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7th Semester
Section A

It is my privilege to record my deep sense to perform gratitude to those who helped me in
completion of this project.
In making of this project many people helped me immensely directly or indirectly.
First of all I would like to thank Dr. K. Y. Danyal who had given me this project. I would
like also to thank my friends and the Librarian for helping me out in the research.

Fahimuddin Ahmed Khan


BASIS OF LEVY......................................................................................................................5
LAWS RELATING TO EXCISE DUTY................................................................................6
CONDITIONS FOR LEVIABILITY OF EXCISE DUTY..................................................8
ILLUSTRATIONS OF MANUFACTURE..........................................................................16
ILLUSTRATIONS: WHAT IS NOT MANUFACTURE....................................................17
DEEMED MANUFACTURE................................................................................................19

The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of
duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The
taxable event under the Central Excise law is manufacture / production and the liability of
Central Excise duty arises as soon as the goods are manufactured or produced. As per the
Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central
Excise Tariff Act, 1985.
The Central Excise law is administered by the Central Board of Excise and Customs (CBEC
or Board) through its field offices, the Central Excise Commissionerates. For this purpose,
the country is divided into 23 Zones and a Chief Commissioner of Central Excise heads each
Zone. There are total 92 Commissionerates in these Zones headed by Commissioners of
Central Excise. Divisions and Ranges are the subsequent formations, headed by
Deputy/Assistant Commissioners of Central Excise and Superintendents of Central Excise,

Till 1969, there was physical control system wherein each clearance of manufactured from
the factory was done under the supervision of the Central Excise Officers. Introduction of
Self-Removal procedure was a watershed in the excise procedures. Now, the assessees were
allowed to quantify the duty on the basis of approved classification list and the price list and
clear the goods on payment of appropriate duty.
In 1994, the gate pass system gave way to the invoice-based system, and all clearances are
now effected on manufacturers own invoice. Another major change was brought about in
1996, when the Self-Assessment system was introduced. This system is continuing today
also. The assessee himself assesses his Tax Return and the Department scrutinises it or
conducts selective audit to ascertain correctness of the duty payment. Even the classification
and value of the goods have to be merely declared by the assessee instead of obtaining
approval of the same from the Department.
In 2001, new Central Excise (No.2) Rules, 2001 have replaced the Central Excise Rules,
1944 with effect from 1 July 2001. Other rules have also been notified namely, CENVAT
Credit Rules, 2001, Central Excise Appeal Rules, 2001 etc. With the introduction of the new
rules several changes have been effected in the procedures. The new procedures are
simplified. There are less numbers of rules, only 32 as compared to 234 earlier.

Excise duty is levied under the authority of Entry 84 and 97 of List 1 of Schedule 7 of the
Indian Constitution.
Entry 84 of List 1 of the Seventh Schedule in the Constitution of India reads as follows:
Duties of excise on tobacco and other goods manufactured or produced in India, except
alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet
preparations containing alcohol, opium or narcotics.
Power to impose excise on alcohol, liquor or opium and narcotics is granted under Entry 51
of List II of the Seventh Schedule of the Constitution to the states and that is called State
In some cases, duty is payable on deemed manufacture. Even if such duty is not leviable
under Entry 84, it can be taxed under Entry 97 which is the residual entry.




This is the basic Act providing for charging of duty, valuation, powers of officers,
provisions of arrests, penalty etc. it has been amended from time to time.
Section 37(1) of the CEA, 1944 grants the power to the government to make rules to
carry into effect the purpose of CEA, 1944. Rules can make the provisions for penalty
and prosecution. Such rules include the Central Excise Rules, 2002; Cenvat Credit
Rules, 2004; Central Excise Valuation (Determination of Price of Excisable Goods)
Rules, 2000; Central Excise (Appeal) Rules, 2001; Central Excise (Settlement of
Cases) Rules, 2001; Central Excise (Removal of Goods at Concessional Rate of Duty

for Manufacture of Excisable Goods) Rules, 2001 etc.

