.
(iv) 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 differential discounts extended as per commercial considerations on
different transactions to unrelated buyers if extended can not be objected to and different
actual prices paid or payable for various transactions are to be accepted. Where the assessee
claims that the discount of any description for a transaction is not readily known but would be
known only subsequently – as for example, year end discount – the assessment for such
transactions may be made on a provisional basis. However, the assessee has to disclose the
intention of allowing such discount to the department and make a request for provisional
assessment.
(v) The definition of transaction value mentions that whatever amount is actually paid or actually
payable to the Government or the relevant statutory authority by way of excise, sale tax and
other taxes, such amount shall be excluded from the transaction value. In other words, if any
excise duty or other tax is paid at a concessional rate for a particular transaction, the amount of
excise duty or tax actually paid at the concessional rate shall only be allowed to be deducted
from price.
(vi) As per commercial practice, the price for the goods charged, normally includes the cost of
packing charges. However, at times separate charge may be billed for special packing, as per
customer’s requirements. Whereas in the context of erstwhile section 4 certain disputes often
arose whether certain packing in relation to particular goods is secondary or primary and
whether its value is to be added for assessment purposes, under the new section 4, such
issues are no longer relevant. Any charges recovered for packing are obviously charges
recovered in relation to the sale of the goods under assessment and will form part of the
transaction value of the goods. In short, it is immaterial whether packing is ordinary or special.
Whatever amount is charged from the buyer for packing and if not already included by the
assessee in the price payable for the goods will be included while determining the transaction
value of the goods.

2.6 Where the assessee includes all their costs incurred in relation to manufacture and marketing
while fixing price payable for the goods and bills and collects an all inclusive price –as happens in most
cases where sales are to independent customers on commercial consideration - the transaction price will
generally be the assessable value. Nevertheless, there could be situations where the amount charged by
an assessee does not reflect the true intrinsic value of goods marketed and total value split up into
various elements like special packing charges, warranty charges, service charges etc. These cases would
require to be scrutinised carefully to ensure that duty is paid on correct value. The definition of
"transaction value" makes it clear that all the elements of cost which the assessee incurred till the
sale/marketing as aforesaid, continue to be included in the assessable value even under new section 4.

2.7 The term "place of removal" has been defined in the same manner as was defined in the
erstwhile section 4 prior to its amendment in 1996. If, therefore, the transaction value is with reference to
delivery at the time and place of removal, such transaction value will be the assessable value.
B) State the valuation rules under excise laws.

Ans. 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]

3. Valuation Rules

3.1 In those cases where any of the three requirements mentioned in para 2 above is missing, the
assessable value shall be determined on the basis of the Central Excise Valuation (Determination of Price
of Excisable Goods) Rules, 2001 notified under Section 4(1)(b) by notification No. 45/2000-CE (NT),
dated 30.6.2000.

3.2 Salient features of the new valuation rules are mentioned below:

(i) If the assessee and the buyer are not related persons and the price is also the sole
consideration for sale but only the delivery of goods is made by the assessee at a place other
than the factory/warehouse, then the assessable value shall be the "transaction value" without
the addition of the cost of transportation from the factory/warehouse upto the place of delivery.
However, exclusion of cost of transportation is allowed only if the assessee has shown them
separately in the invoice and the exclusion is permissible only for the actual cost so charged
from his buyers. If the assessee has a system of pricing and sale at uniform prices inclusive of
equated freight for delivery at factory gate or elsewhere, no deductions for freight element will
be permissible.
(ii) If the goods are not sold at the factory gate or at the warehouse but they are transferred by the
assessee to his depots or consignment agents or any other place for sale, the assessable
value in such case for the goods cleared from factory/warehouse shall be the normal
transaction value of such goods at the depot, etc. at or about the same time on which the
goods as being valued are removed from the factory or warehouse. It may be pertinent to take
note of the definition of "normal transaction value" as given in the valuation rules. What it
basically means is the transaction value at which the greatest aggregate quantity of goods from
the depots etc. are sold at or about the time of removal of the goods being from the
factory/warehouse. If, however, the identical goods are not sold by the assessee from
depot/consignment agent’s place on the date of removal from the factory/warehouse, the
nearest date on which such goods were sold or would be sold shall be taken into account. In
either case if there are series of sales at or about the same time, the normal transaction value
for sale to independent buyers will have to be determined and taken as basis for valuation of
goods at the time of removal from factory/warehouse. It follows from the Valuation Rules that in
such categories of cases also if the price charges is with reference to delivery at a place other
than the depot, etc. then the actual cost of transportation will not be taken to be a part of the
transaction value and exclusion of such cost allowed on similar lines as discussed earlier, when
sales are effected from factory gate/warehouse.
(iii) As a measure of simplification, it has been decided to value goods which are captively
consumed on cost construction method only as there have been disputes in adopting values of
comparable goods. The assessable value of captively consumed goods will be taken at 115%
of the cost of manufacture of goods even if identical or comparable goods are manufactured
and sold by the same assessee. The concept of deemed profit for notional purposes has thus
been done away with and a margin of 15% by way of profit etc. is prescribed in the rule itself for
ease of assessment of goods used for captive consumption.
(iv) In the case where price is not the sole consideration for the sale, but the other requirements of
clause (a) of sub-section (1) of section 4 of the Central Excise Act are satisfied, the value shall
be determined in accordance with the provisions of rule 6 of the valuation rules. This provides
for adding, to the transaction value the money value of any additional consideration flowing
directly or indirectly from the buyer to the assessee. Such additional consideration would
include the money value of goods and services provided free or at reduced cost by or on behalf
of the buyer to the assessee. An Explanation has been added in the new rule only to remove
any doubts with respect to its scope.
(v) Where goods are sold through related persons, the transaction value is not applicable. The
definition of related persons includes "inter-connected undertakings" as defined in the
Monopolies and Restrictive Trade Practices Act, 1969. The definition of inter-connected
undertaking in the said Act is comprehensive and includes two or more under-takings which are
inter-connected with each other in any of a number of ways such as if one owns or controls the
other, or where the undertakings are owned by firm, or if such firms have one or more common
partners, etc. A provision has been made in the Valuation Rules that even if the assessee and
the buyer are ‘inter-connected undertakings’, the transaction value will be "rejected" only when
they are "related" in the following manner:
(a) They are relatives.

(b) The buyer is a relative and a distributor of the assessee, or sub-distributor of such
distributor.
(c) They have a direct or indirect interest in the business of each other.

In other cases, they will not be considered related. "Transaction value" could then form the
basis of valuation provided other two conditions, namely, price is for delivery at the time and
place of removal and the price is the sole consideration for sale are satisfied. If any of the two
aforesaid conditions are not satisfied then, quite obviously, value in such cases will be
determined under the relevant rule.

Q3.A) State the concept of “person liable to pay tax” under service tax.
Ans. Person liable to pay Service tax

Service tax is payable by service provider. In few cases, tax is payable by service receiver, under reverse
charge method [Section 68(2)].

In most of the cases, service provider, i.e. person who is providing taxable service is liable to
pay service tax. However, in few cases, exceptions have been made and service receiver is
made liable to pay service tax. The provision that service receiver is liable to pay service tax
is termed as ‘Reverse Charge’. The exceptions are as follows -

Services provided to non-resident - In relation to taxable service provided or to be


provided by any person from a country other than India and received by any person under
section 66A of Finance Act, service tax is payable by recipient of service [Rule 2(1)(d)(iv)]

Services of insurance agents - In case of insurance auxiliary service by an insurance


agent, the tax will be payable by insurance company (general insurance or life insurance as
the case may be). The insurance agent is not liable to register and pay tax. [However, the
insurance agent is not entitled to avail exemption available to a small service provider].

Consignor/consignee paying freight, in case of GTA services - In case of services of


Goods Transport Agency (GTA), service tax is payable by consignor/consignee who is paying
freight [rule 2(1)(d)(v)] [However, the consignor/consignee is not entitled to avail exemption
available to a small service provider].

Services of Agents of mutual fund - In case of distributors/agents of mutual funds, the


liability will be on the recipient of service, namely, mutual funds [Rule 2(1)(vi)] [However,
the mutual fund agent is not entitled to avail exemption available to a small service
provider].

Body corporate or firm located in India receiving sponsorship service - In case of


sponsorship service provided to a body corporate or firm located in India, the body corporate
or firm receiving such sponsorship service will be liable to pay service tax [rule 2(1)(d)(vii)
inserted w.e.f. 1-5-2006 and amended w.e.f. 1-4-2007]. If the recipient of sponsorship service is
located outside India, service tax is required to be paid by the service provider and not by the recipient.

Cenvat credit of tax paid - The Body corporate or firm paying such service tax will be
eligible to avail Cenvat credit of the service tax paid, on the basis of TR-6/GAR-7 challan by
which the tax is paid [Rule 9(1)(e) of Cenvat Credit Rules, as amended w.e.f. 1-5-2006]. It
may be noted that when person receiving service is liable to pay service tax, he is not
entitled to exemption which is available to a small service provider.

Large Taxpayer Unit (LTU) - A concept of LTU has been introduced for large taxpayers of
direct taxes and indirect taxes. In case of service tax, Large Taxpayer has meaning assigned
to it in Central Excise Rules [rule 2(cccc) of Service Tax Rules]. LTU has started functioning
in Bangalore w.e.f. 1-10-2006.

1-4 Service on sub-contract basis

CBE&C vide circular No. 999.03/23.8.07 has clarified that a sub-contractor is also a taxable
service provider. His services are taxable even if these are used by main provider for
completion of his work. The sub-contractor is liable even if the service is input service of the
main contractor and main contractor is paying service tax on entire value of contract.

A ‘person liable for paying service tax’ has to register with Superintendent of Central Excise under whose
jurisdiction your premises fall. He should register within 30 days from date of commencement of
the business of providing taxable service. The person will have to apply for registration in
form ST-1. If a person is providing more than one taxable service, he may make a single
application. He should mention in the application all the taxable services provided by him.
[rule 4(4)].

Applicant should submit following at the time of filing application for registration - (a) copy
of PAN (b) proof of residence and (c) constitution of applicant. If application is signed by
authorised person, power of attorney would be required.

Most important document that is required is copy of Income Tax PAN number. Copy of
memorandum of association or partnership deed and a list of partners/directors should be
submitted.

The registration certificate will be granted by Superintendent of Central Excise in seven days
in form ST-2.

5-3 Payment of tax

A person liable to pay tax shall pay the same in prescribed manner [section 68(1)]. The
service tax is payable 5th (6th in case of e-payment) of the month following the month in
which payments are received toward value of taxable services except in March [rule 6(1) of
Service Tax Rules].

If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on
quarterly basis within 5 days (within 6 days if e-payment is made) at the end of quarter
except in March. (rule 6). This facility is not available to HUF firm in view of clear wording of
the provision.
Exception in March - Exception has been made in case of March. Service tax on value of
taxable services received during month of March or quarter of March is required to be paid
by 31st March.

