Indirect taxation contributes significantly towards government revenues. Indirect taxation, inter-alia, comprises of Central Value Added Tax (CENVAT - excise duty), Customs duties, Service tax, Central sales tax and Value-added taxes (formerly known as Sales Tax). Excise duty, customs duties, service tax and Central sales tax are administered by the Union Government whereas the value-added taxes are administered by the States. Excise duty and Custom duties contribute nearly 50% of the total revenue collection of the Union Government.
This article gives a bird's eye view of the statutory enactments under which excise duty is collected, the procedural requirements, the administrative setup and the quasi judicial authorities to deal with disputes between the Government and assesses.
The Charge of Excise Duty:
A tax, known as the Central Value Added Tax (CENVAT), commonly referred to as excise duty, is levied on the manufacture and production of 'excisable goods' in India. This tax is levied under the Central Excise Act, 1944 (hereinafter 'Excise Act') and administered by the Union Government of India. The duty is levied under section 3 of the Excise Act (the charging section).
Excise duty may be levied and collected on goods only if two tests are satisfied; one, that the goods are manufactured and two, that the goods are marketable.
Concept of Manufacture:
The definition of 'manufacture' given under the Excise Act is an inclusive one. It does not define the term manufacture but merely states that certain processes set out therein would fall under the definition of manufacture.
The task of determining what is 'manufacture' had, therefore, to be undertaken by Courts. The Supreme Court of India in the case of Union of India vs. Delhi Cloth & General Mills Co. Limited1, held that the word 'manufacture' is generally understood to mean "as bringing into existence a new substance" and does not merely mean "to produce some change in substance". The Court quoted with approval a passage appearing in Volume 26 of the Permanent Edition of the "Words and Phrases" as below:
"'Manufacture' implies a change but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation: a new and different article must emerge having a distinctive name, character or use".
The Supreme Court had occasion to once again consider the meaning of the term 'manufacture' in the case of South Bihar Sugar Mills Ltd versus Union of India2. The Court held:
"The Act charges duty on manufacture of goods. The word "manufacture" implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use."
In a recent judgment, the Supreme Court, in the case of Kores India Ltd, Chennai versus Commissioner of Central Excise3 following the aforesaid two earlier judgments, defined the concept of manufacture in the following manner -----
"11. Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to (sic that the) manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana, Rajasthan (1891 (4) SCC 473)."
Thus, to constitute manufacture the process involved must bring about a transformation and as a result of such transformation a new and different commercial article must emerge having a distinctive name, character and use. Therefore, a mere change of form, shape or size of the same article or substance would not ordinarily amount to manufacture.
However, the definition of manufacture in the Excise Act underwent various amendments in years 1986, 1999, 2002 and 2003. By virtue of these amendments, 'manufacture' would now include any process which is specified as amounting to manufacture in relation to any goods in the Section or Chapter Notes specified in the First Schedule to the Central Excise Tariff Act, 1985 and in respect of goods specified in the Third Schedule to the Excise Act which involve packing or re-packing of such goods in the unit container or labeling or re-labeling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer. In other words, by a legal fiction, certain processes have been equated with manufacture, even though as a result of such processes no new or different article emerges having a distinctive name, character or use.
Concept of Marketability:
Excise duty, as provided under section 3 of the Excise act, is levied on the manufacture or production of 'excisable goods'. The term 'excisable goods' has been defined to mean goods specified in the First Schedule to the Central Excise Tariff Act, 1985. However, there is no definition of the word 'goods'. It was once again left to the Courts to interpret the word 'goods'. In a catena of judgments the Supreme Court has held that in order to be goods an article must be something which can ordinarily come to the market and is brought for sale and must be known to the market as such. Therefore, the essentiality of the concept of marketability is that the goods manufactured are known in the market or are capable of being sold and purchased in the market. This is best explained by a few cases:
In the case of Union of India vs. Delhi Cloth & General Mills Co. Limited (supra), the assessee was manufacturing hydrogenated vegetable oil (known as vanaspati). During the process of manufacture, at an intermediate stage, refined oil came into existence. It was the contention of the Revenue Authorities that excise duty was leviable on such refined oil. The assessee contended that the refined oil that came into existence was not refined oil as known to the market since refined oil as known to the market must have undergone the process of deodorisation and that, in their case, the refined oil had not undergone such process. The Supreme Court held that to become "goods" an article must be something which can ordinarily come to the market to be bought and sold and that since the refined oil, in the condition in which it came into existence in the assessee's factory, was not refined oil which could ordinarily come to the market to be bought and sold, that the said refined oil was not 'goods'.
In the case of South Bihar Sugar Mills Ltd versus Union of India (supra) the assessee manufactured sugar. During the process of manufacture of sugar, a gas known as 'kiln gas' emerged as a byproduct and was released to the atmosphere. The Revenue Authorities sought to levy excise duty on the said kiln gas on the ground that it was either carbon dioxide or compressed carbon dioxide. The contention of the assessee was that kiln gas was not carbon dioxide as known to the market or to the commercial community dealing in carbon dioxide. The Supreme Court held that excise duty is levied on goods and as the Act does not define 'goods', the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. Looking at the evidence on record the Court held:
"In our view, the gas generated by these concerns is kiln gas and not carbon dioxide as known to the trade, i. e., to those who deal in it or who use it. The kiln gas in question therefore is neither carbon dioxide nor compressed carbon dioxide known as such to the commercial community and therefore cannot attract Item 14-H in the First Schedule."
