Exemption from Duty

CETA / Customs Tariff prescribe the rate of duty for each Chapter head and subhead. This rate is called ‘Tariff Rate’ and the duty payable is ‘Statutory Duty’. The rates are fixed by Parliament and changing these rates is time consuming. However, Government needs flexibility in operations of taxing statute. As the circumstances change, quick adoption to changing situations is required. CEA and Customs Act, have, therefore, granted powers to Central Government to modify rates as per requirements, by issuing a notification. The duty actually payable as per the notification (usually referred to as ‘exemption notification’) is called ‘effective rate of duty’.

Exempted from duty and chargeable to Nil rate of duty - If the tariff itself specified duty as ‘Nil’, the goods are chargeable to ‘Nil’ rate of duty. If the goods are exempt by way of a notification, they are called ‘exempt from duty’. Thus, there is difference between goods chargeable to ‘Nil’ rate of duty and goods ‘exempt from duty’. -Arun Auto Spinning and Mfg. Co. v. CCE - 1990 (48) ELT 543 (CEGAT). It may be noted that ‘Nil’ duty is still a duty. - CCE v. Vazir Sultan Tobacco Co. Ltd. - AIR 1996 SC 3025 = 1996 AIR SCW 1353 = 1996 (2) SCALE 603 = (1996) 13 RLT 291 = JT 1996 (3) SC 112 = (1996) 83 ELT 3 = (1996) 3 SCC 434 = 63 ECR 359 (SC 3 member bench).

Exemption does not erase duty – In Hico Products v. CCE (1994) 71 ELT 339 (SC), it was held that exemption by notification does not take away the levy or has effect of erasing levy of duty. The object of exemption notification is to forego the duty and confer certain benefits upon the manufacturer or buyer or consumer through manufacturer, as the case may be.

If exemption is granted u/s 5A(1) [that time rule 8(1)], goods do not cease to be excisable goods and levy of duty is not erased. – CCE v. Smithkline Beecham Consumer Health Care Ltd. 2003(151) ELT 5 (SC).

General exemption from duty – Central Excise Rules grant exemption from duty if goods are exported under bond, except exports to Nepal and Bhutan. Similarly, goods manufactured in Special Economic Zone (SEZ) are ‘excluded excisable goods’ and hence no excise duty can be levied on goods manufactured in SEZ.

Further, section 5A(1) of CEA authorises Central Government to exempt the excisable goods, (a) generally (b) either absolutely or subject to such conditions (to be fulfilled before or after removal), (c) from whole or any part of excise duty leviable. Such exemption should be in public interest and it should be by way of a notification published in Official Gazette. – similar provision in section 25(1) of Customs Act in respect of customs duty.

The exemption notification issued u/s 5A is not applicable in respect of DTA clearances by EOU/SEZ unit, unless specifically provided in the notification. [proviso to section 5A(1)].

Method or form of granting exemption - The typical notification granting exemption reads as follows : “In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), the Central Government being satisfied that it is necessary in the public interest so to do, hereby exempts goods falling under heading No. . . . . of the Schedule to the Central Excise Tariff Act, 1985 ( 5 of 1986) from whole of the duty of excise leviable thereon under section 3 of Central Excise Act, 1944 (1 of 1944).” In case of partial exemption, the wording is “exempts, from so much of the duty of excise leviable thereon which is specified in the said schedule, as is in excess of the amount calculated at the rate of . . . per cent ad valorem.” or “as is in excess of the amount calculated at the rate of Rs. . . . . . per Ton” and so on. The rate at which duty is actually payable is called ‘effective rate’.

Public Interest is essential - The exemption notification can be issued only in public interest. Public interest means greatest happiness of greatest number. It is not necessary to disclose the exact nature of public interest of each notification. In India Cement v. State of AP - (1988) 69 STC 305 (SC) = AIR 1988 SC 567, it was observed that exercise of power to tax may be normally presumed to be in public interest. Court will presume that the notification has been issued in public interest. Person challenging the tax has the heavy burden to prove that it is not in public interest.

Different exemptions to different categories or classes permissible - It is permissible to grant different exemptions to different classes, as long as all those within a particular class are treated equally and uniformly. Statute can be declared invalid only when it is shown that the impugned statute is based on discrimination and that such discrimination is not referable to any classification which is rational and which has nexus with the object intended to be achieved by the Statute. Thus, granting exemption to small scale units, or to units manufacturing goods without aid of power, or to Government undertakings or to a class of consumers will be permissible. However, such classification should be in public interest and powers should be used bona fide. It is well recognised that State enjoys the widest latitude where measures of economic regulations are concerned. State can pick and choose districts, objects, persons, methods and even rate for taxation if it does so reasonably.

Exemption notification has statutory force - All exemption notifications are issued under delegated legislative power and have full statutory force and validity. Since it has a legislative character, question of hardship to anyone is irrelevant. Persons affected are not entitled to opportunity of hearing before issue of notification.