Assessee may find it difficult to accurately estimate the amounts he is going to receive from
his customers in last two days. Hence, he may pay excess amount upto Rs 50,000; which
can be adjusted in subsequent month/quarter, as per rule 6(4B) inserted w.e.f. 1-3-2007.

Payment of tax on amounts actually received - Rule 6(1) makes it clear that the
liability is to pay service tax on payments towards value taxable services actually received.
Thus, service tax is not payable on amounts charged in the bills/invoice, but on amounts
actually received.

Payment of tax in advance - A system similar to PLA in Central Excise has been
introduced in service tax. A person liable to pay service tax can pay any amount in advance
towards future service tax liability. After such payment he should inform Superintendent of
Central Excise within 15 days. When he adjusts the advance, he should indicate details in
the subsequent return filed - Rule 6(1A) of Service Tax Rules, w.e.f. 1-3-2008 [Really, why
intimation is required every time?. Even if not informed, it can at the most be taken as a
procedural lapse].

Payment of service tax

The service tax is payable 5th of the month following the month (6th in case of e-payment) in which
payments are received toward value of taxable services [rule 6(1) of Service Tax Rules]. Thus, service tax
is not payable on basis of amounts charged in the bills/invoice, but only on amounts actually received
during the relevant period.
Q4. State the brief aspects of Cenvat credit rules,2004.