Thus, before excise duty can be levied and collected on any goods, the twin tests of manufacture and marketability have to be satisfied. The burden of proving that goods satisfy the twin tests lies on the Revenue Authorities.
Classification of Goods:
There are thousands of varieties of manufactured goods. All goods do not carry the same rate or amount of duty. It is not possible to identify all the goods individually. Therefore, it is necessary to identify the goods through groups and sub-groups and then to determine the rate of duty on each group or sub-groups of goods. The exercise of placing the various manufactured goods under the various groups or sub-groups is known as 'Classification' of a product. This basically means the determination of the heading or sub-heading under which a particular product will be covered.
For the purposes of classifying goods under various heads and/or sub-heads, Parliament has passed the Central Excise Tariff Act, 1985 (hereinafter 'Tariff Act'). The Tariff Act is based on the International Convention of Harmonised System of Nomenclature (HSN). This is a universally adopted standard to ensure uniformity in classification of goods in international trade.
The First Schedule of the Tariff Act is divided into 20 sections, which broadly cover separate categories of goods. For instance Section I deals with live animals: animal products; Section II deals with vegetable products; Section XI deals with textile and textile articles; and Section XV deals with base metals and articles of base metal. Each Section contains a number of Chapters. The First Schedule comprises of 96 Chapters.
Each of the Sections and Chapters contain Section and/or Chapter Notes. The Section/Chapter Notes aid in the classification of goods.
Principles of Classification:
As mentioned above, each section and each chapter contains notes which act as an aid in the classification of goods. In addition, the Tariff Act also contains Rules for the Interpretation of the First Schedule. Although these provisions are quite elaborate, they are not always adequate to correctly classify a product. However, over the years Courts and Tribunals have involved principles for the classification of products. Some of these principles are dealt with herein.
Trade Parlance Theory:
Probably the most common and oft repeated principle of classification is that goods should be classified according to their popular meaning or as they are understood in commercial sense. The test applied in such cases is: how is the product identified by the class of people dealing with or using the product? This test is applied whenever a statute does not contain any definition. The courts in India have repeatedly held that while interpreting fiscal statutes resort should be had to the commercial or popular meaning attached to terms by those dealing in them and not to any scientific or technical meaning. The trade parlance test may, however, have some limitations. For instance when a new product is introduced in the market, or where the structure of the heading in the Chapter is entirely based on technical identification of various products, the commercial parlance by which a particular product is known would have no relevance.
Rate of duty:
The Tariff Act specifies the rate of duty in respect of each heading/subheading given in all the chapters thereunder. The rate of duty may either be a specific rate, i.e., quantified in terms of money or may be ad valorem, i.e., a percentage of the value of the goods.
Thus, for determining the rate of duty applicable on a particular product the first step is to determine the relevant heading or sub-heading which the particular product is covered. Against the relevant entry the rate of duty of excise payable on the product is mentioned. The rate of duty is then to be applied to the particular product.
If the rate of duty is specific (a certain quantum of money), the assessee is required to pay that amount.
However, if the rate of duty is ad valorem, the assessee has to determine the assessable value of the particular product and thereafter apply the rate of duty to such derived assessable value. The process of determining the assessable value of a product is known as 'valuation'.
As mentioned above the issue of valuation of goods arises where the rates of duty are ad valorem, i.e., expressed as a percentage of the value of goods. For this purpose the assessable value of the goods has to be determined. This exercise has to be carried out at the price at which it is sold by a manufacturer. At present there are three basis for valuation in cases where the duty is ad valorem. These are where a tariff value is fixed by the government in respect of certain goods; transaction value and valuation based on the retail sale price printed on a package of goods.
The Central Government has power to fix tariff values in respect of goods under section 3 (2) of the Excise Act. In such case the assessee pays the ad valorem duty on the tariff value as fixed. However, in recent years tariff values have rarely been fixed by the Government.
In cases where either a tariff value has not been fixed by the Central Government or the valuation is not based on the retail sale price, the valuation of goods is required to be carried out under section 4 of the Excise Act. In such cases valuation is based on the 'transaction value' of the goods. The concept of 'transaction value' was introduced in the Excise Act with effect from July 1, 2000.
Sub-section (1) of section 4 of the Excise Act prescribes that the value of excisable goods shall be the 'transaction value'. This is, however, subject to the following conditions being satisfied:-
- The price must be the sole consideration for the sale.
In other words the assessee must not receive any other sum
either by way of money or by way of any other assistance
for the manufacture of goods or any manufacturing
assistance from the buyer.
- The buyer of the goods must not be related person. The
term related person has been defined in sub-section (3) (b)
of section 4 of the Excise Act.
