FINAL COURSE STUDY MATERIAL PAPER 8 Indirect Tax Laws As amended by the Finance Act, 2006 BOARD OF STUDIES

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

This study material has been prepared by the faculty of the Board of Studies. Th e objective of the study material is to provide teaching material to the student s to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text book(s). In cas e students need any clarifications or have any suggestions to make for further i mprovement of the material contained herein they may write to the Director of St udies. All care has been taken to provide interpretations and discussions in a m anner useful for the students. However, the study material has not been specific ally discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of th e Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. The Institute of Chartered Accountants of India All rights reserved. No part of this book may be reproduced, stored in a retriev al system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, fr om the publisher. Website : www.icai.org E-mail : bosnoida@icai.org Published by Dr. T.P. Ghosh, Director of Studies, ICAI, C-1, Sector-1, NOIDA-201 301 Typeset and designed by Gursharan K Madhwal at Board of Studies, The Institute o f Chartered Accountants of India.

PREFACE In the scheme of our national economy, the role of Indirect Taxes is fast gaining prime importance. In the fiscal legislations increased importance has been given on the levy of indirect taxes as it constitutes a major source of revenue. Tax management and planning, especially in the corporate sector, necessarily entails a great degree of indirect taxes management and chartered accountants are expec ted to advise clients and organisations in this area of tax management. Accordin gly, adequate emphasis has been given in the chartered accountancy curriculum on the subject. This study material covers the syllabus for that paper and include s laws relating to central excise, customs, service tax and VAT. VAT is introduc ed for the first time in the new Final Course. The study material has been divid ed into three sections. Section A covers central excise law, Section B deals wit h service tax and VAT and Section C deals with customs law. The subject matter o f all the sections is based on the law as amended by the Finance Act, 2006. Thou gh the law is vast, we have tried to make the study material simple yet comprehe nsive. The chapters have been organised in a logical sequence so as to facilitat e easy understanding of the law. The latest amendments have been given in italic s. Another helpful feature in this study material is the addition of self-examin ation questions at the end of every chapter which will be useful to test the und erstanding of the students with regard to various provisions in the chapter. Ans wers have been given in respect of those questions which are based on judicial d ecisions or involving legal interpretations. Students may keep in mind that thou gh the study material covers the entire syllabus, it is of utmost importance to refer to the bare Acts and a standard text book in addition to this study materi al. This would be helpful for solving problems, answering a variety of questions and remembering sections and rules. Past suggested answers published by the Ins titute also provide a rich bank of questions. Students must also update themselv es regularly with amendments in the law and other relevant judicial and legislat ive developments. The annual publications brought out by the Board of Studies in the form of the Supplementary Study Paper and Select Cases in Direct and Indirect Taxes An Essential Reading for the Final Course would be helpful in this regard. No efforts have been spared in making this study material lucid and student frie ndly. The Board has also received useful inputs from Mr. Arun Kumar Agrawal for which the Board is thankful. Finally, we would request the students to kindly se nd their suggestions on how to make this study material more useful for them. St udents are welcome to write to the Director of Studies, The Institute of Charter ed Accountants of India, C-1, Sector 1, Noida - 201301.

SYLLABUS PAPER 8 : INDIRECT TAX LAWS (One paper Three hours 100 marks) Level of Knowledge: Advanced knowledge Objecti ves: (a) To gain expert knowledge of the principles of the laws relating to cent ral excise customs and service tax, (b) To acquire the ability to apply the know ledge of the provisions of the abovementioned laws to various situations in actu al practice. Contents: Section A: Central Excise (40 marks) Central Excise Act, 1944 and the related Rules, Circulars and Notifications; Central Excise Tariff A ct, 1985 and the related Rules. Section B: Service tax & VAT (40 marks) Law rela ting to service tax as contained in the Finance Act, 1994 as amended from time t o time and the related Rules, Circulars and Notifications. Issues related to Val ue Added Tax: 1. 2. 3. 4. 5. 6. 7. Backdrop for State-Level VAT in India Taxonom y of VAT Input tax credit, tax invoices Small dealers and composition scheme VAT procedures VAT in relation to incentive schemes, works contract, lease transact ions and hire purchase transactions. VAT and Central Sales Tax Section C: Customs (20 marks) Customs Act, 1962 and the related Rules, Circulars and Notifications; Customs Tariff Act, 1975 and the related Rules.

While covering the above laws, students should familiarize themselves with the i nterrelationship of accounting with excise, customs and service tax and also the ethical considerations involved in the compliance of these laws. Note If new le gislations are enacted in place of the existing legislations relating to central excise, customs and service tax, the syllabus will accordingly include such new legislations in place of the existing legislations with effect from the date to be notified by the Institute. Students shall not be examined with reference to any particular State VAT Law.

SECTION A CENTRAL EXCISE CONTENTS CHAPTER 1 BASIC CONCEPTS 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 Constitution of India................................. ...................................................... 1.1 Direct and indirect t axes ........................................................................... ..... 1.2 What is excise duty................................................... ..................................... 1.2 History of central excise law......... .................................................................. 1.3 Body of c entral excise law............................................................... ............... 1.4 Exemption notifications in central excise................... ...................................... 1.5 Departmental circulars and trade noti ces in central excise............................... 1.6 Definitions under excis e law........................................................................... 1.6 Levy and collection of duty................................................ ............................. 1.7 Goods and excisable goods .................... ....................................................... 1.8 Manufacture ........ ................................................................................ ........ 1.12 Dutiability of intermediate products and captive consumption...... ................... 1.20 Dutiability of site related activities and immovable pr operty ........................... 1.21 Whether assembly amounts to manufacture .................................................. 1.26 Dutiability of waste and scrap....................................................................... 1. 26 Packing, labelling and branding activities................................... ................... 1.27 Can the test of change in tariff heading/sub-headings b e adopted for identifying whether a process amounts to manufacture.............. .................... 1.29 Determination of taxable event for charge of duty..... ..................................... 1.30 CHAPTER 2 CLASSIFICATION OF EXCISABLE GOODS 2.1 2.2 2.3 2.4 2.5 Introduction ... ................................................................................ ................ 2.1 Central Excise Tariff ..................................... ................................................. 2.1 Explanatory Notes to the H SN ........................................................................ 2.3 Power of Central Government to amend first and second schedules of the tariff .. ................................................................................ .................. 2.3 Interpretative Rules to Central Excise Tariff ........... ......................................... 2.3 i

CHAPTER 3 VALUATION OF EXCISABLE GOODS 3.1 3.2 3.3. 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Basis of valuation ....................................................... ................................... 3.1 Valuation under section 4 (ad valorem).. ......................................................... 3.2 Related persons .. ................................................................................ .......... 3.6 Place of removal................................................. ......................................... 3.13 Price is the sole consideration.. .................................................................... 3.13 Ingred ients of transaction value...................................................... .............. 3.13 Situations where transaction value does not apply .......... .............................. 3.16 Valuation Rules, 2000....................... ........................................................... 3.17 Analysis of the Valuation Rules ............................................................... ..... 3.24 Valuation under different circumstances ............................. .......................... 3.29 Maximum Retail Price (MRP) based valuation [Sect ion 4A]............................ 3.32 CHAPTER 4 CENVAT CREDIT RULES, 2004 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.1 1 4.12 4.13 4.14 4.15 4.16 Introduction & brief legislative history ............ ................................................. 4.1 CENVAT Credit Rules, 2004 .......................................................................... 4.1 R ule 2 - Definitions ............................................................ ............................ 4.2 Rule 3 - Cenvat credit ........................ .......................................................... 4.11 Rule 4 - Conditi ons for availing the Cenvat credit .......................................... 4. 16 Job work provisions [Rule 4(5) and 4(6)]..................................... .................. 4.17 Rule 5 - Refund of Cenvat credit ....................... ........................................... 4.17 Rule 6 - Obligation of manufact urer of dutiable and exempted goods and provider of taxable and exempted service s ................................................... 4.20 Option to pay duty .. ................................................................................ ..... 4.23 Rule 7 Manner of distribution of credit by input service distributor ............... 4.24 Rule 8 Storage of inputs outside the factory of the manufac turer................. 4.24 Rule 9 - Documents and accounts .................... ............................................ 4.25 Rule 9A Information relating t o principal inputs .......................................... 4.27 Rule 10 - Tra nsfer of credit ................................................................ .......... 4.28 Rule 11 - Transitional provisions .............................. .................................... 4.29 Rule 12 - Special dispensation in resp ect of inputs manufactured in factories located in specified areas of North East region, Kutch District of Gujarat, State of Jammu & Kashmir and State of Sikkim ............................................. 4.29 ii

4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 Rule 13 Power of Central Government to notify goods for deemed Cenvat credit ... ............................................................................... 4.29 Rule 14 Recovery of Cenvat credit wrongly taken or erroneously refunded .. 4.29 Rule 15 - Confiscation and penalty ........................................ ....................... 4.30 Rule 16 - Supplementary provision ................. .............................................. 4.30 CBEC guidelines on Cenvat cr edit ................................................................ 4.31 Cenva t and assessable value ......................................................... .............. 4.32 Cenvat on defective goods returned ......................... .................................... 4.32 Balance of Cenvat credit lying unutili zed at year end..................................... 4.33 Procedure for removal of inputs.................................................................... 4. 33 CHAPTER 5 GENERAL PROCEDURES UNDER CENTRAL EXCISE 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5. 8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 Introduction ..................... .............................................................................. 5 .1 Removal of excisable goods [Rule 4] ......................................... ..................... 5.2 Date for determination of duty and tariff valuation [R ule 5]............................... 5.3 Assessment [Rule 6] .................. .................................................................... 5.4 Manner of payment [Rule 8] ............................................................ ............... 5.8 Registration [Rule 9] ...................................... .............................................. 5.11 Records [Rule 10]........... ............................................................................. 5. 17 Electronic maintenance of records and preparation of returns and documents .. .......................................................................... 5.19 Invoicing [Rule 11]............................................................. .......................... 5.20 Returns [Rule 12] .............................. .......................................................... 5.23 Job work in arti cle of jewellery [Rule 12AA]................................................... 5.25 Maintenance of records & payment of duty by the independent weaver of unpro cessed fabrics [Rule 12C] ................................. 5.27 Special procedu re for payment of duty [Rule 15] ........................................... 5.2 7 Return of duty paid goods to the factory [Rule 16] ........................... .............. 5.27 Removal of goods for job work etc. [Rule 16A] .............. ................................ 5.28 Special procedure for removal of semi-fini shed goods for certain purposes [Rule 16B] ..................................... ............................................... 5.28 Special procedure for remov al of excisable goods for carrying out tests [Rule 16C]......................... .................................................................. 5.29 iii

5.18 5.19 5.20 5.21 Removal of goods by a 100% export oriented undertaking for domestic tariff area [Rule 17]....................................................................... ............... 5.29 Powers of central excise officers ......................... ......................................... 5.29 Account current and procedures re lating thereto ........................................... 5.31 Samples......... ................................................................................ ............. 5.35 CHAPTER 6 EXPORT PROCEDURES 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 I ntroduction .................................................................... ............................... 6.1 Export without payment of duty under bond/le tter of undertaking...................... 6.1 Categories of exports and the cond itions and safeguards thereto................... 6.10 Export procedure ......... ................................................................................ 6.13 Procedure for discharge of bond or the duty liability .................... .................. 6.15 Cancellation of export documents........................ ......................................... 6.16 Re-entry of the goods cleared for export under bond but not actually exported, in the factory of manufacture..... .................................................... 6.17 Re-import of exported goods for repairs etc. and subsequent re-export .......... 6.17 Entry of goods i n another factory of the same manufacturer for consolidation and loading of cons ignment for export ..................................... 6.18 Samples of export goods .......................................................................... ... 6.18 Export under claim for rebate ......................................... .............................. 6.18 Miscellaneous matters ...................... ........................................................... 6.29 CHAPTER 7 BONDS 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 Bond .................. ................................................................................ ........... 7.1 Types of bonds.................................................. ............................................ 7.1 Guidelines for executing bonds ...................................................................... 7.2 Bonds for provisional assessment .................................................... .............. 7.3 Stamps on bond .............................................. .............................................. 7.3 Execution of bond by governme nt undertakings or autonomous corporations ..................................... ............................................................. 7.3 Security ..... ................................................................................ ................... 7.4 Surety ................................................. .......................................................... 7.5 Guarantee bond ex ecuted by bank ................................................................. 7.5 Preservation of bond and retention of securities........................... ................... 7.5 iv

7.11 7.12 Verification of sureties ....................................................... ............................ 7.6 Bond accepting authority ...................... ......................................................... 7.6 CHAPTER 8 DEMAND, ADJUDICATION AND OFFENCES 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Demand .................................................................... .................................... 8.1 Issue of duty demand notice ........... ............................................................... 8.1 Waiver of no tice ........................................................................... ................. 8.3 Certain common questions about the provisions relating to demand................. 8.3 Adjudication ....................................... ........................................................... 8.5 Interest ....... ................................................................................ .................. 8.8 Offences ................................................ ....................................................... 8.8 Civil and criminal p roceedings...................................................................... 8.10 Penalty and confiscation ................................................. ............................. 8.14 Recovery of dues ............................ ............................................................ 8.18 CHAPTER 9 REFUND 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 Refund of duty......................................................................... ...................... 9.1 Interest on delayed refund .......................... ................................................... 9.1 Theory of unjust enrichm ent ........................................................................... 9.1 Assessment documents to show duty payment particulars ...................... ......... 9.3 Time-limit for making the application for refund of duty.......... .......................... 9.4 Presentation of refund claim..................... ...................................................... 9.5 Payment of refund ... ................................................................................ ...... 9.6 Post Audit .......................................................... ........................................... 9.6 Monitoring and control for timel y disposal of refunds ....................................... 9.7 Provisions rel ating to interest on delayed refunds [Section 11BB] .................... 9.7 Dut y of excise not levied or short-levied as a result of general practice not to be recovered [Section 11C] ..................................................... 9 .8 Obligation of persons who have collected excise duty from buyers [Section 11D ] .............................................................................. ....... 9.8 Interest on the amounts collected in excess of the duty [Section 11D D] ......... 9.19 v

CHAPTER 10 APPEALS 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 Intr oduction ....................................................................... .......................... 10.1 Appellate stages................................ .......................................................... 10.1 Appeals to Commi ssioner (Appeals) ............................................................. 10.2 Production of additional evidence before Commissioner (Appeals) ........... ...... 10.4 Appeals to Appellate Tribunal....................................... ................................ 10.5 Stay of demand/order [Section 35F] ....... ...................................................... 10.8 Legal decisions rela ting to stay applications ................................................. 10.9 Revision application........................................................... .........................10.10 Appeal to High Court [Section 35G] .............. ...............................................10.11 Appeal to Supreme Court ... .........................................................................10.12 S ummary ......................................................................... ..........................10.12 CHAPTER 11 REMISSION OF DUTY AND DESTRUCTION OF GOODS 11.1 11.2 11.3 11.4 Statut ory provisions ................................................................. .................... 11.1 Procedure for destruction of goods and remission of du ty .............................. 11.2 Manner of destruction ................... ............................................................... 11.3 Case laws p ertaining to remission of duty ................................................. .... 11.4 CHAPTER 12 WAREHOUSING 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 Statut ory provisions ................................................................. .................... 12.1 Place of registration of warehouse.................... ............................................ 12.1 Procedure for warehousing of e xcisable goods removed from a factory or a warehouse ........................... ................................................................ 12.2 Failure to receive a warehousing certificate ............................................. ..... 12.2 Accountal of goods in a warehouse ................................... ........................... 12.3 Responsibility of the registered person ....... .................................................. 12.3 Revoked or suspended reg istration of a warehouse....................................... 12.3 Warehouse t o store goods belonging to the registered person ....................... 12.4 Re gistered persons right to deal with the warehoused goods ........................ 12.4 Export warehousing ....................................................... .............................. 12.4 vi

CHAPTER 13 EXEMPTION BASED ON VALUE OF CLEARANCES (SSI) 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10 13.11 Introduction .................................. ............................................................... 13.1 Meaning of small scale units .............................................................. .......... 13.1 Products covered under the SSI exemption notification .......... ....................... 13.2 Eligibility ....................................... .............................................................. 13.2 Relaxation i n the duty ..................................................................... ............. 13.2 Availability of Cenvat credit................................ .......................................... 13.3 Value of clearances to be exclud ed for calculation of limit of Rs.100 lakhs and Rs.400 lakhs ................... ................................................. 13.3 Important case laws on va lue of clearances .................................................. 13.4 Brand name ........................................................................... ..................... 13.5 Clubbing of clearances .............................. .................................................. 13.7 Case laws relating to cl ubbing of clearances................................................. 13.8 CHAPTER 14 NOTIFICATIONS, DEPARTMENTAL CLARIFICATIONS AND TRADE NOTICES 14.1 14. 2 14.3 14.4 14.5 14.6 14.7 14.8 14.9 14.10 14.11 Power of the Central Government to make rules ........................................... 14.1 Power of the Cen tral Government to empower central excise authorities ........ 14.5 Emergency po wer of the Central Government under Central Excise Tariff Act, 1985 to increase duty................................................................... 14.5 Exe mption notifications in central excise.......................................... ............. 14.7 Effect of amendments, etc., of rules, notifications or orders [Section 38A] ...... 14.8 Departmental circulars and trade notices in central e xcise............................. 14.9 Binding nature of Board circulars....... ........................................................... 14.9 Can departmenta l authorities of one region refuse to accept a circular issued by another region ? ............................................................14.10 Can departme ntal circulars be inconsistent with the law? .............................14.10 Can a Board circular be contrary to a Tribunal decision? ....................... .......14.10 Date from which Board circulars are effective ..................... .........................14.10 CHAPTER 15 ADVANCE RULING 15.1 15.2 Definitions................................. .................................................................. 15.1 Procedur e for application for advance ruling ........................................... ...... 15.2 vii

15.3 15.4 Constitution of Authority for Advance Ruling (Central Excise, Customs and Servic e tax) ......................................... 15.3 Procedure to be followed b y Authority for Advance Ruling (Central Excise, Customs and Service tax) on rece ipt of application [Section 23D] .................. 15.3 CHAPTER 16 ORGANISATION STRUCTURE OF THE EXCISE DEPARTMENT 16.1 Organisation str ucture ......................................................................... ........ 16.1 CHAPTER 17 EXCISE AUDIT 17.1 17.2 17.3 17.4 Audit under Central Excise Act, 1944 ........................................................... 17.1 Audit prescrib ed by central excise department .............................................. 1 7.2 What is Excise Audit 2000?.................................................. ........................ 17.3 Procedure of Excise Audit 2000 ................... ................................................ 17.4 CHAPTER 18 SETTLEMENT COMMISSION 18.1 18.2 18.3 18.4 18.5 Introduction ......... ................................................................................ ........ 18.1 Salient features of Settlement Commission ........................ ........................... 18.1 Categories of cases that cannot be settled..... ............................................... 18.4 Procedure to make an applic ation before the Settlement Commission ............ 18.5 Procedure to be followe d by the Settlement Commission [Section 32F] .......... 18.6 viii

SECTION B SERVICE TAX & VAT CONTENTS CHAPTER 1 INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Need for a tax on service s ............................................................................. 1.1 Genesis of service tax in India ............................................ ........................... 1.1 Constitutional authority ....................... ........................................................... 1.2 Service tax law ................................................................................ .............. 1.3 Selective vs. comprehensive coverage ........................ ................................... 1.5 Administration of service tax .......... ................................................................ 1.6 Service tax procedures .................................................................... .............. 1.7 Role of a chartered accountant .............................. ........................................ 1.7 CHAPTER 2 PRELIMINARY LEGAL PROVISIONS 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Extent, c ommencement and application [Section 64] ....................................... 2.1 Definitions [Section 65] .................................................. ................................ 2.1 Classification of taxable services [Section 65A] .............................................. 2.2 Charge of service tax [ Section 66] .................................................................. 2 .3 Education Cess .............................................................. ............................... 2.3 Nature of service tax ...................... ............................................................... 2.4 Valuation of taxable services for charging service tax [Section 67]................... 2.4 S ervice Tax (Determination of Value) Rules, 2006 ................................ .......... 2.4 CHAPTER 3 BASIC CONCEPTS APPLICABLE TO ALL SERVICES 3.1 3.2 3.3 3.4 3.5 Basic ex emption to small service providers ............................................. ........ 3.1 Payment only on receipt ........................................... ..................................... 3.3 Service tax payable on advance receive d ....................................................... 3.4 Import of services ............................................................................... ........... 3.4 Taxation of Services (Provided from Outside India ix

and Received in India) Rules, 2006 ............................................. ................... 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 Export of services....... ................................................................................ . 3.11 Export of Services Rules, 2005 .......................................... .......................... 3.11 Concept of deemed service non-existent ......... ............................................. 3.20 Services provided by mutual c oncerns to its members subject to service tax .................................. ................................................................ 3.20 Services p rovided to United Nations or International Organisation exempt from payment of s ervice tax ............................................................. 3.20 Se rvices provided to a developer or units of special economic zone exempt from pay ment of service tax ...................................... 3.21 Exemption to goo ds and materials sold by service provider to recipient of service .............. ........................................................................ 3.21 CHAPTER 4 GAMUT AND COVERAGE OF SERVICE TAX LAWS 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 Stock broking services ................. .................................................................. 4.1 Telephone services ...................................................................... ................. 4.2 Pager services ........................................... ................................................... 4.3 General Insurance servic es............................................................................ 4 .3 Advertising agency services. ................................................ .......................... 4.4 Courier services ................................ ............................................................ 4.6 Consulting engi neers services .................................................................. ..... 4.6 Custom house agents services .......................................... ............................ 4.8 Steamer agents services......................... ...................................................... 4.8 Clearing & forwarding agents services ........................................................... 4.9 Manpower recruitment agents services ............................................ ............ 4.11 Air travel agents services .................................... ........................................ 4.12 Mandap keepers services............ ................................................................ 4.12 Tour opera tors services ................................................................... ........... 4.15 Rent-a-cab scheme operators services ........................... ............................. 4.17 Architects services .......................... ........................................................... 4.18 x

4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31 4.32 4.33 4.34 4.35 4.36 4.37 4.38 4.39 4.40 4.41 4.42 4.43 4.44 Interior decorators services .................................................... ..................... 4.19 Management consultants services ...................... ......................................... 4.20 Practising chartered accountants s ervices ................................................... 4.22 Practising cost accountants services ........................................................... 4.22 Practising company secretarys services..................................... .................. 4.22 Real estate agents services ............................. ........................................... 4.23 Security agencys services ...... ..................................................................... 4.23 Credi t rating agencys services ....................................................... ............. 4.24 Market research agencys services.............................. ................................. 4.24 Underwriters services .................... ............................................................. 4.25 Scientific or technical consultancy services ................................................ .. 4.26 Photography services ................................................... ............................... 4.27 Convention services ....................... ............................................................. 4.28 Leased circui t services ..................................................................... ........... 4.29 Telegraph services ............................................ .......................................... 4.29 Telex services ................. ............................................................................ 4.3 0 Facsimile (Fax) services ..................................................... ......................... 4.31 On-line information and database access and/or re trieval services ................ 4.32 Video tape production services .......... .......................................................... 4.34 Sound recording services........................................................................ ..... 4.35 Broadcasting (radio and television) services ........................ ......................... 4.36 Insurance auxiliary services .................... ..................................................... 4.39 Banking and other fin ancial services ............................................................ 4.4 2 Port services by major ports and other ports ................................. ................ 4.48 Authorised service stations services ...................... ..................................... 4.49 Beauty parlours services ............. ................................................................ 4.51 Cargo hand ling services .................................................................. ............ 4.51 Cable operators services ...................................... ...................................... 4.53 xi

4.45 4.46 4.47 4.48 4.49 4.50 4.51 4.52 4.53 4.54 4.55 4.56 4.57 4.58 4.59 4.60 4.61 4.62 4.63 4.64 4.65 4.66 4.67 4.68 4.69 4.70 4.71 4.72 Dry cleaning services .......................................................... ........................ 4.54 Event management services ........................ ................................................ 4.55 Fashion designers services ......................................................................... 4.56 H ealth club and fitness centre services.......................................... ............... 4.57 Life insurance services ................................... ............................................ 4.58 Rail travel agents services ... ....................................................................... 4.60 Sto rage and warehousing services .................................................. ............. 4.60 Business auxiliary services ................................. ......................................... 4.61 Commercial training or coaching s ervices ..................................................... 4.65 Erection, com missioning and installation services ......................................... 4 .67 Franchise services ......................................................... ............................. 4.69 Internet cafs services ........................ ........................................................ 4.69 Management, mainte nance or repair services ............................................... 4.69 Te chnical testing and analysis services .......................................... .............. 4.71 Technical inspection and certification services ............ .................................. 4.72 Airport services ....................... .................................................................... 4.72 Transp ort of goods by air services.................................................... ............ 4.73 Business exhibition services ................................. ....................................... 4.74 Transport of goods by road (by a go ods transport agency) ............................ 4.75 Construction services in respect of commercial or industrial buildings or civil structures ............. ............................................................................ 4.7 7 Intellectual property service other than copyrights........................... .............. 4.79 Opinion poll services ...................................... ............................................. 4.80 Outdoor catering ............ ............................................................................. 4. 81 TV or radio programme production services ................................... ............... 4.81 Survey and exploration of mineral services ................ ................................... 4.82 Pandal or shamiana services ........... ............................................................ 4.83 Travel agents s ervices (other than air/rail travel agents)............................... 4.84 Forward contract services ...................................................... ...................... 4.84 xii