Ans. CENVAT Credit Rules, 2004


1. Short title, extent and commencement.- (1) These rules may be called the CENVAT Credit
Rules, 2004.
(2) They extend to the whole of India:
Provided that nothing contained in these rules relating to availment and utilization of credit of
service tax shall apply to the State of Jammu and Kashmir.
(3) They shall come into force from the date of their publication in the Official Gazette.
2. Definitions.- In these rules, unless the context otherwise requires,-
(a) "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 at (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
(2) for providing 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;
(b) "Customs Tariff Act" means the Customs Tariff Act, 1975 (51 of 1975);
(c) "Excise Act" means the Central Excise Act, 1944 (1 of 1944);
(d) "exempted goods" means excisable goods which are exempt from the whole of the duty of
excise leviable thereon, and includes goods which are chargeable to "Nil" rate of duty;
(e) "exempted services" means taxable services which are exempt from the whole of the service
tax leviable thereon, and includes services on which no service tax is leviable under section 66 of
the Finance Act;
(f) "Excise Tariff Act" means the Central Excise Tariff Act, 1985 (5 of 1986);
(g) "Finance Act" means the Finance Act, 1994 (32 of 1994);
(h) "final products" means excisable goods manufactured or produced from input, or using input
service;
(ij) "first stage dealer" means a dealer, who purchases the goods directly from,-
(i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central
Excise Rules, 2002 or from the depot of the said manufacturer, or from 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, under cover of an invoice; or
(ii) an importer or from the depot of an importer or from the premises of the consignment agent of
the importer, under cover of an invoice;
(k) "input" means-
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as
petrol, used in or in relation to the manufacture of final products whether directly or indirectly and
whether contained in the final product or not and includes lubricating oils, greases, cutting oils,
coolants, accessories of the final products cleared along with the final product, goods used as
paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in
relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol
and motor vehicles, used for providing any output service;
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as
petrol, shall not be treated as an input for any purpose whatsoever.
Explanation 2.- Input include goods used in the manufacture of capital goods which are further
used in the factory of the manufacturer;
(l) "input service" means any service,-
(i) used by a provider of taxable service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of
final products and clearance of final products from the place of removal,and includes services
used in relation to setting up, modernization, 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 upto the place of removal, procurement of inputs, activities
relating to business, such as accounting, auditing, financing, recruitment and quality control,
coaching and training, computer networking, credit rating, share registry, and security, inward
transportation of inputs or capital goods and outward transportation upto the place of removal;
(m) "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;
(n) "job work" means processing or working upon of raw material or semi-finished goods supplied
to the job worker, so as to complete a part or whole of the process resulting in the manufacture or
finishing of an article or any operation which is essential for aforesaid process and the expression
"job worker" shall be construed accordingly;
(na) “manufacturer” or “producer” in relation to articles of jewellery falling under heading 7113 of
the First Schedule to the Excise Tariff Act, includes a person who is liable to pay duty of excise
leviable on such goods under sub-rule (1) of rule 12AA of the Central Excise Rules, 2002;
(o) "notification" means the notification published in the Official Gazette;
(p) "output service" means any taxable service provided by the provider of taxable service, to a
customer, client, subscriber, policy holder or any other person, as the case may be, and the
expressions ‘provider’ and ‘provided’ shall be construed accordingly;
Explanation.- For the removal of doubts it is hereby clarified that if a person liable for paying
service tax does not provide any taxable service or does not manufacture final products, the
service for which he is liable to pay service tax shall be deemed to be the output service.
(q) "person liable for paying service tax" has the meaning as assigned to it in clause (d) of subrule
(1) of rule 2 of the Service Tax Rules, 1994;
(r) "provider of taxable service" include a person liable for paying service tax;
(s) "second stage dealer" means a dealer who purchases the goods from a first stage dealer;
(t) words and expressions used in these rules and not defined but defined in the Excise Act or the
Finance Act shall have the meanings respectively assigned to them in those Acts.
3. CENVAT credit.- (1) A manufacturer or producer of final products or a provider of taxable
service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of -
(i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the
Excise Act;
(ii) the duty of excise specified in the Second Schedule to the Excise Tariff Act, leviable under the
Excise 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);
(vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the
Finance (No.2) Act, 2004 (23 of 2004);
(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 (vi);
“(viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act,
as substituted by clause 72 of the Finance Bill, 2005, the clause which has, by virtue of
the declaration made in the said Finance Bill under the Provisional Collection of Taxes
Act, 1931 (16 of 1931), the force of law:
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 leviable under section 66 of the Finance Act; and
(x) the Education Cess on taxable services leviable under section 91 read with section 95 of the
Finance (No.2) Act, 2004 (23 of 2004),
(xi) the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill under the
Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law;
paid on-
(i) any input or capital goods received in the factory of manufacture of final product or premises of
the provider of output service on or after the 10th day of September, 2004; and
(ii) any input service received by the manufacturer of final product or by the provider of output
services on or after the 10th day of September, 2004,including the said duties, or tax, or cess
paid on any input or input service, as the case may be, used in the manufacture of intermediate
products, by a job-worker availing the benefit of exemption specified in the notification of the
Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central
Excise, dated the 25th March, 1986, published in the Gazette of India vide number G.S.R. 547
(E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the
manufacture of final product, on or after the 10th day of September, 2004.
Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products
and the provider of output service shall be allowed CENVAT credit of additional duty leviable
under section 3 of the Customs Tariff Act on goods falling under heading 9801 of the First
Schedule to the Customs Tariff Act.
(2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of final
products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in
process or inputs contained in the final products lying in stock on the date on which any goods
manufactured by the said manufacturer or producer cease to be exempted goods or any goods
become excisable.
(3) Notwithstanding anything contained in sub-rule (1), in relation to a service which ceases to be
an exempted service, the provider of the output service shall be allowed to take CENVAT credit of
the duty paid on the inputs received on and after the 10th day of September, 2004 and lying in
stock on the date on which any service ceases to be an exempted service and used for providing
such service.
(4) The CENVAT credit may be utilized 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 Central Excise Rules, 2002; or
(e) service tax on any output service:
Provided that while paying duty of excise or service tax, as the case may be, the CENVAT credit
shall be utilized only to the extent such credit is available on the last day of the month or quarter,
as the case may be, for payment of duty or tax relating to that month or the quarter, as the case
may be:
Provided further that the CENVAT credit of the duty, or service tax, paid on the inputs, or input
services, used in the manufacture of final products cleared after availing of the exemption under
the following notifications of Government of India in the Ministry of Finance (Department of
Revenue),-
(i) No. 32/99-Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated 8th July, 1999];
(ii) No. 33/99-Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated 8th July, 1999];
(iii) No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565 (E), dated the 31st July,
2001];
(iv) No. 56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated the 14th
November, 2002];
(v) No. 57/2002-Central Excise, dated 14th November, 2002 [G.S.R.. 765(E), dated the 14th
November, 2002];
(vi) No. 56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June,
2003]; and
(vii) No. 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R. 717 (E), dated the 9th
September, 2003],
shall, respectively, be utilized only for payment of duty on final products, in respect of which
exemption under the said respective notifications is availed of:
Provided also that no credit of the additional duty leviable under sub-section (5) of section 3
of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which
has, by virtue of the declaration made in the said Finance Bill under the Provisional Collection of
Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on any output
service:
Provided also that the CENVAT credit of any duty mentioned in sub-rule (1), other than
credit of additional duty of excise leviable under clause 85 of the said Finance Bill, the clause
which has, by virtue of the declaration made in the said Finance Bill under the Provisional
Collection of Taxes Act, 1931, the force of law, shall not be utilised for payment of said additional
duty of excise on final products.
(5) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such
from the factory, or premises of the provider of output service, the manufacturer of the final
products or provider of output service, as the case may be, shall pay an amount equal to the
credit availed in respect of such inputs or capital goods and such removal shall be made under
the cover of an invoice referred to in rule 9:
Provided that such payment shall not be required to be made where any inputs are removed
outside the premises of the provider of output service for providing the output service:
Provided further that such payment shall not be required to be made when any capital goods are
removed outside the premises of the provider of output service for providing the output service
and the capital goods are brought back to the premises within 180 days, or such extended period
not exceeding 180 days as may be permitted by the jurisdictional Deputy Commissioner of
Central Excise, or Assistant Commissioner of Central Excise, as the case may be, of their
removal.
(6) The amount paid under sub-rule (5) shall be eligible as CENVAT credit as if it was a duty paid
by the person who removed such goods under sub-rule (5).
(7) Notwithstanding anything contained in sub-rule (1) and sub-rule (4), -
(a) 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 and 7 of notification No. 23/2003-Central Excise,
dated the 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 the capital goods respectively and X denotes the assessable value.
(b) CENVAT credit in respect of -
(i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise
(Textiles
and Textile Articles) Act, 1978 (40 of 1978);
(ii) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14
of
2001);
(iii) the education cess on excisable goods leviable under section 91 read with section 93 of the
Finance (No.2) Act, 2004 (23 of 2004);
(iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of
excise specified under items (i), (ii) and (iii) above;
(v) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003);
(vi) the education cess on taxable services leviable under section 91 read with section 95 of the
Finance (No.2) Act, 2004 (23 of 2004); and
(vii) the additional duty of excise leviable under clause 85 of the Finance Bill, 2005, the clause
which has, by virtue of the declaration made in the said Finance Bill under the Provisional
Collection of
Taxes Act, 1931, the force of law,
shall be utilized only towards payment of duty of excise or as the case may be, of service tax
leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 or the
National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of
2001), or the education cess on excisable goods leviable under section 91 read with section 93 of
the Finance (No.2) Act, 2004, additional duty of excise leviable under section 157 of the Finance
Act, 2003, or the education cess on taxable services leviable under section 91 read with section
95 of the said Finance (No.2) Act, 2004, or the additional duty of excise leviable under clause 85
of the Finance Bill, 2005, the clause which has, by virtue of the declaration made in the said
Finance Bill under the Provisional Collection of Taxes Act, 1931 (16 of 1931), the force of law,
respectively,
on any final products manufactured by the manufacturer or for payment of such duty on inputs
themselves, if such inputs are removed as such or after being partially processed or on any
output service:
Provided that the credit of the education cess on excisable goods and education cess on taxable
services can be utilised, either for payment of the education cess on excisable goods or for the
payment of the education cess on taxable services.
Explanation.-For the removal of doubts, it is hereby declared that the credit of the additional duty
of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special
Importance) Act, 1957 (58 of 1957) paid on or after the 1st day of April, 2000, may be utilised
towards payment of duty of excise leviable under the First Schedule or the Second Schedule to
the Excise Tariff Act.
(c) the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff
Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31 respectively
of the First Schedule to the Excise Tariff Act shall be allowed to the extent of thirty rupees per
square meter;
Explanation.- Where the provisions of any other rule or notification provide for grant of whole or
part exemption on condition of non-availability of credit of duty paid on any input or capital goods,
or of service tax paid on input service, the provisions of such other rule or notification shall prevail
over the provisions of these rules.
4. Conditions for allowing CENVAT credit.- (1) The CENVAT credit in respect of inputs may be
taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of
the provider of output service:
Provided that in respect of final products, namely, articles of jewellery falling under heading
7113 of the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs
may be taken immediately on receipt of such inputs in the registered premises of the person who
get such final products manufactured on his behalf, on job work basis, subject to the condition
that the inputs are used in the manufacture of such final product by the job worker.
(2) (a) The CENVAT credit in respect of capital goods received in a factory or in the premises of
the provider of output service at any point of time in a given financial year shall be taken only for
an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same
financial year:
Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole
amount of the duty paid on such capital goods in the same financial year if such capital goods are
cleared as such in the same financial year.
Provided further that the CENVAT credit of the additional duty leviable under sub-section
(5) of section 3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the
clause which has, by virtue of the declaration made in the said Finance Bill under the Provisional
Collection of Taxes Act, 1931, the force of law, in respect of capital goods shall be allowed
immediately on receipt of the capital goods in the factory of a manufacturer.
(b) The balance of CENVAT credit may be taken in any financial year subsequent to the financial
year in which the capital goods were received in the factory of the manufacturer, or in the
premises of the provider of output service, if the capital goods, other than components, spares
and accessories, refractories and refractory materials, moulds and dies and goods falling under
heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Excise Tariff Act,
are in the possession of the manufacturer of final products, or provider of output service in such
subsequent years.
Illustration.- A manufacturer received machinery on the 16th day of April, 2002 in his factory.
CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a
maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent
years.
(3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer,
provider of output service even if the capital goods are acquired by him on lease, hire purchase or
loan agreement, from a financing company.
(4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of
the value of capital goods which represents the amount of duty on such capital goods, which the
manufacturer or provider of output service claims as depreciation under section 32 of the Incometax
Act, 1961( 43 of 1961).
(5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after
being partially processed are sent to a job worker for further processing, testing, repair, reconditioning
or any other purpose, and it is established from the records, challans or memos or
any other document produced by the manufacturer or provider of output service taking the
CENVAT credit that the goods are received back in the factory within one hundred and eighty
days of their being sent to a job worker and if the inputs or the capital goods are not received
back within one hundred eighty days, the manufacturer or provider of output service shall pay an
amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the
CENVAT credit or otherwise, but the manufacturer or provider of output service can take the
CENVAT credit again when the inputs or capital goods are received back in his factory or in the
premises of the provider of output service
(b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by
a manufacturer of final products to a job worker for the production of goods on his behalf and
according to his specifications.
(6) The Commissioner of Central Excise having jurisdiction over the factory of the manufacturer of
the final products who has sent the input or partially processed inputs outside his factory to a jobworker
may, by an order, which shall be valid for a financial year, in respect of removal of such
input or partially processed input, and subject to such conditions as he may impose in the interest
of revenue including the manner in which duty, if leviable, is to be paid, allow final products to be
cleared from the premises of the job-worker.
(7) The CENVAT credit in respect of input service shall be allowed, on or after the day which
payment is made of the value of input service and the service tax paid or payable as is indicated
in invoice, bill or, as the case may be, challan referred to in rule 9.
5. Refund of CENVAT credit.- Where any input or input service is used in the final products which
is cleared for export under bond or letter of undertaking, as the case may be, 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 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:
Provided further that no credit of the additional duty leviable under sub-section (5) of section
3 of the Customs Tariff Act, as amended by clause 72 of the Finance Bill, 2005, the clause which
has, by virtue of the declaration made in the said Finance Bill, under the Provisional Collection of
Taxes Act, 1931, the force of law, shall be utilised for payment of service tax on any output
service.
Explanation: For the purposes of this rule, the words ‘output service which is exported’ means the
output taxable services exported in accordance with The Export of Service Rules, 2005.
6. Obligation of manufacturer of dutiable and exempted goods and provider of taxable and
exempted services.- (1) The CENVAT credit shall not be allowed on such quantity of input or
input service which is used in the manufacture of exempted goods or exempted services, except
in the circumstances mentioned in sub-rule (2).
Provided that the CENVAT credit on inputs shall not be denied to job worker referred to in rule
12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the
manufacture of goods cleared without payment of duty under the provisions of that rule.
(2) Where a manufacturer or provider of output service avails of CENVAT credit in respect of any
inputs or input services, except inputs intended to be used as fuel, and manufactures such final
products or provides such output service which are chargeable to duty or tax as well as exempted
goods or services, then, the manufacturer or provider of output service shall maintain separate
accounts for receipt, consumption and inventory of input and input service meant for use in the
manufacture of dutiable final products or in providing output service and the quantity of input
meant for use in the manufacture of exempted goods or services and take CENVAT credit only
on that quantity of input or input service which is intended for use in the manufacture of dutiable
goods or in providing output service on which service tax is payable.
(3) Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer or the provider