Under Sections 5A and 11C of the Central Excise Act, 1944, the central government
has been given the power to issue notifications in order to grant full or partial
exemptions to goods from excise duty. Similarly, the rules also provide provisions for
issuing of notifications for various matters. Each rule and notification has to be placed
before each of the Parliament houses for a total period of 30 days. The rules and

notifications are treated as part of the Act itself.

Goods are classified under this Act under various heads in 96 chapters and a specific
code is assigned to each of them. It is based on the different duties leviable on
different types of goods.


Section 3 of the Central Excise Act is called the charging section. It states that:

There shall be levied and collected in such manner as may be prescribed duties on all
excisable goods (excluding goods produced or manufactured in special economic zones)
which are produced or manufactured in India
Basic excise duty is levied under Section 3 of the Central Excise Act at rates given under
Schedule I to the Central Excise Tariff Act, 1985.
There are mainly 4 major essentials for the levy of central excise duty:
1. The duty is on the good
2. The goods must be excisable
According to section 2(d) of the Central Excise Act, excisable goods have been defined as
goods specified in the schedule to CETA as being subject to a duty of excise and includes
As per judicial pronouncements, there are two main conditions for a good to be excisable, the
following two conditions need to be satisfied:
a. It must be movable immovable property or property attached to the earth is not
b. It must be marketable the item must be such as is capable of being bought or sold.
The goods must be known in the market. Otherwise, duty is not leviable. However,
actual sale is not required. Also, only one purchaser may also be sufficient to establish
In Triveni Engineering v. CCE1, it was observed that goods to be marketable must be in a
position to be taken to the market and sold as such. If they have to be separated or disassembled before moving them, the test is not satisfied. Huge tanks separate from the earth
but which cannot be physically moved without dismantling are also not goods.
In the case of Union of India v. Delhi Cloth Mills2, DCM was manufacturing Vanaspati. The
raw materials used were groundnut and sesame oil. During the manufacturing process,
refined oil got produced at an intermediate stage which was consumed within factory for
1 AIR 2000 SC 2896
2 AIR 1963 SC 791

manufacture of Vanaspati. The excise department demanded excise on this refined oil. During
those days, Vanaspati was not excisable but refined oil was. However, the refined oil was not
deodorised, and that was an essential part of the manufacture of refined oil. It was held that in
the market, the product was not known as refined oil unless it was deodorised. Thus, such
refined oil was not a good and hence, excise duty could not be levied on that.
CBEC, vide Circular No. 904/24.2009-CX dated 28-10-2009, has clarified that waste such as
dross, skimmings, bagasse, residues, refuse etc. will be subject to excise duty (as it is capable
of being sold). Waste for the purpose of this act is treated as a final product. Empty drums
and packing materials in which the inputs were packed cannot be dutiable as they were not
manufactured. Waste arising during cutting and dismantling of old machinery is also not
dutiable as it was not manufactured.
Waste arising during maintenance and repair work is not excisable. In Grasim Industries v.
Union of India3, the issue was whether scrap arising from repairs or maintenance of
machinery were dutiable or not. The assessee was manufacturer of cement. He was repairing
his machinery for which wielding electrodes, steel angles, beams, channels etc. were being
used. During manufacture, mild steel scrap and iron scrap did arise. Department demanded
duty on such scrap. It was held that to be dutiable, the scrap must arise continuously and
regularly in the course of the business of the product manufactured by the assessee. Goods
are not excisable merely because they are mentioned in the tariff entry. Repairing is not
In Union of India v. Ahmedabad Electricity Co. Ltd. 4, it was held that waste arising in
ancillary process is not manufacture. In this case, coal was used as a fuel to produce steam.
The steam was used in manufacturing process. The coal left cinder after being burnt. The
cinder was held to not be dutiable as it was a waste generated from an ancillary process.
Waste and scrap can beexcisable only if mentioned in CETA and not otherwise.
3 (2011) 273 ELT 10 (SC)
4 AIR 2004 SC 11