4.73 4.74 4.75 4.76 4.77 4.78 4.79 4.80 4.81 4.82 4.83 4.84 4.85 4.86 4.87 4.88 4.89 4.90 4.91 4.92 4.93 4.94 4.95 Transport of goods through pipeline or other conduit ........................... .......... 4.85 Site preparation and clearance, excavation, earth moving and dem olition services ............................................................... ................ 4.85 Dredging services of rivers, ports, harbours, backwaters a nd estuaries .......... 4.86 Survey and map-making services other than by govern ment departments ............................................................... .............. 4.87 Cleaning services other than in relation to agriculture, hor ticulture, animal husbandry or dairying ........................................ ............ 4.88 Services in respect of membership of clubs or associations ... ........................ 4.89 Packaging services................................ ...................................................... 4.90 Mailing list compila tion and mailing services ................................................. 4.91 Construction services in respect of residential complexes ..................... ........ 4.91 Registrar to an issues services ................................... ................................... 4.93 Share transfer agents services ......... .................................................................... 4.94 Automa ted teller machine operations, maintenance or management services ....... 4.94 R ecovery agents services.......................................................... ........................... 4.94 Sale of space or time for advertisement, other than in print media ........................ 4.95 Sponsorship services provided to any body corporate or firm, other than sponsorship of sports events ......... ....................................................... 4.95 Transport of passen gers embarking on international journey by air, other than economy class passeng ers ........................................................ 4.96 Transport of g oods in containers by rail by any person, other than government railway ........ ...................................................................... 4.96 Busi ness support services........................................................... .......................... 4.97 Auctioneers services, other than auction of pro perty under directions or orders of a court of law or auction by the Central Gov ernment .............................. 4.97 Public relations services........... ............................................................................. 4. 98 Ship management services .................................................... ............................... 4.98 Internet telephony services ............... .................................................................... 4.99 Transp ort of persons by cruise ship................................................... .................... 4.99 xiii

4.96 Credit card, debit card, charge card or other payment card related services..... ..... 4.99 CHAPTER 5 - SERVICE TAX PROCEDURES 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19 5.20 5.21 Registration [Section 69 & Ru le 4 of Service Tax Rules, 1994] ........................ 5.1 Taxable service to be provided or credit to be distributed on invoice, bill or challan [Rule 4A of Service Tax Rules, 1994] ........................................ 5.3 Payment o f service tax [Section 68 & Rule 6 of Service Tax Rules, 1994] ........ 5.5 Retu rns [Section 70 & Rule 7 of Service Tax Rules, 1994] ........................... .... 5.9 Records [Rule 5 of Service Tax Rules, 1994] ........................... ....................... 5.9 Assessment ......................................... ....................................................... 5.10 Recovery of service tax not levied or paid or short-levied or short paid or erroneously refunded [S ection 73] ................................................................ 5.11 Service tax collected from any person to be deposited with the Central Governme nt [Section 73A] ......................................................... 5.13 Interest on amount collected in excess [Section 73B] ........................... ......... 5.14 Provisional attachment to protect revenue in certain cases [Secti on 73C]....... 5.15 Publication of information in respect of persons in certain cases [Section 73D] ............................................................ ............ 5.15 Refunds ...................................................... ................................................ 5.16 Penal consequences........ ............................................................................ 5.1 7 Reasonable cause [Section 80] ................................................ .................... 5.19 Power to search premises [Section 82] ................ ......................................... 5.20 Powers of revision [Section 84] . ................................................................... 5.20 Appeals to Commissioner of Central Excise (Appeals)- First appeal [Section 85]......... ................................................................................ ........ 5.20 Appeals to the Appellate Tribunal Second appeal [Section 86] ..... ............... 5.20 Appeal to High Court and Supreme Court .................... ................................. 5.22 Recovery of any amount due to Central Gov ernment [Section 87] .................. 5.22 Power of the Central Government to grant exemption from service tax [Section 93] .................................. ............................................. 5.23 xiv

5.22 5.23 5.24 5.25 5.26 5.27 5.28 Power to grant rebate [Section 93A] ............................................ ................. 5.23 Power to make rules [Section 94] ........................ ......................................... 5.24 Power to remove difficulties [Sec tion 95] ...................................................... 5.25 Chapter VA Advance ruling ................................................................. ...... 5.25 Applicability of provisions of the Central Excise Act, 1944 to servi ce tax [Section 83]............................................................. .................................... 5.29 Due dates for service tax ............ ................................................................ 5.30 Credit of service tax..................................................................... ................ 5.31 CHAPTER 6 BACKDROP FOR STATE-LEVEL VAT IN INDIA 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 Introduction .......................................................... ......................................... 6.1 Historical background ............ ........................................................................ 6.2 VAT in Indian context ............................................................. ....................... 6.3 Committee of State Finance Ministers ............... .............................................. 6.3 Empowered Committee of State Finance Ministers .......................................... 6.4 Dr. Vijay Kelka rs views ........................................................................ ......... 6.4 White paper on State-Level VAT in India .......................... .............................. 6.5 Present position ............................ ................................................................ 6.5 Discontinua nce of the central sales tax.................................................... ....... 6.6 Goods and service tax .............................................. ..................................... 6.6 CHAPTER 7 TAXONOMY OF VAT 7.1 7.2 7.3 7.4 7.5 Different stages of VAT........... ....................................................................... 7.1 How VAT operates.................................................................... ..................... 7.2 Variants of VAT ...................................... ....................................................... 7.5 Methods for computat ion of tax ..................................................................... .. 7.6 Merits and demerits of VAT .............................................. ............................ 7.12 CHAPTER 8 INPUT TAX CREDIT 8.1 Concepts of input tax and output tax ............ .................................................. 8.1 xv

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Input tax credit (ITC).......................................................... ............................ 8.1 VAT liability.................................. ................................................................. 8.2 Eligible p urchases for availing input tax credit ......................................... ........ 8.3 Purchases not eligible for input tax credit ....................... ................................. 8.4 Carrying over of tax credit............... ............................................................... 8.4 Refund to ex porters within three months .................................................... ..... 8.5 Exemption or refund to SEZ and EOU units ............................. ....................... 8.5 Concept of input tax credit on capital goods........ ............................................ 8.5 VAT invoice.................... ............................................................................... 8.7 CHAPTER 9 SMALL DEALERS AND COMPOSITION SCHEME 9.1 9.2 9.3 9.4 9.5 9.6 9.7 Princ iples laid down in the White Paper ............................................. ............. 9.1 Threshold exemption limit .................................... .......................................... 9.1 State laws to provide for composi tion scheme ................................................. 9.1 Features of co mposition scheme................................................................ ..... 9.2 Eligibility for the composition scheme................................ .............................. 9.2 Exercising of option ........................ ............................................................... 9.3 VAT chain un der composition scheme ......................................................... ... 9.3 CHAPTER 10 VAT PROCEDURES 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Registrat ion ............................................................................ .................... 10.1 Tax payers identification number (TIN) ................ ........................................ 10.2 Records .......................... ............................................................................ 10. 2 Returns....................................................................... ............................... 10.3 Assessment ................................ ............................................................... 10.4 Audit ..... ................................................................................ ...................... 10.4 Penal provisions ................................... ....................................................... 10.5 Tax rates under VAT ................................................................................ .... 10.5 Miscellaneous ........................................................ ..................................... 10.6 xvi

CHAPTER 11 VAT IN SPECIAL TRANSACTIONS 11.1 11.2 11.3 11.4 VAT and sales-tax inc entives ....................................................................... 11.1 VAT and works contract .................................................... ........................... 11.3 VAT and lease transactions .................... ..................................................... 11.6 VAT and hire-purchase transactions............................................................ 11.9 CHAPTER 12 VAT AND CENTRAL SALES-TAX 12.1 12.2 12.3 12.4 12.5 Central sales tax ................................................................................ ......... 12.1 CST leads to cascading of taxes ................................. ................................. 12.1 CST is not vatable ...................... ................................................................. 12.2 CST after introduction of VAT ........................................................... .......... 12.2 Amendments in CST act to facilitate introduction of VAT ........ ...................... 12.3 xvii

SECTION C CUSTOMS CONTENTS CHAPTER 1 - BASIC CONCEPTS 1.1 1.2 1.3 1.4 Introduction ........................ ........................................................................... 1.1 Constitutional provisions ...................................................... .......................... 1.2 An overview of the Customs Act, 1962............. ............................................... 1.3 Some important definitions.. ........................................................................... 1.5 CHAPTER 2 - LEVY OF AND EXEMPTIONS FROM CUSTOMS DUTY 2.1 2.2 2.3 2.4 Determining factors ....................................................................... ................ 2.1 Point and circumstances of levy ........................... .......................................... 2.2 Procedure, mechanism and organisa tion for assessment of duty...................... 2.5 Remission, abatement and e xemptions........................................................... 2.7 CHAPTER 3 - TYPES OF DUTY 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Basic cu stoms duty [Section 2 of the Customs Tariff Act] ............................... . 3.1 Additional duty of customs [Section 3 of the Customs Tariff Act] ......... ............. 3.2 Protective duties [Section 7 of the Customs Tariff Act] ...... .............................. 3.5 Emergency power to impose or enhance export d uties [Section 8 of the Customs Tariff Act] .................................... .................................................... 3.6 Emergency power to impo se or enhance import duties [Section 8A of the Customs Tariff Act] ............. ........................................................................... 3.6 Safeguard duty [Section 8B of the Customs Tariff Act] .......................... .......... 3.7 Power of Central Government to impose transitional product specif ic safeguard duty on imports from China [Section 8C of the Customs Tariff Act].. ................. 3.8 Countervailing duty on subsidized articles [Section 9 of t he Customs Tariff Act] ......................................................... ............................................. 3.9 Anti-dumping duty [Section 9A of the Customs Tariff Act] .............................. 3.10 No levy under sec tion 9 or section 9A in certain cases [Section 9B of the Customs Tariff Act] ... ................................................................................ ... 3.12 Education cess @ 2% ................................................... ............................... 3.13 xviii

CHAPTER 4 - CLASSIFICATION OF GOODS 4.1 4.2 4.3 4.4 4.5 Customs Tariff.......... ................................................................................ ..... 4.1 General explanatory notes ............................................ ................................. 4.1 Rules of Interpretation of Customs Tariff Act................................................... 4.2 Special provisions fo r classification of sets of articles and accessories ............ 4.6 Some cases on classification ............................................................. ............ 4.7 CHAPTER 5 - VALUATION UNDER THE CUSTOMS ACT, 1962 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5. 8 5.9 5.10 Introduction ........................................................ ........................................... 5.1 Concept of value ............... ............................................................................ 5.1 Terms used in commercial parlance ............................................. .................. 5.2 Technical terms relating to value in the course of import or export ................... 5.6 Concept of indirect tax and valuation for the same .......................................... 5.6 Computation of assessable v alue ................................................................... 5.7 Cus toms valuation (Determination of Price of Imported Goods) Rules, 1988 ... 5.10 N otes to Rules................................................................... .......................... 5.18 Date for determination of rate of duty and tarif f value .................................... 5.30 Judicial decisions on valuatio n of imported goods ......................................... 5.31 CHAPTER 6 - ADMINISTRATIVE ASPECTS OF CUSTOMS ACT, 1962 6.1 6.2 6.3 Appointment of customs ports, airports, warehousing stations, etc., ................. 6.1 Ad ministrative set up ............................................................ ......................... 6.4 Warehousing stations ............................. ....................................................... 6.6 CHAPTER 7 - IMPORTATION, EXPORTATION AND TRANSPORTATION OF GOODS 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Introduction .................................................. ................................................. 7.1 Importation............... ................................................................................ ..... 7.1 Definitions of important terms........................................ ................................. 7.2 Statutory provisions ..................... .................................................................. 7.3 Procedure for clearance of imported goods ............................................... .... 7.10 Exportation........................................................... ....................................... 7.16 Procedure for the clearance of expo rt goods ................................................. 7.21 Procedure for po stal articles .................................................................. ...... 7.22 xix

7.9 7.10 7.11 Special provisions relating to stores .......................................... ................... 7.26 Special procedures relating to clearance of baggage.... ................................. 7.30 Transit and transhipment ................ ............................................................. 7.38 CHAPTER 8 - WAREHOUSING 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Introduction .. ................................................................................ ................. 8.1 Parallel provisions for home consumption ................. ...................................... 8.2 Special provisions for warehousing .. .............................................................. 8.2 Important def initions ....................................................................... ............... 8.3 Procedure for deposit in the warehouse and subsequent remova l .................... 8.3 Statutory provisions ................................ ....................................................... 8.5 Removal of goods fro m the warehouse ......................................................... 8.13 M anufacture in bonded warehouse ................................................. .............. 8.22 Free trade zones and export processing zones ............... .............................. 8.26 Project imports ............................ ................................................................ 8.29 CHAPTER 9 - DEMAND AND APPEALS 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 Demands under Cus toms Act, 1962................................................................ 9 .1 Issue of show cause notice [Section 28] ..................................... .................... 9.1 Power of the Central Government not to recover duties [ Section 28A] .............. 9.3 Duties collected from the buyer to be deposited with the Central Government [Section 28B]....................................... .......................................................... 9.4 Certain common qu estions on demand ........................................................... 9. 5 Adjudication ................................................................. ................................. 9.6 Interest, penalty, confiscation, duty paym ent under protest.............................. 9.8 Appeals and revisions....... ............................................................................. 9. 8 CHAPTER 10 - REFUND 10.1 10.2 10.3 10.4 10.5 Introduction ...................... ........................................................................... 10.1 Application for refund......................................................... .......................... 10.1 Processing of refund claim ..................... ...................................................... 10.2 Interest on delayed refund ......................................................................... .. 10.3 Refund of export duty in certain cases [Section 26] .................... ................... 10.3 xx

10.6 10.7 Duty paid under protest......................................................... ....................... 10.5 Doctrine of unjust enrichment with respect to refun d of duty .......................... 10.5 CHAPTER 11 - DUTY DRAWBACK 11.1 11.2 11.3 11.4 11.5 11.6 11.7 Introduction ..... ................................................................................ ............ 11.1 Drawback of customs duty ..................................... ...................................... 11.1 Rate of drawback ................... ..................................................................... 11.4 Duty Drawback Rules ................................................................. ................. 11.6 Drawback on imported materials used in the manufacture of export goods [Section 75]...................................................... ........................................... 11.7 Interest on drawback [Section 7 5A] .............................................................11.13 Prohibiti on and regulation of drawback [Section 76] ..................................... 11.13 CHAPTER 12 - PROVISIONS RELATING TO ILLEGAL IMPORT, CONFISCATION, PENALTY & ALLI ED PROVISIONS 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.10 12.11 Introduct ion ............................................................................ ..................... 12.1 Prohibition.......................................... ......................................................... 12.1 Detection of ille gally imported goods and prevention of the disposal thereof [Chapter IV A] ..... ................................................................................ ........ 12.3 Prevention or detection of illegal export of goods [Chapter IV B] .................... 12.5 Exemptions from the operation of Chapter IV A & IV B . ................................. 12.7 Confiscation of goods and conveyances and imposition of penalties [Chapter XIV] ......................................... ..................................................... 12.7 Penalties on persons ................................................................................ ..12.12 Penal provisions under the Customs Act ................................. .....................12.12 Adjudication [Section 122]........................... ................................................12.16 Seizure and arrest ....... ...............................................................................1 2.17 Offences and prosecution - specific provisions............................. ................12.21 CHAPTER 13 - SETTLEMENT COMMISSION 13.1 13.2 13.3 13.4 Introduction ............ ................................................................................ ..... 13.1 Definitions [Section 127A] .......................................... .................................. 13.1 Application for settlement of cases [Sec tion 127B] ........................................ 13.2 Procedure on receipt of application [Section 127C] ....................................... 13.3 xxi

13.5 13.6 13.7 13.8 13.9 13.10 13.11 Powers of Settlement Commission ................................................ ............... 13.5 Inspection, etc., of reports [Section 127G] ............... ..................................... 13.7 Order of settlement to be conclusive [Section 127J] ...................................... 13.7 Recovery of sums due under order of settlement [Section 127K] .................... 13.7 Bar on subseq uent application for settlement in certain cases [Section 127L] ................ ............................................................................. 13 .7 Proceedings before Settlement Commission to be judicial proceedings [Section 127M] .......................................................................... .................. 13.8 Certain persons who have filed appeals to the Appellate Tribunal entitled to make applications to the Settlement Commission [Section 127 MA] ............................................................................ .............. 13.8 Applications on certain provisions of Central Excise Act [Se ction 127N] ......... 13.9 Customs (Settlement of Cases) Rules, 1999 ........... ...................................... 13.9 13.12 13.13 CHAPTER 14 - ADVANCE RULING 14.1 14.2 14.3 14.4 14.5 14.6 14.7 Definitions [Sect ion 28E]........................................................................ ...... 14.1 Authority for Advance Ruling (Central Excise, Customs and Service ta x) [Section 28F] ............................................................... ............. 14.2 Application for advance ruling [Section 28H] ................ ................................. 14.2 Procedure on receipt of application [Sect ion 28-I] ......................................... 14.3 Applicability of advanc e ruling [Section 28J] ................................................. 14.5 Ad vance ruling to be void in certain circumstances [Section 28K] ................. . 14.5 Powers of authority [Section 28L] ....................................... .......................... 14.5 CHAPTER 15 - MISCELLANEOUS PROVISIONS 15.1 15.2 15.3 15.4 15.5 15.6 15.7 15.8 Co nveyance and goods in a customs area subject to control of officers of customs [ Section 141] .............................................................. 15.1 Recovery of sums due to Government [Section 142]............................... ....... 15.1 Power to allow import or export on execution of bonds in certain ca ses [Section 143] .............................................................. ................................. 15.3 Duty deferment [Section 143A] ........... .......................................................... 15.4 Power to take sa mples [Section 144] ............................................................ 15.5 Custom house agents to be licensed [Section 146].......................... .............. 15.6 Appearance by authorised representative [Section 146A] ..... ......................... 15.6 Procedure for sale of goods and application of sa le proceeds [Section 150] ... 15.8 xxii

15.9 15.10 15.11 15.12 15.13 15.14 15.15 15.16 Certain officers required to assist officers of customs [Section 151] .......... ..... 15.9 Instructions to officers of customs [Section 151A] .................. ......................15.11 Delegation of powers [Section 152] ................. ............................................15.12 Service of order, decision, et c. [Section 153] ...............................................15.13 Rounding o ff of duty, etc. [Section 154A]. ............................................... .....15.14 General power to make rules [Section 156] ........................... .......................15.14 General power to make regulations [Section 157].... .....................................15.15 Provisions with respect to rules and regulations [Section 158] ......................15.15 CHAPTER 16 - SPECIAL ECONOMIC ZONE 16.1 16.2 16.3 16.4 16.5 Introduction ....... ................................................................................ .......... 16.1 Features of special economic zones ............................. ................................ 16.1 Advantages of special economic zones...... ................................................... 16.2 Disadvantages ......... ................................................................................ ... 16.3 Approved SEZ .......................................................... .................................. 16.4 CHAPTER 17 INTER-RELATIONSHIP OF ACCOUNTING WITH EXCISE, CUSTOMS AND SERVICE TAX 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9 Introduction ..................... ............................................................................ 17. 1 Accounting standards issued by Accounting Standards Board (ASB) of ICAI ...... .............................................................. 17.1 Cost Account ing Standards issued by ICWAI ................................................ 1 7.7 Guidance notes ............................................................. .............................17.11 Accounting for CENVAT credit of service tax . ..............................................17.20 Accounting treatment for PLA ......................................................................17.21 Acco unting for import and export duties ............................................ ...........17.21 Maintenance of books of account ............................... .................................17.21 Divergence between accounting and taxatio n principles ...............................17.23 xxiii

SECTION A CENTRAL EXCISE

1 BASIC CONCEPTS 1.1 CONSTITUTION OF INDIA Power to levy and collect taxes whether direct or indirect emerges from the Cons titution of India. Without a study of the basic provisions in the Constitution, no study would be complete. Article 246 of Constitution of India gives the respe ctive authority to Union and State governments for levying tax. Seventh Schedule to the Constitution of India contains three lists setting out matters under whi ch the State and Union have got the authority to make laws. List I known as Unio n List contains 97 entries. The Union Legislature has an exclusive power to make laws in respect of matters listed in List I. List II known as State list contai ns various matters like taxes on agricultural income, excise duty on alcoholic l iquors, opium and narcotics, etc., in respect of which State legislatures have t he exclusive powers to make laws. List III also known as Concurrent list lists o ut the matters like criminal law and procedure, trust and trustees, civil proced ures, economic and social planning etc., in respect of which Central Government has authority to make laws. Part XII of the Constitution of India contains matte rs related to Finance, Property, Contracts and Suits in the Articles 264 to Articl e 300A. Article 265 states that no tax shall be levied or collected except by aut hority of law. It has been held by the Supreme Court in Kunnathat v. State of Ker ala AIR 1961 SC 552 that the term authority of law means that tax proposed to be l evied must be within the legislative competence of the Legislature imposing the tax. The law must not be a colourable use of or a fraud upon the legislative pow er to tax. It must not also violate the fundamental rights such as Article 14, 1 9 etc. See Express Newspapers v. U.O.I. 1999 (110) E.L.T. 3 (S.C.). Article 272 mentions Union duties of excise other than such duties of excise on medicinal or toilet preparations as are mentioned in the Union List shall be levied and colle cted by the Government of India. Entry 84 of list I of the Seventh Schedule to the Constitution of India enumerates duties of excise on tobacco and other goods man ufactured or produced in India except (a) (b) alcoholic liquors for human consum ption; opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included i n sub-

1.2 Central Excise paragraph (b) of this entry. 1.2 DIRECT AND INDIRECT TAXES Taxes are broadly classified into Direct taxes and Indirect taxes. Direct Taxes are taxes which are levied on persons for the income earned or activities conduc ted, the incidence of which is to be borne by the person himself on whom it is l evied. On the other hand, Indirect taxes are the taxes which are levied on a pro duct or a service the incidence of which is borne by the consumers who ultimatel y consume the product or the service, while the immediate liability to pay the t ax may fall upon another person such as a manufacturer or seller of goods. 1.3 W HAT IS EXCISE DUTY Excise is derived from the Latin word Excisum. Excise, according to the Federal Co urt and Privy Council is a tax attracted by the event of manufacture but collect ed at some convenient stage which may be after the said event, which is only for administrative convenience [Province of Madras v. Boddu Paidanna & Sons 1978 (2 ) E.L.T. J272]. It is a duty levied upon goods manufactured and not upon sales o r the proceeds of sale of goods [Council v. Province of Madras, 1978 (2) E.L.T. J28]. Therefore the duty of excise is levied on a manufacturer or producer in re spect of the commodities produced or manufactured by him. It is a tax upon manuf acture of goods and not upon sales or proceeds of sale of goods. Duty of excise ha s been renamed as Central Value Added Tax (CENVAT). CENVAT includes duty, duties duty of excise or duties of excise. Excise duties are of following types Duties under C entral Excise Act, 1944 Basic excise duty: This duty is levied under section 3(1 )(a) of Central Excise Act. As per section 2A of Central Excise Act, basic excis e duty is termed as Cenvat with effect from 125-2000. It is levied at the rates specified in First Schedule to Central Excise Tariff Act, read with exemption no tification, if any. Special excise duty: This duty is levied under section 3(1)( b) of Central Excise Act. Special duty of excise is leviable on some commodities like pan masala, cars etc. These items are covered in Second Schedule to Centra l Excise Tariff. Duty in case of 100% EOU and FTZ: Hundred percent Export Orient ed Undertakings (EOU) and units in Free Trade Zone (FTZ) export all their produc tion. However, when they clear their final products in Domestic tariff area (DTA ), excise duty has to be paid. The duty amount is equal to the aggregate of the duties of customs leviable on like article if imported in India. Even if rate of customs duty is considered for payment of duty, actually the duty paid by them is Central Excise Duty. The rate of customs duty is taken only as a measure. Dut ies under Other Acts Some duties and cesses are levied on manufactured products under other Acts like