Conditional exemption at option of assessee - Some exemptions are subject to some conditions e.g. following Central Excise (Removal of Goods at Concessional Rate of Duty for manufacture of Excisable Goods) Rules [earlier Chapter X] procedure or not claiming Cenvat etc. In such cases, the assessee may or may not avail of the concession or exemption.

Option to assessee if two exemption notifications available - When there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one. -  CIT v. Mahendra Mills (2000) 2 SCALE 384 = 2000 AIR SCW 1016 = AIR 2000 SC 1960 =  (2000) 109 Taxman 225 (SC). Where there are two exemption notifications that cover the goods in question, assessee is entitled to the benefit of that exemption notification which gives him greater relief, regardless of the fact that notification is general in its terms and the other notification is more specific to the goods. – HCL Ltd. v. CCE 2001(130) ELT 405 (SC 3 member bench order).

Exemption in exceptional circumstances - General Exemptions can be granted under section 5A (1) by issuing a notification. However, section 5A(2) authorises Central Government to grant exemption, in public interest, in exceptional circumstances by a special order.  The exceptional circumstances should be specified in the order. - similar provision in section 25(2) of Customs Act.

This is ad hoc  exemption and can be granted even retrospectively. - CBE&C circular No. 12/97-Cus dated 12-5-1997.

Retrospective insertion of clarification to exemption notification - Sometimes it is found that there is some drafting mistake or ambiguity in (a) the general exemption notification issued u/s 5A(1) of CEA or 25(1) of Customs Act or (b) Special exemption order issued u/s 5A(2) of CEA or section 25(2) of Customs Act. Sometimes, assessee gets unintended benefit while in some cases even intended benefit cannot be obtained due to drafting error in the exemption notification  or exemption order. To overcome this problem, section 5A(2A) of CEA and section 25(2A) of Customs Act have been inserted w.e.f. 11-5-2002.

As per these inserted sections, Central Government, for the purpose of clarifying the scope or applicability of exemption notification or exemption order, may insert an explanation to the exemption notification or order within one year of such notification or order. Such Explanation to an exemption Notification will have retrospective effect from date of exemption notification. Such Explanation can be inserted in exemption notification only within one year of date of issue of notification and not thereafter.

Purpose and meaning of explanation – The section itself clarifies that purpose of ‘explanation’ is to clarify the scope or applicability of an exemption notification or exemption order. Thus, the retrospective insertion can be made only to explain or clarify.

As per Concise Oxford dictionary, ‘explain’ means to make clear or intelligible with detailed information etc. ‘Clarify’ means to make clearer, make transparent.

Thus, the clarification to exemption notification/order cannot be added with retrospective effect to restrict the scope of notification/order or to insert a condition which was not there.

Exemption for past general practice - At times, the assessees and excise department treat a provision of excise law or classification/valuation of particular goods in a particular way. Duty is levied or exempted accordingly. However, the settled and mutually accepted position of duty liability may get disturbed for some reason like (a) Supreme Court/High Court/Tribunal decision on classification or mode of valuation or any other decision having effect on duty liability (b) Rethinking of excise department regarding correct legal interpretation of tariff item or interpretation of a notification which might affect duty liability of particular excisable goods (c) any other reason where earlier general understanding about duty payable on particular goods may be found to be incorrect. If it is found that higher duty was legally recoverable, the same can be recovered for past period also within the limitations of law. However, this might seriously affect industries as they had not considered this unexpected burden while deciding their price structure. Some units may even become bankrupt. Hence, section 11C of CEA provides that if (a) there was a generally prevalent practice of levy or non-levy of any excisable goods and (b) such goods were actually liable for duty at higher rates; Central Government may, by notification in Official Gazette, direct that such excess duty payable, need not be paid. - similar provision u/s 28A of Customs Act in respect of customs duty.

Captive consumption - Intermediate product

Since excise duty is on manufacture of goods, duty is payable as soon as goods are manufactured within the factory. Such goods are called ‘intermediate products’ and its use within the factory is termed as ‘captive consumption’. Duty is payable even when goods are despatched from one factory to another factory of the same manufacturer. In A S Processors v. CCE 1999(112) ELT 706 (CEGAT), it was held that once a new marketable intermediate product comes into existence, it is to be charged to duty if not exempted by a notification. – same view in CCE v. Citric India 2001(127) ELT 539 (CEGAT).

However, this will obviously cause inconvenience to manufacturers and hence exemptions have been given in many cases. These exemptions are discussed here.

Exemption to intermediate products used for captive consumption - The intermediate product manufactured within the factory is exempt from duty, if is consumed captively for manufacture of (a) Capital goods as defined in Cenvat Credit Rules i.e. those which are eligible for Cenvat credit or (b) Used for in or in relation to manufacture of final products eligible for Cenvat, made from inputs which are eligible for Cenvat. [Notification No. 67/95 dated 16-3-1995].