- Goods must be sold by the assessee for delivery at the
time and place of removal.
If any one of the aforesaid three conditions is not satisfied than the value of the goods is determined in such manner as may be prescribed. For this purpose the Central Government has framed the 'Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000'. These rules provide the manner for determination of value of goods which do not satisfy the above mentioned conditions.
'Transaction value' has been defined in section 4 (3) (d) of the Excise Act. In effect transaction value would include any amount that is paid or payable by the buyer to or on behalf of the assessee on account of the sale of goods. However, for determining the transaction value the duty of excise, sales tax and other taxes, actually paid or payable are not to be included.
Valuation with Reference to Retail Sale Price:
With effect from May 14, 1997 section 4 A was inserted in the Excise Act. Under this provision valuation of products may be made with reference to the retail sale price of the products. However, the conditions precedent for the application of the section are:-
- The excisable goods must be packaged goods on which
there is a requirement to specify the retail sale price
under the provisions of the Standards of Weights and
Measures Act, 1976 or the rules framed thereunder or any
other law for the time being in force:
- The excisable goods are notified by the Central
Government for purposes of the section; and
- The goods must be chargeable to duty based on their
On satisfaction of the aforesaid three conditions the value for purposes of levy of excise duty shall be the retail sale price of such goods less such amount of abatement from such retail sale price as the Central government may notify. The abatement is given as a percentage of the retail sale price.
All manufactured goods are not used by end-users or consumers. The final products manufactured by some manufacturers may be the raw material/input for other manufacturers. Similarly capital goods purchased by a manufacturer may be utilised by him for setting up a plant, machinery or a factory. The inputs/capital goods so purchased by the manufacturer are duty paid. In order to overcome the cascading effect of tax, a scheme known as the Cenvat Credit Scheme has been put in place by the Central Government.
Under this Scheme a manufacturer or a service provider may take credit, inter-alia, of excise duty or additional duty of customs (levied under section 3 (1) of the Customs Tariff Act, 1975) or service tax paid on the inputs or capital goods or inputs services and adjust such credit for making payment of tax on his final products or output services.
The categories of persons who can avail of the scheme, the procedures to be followed and the various records required to be maintained are set out in the Cenvat Credit Rules, 2004.
The Union Government also has the power, in public interest, to either exempt goods manufactured or produced from the whole of the duty of excise leviable thereon or from part of the duty of excise leviable thereon. Such exemptions are notified by the Union Government and published in the Official Gazette.
Detailed procedures have been laid down under the Excise Act and the rules framed thereunder for adjudication. For instance at the time of clearance of goods the assessee may not be in a position to determine the correct classification of goods. In such circumstances the assessee may clear the goods on a provisional assessment basis. Thereafter, adjudication proceedings would be held before the designated revenue authorities for a correct determination of the classification. Similarly a question may also arise as to the correct determination of the assessable value. In this case also adjudication proceedings will be held for determining the correct assessable value.
There may also be instances where the revenue authorities are of the view that the duty paid by an assessee has not been correctly determined or the classification arrived at by an assessee is incorrect. In such cases a show cause notice is issued to the assessee setting out the case of the revenue authorities and directing the assessee to show cause. On the reply being submitted a personal hearing is granted by the concerned adjudicating authority and thereafter the adjudicating authority issues an order on the questions raised. The Excise Act and the Rules also provide for penalty proceedings in case the revenue authorities are of the view that excise duty has been short paid, not paid, short levied or not levied on account of certain acts or omissions on the part of the assessee. In these cases also show cause notices are issued to the assessee and the matter is then adjudicated by the concerned specified Officer's of the revenue Department.
The Excise Act provides for appellate remedies against the orders. For instance in case of an order passed by an officer below the rank of Commissioner, an appeal lies to an officer designated as Commissioner (Appeals). An appeal against the order of the Commissioner (Appeals) lies to the Customs Excise & Service Tax Appellate Tribunal. In case the order is made by an officer of the rank of Commissioner, an appeal lies to the Customs Excise & Service Tax Appellate Tribunal.
Against orders of the Customs Excise & Service Tax Appellate Tribunal two streams of appeals are contemplated. In case the issue relates to either the classification or valuation of goods, an appeal lies to the Supreme Court of India. In other cases an appeal lies to the jurisdictional High Court.
The Union Government in the year 1999 constituted an Authority for Advance Rulings (Central Excise, Customs & Service Tax). This Authority has basically been set up for purposes of determination of questions of law or fact in relation to an activity proposed to be undertaken by the applicant. This Authority would, inter alia, determine issues relating classification of goods and services, the principles to be adopted for valuation of goods and services, the applicability of notifications having a bearing on the rate of duty and admissibility of Cenvat credit and credit on service tax. This is a great boon for assessees as it takes away the uncertainties or vagaries of taxing statutes as any determination is statutorily binding. However only non-resident, or companies or individual in joint venture non-residents can avail of this facility.
1 AIR 1963 SC 791
2 2 AIR 1968 SC 922
3 2005 (1) SCC 385
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.