Answers to Unsolved Practical Examples in ‘Indirect Taxes'

Chapter 40

Answer to questions 

Question - The value of excisable goods viz. Iron and Steel articles manufactured by M/s.  Thunder TV Ltd. is engaged in the manufacture of colour television sets having its factories at Bangalore and Pune. At Bangalore the company manufactures picture tubes which are stock transferred to Pune factory where it is consumed to produce television sets. Determine the Excise duty liability of captively consumed picture tubes from the following information: - * Direct material cost (per unit) Rs. 600 * Indirect Materials Rs. 50 * Direct Labour Rs. 100 * Indirect Labour Rs. 50 * Direct Expenses Rs. 100 * Indirect Expenses Rs. 50 * Administrative Overheads Rs. 50 * Selling and Distribution Overheads Rs. 100. Additional Information: - (1) Profit Margin as per the Annual Report of the company for 1999-2000 was 12% before Income Tax. (2) Material Cost includes Excise Duty paid Rs. 100 (3) Excise Duty Rate applicable is 16%, plus education cess of 2%. [ICWA Inter December 2000 adopted]

Answer - Cost of production is required to be computed as per CAS-4. Material cost is required to be exclusive of Cenvat credit available. 

Note – (1) Indirect labour and indirect expenses have been included in Works Overhead (2) In absence of any information, it is presumed that administrative overheads pertain to production activity. (c) Actual profit margin earned in not relevant for excise valuation.

Question - How does the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 provide for determining the value of captively consumed goods?  Calculate the cost of production for the purpose of captive consumption based upon the following details: Materials purchased (includes excise duty Rs. 2,000) - Rs. 22,000  Realisable value of scrap – Rs. 2,000. Wages – Rs. 12,000. Manufacturing expenses – 8,000. Administrative expenses – 8,500. Selling and Distribution expenses – Rs. 3,400. Expenses of quality inspection department – Rs 4,000. Expenses of research and development department – Rs 6,000 (ICSI Final June 2005) 

Answer - Cost of production is required to be computed as per CAS-4. Material cost is required to be exclusive of Cenvat credit available.

Note –  In absence of any information, it is presumed that administrative overheads pertain to production activity.

Chapter 41

Note – In view of rule 10A of Valuation Rules introduced w.e.f. 1-4-2007, the duty will be payable on basis of selling price of raw material supplier w.e.f. 1-4-2007. Upto 31-3-2007, duty was payable on the basis of material cost plus job charges. 

Question - A trader supplies fabrics to independent processor. Cost of fabrics is Rs. 1,150. The processor charges Rs. 450 which includes Rs. 350 as processing charges and Rs. 100 as his profit. After processing goods are sent back to the trader, who sells them at Rs. 1,800. Transport charges for receiving goods at the premises of the processor is Rs. 50 and the transport charges for sending goods after processing is Rs. 60. Please determine the assessable value of the goods under Section 4 of the Central Excise Act (CA Final May 2005).

Answer - For clearances upto 31-3-2007 - Assessable Value (AV) is Rs. 1,650 (1,150+350+100+50). Duty is not payable on Rs. 1,800, which includes Traders’ profit. Since place of the processor is the place of removal of goods, no duty is payable on outward freight of Rs. 60.

Material cost is not required to be added if parent manufacturer had sent material under Cenvat, as per decision of Supreme Court in International Auto Ltd. v. CCE 2005 (183) ELT 239 = 68 RLT 341 (SC 3 member bench).

For clearances on or  after 1-4-2007 – Rs 1,800 will be taken as cum duty price and Assessable Value will be calculated by back calculations.

Question - Asha Ltd., supplies raw material to a job worker Kareena Ltd.  After completing the job-work, the finished product of 5,000 packets are returned to Asha Ltd. putting the retail sale price as Rs. 20 on each packet.  The product in the packet is covered under MRP provisions and 40% abatement is available on it.  Determine the assessable value under Central excise law from the following details : * Cost of Raw material supplied Rs. 30,000/- * Job worker’s charges including profit Rs. 10,000/- * Transportation charges for sending the raw material to the job worker Rs. 3,000/- * Transportation charges for returning the finished packets to Asha Ltd. Rs. 3,000/-  (CA Final November 2005)

Answer - Provisions of section 4A are overriding provisions, i.e. if a product is covered under provisions of section 4A, valuation will be on the basis of provisions of section 4A and not on the basis of material cost plus job charges.