The exemption is to basic duty as well as AED(GSI). The exemption is available for all intermediate products, except LDO, HSD and petrol. [These articles are same which are not entitled for Input Cenvat credit].

Inputs eligible for Cenvat credit even if intermediate product exempt - CBE&C had clarified vide para 5 of circular No. B4/7/2000-TRU dated 3.4.2000, that Cenvat credit should not be denied if the inputs are used in any intermediate of final product, even if such intermediate product is exempt from payment of duty. The idea is that Cenvat credit is available so long as the inputs are used in or in relation to manufacture of final product, and whether directly or indirectly – view reiterated in Chapter 5 Para 3.9 of CBE&C’s CE Manual, 2001. – same view in CCE v. Hindustan Sanitaryware 2002(145) ELT 3 (SC), in respect of earlier notification 217/86.

Final product should not be exempt from duty - This exemption is not available if final product is exempt from duty or is chargeable to Nil rate of duty. In other words, if no duty is payable on final products, duty will be payable on intermediate products.

Exemption if final product cleared for deemed export - As per excise provisions, no duty is payable if final product is cleared * to EOU * to a unit in Electronics Hardware Technology Park * to a unit in Software technology park. In such cases, duty on intermediate product is not payable even if final product is cleared without payment of duty. – provisos (i) to (iv) to Notification No. 67/95-CE dated 16.3.1995.

Goods cleared to UN, WHO etc. – Final products cleared to ILO, WHO, UNDP, UNIDO programme etc. are exempt under Notification 108/95-CE dated 28.8.1995. In such case, intermediate product will be exempt from duty. - – proviso (v) to Notification No. 67/95-CE dated 16.3.1995.

Capital goods manufactured and used within factory – As per notification No. 67/95-CE dated 16-3-1995, capital goods (as defined in Cenvat Credit Rules) manufactured in a factory and used within the factory of production are exempt from excise duty. Further, as per explanation 2 to rule 2(g) of Cenvat Credit Rules, inputs include goods used in manufacture of capital goods which are further used in the factory of manufacturer. Thus, if capital goods are manufactured and used within the factory, Cenvat credit can be availed of goods which are used to manufacture such capital goods. Moreover, no duty will be payable on such capital goods.

Cenvat credit on capital goods used in manufacture of exempt intermediate product – It may happen that capital goods may be used in manufacture of an exempt intermediate product, but final product may be dutiable. In such case, Cenvat credit is available on such capital goods, if final product is chargeable to duty. – CBE&C circular No. 665/56/2002-CX dated 25-9-2002.

Exemption if goods cleared under rule 6 of Cenvat Rules – If final product is exempt from duty, normally duty is payable on intermediate product. However, if final product is cleared as per provisions of rule 6 of Cenvat Credit Rules [i.e. after paying 8% of price as ‘amount’ or after reversing Cenvat credit], intermediate product will be exempt from duty. – proviso (vi) to Notification No. 67/95-CE – clarified and confirmed in CCE, Cochin TN 68/2001 dated 24.7.2001].

Provisions not applicable to matches as final products - The provisions of notification No 67/95 dated 16.3.95 is applicable to all final products except matches [This item is also excluded from Cenvat provisions].

Parts manufactured within the factory for repairs - Goods manufactured in a workshop within the factory for use within factory for repairs or maintenance of machinery installed within the factory are exempt from duty - [Notification No. 65/95 dated 16-3-95]. Thus, no duty is payable on parts manufactured within the factory for repairs or maintenance of machinery within the factory.

Intermediate products used captively for exported goods - Intermediate products manufactured and used within the factory for manufacture of final products are exempt from duty, even if CT-3 certificate is not issued and Central Excise (Removal of Goods at Concessional Rate of Duty for manufacture of Excisable Goods), Rules [earlier Chapter X] procedure is not followed, subject to the condition that documents / records are available with manufacturer that the intermediate goods have been used for export purpose only - CBE&C circular No. 229/63/96-CX dated 8-7-1996, amended vide 303/19/97-CX dated 11-3-1997.

Goods manufactured for defence/Government, etc. - Some goods are exempt from duty if they are supplied to defence, railways, defence stores, Indian Navy, or if manufactured in ordnance factories, mint, prison, mine, Government tool rooms, etc. In such cases, if an intermediate product gets produced while manufacturing final product, such intermediate product is also exempt from duty - Notification No. 83/92 dated 16-9-92.