Basic Concepts 1.3 Additional Duty on Goods of Special Importance [AED(GSI)] and Additional Duty on Textile Articles. The administrative machinery of Central Excise is used to col lect these taxes. Provisions of Central Excise Act and Rules have been made appl icable for levy and collection of these duties/cesses. A National Calamity Conti ngent Duty (NCCD) has been imposed vide section 136 of Finance Act, 2001. This d uty is imposed on pan masala, chewing tobacco and cigarettes. An Education Cess has been levied on excisable goods manufactured in India with effect from 10.09. 2004. It is levied @ 2% of the aggregate duties of excise levied on such goods. The cess paid on inputs and capital goods is available as credit for payment of cess on the final products or output services, as per the provisions of Cenvat C redit Rules, 2004. The Education Cess so collected is utilized for providing and financing universalised quality basic education. The Education Cess on excisabl e goods is in addition to any other duties of excise chargeable on such goods, u nder the Central Excise Act, 1944 or any other law for the time being in force. The provisions of the Central Excise Act, 1944 and the rules made thereunder, in cluding those relating to refunds and exemptions from duties and imposition of p enalty, apply in relation to the levy and collection of the Education Cess on ex cisable goods as they apply in relation to the levy and collection of the duties of excise on such goods under the Central Excise Act, 1944 or the rules, as the case may be. An additional excise duty, by way of surcharge on pan masala and c ertain specified tobacco products is levied to finance the National Rural Health Mission. This additional duty is charged at prescribed specific rates on cigare ttes, and at a rate equal to 10% of the aggregate of normal rates of excise duti es payable on pan masala and other tobacco products. This surcharge is not levie d on biris. The additional duty of excise is in addition to any other duty of ex cise chargeable on such goods under the Central Excise Act or any other law for the time being in force. The provisions of the Central Excise Act and the rules made thereunder, including those relating to refunds and exemptions from duties and imposition of penalty apply in relation to the levy and collection of such a dditional duty of excise on the specified tobacco products as they apply in rela tion to the levy and collection of the duty of excise on such goods under the Ce ntral Excise Act or, as the case may be, the rules made thereunder. 1.4 HISTORY OF CENTRAL EXCISE LAW Prior to 1944 there were 16 individual Acts which levied excise duty. Each such act dealt with one or same type of commodities. All these acts were consolidated and a consolidating Act was passed in 1944 called as Central Excises and Salt A ct, 1944 which came into effect from 28th February 1944. In I996 the Act was ren amed as Central Excise Act, 1944. The Central Excise Act, 1944 (originally Centr al Excises and Salt Act, 1944) and Rules framed there under came into force on 2 8 th February, 1944. The Act applies to the whole of India. India includes India n territorial waters. Indian territorial waters extend upto 12

1.4 Central Excise nautical miles from the Indian land mass. It also extends to areas designated in the Continental Shelf and Exclusive Economic Zone of India. The exclusive econom ic zone extends upto 200 nautical miles inside the sea from base line. Though ori ginally the Act did not apply to the State of Jammu and Kashmir, its application was extended to that State since the enactment of Taxation Laws (Extension to J ammu & Kashmir) Act, 1954. 1.5 BODY OF CENTRAL EXCISE LAW Central Excise Law includes (a) Central Excise Act, 1944 (b) Central Excise Rule s, 2002 (c) Cenvat Credit Rules, 2004 (d) Central Excise (Appeal) Rules, 2001 (e ) Central Excise (Advance Rulings) Rules, 2002. (f) Central Excise (Settlement o f Cases) Rules, 2001. (g) Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 (h) Central Excise Valua tion (Determination of Price of Excisable Goods) Rules, 2000 (i) Central Excise Tariff Act, 1985 1.5.1 Central Excise Act, 1944 : This Act contains the basic pr ovisions relating to the levy of excise duty. There are 10 chapters in the Centr al Excise Act. These are briefly as follows: Chapter I Chapter II Chapter IIA Chapter III Chapter IIIA Chapter V Chapter VI C hapter VIA Chapter VIB Chapter VII Short title, extent and commencement of the Act including definitions Levy and c ollection of duty Indicating amount of duty in the price of goods, etc., for pur pose of refund and crediting certain amounts to the Consumer Welfare Fund Powers and Duties of Officers and Land Holders Advance Rulings Settlement of Cases Adj udication of Confiscations and Penalties Appeals Presumptions as to Documents Su pplemental Provisions

Basic Concepts 1.5 1.5.2 Central Excise Rules, 2002: These Rules contain the procedure for the asse ssment and collection of duty including other procedures like manner of payment of duty, registration, maintenance of records, invoicing, rebate of duty, export without payment of duty etc. 1.5.3 Cenvat Credit Rules, 2004 : The provisions r elating to Cenvat credit which were a part of Central Excise Rules, 1944 were gi ven a separate identity from 1st July 2001 and were called Cenvat Credit Rules, 2001. These Rules were superseded by the Cenvat Credit Rules, 2002. However, wit h effect from 10.09.2004 Cenvat Credit Rules, 2002 have been replaced by a new s et of rules, viz., Cenvat Credit Rules, 2004 which provide for extending credit across goods and services. 1.5.4 Central Excise (Appeals) Rules, 2001 : The proc edure relating to appeals are covered in this rules which was earlier included i n Central Excise Rules, 2001. 1.5.5 Central Excise (Settlement of Cases) Rules, 2001 : The procedural aspects relating to settlement commission are contained in these rules. 1.5.6 Central Excise (Advance Rulings) Rules, 2002: These rules co ntain the provisions relating to Advance Rulings. 1.5.7 Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 : These rules contains the provisions and procedure relating to the goods removed at concessional rate of duty for manufacture of excisable goods. 1.5.8 C entral Excise Tariff Act, 1985 : The Central Excise Tariff which was originally a schedule to the Central Excise Act, 1944 was de-linked from it and the Central Excise Tariff, Act 1985 containing the Tariff schedule was enacted, based on th e international product coding system called Harmonised System of Nomenclature(H .S.N.). However, w.e.f. 28.02.2005 the Central Excise Tariff (Amendment) Act, 20 05 has been brought into 1.5.9 Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 have been framed to prescribe valuation methods where transaction value cannot be determined under Section 4. 1.6. EXEMPTION NOT IFICATIONS IN CENTRAL EXCISE Central excise legislation is driven by exemption notifications. Under section 5 A(1), the Central Government is empowered to grant exemption in public interest either absolutely or subject to conditions (either before or after removal) from the whole or any part of the duty of excise payable. Notifications issued under section 5A(1) are not applicable to 100% EOU/EPZ/STP/EHTP unless otherwise spec ified. This is because such units are exempted under other notifications issued specially for them. It is clarified that where an exemption under sub-section (1 ) in respect of any excisable goods from the whole of the duty of excise leviabl e thereon has been granted absolutely, the manufacturer of such excisable goods shall not pay the duty of excise on such goods.

1.6 Central Excise Sub section (2) of section 5A states that the Central Government can exempt exci sable goods from the payment of duty by a special order if it is satisfied that it is necessary in the public interest to do so, under circumstances of an excep tional nature which are to be stated in such order. Under the Customs Act, 1962, a similar provision exists in section 25(2). 1.7 DEPARTMENTAL CIRCULARS AND TRA DE NOTICES IN CENTRAL EXCISE Departmental circulars and trade notices are a form of delegated legislation. Un der section 37B, which is titled Instructions to Central Excise Officers, the Cent ral Board of Excise and Customs (CBEC or Board), which is constituted under the Central Boards of Revenue Act, 1963, shall issue instructions to officers who ar e bound to follow them. These instructions or orders can be for the purpose of e nsuring uniformity in the classification of excisable goods or with respect to l evy of duty of excise on goods. However, such orders cannot be passed to direct any officer to dispose of a case in a particular manner or interfere with the di scretion of the Commissioner (Appeals). A separate chapter is devoted to notific ations and trade notices and their legal effect thereof. 1.8 DEFINITIONS UNDER E XCISE LAW Section 2 of the Act contains definitions of certain terms which are given below . 1.8.1 "Adjudicating authority" means any authority competent to pass any order or decision under this Act, but does not include the Central Board of Excise an d Customs constituted under the Central Boards of Revenue Act,1963 (54 of 1963), Commissioner of Central Excise (Appeals) or Appellate Tribunal; (Sec 2(a)) 1.8. 2 "Appellate Tribunal" means the Customs, Excise and service tax Appellate Tribu nal constituted under section 129 of the Customs Act, 1962 (52 of 1962); (Sec 2( aa)) 1.8.3 "broker" or "commission agent" means a person who in the ordinary cou rse of business makes contracts for the sale or purchase of excisable goods for others; (Sec 2(aaa)) 1.8.4 "Central Excise Officer" means the Chief Commissioner of Central Excise, Commissioner of Central Excise, Commissioner of Central Exci se (Appeals), Additional Commissioner of Central Excise, Joint Commissioner of C entral Excise, Assistant Commissioner of Central Excise or Deputy Commissioner o f Central Excise or any other officer of the Central Excise Department, or any p erson (including an officer of the State Government) invested by the Central Boa rd of Excise and Customs constituted under the Central Boards of Revenue Act, 19 63 with any of the powers of a Central Excise Officer under this Act; (Sec 2(b)) 1.8.5 "Curing" includes wilting, drying, fermenting and any process for renderi ng an unmanufactured product fit for marketing or manufacture; (Sec 2(c)) 1.8.6 "Excisable goods" means goods specified in the First Schedule and the Second Sch edule to the Central Excise Tariff Act, 1985 as being subject to a duty of excis e and includes salt; (Sec 2(d))

Basic Concepts 1.7 1.8.7 "Factory" means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherei n or in any part of which any manufacturing process connected with the productio n of these goods is being carried on or is ordinarily carried on; (Sec 2(e)) 1.8 .8 "Fund" means the Consumer Welfare Fund established under section 12C; (Sec 2( ee)) 1.8.9 "Manufacture" includes any process, (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation t o any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, or (iii) which, in relatio n to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-Iabelling of containers inclu ding 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, and the word "manufacturer" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of exci sable goods, but also any person who engages in their production or manufacture on his own account; (Sec 2(f)) 1.8.10 "Prescribed" means prescribed by rules mad e under this Act; (Sec 2(g)) 1.8.11 "Sale" and "purchase", with their grammatica l variations and cognate expressions, mean any transfer of the possession of goo ds by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration; (Sec 2(h)) 1.8.12 "Wholesa le dealer" means a person who buys or sells excisable goods wholesale for the pu rpose of trade or manufacture, and includes a broker or commission agent who, in addition to making contracts for the sale or purchase of excisable goods for ot hers, stocks such goods belonging to others as an agent for the purpose of sale; (Sec 2(k)). 1.9 LEVY AND COLLECTION OF DUTY Chapter II of the Central Excise Act, 1944 deals with levy and collection of the duty. This chapter contains sections 3, 4 & 4A. Section 3 is the charging secti on, section 4 provides for the method of valuation of excisable goods and sectio n 4A deals with valuation based on maximum retail price (MRP). Section 3(1) whic h is the charging section states : There shall be levied and collected in such m anner as may be prescribed: (a) a duty of excise on all excisable goods (excludi ng goods produced or manufactured in

1.8 Central Excise special economic zones) which are produced or manufactured in Ind ia as, and at the rates set forth in the First Schedule to the Central Excise Ta riff Act, 1985; (b) a special duty of excise, in addition to duty of excise specified in clause (a) above, on excisable goods (excluding goods produced or manufactured in speci al economic zones) specified in the Second Schedule to the Central Excise Tariff Act, 1985 which are produced or manufactured in India, as, and at the rates set forth in the Second Schedule. However, the duties of excise which shall be levi ed and collected on any excisable goods which are produced or manufactured,(i) i n a free trade zone and brought to any other place in India; or (ii) by a hundre d percent export oriented undertaking and brought to any other place in India sh all be an amount equal to the aggregate of the duties of customs which would be leviable under the Customs Act or any other law for the time being in force on l ike goods produced or manufactured outside India if imported into India. Where i n respect of any such like goods, any duty of customs leviable for the time bein g in force is leviable at different rates, then, such duty shall, be deemed to b e leviable at the highest of those rates. Section 3(1) speaks of levying two typ es of duty, firstly Basic Excise Duty (BED) at the rates specified in the First Schedule to the CETA, 1985; secondly Special Excise Duty(SED) at the rates speci fied in the Second Schedule to the CETA, 1985 in addition to BED. An analysis of section 3 of the Central Excise Act, 1944 which is the charging section, throws out the following propositions :(a) There must be a manufacture (b) Manufacture must be in India and (c) The manufacture must result in goods (d) The resultant g oods must be excisable goods Each of these propositions are discussed below. 1.10 GOODS & EXCISABLE GOODS Before we examine the question of what amounts to manufa cture, it must be understood that unless the goods that are manufactured are exc isable goods, there will be no question of attracting excise duty. Section 2 (d) of the Act defines excisable goods to be goods which are specified in the Tariff as being subject to a duty of excise. Therefore, first of all the items which ar e subject to tax must be goods, then they must be specified in the Tariff and th ey must come into existence as a result of manufacture.

Basic Concepts 1.9 The word goods has not been defined in the Central Excise Act. The word goods is def ined in Article 366(12) of the Constitution of India as goods include all materia ls, commodities and articles. Sale of Goods Act, 1930 in section 2(7) defines goo ds to mean every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to and forming part of the land which are agreed to be served before sale or under the contract of sale. To be goods the article concerned must be movable. In other word s, immovable property cannot be goods. Any movable property whether visible, tan gible, corporeal or not will constitute goods. Blacks Law Dictionary define goods as a term of variable content and meaning. It may include every species of perso nal property or it may be given a very restricted meaning. In U.O.I. v. DCM 1997 (1) E.L.T. J199 the Supreme Court has held that in order to be goods the article s must be capable of coming to the market to be bought and sold. Therefore, to b e called goods, the items must be moveable and marketable. From the above, two f undamental aspects of the term goods arise that they should be moveable and marketabl e. The two fundamental aspects of the term goods moveable and marketable are discusse d in detail. 1.10.1 Concept of Moveable: The first aspect of goods is that they sh ould be moveable. In Union of India Vs. Delhi Cloth Mills (1977) ELT J-199 and i n South Bihar Sugar Mills Vs. Union of India (1978) ELT J-336, the Supreme Court enunciated the principal that to be called goods, the articles must be such as are capable of being bought and sold in the market. The articles must be somethi ng, which can ordinarily come or can be brought to the market to be bought and s old. As opposed to moveable goods, immoveable goods like property cannot be brou ght to the market to be sold. Under section 3 (36) of the General Clauses Act of 1897, moveable goods mean property of every description except immoveable prope rty. Section 3(26) of the General Clauses Act, 1897 defines the term immovable p roperty as: immoveable property shall include land, benefits to arise out of land , and things attached to the earth, or permanently fastened to anything attached to the earth. Thus excise duty cannot be levied on immoveable goods and property . There are several case law on this aspect and they are discussed subsequently in the section Dutiability of Site Activities. 1.10.2 Concept of Marketable: Unless the goods are capable of being marketed, they cannot be charged to duty. Marketa bility is the capability of a product of being put into the market for sale. In order to become goods, an article must be something, which can ordinarily come t o the market to be bought and sold. Marketability is an essential ingredient in order to render goods dutiable under law. Whether a product is marketable or not is to be decided on the facts of each case. The burden of proving marketability of goods is on the revenue, if the assessee were to claim non-marketability.

1.10 Central Excise Let us examine some important cases under marketability: In Union Carbide India Ltd. Vs. Union of India (1986) (24) ELT-169, the Supreme Cou rt held that to become goods, an article must be something which can ordinarily co me to the market to be bought and sold. Articles in crude or elementary form are not dutiable as they are merely intermediate products and are not goods. It, th erefore, held that aluminium cans or torch bodies produced by extrusion process were neither sold nor marketable and hence were not goods and not liable to excise duty. It is clear from this decision that goods must be marketable and known in the market as such, in order to be exigible to duty. The Supreme Court in anoth er decision, in C.C.EX. Vs. Ambalal Sarabhai Enterprises (1989) (43) ELT-214 has held that the duty of excise is on the manufacture of goods and for an article to be goods, it must be known in the market as such or must be capable of being so ld in the market as goods. Actual sale is not necessary. Usage in captive consum ption is not determinative of whether the article is capable of being sold in th e market or is known in the market as goods. Even transient items or articles ca n be goods, provided that they are known in the market as distinct and separate articles, having separate uses. They would still become goods if they were capab le of being marketed during the said short period of their life. Thus, goods wit h unstable character can be theoretically marketable if there was a market for s uch transient types of articles, but one has to take a practical view on the bas is of available evidence. In the landmark decision, in Bhor Industries Ltd. Vs. C.C.EX. (1989) (40) ELT-280, the Supreme Court has held that marketability is es sential if an article is to be liable to excise. Merely because an article is sp ecified under the Tariff, it would not be correct to state that it is chargeable to duty, unless it is proved that the goods are marketable. Prior to this decis ion in Bhor Industries, it was the practice to hold all goods specified in the T ariff as chargeable to duty, regardless of this criterion of marketability. The Court held that it would be necessary to find out whether the goods are known in the market as separate, distinct and identifiable commodities. Following the de cision in Bhor Industries, the Madras High Court, in Madura Coats Ltd. Vs. Asstt . Collector of C.C.EX. (1990) (48) ELT-321, has held that where a product could neither be sold nor consumed in the market, nor was capable of being sold or con sumed, it would not be liable to duty. In Ion Exchange India Ltd. vs. C.C.EX 199 9 (112) ELT-746, the Supreme Court has held that mere specification of an item i n the Central Excise tariff is not sufficient in the absence of the marketabilit y test. In CCEX. Vs. Bakelite Hylam, Ltd. (1990) (46) ELT-552, the tribunal has held that an article is not liable to excise merely because it is specified in t he Tariff Schedule, unless it is known as goods in the market. Marketability is an essential ingredient for Dutiability. This decision of the Tribunal is import ant since it first interpreted the Supreme Courts criterion of marketability, as laid down in the Bhor Industries case, that goods were not excisable even though they were specified in the Excise Tariff, unless the test of marketability was m et.

Basic Concepts 1.11 In Cipla Ltd. Vs. UOI (1990) (46) ELT-240, the Karnataka Hig h Court has held that for Dutiability, a product must pass the test of marketabi lity even if it is a transient item, which is captively consumed in, the manufac ture of other finished products. It is the onus of the Department to produce evi dence of marketability. The Bombay High Court, in UOI Vs. CEAT Tyres India Ltd. (1989) (43) ELT-267, has held that if a product is not a marketable commodity, t hen no excise duty is leviable. The Calcutta High Court, in UOI Vs. Bata India L td. (1993) (68) ELT-756, has held that articles are not goods under section 3 of t he Act unless they are marketable. The Court has also held that goods which are specified in the excise tariff are presumed to be excisable unless shown to be n on marketable and actual sales are not necessary in order to establish marketabi lity. 1.10.3 Excisable Goods: Excisable goods means goods specified in the Schedul e to the Central Excise Tariff Act, 1935 as being subject to a duty of excise an d includes salt. On analyzing the last part of the definition as being subject to a duty of excise a doubt arises that whether the goods which are included in the tariff at Nil rate of duty are excisable goods or not. Therefore two conditions have to be satisfied to be excisable goods. Firstly the goods must be specified in the Schedule to the Central Excise Tariff Act, 1835. Secondly the goods so s pecified must be subject to duty as per the tariff. In CCE vs Usha Martin Indust ries, 1997 (94) ELT 460, the Supreme Court held that the term appropriate amount of duty has already been paid would also include goods cleared at nil rate of dut y since nil rate is also an appropriate rate. However, this decision was overrul ed by a constitutional bench of Supreme Court in the case of CCEx. v. Dhiren Che mical Industries 1997 (094) ELT 460 S.C. The Supreme Court has held in this case that the word appropriate in the term on which the appropriate amount of duty of e xcise has already been paid means the correct or the specified rate of excise dut y. In the said phrase, due emphasis must be given to the words has already been p aid. Where the raw material is not liable to excise duty or such duty is nil, no excise duty is, as a matter of fact, paid upon it. 1.10.4 Goods exempt from duty whether excisable: Having held that in order to constitute goods under excise law , articles must be moveable and marketable, let us now turn to the definition of excisable goods under the Act. Section 2(d) defines excisable goods as goods sp ecified in the Schedule to the Central Excise Tariff Act, 1985 as being subject to the duty of excise and includes salt. In other words, all goods specified or covered in the Tariff will be known as excisable goods. This brings us to the im portant point in law that goods, which are exempt from duty under a notification , are nevertheless excisable goods as long as they are covered by any of the hea dings of the Central Excise Tariff. This point in law was earlier in doubt. The Allahabad High Court had taken the view in couple of cases that fully exempted g oods were meant to be taken out of the Schedule to the Tariff Act and hence cann ot be treated as excisable goods at all. However, the Delhi, Andhra Pradesh and Madras High Courts took the view that fully exempted goods continued to be excis able goods. Finally, the Supreme Courts decision in Wallace Flour Mills Ltd. Vs. C.C.EX. (1989) (44) ELT-598 has effectively settled the issue. It was held there in that fully exempted goods

1.12 Central Excise were also excisable goods and hence were chargeable to duty if the exemption was removed prior to removal of goods but subsequent to manufac ture. 1.11 MANUFACTURE 1.11.1 Concept of Manufacture: The term manufacture literal ly means to make by hand. However, in the context of todays mechanised world, the term includes making articles by machines also. However, as far as central exci se is concerned the term has a specific definition in the Central Excise Act, 19 44 which is contained in Section 2(f) of the Act. It defines manufacture in an i nclusive manner as follows : Manufacture includes any process, (i) incidental and ancillary to the completion of a manufactured product; and (ii) which is specif ied in relation to any goods in the Section or Chapter Notes of the Schedule of the Central Excise Tariff Act, 1985 as amounting to manufacture; or (iii) which, in relation to the goods specified in the Third Schedule, involves packing or r epacking of such goods in a unit container or labelling or re-Iabelling of conta iners including the declaration or alteration of retail sale price on it or adop tion of any other treatment on the goods to render the product marketable to the consumer, and the term manufacturer shall be construed accordingly and shall in clude not only a person who employs hired labour in the production or manufactur e of excisable goods, but also any person who engages in their production or man ufacture on his own account. The definition stipulates that manufacture will incl ude any process which is specified in the Section and Chapter Notes of the Centr al Excise Tariff as amounting to manufacture. In other words, the concept of dee med manufacture is given legal sanction. Thus, excise duty could be leviable on activities which do not result in the production or manufacture of a new commodi ty. As already indicated, Parliament has power to levy excise duty on goods manu factured in India. In other words, manufacture or production of goods is a neces sary condition for imposition of the levy. The question therefore arises as to w hether Parliament can levy excise duty on activities which do not amount to manu facture or production by means of giving artificial meaning to the terms manufact ure and production. This has been held to be valid by the Supreme Court in Ujagar P rints v. U.O.I. 1988 (38) E.L.T. 535 which said that resort could be had to Entr y 97 of List I to the Constitution. Reference may be also made of the case of Co llector v. SD Fine Chemicals Pvt. Ltd. 1995 (75) E.L.T. 49 (S.C.). Since the def inition of manufacture is an inclusive one and does not spell out or enumerate t he activities covered therein, it is essential to arrive at an understanding of the term based on legal decisions on the point. Therefore, we go by the judicial decisions handed down to us. The expression manufacture was considered at length by the Supreme Court in its decision in Union of India Vs. Delhi Cloth & General Mills Co. Ltd. 1977 (1) ELT J199. In para 14 of the judgment, the court held th at the word manufacture when used as a verb is generally

Basic Concepts 1.13 understood to mean as bringing into existence a new substanc e and not merely to produce some change in the substance. The Court thereafter e mphasized the definition by citing passage from an American judgement which was quoted in the Permanent Edition of Word and Phrases. The passage is as follows :M anufacture implies a change, but every change is not manufacture and yet change of an article is the result of treatment, labour and manipulation. But something is necessary and there must be transformation; a new and different article must emerge having a distinctive name and character or use. This famous paragraph is now the basis for determining whether or not an activity or process amounts to m anufacture. In case of South Bihar Sugar Mills Ltd. Vs. Union of India (1978)( ) ELT J336 Apex court has held that the word manufacture implied a change, but eve ry change in the raw material does not tantamount to manufacture. There must be such a transformation that a new and different article must emerge having a dist inctive name , character and use. Again, the Supreme Court, in Empire Industries Ltd., Vs. Union of India 1985(20) ELT 1 held that to constitute manufacture it is not necessary that one should absolutely make out a new thing because it is w ell settled that one cannot absolutely make a thing by hand in the sense that no body can create matter by hand(scientifically). It is transformation of a matter into something else that would amount to manufacture. That something else is a question of degree. Whether that something else is a different commercial commod ity having its distinct character, use and name and is commercially known as suc h, is an important consideration in determining whether there is a manufacture. Whether or not something results in manufacture would depend on the facts of the case but any number of processes undertaken which do not result in a commercial ly different commodity cannot result in manufacture U.O.I. v. Parle Products 199 4 (74) E.L.T. 492 (S.C.). The Supreme Court in Ujagar Prints Vs. U.O.I 1988 (38) ELT 535 held that prevalent and generally accepted test to ascertain whether th ere was manufacture was whether the change or the series of changes brought abou t by application of processes take the commodity to the point where, commodity c an no longer be regarded as the original commodity but is, instead, recognized a s a distinct and new article that has emerged because of the result of the proce sses. There might be border line cases where either conclusion can be reached wi th equal justification. Insistence on any sharp or intrinsic distinction between processing and manufacture results in an over simplification of both and tends to blur their interdependence in cases. The Tribunal, in B.P.L. Electronics Ltd. , Vs. CCE 1994 (71) ELT 801, has held that levy of excise duty is on manufacture and not on sale and hence the fact that invoices have been raised by the manufa cturer in favour of a leasing company in respect of captively consumed excisable goods would not have any bearing on excise duty liability. The Bombay High Cour t in Critic India Ltd. Vs. U.O.I 1993 (66) ELT 566 has held that excise duty is a tax on manufacture and the liability to pay the duty does not depend on the en d