In Bata India v. CCE5, the issue was whether theoretical possibility of sale and purchase was
sufficient to prove marketability. In this case, the assesse was manufacturing unvulcanised
sandwiched fabric which was captively consumed for the manufacture of footwear. Such
fabric was also sent to job worker. Vulcanisation of footwear takes place only after
completing the entire process and then it becomes finished footwear. The assessee contended
that the intermediate product is not marketable. He produced certificate from technical
authorities that the product has no commercial identity as such. The department did not
produce any evidence of marketability. It was held that the test of marketability that the
product which is made liable to duty must be marketable in the condition in which it emerges,
without further processing. Hypothetical possibility of purchase and sale is insufficient. Mere
theoretical possibility of the product being sold is not sufficient but there should be
commercial capability of being sold. The burden of proof is on the department to show
marketability. The intermediate product is not marketable and hence not dutiable.
Goods unstable and having very short life are not goods, if not marketable in that short
period. However, if goods are marketable in the short shelf life, they will be excisable
In Nicholas Piramal India v. CCE6, the issue was whether the goods having a short shelf life
can be marketable. In this case, the assessee was manufacturing animal feed supplements
which were exempt from duty. At intermediate stage, Vitamin A was manufactured and
captively consumed. Duty was demanded on the intermediate product. The assessee
contended that the foods are not marketable. Its shelf life is 2 or 3 days and it is unstable in
the stage produced. The department contended that the product is marketable as a finding of
fact. It was held that if the shelf life is 2 or 3 days and it is capable of being sold during that
period, it will be marketable. If the assessee had not manufactured the intermediate product,
5 (2010) 252 ELT 492 (SC)
6 2010) 260 ELT 338 (SC)

they would have to buy it from the market. Thus, the product is marketable and hence
Gas and steam, electricity, electrical energy, drawings or designs, software etc. are all
illustrations of goods.
3. The goods must be manufactured or produced
The term manufacturing is defined in Section 2(f) of the Central Excise Act, 1944 which
includes any process enumerated therein. However all the process would not amount to
manufacturing under this Act. The term process is not defined under the Act. Therefore it
should be understood in a common parlance. The process may be a flow, progress,
movement, transformation, change continuation, a link, an action, happening etc. Any process
which produces distinct and identifiable commodity and renders marketable value then it can
be said to be a manufacturing process.

A commodity whether manufactured or not

necessarily depends on the context and the factors of production/process of the commodity.
Production means among other things, that which is produced; a thing which results as from
any action, process or effort, a product. It is something which is yielded naturally or through
some effort. The word produce has a wider meaning than manufacture. Every manufacture is
production, but every production may not be a manufacture. Production covers all the
intermediate, subsidiary or residual products that arise in course of manufacture.
Manufacture is defined in the Act through an inclusive definition. Section 2(f) defines it as
including any process:
a. Incidental or ancillary to the completion of manufactured product
b. Which is specified in relation to any goods in the section or chapter notes of the First
Schedule to the CETA, as amounting to manufacture
c. Which, in relation to goods specified in Third Schedule of the CEA, involved packing
or repackaging of such goods in a unit container or labelling or re-labelling of
containersor any other treatment to render the product marketable to the consumer.
Clauses b and c are called deemed manufacture.