Job work under Central Excise

It is common for Industries to get some processing done from outside on job work basis. Job work means supplying the material by a Customer (often a Large Scale Unit) to a job worker who carries out certain processes [like machining, drilling, welding, painting etc. for engineering goods; bleaching, dyeing, printing etc. in textiles etc.], and returns the material to the customer after carrying out the processes. This is particularly common in Engineering and textile Industries. This is usually called ‘job work’ or ‘sub-contracting’ in engineering industry and ‘processing’ in chemical or textile industry. In drug industry, a system of ‘loan licensee’ is in vogue, where one unit gets the drugs manufactured from another small unit under his own brand name by supplying the raw material.

Job Work Definition - Notification No. 214/86 dated 25-3-86 defines that Job Work means processing or working upon of raw materials or semi-finished goods supplied to 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 the aforesaid process. - - Thus, job work is possible even if it results in ‘manufacture’ of an article.

Use of own material by job worker not a bar under Central Excise - As explained above, normally, a 'job worker' can use only minor items. However, as rightly observed in Shakti Insulated Wires Ltd. v. CCE 1999(114) ELT 424 (CEGAT), excise exemption notification No. 214/86-CE does not prohibit a job worker from utilising other inputs in addition to raw material received by him and recover charges therefor from the principal manufacturer. Thus, there is no bar under Central Excise from using own material in addition to material supplied by principal manufacturer.

Inputs which can be sent for job work – All inputs can be send for job work. However, high speed diesel oil, LDO and petrol cannot be sent for job work to a job worker, under this notification. - -  The job worker can manufacture any final product included in Central Excise Tariff.

Use of goods after job work - After the job work, the material should  be normally returned to person who had sent it for job work. The person who had sent the material, can either use it for further manufacture or clear the product (as received from the job worker). He can clear the product received from job worker without any further processing (a) On paying duty (b) On payment of 8% ‘amount’ on exempted products under rule 6 of Cenvat Credit Rules (c) Export under bond (d) clear to SEZ, EOU, EHTP or STP unit without payment of duty (e) Clearance to UN or international organisation or a project funded by them. - - Goods can be cleared directly from the place of job worker with permission of Commissioner. This aspect is discussed under Cenvat.

Who can send the material for job work - The manufacturer can send inputs for job work. Following are eligible to send materials for job work (a) Manufacturers (b) Exporters (c) Units in SEZ, EOU, EHTP & STP (d) Who are supplying final product to United Nations or international organisation for their official use or to project funded by them.

Thus, a trader cannot send goods for job work under this notification. In such case, the job worker will be treated as manufacturer. - Sonder Technologies v. CCE 2002(146) ELT 597 (CEGAT SMB).

Duty liability of goods manufactured under job work - Since excise duty is on ‘manufacture’, duty liability arises only when the goods are manufactured during job work. Thus, if an item is only repaired or reconditioned, no duty liability arises as no new product emerges. Similarly, if some operation is carried out which does not amount to manufacture, there is no duty liability. However, if goods are manufactured during job work, excise liability will arise, as duty is on manufacture and who has supplied the raw material is immaterial.

Valuation for Job Work - Once it is established that duty liability has arisen, it has to be determined what is the ‘assessable value’ of the product for purpose of determining excise duty. It has been held by Supreme Court in the case of Ujagar Prints v. UOI that value for this purpose means cost of material supplied to the job worker plus job work charges of the job worker, plus profit of job worker. [Profit of trader/supplier of raw material is not to be taken into account.] This is because the excise duty is on goods and who is the supplier or raw material is irrelevant. For example, if the cost of material is Rs. 100 and job work charges are Rs. 20, assessable value for excise purposes will be Rs. 120 (i.e. excise duty will be payable on Rs. 120) [assuming that job work charge of Rs. 20 include the profit of job worker]

Exemption for items received for job work if raw material supplier undertakes to discharge duty - Payment of duty on material cost plus job work charges will create a very big excise liability which will seriously hamper job work and hence exemption is given in many of the cases for job work.

Exemption for material received under Cenvat provisions - Material received by a manufacturer under CENVAT can be sent to a job worker for processing and can be brought back by the manufacturer for further processing. In such cases, there is no duty liability on the job worker and he is exempted from the same.

Clearance under 214/86 - Notification No. 214/86 dated 25-3-1986 has been issued for exemption from job work. The exemption is available even if the job worker manufactures an intermediate product. Notification No. 214/86 provides that a declaration has to be given by person sending material for job work to jurisdictional Assistant Commissioner having jurisdiction over the factory of job worker.

All Final Products eligible under notification 214/86 – All final products are eligible under notification No. 214/86-CE.

Exemption for job work for inputs received from SSI unit - A SSI unit having turnover below Rs. 100 lakhs does not have to pay excise duty and hence he is not covered under Cenvat. He cannot send material to another unit under Cenvat procedure, but still he is allowed to send goods to another unit and bring them back after job work to his factory, subject to condition that the material received back after job work should be used in manufacture of his final product.