1.14 Central Excise use of the product. The production or manufacture of goods i s sufficient to attract duty, whether the goods are consumed, sold or not used t hereafter is wholly irrelevant. The mere fact that the product is not actually s old would not make any difference in determining the excisability of that produc t. It is the effect of the operation carried out on a commodity that is material for the purpose of determining whether the operation constitutes manufacture unde r excise law. Any process or processes creating something else having distinctiv e name, character and use would amount to manufacture. The moment there is a tra nsformation of an input into a new commodity which is commercially known as a di stinct and separate commodity, having its own character, use and name, whether i t is the result of a process or several processes, manufacture takes place and t he liability to duty is attracted. 1.11.2 Manufacture and processing: It is nece ssary to differentiate between manufacture and processing. Manufacture involves a series of processes, whereas a process is one of the activities undertaken for manufacture of a product from input materials. Manufacture is the cumulative ef fect of various processes to which raw materials are subjected and each such ste p towards the finished product would constitute processing in relation to the ma nufacture. The definition of manufacture under section 2(f) states that it inclu des any process incidental or ancillary to the completion of the manufactured pr oduct. The definition clarifies that a process, which is incidental to the manuf acture of the product, is also manufacture under law. Consequently, it would be incorrect to state that the manufacture of a product was complete merely by mean s of carrying out one or more processes on raw materials. It is only when a proc ess or a series of processes has taken the input material to a point where it is recognised as a new and distinct article commercially, that manufacture of good s is said to have taken place. The inclusive nature of the definition would thus cover all intermediate processes, packing of final products etc. If there is no essential difference in identity between the original article and the processed article, then no manufacture under excise law has taken place. Although the inp ut material has undergone a degree of processing, it must be regarded as still r etaining its original identity. Where the article retains its substantial identi ty through the stage of processing, it could be said to have been merely process ed and not manufactured. If there are separate and distinct processes of manufac ture and each such process results in such a transformation that a new and disti nct article known in the market comes into being, then each process would be sub ject to duty. The question whether a process amounts to manufacture under excise law would hence depend on the facts of each case. The distinction between the m anufacture and process has been dealt by the Supreme Court in the case of Union of India vs J.G. Glass Industries Ltd. 1998 (097) ELT 0005 (S.C) wherein the ape x court observed that the answer to the question whether the process is that of m anufacture would be based on two-fold test - First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original

Basic Concepts 1.15 commodity ceases to exist - Secondly, whether the commodity which was already in existence will serve no purpose or will be of no commercial use but for the said process. In the above case with reference to the process o f Printing, whether a process amounting to manufacture - Test is whether the product would serve any purpose but for the printing - If the product could serve a pur pose even without printing and there is no change in the commercial product afte r the printing is carried out, the process cannot be said to be one of manufactur e. The meaning of incidental or ancillary processes needs to be understood. Befor e a process can be regarded as incidental or ancillary to the completion of manuf actured product, it must have some relation to the manufacture of finished produ ct. However inessential the process may be, if it is found incidental or ancilla ry to the completion of the manufactured product, then that process falls within the compass of the expression manufacture. If the process is not integral to or connected with manufacture, it will not be incidental. Here again, the finding is one of fact as prevalent in each case. In sum, the question whether a particu lar process is a process of manufacture or not, has to be determined having rega rd to the facts and circumstances of each case and having regard to the well kno wn tests laid down by the Courts in the aforementioned decisions. The following are some representative cases, where the Courts have decided on what constitutes manufacture under law :1.11.3 Instances of Goods/Processes not amounting to Man ufacture : Product/process/activity Cutting, punching section drilling and of al uminium Citation CCE v. Ajit India Pvt. Ltd. 2000 (119) E.L.T. 274 (S.C.) Union Carbide India Ltd. v. CCE 1986 (24) E.L.T. 169 (S.C.); Geep Industrial Syndicate Ltd. v. CG 1987 (31) E.L.T. 865 (S.C.) State of Tamil Nadu v. Bharat Dairy Farm 1992 (61) E.L.T. 25 (Mad.) XI Telecom Ltd. v. CCE 1999 (105) E.L.T. 263 (A.P.) Farm & Co. v. CCE 1987 (30) E.L.T. 541 (T) Namputhiris Pickle Industries v. Stat e of Kerala 194 (92) STC 1 (S.C.) CCE v. Brooke Bond India Ltd. 1998 (101) E.L.T . 2965 (T-SZB) Final Product Aluminium Aluminium cans (torch bodies) Aluminium slugs converted to intermediate product Butter Cable joining kits Stirring of cream Putting together different duty paid items not manufacture Chi lling of water Pulverising of chilly Reprocessing of coffee Chilled water Chilly powder Coffee

1.16 Central Excise Coloured/ printed paper Coloured plastic granules Computer u nder Heading No. 84.71 Colouring/printing of white paper Conversion granules of plastic Swastic Products v. SCE 1980 E.L.T. 164 (Guj.) Vadodara CTN No. 61/92, d ated 227-1992, 1992 (60) E.L.T. T43 CBEC Circular No. 454/ 20/99-CX, dated 12-41999 Universal Micro Systems v. CCE 1999 (107) E.L.T. 505 (T) Sheth Computers Pv t. Ltd. v. CCE 2000 (121) E.L.T. 738 (T) State of Tamil Nadu v. SVS Natarajan & Sons 1992 84STC (Mad.) T.I. Cycles of India v. U.O.I. 1983 E.L.T. 681 (Mad.) Dal mia Industries Ltd. v. CCE 1999 (112) E.L.T. 305 (T) D & H Sechron Electrodes Pv t. Ltd. v. CCE 1990 (40) E.L.T. 401 (T) CST v. Musarafalli Kutbuddin 35 STC 503 (Bom.) CST v. Habib Kasambai 35 STC 560 (Bom.) Sudhir Ch. Mukherjee v. Addl. Com missioner of CT 1976 (37) STC 554 (Cal.) Salco Extrusions P. Ltd. v. CCE 1984 (1 6) E.L.T. 356 (T) Reliable Rock Builders v. State of Karnataka, 49 STC 110 (Kant ); Kher Stone Crushers v. G.M. District Industries Centre, 1992 (62) E.L.T. 586 (M.P.) State of Gujarat v. Sukhram Jagannath 50 STC 76 (Guj.) Upgradation does not amount to manufacture Installation at customers site not ma nufacture Assembly of computer from duty paid parts amounts to manufacture Curry powder rasam powder, masala powder Cycle Feeding bottle Mixing of chilly powder coriander powder Assembling of cycle parts Putting toget her bought out parts like bottles, nipples, lids etc. is not manufacture Straigh tening and cutting into required sizes of wires (stainless steel) Polishing/colo uring of old furniture Preparation of flowers Filler wire Furniture (for resale) Garland/ bouquets Ingots/billets Jelly (stone) (See contr a decision under Table below) Pan-masala Recycling waste of aluminium Breaking of boulders Mixing of supari, variyali, dhana dal, etc

Basic Concepts 1.17 Paper Pillows Pine apple Planks/ rafters. Polishing/ printin g of paper Covering pillow an uncovered Modern Paper Industries v. Union of Indi a 1983 ECR 636 D (Bom.) DP Foam Pvt. Ltd. v. CCE 1999 (106) E.L.T. 544 (T) Dy. C ST v. PIO Food packers, 1980 (6) E.L.T. 343 (S.C.) Y. Mohiden Kunhi and Others v . CCE 1986 (23) E.L.T. 293 (Kar.) See also Sanghvi Enterprises v. CCE 1984 (16) E.L.T. 317 (T) CCE v. Kutty Flush Doors & Furniture P.d. 1988 (35) E.L.T. 6 (S.C .). Departmental appeal dismissed 1997 (89) E.L.T. A105. of Mahabirprasad Bishiw ala v. State of W.B. 31 STC 628 (Cal.) Krishna Chander Dutta (Spice) Pvt. Ltd. v . CTO (1994) 93 STC 180 (S.C.) 1994 (70) E.L.T. 501 (S.C.) CCE v. Reelco Paper P roducts (P) Ltd. 1989 (40) E.L.T. 435 (T) Bombay-I CTN No. 56/1989 dated 96-1989 , 1989 (42) E.L.T. T-33 Slicing of pineapple Sawing of timber logs Powdered pepper/ Turmeric Powdering pepper/turmeric Reels width meter of lesser and diaSlitting and rewinding of paper (jumbo reels) Cutting and slitting of sensitised photographic paper in jumbo rolls Cutting and slitting of X-ray films (industri al as well as medical) in jumbo rolls Pulverising of turmeric Smaller rolls of flat rolls of sensitised photographic paper Smaller rolls of su ch X-ray films Turmeric powder Water Bombay-I CTN No. 56/89 dated 9-61989, 1989 (42) E.L.T. T-42 Krishna Chander Dutt a (Spice) P. Ltd. v. CTO 1994 (70) E.L.T. 501 (S.C.) McDowel Co. Ltd. v. CCE 199 9 (105) E.L.T. 577 (T) Process of removing chemicals to make it soft without purifying

1.18 Central Excise 1.11.4 Instances of Goods/Processes amounting to Manufacture Product/process/activity R ecording of audio cassettes amounts to manufacture as pre- recorded cassette is distinct Crushing of sugarcane Cutting, hemming and stitching of running cloth R olling of tobacco Citation Gramophone Co. Ltd. v. CC 1999 (114) E.L.T. 770 (SC) Final Product Audio cassettes Bagasse Deccan Sugar and Abkhari Company v. Union of India, 1986 (26) E.L.T. 209 (Mad.) Kapri International v. CCE 1986 (23) E.L.T. 538 (T) Y. Tirupathy Rao v. CCE 1983 E.L.T. 2346 (AP) Khandelwal Metal & Engg. v. Union of India, 1983 E.L.T. 292 (D el.) (affirmed in 1985 (20) E.L.T. 222 (SC) Multi. Metals Ltd. v. CCE 1995 (75) E.L.T. 938 (T) affirmed by the Supreme Court in 1995 (78) E.L.T. A31 Veekayan In dustries v. CCE 1985 (21) E.L.T. 596 (T) Om Prakash Gupta v. CTO 38 STC 73 (Cal. ) Ramnagar Cane & Sugar Co. v. Union of India, 1983 E.L.T. 6 (Raj.) Achamma Seba stian v. State of Kerala, 1967 (20) STC 483 (Ker.) CCE v. Sudhakar Litho Printer s, 1988 (36) E.L.T. 346 (T) Union of India v. Ramlal, 1978 E.L.T. (J389) (SC) Bed sheets, bed spreads and table cloths Biris Brass Mixing of copper & zinc Brass tubes new Melting and remaking of tubes of brass out of old brass tubes Drawing of round b ars Conversion granules Canning products of of camphor vegetable Bright bars Camphor cubes Canned foods Chappals Cinema wall paper Circles Assembly of rubber sole & rubber strap mouldings Printing of paper Rolling & bil lets of copper

Basic Concepts 1.19 Dyed & printed cloth Evacuated Bottles Dyeing & printing of grey cloth Empty bottles cleaned, siliconized, evacuated sealed and sterlised to make a new product Conversion of fruit pulp to ready made drink Boiling of butt er Crushing of stone boulders Lal Woolen and Silk Mills P. Ltd. v. CCE 1999 (108 ) E.L.T. 7 (S.C.) Shri Krishna Keshav Laboratories Ltd. v. CCE 1999 (105) E.L.T. 117 (T) Godrej Foods Ltd. v. CCE 2000 (122) E.L.T. 231 (T) Motilal Ramchandra O swal v. State of Bombay 3STC 140 (Bom.) Kher Stone Crusher v. G.M. Dist. Industr ies Centre 1992 (61) E.L.T. 587 (MP-FB); Contra Reliable Rock Builders v. State of Karnataka, 1982 49 STC 110 (Kar.) CCE v. Herbal Isolates (P) Ltd. 1994 (74) E .L.T. 929 (T) Rangoon Metal & Refining Com v. State of Tamil Nadu 47 STC 60 (Mad .) crude of Bapalal & Co. v. Govt of India, 1981 E.L.T. 587 (Mad.) Chenna Kesava lu v. Board of Revenue, 1981 (47) STC 403 (Mad.) CBEC Circular No. 13/ 92-CX3, d ated 28-12-1992, 1993 (63) E.L.T. T31 Garware Plastics & Polyesters Ltd. v. CCE 1993 (67) E.L.T. 670, 673 (T). State of Karnataka v. B. Raghuram Sethy, 47 STC 2 82 (S.C.) M. Narayanan Nambiar v. State of Karnataka 44 (STC) 191 (Ker.) Fruit Drink Ghee Gittis, ballast Ground black pepper Grinding of black pepper Ingots Metting of scrap iron Jewellery New jewellery Conversion diamonds of Melting/conversion jewellery (Old) Photographic films Cutting slitting of jumbo rolls of photographic films Recording and re-recording of blank video cassette Dehusking of paddy Recorded cassette Rice video Rice Milling of paddy

1.20 Central Excise Water filter Putting together parts alongwith bought out fil ter cum purifier Eureka Forbes Ltd. v. CCE 2000 (122) E.L.T. 550 (T) It should be noted that the above decisions may not be the final word since we n ormally see conflicting decisions being rendered by various courts on the same s et of facts. 1.12 DUTIABILITY OF INTERMEDIATE PRODUCTS AND CAPTIVE CONSUMPTION T he definition of manufacture under section 2(f) of the Act would also imply that manufacture would take place at an intermediate stage of the process, as long a s the intermediate product was known commercially as a distinct and identifiable product. Further, the word product, as occurring in Entry 84, List I, Schedule VI I of the Constitution would cover intermediate goods also. However, although exc ise duty is chargeable on manufactured goods, the collection of the levy is post poned to the time of removal of goods from the factory, In other words, even tho ugh section 3 of the Act imposes the levy on the event of manufacture, the Rules require the duty to be paid only at the time of removal from the factory. In ca se of Collector v. Vazir Sultan Tobacco Co. Ltd. 1996 (83) E.L.T. 3, the Supreme Court has held that the words used in section 3(1) in such manner applies to colle ction. Hence, the section creates the levy itself and collection is left to be regu lated by the Rules. Captive Consumption in the context of Excise Law signifies u tilisation of goods produced or manufactured within the factory of production. T his is normally prevalent in large factories with several departments in diverse manufacturing processes with their departmental and intradepartmental stock tra nsfers. In such cases, emergence of goods in one process, which are used in anot her process, would require compliance of procedure relating to captive consumpti on, as the removal of goods or consumption thereof for or in another process wou ld be a clearance in law as per Rule 9 read with Rule 49 of the Rules (now Rule 4) , which requires payment of duty. Rules 9 and 49 of the Central Excise Rules 19 44, prior to 1st July 2001, and Rule 4 presently, specify that excise duty will be chargeable only on removal of excisable goods from the factory premises or fr om the approved place of storage. Prior to their amendment by the Finance Act, 1 982, these Rules, read together, implied that there was no excise duty liability on intermediate goods of any kind, since there was no removal of such goods fro m the factory at all but these goods were consumed within the factory in the man ufacture of finished products. The Delhi High Court, in J.K Cotton Spinning & We aving Mills Co. Ltd. Vs. Union of India (1981) (8) ELT-887, held that intermedia te goods were not removed, since they were captively consumed and hence no duty co uld be collected on such goods in terms of Rules 9 and 49(prior to amendment). T he decision was rendered in the context of usage of such goods in an uninterrupt ed and continuous process. The Gujarat High Court and the Karnataka High Court t ook a contrary view. However, several assesses began to follow the decision in J .K Cottons case and discontinued payment of duty on intermediate products.

Basic Concepts 1.21 However, the Finance Act, 1982 amended the provisions of Rul es 9 and 49 of Central Excise Rules 1944 with retrospective effect from 28.2.194 4, being the date on which the Central Excise Act came into force. The amendment s meant that intermediate goods would be chargeable to duty as they would be dee med to have been removed prior to consumption in the manufacturing process. This amendment was upheld by the Supreme Court in J.K.Spinning & Weaving Mills vs UO I 1987 (32) ELT 234 (SC). Therefore, captive consumption would amount to removal though there are several exemption notifications like 67/95 which under specifi ed circumstances exempt captive consumption from payment of duty. It must also b e understood that as discussed earlier the Supreme Court in its decisions in Uni on Carbide India Ltd. Vs. Union of India (1986) (24) ELT-169 and in Bhor Industr ies Ltd. Vs. C.C.EX. (1989) (40) ELT-280 has held that an intermediate product w ould be excisable only if it is a complete product in the sense that it is capab le of being sold to a consumer. Thus marketability is essential for charging an article to duty. Therefore where the intermediate product is not capable of bein g sold it is not dutiable even if it is included in the Tariff Entry. In other w ords intermediate goods will be chargeable to duty under law only if the test of marketability is met. The Tribunal, in Hindustan Lever Ltd. Vs.C.C.EX. (1990) ( 30) ECR-180, has held that intermediate goods which are not sold nor are marketa ble, are not excisable and that the burden of proof regarding marketability is o n the Revenue. In Krishna International Vs.C.C.EX.(1994) (71)ELT-694, the Tribun al has held that the burden of proving that products emerging at an intermediate stage of processing are marketable and hence are goods is to be discharged by the excise authorities and, if not, excise duty would not be leviable. Intermediate goods which are bought into being insitu in the process will not be chargeable to duty since they are not marketable. Moreover, transient and unstable intermed iate goods would also not be chargeable to duty on the same basis. However, othe r kind of intermediate products, which are capable of being marketed as goods in their own right, will be chargeable to duty, notwithstanding that they are not packed or stored separately but are used as part of a continuous process. In BPL Electronics Vs CCE 1994 (71) ELT 801, the Tribunal held that exemption to capti ve consumption is not deniable merely because manufacturer has raised an invoice but used the goods within the factory of production. In the instant case the ma nufacturer manufactured the moulds intended for use in factory in which they are manufactured and merely on the fact of raising an invoice in respect of certain moulds in favour of a financial company, a liability for charging duty is not c reated, levy of excise duty being on manufacture and not on saleability. 1.13 DU TIABILITY OF SITE RELATED ACTIVITIES AND IMMOVABLE PROPERTY We have already seen that excise duty is a levy on moveable goods and not on immoveable goods or pro perty. The aforesaid principle is of paramount relevance for determining the

1.22 Central Excise excisability of activities undertaken at project sites. The aspect of excisability of site related activities is source of perennial litigat ion between department and assesses. Reference may be made to the definition of immovable property which has been set out earlier. Excise duty is chargeable whe n, at site, there emerges moveable goods during the course of fabrication or bri nging into being of immovable property in the form of buildings, plant etc. In o ther words, if movable goods such as fabricated parts, structures, equipment are brought into being and they are thereafter mounted or fixed on civil foundation s so as to complete the construction, excise duty will be chargeable on such mov able goods, notwithstanding that the final products are items of immovable prope rty. On the other hand, if the site work is carried out on top of civil foundati on and such parts, structures etc are erected piece by piece on such foundation, no movable goods are brought into being and hence no duty is chargeable of such activities. In this connection, the Central Board of Excise and Customs has iss ued a circular on the subject in 17/89 dated 21.4.89. The principles laid down t herein are as follows :(i) At the factory, duty would be chargeable on the parts and components of such goods leaving the factory in the condition in which they are removed. Thus if together, the goods can be regarded as a chimney or a tank or a scrubber or tower or a hopper in completely knocked down condition, or hav ing the essential character of the aforementioned goods, the goods would be char geable to duty under the headings/sub-headings appropriate to such goods in thei r complete form; otherwise such parts and components should be charged to duty u nder the headings/subheadings appropriate to such parts and components. (ii) At site, duty would be chargeable only if the assembly of parts/components results in a different recognizable marketable product before installation in an immovable manner. Mere bringing together of parts and components would not be e xcisable. (iii) However, at site, if the piece by piece erection or installation of parts or components result in an immovable property, then no duty would be r equired to be levied on such property. The Board has thus reiterated the well-kn own principles for deciding on whether or not specific site related activities w ould attract excise duty liability. The tests laid down by the Supreme Court as found in the celebrated case of Municipal Corporation of Greater Bombay vs India n Oil Co.Ltd 1991 Suppl(2) SCC 18 can be summarized as under: The test was one o f permanency; if the chattel was movable to another place of use in the same pos ition or liable to be dismantled and re-erected at the later place, if the answe r to the former is positive it must be movable property but if the answer to the latter part is in the positive, then it would be treated as permanently attache d to the earth. Immovable property or articles embedded to earth, structures, ere ctions and installations are also not goods because they cannot ordinarily come to the market to be bought and sold - Quality Steel Tubes (P) Ltd. v. Collector 19 95 (75) E.L.T. 17 (S.C.) & Mittal Engg.

Basic Concepts 1.23 Works (P) Ltd. v. Collector 1996 (88) E.L.T. 622 (S.C.). Ref erence can also be made to the following : Otis Elevator Companys Case 1981 E.L.T . 710 (G.O.I.) Gujarat Machinery Manufacturers Ltd. v. Collector 1983 (12) E.L.T . 825 (CEGAT) Hyderabad Race Clubs case 1996 (88) E.L.T. 633 (S.C.) However, the Supreme Court in Sirpur Paper Mills Ltd. v. CCE 1998 (97) E.L.T. 3 held that ass embly of a paper making machine and its erection at site mainly from bought out components and by fabricating the rest of the parts at site, amounts to manufact ure. This decision has caused considerable amount of re-thinking as to what cons titutes immovable property and also has left the field open for further disputes . The Supreme Court in a landmark judgement in Triveni Engineering & Industries Ltd. v. CCE 2000 (120) E.L.T. 273 held that while fixing of steam turbine, alter nator and coupling them to form a turbo alternator amounts to a manufacturing pr ocess, the resultant property being immovable the same cannot be brought to exci se. This decision has once again set the ball rolling in favour of the assessee as regards immovable property and excise. In CCE Vs. Man Structurals Ltd. 2001 ( 130) ELT 401 (S.C.) the Supreme Court held that the Tribunal has failed to consi der the facts and proceeded simply upon the basis that structurals are not exigi ble to excise duty. It has failed to appreciate that there is a tariff entry whi ch makes structurals exigible to excise duty and that they are so exigible, prov ided that they are new identifiable goods that are the result of manufacture or processes and they are marketable. Considering the above conflicting judgements, CBEC issued Circular No. 58/1/2002-CX, dated 15-1-2002 to clarify its position on the excisability of immovable property which is as under: (i) For goods manuf actured at site to be dutiable they should have a new identity, character and us e, distinct from the inputs/ components that have gone into its production. Furt her, such resultant goods should be specified in the Central Excise Tariff as ex cisable goods besides being marketable i.e. they can be taken to the market and sold (even if they are not actually sold). The goods should not be immovable. (ii) Where processing of inputs results in a new product with a distinct commerc ial name, identity and use (prior to such product being assimilated in a structu re which would render them as a part of immovable property), excise duty would b e chargeable on such goods immediately upon their change of identity and prior t o their assimilation in the structure or other immovable property. (iii) Where c hange of identity takes place in the course of construction or erection of a str ucture which is an immovable property, then there would be no manufacture of good s involved and no levy of excise duty.