Hence, in this case, assessable value will be Rs 12 per piece (after allowing 40% abatement from MRP). Hence, assessable value for 5,000 packets is Rs 60,000.

Question - M/s KLM gets their gray cloth processed from M/s ABC. M/s ABC carried out the processes of bleaching, dyeing, sizing, finishing etc. on the gray cloth and return the same to M/s KLM. The cloth is supplied by M/s KLM and the ownership of the goods vests with M/s KLM all the time. M/s KLM sells the processed cloth at the rate of Rs. 100 per metre. The cost of the gray cloth in the hands of M/s ABC is Rs. 50 per metre and M/s ABC charge Rs. 20 per metre as job charges (which includes M/s ABC’s profits) and the job charges are recovered from M/s KLM. Upon the above facts, discuss briefly with reference to the relevant provisions of the Central Excise Act, 1944 and the Rules made thereunder the following questions that arise (i) Does the process of bleaching, dyeing, sizing, finishing etc. in the above context amount to manufacture within the meaning of Section 2(f) of the Central Excise Act, 1944 ? (ii) In the facts and circumstances of the above case, who will be regarded as the ‘manufacturer’ for the purpose of the Central Excise Act, 1944 - M/s KLM or M/s ABC or both ? (iii) How will the assessable value of the processed cloth for purposes of Section 4 of the Central Excise Act, 1944 and the Rules made thereunder be arrived ? [CA Final November 2000]

Answer - The process is ‘manufacture’. ABC is the ‘manufacturer’ and will be  liable to pay excise duty. Assessable value will be Rs 70 for clearances upto 31-3-2007. For clearances on or after 1-4-2007, selling price of KLM will be taken as cum-duty price and assessable value will be calculated by back calculations.

Question - A Ltd. is engaged in the activity of conversion of grey cloth into embroidered dyed cloth. In the course of the various activities, it gets the sizing done by S and dyeing by D. The cost of gray cloth is Rs 40 per metre. S charged Rs 5 per metre for sizing and D charges Rs 20 per metre. The finished product is sold by A Ltd. for Rs 75 per metre. In the context of C. E. Act, 1944, is there any manufacture involved? Who will be regarded as the manufacturer in this situation? [ICWA Final December 2004].

Answer - In Ujagar Prints v. UOI - AIR 1989 SC 516 = 39 ELT 493 (SC) = 74 STC 401 (SC) = 42 Taxman 151 (SC) = (1989) 3 SCC 488 = 179 ITR 317 (5 member Constitution bench), it has been held that processing gray fabrics by bleaching, dyeing, printing of fabric will amount to ‘manufacture’. Hence, duty will be payable.

The ‘manufacture’ is actually done by D. Hence, he will be liable to pay excise duty, even if grey cloth was supplied by A Ltd.

For clearances upto 31-3-2007 - ‘Assessable Value’ for purpose of excise duty is Rs 65 (value of raw material plus job charges of S and D). This will be so even if the cloth is sold by A Ltd. for Rs 75.

For clearances on or after 1-4-2007 – Rs 75 will be taken as cum-duty price and assessable value will be calculated by back-calculations.

Question - An assessee manufactures certain goods on job-work basis. The trader supplies the raw material to job-worker and sells the manufactured product under his brand name. Find the assessable value for the purpose of levy of excise duty from the following particulars - (i) Cost of raw material supplied by trader – Rs. 10,000. (ii) Cost of bringing raw material to factory – Rs. 500. (iii) Value of job work done – Rs. 2,500. (iv) Job worker’s profit – Rs. 400. (v) Transportation charges incurred for returning the manufactured product to the trader – Rs. 600. (vi) Trader’s sales price of finished product – Rs. 15,000 (ICSI Final June 2003)

Answer – For clearances upto 31-3-2007, assessable value is Rs 13,400. For clearances on or after 1-4-2007, Rs 15,000 will be treated as cum-duty price and assessable value will be calculated by back calculations.

Question - Gopal is doing only job work by charging Rs. 20 per product. The cost of materials supplied to him for the job work is Rs. 100 per product. Calculate the excise duty payable @ 8% assuming that the job worker has undertaken to pay the excise duty (ICSI Inter June 2005)

Answer – For clearances upto 31-3-2007, assessable value is Rs 120 and excise duty is Rs 9.60. For clearances on or after 1-4-2007, assessable value cannot be determined since selling price of raw material supplier is not known.