Goods falling under 74.17, 84.36, 84.37, 87.14, 96.08, 7321.90, 8424.10, 8424.91, 8481.20, 8481.92, 9017.10 or 9405.10 are completely exempt from duty, irrespective of turnover. Manufacturers of these goods can also send their inputs outside for job work and return. In their case, there is no question of SSI exemption limit of Rs 100 lakhs.

The SSI unit sending the material for job work has to file a declaration to Assistant Commissioner of his division that goods returned after job work will be used in his factory for manufacture of products exempt from duty (Notification No. 84/94 dated 11th April, 94). He also has to file another declaration to Assistant Commissioner of division having jurisdiction over factory of job worker that the goods will be used by him after job work in manufacture of final product which is exempt from duty. This exemption is not available to products which are not eligible for SSI exemption. However, this exemption has been extended to certain products as specified in the notification. (Notification No. 83/94 dated 11th April, 94).

The job worker getting such material does not have to pay any duty, but should maintain proper records. The job worker may be even a large scale industry. Procedure has been prescribed for this purpose.

Budget and Central Excise

Every year, Govt. introduces its taxation proposals at the time of annual budget which is presented usually on last day of February every year, by way of a Finance Bill. Major changes in excise duties are announced on budget day and hence budget is an important day for persons dealing with excise.

Increased rates become effective immediately - Normally, any provision of legislation, takes effect only after it is passed by the Parliament. However, in case of excise provisions, this might create complications. Finance Bill is normally presented on last day of February, but it is passed by Parliament only after a few months. If the assessees know the changes in advance before new rates are effected, they will either clear the goods or will stop clearances for some time, as may be suitable to them.

Provisional Collection of Taxes Act - To avoid these problems, it is provided vide section 4 of ‘Provisional Collection of Taxes Act, 1931’ that budget provisions in respect of imposition or increase in excise and customs will take effect immediately if a declaration is inserted in the Bill that it is expedient in Public interest to have immediate effect to the provisions of the Bill. This provision is not applicable for reduction in duty. Once this declaration is given, the new rates become effective on the expiry of the day when the bill is introduced. Accordingly, every year, the declaration is given and budget provisions come into effect immediately. Such declaration is valid only for 75 days or the date when the Finance Bill is passed, whichever is earlier. If rates are reduced when the bill is passed, refund will be granted of excess duty collected [subject to provisions of refund of Unjust Enrichment of section 11B (2) of CEA].

Thus, if budget is presented on last day of February [28 or 29 as the case may be], new rates will become effective on 1st March itself.

Provision not applicable for change in classification or reduction in duty - The aforesaid provision is applicable only in case of imposing increase in duty. It is applicable for change in classification of product, only if the change in classification has effect of imposing or increasing the rate of duty. Similarly, the provisions are not applicable when there is reduction in duty - Shri Har Chemical Enterprises (P.) Ltd. v. CCE - Indore - 1990 (49) ELT 377 (CEGAT).

Duty liability of Pre-budget Stock - Some goods in stock on the budget day are cleared subsequent to presentation of budget. If there is change in duty at budget, it was felt that these goods should be cleared at the rate applicable before the budget. The thinking was that duty liability is fastened as soon as goods are manufactured and since goods were already manufactured before budget, rate as applicable at the time of manufacture should be applied. However, Supreme Court in Wallace Flour Mills Co. Ltd. v. CCE (1989) 186 ITR 440 (SC) = 1989 (44) ELT 598 (SC) = (1989) 4 SCC 592; have decided that rate applicable at the time of clearance from the factory will be applicable for payment of excise duty.

In CCE v. Surat Cotton Spg 1997(92) ELT 313 (SC 3 member bench), it was held that when excise exemption is withdrawn, duty is payable on final products lying in stock.

The only exception is that if the goods were not included in tariff at all before budget, such goods manufactured before budget will be exempt e.g. some goods like wheat, rice, oil seeds, cut flowers etc. are not included in the Excise Tariff at all. If excise duty is imposed on these goods in budget, no duty will be payable on pre-budget stock.

Similarly, if goods were brought under excise net by amending the definition of ‘manufacture’, goods manufactured prior to such amendment will not be liable to duty, even if cleared subsequently - Ganesh Extrusion Industries v. CCE - 1993 (66) ELT 639 (CEGAT) * CCE v. National Tubes 2000(118) ELT 716 (CEGAT) * Lao Pala RG v. CCE 2002(140) ELT 405 (CEGAT).

No Restrictions on clearances on budget day – Goods can be cleared from factory on budget day without any restriction on its movements.

Brand Name under Central Excise

Many products are produced under some brand name for easy marketability. In some cases, the brand name belongs to the manufacturer himself, while, in other cases, brand name belongs to somebody else and the manufacturer puts his brand name on goods produced by him. For example, Bata gets many chappals made from small units under the brand name ‘Bata’ and are sold by Bata. Similarly, Bajaj Electricals gets many electrical goods manufactured from small industries under brand name Bajaj, which are then marketed by Bajaj Electricals. There are many such Companies e.g. Philips, Crompton etc. who get the goods manufactured from others. In drug and pharmaceutical industry, system of ‘loan licensing’ is common, where a brand owner gets the drugs manufactured from a small ‘loan licensee’ unit. In such cases, following are the main provisions of Central excise.