1.24 Central Excise (iv) Integrated plants/machines, as a whole, may or may not be goods. For example, plants for transportation of material (such as handling pla nts) are actually a system or a net-work of machines. The system comes into bein g upon assembly of its component. In such a situation there is no manufacture of goods as it is only a case of assembly of manufactured goods into a system. This cannot be compared to a fabrication where a group of machines themselves may be combined to constitute a new machine which has its own identity/marketability an d is dutiable (e.g. a paper making machine assembled at site and fixed to the ea rth only for the purpose of ensuring vibration free movement) (v) If items assem bled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, th en the items would not be considered as moveable and will, therefore, not be exc isable goods. (vi) If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base and wi thout dismantling into its components/parts, the goods would be considered to be moveable and thus excisable. The mere fact that the goods, though being capable of being sold or shifted without dismantling, are actually dismantled into thei r components/parts for ease of transportation etc., they will not cease to be du tiable merely because they are transported in dismantled condition. Rule 2(a) of the Rules for the Interpretation of Central Excise Tariff will be attracted as the guiding factor is capability of being marketed in the original form and not whether it is actually dismantled or not, into its components. Each case will th erefore have to be decided keeping in view the facts and circumstances, particul arly whether it is practically possible (considering the size and nature of the goods, the existence of appropriate transport by air, water, land for such size, capability of goods to move on self propulsion -ships- etc.) to remove and sell the goods as they are, without dismantling into their components. If the goods are incapable of being sold, shifted and marketed without first being dismantled into component parts, the goods would be considered as immovable and therefore not excisable to duty. (vii) When the final product is considered as immovable a nd hence not excisable goods, the same product in CKD or unassembled form will a lso not be dutiable as a whole by applying Rule 2(a) of the Rules of Interpretat ion of the Central Excise Tariff. However, components, inputs and parts which ar e specified excisable products will remain dutiable as such identifiable goods a t the time of their clearance from the factory or warehouse. (viii) The intentio n of the party is also a factor to be taken into consideration to ascertain whet her the embedment of a machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are

Basic Concepts 1.25 moveable or immovable. Keeping the above factors in mind the position is clarified further in respect of specific instances which have been brought to the notice of the Board. (i) Turn key projects like Steel plants, Cem ent plants, Power plants etc. involving supply of large number of components, ma chinery, equipments, pipes and tubes etc. for their assembly/installation/erecti on/integration/inter-connectivity on foundation/civil structure etc. at site, wi ll not be considered as excisable goods for imposition of central excise duty the components, however, would be dutiable in the normal course. Huge tanks made of metal for storage of petroleum products in oil refineries or installations. These tanks, though not embedded in the earth, are erected at site, stage by sta ge, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not poss ible to assemble the tank all over again. Such tanks are, therefore, not moveabl e and cannot be considered as excisable goods [Reference para 15 of Triveni judg ement supra and the case of CCE Chandigarh v. Bhagwanpura Sugar Mills reported i n 2001 (134) E.L.T. 673 (Tri.-Del.) = 2001 (47) RLT 409 (CEGAT-Del)] (ii) (iii) Refrigeration/Air conditioning plants. These are basically systems compris ing of compressors, ducting, pipings, insulators and sometimes cooling towers et c. They are in the nature of systems and are not machines as a whole. They come into existence only by assembly and connection of various components and parts. Though each component is dutiable, the refrigeration/air conditioning system as a whole cannot be considered to be excisable goods. Air conditioning units, howe ver, would continue to remain dutiable as per the Central Excise Tariff. (iv) Li fts and escalators. (a) Though lifts and escalators are specifically mentioned i n the tariff, those which are installed in buildings and permanently fitted into the civil structure, cannot be considered to be excisable goods. Such lifts and escalators have also been held to be non-excisable by the Govt. of India in the case of Otis Elevators India Co. Ltd. reported in 1981 (8) E.L.T. 720 (GOI). Fu rther, this aspect was also a subject matter of C&AGs Audit Para No. 7.1(b)/98-99 [DAP No. 186] which has since been settled by the C&AG accepting the Boards view that such lifts and escalators are not excisable goods. Also refer CCE v. Kone Elevators India Ltd. reported in 2001 (138) E.L.T. 635 (Tri.-Chen.) = 2001 (45) RLT 676 (CEGAT-Chen). (b) There may, however, be instances of fabrication of com plete lifts and escalators which are movable in nature as a whole and can be tem porarily installed at construction sites or exhibitions for carrying men or mate rial. Such cases alone would be liable to duty under sub-heading 8428.10 of the Central Excise Tariff. In Unicorn Industries Vs. CCE 1990 (50) ELT 279, the Trib unal has held that the operation of supply of manufactured and bought out equipm ent and components by the assessee and

1.26 Central Excise erection and commissioning of the plant which comprised of t he equipment and components amounts to manufacture. It was held that manufacture and clearance of various manufactured and bought out equipments taken from thei r factory and erected at site led to the emergence of a new commodity liability to duty. The Tribunal followed the Supreme Courts decision in Narne Tulaman Manuf acturers Pvt. Ltd. Vs. CCE 1988 (38) ELT 566, wherein it was held that assembly of an excisable product out of duty paid components would amount to manufacture and the assembly of both own manufactured parts together with bought out parts/c omponents would amount to manufacture and accordingly the person carrying on suc h activity was a manufacturer and liable to duty. However, the aspect on non exc isability of immovable property was not argued in Narne Tu amans case. If the eme rgent final product is immovable property then no liability to excise duty accru es. 1.14 WHETHER ASSEMBLY AMOUNTS TO MANUFACTURE Assembly is a process of puttin g together a number of items or parts of an item to make a product or item. From a general point of view not all cases of assembly would amount to manufacture i n as much as an already manufactured item may be put in a readily usable form. T he assembly may take place before the sale or after the sale of manufactured goo ds and again at the factory gate of the manufacturer or the customers site. It ma y be done by the manufacturer/buyer/intermediary/technician. In all such cases, the questions that arise are :(a) Whether such assembly is manufacture? (b) Do n ew goods emerge as a result of assembly? The leading judgment in this context is Narne Tulaman Manufacturers Pvt. Ltd. v. CCE 1988 (38) E.L.T. 566 (S.C.). Their Lordships held that as the Tribunal had found that the Appellant had fitted a p latform, load cells and indicator system which in the assembled form became a we igh bridge, there was a commercial commodity, having a distinct name, character and use resulting in manufacture. The aspect whether the resultant product would become an immovable property was not argued or considered. Therefore, the gener al proposition would be that if the assembly results in new commercial commodity with a distinct name, character and use, then it would amount to manufacture. I n BPL India Ltd. Vs CCE 2002 (143) ELT 3, the Supreme Court held that assembly o f imported kits of VTR with colour monitors imported in disassembled condition a mounted to manufacture since the end product had a distinct character and use an d the process of assembly was done by technical experts or skilled persons. 1.15 DUTIABILITY OF WASTE AND SCRAP The long legal battle on the dutiability of wast e and scrap was settled by the Supreme Court by its decision in Khandelwal Metal & Engineering Works Vs. U.O.I 1985(20) ELT 222 by holding that not withstanding that process waste and scrap arose as intermediate products or by-products out of final products, nevertheless such process waste and scrap, if

Basic Concepts 1.27 marketable, would be chargeable to duty in view of the incor poration of the specific subheadings in various Chapters of the revised Tariff. The apex court held that process waste and scrap was a commercially distinct and identifiable product and has commercial value. Hence, such waste and scrap were chargeable to duty, if covered in the Tariff. Following the decision in Khandel wals case, the Tribunal, in Tata Iron & Steel Co. Ltd. Vs. CCE 1993 (49) ECT 665, has held that a waste product arising during the course of manufacture of a fin al product is excisable if classified under the Central Excise Tariff. In CCE Vs . Oswal Vanaspati & Allied Industries 1994 (70) ELT 236, it was held that spent earth is excisable goods in view of the fact it is classifiable under a particul ar subheading of the Central Excise Tariff. Hence the position as it currently s tands is that all process waste and scrap, if incorporated in the Tariff and if marketable, would be chargeable to duty. However, the Supreme Court in UOI vs In dian Aluminium Co.Ltd 1995 (77) ELT 268 made a slight departure on the facts and held that refuse, ashes and rubbish are different from waste and scrap and thou gh they may fetch a value, they are not marketable and hence not excisable. In t hat case, aluminium dross was considered to be a refuse. It is important to note here is that as the excise duty is on manufacture, the waste and scrap actually generated in the course of manufacture alone is chargeable to duty and the wast e and scrap generated without any process is not liable to excise duty. 1.16 PAC KING, LABELLING AND BRANDING ACTIVITIES Packing of dutiable goods is a process o f manufacture. The definition of manufacture as contained in section 2(f) of the Act, covering incidental and ancillary activities there under, would incorporat e within its ambit the activity of packing, which is a necessary adjunct to manu facture. Further, goods are normally treated as fully manufactured for the purpo se of accounting in the statutory excise records at the stage where they are pac ked in their normal packing, without which they cannot be delivered in wholesale at the factory gate. In other words the activity of packing of otherwise fully manufactured goods is the process which renders such goods marketable and conseq uently the activity of packing is part and parcel of manufacture. Reference is a lso made in this connection to section 4 of the Central Excise Act governing the determination of value of excisable goods. The aforesaid provisions of section 4 would also indicate that packing is always contemplated under excise law as a part of the entire process of manufacture by which input materials are transform ed into commercially distinct, identifiable and marketable finished products. It is to be noted that for the goods specified in Third Schedule of Central Excise Tariff, the process of packing or repacking of such goods in a unit container o r labelling or re-Iabelling of containers amounts to manufacture. Further, the d eclaration or alteration of retail sale price or adoption of any other treatment on the goods to render the product marketable to the consumer also results in m anufacture. The goods specified in Third Schedule of the Central Excise Tariff a re valued on MRP basis as per the provisions of Section 4A.

1.28 Central Excise Further, several Chapters of the Central Excise Tariff also incorporate the duty rates on excisable goods packed in packages. In other words , the Tariff itself determines the duty rates of excisable goods in a fully pack ed and saleable condition. For example, milk powder is chargeable to duty only i f it is put up in unit containers. In case it is produced and consumed within th e factory of production without packing in such unit containers, there is no lia bility to duty. Unit containers are also defined in the Tariff as containers, la rge or small, designed to hold a predetermined quantity or number. Several examp les of unit containers are also described therein. The position in law however c hanges when excisable goods which are packed in bulk are charged to duty and are thereafter dispatched to outside godowns wherein they are repacked into small c ontainers. In such a situation, the principle in law is that since the bulk prod uct has already been fully manufactured and has been marketed or dispatched in t he factory, the repacking activity would not constitute manufacture in law. Ther e are numerous decisions to this effect both of the Tribunal and of the High Cou rts. In C.C.EX. Vs. Prabhat Packaging Corporation (1990) (47) ELT-112, the Tribu nal held that repacking of an alreadymanufactured product would not amount to ma nufacture in excise law. Also, the reason why repacking would not constitute man ufacture is that the activity does not result in the emergence of any commercial ly distinct end product since both the bulk duty paid finished products as well as the individually packed finished products are commercially known as one and t he same articles. Hence, the test of transformation into a distinct end product, in terms of the Supreme Courts decision in DCMs case, is not fulfilled and hence repacking would not amount to manufacturer. Another aspect of the issue is that of packing together of a manufactured item together with a bought out or purchas ed item. It was held by the tribunal that packing together of a fully manufactur ed product and the bought out item would not bring into existence any new commod ity. Consequently, the duty liability would be restricted to the manufactured pr oduct only. The mere activity of packing together of two distinct goods in a sin gle container would not bring into existence any new commodity; here it is impor tant to distinguish the activity of packing together of two different products f rom that of assembly of the products together to form a distinct third product. In other words, while such packing would not constitute manufacture, assembly wo uld certainly constitute manufacture. Reference is made in this connection to th e Supreme Courts decision in the Narne Tulaman case. Coming now to the aspect of whether labelling and branding activities constitute manufacture or not, the set tled position in law is that an unlabelled and a labelled product is normally tr eated in commercial parlance as the same and consequently the mere labelling of fully manufactured products would not constitute manufacture in law. The Bombay High Court, in Pioneer Tools and Appliances (P) Ltd. Vs. Union of India (1989) ( 42) ELT-384 has held that mere affixation of labels would not render the person who undertakes the said activity as a manufacturer since the activity would not constitute manufacture in law. As far as question of branding of goods is concer ned there are numerous decisions, which hold that such branding would not amount to manufacture. In most of these cases, the manufacturer was affixing the brand name of the customers on the specified goods and the

Basic Concepts 1.29 Department sought to establish that the brand name owner was the manufacturer in law. This was negatived by the Supreme Court in a series of three decisions in Union of India Vs. Cibatul Ltd. (1985) (22) ELT- 302, Joint Secretary to Govt. of India Vs. Food Specialties Ltd. (1985) (22) ELT-324, and i n Sidhosons Vs. UOI (1986) (26) ELT-881. The question whether branding of alread y manufactured goods was a process of manufacture was not per se considered in t hese decisions and Court rendered its decision only on whether or not the brand name owner was the manufacturer under excise law. However, in Banner & Co. Vs Un ion of India (1994) (70) ELT-181, the Calcutta High Court held that affixation o f a brand name on specified goods did not amount to manufacture. Similarly, in t he Pioneer Tools case (supra), the Bombay High Court impliedly held that the act ivity of branding carried out by a wholesale buyer on fully manufactured goods c ould not constitute manufacture under excise law so as to require excise duty li ability discharged on such an activity. The Apex Court agreed in this regard in Metal Box (I) Ltd.(1996). In view of the aforesaid position of law, wherever the re are serious revenue implications, the Legislature has introduced the concept of artificial definition of manufacture to include the activity of repacking, re labelling or branding as amounting to manufacture. For example, you would find t hese activities as amounting to manufacture under Chapter 21 or Chapter 30 of th e Tariff. Therefore, wherever the Tariff would state so, such activities would a mount to manufacture. 1.17 CAN THE TEST OF CHANGE IN TARIFF HEADING/SUB-HEADINGS BE ADOPTED FOR IDENTIFYING WHETHER A PROCESS AMOUNTS TO MANUFACTURE The manufac ture and production of goods is the event for attracting the levy of duty. Howev er, unless such goods are covered under the individual headings/sub-headings of the Chapters of the Central Excise Tariff, no duty liability would arise. There is thus an intricate link between manufacture of goods and the liability that wo uld arise. The aforesaid aspect brings into focus the question whether there has to necessarily be a change from one Tariff Heading/sub-heading to another in or der to bring the said activity within the ambit of the definition of manufacture under excise law. In other words, the question to be answered is whether a chan ge in Tariff heading or sub heading between input material and the resultant fin ished product is required so as to render such finished products liable to duty. This question was considered by the larger Bench of the Appellate Tribunal in G uardian Plasticote Vs. C.C.EX. (1986) (24) T-542 wherein the Tribunal held that in such an eventuality, the definition of manufacture would be attracted. The re asoning was that there was a transformation from one identifiable and distinct a rticle to another identifiable and distinct article, known differently in the tr ade parlance. It was held that since the market understood the two goods differe ntly, the fact that the tariff headings or sub headings did not change as a resu lt of the process was of no relevance for determining the chargeability. The dec ision was upheld by the Honble Supreme Court in landmark decisions in Laminated P ackings (P) Ltd. Vs. C.C.EX. (1990) (49) ELT-326 and in Union of India Vs. Babub hai Nychand Mehta (1991) (51) ELT-182. The Supreme Court held that a process wou ld amount to manufacture when input and output material were differentiated in t he commercial or

1.30 Central Excise trade parlance and that the fact that the same chapter headi ng or sub heading would govern both the input and output material was not german e to the issue. The Apex Court held that the commercial or trade parlance test w as a safe and reliable test which must necessarily be adopted in such a situatio n so as to determine whether or not the process amounted to manufacture or not. Therefore, the test would be of commercial differentiation and not whether the T ariff heading changes or not. 1.18 DETERMINATION OF TAXABLE EVENT FOR CHARGE OF DUTY Before getting into the discussion it will be relevant to note the differen ces between the exempted goods and the goods which are out side the purview of t he Central Excise. Exempted goods are basically chargeable to duty but with an i ntention of giving relaxation, they are exempted from payment of duty. On the ot her hand the goods out side the purview of levy are either goods which are not i ncluded in the tariff at all . The taxable event for the charge of excise duty i s the manufacture of goods, as per section 3 of the Central Excise Act. However, the collection of duty is postponed to the stage of removal of goods as per Rul es 4 of the Central Excise Rules 2002. The question which arises for considerati on is whether goods which are manufactured at the period in time when they were either not chargeable to duty or were exempted from duty could be charged to dut y if, subsequent to manufacture but before removal such goods become chargeable to duty, either due to their inclusion in the Tariff or due to withdrawal of the exemption from duty. In its decision in Wallace Flour Mills Vs. C.C.EX. (1989) (44) ELT-598, the Supreme Court held that the taxable event for the liability to duty was manufacture of goods but the duty could be levied and collected at any later stage for administrative convenience. Merely because the payment of duty under Rules is postponed to the stage of removal it could not be contended that the removal of goods has become the taxable event for the levy of duty. The Supr eme Court considered the several earlier High Court judgements on the point, esp ecially, the Madhya Pradesh High Courts decision in Union of India Vs. Kirloskar Brothers (1978) (2) ELT-690, the Bombay High Courts decision in Synthetics & Chem icals Ltd. Vs. S.C. Coutinho (1981) (8) ELT-414 and the Madras High Courts decisi on in Sudaram, Textiles Ltd. Vs. Asstt. Collector C.EX. (1983) (13) ELT-909. Con sequently, the excisable goods which were chargeable to duty under the Tariff at the time of manufacture but were exempted under an exemption notification will be liable to payment of duty if, post manufacture and prior to removal, such exe mption from duty is withdrawn. However, in cases where the goods were outside th e purview of the Tariff at the time of manufacture such goods would not be charg eable to duty even though, subsequent to manufacture but prior to removal, such goods were brought within the purview of the Tariff or were charged to a duty of excise by means of an amendment to the Tariff. In other words, since the goods were not excisable goods as per the provisions of section 2(d) at the time of ma nufacture, they would not be liable to duty even though they were brought within the purview of the aforesaid section prior to removal from the factory.

Basic Concepts 1.31 This was the implication of the decision of the Supreme Cour t in Vazir Sultan Tobacco Co.Ltd vs CCE 1996 (83) ELT 3. To summarise, the curre nt position in law is that exempted goods will be chargeable to duty at the time of removal if, subsequent to manufacture but before removal, the exemption from duty is withdrawn. However, goods that are not covered within the ambit of the Central Excise Tariff will not be chargeable to duty even though subsequent to m anufacture but before removal such goods are bought within the purview of the ta riff or are made chargeable to a specified rate of duty under the Tariff. [Vazir Sultan Tobacco case] Self-examination questions 1. 2. 3. Define the nature of e xcise duty and enumerate the duties leviable under the various excise laws and r ules made thereunder. Describe the taxable event in central excise. Discuss brie fly whether excise duty is attracted on the excisable goods manufactured in: (a) Jammu & Kashmir; (b) Special Economic Zone; (c) EPZ/100% EOU; (d) Indian Territ orial Waters; (e) Beyond Indian Territorial Waters. 4. Examine whether the follo wing amount to manufacture: (i) Labeling or re-labeling of unit containers of choc olate (ii) Dyeing and colouring of yarn (iii) Pulverising of chilly 5. With refe rence to the Central Excise Act, 1944, define the following: (i) Factory (ii) Ap pellate Tribunal (iii) Excisable Goods (iv) Wholesale Dealer (v) Sale and purcha se (vi) Broker or commission agent

1.32 Central Excise 6. Discuss whether the following can be considered as excisa ble goods for the purpose of levying excise duty: (a) Turn key projects (b) Lift s and escalators (c) Refrigeration or Air conditioning plants 7. 8. Explain brie fly whether "assembly" would tantamount to "manufacture" under the Central Excis e Act, 1944. M/s. Onkar Steel Works processes cold rolled strips from duty paid hot rolled strips. Duty is being paid by M/s. Onkar Steel Works on removing cold rolled strips. M/s. Onkar Steel Works contends that cold rolled strips are only those strips, which emerge after the hot rolled strips have been processed and the edges sheared and slit according to the specification of the customer. Howev er, Department has claimed that cold rolled strips meant and included unsheared and unslit strips also. The basis of the Departments claim is Indian Standard Spe cification Nos. 1956 to 1962, which specifiy that a strip is supplied in straight length or in coil with mill, trimmed or sheared edges. On this basis duty is dem anded on the unsheared and unslit strips also. Discuss whether the demand put fo rth by the Department is tenable in law. You may refer to any decided case laws on this issue. Agrotech Industries Pvt. Ltd uses coal as fuel for producing stea m to run the machines used for manufacturing the end product. Coal is burnt in b oilers and furnaces to produce steam. Normally coal is reduced to ash when it is burnt in boilers. Some part of it does not get fully burnt because of its low c ombustible quality. This unburnt or half burnt portion left out in the boiler is called cinder. A show cause notice is issued asking why the duty should not be demanded on such cinder produced by Agrotech Industries Pvt. Ltd on the followin g grounds: (i) Cinder is an excisable good as it finds a place in Serial no. 26. 21 of Chapter 26 of the First Schedule of The Central Excise Tariff Act, 1985. S erial no.26.21 covers other slag and ash, including seaweed ash (kelp). 9. (ii) Cinder is exigible to excise duty as it is manufactured as a by-product of coal that emerges in the course of manufacture of the end product. Also, it is m arketable as the same is sold by the Agrotech Industries Pvt. Ltd. You are appoi nted as a consultant of Agrotech Industries Pvt. Ltd. Discuss your views on the above issue. 10. Pravaal purchases duty paid wire rods and draws them into a thi nner gauge. The two items fall under different tariff headings. Pravaal claims t hat the process undertaken by him does not amount to manufacture. His claim is b ased on a decision given by the Apex Court in the case of Collector of Central E xcise v Technowled Industries 2003 (155) E.L.T. 209 (S.C.). Is the claim of the assessee correct in the present position of law?

Basic Concepts 1.33 11. MTZ Ltd. purchases edible vegetable oil from the open ma rket and refines it. Refined edible vegetable oil falls in Chapter 15 of the Fir st Schedule to the Central Excise Tariff. MTZ Ltd. claims that the process under taken by it does not amount to manufacture as there is no Chapter Note or Sectio n Note which specifies that refining of edible vegetable oil amounts to manufact ure. You are required to advise with reference to the present position of law in this regard. 12. Alpha Ltd. is engaged in the activity of cutting/slitting of j umbo rolls of toilet paper of a width exceeding 36 cms. The jumbo rolls are purc hased on payment of excise duty from various suppliers. The process undertaken b y Alpha Ltd. reduces the width of the jumbo rolls to less than 36 cms. The rolls with width exceeding 36 cms and with width less than 36 cms fall under differen t tariff headings. The excise department contends that such reduction of width a mounts to manufacture. The excise department has assessed and demanded duty from Alpha Ltd. on the basis of the heading covering jumbo rolls of width less than 36 cms. You are required to examine the situation with the help of a decided cas e law. Answers 8. Similar issue came up for consideration before Supreme Court i n the case of Tata Iron & Steel Co. Ltd. v. Union of India 2004 (164) E.L.T. 372 (S.C). Here, the Apex Court pointed out that there was no separate heading in r espect of cold rolled strips and hot rolled strips. Another reasoning put forwar d by the Supreme Court was that there was no proof of the marketability of the c old rolled strips, which is an essential item of manufacture. The Court held tha t Marketability is a question of fact and does not follow from the mere mention of item in the ISI. Therefore, it was held by the Court that the processing of c old rolled strips from duty paid hot rolled strips does not amount to manufactur e. Therefore, the Departments claim in the instant case is not tenable as the ver y process of manufacturing cold rolled strips from hot rolled strips does not am ount to manufacture, thereby, making the demand on unsheared and unslit strips v oid. 9. This issue came up for consideration before Supreme Court in the case of Union of India vs Ahmedabad Electricity Co. Ltd. & Ors. 2003 (111) ECR 274 (SC) . In this case, the Supreme court observed that simply because goods find mentio n in one of the entries of the First Schedule, it does not mean that they are li able for payment of excise duty. Goods have to satisfy the test of being produce d or manufactured in India. Further, the Apex Court held that cinder is not ash it is something between coal and coal ash.

1.34 Central Excise On the issue regarding manufacture, Supreme Court held that excise duty is an incidence of manufacture and, therefore it is essential that t he product sought to excise duty should have gone through the process of manufac ture i.e. the raw material should have gone through the process of transformatio n in to a new product by skillful manipulation. In producing cinder there is no manufacturing process involved. Coal is simply burnt as fuel to produce steam. C oal is not tampered with, manipulated or transformed in to the end product. Burn ing of coal for purpose of producing stream cannot be said to be manufacturing a ctivity. From burning coal no new product emerges except cinder or ash that is n othing but the inferior quality of coal itself. Moreover, coal which leads to pr oduction of cinder is not used as a raw material for the end product. It is bein g used only for ancillary purpose that is as a fuel. Therefore, irrespective of the fact whether any manufacture is involved in production of cinder it should b e held to be out of tax net for the reason that it is not a raw material for the end product. As regards the marketability aspect, the Court held that since cin der fails the test of being manufactured in India, even if it is saleable, it do es not make any difference. In the light of the above discussion it can be infer red that cinder is not liable to excise duty and the demand by the Department is not tenable in law. 10. The Apex Court had held in the case of Collector of Cen tral Excise v Technowled Industries 2003 (155) E.L.T. 209 (S.C.) that there is n o manufacture of a new product when the guage of the rod is made thinner and the product is finished a little better. However, Finance (No. 2) Act, 2004 has ins erted a section note in section XV of the First Schedule to the Central Excise T ariff Act so as to provide that the process of drawing or redrawing a rod, wire o r any other similar article, into wire shall amount to manufacture. Therefore, this chapter note overrules the judgment of the Supreme Court. Hence, the contention of the assessee is not correct in law. 11. The definition of manufacture inter alia provides that manufacture includes any process, which is specified in relati on to any goods in the Section or Chapter notes of the Schedule to the Central E xcise Tariff Act, 1985 as amounting to manufacture. Finance Act, 2005 has inserte d a Note in Chapter 15 of Central Excise Tariff to provide that in relation to r efined edible vegetable oils falling under Headings 1507 to 1515, the process of refining shall amount to manufacture. In this context, the process of refining shall include treatment of crude oil with alkali, bleaching and deodorisation. T his Chapter note has been given retrospective effect from 1.03.1986. Therefore, in the current position of law the process of refining of edible vegetable oil u ndertaken by MTZ Ltd. shall amount to manufacture.