of output service, opting not to maintain separate accounts, shall follow either of the following
conditions, as applicable to him, namely:-
(a) if the exempted goods are-
(i) goods falling within heading No. 22.04 of the First Schedule to the Excise Tariff Act (hereinafter
in this rule referred to as the said First Schedule);
(ii) Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in
the generation of electricity;
(iii) Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of
fertilizer;
(iv) Naptha (RN) and furnace oil falling within Chapter 27 of the said First Schedule used for
generation of electricity;
(v) newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;
(vi) final products falling within Chapters 50 to 63 of the said First Schedule,
(vii) goods supplied to defence personnel or for defence projects or to the Ministry of Defence for
official purposes, under any of the following notifications of the Government of India in the
Ministry of Finance (Department of Revenue), namely:-
(1) No. 70/92-Central Excise, dated the 17th June, 1992, G.S.R. 595 (E), dated the 17th June,
1992;
(2) No. 62/95-Central Excise, dated the 16th March, 1995, G.S.R. 254 (E), dated the 16th March,
1995;
(3) No. 63/95-Central Excise, dated the 16th March, 1995, G.S.R. 255 (E), dated the 16th March,
1995;
(4) No. 64/95-Central Excise, dated the 16th March, 1995, G.S.R. 256 (E), dated the 16th March,
1995,
the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs and
input services used in, or in relation to, the manufacture of such final products at the time of their
clearance from the factory; or
(b) if the exempted goods are other than those described in condition (a), the manufacturer shall
pay an amount equal to ten per cent. of the total price, excluding sales tax and other taxes, if any,
paid on such goods, of the exempted final product charged by the manufacturer for the sale of
such goods at the time of their clearance from the factory;
(c) the provider of output service shall utilize credit only to extent of an amount not exceeding
twenty per cent. of the amount of service tax payable on taxable output service.
Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer
or provider of output service by debiting the CENVAT credit or otherwise.
Explanation II.- If the manufacturer or provider of output service fails to pay the said amount, it
shall be recovered along with interest in the same manner, as provided in rule 14, for recovery of
CENVAT credit wrongly taken.
(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the
manufacture of exempted goods or in providing exempted services, other than the final products
which are exempt from the whole of the duty of excise leviable thereon under any notification
where exemption is granted based upon the value or quantity of clearances made in a financial
year.
(5) Notwithstanding anything contained in sub-rules (1), (2) and (3), credit of the whole of service
tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp),
(zy), (zzd), (zzg), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance
Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of
exempted goods or providing exempted services.
(6) The provisions of sub-rules (1), (2), (3) and (4) shall not be applicable in case the excisable
goods removed without payment of duty are either-
(i) cleared to a unit in a special economic zone; or
(ii) cleared to a hundred per cent. export-oriented undertaking; or
(iii)cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or
(iv) 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 of the
Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central
Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or
(v) cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002; or
(vi) gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of
manufacture of copper or zinc by smelting; or
(vii) all goods which are exempt from the duties of customs leviable under the First Schedule to
the Customs Tariff Act, 1975 (51 of 1975) and the additional duty leviable under section 3 of the
said Customs Tariff Act when imported into India and supplied against International Competitive
Bidding in terms of notification No. 6/2002-Central Excise dated the 1st March, 2002.
7. Manner of distribution of credit by input service distributor.- 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:-
(a) the credit distributed against a document referred to in rule 9 does not exceed the amount of
service tax paid thereon; or
(b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of
exempted goods or providing of exempted services shall not be distributed.
8. Storage of input outside the factory of the manufacturer.- The Deputy Commissioner of Central
Excise or the Assistant Commissioner of Central Excise, as the case may be, having jurisdiction
over the factory of a manufacturer of the final products may, in exceptional circumstances having
regard to the nature of the goods and shortage of storage space at the premises of such
manufacturer, by an order, permit such manufacturer to store the input in respect of which
CENVAT credit has been taken, outside such factory, subject to such limitations and conditions
as he may specify:
Provided that where such input is not used in the manner specified in these rules for any reason
whatsoever, the manufacturer of the final products shall pay an amount equal to the credit availed
in respect of such input.
9. Documents and accounts.- (1) The CENVAT credit shall be taken by the manufacturer or the
provider of output service or input service distributor, as the case may be, on the basis of any of
the following documents, namely :-
(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
terms of the provisions of Central Excise Rules, 2002 from his factory or depot or from the
premises of the consignment agent of the said manufacturer or importer or from any other
premises from where the goods are sold by, or on behalf of, the said manufacturer or importer, in
case additional amount of excise duties or additional duty leviable under section 3 of the Customs
Tariff Act, 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 or contravention of
any provisions of the Excise Act, or of the Customs Act, 1962 (52 of 1962) or the rules made
there under with intent to evade payment of duty.
Explanation.- For removal of doubts, it is clarified that supplementary invoice shall also include
challan 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 subclauses
(iii) and (iv) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994; 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 challan issued by an input service distributor under rule 4A of the Service
Tax Rules, 1994.
(2) The CENVAT credit shall not be denied on the grounds that any of the documents mentioned
in sub-rule (1) does not contain all the particulars required to be contained therein under these
rules, if such doc ument contains details of payment of duty or service tax, description of the
goods or taxable service, assessable value, name and address of the factory or warehouse or
provider of input service:
Provided that the Deputy Commissioner of Central Excise or the Assistant Commissioner of
Central Excise, as the case may be, having jurisdiction over the factory of a manufacturer or
provider of output service intending to take CENVAT credit, or the input service distributor
distributing CENVAT credit on input service, is satisfied that the duty of excise or service tax due
on the input or input service has been paid and such input or input service has actually been used
or is to be used in the manufacture of final products or in providing output service, then, such
Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the
case may be, shall record the reasons for not denying the credit in each case.
(3) The manufacturer or producer of excisable goods or provider of output servi ce taking
CENVAT credit on input or capital goods or input service, or the input service distributor
distributing CENVAT credit on input service shall take all reasonable steps to ensure that the
input or capital goods or input service in respect of which he has taken the CENVAT credit are
goods or services on which the appropriate duty of excise or service tax as indicated in the
documents accompanying the goods or relating to input service, has been paid.
Explanation.- The manufacturer or producer of excisable goods or provider of output service
taking CENVAT credit on input or capital goods or input service or the input service distributor
distributing CENVAT credit on input service on the basis of, invoice, bill or, as the case may be,
challan received by him for distribution of input service credit shall be deemed to have taken
reasonable steps if he satisfies himself about the identity and address of the manufacturer or
supplier or provider of input service, as the case may be, issuing the documents specified in subrule
(1), evidencing the payment of excise duty or the additional duty of customs or service tax, as
the case may be, either-
(a) from his personal knowledge; or
(b) on the basis of a certificate given by a person with whose handwriting or signature he is
familiar; or
(c) on the basis of a certificate issued to the manufacturer or the supplier or, as the case may be,
the provider of input service by the Superintendent of Central Excise within whose jurisdiction
such manufacturer has his factory or such supplier or provider of output service has his place of
business or where the provider of input service has paid the service tax,
and where the identity and address of the manufacturer or the supplier or the provider of input
service is satisfied on the basis of a certificate, the manufacturer or producer or provider of output
service taking the CENVAT credit or input service distributor distributing CENVAT credit shall
retain such certificate for production before the Central Excise Officer on demand.
(4) The CENVAT credit in respect of input or capital goods purchased from a first stage dealer or
second stage dealer shall be allowed only if such first stage dealer or second stage dealer, as the
case may be, has maintained records indicating the fact that the input or capital goods was
supplied from the stock on which duty was paid by the producer of such input or capital goods
and only an amount of such duty on pro rata basis has been indicated in the invoice issued by
him.
(5) The manufacturer of final products or the provider of output service shall maintain proper
records for the receipt, disposal, consumption and inventory of the input and capital goods in
which the relevant information regarding the value, duty paid, CENVAT credit taken and utilized,
the person from whom the input or capital goods have been procured is recorded and the burden
of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer or
provider of output service taking such credit.
(6) The manufacturer of final products or the provider of output service shall maintain proper
records for the receipt and consumption of the input services in which the relevant information
regarding the value, tax paid, CENVAT credit taken and utilized, the person from whom the input
service has been procured is recorded and the burden of proof regarding the admissibility of the
CENVAT credit shall lie upon the manufacturer or provider of output service taking such credit.
(7) The manufacturer of final products shall submit within ten days from the close of each month
to the Superintendent of Central Excise, a monthly return in the form specified, by notification, by
the Board:
Provided that where a manufacturer is availing exemption under a notification based on the value
or quantity of clearances in a financial year, he shall file a quarterly return in the form specified,
by notification, by the Board within twenty days after the close of the quarter to which the return
relates.
(8) A first stage dealer or a second stage dealer, as the case may be, shall submit within fifteen
days from the close of each quarter of a year to the Superintendent of Central Excise, a return in
the form specified, by notification, by the Board.
(9) The provider of output service availing CENVAT credit, shall submit a half yearly return in form
specified, by notification, by the Board to the Superintendent of Central Excise, by the end of the
month following the particular quarter or half year.
(10) 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.
9A. – Information relating to principal inputs. -
(1) A manufacturer of final products shall furnish to the Superintendent of Central Excise,
annually by 30th April of each Financial Year, a declaration in the Form specified, by a notification,
by the Board, in respect of each of the excisable goods manufactured or to be manufactured by
him, the principal inputs and the quantity of such principal inputs required for use in the
manufacture of unit quantity of such final products:
Provided that for the year 2004-05, such information shall be furnished latest by 31st December,
2004.
(2) If a manufacturer of final products intends to make any alteration in the information so
furnished under sub-rule (1), he shall furnish information to the Superintendent of Central Excise
together with the reasons for such alteration before the proposed change or within 15 days of
such change in the Form specified by the Board under sub-rule (1).
(3) A manufacturer of final products shall submit, within ten days from the close of each month,
to the Superintendent of Central Excise, a monthly return in the Form specified, by a notification,
by the Board, in respect of information regarding the receipt and consumption of each principal
inputs with reference to the quantity of final products manufactured by him.
(4) The Central Government may, by notification and subject to such conditions or limitations,
as may be specified in such notification, specify manufacturers or class of manufacturers who
may not be required to furnish declaration mentioned in sub-rule (1) or monthly return mentioned
in sub-rule (3).
Explanation: For the purposes of this rule, “principal inputs”, means any input which is used in
the manufacture of final products where the cost of such input constitutes not less than 10% of
the total cost of raw-materials for the manufacture of unit quantity of a given final products.”
10. Transfer of CENVAT credit.- (1) If a manufacturer of the final products shifts his factory to
another site or the factory is transferred on account of change in ownership or on account of sale,
merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision
for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the
CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or
amalgamated factory.
(2) If a provider of output service shifts or transfers his business on account of change in
ownership or on account of sale, merger, amalgamation, lease or transfer of the business to a
joint venture with the specific provision for transfer of liabilities of such business, then, the
provider of output service shall be allowed to transfer the CENVAT credit lying unutilized in his
accounts to such transferred, sold, merged, leased or amalgamated business.
(3) The transfer of the CENVAT credit under sub-rules (1) and (2) shall be allowed only if the
stock of inputs as such or in process, or the capital goods is also transferred along with the
factory or business premises to the new site or ownership and the inputs, or capital goods, on
which credit has been availed of are duly accounted for to the satisfaction of the Deputy
Commissioner of Central Excise or, as the case may be, the Assistant Commissioner of Central
Excise.
11. Transitional provision.- (1) Any amount of credit earned by a manufacturer under the
CENVAT Credit Rules, 2002, as they existed prior to the 10th day of September, 2004 or by a
provider of output service under the Service Tax Credit Rules, 2002, as they existed prior to the
10th day of September, 2004, and remaining unutilized on that day shall be allowed as CENVAT
credit to such manufacturer or provider of output service under these rules, and be allowed to be
utilized in accordance with these rules.
(2) A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods
manufactured by him under a notification based on the value or quantity of clearances in a
financial year, and who has been taking CENVAT credit on inputs or input services before such
option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any,
allowed to him in respect of inputs lying in stock or in process or contained in final products lying
in stock on the date when such option is exercised and after deducting the said amount from the
balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be
allowed to be utilized for payment of duty on any excisable goods, whether cleared for home
consumption or for export.
12. Special dispensation in respect of inputs manufactured in factories located in specified areas
of North East region, Kutch district of Gujarat, State of Jammu and Kashmir and State of Sikkim.-
Notwithstanding anything contained in these rules, where a manufacturer has cleared any inputs
or capital goods, in terms of notifications of the Government of India in the Ministry of Finance
(Department of Revenue) No. 32/99- Central Excise, dated the 8th July, 1999 [G.S.R. 508(E),
dated the 8th July, 1999] or No. 33/99- Central Excise, dated the 8th July, 1999 [G.S.R. 509(E),
dated the 8th July, 1999] or No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R.
565(E), dated the 31st July, 2001] or notification of the Government of India in the erstwhile
Ministry of Finance and Company Affairs (Department of Revenue) No.56/2002-Central Excise,
dated the 14th November, 2002 [G.S.R. 764(E), dated 14th November, 2002]or No.57/2002-
Central Excise, dated the 14th November, 2002 [ GSR 765(E), dated the 14th November, 2002]
or notification of the Government of India in the Ministry of Finance (Department of Revenue) No.
56/2003-Central Excise, dated the 25th June, 2003 [G.S.R. 513 (E), dated the 25th June, 2003]
or 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R.717 (E), dated the 9th
September, 2003, the CENVAT credit on such inputs or capital goods shall be admissible as if no
portion of the duty paid on such inputs or capital goods was exempted under any of the said
notifications.
13. Power of Central Government to notify goods for deemed CENVAT credit.- Notwithstanding
anything contained in rule 3, the Central Government may, by notification, declare the input or
input service on which the duties of excise, or additional duty of customs or service tax paid, shall
be deemed to have been paid at such rate or equivalent to such amount as may be specified in
that notification and allow CENVAT credit of such duty or tax deemed to have been paid in such
manner and subject to such conditions as may be specified in that notification even if, in the case
of input, the declared input, or in the case of input service, the declared input service, as the case
may be, is not used directly by the manufacturer of final products, or as the case may be, by the
provider of taxable service, declared in that notification, but contained in the said final products, or
as the case may be, used in providing the taxable service.
14. Recovery of CENVAT credit wrongly taken or erroneously refunded.- Where the CENVAT
credit has been taken or utilized wrongly or has been erroneously refunded, the same along with
interest shall be recovered from the manufacturer or the provider of the output service and the
provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act,
shall apply mutatis mutandis for effecting such recoveries.
15. Confiscation and penalty.- (1) If any person, takes CENVAT credit in respect of input or
capital goods, wrongly or without taking reasonable steps to ensure that appropriate duty on the
said input or capital goods has been paid as indicated in the document accompanying the input or
capital goods specified in rule 9, or contravenes any of the provisions of these rules in respect of
any input or capital goods, then, all such goods shall be liable to confiscation and such person,
shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any
contravention has been committed, or ten thousand rupees, whichever is greater.
(2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or
utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts, or
contravention of any of the provisions of the Excise Act or the rules made thereunder with
intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in
terms of the provisions of section 11AC of the Excise Act.
(3) If any person, takes CENVAT credit in respect of input services, wrongly or without taking
reasonable steps to ensure that appropriate service tax on the said input services has been paid
as indicated in the document accompanying the input services specified in rule 9, or contravenes
any of the provisions of these rules in respect of any input service, then, such person, shall be
liable to a penalty which may extend to an amount not exceeding ten thousand rupees.
(4) In a case, where the CENVAT credit in respect of input services has been taken or utilized
wrongly by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention
of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade
payment of service tax, then, the provider of output service shall also be liable to pay penalty in
terms of the provisions of section 78 of the Finance Act.
(5) Any order under sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule (4) shall be issued by the
Central Excise Officer following the principles of natural justice.
16. Supplementary provision.- Any notification, circular, instruction, standing order, trade notice or
other order issued under the CENVAT Credit Rules, 2002 or the Service Tax Credit Rules, 2002,
by the Central Government, the Central Board of Excise and Customs, the Chief Commissioner
of Central Excise or the Commissioner of Central Excise, and in force at the commencement of
these rules, shall, to the extent it is relevant and consistent with these rules, be deemed to be
valid and issued under the corresponding provisions of these rules.
*****