No SSI Exemption to the small manufacturer - If the small scale unit manufactures goods which bears a brand name which does not belong to him, there is no excise exemption and the small scale industry will have to pay duty at full rate. However, the turnover of small unit of such branded products will not be considered for granting exemption for the SSI unit for his other products which may be un-branded or under his own brand name.

Brand name Owner is Not the Manufacturer - It has been held in several cases that the Small Scale Manufacturer is the real “manufacturer” for the purpose of Central Excise. Thus, in above examples, Bajaj or Bata will not be treated as the manufacturer, but the duty liability will be on the actual manufacturer manufacturing the goods [see case law discussed under ‘Manufacture’].

Manufacturer should not be dummy - However, if the manufacturer is not an independent entity, but is only dummy, the brand name owner will be treated as the manufacturer. The test is that relation between the manufacturer and brand name owner should be on principal to principal basis. The manufacturer should be independent. Even if brand name owner exercises control over quality or supplies his design or specifies sources for procurement of raw material by the manufacturer, the SSI unit will be treated as manufacturer, if the relations between manufacturer and brand name owner are on ‘principal to principal’ basis.

Duty on the price of the actual manufacturer - It is obvious that the brand name owner purchases goods from small unit at lower price and sells the same at higher prices. For example he may purchase the goods under his brand name for Rs. 100/- from the manufacturer and sell the same at Rs. 150/-. In such cases, the duty will be payable by the manufacturer on Rs. 100/- and not on Rs. 150/-, if the manufacturer and the brand name owners are independent persons, and the price is the sole criteria for the sale.

However, if the manufacturer and brand name owner are related persons as per the definition u/s 4 or if the manufacturer is dummy or if their relationship is not on principal to principal basis, duty will be payable on Rs. 150/-. Moreover, if the final product is covered u/s 4A (MRP valuation), duty will be payable on the basis of MRP printed on packing and not on basis of section 4. Similarly, if tariff value has been fixed, section 4 is not applicable.

House Mark and Brand Name – 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.

This distinction is vital in case of ‘patent and proprietary medicines’ [P&P medicine]. Drugs are basically classified as ‘drug with genetic name’ and ‘patent and proprietary medicines’. The drugs with genetic name carry a name specified in ‘Pharmacopoeia Formulatory’. Patent and Proprietary Medicine is (a) which is not specified in ‘Pharmacopoeia’ or (b) which bears a brand name. Supreme Court has held that if a product is sold with name as specified in ‘Pharmacopoeia Formulatory’, it will not become a P&P medicine only because it bears a house mark. In a case decided by SC, the manufacturer was making ‘20% Dextrose Injection’ (which is a name specified in ‘Pharmacopoeia Formulatory’) However, the product carried mark ‘AP-ASTRA’ on the carton. It was held that this is a ‘house mark’ to identify the manufacturer, which is compulsory under the Drug Rules. This is not a ‘brand name’. Brand name should be such that it should establish relationship between the mark and medicine e.g. it would have been a brand name if the product was described as ‘Astra Injections’ or ‘Astra Dextrose Injections’, instead of ‘20% Dextrose Injections’. Thus, putting a ‘house mark’ side by side with the name contained in Pharmacopoeia will not make it a ‘P&P Medicine’ - Astra Pharmaceuticals (P) Ltd. v. CCE 1995 (75) ELT 214 (SC) = JT 1995 (1) SC 276 = (1995) 2 SCC 84.

Excise Audit/Checks

Most of the factories are under ‘Self Removal Procedure’ and there is no physical control over production and clearance of goods. Assessment is mainly based on returns submitted by assessee. Department has evolved various checks and counter-checks to ensure that excise duty is not evaded.

Checks by Departmental authorities - Various checks have been devised to reduce leakage of revenue.

Visits of Officers - Every factory comes under jurisdiction of Range Superintendent. The Superintendent and Excise Inspectors working under him do occasionally visit factories. However, they are not expected to have day to day checks.

Stock taking – New Central Excise Rules make no provision for ‘store room’ or ‘stock taking’. However, it does not mean that stock taking by excise authorities is prohibited. In the opinion of author, stock taking can be done of finished goods and Cenvat goods.

Road Checks - Surprise road checks are carried out to see that all goods moving are accompanied by duty paying documents.

Information from Informants - Like all tax departments, department can and does collect information from secret informants (some times he is a disgruntled employee of the Company). In R K Ranganathan v. UOI 2001(131) ELT 321 (Mad HC), payment of such reward was ordered when information was found to be accurate and was furnished at earliest point of time.