Basic Concepts 1.35 Note: This matter had come up before the Supreme Court in th e case of Shyam Oil Cake Ltd. v. CCEx., Jaipur, 2004 (174) E.L.T. 145 (S.C.). Th e Apex Court stated that merely setting out a process in tariff entry would not be sufficient to hold that the particular process resulted in manufacture. If th e process was indicated in the Tariff Entry, without specifying that the same wo uld amount to manufacture, then the indication of the process was merely for the purpose of identifying the product and the rate which was applicable to that pr oduct. The Apex Court emphasised that for a deeming provision to come in to play it must be specifically stated that a particular process would amount to manufa cture. In the absence of it being so specified, the commodity would not become e xcisable merely because a separate Tariff Item existed in respect of that commod ity. It was observed by the Supreme Court that neither the Section Note nor the Chapter Note nor the Tariff Item gave any indication that the process indicated would amount to manufacture. The product remained edible vegetable oil even afte r the processing/refining. It was held by the Apex Court that as actual manufact ure had not taken place, deeming provision could not be invoked in the absence o f a specific statement that the process would amount to manufacture. However, in view of the above-mentioned amendment made by Finance Act, 2005 this judgment d oes not hold good anymore. 12. The facts of the problem are similar to that of t he case of CCEx. New Delhi I v. S.R. Tissues Pvt. Ltd. 2005 (186) ELT 385 (SC). In this case, the Supreme Court has held that slitting/cutting of jumbo rolls of plain tissue paper into smaller size does not amount to manufacture as its char acter and end-use viz., household purposes, do not undergo any change on account of winding, cutting/slitting and packing. Further, slitting and cutting of toil et paper cannot be termed as deemed manufacture as the said process is not treat ed as manufacture by legislature under any of the Section/Chapter Notes of the C entral Excise Tariff. The Apex Court has elaborated that mere mention of a produ ct in a tariff heading does not necessarily imply that said product is obtained by process of manufacture. Just because raw material and finished product come u nder two different headings, it cannot be presumed that process of obtaining fin ished product from such raw material automatically constitute manufacture. There fore, slitting/cutting of jumbo rolls of toilet tissue paper into various shapes and sizes shall not amount to manufacture merely because tissue paper in jumbo roll of size exceeding 36 cms. fall in one entry and toilet roll of a width not exceeding 36 cms. fall in a different entry. The Supreme Court further explained that value addition on account of transport charges, sales tax, distribution an d selling expenses and trading margin without any change in name, character or e nd-use by mere cutting/slitting of jumbo rolls cannot constitute the criteria to decide what is manufacture.

1.36 Central Excise In view of the abovementioned decision, the contention of th e excise department does not hold good.

2 CLASSIFICATION OF EXCISABLE GOODS 2.1. INTRODUCTION The actual amount of excise duty payable on excisable goods is, inter alia, depe ndent upon the rate of duty. The rate of duty is determinable on the basis of cl assification of goods. The classification of goods consists of determining the h eadings or sub-headings of the Central Excise Tariff under which the said goods would be covered. The classification of goods is also required to be decided for the purposes of determining eligibility to exemptions, most of which are with r eference to the Tariff headings or sub headings. In Reckitt & Colman of India Vs . CCE 1994 (71) ELT 1144, Tribunal has held that for the purpose of classificati on of goods, the nomenclature, character and function of the product is required to be determined and thereafter the excisable product may be identified accordi ngly with one or the other headings or sub headings with reference to the relati ve Section Notes and Chapter Notes and Rules of Interpretation. 2.2 CENTRAL EXCI SE TARIFF Prior to 1986, the First Schedule to the Central Excises and Salt Act, 1944 cont ained a schedule of the goods. This Schedule contained bare descriptions of prod ucts, split up into number of items and sub-items relating to each type of commo dity. The Central Excises and Salt Act, 1944 also did not provide any guidelines as to the manner in which the said goods were to be classified. Accordingly, th e goods used to be classified as per the popular or trade understanding of the s ame in commercial parlance. However, from 28th February, 1986, the Tariff Schedu le was taken out of the Central Excises and Salt Act, 1944, and a new Tariff Sch edule based on the Harmonised System of Nomenclature (popularly known as HSN) wa s brought into force under an independent enactment called the Central Excise Ta riff Act, 1985. HSN is an internationally accepted product coding system formula ted under the auspices of the General Agreement on Tariffs & Trade (GATT). This new Tariff Act is modelled along with international practices. The international practice of adopting a uniform classification was done to facilitate a common u nderstanding of products across countries. It consists of two Schedules. First S chedule consists of 96 chapters which group similar class of products under broa d sections and specific classes of products under specific chapters. The chapter s are arranged classifying all

2.2 Central Excise goods of a kind beginning with the raw material and ending with the finished pro ducts, within the same Chapter. Also, it is designed to group all goods relating to the same industry and all goods obtained from the same raw material under on e Chapter in, progressive manner. The said 96 chapters are grouped into twenty s ections. Each of these sections relates to a broad class of goods. For example, section I relates to Animal and Dairy products while Section V relates to Minera l products. Each of these sections has been divided into various Chapters and ea ch Chapter contains goods of a particular class. Each Chapter has been further d ivided into various Headings, depending upon the different types of goods belong ing to the same class of products. This Schedule provides the rates of basic exc ise duty (CENVAT) leviable on various products. The Second Schedule specifies th e items on which special excise duty is leviable. Second Schedule contains only few items. It has been clarified that the Tariff headings given in the Second Sc hedule will be interpreted in the same way as those in First Schedule. Unlike th e earlier Central Excise Tariff, the new Central Excise Tariff contains Rules of Interpretation, Section/Chapter Notes and Chapter Sub-Notes giving detailed exp lanation as to the scope and ambit of the respective Chapter. These notes have b een given statutory backing and have been incorporated at the top of each Chapte r. Residuary items have been provided separately for each class of goods under e ach Chapter. With effect from 28.02.2005, the excisable goods are classified by using 8-digit system. The first two digits refer to the Chapter Number of the Ta riff, the next two digits refer to heading of the goods in that Chapter, the nex t two digits indicate Chapter sub-heading and the last two digits refer to the C hapter sub-sub-heading. Description with eight digits is termed as tariff item. Th e 8-digit tariff has a triple dash (---) scheme. If the description of the artic les is preceded by a single dash, it means that it is a sub-classification of th e immediately preceding heading. If there is double dash or triple dash before a description, it means that it is a sub-classification of the immediately preced ing item which has either a single dash or double dash. Thus, to a considerable extent, the concepts of classification of goods on the basis of popular meaning, commercial parlance or trade understanding has been done away with but to the e xtent that the goods are not covered by the Section Notes and Chapter Notes spec ifically, resort must yet to be had to the commercial or trade parlance in order to determine the classification. In its decision in Akbar Baruddin Jaiwani Vs. CC 1990 (47) ELT 161, the Supreme Court has held that the express wordings of th e Tariff Headings and relevant Section and Chapter Notes would take precedence o ver the commercial or trade parlance test for classifying excisable goods. Howev er, if the specific headings and notes do not cover the excisable goods, then re sort must be had to the commercial or trade understanding of the goods. The Supr eme Court has held in CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23 that H SN can be resorted to in case of ambiguity in classifying goods.

Classification of Excisable Goods 2.3 EXPLANATORY NOTES TO THE HSN 2.3 The Explanatory Notes to the HSN are the official notes issued by the Customs Co -operation Council, Brussels. They explain and clarify the scope and extent of e ach and every heading of the HSN, on the basis of which the present Central Exci se Tariff has been patterned. It is to be remembered that the Explanatory Notes do not have legal backing, unlike the Chapter Notes and Section Notes contained in the Tariff. Consequently, these Explanatory Notes are only of persuasive valu e and can be used as an aid to classification of goods when there is ambiguity a s to the scope of the entry. 2.4 POWER OF CENTRAL GOVERNMENT TO AMEND FIRST AND SECOND SCHEDULES OF THE TARIFF The Central Government has the power to amend the Schedules by notification under section 5 of the Central Excise Tariff Act. Thi s is subject to the condition that such amendment shall not alter or affect in a ny manner, the rates of duty. The provisions of this section are: (1) Where the Central Government is satisfied that it is necessary so to do in the public inte rest, it may, by notification in the Official Gazette, amend the First Schedule and the Second Schedule. However, such amendment shall not alter or affect in an y manner the rates specified in the First Schedule and the Second Schedule in re spect of goods at which duties of excise shall be leviable on the goods under th e Central Excise Act, 1944. (2) Such notifications shall be laid before each Hou se of Parliament, while it is in session, for a total period of thirty days as s oon as it is issued. These thirty days may be comprised in one session or in two or more successive sessions. If before the expiry of the session, immediately f ollowing the session or the successive sessions aforesaid, both Houses agree in making any modification in the notification or both Houses agree that the notifi cation should not be issued, the notification shall thereafter have effect only in such modified form or be of no effect, as the case may be. However, any such modification or annulment shall be without prejudice to the validity of anything previously done under that notification. 2.5 INTERPRETATIVE RULES TO CENTRAL EX CISE TARIFF The Central Excise Tariff Act, 1985, contains a set of five general rules for th e interpretation of the Tariff Schedules. By and large, these rules for interpre tation are identical to those contained in the HSN. Accordingly, the Explanatory Notes issued for these interpretative rules under HSN are also relevant for Cen tral Excise purposes. However, the Supreme Court in the case of CCE Vs K.W.H.Hel iplastics Ltd., 1998 (97) ELT 385 (S.C.) held that classification of goods under particular heading depends upon description, purpose and use of the goods. Ther efore, before resorting to interpretative rules, one has to look at the nature, description, purpose and usage of the goods. 2.5.1 Rules for the Interpretation: Classification of goods in the First Schedule shall be governed by the followin g principles: 1. The titles of Sections, Chapters and Sub-Chapters are provided for ease of reference

2.4 Central Excise only; for legal purposes, classification shall be determined acco rding to the terms of the headings and any relative Section or Chapter Notes and , provided such headings or Notes do not otherwise require, according to the fol lowing provisions. 2. (a) Any reference in a heading to an article shall be taken to include a referen ce to that article incomplete or unfinished, provided that, as presented, the in complete or unfinished article has the essential character of the complete or fi nished article. It shall also be taken to include a reference to that article co mplete or finished (or falling to be classified as complete or finished by virtu e of this rule), presented unassembled or disassembled. (b) Any reference in a h eading to a material or substance shall be taken to include a reference to mixtu res or combinations of that material or substance with other materials or substa nces. The classification of goods consisting of more than one material or substa nce shall be taken to include a reference to goods consisting wholly or partly o f such material or substance. The classification of goods consisting of more tha n one material or substance shall be according to the principles of rule 3. 3. When by application of rule 2(b) or for any other reason, goods are, prima facie , classifiable under two or more headings, classification shall be effected as f ollows: (a) the heading which provides the most specific description shall be pr eferred to headings providing a more general description. However, when two or m ore headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retai l sale, those headings are to be regarded as equally specific in relation to tho se goods, even if one of them gives a more complete or precise description of th e goods. (b) mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which can not be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable. (c) when goods cannot be classified by referen ce to (a) or (b), they shall be classified under the heading which occurs last i n numerical order among those which equally merit consideration. 4. 5. Goods which cannot be classified in accordance with the above rules shall be cla ssified under the heading appropriate to the goods to which they are most akin. In addition to the foregoing provisions, the following rules shall apply in resp ect of the goods referred to therein: (a) camera cases, musical instrument cases , gun cases, drawing instrument cases, necklace cases and similar containers, sp ecially shaped or fitted to contain a specific article or set of articles, suita ble for long-term use and presented with the articles for which they are intende d, shall be classified with such articles when of a kind normally sold therewith . This rule does not, however, apply to containers which give the whole its esse ntial character;

Classification of Excisable Goods 2.5 (b) subject to the provisions of (a) above, packing materials and packing contai ners presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. However, this provision doe s not apply when such packing materials or packing containers are clearly suitab le for repetitive use. 6. For legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those s ub-headings and any related sub-heading Notes and, mutatis mutandis, to the abov e rules, on the understanding that only subheadings at the same level are compar able. For the purposes of this rule the relative Section and Chapter Notes also apply, unless the context otherwise requires. GENERAL EXPLANATORY NOTES 1. Where in column (2) of this Schedule, the descripti on of an article or group of articles under a heading is preceded by -, the said a rticle or group of articles shall be taken to be a sub-classification of the art icle or group of articles covered by the said heading. Where, however, the descr iption of an article or group of articles is preceded by - -, the said article or group of articles shall be taken to be a sub-classification of the immediately p receding description of the article or group of articles which has -. Where the de scription of an article or group of articles is preceded by - - or - - -, the said a rticle or group of articles shall be taken to be a sub-classification of the imm ediately preceding description of the article or group of articles which has - or -. 2. The abbreviation % in column (4) of this Schedule in relation to the rate of duty indicates that duty on the goods to which the entry relates shall be charg ed on the basis of the value of the goods fixed, defined or deemed to be, as the case may be, under or in subsection (2) read with sub-section (3) of section 3 (tariff value) or section 4 or section 4A (MRP) of the Central Excise Act, 1944, the duty being equal to such percentage of the value as is indicated in that co lumn. ADDITIONAL NOTES In this Schedule,-1. (a) heading, in respect of goods, mean s a description in list of tariff provisions accompanied by a four-digit number and includes all sub-headings of tariff items the first four-digits of which cor respond to that number; (b) sub-heading, in respect of goods, means a description in the list of tariff provisions accompanied by a six-digit number and includes all tariff items the first six-digits of which correspond to that number; (c) tar iff item means a description of goods in the list of tariff provisions accompanyi ng either eight-digit number and the rate of the duty of excise or eightdigit nu mber with blank in the column of the rate of duty; 2. the list of tariff provisi ons is divided into Sections, Chapters and Sub-Chapters

2.6 3. Central Excise in column (3), the standard unit of quantity is specified for eac h tariff item to facilitate the collection, comparison and analysis of trade sta tistics. 2.5.2 Analysis of Rules for Interpretation of the Tariff (Statutory Principles) : Rule 1 states that the titles of sections, chapters and sub-chapters are provi ded for ease of reference and the determination of where the goods will fall is dependent on the relevant section and chapter notes contained in the Tariff. Whe re the Notes are silent, classification will be as per Note 2, 3, 4 and 5 of the Interpretative Rules. It would therefore be noted that Note 2, 3, 4 and 5 will have to be resorted to only if the Chapter does not contain any guide to classif y the particular product. The Tribunal held in Rajasthan Synthetic Industries Lt d. v. CCE 1989 (42). E.L.T. 24 that rules for interpretation are not invokable i f the section and chapter notes clearly determine the classification. In Subhash Photographics Vs. U.O.I. 1992 (62) ELT 270 it was held that classification has to be determined according to the terms of the headings read with the relevant C hapter Notes and Rules of Interpretation. Rule 2(a) governs classification of in complete or unfinished goods. It specifies that if the incomplete or unfinished goods have the essential characteristics of the complete or finished goods, then such goods will be classified in the same heading as the complete goods. Comple te or finished goods will cover goods removed in unassembled or disassembled for m. It was held in MICO Ltd. v. AC 1992 (62) E.L.T. 13 (Mad.) that only goods req uiring minor adjustments would be covered by this interpretative note and if maj or processes like turning, grinding, broaching, etc. are undertaken, the incompl ete goods cannot be classified as complete goods. Rule 2(b) consists of two part s - the first part relates to the mention of a material or a substance under any heading. The Rules states that the reference to a material or substance shall b e taken to include a reference to mixtures of that material or substances. On th e other hand, the second part of the rule deals with the goods of a given materi al or substance mentioned under any heading of the Tariff and states that a refe rence to a material or substance is to be taken to include a reference to goods consisting of such material or substance. This Rule further says that goods made of several materials or substances shall be classified according to Rule 3. Rul e 3 states that for the purposes of sub-rule (b) of rule 2 or where goods are pr ima facie classifiable under two headings, the following shall be done sequentia lly: a. Specific description will have to adopted in place of a general descript ion. This has been adopted by the Supreme Court in Moorco India Ltd. v. CC 1994 (74) E.L.T. 5. This rule further says that if the goods are made up of different materials or substances or parts against which each different headings refer to part only of the materials or substances contained in mixed or composite goods, in such case each of the headings are to be regarded as equally specific in rel ation to those goods,

Classification of Excisable Goods even if one of them gives a more complete or p recise description of the goods. b. 2.7 Mixtures, composite goods consisting of different materials (generally second pa rt explained above) shall be classified as if they consist of that material or p art which gives them their essential character. When goods cannot be classified in (a) or (b) above, they shall be classified under that heading which occurs la st in the numerical order. c. Rule 4 says where goods cannot be classified using the above principles, they wo uld be classified under the head appropriate to the goods to which they are most akin. i.e. if a goods cannot be classified according to the above principle, th en the goods shall be classified under the heading in which another goods which are mostly similar to the goods in question (akin goods) is classified. Rule 6 s ays that after classifying the goods under a specific heading classification und er subheadings under such headings shall be made in accordance with terms of sub -headings, notes to sub-headings and applying the principles as explained above. 2.5.3 Rules for Interpretation Non-statutory Principles : Apart from the above statutory principles of classification, the Courts have evolved certain non-stat utory principles. But it must be understood that statutory principles will have precedence over non-statutory principles. The Supreme Court in CCE v. Wood Polym ers Ltd. 1998 (97) E.L.T. 193 held that Rules of interpretation will be preferre d to the common parlance test. In case of variation between section and chapter notes incorporated in the Tariff and in the HSN Explanatory notes, the Section a nd chapter will always prevail and the classification shall be made in accordanc e with the tariff only Amco Batteries Vs. CCE 1993 (44) ECR 519 (Tri) The burden of proving that a particular goods fall in a particular entry will be on the De partment as per Hindustan Ferodo Ltd. v. CCE 1997 (89) E.L.T. 16 (SC). Specific to be preferred to general as held in case of Plasmac Machinery Mfg Co. Ltd. v. CCE 1991 (51) E.L.T. 161 (S.C.) Tariff Entry using commercial words to be interp reted as understood in the trade. A different approach may be required where str ictly technical or scientific words are used - Chemical and Fibres of India Ltd. v. U.O.I. 1997 (89) E.L.T. 633 (S.C.) Trade understanding to be resorted to if words not defined in the Act - CCE v. Fenoplast P. Ltd. 1994 (72) E.L.T. 513 (S. C.) Goods to classified according to its popular meaning - Shree Baidyanath Ayur ved Bhavan Ltd v. CCE 1996 (83) E.L.T. 492 (S.C.) HSN a safe guide to interpreta tion - CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23 (S.C.) ISI specificat ions not relevant as compared to circulars issued by trade associations and stat utory control orders. - Indian Aluminium Cables Ltd. v. U.O.I. 1985 (21) E.L.T. 3 (S.C.)

2.8 Central Excise ISI specifications not ignorable in the absence of any material - National Sales Corporation v. CCE 1995 (78) E.L.T. 653 (S.C.) Dictionary meaning have limited use and are not safe. - CCE v. Krishna Carbon Paper Co. 1988 (37) E.L.T. 480 (S. C.); 2.5.4 Burden to prove classification : In Kirloskar Oil Engines Ltd. Vs. Un ion of India (1991) (51) ELT-334, it was held that it is well settled that the b urden to establish that certain goods can be classified and excise duty can be l evied under a particular tariff item is entirely on the Department. Similarly, i n Union of India Vs. Sahney Steel And Press Works Ltd. (1992) (58) ELT-38, it wa s held by the Tribunal that the burden was on the authorities to establish that particular goods fell within a particular item of the Tariff. Under normal circu mstances, it is the responsibility of the Department to establish the correct Ta riff Heading under which the product falls. The onus is on the Department to est ablish the alternate classification, when the Department turns down the one clai med by the assessee. When certain goods are prima facie covered by the generic d escription, the burden to prove that they are not so covered would be on the per son claiming so. To sum up, the burden to prove a particular classification is i nitially on the Department and once it is discharged, the onus shifts to the ass essee, because it is he who has exclusive and special knowledge about the produc t produced by him. 2.5.5 Treatment of goods for the purpose of classification an d exemption: The meaning of for the purpose of classification as well as for exempt ion should be the same in view of the provisions of section 20 of the General Cl auses Act, but the onus of proving dutiability is on the department while in the case of exemption, the burden is on the tax payer claiming the exemption. In Es kayef Ltd. Vs. CCE 1990 (49) ELT- 649, the Supreme Court held that the exemption from payment of a excise duty which has been granted under a Notification is co nfined to goods falling under a particular Tariff Heading. Merely because a prod uct can be used for the purposes as specified in the exemption notification does not qualify it for exemption, unless it also falls under the Tariff Heading spe cified in the Notification because the exemption cannot transfer product from on e Tariff entry to another. Again, in Mangalore Chemicals & Fertilisers Ltd. Vs. DC 1991 (51) ELT 437, the Supreme Court held that the Rules for interpretation o f the statute are the same for the purpose of classification and exemption. In N affar Chandra Jute Mills Ltd. Vs. Asst. CCE the Calcutta High Court has held tha t the Rules for Interpretation of the Central Excise Tariff are applicable for i nterpreting exemption notifications as well. In Maestro Motors Ltd. 2004 (174) E .L.T. 289, the Supreme Court has held that if a tariff heading is specifically m entioned in exemption notification, the Rules for Interpretation will apply to s uch exemption notification. However, if an item is specifically mentioned withou t any tariff heading, then exemption would be available even though for purpose of classification, it may be something else. 2.5.6 Classification of goods wheth er can be changed by the Department : While it is open to the Department to revi ew classification matters, it is not open to the Department to arbitrarily chang e the classification of goods if they had been classified under a particular

Classification of Excisable Goods 2.9 heading for a long time. Though there is no estoppel in taxation matters, change s in classification can be made only if there are cogent reasons. In J.K Synthet ics Ltd. Vs. U.O.I. (1981) (8) ELT 328, the Delhi High Court has held that an au thority can depart from his earlier stand only for cogent reasons, such as fresh facts are brought on record or the process of manufacture has changed or the re levant Tariff Entry has undergone modification or, subsequent to earlier decisio n, there has been pronouncement of a High Court or the Supreme Court which neces sitates the reconsideration of the issue. Thus review/reopening of a classificat ion list may only be done for cogent reasons. The Tribunal in CCE Vs. Sunita Tex tiles Ltd. 1993 (67) ELT 932, has held that abrupt changes in classification, wi thout any cogent reasons, are not justified, if the construction of a Tariff ent ry has continued unchallenged for a considerable length of time, it should not b e disturbed. However, a classification list can be changed or modified by the De partment, when material facts were not disclosed in the classification list and they came to the notice or knowledge of the Department subsequently. However, ch ange based on re-evaluation of the same facts is not permissible as it tantamoun t to review, which was not permissible under erstwhile Rule 173B(5) (in the new Central Excise Rules 2002 there is no rule corresponding to this rule). In Sanat ha Engg. Industrials Vs. Superintendent of CEX 1991 (52) ELT 376 it was held tha t once the classification list filed by the assessee had been accepted by the ad judicating authority, he cannot direct the assessee to file a revised classifica tion list in the absence of initiation of proceedings for cancellation of the ea rlier sanction. When out of two possible headings, goods are classified by the D epartment under one of them, such a classification cannot be subsequently change d without notice to party. An approved classification list can only be reopened when fresh facts are brought on record or when there is a change in the statute. Approved classification lists cannot be changed arbitrarily or capriciously or without sufficient cause. Self-examination questions 1. 2. 3. Discuss whether cl assification of goods can be altered by the central excise department. Discuss b riefly the Rules for Interpretation of the Schedules to the Central Excise Tarif f Act, 1985. How are the following goods classified under the Central Excise Tar iff Act, 1985? (i) Incomplete or unfinished goods having the essential character istics of finished goods (ii) Finished goods that are removed in an unassembled condition or in a disasse mbled condition such as semi-knocked down or completely knocked down condition. 4. 5. Does the maxim Latter the Better apply in classifying the excisable goods? V ertex Ltd. manufactures a product known as MICEL which is used for killing lice in

2.10 Central Excise human hair. Vertex Ltd classifies their product under Tariff sub-heading 3808.10 as an insecticide. However, the Central Excise Officer is o f the view that the product is classifiable under Tariff subheading 3003.10 as a medicament as it has therapeutic and prophylactic properties. Vertex Ltd.s claim is supported by the reports of chemical examiners and the Department of Dermato logy & Venereology, which confirm that MICEL is an insecticide. Further, various s tatements of dealers also state that in the market the product is considered to be an insecticide. The claim of the central excise officer is substantiated by t he fact that Chapter Note 1(c) of Chapter 38 indicates that Chapter 38 would not cover "Medicaments under Heading No. 3003 or 3004". Chapter Heading 2(i) of Cha pter 30 defines "Medicament", inter alia, as a product comprising of two or more constituents which have been mixed or compounded together for therapeutic or pr ophylactic use. Give your opinion on the issue with the help of decided case law s, if any. Answers 4. The Central Excise Tariff Act, 1985 incorporates five Rule s of Interpretation. Rule 3(c) of the Rules for the Interpretation provides that when goods cannot be classified by reference to rule 3(a) or rule 3(b), they sh all be classified under the heading which occurs last in the numerical order amo ng those which equally merit consideration. Thus the maxim Latter the Better appli es in determining the classification of the excisable goods. 5. The facts of the given problem are similar to the case of Sujanil Chemo Industries v CC.Ex., & C us., Pune 2005 (181) E.L.T. 206 (S.C.) wherein the Supreme Court observed that e ven though, in normal parlance, a product might be considered to be an insectici de if that product had any therapeutic and prophylactic use, but for the purpose s of classification, that product could not fall under Chapter 38. The Apex Cour t clarified that any medicine or substance which treats disease or is a palliati ve or curative is therapeutic. Therefore, since Licel cured the infection or inf estation of lice in human hair, it was therapeutic. Further, it was also prophyl actic in as much as it prevented disease which would follow from infestation of lice. Thus, the Apex Court held that Licel was a product which was used for therap eutic and prophylactic purposes. It would thus be a Medicament within the meanin g of the term "Medicament" in Note 2 of Chapter 30 and would be excluded from Ch apter 38. Applying the ratio of the above decision, MICEL will be classified as a medicament under Tariff subheading 3003.10 and not as an insecticide under Tarif f sub-heading 3808.10.