C) Write a note on small service providers exemption.

Ans. Various concessions are given to small scale industries to encourage their growth and also on
account of administrative convenience. Since Excise is a duty on manufacture, it is payable even by a
small unit manufacturing the goods. However, it is Government’s policy to encourage growth of small
units. Moreover, it is administratively inconvenient and costly to collect revenue from numerous small
units. Applying ABC principle, the revenue collected from small units would be negligible compared to the
efforts and administrative costs involved. The Govt. has therefore, given various concessions to small
scale industries (SSI). The most important notification giving these concessions is notification No. 8/2003
dated 1-3-2003. SSI units whose turnover is less than Rs. 4 crores are eligible for the concessions. If SSI
unit does not avail Cenvat on inputs, turnover upto Rs 150 lakhs is fully exempt (The limit was Rs 150
lakhs upto 31-3-2007). If SSI unit avails Cenvat on inputs, it has to pay full normal duty on all its
clearances.

Goods not Eligible for SSI concession - Many of goods manufactured by SSI are eligible for the
concession. However, some items are not eligible (some of the items not eligible for SSI exemption are
eligible for exemption under different notifications. Some are not exempt at all). Thus, SSI exemption is
available only if the item is covered in this notification.

Broadly, items generally manufactured by SSI (except in tobacco, matches and textile sector) are eligible
for SSI exemption. Some items like pan masala, matches, watches, some textile products, tobacco
products, etc. are specifically excluded, even when these can be manufactured by SSI. Some items like
automobiles, primary iron and steel etc. are not eligible, but anyway, these are beyond capacity of SSI
unit to manufacture.

Goods with other’s brand name not eligible - Goods manufactured by an SSI unit with brand name of
others are not eligible for SSI concession, unless goods are manufactured in a rural area. These
provisions are discussed later in this Chapter.
Duty payable on goods manufactured for captive consumption, if not eligible for SSI concession - If goods
which are not eligible for SSI concession are manufactured by SSI unit for captive consumption, duty will
be payable, even if final product is eligible for SSI concession, as correctly held in Super Polyfabriks Ltd.
v. CCE 1999(114) ELT 1019 (CEGAT).

SSI units eligible for SSI concession - All industries irrespective of their investment or number of
employees are eligible for concession. In fact, even a large industry will be eligible for the concession if its
annual turnover is less than Rs. 4 crores. The SSI unit need not be registered with any authority.

EXEMPTION AVAILABLE ONLY IF TURNOVER IN PREVIOUS YEAR WAS LESS THAN RS 4 CRORES
- A unit is entitled for exemption only if its turnover in previous year was less than Rs. 4 crores. Units
whose turnover was over Rs. 4 crores in 2004-05 are not eligible to any SSI concession in 2005-06. They
have to pay full normal duty from 1st April, 2005.

GOODS WITH OTHER’S BRAND NAME NOT ELIGIBLE - Goods manufactured with other's brand name
are not eligible.

CLUBBING OF TURNOVER - (a) If the manufacturer has more than one factories (even at different
places), the turnover of all factories (belonging to same manufacturer) have to be clubbed together for
calculating the SSI exemption limits of Rs 150 or 400 lakhs. (b) It is also possible that more than one
manufacturers may clear the goods from the same factory e.g. part of factory may be used by one
manufacturer and another part of same factory may be used by another manufacturer. In such cases, all
clearances from the factory has to be considered even if the clearance is of different manufacturers for
calculating the SSI exemption limits of 150 or 400 lakhs. (c) Some times, a manufacturer may use the
factory for part of the year and then another manufacturer may use the same factory for remaining part of
the year. In such cases, the turnover of different manufacturers has to be clubbed for calculating the SSI
exemption limits of 150 or 400 lakhs, if it is from the same factory. (d) Clubbing is also possible if two units
are sham or bogus or if there is unity of interest and practically they are one.

EXEMPTION TO BE AVAILED FOR ALL FACTORIES - If a manufacturer has more than one factories,
he has to avail the option in respect of all factories. He cannot opt to avail Cenvat in respect of one factory
and avail SSI exemption in respect of other factory, as the slab-wise exemption is for all factories of
manufacturer together. - CBE&C Circular No. 172/6/96-CX dated 6-2-1996.

CHOICE OF VARIOUS TYPES OF EXEMPTION - SSI units have been given two types of exemptions -

(a) Unit can avail full exemption upto Rs 150 lakhs and pay normal duty thereafter. Such units can avail
Cenvat credit on inputs only after reaching turnover of Rs 150 lakhs in the financial year. [The full
exemption limit of Rs 150 lakhs was increased to Rs 150 lakhs w.e.f. 1-3-2007].

(b) Unit intending to avail Cenvat credit on inputs on all its turnover have to pay normal duty without any
concession.

WHEN SECOND OPTION SUITABLE - Option of payment of duty may be suitable in following cases - (a)
When buyer intends to claim Cenvat credit. In such cases, the effective cost will be lower as SSI unit can
claim Cenvat on inputs (b) When SSI unit intends to export the products and has huge balance in Cenvat
credit account. In such cases, he can pay duty and claim rebate after export of goods. Otherwise, the
balance may remain unutilised. There is provision to get refund of balance lying in credit in Cenvat Credit
account. However, such refund can be only of Cenvat on inputs and not of capital goods.

OPTION MUST BE INDICATED, IF SSI UNIT INTENDS TO AVAIL CENVAT CREDIT - The first option,
i.e. Nil duty upto Rs 150 lakhs and normal duty for subsequent clearances is automatic. However, if
assessee wants to avail second option, he must inform option to department. He should inform in writing
to Assistant Commissioner with a copy to Superintendent of Central Excise, the following - (a) Name and
address of manufacturer (b) Location / locations of factory / factories (c) Description of specified goods
produced (d) date from which option under the SSI exemption notification has been exercised. (e)
Aggregate value of clearances of specified goods (excluding the value of clearances not covered under
SSI exemption notification e.g. goods exempted under any other notification, goods with brand name of
other, intermediate products and strips of plastics used for manufacture of sacks or bags). The second
option (of paying 150% duty) is available any time during the year, but the option once availed cannot be
withdrawn during the financial year.

CENVAT TO BE REVERSED IF UNIT DECIDES TO OPT FOR EXEMPTION - If the unit was availing
Cenvat credit prior to 31st March, it will have to pay an amount equivalent to Cenvat credit allowed to him
on the inputs lying in stock or used in finished excisable goods lying in stock as on 1st April. If any Cenvat
credit on inputs is balance on 31st March, it will lapse on 1st April [Rule 9(2) of Cenvat Credit Rules]. The
‘amount’ is not ‘duty’ and hence, strictly, Cenvat credit of such ‘amount’ paid will not be available.

CENVAT ON STOCK WHEN UNIT DECIDES TO START AVAILING CENVAT CREDIT - The SSI unit
can decide to start availing and utilising Cenvat on inputs during middle of the year. When it decides to
start availing Cenvat on inputs, it should do following - (a) Submit a letter that it intends to avail Cenvat on
inputs lying in stock or contained in finished products on date of declaration. (c) Submit a statement giving
stock of inputs lying in stock on date of declaration and duty paid on such stock. [These are not legally
prescribed conditions, but it is highly advisable to follow them].

Board has confirmed that Cenvat credit will be available in respect of duty on inputs contained in on stock
of raw material, WIP and finished goods when SSI unit crosses the turnover limit and starts paying duty.
SSI unit should keep proper records.

The SSI unit cannot avail Cenvat credit in respect of inputs which are already used in manufacture and
final product from such inputs is already cleared.

Slabs in SSI excise exemption - Following are slabs in SSI excise exemption.

First slab of 150 lakhs - There is full exemption from excise upto the first clearances of Rs. 150 lakhs,
starting from 1st April every year, if the SSI unit does not avail Cenvat credit on inputs. If an SSI unit
manufactures goods of different varieties, falling under different Chapter heads and/or in different
factories, total exemption considering clearances of all Chapters together and all factories of same
manufacturer together, will be Rs. 150 lakhs. An SSI unit can opt for paying full normal duty also.

Second slab after initial 150 lakhs - After the turnover crosses Rs. 150 lakhs, full normal duty is payable.
The SSI unit can avail Cenvat credit on inputs in respect of inputs used after turnover crosses Rs 150
lakhs. - . - . - Even if an assessee crosses turnover of Rs. 4 crores, he has to only pay duty at normal rate.
The SSI manufacturer does not have to pay duty on earlier turnover for which he had availed concession.
[confirmed in Searsole Chemicals v. CCE 1999(113) ELT 435 (CEGAT)]. However, in next year, he will
not be able to avail any concession and he has to pay normal rate of duty from 1st April itself.

Excluded turnover for calculating exemption limit of Rs 150 lakhs - While calculating exemption limit of
Rs. 150 lakhs, some of turnover of SSI is not to be considered, as explained below. [Note the differences
in provisions in calculating limits of Rs 150 lakhs and Rs 400 lakhs].

CLEARANCES OF GOODS EXEMPTED UNDER ANY OTHER NOTIFICATION TO BE EXCLUDED –


Some goods may be exempt under some other notification, i.e. other than SSI exemption notification. In
some cases, duty may not be payable on such goods for some other reason. Turnover of such goods is
not to be considered for calculating exemption limit of Rs 150 lakhs. However, if some intermediate
product gets produced, its turnover may be held as includible. [However, this turnover (except clearances
to EOU, SEZ, STP, EHTP, UN etc.) will have to be considered for calculating exemption limit of Rs 400
lakhs].
EXPORT TURNOVER TO BE EXCLUDED - The limit of Rs 150 lakhs is of clearance for home
consumption, i.e. within India. Export turnover should not be considered for the purpose of calculating the
turnover of 150 lakhs.