Preventive Section - Each Commissionerate has a preventive section to have surprise checks and raids when evasion is suspected.

DRI - Directorate of Revenue Intelligence under Central Board of Excise and Customs, gathers information from various sources (including informants) about tax evasion and take suitable action.

Departmental Excise Audit – Audit means scrutiny and verification of documents, events and processes in order to verify facts and draw conclusions regarding correctness of recording the facts and the efficiency of a system under study. For Central Excise purposes, Audit means scrutiny of the records of the assessees and the verification of the actual process of receipt, storage, production and clearance of goods with a view to check whether the assessee is paying the Central Excise duty correctly and is following the Central Excise procedures. - Chapter 15 Para 1.1 of CBE&C’s CE Manual, 2001.

An Audit section is attached to each Commissionerate. Some audit parties are functioning under Commissionerate headquarters, while some may function at important industrial centres where Joint Commissioner or Addl Commissioner has been posted. Audit of assessee’s factory is carried out by visit by ‘audit party’. The Audit Party usually consist of 2/3 inspectors and a Deputy Office Superintendent, headed by a Excise Superintendent. AC / DC and senior officers are also associated with the audit of large units. These audit parties visit factories periodically. Audit by these audit parties is called 'departmental audit'.

New audit system, termed as ‘EA-2000’ [Excise Audit 2000] has been introduced with help of Revenue Canada. This is part of various projects Ministry of Finance has taken up with aid of Canadian International Development Agency (CIDA).

Submission of records by assessee - Vide Rule 22(3) of Central Excise Rules [earlier rule 173G (6)], assessee is required to produce to audit parties (i) records maintained by him in respect of accounting of transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of goods including inputs and capital goods as required under rule 22(2) of CE Rules (ii) cost audit reports u/s 233B of Companies Act (iii) Income Tax audit report u/s 44AB of Income Tax Act.

Frequency of audit – Audit of assessees paying duty of over Rs one crore through PLA is normally carried out once in a year. Those units which pay cash duty between Rs 10 lakhs to one year are audited once in two years. In case of units paying cash duty less than Rs 10 lakhs per annum, not more than 20% of the units are audited every year. [This works out to about once in five years]. Selection of small units is done for prioritization, by applying risk assessment technique.

The audit parties check records, see the operations of factory and carry out test checks. Excise returns are checked with other records and returns like balance sheets, bank statements, store ledger, buyer-wise ledger, return to department of industries and other Government authorities etc. These checks are done on selective basis. If their queries are not replied satisfactorily, show cause notices cum demands are issued and adjudicated as per Excise Rules.

CERA - Audit of C and AG - Comptroller and Auditor General of India also carries out audits of all assessees. These are called ‘CERA’ i.e. Central Revenue Audit. These audit parties audit accounts of excise as well as customs assessees. C& AG is an authority appointed under Article 148 of Constitution of India. Article 151 of Constitution specifies that reports of C&AG shall be submitted to President of India, who causes these to be laid before each House of Parliament. CERA audits are conducted as a part of audit of Government accounts. Thus, these audits are conducted under Constitutional authority and are in no way connected or related to internal audits carried out by staff of excise department. Frequency of CERA Audits is as per the importance they attach and availability of time to CERA audit parties.

Assessee is required to produce to audit parties (i) Records (ii) cost audit report (iii) Income Tax audit report.

Scrutiny of monthly returns - Every assessee has to submit a monthly return to Superintendent, Central Excise. This will be acknowledged by him on the assessee’s copy. No assessment order will be issued. These returns will be only scrutinised. Some returns will be studied in details and further investigation may be made.

Valuation Audit - Special Audit - Valuation is one of the most vital and important aspect of assessment of excise duty payable. In order to ensure that duty is being paid correct ‘Assessable Value’, a provision has been made to order a ‘Special Audit’ in some specified cases, vide section 14A of CEA. The audit can be ordered only with prior approval of Chief Commissioner of CE.

Cenvat credit audit - Special Audit - As per section 14AA of CEA (added w.e.f. 14th May, 1997), special audit of Cenvat credit availed or utilised can be ordered by Commissioner of Central Excise. Such audit can be ordered if the Commissioner of CE has reason to believe that (a) Cenvat credit availed or utilised is not within the normal limits, having regard to nature of final products and type of inputs (b) Cenvat credit has been availed or utilised by reason of fraud, collusion or any wilful misstatement or suppression of facts. Such audit can be done by practising 'Cost Accountant', to be appointed by Commissioner of CE. Expenses of and incidental to such audit, including the remuneration payable to the cost accountant shall be paid by Central Government (i.e. excise department)

Accounting Treatment of Central Excise

Accounting treatment of Central Excise is mainly related to accounting in respect of Cenvat.