3 VALUATION OF EXCISABLE GOODS 3.1 BASIS OF VALUATION The excisable goods are those goods which are charged to duty as per the Tariff. The duty is payable on the basis of any of the following : (a) Specific duty (b ) Duty based on value (i) Duty based on the Tariff Value (ii) Duty based on the value arrived at on the basis of valuation u/s 4. (iii) Duty based on Maximum Re tail Price (MRP) 3.1.1 Specific duty: In the case of some goods, duty is payable on the basis of certain unit, length, weight, volume, etc. For instance, duty p ayable on cigarettes is on the basis of length. However, this method of levying duty demands frequent revisions in order to increase revenue since while the pri ces may be increasing, the duty would remain the same quantum when based on leng th. Since specific duties do not keep pace with inflation, more and more tariff entries are designed based on advalorem duty structure. Presently, specific rate s have been specified for: (i) cigarettes -on the basis of length (ii) matchesper 100 boxes or packs (iii) sugar -on the basis of quintal (iv) marble slabs an d tiles- on the basis of square metre (v) colour TV (only when MRP is not marked on the package or it is not the sale consideration) -on the basis of screen siz e in cm (vi) cement clinkers on the basis of per tonne (vii) molasses on the basis of per ton 3.1.2 Duty based on value (Ad valorem duty): In the case of duties c harged on the basis of value, such value may be charged on either of the followi ng basis :

3.2 Central Excise (a) Duty as a percentage of Tariff value fixed by the Central Government u/s 3(2 ) of the Central Excise Act, 1944 The Central Government is empowered to notify the values of goods which will be chargeable to ad valorem duty as per Central E xcise Tariff Act, 1975. In such a case, the task is easy since the value is alre ady fixed. For example, Central Government has fixed tariff value for pan masala and readymade garments. The Central Government has also got the power to alter the tariff value once fixed. The Central Government may fix different values for different classes or descriptions of the same excisable goods. The Central Gove rnment can also fix different values for same class or description of the goods but produced or manufactured by different classes of producers or manufacturers. (b) Duty as percentage of Assessable Value determined in accordance with sectio n 4 of the Central Excise Act, 1944 (Ad valorem duty). Section 4 deals with the valuation of goods which are chargeable to duty on the basis of ad valorem. Prio r to 1 st July 2000 the valuation under this section was based on the principle of normal price which was based on the prices at which manufacturer sold the goods . Since 1 st July 2000, the new concept of transaction value has been brought in to the central excise law as a precursor to introduction of full fledged VAT in the country. (c) Duty may also be fixed on the basis of maximum retail price af ter giving permissible deductions. This has been done under section 4A on many m ass consumption products where the retail price and wholesale price of goods are at wide variance and the Government wants to raise revenues knowing that the ma nufacturer has shifted much of the overheads away from the manufacturing locatio n. The valuation under section 4 and also section 4A (MRP valuation) are discuss ed in detail in the coming paragraphs. 3.1.3 The scheme of valuation in general can be summarised in the form of the chart provided as given on page 3.3. 3.2 VA LUATION UNDER SECTION 4 (AD VALOREM) With the intention of making the valuation mechanism simple, from 1 st July 2000 valuation mechanism based on normal price was replaced by a user friendly and com mercially acceptable new mechanism based on transaction value. Valuation provision s are contained in section 4. Section 4 reads as under: 4(1) Where under this Act , the duty of excise is chargeable on any excisable goods with reference to thei r value, then, on each removal of the goods, such value shall (a) in a case wher e the goods are sold by the assessee, for delivery at the time and

Valuation of Excisable Goods 3.3 place of the removal, the assessee and the buyer of the goods are not related an d the price is the sole consideration for the sale, be the transaction value; (b ) in any other case, including the case where the goods are not sold, be the val ue determined in such manner as may be prescribed. Explanation For the removal o f doubts, it is hereby declared that the price-cumduty of the excisable goods so ld by the assessee shall be the price actually paid to him for the goods sold an d the money value of the additional consideration, if any, flowing directly or i ndirectly from the buyer to the assessee in connection with the sale of such goo ds, and such price-cum-duty, excluding sales tax and other taxes, if any, actual ly paid, shall be deemed to include the duty payable on such goods. Chart showin g the scheme of valuation under Central Excise Valuation under Central Excise Are tariff values being fixed under Section 3(2)? Yes Valuation under Section 3(2) No Are the goods notified for valuation with reference to retail sale price? Yes Valuation under Section 4A No Valuation Section 4 under [Refer to page 3.2 (para 3.1.3)]

3.4 Central Excise (2) The provisions of this section shall not apply in respect of any excisable g oods for which a tariff value has been fixed under sub-section (2) of section 3. (3) (a) (b) (i) (ii) For the purpose of this section assessee means the person wh o is liable to pay the duty of excise under this Act and includes his agent; per sons shall be deemed to be related if they are inter-connected undertakings they a re relatives (iii) amongst them the buyer is a relative and a distributor of the assessee or a sub distributor of such distributor (iv) they are so associated that they have interest, directly or indirectly, in the business of each other. Explanation : In this clause (i) (ii) inter-connected undertakings shall have the meaning assigned to it in clause (g) of section 2 of the Monopolies and Restrict ive Trade Practices Act, 1969; and relative shall have the meaning assigned to it in clause (41) of section 2 of the Companies Act, 1956; (i) (ii) a factory or an y other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty. a warehouse or any other place or premises wh erein the excisable goods have been permitted to be deposited without payment of duty from where such goods are removed. (c) place of removal means (iii) a depot, premises of a consignment agent or any other place or premises fr om where the excisable goods are to be sold after their clearance from the facto ry. (cc) time of removal, in respect of the excisable goods removed from the place of removal referred to in sub-clause (iii) of clause (c), shall be deemed to be the time at which such goods are cleared from the factory. (d) transaction value means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with th e sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertisi ng or publicity, marketing and selling organization expenses, storage, outward h andling,

Valuation of Excisable Goods 3.5 servicing, warranty, commission or any other matter; but does not include the am ount of duty of excise, sales tax and other taxes, if any, actually paid or actu ally payable on such goods. Section 3(1) of the Act is the charging section, and the goods are chargeable with rate of duty as specified in the Central Excise T ariff Act, 1975. The rates specified in this Tariff for most of the goods are ad valorem and hence the valuation of the goods becomes most important. The scheme of valuation under section 4 can be put in the form of chart provided below. Sc heme of Valuation under section 4 Scheme under Sec. 4 Duty chargeable with reference to value where the value at which goods are sold by assessee to be the Transaction value Goods not sold or any of the four conditions is not fulfilled - Central Excise V aluation (DPEG) Rules, 2000 Delivery at the time of removal Delivery at the place of removal Buyer being not related person Price is the sole consideration

3.6 Central Excise 3.3. (a) (b) RELATED PERSONS they are inter-connected undertakings; they are relatives; Section 4(3) (b) states that persons shall be deemed to be related if : (c) amongst them the buyer is a relative and distributor of the assessee or a su bdistributor of such distributor; or (d) they are so associated that they have i nterest directly or indirectly in the business of each other. Inter-connected un dertakings are defined to have the same meaning as in the MRTP Act and relative to have the same meaning as the Companies Act, 1956. 3.3.1 "Inter-connected unde rtakings" means two or more undertakings which are inter-connected with each oth er in any of the following manners, namely:(i) if one owns or controls the other , (ii) where the undertakings are owned by firm, if such firms have one or more common partners, (iii) where the undertakings are owned by bodies corporate,(a) if one body corporate manages the other body corporate, or (b) if one body corpo rate is a subsidiary of the other body corporate, or (c) if the bodies corporate are under the same management, or (d) if one body corporate exercises control o ver the other body corporate in any other manner; (iv) where one undertaking is owned by a body corporate and the other is owned by a firm, if one or more partn ers of the firm,(a) hold, directly or indirectly, not less than fifty per cent o f the shares, whether preference or equity, of the body corporate, or (b) exerci se control, directly or indirectly, whether as director or otherwise, over the b ody corporate. (v) if one is owned by a body corporate and the other is owned by firm having bodies corporate as its partners, if such bodies corporate are unde r the same management, (vi) if the undertakings are owned or controlled by the s ame person or (by the same group),

Valuation of Excisable Goods 3.7 (vii) if one is connected with the other either directly or through any number o f undertakings which are inter-connected undertakings within the meaning of one or more foregoing sub-clauses. Explanation I - For the purpose of this Act, two bodies corporate shall be deemed to be under the same management,(i) if one such body corporate exercises control over the other or both are under the control o f the same group or any of the constituents of the same group; or (ii) if the ma naging director or manager of one such body corporate is the managing director o r manager of the other; or (iii) if one such body corporate holds not less than one fourth of the equity shares in the other or controls the composition of not less than one fourth of the total membership of the Board of Directors of the ot her; or (iv) if one or more directors of one such body corporate constitute, or at any time within a period of six months immediately preceding the day when the question arises as to whether such bodies corporate are under the same manageme nt, constituted (whether independently or together with relatives of such direct ors or the employees of the first mentioned body corporate) one-fourth of the di rectors of the other; or (v) if the same individual or individuals belonging to a group, while holding (whether by themselves or together with their relatives) not less than one-fourth of the equity shares in one such body corporate also ho ld (whether by themselves or together with their relatives) not less than one-fo urth of the equity shares in the other; or (vi) if the same body corporate or bo dies corporate belonging to a group, holding, whether independently or along wit h its or their subsidiary or subsidiaries, not less than one-fourth of the equit y shares in one body corporate, also hold not less than one-fourth of the equity shares in the other; or (vii) if not less than one-fourth of the total voting p ower in relation to each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group or by the same bodies corporate bel onging to a group, or jointly by such individual or individuals and one or more of such bodies corporate; or (ix) if the directors of one such body corporate ar e accustomed to act in accordance with the directions or instructions of one or more of the directors of the other, or if the directors of both the bodies corpo rate are accustomed to act in accordance with the directions or instructions of an individual, whether belonging to a group or not. Explanation II - If a group exercises control over a body corporate, that body corporate

3.8 Central Excise and every other body corporate, which is a constituent of or controlled by, the group shall be deemed to be under the same management. Explanation III - If two or more bodies corporate under the same management hold, in the aggregate, not l ess than one-fourth of equity share in any other body corporate, such other body corporate shall be deemed to be under the same management as the first mentione d bodies corporate. Explanation IV - In determining whether or not two or more b odies corporate are under the same management, the shares held by financial inst itutions in such bodies corporate shall not be taken into account. Illustration Undertaking N is inter-connected with undertaking A and undertaking C is inter-c onnected with undertaking B. Undertaking C is inter-connected with undertaking A ; if undertaking D is inter-connected with undertaking C, undertaking D will be inter-connected with undertaking B and consequently with undertaking A; and so o n. Therefore we can understand that interconnected undertakings under MRTP Act i s very wide enough to cover many types of connections including the holding and subsidiary company. Under Central Excise Valuation (Determination of Price of Ex cisable Goods) Rules, 2000, the applicability of the definition of inter-connect ed undertakings has been considerably restricted to cover the cases listed in (b ), (c) and (d) of the above paragraph or where the companies are holding and sub sidiary companies. 3.3.2 Relative : Coming now to the definition of relative, one has to read sections 2(41), 6 and schedule I-A of the Companies Act, 1956 togeth er. Section 2(41) of Companies Act, 1956 defines relative to mean persons related as per section 6 and no other. Section 6 of the said Act, states that the follow ing are relatives :(a) members of a HUF; (b) husband and wife; (c) persons relat ed to one another in the manner indicated in Schedule I-A. The Schedule is a det ailed one and enumerates 22 different relationships. Thus, all of the above cate gories will be covered within the definition of relatives and transactions betwe en an assessee and such relatives will be covered within the ambit of section 4( 4) (c) of the Act. 3.3.3 Distributor : Section 4(4)(c) governing related person incorporates the word distributor. The phrase relative and a distributor of the ass essee as occurring in the section apparently implies that even a distributor shou ld be a related person. In its landmark decision in the Bombay Tyres Internation als case, the Supreme Court has given

Valuation of Excisable Goods 3.9 a narrow and interesting interpretation of this expression. The Court held that the words a relative and distributor of an assessee, do not refer to any distribut or but they are limited only to a distributor who is also a relative of the asse ssee, within the meaning of the Companies Act, 1956. So analyzing the definition of relative read with the decision given by Supreme Court in Bombay Tyres case, if a company or a firm is appointed as a distributor, it can never be related p erson since an impersonal body cannot be treated as a relative under section 4(4 )(c). The words relative & a distributor of the assessee do not refer to any distr ibutor but the distributor who is relative of the assessee within the meaning of the Companies Act, 1956 - UOI v. Bombay Tyre International Ltd. 1983 (14) E.L.T . 1986 (S.C.) Price charged by the manufacturer to the distributor is to be asse ssable value, when the dealings are on principal to principal basis - UOI v. Mah indra & Mahindra Ltd. 1989 (43) E.L.T. 611 (Bom.) 3.3.4 Mutuality of business in terest : In U.O.I Vs. Atic Industries Ltd. 1984 (17) E.L.T. 323, The Supreme Cou rt has held that in order to attract the first part of the definition, the asses see and the person alleged to be a related person must have interest, direct or indirect, in the business of each other. Each of them must have direct or indire ct interest in the business of the other. The quality and degree of interest whi ch each has in the business of the other may be different, the interest of the o ne in the business of the other may be direct, while interest of the latter in t he business of the former may be indirect. That would not make any difference so long as each has got some interest, direct or indirect, in the business of the other . In U.O.I Vs. Hind Lamp 1989 (43)ELT 161, the Supreme Court reiterated th e principle that it is not enough that the assessee has an interest, direct or i ndirect, in the business of the assessee. Both must have an interest in the busi ness of each other. The degree and quality of their respective interests in each other may be different. In CCE Vs. Vikram Engineering Co. 1989 (39) ELT 143, th e Tribunal followed the decision in Atics case by holding that the degree of mutu al interest was not material in order to attract the definition but the existenc e of some interest was all that was required. Corporate concern and a partnershi p concern were not related persons, and where the price charged from a person wa s the same as charged from others, then such a person could not be construed as a favored buyer. Weikfield Products Co. Pvt. Ltd. Vs. CCE 1990 (29) ECR 321 Sale s of the entire quantity of excisable products through a single agency, which al so undertook advertising of such products would not, per se make the manufacture r and the agency as related persons since the mutuality of business interest was not proved Pepsi

3.10 Central Excise Foods (P) Ltd. Vs. CCE 1993(44) ECR 599. The mere fact of th ere being a common registered office and common usage of telephone and gowdown w as not sufficient to prove common ownership between two units so as to make them related persons. See Cheryl Laboratories Vs. CCE 1994 (50) ECR 194. 3.3.5 Summa ry of various decisions on this issue is given in the following table. Decision The definition of related person requires mutuality of interest in the busines s to be proved. The mutuality of business interest between the manufacturer and his buyer can be shown only if one has special interest in the promotion or deve lopment of the business of another. If one of the directors of the buyer company is also chairman of the manufacturing company, it can not be said that they hav e mutual interest in the business. A limited company can not have indirect inter ests in the business carried by one of its shareholders. The words relative & a d istributor of the assessee do not refer to any distributor but the distributor wh o is relative of the assessee within the meaning of the Companies Act, 1956. Goo ds sold to dealers under agreement. Dealers to have own show room, repair shop e tc. Dealer not a related person. Citation UOI v. Atic Industries Ltd. 1984 (17) E.L.T. 323(S.C.) Cibatul Ltd. v. UOI 1979 (4) E.L.T. (J407) (Guj.) Jay Engg. Works Ltd. v. UOI 1981 (8) E.L.T. 284 (Del.) Collector v. T.I. Miller Ltd. 1988 (35) E.L.T. 8 (S.C.) UOI v. Bombay Tyre International Ltd. 1983 (14) E.L.T. 1986 (S.C.) Moped India Ltd v. AC 1986 (23) E.L.T. 8 (S.C.)

Valuation of Excisable Goods 3.11 Goods sold to dealers having no funds of their own or business premises. Dealers merely a sham and to be ignored. Once existence of mutual interest is establish ed, the extent of such interest is not material. Merely because, goods are manuf actured with customer s brand name and entire production sold to customer, does not mean that sales are to related person. Regional sale offices/godowns are not related persons. After sales service by dealers during warranty period do not m ake such dealers related persons. Price charged by the manufacturer to the distr ibutor, to be assessable value, when the dealings are on principal to principal basis. "Main dealer" can not be treated as distributor or related person, when g oods are sold through main dealer as well as independent purchasers. Sale of ent ire production to one buyer does not make Buyer & Seller related persons. Custom ers can not be treated as related, if the sales are on principal to principal ba sis to a shareholding company and associate companies of foreign shareholding co mpanies. JK Cotton Spg. & Weaving Ltd v. 1997 (91) E.L.T. 534 (SC). Mills Co. CCE UOI v. Atic Inds. Ltd. 1984 (17) E.L.T. 323 (S.C.) Ceam Electronics P. Ltd. v. UOI 1991 (51) E.L.T. 309 (Bom.) Indo-National Ltd. v. UOI 1979 (4) E.L.T. (J334) (A. P.) S.M. Chemicals & Electr onics v. R. Parthasarathi 1980 (6) E.L.T. 197 (Bom.) UOI v. Mahindra & Mahindra Ltd. 1989 (43) E.L.T. 611 (Bom.) GOI v. Ashok Leyland Ltd. 1983 (14) E.L.T. 2168 (Mad.) Ceam Electronics P. Ltd. v. UOI 1991 (51) E.L.T. 309 (Bom.) UOI v. Hind Lamps Lt d. 1989 (43) E.L.T. 161 (S.C.)

3.12 Central Excise Merely because goods are manufactured with customer s brand name and entire prod uction sold to him, it can not be treated as a sale to a related person. Brand n ame value can not be added to the value of goods manufactured by manufacturer fo r brand name owner unless it is proved that they are related persons. Whole sale price at which goods are sold to the buyer to be the assessable value, when goo ds are manufactured under agreement with buyer s trade mark. Buyer to be held as related person when manufacturer was to accept back unsold stock etc. and the b uyer s price held to be assessable value. Partner of one of the dealers related to director of the manufacturing company to whom only 34% - 40% of production is sold, can not be treated as related person and the price at which goods are sol d to him is assessable value. Dealers can not be treated as relative of the manu facturer or even otherwise, when the dealer is required to deposit specific sum for each moped, getting fixed commission and all payments are through bank. When 90% of the goods are sold to the wholesaler, and only 10% to the related person , the assessable value will be price charged to wholesale dealers. UOI v. Play World Electronics P. Ltd. 1989 (41) E.L.T. 368 (S.C.) UOI v. Purolator India Ltd. 1989 (24) ECR 216 (S.C.) UOI v. Cibatul Ltd. 1985 (22) E.L.T. 302 (S.C.) Snow White Indl. Corpn. v. Collector 1990 (46) E.L.T. 3 (S.C.) UOI v. Kantilal Chunilal 1986 (26) E.L.T. 289 (S.C.) Mopeds India Ltd. v. Asst. Collector 1986 (23) E.L.T. 8 (S.C.) Kirloskar Cummins Ltd. 1991(51) E.L.T. 325(Bom.) v. UOI

Valuation of Excisable Goods 3.13 Department can lift the corporate veil even if the assessee concerned are limite d companies. Holding and subsidiary companies not related persons unless tests o f mutuality and extracommercial consideration shown. Note : Not applicable after 1-7-2000. 3.4 PLACE OF REMOVAL Calcutta Chromotype Ltd v. CCE 1998 (99) E.L.T. 202 (SC) Dawn Apparels v. UOI 1989 (43) E.L.T. 401 (Bom) and Ralliwolf Ltd v. UOI 1992 (5 9) E.L.T. 220 (Bom.) Section 4(3)(c) defines the place of removal to mean (a) a factory or any other pl ace or premises of production or manufacture of the excisable goods; (b) a wareh ouse or any other place or premises wherein the excisable goods have been permit ted to be deposited without payment of duty from where such goods are removed. ( c) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory. 3.5 PRICE IS THE SOLE CONSIDERATION The price should be the sole consideration for sale. Any other consideration in ca sh or in kind which forms part of the transaction has to be converted in monetar y terms and added back to the price. Each such transaction has to be at arms leng th and on principal to principal basis. If the transaction is not on principal t o principal basis, the charges paid are to be added to the transaction value of the goods. When the sale is at arms length, sale price of subsequent seller is no t relevant and does not matter that dealings were confined only to two buyers Atic Inds. Ltd. v. H.H. Dave, Asst. Collector 1978 (2) E.L.T. (J444) (S.C) Relat ionship between manufacturer & sole distributor though a special one is not a pr oof by itself to show that price is favourable price - UOI v. Hind Lamps Ltd. 19 81 (8) E.L.T. 11 (Del.) Price declared by the assessee to be acceptable even tho ugh it is less than cost of raw material, manufacturing cost & manufacturing pro fit; when the transactions are at arms length - Guru Nanak Refrigeration Corpn v. CCE 1996 (81) E.L.T. 290 (T) 3.6 INGREDIENTS OF TRANSACTION VALUE It would be important to see that the definition of transaction value is an all inclusive

3.14 Central Excise definition which seems to extend its scope beyond the normal boundaries of central excise levy. While it is true that such a definition is n ecessary when we have a full fledged VAT system, it is rather premature to inclu de so many items within the parameters of excise, more so when the assesses are paying sales tax and service tax. It is important to note that the Supreme Court has held in the context of customs law in Associated Cement Companies Ltd. v. C C 2000 (121) ELT 21 that the concept of transaction value is quite different fro m the concept of price and such value can include many items which may classical ly have been understood to be part of the sale price. Let us analyse the definit ion of transaction value through the use of flow charts. And includes Transaction Value means the price actually paid or payable when sol d In addition to the price any amount that the buyer is liable to pay to or on beh alf of the assessee by reason of or in connection with the sale whether payable at the time of sale or any time thereafter The definition also gives an illustration of what amounts are included as additi ons to price which the buyer may be liable to pay to or on behalf of the assesse e. However, the definition specifically states as including but not limited to whi ch clearly means that the items included in the definition are only illustrative and more may be includible.

Valuation of Excisable Goods 3.15 The items which are included in the definition Advertising and publicity Marketing and selling Storage Outward Handling Servici ng Warranty Commission Any other matter It is clear that the above are includible only if the buyer is liable to pay for or on behalf of the assessee. However, the amounts like excise duty, sales tax and other taxes are not includible if actually paid or payable. It would be wort hwhile to examine the issue of includibility or otherwise of certain items. Item s of Cost 1. Advertising and publicity 2. Warranty 3. Marketing and selling 4. S torage and outward handling 5. Servicing 6. Commission 7. Freight Yes Yes Yes Ye s Yes Yes No. Since it is an activity being incidental to manufacturing. See Sup reme Courts decision in CCE v. Indian Oxygen Ltd 1988 (36) E.L.T. 730 (SC) Inclu dibility or otherwise

3.16 Central Excise 8. Discounts (Trade and Cash) No. Since the same is already factored into the definition of transaction value. See also CBEC Circular No. 354/81/2000-TRU, dated 30-62000 itself clarifies tha t reference to discounts in the definition of transaction value is not relevant since duty is to be charged on net price after allowing discounts. However, the Circular states that the discount should be actually passed on to the buyers. No . Since the activity would not be related to sale of goods and can be done indep endently. Ratio of decision in Thermax Ltd v. CCE 1998 (99) E.L.T. 481 would app ly. Yes. However, in our opinion, certain packing like tankers sent to deliver g oods may not be includible. The distinction between primary/secondary packing an d safe packing will no more be relevant. No. Specifically excluded by section. N o. No. See decision of Supreme Court in Shriram Bearing Ltd v. CCE - 1997 (91) E .L.T. 255. Yes. [CBE&C Circular No. 763/79/2003 C.X. dated 21.11.2003] 9. Installation and Commissioning 10. Packing 11. Taxes and duties 12. Interest on deposits, advances. 13. Accessories 14. Dharmada However, the above is not conclusive in all cases and would be subjected to inte rpretation of the Courts in future time to come. 3.7 SITUATIONS WHERE TRANSACTIO N VALUE DOES NOT APPLY As given in the chart for the valuation scheme under section 4 there are four co nditions which have to be fulfilled. (a) There should be sale of goods (b) The g oods sold should be for delivery at the time and place of removal

Valuation of Excisable Goods (c) The assessee and the buyer of the goods are not to be related persons (d) The price should be the sole consideration for the sa le. 3.17 In those cases where any of the above said requirements are missing, the assessa ble value shall be determined on the basis of the Central Excise Valuation (Dete rmination of Price of Excisable Goods) Rules, 2000 notified under Section 4(1)(b ) by notification No. 45/2000-CE (NT), dated 30.6.2000. 3.8 VALUATION RULES, 200 0 CENTRAL EXCISE VALUATION (DETERMINATION OF PRICE OF EXCISABLE GOODS) RULES, 20 00 Notification No. 45/2000-C.E. (N.T.) dated 30-6-2000 [Effective from 1-7-2000 ] RULE - 1. (1) These rules may be called the Central Excise Valuation (Determin ation of Price of Excisable Goods) Rules, 2000. (2) They shall come into force o n and from the 1 st day of July, 2000. CHAPTER I PRELIMINARY The text of the rules is given for the reference. RULE - 2. In these rules, unless the context otherwise requires,(a) "Act" means the Central Excise Act, 1944 (1 of 1944); (b) "normal transaction" means the tra nsaction value at which the greatest aggregate quantity of goods are sold; (c) " value" means the value referred to in Section 4 of the Act; (d) words and expres sions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act. CHAPTER II DETERMINATION OF V ALUE RULE - 3. The value of any excisable goods shall, for the purposes of claus e (b) of subsection (1) of section 4 of the Act, be determined in accordance wit h these rules.