Exports to Nepal and Bhutan cannot be excluded, i.e. export turnover to Nepal and Bhutan will have to be
considered while calculating limit of Rs 150 lakhs. It will be treated as 'clearance for home consumption',
even if actually it is 'export'. Exports to Nepal and Bhutan will have to be included whether payment is
received in Indian Rupees or in free foreign currency. [Same provision for calculating limit of Rs 400
lakhs].

EXPORT UNDER BOND THROUGH MERCHANT EXPORTER TO BE EXCLUDED - If the exports are
under bond without payment of duty through an export house, these will not be considered for SSI
exemption limit i.e. it will be excluded for calculating exempted turnover. This is because, in such case,
the clearance is not for 'home consumption'. [Same provision for calculating limit of Rs 400 lakhs].

TURNOVER OF NON-EXCISABLE GOODS SHOULD BE EXCLUDED – Some goods are non-excisable,


i.e. these are not included in Tariff at all. In such case, its turnover cannot be considered for purpose of
exemption limit. [Same provision for calculating limit of Rs 400 lakhs].

GOODS MANUFACTURED WITH OTHER’S BRAND NAME NOT TO BE INCLUDED - A SSI unit can
manufacture goods with brand name belonging to others. Such goods are not exempt from duty and full
duty is payable on such goods. This turnover has to be ignored for calculating SSI exemption limits of Rs
150 lakhs. [However, if these goods are manufactured in rural area with other’s brand name, these are
exempt upto Rs 150 lakhs. In such case, that turnover will have to be considered for calculating
exemption limit of Rs 150 lakhs]. [Same provision for calculating limit of Rs 400 lakhs].

INTERMEDIATE PRODUCTS - Value of intermediate products manufactured while producing final


products which are eligible for SSI exemption cannot be considered for calculating limits of Rs 150 lakhs,
if both intermediate product and final product are eligible for SSI concession. Such intermediate product is
fully exempt from duty. - - However, if final product is exempt under any other notification, the value of
intermediate product will have to be considered, i.e. included for considering SSI exemption [Same
provision for calculating limit of Rs 400 lakhs].

STRIPS OF PLASTICS USED WITHIN FACTORY - Clearance of strips of plastics used within factory of
production for weaving of fabrics or manufacture of sacks or bags made of polymers of ethylene or
propylene are exempt. [Same provision for calculating limit of Rs 400 lakhs].

JOB WORK WHICH DOES NOT AMOUNT TO MANUFACTURE TO BE EXCLUDED - Job work of test,
repairs, reconditioning etc. as this does not amount to ‘manufacture’ i.e. where new and identifiable
product does not emerge. [Same provision for calculating limit of Rs 400 lakhs].

Partial exemption if Cenvat on input availed - The full exemption upto Rs 150 lakhs is available only if the
unit does not avail Cenvat credit on inputs. However, once the SSI unit starts to avail Cenvat credit and
pay duty, he cannot then avail SSI concessional rate of duty for the whole year. However, option to avail
Cenvat and pay duty can be availed any time during the year. - CBE&C circular No B-41/2/97-TRU dated
14.7.1997.

Cenvat on capital goods permissible - The SSI unit can avail Cenvat credit on capital goods even if it is
availing SSI exemption and not availing Cenvat on inputs. However, the Cenvat credit on capital goods
can be utilised only after the turnover reaches 150 lakhs. Even if the capital goods are received during the
period when his turnover was less than Rs 150 lakhs, he can take credit only after his turnover crosses
Rs 150 lakhs (He should make suitable entries in Cenvat credit on capital goods account, but actually
start debiting the account only after turnover crosses Rs 150 lakhs). If the unit pays duty, it can avail and
utilise Cenvat both on inputs and capital goods without any restrictions.
How to calculate the SSI exemption limit of Rs 400 lakhs - While calculating turnover of Rs. 400 lakhs,
some of turnover of SSI is not to be considered, while some has to be considered, as discussed below.
[Note the differences in provisions in calculating limits of Rs 150 lakhs and Rs 400 lakhs].

Turnover to be excluded – While calculating limit of Rs 400 lakhs, following is to be excluded –

EXPORT TURNOVER TO BE EXCLUDED - The limit of Rs 400 lakhs is of clearance for home
consumption, i.e. within India. Export turnover should not be considered for the purpose of calculating the
turnover of Rs 400 lakhs.

EXPORT UNDER BOND THROUGH MERCHANT EXPORTER TO BE EXCLUDED - If the exports are
under bond without payment of duty through an export house, these will not be considered for SSI
exemption limit i.e. it will be excluded for calculating exempted turnover. This is because, in such case,
the clearance is not for 'home consumption'.

DEEMED EXPORTS TO BE EXCLUDED – Goods can be cleared to EOU, SEZ, EHTP or STP unit or to
UN or an international organisation without payment of duty. Such clearances are not to be considered for
calculating the exemption limit of Rs 400 lakhs. [Same provision for calculating limit of Rs 150 lakhs].

TURNOVER OF NON-EXCISABLE GOODS SHOULD BE EXCLUDED – Some goods are non-excisable,


i.e. these are not included in Tariff at all. In such case, its turnover cannot be considered for purpose of
exemption limit.

GOODS MANUFACTURED WITH OTHER’S BRAND NAME NOT TO BE INCLUDED - A SSI unit can
manufacture goods with brand name belonging to others. Such goods are not exempt from duty and full
duty is payable on such goods. This turnover has to be ignored for calculating SSI exemption limits.

However, goods manufactured in rural area under other’s brand name will have to be included.

INTERMEDIATE PRODUCTS - Value of intermediate products manufactured while producing final


products which are eligible for SSI exemption cannot be considered for calculating limits of Rs 400 lakhs,
if both intermediate product and final product are eligible for SSI concession. However, if final product is
exempt under any other notification, the value of intermediate products will have to be considered. [Same
provision for calculating limit of Rs150 lakhs].

JOB WORK OR ANY PROCES WHICH DOES NOT AMOUNT TO MANUFACTURE TO BE EXCLUDED
- Job work of test, repairs, reconditioning etc. is not to be included, as this does not amount to
‘manufacture’ i.e. where new and identifiable product does not emerge. Similarly, if any processing or
operation is done which does not amount to manufacture, its value will not be included. - - Goods
returned and cleared after processing are not includible as value of goods for clearances can be
considered only once and not twice over. – Kusum Chemicals v. CCE 2002(144) ELT 346 (CEGAT).

STRIPS OF PLASTICS USED WITHIN FACTORY - Clearance of strips of plastics used within factory of
production for weaving of fabrics or manufacture of sacks or bags made of polymers of ethylene or
propylene are exempt. [Same provision for calculating limit of Rs150 lakhs].

INPUTS BROUGHT BY ASSESSEE AND CLEARED AS SUCH NOT TO BE CONSIDERED - A unit can
clear inputs as such on payment of duty under rule 3(4) of Cenvat Credit Rules [That time rule 57AB(1)
(b) - earlier 57F(1)(ii)]. This turnover is not to be considered for calculating clearances of Rs. 150/400
lakhs - Board circular No. 263/30/88-CX.8 dated 27-10-88.

Turnover to be included – While calculating limit of Rs 400 lakhs, following is to be included -


TURNOVER OF GOODS EXEMPTED UNDER OTHER NOTIFICATION TO BE INCLUDED – If SSI unit
clears goods under some other exemption notification, its turnover will have to be considered i.e. included
for calculating exemption limit of Rs 400 lakhs. - - Thus, job work done by SSI unit is exempt under
notification No. 214/86-CE or 83/94-CE. This turnover will have to be considered i.e. included for
considering exemption limit of Rs 400 lakhs. The valuation will have to be done on basis of material cost
plus job charges. - - Similarly, goods exempted under any other notification i.e. other than SSI exemption
notification will have to be included. - - However, clearances to EOU, SEZ, EHTP, STP, UN or other
international agency without payment of excise duty will not be considered for calculating exemption limit
of Rs 400 lakhs. [If goods are excluded under any notification other than SSI exemption notification, that
turnover has to be excluded for calculating limit of Rs 150 lakhs].

GOODS MANUFACTURED IN RURAL AREA WITH OTHER’S BRAND NAME TO BE INCLUDED - If


goods are manufactured in rural area with other’s brand name, these are exempt upto Rs 150 lakhs. In
such case, that turnover will have to be included for calculating exemption limit of Rs 400 lakhs [Same
provision for calculating limit of Rs150 lakhs].

Option to pay full duty to SSI without availing concession - An SSI unit is allowed to pay full duty
even if it is entitled to pay concessional duty. He can avail and utilise Cenvat on inputs as well as capital
goods. Option once exercised cannot be changed during the year. It is not permissible to pay full duty on
part clearance and concessional duty on part of the clearance. The option must be informed in writing to
Assistant Commissioner with copy to Superintendent.

This option is useful to SSI units which supply goods to other units which can avail Cenvat of duty paid by
SSI. If such option is not available to SSI, the duty paid on inputs used by SSI units is not available for
Cenvat credit.

No concession if previous year’s turnover was over four crores - SSI exemption is available only to those
units whose turnover was less than Rs. 4 crores in previous financial year (i.e. April to March). If turnover
had exceeded Rs. 4 crores in previous year, there is no excise exemption at all and full excise is payable
right from the beginning. If turnover exceeds four crores in current year, concession availed during current
year need not be refunded, but next year, there will be no SSI concession - confirmed in Searsole
Chemicals v. CCE 1999(113) ELT 435 (CEGAT). [Note : the ceiling was Rs. 2 crores in 94-95, which has
been increased to Rs. 4 crores in 95-96. Thus, SSI units whose turnover was less than Rs. 4 crores in
2000-01 can avail SSI exemption in 2001-02.]

ONLY PREVIOUS YEAR'S TURNOVER RELEVANT - In Karnataka Gears v. CCE 1999(110) ELT 529 =
29 RLT 543 (CEGAT), it was held that only previous year's turnover is relevant for purposes of SSI
exemption. Turnover in respect of any other past year is not to be considered.

SSI exemption available in respect of goods exported to Nepal & Bhutan - The SSI exemption is available
for home consumption, i.e. for consumption within India. However, explanation to SSI exemption
notifications make it clear that clearances for home consumption shall also include clearances for export
to Bhutan & Nepal. Thus, exports to Nepal & Bhutan will qualify for SSI exemption. In Unitherm
Inductoweld v. CCE 2000(123) ELT 1162 (CEGAT), it was held that exports to Nepal will be includible
even if the export is under bond without payment of excise duty.

Other Exemptions to small sector - Besides the aforesaid general exemption, there are specific
exemptions.