Accounting for Cenvat needs following consideration (a) Since credit is available of excise duty paid while purchasing inputs, duty paid on inputs while purchase is not an expense but an asset. (b) Un-availed Cenvat is not available as refund (except when it is a case of exports). This may happen when duty paid on inputs is more than duty payable on final product. (c) Cenvat is available instantly on receipt of inputs and Cenvat credit may be utilised even before inputs on which Cenvat is availed are actually used in production. (d) Valuation of stock of finished goods also needs consideration.

Institute of Chartered Accountants of India has published a guidance note. It has been published in Chartered Accountant - September, 2000 issue. [earlier note was published in August 1995 issue].  and is as per legal position as of 1-4-2000, including Cenvat credit. This note replaces the earlier guidance note.

Accounting Treatment of Inputs received - When inputs are purchased, Purchase price (net of Excise) should be debited to Purchase Account and excise on inputs should be debited to ‘Cenvat Credit Receivable (Inputs) account’. Total Invoice amount (i.e. net purchase price plus excise) will be credited to Supplier’s Account (as the supplier has paid Excise and his Invoice is inclusive of excise paid by him on the material supplied). When duty is debited in Input Cenvat Credit Account towards payment of duty on final product, ‘Excise Duty Paid on Final Products’ account should be debited and ‘Cenvat Credit Receivable (Input) account’ should be credited. [Author’s suggestion : This entry could be on monthly basis as duty is payable or once at the end of the month]. Balance in ‘Cenvat Credit Receivable (Input) account’ in General Ledger and credit in 'Input Cenvat Credit Account' as per excise records (that time ‘RG23 A Part II’) should tally, or reconciled.

If there is debit balance at the end of year in ‘Cenvat’ account, it means that credit is not fully utilised and should be shown under Current Assets under ‘Loans and Advances’. Closing stock of inputs should be valued ‘Net of Excise Duty’. However, since Cenvat on stock which has not been used is also utilised for payment of duty, purchases are understated to that extent. If balance in credit of Cenvat cannot be utilised for any reason, the same must be written off.

Write off of non-utilisable balance in Cenvat credit receivable account - Some times, Cenvat Credit Receivable Account may have balance, but it may not be possible to utilise the balance. This may happen in cases where credit on inputs is higher than duty payable on final products. Thus, though credit is available, it may be lying idle, as there is no scope for utilising the same.

As per guidance note of ICAI, the balances in Cenvat credit receivable account should be reviewed at end of the year. If it is found that balances in Cenvat credit are not likely to be used in normal course of business with a reasonable time,  the non-usable excess credit should be adjusted in financial accounts i.e. purchase price of raw materials should be increased to that extent. If it is not possible to identify the excess credit to a particular lot or lots of materials purchased, the excess credit may be apportioned over entire purchases of raw materials, components etc. entitled to Cenvat credit during the year, on pro-rata basis. Valuation of closing stock will also increase to that extent.

Adjustment of excess credit related to capital goods should be made to concerned capital goods account. Excess Cenvat credit which relates to fixed assets acquired, should be added to cost of relevant fixed asset. If value of capital goods is enhanced, depreciation on revised un-amortised depreciable amount should be provided over residual useful life of the asset.

If the asset does not exist, the relevant amount should be written off in the P&L account. In case of capital goods acquired on lease, excess Cenvat credit should be written off on a pro-rata basis along with lease rentals.

In relation to capital goods other than fixed assets (i.e. those which are 'capital goods' as per excise definition, but are not capitalised in books of account of the company), the accounting treatment is same as per accounting treatment of inputs. It is advisable the Cenvat Credit Receivable (Capital Goods) account is maintained separately for fixed assets (which are capitalised) and other capital goods.

If entry in Cenvat Credit available account is reversed, credit available in 'Cenvat Credit Account' as per excise records and balances in ‘Cenvat Credit Receivable’ in financial accounts will not tally. Hence, reconciliation statement will have to be prepared as this difference will continue in subsequent years also.

Reversal of Cenvat credit - In some cases, Cenvat credit on inputs is not available, e.g. when final product is fully exempt, or when inputs are rejected even before they are issued to production. In such cases, Cenvat credit will have to be reversed. In such case, appropriate adjustments in cost of inputs and value for purposes of stock will have to be made.

Accounting of Duty paid on Capital Goods purchased - It has to be remembered that if Cenvat credit on capital goods is availed, depreciation under section 32 of Income Tax is not available.  Moreover, Cenvat credit on capital goods is available in two stages i.e. 50% in current year and balance 50% in subsequent year.

‘Capital Goods’ for Cenvat purposes include tools, spare parts etc., which are treated as consumables and normally not capitalised in financial accounts. Hence, question of claiming depreciation on these does not arise. When credit is availed of duty paid on machinery or equipment which is capitalised, it will be necessary to reduce cost of asset by the amount of duty claimed as credit.