The word manufacture stems from the Latin word manu, by hand and facere which means
to do, make or form, but the meaning is wide enough to include that which is done by hand as
well as by machinery. Manufacture means bringing into existence a new substance.
Manufacture is the end result of one or more processes, through which original commodity
New substance having distinct name, characterand use must emerge
There are a number of tests to determine when manufacture has taken place:
1. The common parlance test. The test is whether a commodity subject to processing
retains its original character and identity or whether the processed commodity is regarded
in the trade by those who deal in it, as distinct identity from original commodity. With
each step, the original commodity gets changed. But manufacture only is said to take
place from the step when the original commodity changes to such an extent that it leaves
its original character and begins to be recognised as a new and distinct entity altogether.
2. Another test is the test of irreversibility
In the case of Indian Cine Agencies v. CIT8, the court held that by manufacture, something s
produced or brought into existence which is different from that, out of which it is made, in
the sense that the thing produced is by itself a commercial commodity capable of being sold
or supplied. The test to determine whether a thing is manufactured or not is whether a new
and different thing emerges having a distinct name, use and character. The word production
has a wider connotation than manufacture.
In ITO v. Arihant Tiles and Marbles9, the issue was whether the conversion of marble blocks
into tiles and slabs amounted to manufacture or not. It was held that mere cutting of marble
stones into slabs will not amount to manufacture, but since after the process completes, a new

7 Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC 791
8 (2009) 233 ELT 8 (SC)
9 (2010) 186 Taxmann 439

and distinctive polished slab and tile results, it becomes a new and different commodity, it is
In the case of Kesarwani Zarda Bhandar v. State of UP10, the issue was whether zafrani
zarda which was processed from raw tobacco was processed or manufactured. The UP
government had imposed a market fees on agricultural produce in raw form and processed
form. The appellant contended that the zafrani zarda was made from raw tobacco by carrying
out various processes like sprinkling of jiggery juice, cutting it, drying it, adding flavours and
mixing it with other spices and lime etc. thus, raw tobacco loses its original character and
becomes an altogether new product. It is a different commercial commodity and is thus a
manufactured product. It is not a processed agricultural produce. The court held that when a
new form comes into being and in the market parlance, it is considered to be a new product,
the same would be deemed to be manufactured goods as contra-distinguished from processed
goods. Test of manufacture is whether it is a completely new item. In trade, it is known as a
different product. Applying common parlance test, the product is a manufactured good.
A manufacture can also happen if both the final product as well as the input fall under the
same tariff heading. Tariff heading is merely for the classification of goods and it is not an
authority on whether a good has been manufactured or not.
In CCE v. Tarpaulin International11, the issue was whether the tarpaulin made out of
tarpaulin sheets was manufactured only because the item was mentioned in the Tariff. The
court held that an article does not merely become a manufactured good because it is
mentioned in the CETA Schedule. The process of stitching tarpaulin sheets and fixing eyelets
does not change the basic nature of the tarpaulin and does not bring into existence any new
product which is completely transformed from its original entity. The activity is NOT

10 (2009) 227 ELT 337 (SC)

11 (2010) ELT 481 (SC)

However, an assembly of various parts and components may amount to manufacture if the
new product so formed is movable and marketable. Combining a steam engine turbine and an
alternator by fixing them on a platform and aligning them is a manufacture as new product
a turbo alternator comes into existence which has a distinctive use and name. 12But if an
immovable entity results after such assembly, then it is not dutiable.
In Collector of Central Excise v. Technoweld Industries13, the Supreme Court has dealt with
the issue that drawing wires from wire rods is manufacture or not and it is held that both the
products being wires are not considered excisable merely because they are covered by two
separate entries in the tariff.
Incidental or ancillary
Packing, purification, filtering of chemical to make it marketable, testing, heat treatment and
chrome plating are all illustrations of ancillary and incidental processes and do amount to

4. Such manufacture or production must be in India

Excise cannot be levied on imported goods or goods that are manufactured outside India. It
can be levied only and only if the good has been manufactured or produced in India.