Goods manufactured without aid of power - Some goods are exempt if no process in or in relation to
manufacture of these goods is ordinarily carried on with aid of power. Some of these are mentioned in
CETA itself and some in a Notification No. 167/86 dated 1-3-86. Apex Court in CCE v. Rajasthan State
Chemical Works - 1991 (55) ELT 444 (SC) = (1991) 4 SCC 473 = 1991(2) SCALE 602 have held that
process in manufacture or in relation to manufacture implies various stages through which the raw
material is subjected to change by different operations. Thus, handling of raw materials or filling of pans
are so interrelated that without these manufacturing process is impossible to be completed. Hence, if
power is used in any of these operations, it is a case where, in or in relation to the manufacture, the
process is carried on ‘with aid of power’.

Goods in rural area by cooperatives - Some goods manufactured by registered cooperatives or


institutions recognized by Khadi and Village Commission or Board are exempt. These are : preparations
of vegetable or fruits, sauces, laundry soap, foot-wears, calculators, cassettes, radios, black and white TV
sets, electric iron and toaster, electronic clocks and watches, synthetic detergents, jute yarn and fabrics.
This exemption is available to un-branded goods. If the goods are branded, the exemption is available
only if the brand or trade name belongs to (a) the manufacturer producing the goods himself or (b) if it
belongs to Khadi & Village Industries Commission or Board, (c) National Small Industries Corporation or
State Industries Development Corporation or (d) a State Small Industries Development Corporation. In
other words, the exemption is not available if the brand name belongs to a private trader who is not
manufacturing those goods (Notification No. 88/88 dated 1-3-88 as amended).

Genuine specified products of village industry - Certain items produced by village industry and marketed
by or with assistance of Khadi & Village Industries Commission are exempt from duty. The products
include - lac, gum, vegetable products, fireworks, resin acids, articles of vulcanised rubber, articles of
leather, articles of wood, ceramic products, furniture etc. [Notification No 198/87-CE dated 28.8.1987].

Procedural concessions to SSI - Following are some procedural concessions to SSI.

QUARTERLY RETURN - The SSI unit availing SSI concession need not submit monthly ER-1 return.
They have to submit a quarterly ER-1 return, by 20th of following month.

PAYMENT BY 15TH OF FOLLOWING MONTH - SSI units have to pay duty by 15th of following month,
while large units have to pay duty by 5th of following month. Both have to pay duty in March by end of the
month.

EXPORT PROCEDURES FOR SSI - The SSI units not covered under excise provisions have to follow
simplified export procedures. They do not have to prepare ARE-1 form etc. The procedure has been
discussed in a previous chapter.

Sending material for job work by exempt SSI unit - SSI unit can send his raw materials or semi-finished
material to another unit for job work. Such another unit can carry out job work and return to SSI unit
without payment of duty. The SSI unit can do further processing on these inputs and clear his final
product without duty if his total turnover is below Rs. 150 lakhs.

The SSI unit has to file two declarations with Assistant / Deputy Commissioner for this purpose. The job
worker may be a small unit or large unit. The job worker does not have to pay duty if the SSI unit sending
goods for job work follows prescribed procedure. - refer notification Nos 83/94 and 84/94 dated
11.4.1994.

Exempted small units Exempt from registration - Exempted small units, having turnover below Rs. 150
lakhs, which are exempt from duty, are also exempt from provisions of registering their unit with excise
authorities.

These small units, which are exempt from registration, do not have to follow any other excise formality.
However, they have to maintain their own records of manufacture and clearance, to prove that their
turnover is less than Rs. 150 lakhs per year.
While calculating the turnover, the export turnover is not to be considered. Thus, even if the export
turnover exceeds Rs 150 lakhs, no registration is necessary if domestic turnover ('home consumption' in
excise terminology) is less than Rs 150 lakhs - [MF(DR) circular No 284/118/96-CX dated 31.12.1996].

Visit of officers only with prior approval - Excise inspectors, preventive parties and audit parties can visit
SSI unit only with specific permission of Assistant Commissioner and for a specific purpose. They have to
enter relevant particulars in Visitors book maintained by registered person - CBE&C Circular No. 19/92-
Cx.6 dated 18-12-1992. - similar earlier telex F No 233/17/86-CX dated 10.3.1986.

Audit of SSI unit once in two to five years - Audit of SSI units should be done only as per following
frequency - (a) Units paying duty of Rs one crore or above (PLA) in financial year should be audited every
year. (b) Audit of units paying duty of Rs 10 lakhs (PLA) and above but less than Rs one crore (PLA) in
financial year, should be normally audited once in two years. (c) Not more than 20% of units paying duty
less than Rs 10 lakhs in a financial year shall be audited every year. Selection will be based on risk
pattern as above. [Thus, such small units may be audited only once in five years]. – CBE&C circular No.
580/17/2001-CX dated 29-6-2001.

Branded Goods and SSI

Some large units get their goods manufactured from small unit under their brand name or trade name. For
example, Bata gets many of their Chappals made from small units. Similarly, Bajaj Electricals/Philips India
etc. get many electrical goods made from small units with Bajaj/Philips brand name. In such cases, the
small unit will not be eligible for excise exemption. However, if the small unit manufactures goods under
his own brand name, SSI exemption is available. If he manufactures goods bearing brand name of any
other person, SSI exemption is not available.

In CCE v. Fine Industries 2002(146) ELT 53 (CEGAT 3 member bench), it was observed that the
exemption to SSI is designed to enable the small manufacturer to survive in the market in competition
with the ineligible manufacturer (i.e. who sales under a brand name). But if he (i.e. small scale
manufacturer) joins or identifies himself with the ineligible manufacturer, his goods become one with the
goods of such ineligible manufacturer. In the market they will be understood as one and the same goods.
They no longer need the benefit under (SSI exemption) notification. [In this case, it was held that SSI
exemption can be denied only if he uses brand name of another manufacturer on the same goods, but he
will be eligible to SSI exemption if he manufactures different goods under the same brand name].

SSI exemption is not available if brand name or trade name belongs to a foreign person or a non-
manufacturing trader - Namtech Systems Ltd. v. CCE 2000(115) ELT 238 = 36 RLT 35 (CEGAT 5
member bench - 3 v. 2 order). – followed in Ashwin Enterprises v. CCE 2002(147) ELT 1143 (CEGAT) –
assessee’s appeal admitted by SC but no stay – 151 ELT A183.

SSI exemption is not available if brand name belongs to a company belonging brother of appellant
company’s director. – Alaska Tyres v. CCE 2002(145) ELT 329 (CEGAT).

SSI units manufacturing goods bearing a brand name of another are exempt from duty, if these goods are
manufactured in rural area.

SSI exemption is not available only if the brand name or trade is of another person. Thus, if the brand
name or trade name does not belong to any another person, SSI exemption will be available to the
manufacturer. It is not requirement that the brand name must belong to the SSI manufacturer. The only
requirement is that it should not be of another person.

DISTINCTION BETWEEN HOUSE-MARK AND TRADE MARK - A ‘house mark’ indicates the name of
person manufacturing the goods while a trade mark indicates the product by which it is identified or sold.
For example, ‘Hindustan Lever’ has a logo identifying it with the company, while it has various brands like
‘Lux’ to identify various products manufactured by it. Of course, some times, both can be same e.g.
‘Godrej’ is house mark, which is also used as brand name on the steel furniture of the company.

A ‘house mark’ is an emblem of manufacturer projecting the image of manufacturer generally. Such
‘house mark’ may be in the form of emblem, word or both. It is used on all the products of manufacturer.
On the other hand, a ‘product mark’ or ‘brand name’ is used which is invariably a word or combination of
word and letter or numerical by which the product is identified and asked for.

Provisions in respect of brand name - Brand name or trade name means any name or mark such as
symbol, monogram, label, signature, or invented word or writing which is used in relation to the goods for
the purpose of indicating, or so as to indicate a connection in the course of trade between such goods
and some person using such name or mark. The name or mark may or may not indicate identity of that
person. The brand name or mark or trade name may or may not be registered. [Definition as per SSI
exemption notifications].

Thus, the definition is very wide. Even name of person who markets the goods, if used on the product,
may attract the provision, as such name or mark indicates the connection between the goods and person
using that name or mark.

Provision applicable in respect of Brand name of final product only - Some SSI units manufacture a
component or part which bears the brand name or trade name. These parts are for use by the large
manufacturer as a part (Original Equipment part) e.g. (a) a glass bottle may be manufactured by an SSI
unit where the name ‘Pepsi’ or ‘Coca-Cola’ is engrossed (b) a SSI unit may manufacture a small
component bearing ‘Telco’ mark, where the part will be used by Telco while manufacturing their truck (c)
a SSI bag manufacturer may make bags with ‘ACC’ or ‘L&T’ mark and supply it to ACC/ L&T. (d) A small
manufacturer may manufacture lock with ‘VIP’ mark, which will be used by manufacturer of VIP Bags as a
part of the bag. In such cases, the manufacturer of such parts/components will be eligible for SSI
concession.

BRAND NAME IS OF THE GOODS, NOT ITS PART - Goods which are only part of an article sold as OE
(Original Equipment) to the manufacturer of final product are not covered under the provision of ‘branded
goods’, as the brand name is in relation to the goods and not to its component or part e.g. ‘Coca-Cola’ is
trade name of the cold drink and not of the bottle.

Brand name should be ‘in course of trade’ - There are two conditions to bring goods in the mischief of SSI
exemption notification (a) such brand name must indicate connection with the branded goods and (b)
Such connection should be in course of trade. If there is no ‘trade’ of such goods, the brand name
provisions will not apply.

GOODS BEARING FOREIGN BRAND NAME NOT ELIGIBLE - Use of foreign brand name would dis-
entitle the manufacturer of the SSI concession - India Reprographic Systems (P.) Ltd. v. CCE 1995 (75)
ELT 112 (CEGAT) - quoted and followed in Sonoma Aromatics (P.) Ltd. v. CCE 1995 (78) ELT 285
(CEGAT) - finally confirmed in Namtech Systems Ltd. v. CCE 2000(115) ELT 238 = 36 RLT 35 (CEGAT 5
member bench - 3 v. 2 order).

MERE MARKING 'IN TECHNICAL COLLABORATION WITH - - -' OR 'UNDER LICENCE FROM - - ' IS
NOT BRANDING - In Weigand India (P) Ltd. v. CCE 1997(94) ELT 124 (CEGAT), the assessee was
manufacturing goods showing his name as manufacturer. The name plate declared that the goods were
manufactured in technical collaboration with 'GEA Wiegand GMBH Ltd., West Germany'. This was as per
terms of technical collaboration agreement. It was held that this does not amount to use of brand name of
another person and SSI exemption is available. – followed in Sonnenflex Abrasives v. CCE 2002(145)
ELT 165 (CEGAT), where in fact, ‘Sonnenflex’ was the name of Indian manufacturer as well as foreign
collaborator. However, logo of foreign collaborator was not adopted.
Putting name and address of Marketer / distributor - In DCI Pharmaceuticals P Ltd. v. Superintendent
2000(115) ELT 45 (Bom HC DB), it has been held that if SSI unit manufactures goods under his brand
name, he will be entitled to SSI concession even if distributor's name and logo are printed on cartons,
unless it is established that the distributor also manufactures goods under same brand.

PUTTING NAME OF SERVICE AGENCY - In Demech Erectors v. CCE 1999(110) ELT 831 (CEGAT), it
was held that putting name of service agent is not branding. In this case, the manufacturer was putting his
own brand 'Pride' on the washing machine. In addition a plate marked ‘Serviced by Racold’ was put.

Brand name for a particular product can be used by another for other product only if registered - If a
brand name is registered for a particular product, other manufacturer can use it for another product and in
such cases, he will be eligible for normal SSI concession only if the brand name is registered. Similarly, it
may happen that a person may be using a brand name or trade name, (belonging to other), for a different
product with same brand name. In such cases, the provisions regarding ‘brand name’ will not apply e.g.
‘Maruti’ is brand name of car, but same brand name may be used by some independent person for oil or
soap. In such case, manufacture of oil or soap by an SSI unit under ‘Maruti’ brand name will be eligible for
SSI concession only if his brand name is registered.

Assignee of brand name is eligible for SSI concession – In P&B Pharmaceuticals v. CCE 2003(153) ELT
14 (SC), it was held that once a logo is assigned, the assignee is entitled to SSI exemption, even if third
party or assignor is also using the logo. There is no obligation on owner of a logo to make a roving
enquiry to ascertain whether any other person is using his logo and then disclose it to department to avert
a possible allegation of suppression of facts.

Concession if goods under brand of Khadi Board - The provision regarding brand name is not applicable if
the brand belongs to Khadi and Village Industries Commission or State Khadi and Village Industries
Board. Thus, SSI unit making goods under brand name of Khadi and Village Board or Commission will be
entitled to the SSI concession.

Brand name not belonging to any one eligible for SSI concession - In lock industry, there is a practice to
use a mark or name even though it is not owned by any particular person. Provision of brand name apply
if the trade name indicates a connection between specified goods and some person using such name or
mark. If there is no person to claim ownership of that mark or name, it does not belong to any person and
any body is free to use the name or mark. In such case, units using trade name or brand name, not
belonging to any person, are eligible for SSI exemption. - MF(DR) Circular No. 52/52/94-CX dated 1-9-
1994]. The principle should be applicable to all goods which are eligible for SSI concession.

Valuation in respect of branded goods manufactured by SSI - The valuation aspect has been
discussed in an earlier chapter. However, the summary is highlighted here - (a) If the brand name does
not belong to the manufacturing unit, it is not entitled to any SSI concession. It has to pay full normal duty.
(b) The duty is payable on the basis of price charged by SSI unit to the brand name owner, if the
relationship between the SSI manufacturer and the brand name owner is on 'principal to principal' basis.
(c) If the goods are covered under section 4A, i.e. valuation on basis of Maximum Retail Price printed on
the carton, the manufacturing unit has to pay duty on basis of MRP printed on the product package,
irrespective of the price at which he is selling the product. (d) Brand name owner will not be treated as
manufacturer if relations between actual manufacturer and brand name owner are on 'principal to
principal' basis.

Exemption if branded goods manufactured in rural area - Excise duty on goods manufactured under
other’s brand name will be exempt if these are manufactured in rural area. 'Rural area' means the area
comprised in a village as defined in the land revenue records, excluding (i) Area under any municipal
committee, municipal corporation, town area committee, cantonment board or notified area committee or
(ii) Any area that may be notified as an urban area by State Government or Central Government.
It is highly advisable to obtain certificate from State Government Revenue Authorities that the factory is
within the ‘rural area’ as per land revenue records.

It must be noted that this exemption is only in respect of first turnover of Rs 150 lakhs. Full duty is payable
for subsequent clearances. Further, if turnover of the SSI manufacturer during previous year was over Rs
four crores, he is not entitled to SSI exemption at all and full duty is payable on all clearances during the
following financial year without availing exemption.

Clubbing of Clearances of SSI

If the same manufacturer (i.e. firm with same partners or same limited company or same proprietor) has
more than one factories, turnover of all the factories will be clubbed together for calculating the limit of Rs.
150 lakhs or 4 crores. Thus, if a manufacturer has one unit at Mumbai with 1.2 crores turnover and
another unit at Delhi with 2.1 crores turnover, he will not be entitled to Excise exemption in any of the
factories.

Some times, as a tax planning, a manufacturer may start another unit, instead of increasing production in
his own factory, so that both units can avail SSI concession. If the other unit belongs to same proprietor or
same company or same partnership firm, the turnover of both these units will be added together for
purpose of SSI concession. To avoid this, the other unit may be started under different partnership or
under different companies. If such other unit is genuinely separate and independent, their turnover will not
be clubbed. However, if the other unit is a ‘sham’ or a ‘facade i.e. deceptive front’ or a ‘bogus unit’, the
turnover of these two units will be clubbed i.e. considered in total for calculating SSI exemption limit. This
is called ‘clubbing of turnover’.

No clubbing of units belonging to Government, Khadi and Village Commission etc. - Central
Government, State Government, State Industries Corporation, State Khadi and Village Industries Board,
National Small Industries Corporation, State Small Industries Development Corporation or Khadi and
Village Industries Commission may hold more than one factories. However, their turnover will not be
clubbed and turnover of each factory will be considered separately for calculating the limit of 150/400
lakhs.

Clubbing if more than one manufacturer in same factory - In some cases, more than one
manufacturer manufactures the goods in one factory. This usually happens in following cases -

ONE MANUFACTURER MANUFACTURES FOR PART OF YEAR AND THEN OTHER - One
manufacturer manufactures goods for some part of the year and then sells/transfers the unit. The other
manufacturer manufactures in remaining part of the year in the same factory.

MORE THAN ONE MANUFACTURERS IN ONE SHED - One large shed is hired by numerous small
units for manufacturing purposes and each small manufacturer uses a small portion of it. In such case,
clubbing provisions will apply. [However, in case of small textile units, such clubbing provision will not
apply – see discussions later].

FACILITIES OF ONE FACTORY USED ON SHARING BASIS - Facilities of one factory are shared by
different manufacturers on time sharing or other basis. In such cases, turnover of all those manufacturers
will be clubbed together for calculating the excise exemption limits. - Indica Laboratories v. UOI - 1990
(50) ELT 210 (Guj).

CLUBBING IF CHANGE OF OWNERSHIP DURING THE YEAR - If ownership of factory changes during
the year, clearances of previous owner as well as new owner during the year will be clubbed for
calculating the value of clearances for purpose of SSI exemption - Gaurav Equipments (P.) Ltd. v. CCE -
1993 (66) ELT 438 (CEGAT).
No Clubbing provisions if two factories belong to different owners - There are various forms of
ownership of an industrial unit i.e. (a) proprietorship (b) partnership firm (c) limited or private limited
Company (d) Hindu Undivided Family (HUF) (e) Family Trust. All these forms of ownership have separate
and distinct existence. Clubbing provisions are applicable if two or more SSI units belong to same
proprietor or to same partnership firm or to same private limited company. However, if one unit ‘A’
belongs to a proprietor ‘P’ and other unit ‘B’ belongs to a partnership firm where ‘P’ is one of the partners,
turnover of ‘A’ and ‘B’ cannot be clubbed as the partnership has independent legal status different from its
partners. Similarly, if ‘A’ belongs to one partnership firm and ‘B’ belongs to another partnership firm where
some partners are common in both firms, both the units i.e. ‘A’ and ‘B’ will be entitled to separate excise
exemption. Same thing holds true if one unit is a firm and other is a limited Company where some
partners of the firm are directors.

No Clubbing if two units are independent and no financial flow back - Clubbing provisions do not
apply if both units namely ‘A’ and ‘B’ are genuinely independent units. Often more than one factories are
established to avail of excise concession and real owner is same. As explained above, if there are more
than one factories and various combinations of ownership are : (a) one belonging to a Proprietor and
other to a partnership firm, where proprietor is one of the partners (b) One belongs to a partnership firm
and other also to another partnership firm, where some partners are common and some are close
relatives (c) One to partnership firm and other to limited Company, where relatives of some partners of
the firm are directors in the limited Company. (d) one belongs to HUF and other to firm where Karta of
HUF is a partner - Shakti Engg Works v. CCE - 1989 (40) ELT 95 (CEGAT). (e) two belong to limited
companies with some common directors - Cosmos (India) Rubber Works (P.) Ltd. v. UOI - 1988 (36) ELT
102 (Bom HC) * ITEC (P.) Ltd. v. CCE - 1992 (57) ELT 639 (CEGAT) (f) Two companies with related
directors and common product Padma Packages P Ltd. v. CCE 1997(90) ELT 175 (CEGAT).

Other similar combinations are possible. In all these and similar cases, if these two units are truly
independent their turnover cannot be clubbed. However, if the two units are formed with sole or main
purpose of saving on excise, these would be sham i.e. bogus units.

Totality of circumstances should be seen - Tribunal has held that the most important test is that if there is
no financial control by one over the other and if there is no flow back of profits, the two units will be
treated as independent units. Other tests to establish that the two factories are independent are :
separate power connection, separate financial arrangements, separate material procurement, separate
registration with Government authorities like sales tax, income-tax etc., separate employees etc. In short,
if the two units are really independent, their turnover will not be clubbed solely because some
partners/directors/their relatives are common.

Common funding and financial flow back are important. Mere circumstance of functioning in adjacent
premises and partners being related to one another is not sufficient to warrant clubbing. The factors which
would be necessary to consider clubbing are common control of production and sales, management
control and special financial inter-linking other than normal commercial transactions. If the combination of
circumstances create a pattern indicative of clearances from plurality of units being made by a
manufacturer, clubbing would be warranted.- Vir Industries v. CCE 1999(109) ELT 322 (CEGAT). [The
decision summarizes major case law in this regard].

Identity of interest should be considered - In H T Bhavnani Chemicals P Ltd. v. CCE 1997(92) ELT 502
(CEGAT), it was held that it is not that financial flow back should be established to justify clubbing of
clearance, but the identity of interest among the firms and the intention of partners. In this case, another
firm was started when the turnover limit of existing unit was reaching the limit. There was no other reason
for establishing another unit.

In Naresh Shroff v. CCE 1997(92) ELT 180 (CEGAT), it was held that two units can be regarded as one
only when there is mutuality of interest and both units are functioning as one and also financial flow back
and integrity of operations between the two units. Unless these factors are established by evidence on
record, it cannot be held that both the units are one and the same entity. In CCE v. Kesharbai Electronic
P Ltd. 2000(122) ELT 851 (CEGAT), it was held that two private companies having some common
directors cannot be treated as ‘related persons’ unless there is mutuality of interest.