12Triveni Engineering v. CCE AIR 2000 SC 2896

132003 -TMI - 46589 - SUPREME COURT OF INDIA


Coffee beans from raw coffee berries

Crushing of limestone into lime
Cutting fabrics to make bedsheets
Making pan masala
Paddy to rice
Processing of commercial plywood
Recording of cassette
Turmeric to turmeric powder
Wheat to wheat flour
Yarn to thread
Transforming blank CDs into software loaded discs is manufacture14
Chewing tobacco from raw tobacco15
Conversion of marble blocks into tiles and slabs16
Fabrication of furniture at site17
Oil cake from mustard seed18

14 CIT v. Oracle Software India (2010) 187 Taxman 275 (SC)

15 R. K. Patel v. CST (2010) 3 GST 320
16 ITO v. Arihant Tiles and Marbles (2010) 186 Taxman 439 (SC)
17 CCE v. Mehta & Co. (2011) 264 ELT 481 (SC)
18 Jain Bhargwan Oil and Flour Mills v. Union of India (2009) 239 ELT 401 (SC)


Affixing brand name
Blending and packing tea as loose tea does not lose its original character after being

packed and sealed

Calendaring of fabrics it is only a finishing process
Changing colour of an article
Cleaning and repairing old ornaments
Compressing and bottling gas
Crushing of stone boulders into small stones
Preparation of frozen foods
Improving quality, utility or performance of a product
Testing or inspection
Upgradation or modification
Tarpaulin made from tarpaulin sheets19
Printing on glass bottle and logo20
In Mafatlal Industries Limited V. Nadiad Nagar Palika 21, the Supreme Court
observed that cutting 100 meters cloth into small pieces does not bring any different
commercial commodity and does not amount to manufacture.

19 CCE v. Tarpaulin International (2010) 256 ELT 481 (SC)

20 Union of India v. Alembic Glass Industries (2010) 259 ELT 8 (SC)
212000 -TMI - 71287 - SUPREME COURT OF INDIA

In Parle Products Private Limited V. Union of India 22, the Division Bench of the
Bombay High Court has dealt with an issue of use of aluminium foil with printed
paper for packing whether amounts to manufacturing.

The Court held that the

Department was clearly in error in recovering the duty from the company. Backing
of aluminium foil with printer paper only to make it more attractive for packing and
not resulting in any distinct and different articles does not amount to manufacture.
In Commissioner of Central Excise, New Delhi I V. S.R. Tissues Private
Limited23, the Supreme Court has observed that slitting/cutting of jumbo rolls of plain
tissue paper/aluminium foil is not treated as a manufacture. Mere mention of the
product in tariff heading does not necessarily imply that the said product was obtained
by process of manufacture.

Deemed manufacture is of two types:
232005 -TMI - 47380 - SUPREME COURT OF INDIA

a. CETA prescribes some processes as deemed manufacture.

b. Goods specified in 3rd schedule of Central Excise Act
So, the process may not be amounting to a manufacture as per court judgements but they are
said to be amounting to manufacture or deemed manufacture under CETA. The test of
marketability however, still needs to be satisfied.
The processes amounting to manufacture under CETA are:

Repacking from bulk packs to retail packs in case of pan masala, yeast, sauces, tea

extracts, mineral water, starches, glues, enzymes etc.

Printing, decorating or ornamenting of glass mirrors, bottles, watch glass, beads etc.

Mere putting of bar code is not manufacture.

The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of
duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The

taxable event under the Central Excise law is manufacture / production and the liability of
Central Excise duty arises as soon as the goods are manufactured or produced. As per the
Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central
Excise Tariff Act, 1985.
The Central Excise law is administered by the Central Board of Excise and Customs (CBEC
or Board) through its field offices, the Central Excise Commissionerates. For this purpose,
the country is divided into 23 Zones and a Chief Commissioner of Central Excise heads each
Zone. There are total 92 Commissionerates in these Zones headed by Commissioners of
Central Excise. Divisions and Ranges are the subsequent formations, headed by
Deputy/Assistant Commissioners of Central Excise and Superintendents of Central Excise,
In order for it to be levied, certain conditions are indispensable to be proved. Only then can
such a duty be levied.






Datey, V. S., INDIRECT TAXES LAW AND PRACTICE, Taxmanns 32 nd Edition,