3.18 Central Excise RULE - 4. The value of the excisable goods shall be based on the value of such goods sold by the assessee for delivery at any other time nea rest to the time of the removal of goods under assessment, subject, if necessary , to such adjustment on account of the difference in the dates of delivery of su ch goods and of the excisable goods under assessment, as may appear reasonable t o the proper officer. RULE - 5. Where any excisable goods are sold in the circum stances specified in clause (a) of sub-section (1) of section 4 of the Act excep t the circumstance in which the excisable goods are sold for delivery at a place other than the place of removal, then the value of such excisable goods shall b e deemed to be the transaction value, excluding the cost of transportation from the place of removal up to the place of delivery of such excisable goods. Explan ation 1 cost of transportation includes(i) the actual cost of transportation; and ( ii) in case where freight is averaged the cost of transportation calculated in a ccordance with generally accepted principles of costing. Explanation 2- For remo val of doubts, it is clarified that the cost of transportation from the factory to the place of removal, where the factory is not the place of removal, shall no t be excluded for the purpose of determinig the value of excisable goods. RULE 6. Where the excisable goods are sold in the circumstances specified in clause (a) of sub section (1) of section 4 of the Act except the circumstance where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money val ue of any additional consideration flowing directly or indirectly from the buyer to the assessee. Explanation1 - For removal of doubts, it is hereby clarified t hat the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of change or at reduce d cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payab le, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sa le of the goods being valued and aggregated accordingly, namely:(i) value of mat erials, components, parts and similar items relatable to such goods; (ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and sim ilar items used in the production of such goods; (iii) value of material consume d, including packaging materials, in the production of such goods;

Valuation of Excisable Goods 3.19 (iv) value or engineering, development, art work, design work and plans and sket ches undertaken elsewhere than in the factory of production and necessary for th e production of such goods. Explanation 2- Where an assessee receives any advanc e payment from the buyer against delivery of any excisable goods, no notional in terest on such advance shall be added to the value unless the Central Excise Off icer has evidence to the effect that the advance received has influenced the fix ation of the price of the goods by way of charging a lesser price from or by off ering a special discount to the buyer who has made the advance deposit. Illustra tion 1: X, an assessee, sells his goods to Y against full advance payment at Rs. 100/- per piece. However, X also sells such goods to Z without any advance payme nt at the same price of Rs.100/- per piece. No notional interest on the advance received by X is includible in the transaction value. Illustration 2: A, an asse ssee, manufactures and supplies certain goods as design and specification furnis hed by B at a price of Rs.10 lakhs. A takes 50% of the price as advance against these goods and there is no sale of such goods to any other buyer. There is no e vidence available with the Central Excise Officer that the notional interest on the advance has resulted in lowering of the prices. Thus, no notional interest o n the advance received shall be added to the transaction value. RULE - 7. Where the excisable goods are not sold by the assessee at the time and place of remova l but are transferred to a depot, premises of a consignment agent or any other p lace or premises (hereinafter referred to as "such other place") from where the excisable goods are to be sold after their clearance from the place of removal a nd where the assessee and the buyer of the said goods are not related and the pr ice is the sole consideration for the sale, the value shall be the normal transa ction value of such goods sold from such other place at or about the same time a nd, where such goods are not sold at or about the same time, at the time nearest to the time of removal of goods under assessment. RULE - 8. Where the excisable goods are not sold by the assessee but are used for consumption by him or on hi s behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such go ods. CBE&C, vide Circular No. 692/8/2003 dated 13-2-2003, has clarified that for the purpose of valuation of excisable goods in case of captive consumption as p er Rule 8 of Central Excise Valuation Rules, 2000, calculation of cost of produc tion should be as per CAS-4 issued by Institute of Cost and Works Accountants of India. Cost Accounting Standard 4 is given below in a summarized form. Cost of production will include various cost components as defined in Cost Accounting

3.20 Central Excise Standard-1 (Classification of Cost CAS-1). The various cost co mponents are: Direct Material Cost + Direct Labour Cost + Direct Expenses = PRIM E COST Prime Cost + Production Overheads + Administration Overheads + Cost of Pr oduction + Selling Cost + Distribution Cost = Cost of Sales + Profit = Selling P rice Research & Development COST OF SALES Expenses (Apportioned) = Cost of Production Cost of Production: Cost of production shall consist of Material Consumed, Direc t Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Re search and Development Cost, Packing cost, and Administrative Overheads relating to production. To arrive at cost of production of goods dispatched for captive consumption, adjustment for Stock of work-in-Process, finished goods, recoveries for sales of scrap, wastage etc shall be made. Material Consumed shall include materials directly identified for production of goods such as indigenous materia ls, imported materials, bought out items, self manufactured items, process mater ials and other items Cost of material consumed shall consist of cost of material , duties and taxes, freight inwards, insurance, and other expenditure directly a ttributable to procurement. Trade discount, rebates and other similar items will be deducted for determining the cost of materials. Cenvat credit, credit for co untervailing customs duty, Sales Tax set off, VAT, duty draw back and other simi lar duties subsequently recovered/ recoverable by the enterprise shall also be d educted. Direct wages and salaries shall include house rent allowance, overtime and incentive payments made to employees directly engaged in the manufacturing a ctivities. Direct wages and salaries include fringe benefits such as contributio n to provident fund and ESIS, bonus/ex-gratia payment to employees, provision fo r retirement benefits such as gratuity and superannuation, medical benefits, sub sidised food, leave with pay and holiday payment, leave encashment and other all owances such as childrens education allowance, conveyance allowance which are pay able to employees in the normal course of business etc. Direct expenses are the expenses other than direct material cost and direct employees

Valuation of Excisable Goods costs which can be identified with the product. 3.21 Direct expenses include cost of utilities such as fuel, power, water, steam etc, royalty based on production, technical assistance/know how fees, amortized cost of moulds, patterns, patents etc, job charges, hire charges for tools and equipm ent, and charges for a particular product designing etc. Works overheads are the indirect costs incurred in the production process. Works overheads include cons umable stores and spares, depreciation of and machinery, factory building etc, l ease rent of production assets, repair and maintenance of plant and machinery, f actory building etc, indirect employees cost connected with production activitie s, drawing and designing department cost., insurance of plant and machinery, fac tory building, stock of raw material & WIP etc., amortized cost of jigs, fixture s, tooling etc and service department cost such as tool room, engineering & main tenance, pollution control etc. Quality control cost is the expenses incurred re lating to quality control activities for adhering to quality standard. These exp enses shall include salaries & wages relating to employees engaged in quality co ntrol activity and other related expenses. Research and development cost incurre d for development and improvement of the process or the existing product shall b e included in the cost of production. Administrative overheads in relation to pr oduction activities shall be included in the cost of production. Administrative overheads in relation to activities other than manufacturing activities e.g. mar keting, projects management, corporate office expenses etc. shall be excluded fr om the cost of production. Packing cost includes both cost of primary and second ary packing required for transfer/ dispatch of the goods used for captive consum ption. If product is transferred/dispatched duly packed for captive consumption, cost of such packing shall be included. Overheads shall be analysed into variab le overheads and fixed overheads. The variable production overheads shall be abs orbed in production cost based on actual capacity utilisation. The fixed product ion overheads and other similar item of fixed costs such as quality control cost , research and development costs, administrative overheads relating to manufactu ring shall be absorbed in the production cost on the basis of the normal capacit y or actual capacity utilization of the plant, whichever is higher. Normal Capac ity is the production achieved or achievable on an average over a period or seas on under normal circumstances taking into account the loss of capacity resulting from planned maintenance (CAS-2). Stock of work-in-progress shall be valued at cost on the basis of stages of completion as per the cost accounting principles. Similarly, stock of finished goods shall be valued at cost. Opening and closing stock of work-in-progress shall be adjusted for calculation of

3.22 Central Excise cost of goods produced and similarly opening and closing sto ck of finished goods shall be adjusted for calculation of goods despatched. In c ase the cost of a shorter period is to be determined, where the figures of openi ng and closing stock are not readily available, the adjustment of figures of ope ning and closing stock may be ignored. In case joint products are produced, join t costs are allocated between the products on a rational and consistent basis. I n case by-products are produced, the net realisable value of by-products is cred ited to the cost of production of the main product. For allocation of joint cost to joint products, the sales values of products at the split off point i.e. whe n the products become separately identifiable may become the basis. Some other b asis may also be adopted. For example, in case of petroleum products, each produ ct is assigned certain value based on its certain properties, may be calorific v alue and these values become the basis of apportionment of joint cost among petr oleum products. The production process may generate scrap or waste. Realized or realizable value of scrap or waste shall be credited to the cost of production. In case, scrap or waste does not have ready market and it is used for reprocessi ng, the scrap or waste value is taken at a rate of input cost depending upon the stage at which such scrap or waste is recycled. The expenses incurred for makin g the scrap suitable for reprocessing shall be deducted from value of scrap or w aste. Miscellaneous income relating to production shall be adjusted in the calcu lation of cost of production, for example, income from sale of empty containers used for despatch of the captively consumed goods produced under reference. Inpu ts received free of cost In case any input material, whether of direct or indire ct nature, including packing material is supplied free of cost by the user of th e captive product, the landed cost of such material shall be included in the cos t of production. The amortization cost of moulds, tools, dies & patterns etc rec eived free of cost shall be included in the cost of production. Interest and fin ancial charges being a financial charge shall not be considered to be a part of cost of production. Abnormal and non-recurring cost arising due to unusual or un expected occurrence of events, such as heavy break down of plants, accident, mar ket condition restricting sales below normal level, abnormal idle capacity, abno rmal process loss, abnormal scrap and wastage, payments like VRS, retrenchment c ompensation, lay-off wages etc. The abnormal cost shall not form the part of cos t of production.

Valuation of Excisable Goods Qty Q1 Q2 Quantity Produced (Unit of Measure) Quant ity Despatched (Unit of Measure) Particulars 3.23 Total Cost (Rs) Cost/ unit ( Rs) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Material Consumed Direct Wages and Salaries Direct Expenses Works Overheads Qual ity Control Cost Research & Development Cost Administrative Overheads (relating to production activity) Total (1 to 7) Add : Opening stock of Work - in Progress Less : Closing stock of Work -in- Progress Total (8+9-10) Less : Credit for Reco veries/Scrap/By-Products / misc income Packing cost Cost of production ( 11 - 12 + 13) Add: Inputs received free of cost Add: Amortised cost of Moulds, Tools, D ies & Patterns etc received free of cost Cost of Production for goods produced f or captive consumption (14 + 15 + 16) Add : Opening stock of finished goods Less : Closing stock of finished goods Cost of production for goods despatched (17 + 18 - 19) The cost sheet should be prepared in the format as per Appendix 1 or as near the reto as possible. Statement of Cost of Production of _____________ manufactured / to be manufactured during the period _____________ RULE - 9. When the assessee so arranges that the excisable goods are not sold by an assessee except to or t hrough a person who is related in the manner specified in either of sub-clauses (ii), (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, th e value of the goods shall be removal, to buyers (not being related person); or where such goods are not sold to such buyers, to buyers (being related person), who sells such goods in retail;

3.24 Central Excise Provided that in a case where the related person does not se ll the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner specified in rule 8. RULE - 10. When the assessee so arranges that the excisable goods are not sold by hi m except to or through an inter-connected undertaking, the value of goods shall be determined in the following manner, namely:(a) If the undertakings are so con nected that they are also related in terms of sub-clause (ii) or (iii) or (iv) o f clause (b) of sub-section (3) of section 4 of the Act or the buyer is a holdin g company or subsidiary company of the assessee, then the value shall be detemin ed in the manner prescribed in rule 9. Explanation- In this clause "holding comp any" and "subsidiary company" shall have the same meanings as in the Companies a ct, 1956 (1 of 1956); (b) in any other case, the value shall be detemined as if they are not related persons for the purpose of sub-section (1) of section 4. RU LE - 11. If the value of any excisable goods cannot be detemined under the foreg oing rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and sub-section (1) of sec tion 4 of the Act. 3.9 ANALYSIS OF THE VALUATION RULES The salient features of the Valuation Rules are as under:According to rule 3 the valuation rules is invokable only when the condition in section 4(1)(b) is sati sfied that is to say when the valuation is not possible as per section 4(1)(a). When the goods are clearly valued according to section 4(1)(a) itself then there is no question of applying the valuation rules. Rule 4 requires adjustment for the differences in the time of removal and the time of delivery when the deliver y time is different from the time of removal. Rule 5 speaks of the conditions th at all the condition as per section 4(1)(a) which are mentioned earlier are fulf illed except for the condition that the place of delivery is different from the place of removal. In such circumstances the rule allows the adjustment for the t ransportation from the place of removal to the place of delivery. Old rule permi tted exclusion of only the actual cost of transportation from the place of remov al upto the place of the delivery. However, this exclusion was allowed only if t he cost of transportation was charged separately and such cost was shown separat ely in the invoice. The rule has been amended to omit the specific requirement f or showing the transportation cost separately in the invoice. Moreover, the actu al transportation cost may also now be

Valuation of Excisable Goods 3.25 excluded on an averaged or equalized basis. For this purpose, the average transp ortation cost shall be computed in accordance with the generally accepted princi ples of costing. Where necessary, the assessee may be asked to furnish certifica tion from a Cost Accountant, inter alia, showing the computations separately in respect of the exempted, non-excisable and specific rated products and the basis for apportionment for arriving at the average cost of transportation. However, no deduction shall be allowable whether on actual or equalized freight basis, fo r the cost of transportation from the factory to the point of removal (if other than the factory gate). Since as per the amended section 4, place of removal shall include a depot, the premises of the consignment agent as well as any other pla ce or premises from which the goods are to be sold after their clearance from th e factory, it may be noted that deduction in respect of the transportation cost from the factory premises to the depot or to any other place of removal shall no t be allowed. Rule 6 takes up another condition and continues to say that other conditions as said above are being fulfilled except for the condition of conside ration to be received for such goods. If the price received is not the sole cons ideration, then the rule requires to add the value of the additional considerati on whether directly or indirectly received (not necessarily from the buyer, it m ay be received even from the third party but which should have relation with the goods being transferred) to the transaction value. In Explanation 1 to Rule 6 i t is said that when any goods or services are given by the buyer free of cost or at concessional price, the value of such goods or service or the concession so received may be added or apportioned (in case such goods or service is used for the manufacture of more than one product) and should be included in the value of the finished goods. The examples given in the said explanation as to the goods and services are : (a) value of materials, components, parts and similar items r elatable to such goods; (b) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used in the production of such good s; (c) value of material consumed, including packaging materials, in the product ion of such goods; (e) value or engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production an d necessary for the production of such goods Rule 7 says that in cases where the goods are not sold at the factory gate or at the warehouse but they are transfe rred by the assessee to his depots or consignment agents or any other place for sale, the assessable value in such case for the goods cleared from

3.26 Central Excise factory/warehouse shall be the normal transaction value of s uch goods at the depot, etc. at or about the same time on which the goods as bei ng valued are removed from the factory or warehouse. It may be pertinent to take note of the definition of "normal transaction value" as given in the valuation rules. What it basically means is the transaction value at which the greatest ag gregate quantity of goods from the depots etc. are sold at or about the time of removal of the goods being from the factory/warehouse. If, however, the identica l goods are not sold by the assessee from depot/consignment agents place on the d ate of removal from the factory/warehouse, the nearest date on which such goods were sold or would be sold shall be taken into account. In either case if there are series of sales at or about the same time, the normal transaction value for sale to independent buyers will have to be determined and taken as basis for val uation of goods at the time of removal from factory/warehouse. It follows from t he Valuation Rules that in such categories of cases also if the price charged is with reference to delivery at a place other than the depot, etc. then the actua l cost of transportation will not be taken to be a part of the transaction value and exclusion of such cost allowed on similar lines as discussed earlier, when sales are effected from factory gate/warehouse. In Rule 8 as a measure of simpli fication, it has been decided to value goods which are captively consumed on cos t construction method only as there have been disputes in adopting values of com parable goods. The assessable value of captively consumed goods will be taken at 110% of the cost of manufacture of goods even if identical or comparable goods are manufactured and sold by the same assessee. The cost of production for this purpose shall be computed in accordance with Cost Accounting Standard-4 issued b y Institute of Cost and Works Accountants of India. The concept of deemed profit for notional purposes has thus been done away with and a margin of 10% by way o f profit etc. is prescribed in the rule itself for ease of assessment of goods u sed for captive consumption. Rule 9 speaks of the situation where goods are sold only through related person (except inter-connected undertakings which is dealt in Rule 10). In such cases the transaction value is not applicable. Here, the v alue to be adopted will be the price at which such related person sells to unrel ated person. If such related person sells it to another related person, then the price at which the second related person sells to unrelated person. Further, it is said when such related person uses such goods in the manufacture of other go ods (captively consumed) then the valuation will be based on the principle of co st plus 10% as per Rule 8. It is important to note that the definition of relate d persons includes "inter-connected undertakings" as defined in the Monopolies a nd Restrictive Trade Practices Act, 1969.

Valuation of Excisable Goods 3.27 The definition of inter-connected undertaking in the said Act is comprehensive a nd includes two or more undertakings which are inter-connected with each other i n any of the ways such as if one owns or controls the other, or where the undert akings are owned by firm, if such firms have one or more common partners, etc. R ule 10 provides that even if the assessee and the buyer are inter-connected under takings, the transaction value will be "rejected" only when they are "related" in the following manner: (a) They are relatives. (b) The buyer is a relative and a distributor of the assessee, or sub-distributor of such distributor. (c) They h ave a direct or indirect interest in the business of each other. In other cases, they will not be considered related. In other words the definition of the inter -connected undertaking as per MRTP Act, 1969 is restricted only to Holding and S ubsidiary company and the other types of relationship mentioned in (a), (b) and c above. "Transaction value" could then form the basis of valuation provided oth er two conditions, namely, price is for delivery at the time and place of remova l and the price is the sole consideration for sale are satisfied. If any of the two aforesaid conditions are not satisfied then, quite obviously, value in such cases will be determined under the relevant rule. Rule 11 is a residuary rule, w hich says when the value of any excisable goods cannot be determined under any o f the aforesaid rules, the value shall be determined using reasonable means whic h are consistent with the principles and general provisions of these rules and s ub-section (1) of section 4 of the Act. The rules can be summarized through the chart on page 3.30. With reference to the Valuation Rules, the Central Board of Excise and Customs has issued a Circular No.643/34/2002-Cx dated 1 st July 2002 wherein the following clarifications are issued: a. With reference to the term " greatest aggregate quantity" used to define the term "normal transaction value" used in Rules 7 and 9 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, the Board clarifies that the time period should b e taken as the whole day and the transaction value of the "greatest aggregate qu antity" would refer to the price at which the largest quantity of identical good s are sold on a particular day, irrespective of the number of buyers. In case th e "normal transaction value" from the depot or other place is not ascertainable on the day identical goods are being removed from the factory/warehouse, the nea rest day when clearances of the goods were affected from the depot or other plac e should be taken into consideration

3.28 Central Excise b. In cases where the vehicle is owned by the manufacturer, the cost of transportation can be calculated through costing method following th e accepted principles of costing. A cost certificate from a certified Cost Accou ntant/Chartered Accountant/Company Secretary, may be accepted. The cost of trans portation should, however, be separately shown in the invoice. c. As per Rule 5 of the Valuation Rules the actual cost of transportation from the place of remov al up to the place of delivery is only to be excluded. If the assessee is recove ring an amount from the buyer towards the cost of return fare of the empty vehic le from the place of delivery, this amount will not be available as a deduction. Therefore, unless it is specifically mentioned in the invoice that the transpor tation charges indicated therein do not include cost of transportation for the r eturn journey of the empty truck/vehicle, the deduction of the said transportati on charges will not be admissible. d. The transit insurance shall be allowed as deduction as being part of transportation cost as held by the Apex Court in the case of Bombay Tyres International that the cost of transportation will include the cost of insurance also during the transportation of the goods. But the trans it insurance should either be shown separately in the invoice or can be included in the transportation cost shown separately. e. Normally the cost of reusable c ontainers (glass bottles, crates etc.) is amortized and included in the cost of the product itself. Therefore the question of adding any further amount towards this account does not arise, except where Audit of accounts reveals that the cos t of the reusable container has not been amortised and included in the value of the product f. Delayed payment charges are excludible since " transaction value" relates to the price paid or payable for the goods. In this case the delayed pa yment charge is nothing but the interest on the price of the goods which is not paid during the normal credit period. However, to be admissible as deduction it should be separately shown or indicated in the invoice and should be charged ove r and above the sale price of the goods g. The erection, installation and commis sioning charges should not be included in the assessable value, if the final pro duct is not excisable. h. Where the assessee does not sell the inputs/capital go ods to any independent buyer and the only removal of such input/capital goods, o utside the factory, is in the nature of transfer to a sister unit. In such a cas e proviso to rule 9 will apply and provisions of rule 8 of the valuation rules w ould have to be invoked. However, this would require determination of the cost of production or manufacture, which would not be possible since the said inputs/cap ital goods have been received by the assessee from outside and have not been pro duced or manufactured in his factory. Recourse will, therefore, have to be taken to the residuary rule 11 of the valuation rules and the value determined using reasonable means consistent with the principles and general provisions of the va luation rules and sub-section (1) of sec.4 of the Act. In that case it would be reasonable to adopt

Valuation of Excisable Goods 3.29 the value shown in the invoice on the basis of which CENVAT credit was taken by the assessee in the first place. In respect of capital goods adequate depreciati on may be given as per the rates fixed in letter F.No.495/16/93 Cus VI dated 26.5 .93, issued on the Customs side. Circular No. 813/10/2005-CX dated 25.04.2005 ha s laid down that value of samples distributed free as part of marketing strategy or as gifts or donations shall be determined under Rule 4 of Central Excise Val uation (Determination of Price of Excisable Goods) Rules, 2000. 3.10 VALUATION U NDER DIFFERENT CIRCUMSTANCES 3.10.1 Valuation of goods manufactured on job work basis: If the processing results in the manufactured product, the assessable val ue will not be processing charges alone but the intrinsic value of the processed product which is the wholesale price at which it is sold for the first time in the wholesale market. Illustration: If the cost of raw material is Rs.50/- and t he job conversion charges including job workers profit is Rs.100/- the value of t he goods will be Rs.150/- as this is the value at which the goods leave the fact ory and enter the main stream. This is the decision of the Supreme Court in Ujag ar Prints vs UOI 1989 (39) ELT 493 (SC). This decision would also be applicable in the present valuation rules. 3.10.2 Assessable value where the raw material i s provided by the customer: The value of the raw material supplied by the custom er would form a part of the assessable value. The fact that the manufacturer doe s not pay for the raw material is immaterial. The matter stands concluded by the judgement of the Supreme Court in the case of Burn Standard Co. Ltd. Vs. UOI (1 991) 36 ECC-1(SC). In this case the assessee manufactured wagons for Railways. T he latter supplied wheel sets and certain other items free of cost. The price ch arged for the vehicle did not include the value of the items supplied free of co st. The Supreme Court held that free supply items like wheel sets etc. form part of the complete wagon and would lose their identity. It hardly matters as to ho w and in what manner the components of wagons were procured by the manufacturer. The assessee would be liable to pay duty on the normal price of the wagon. The present Valuation Rules follow this. 3.10.3 Effect of price escalation subsequen t to the removal of goods, on the assessable value: The excess amount realised u nder an escalation clause would form part of the assessable value and thus attra ct Central Excise duty. The effect of reduction in price subsequent to removal o n payment of duty, on assessable value. If the goods are removed on payment of d uty, based on declared price, subsequent reduction of price for whatever reason, including Government interference, would not create a claim for refund of Centr al Excise duty paid on the quantum of price reduced.

3.30 Central Excise Central Excise Valuation (Determination of Price of Excisable Goods Rules), 2000 Value of goods sold nearest to the time of removal Yes Rule 4 No Rule 5 determines price at a place other than removal on deduction of freight. Adopt other Rules Rule 6 If price is not the sole consideration make adjustments for Cost of tools , dies, moulds, materials supplied free of cost includible Rule 7 only for depot sales Rule 8 In case of captive consumption Value to be the value at which greatest aggregate quantity sold at that depot at the time of removal from the factory. 110% of cost of production Rule 9: for sales only to or through related persons (see also Rule 10) Adopt the price at which related person sells to unrelated buyers or the value s old to related persons who in turn sells in retail. Rule 10: Sale to interconnected undertakings (one of the related persons) Only t hose related in Section 4(3) (ii), (iii) or (iv) or holding/subsidiary companies would follow valuation under Rule 9. Rule 11 Adopt best judgment No [Refer to page 3.27]

Valuation of Excisable Goods 3.31 3.10.4 In cases where interest is made payable after the general credit period i s over, such interest will not form a part of the assessable value: Illustration : Assessee charges Rs.100/- per unit for his goods, if the payment is made withi n 45 days. Rs.100/- per unit will of course include the interest component perta ining to the general credit period of 45 days. Even if the payment is made at th e time of delivery Rs.100/- would be the assessable value, irrespective of the p ossible inclusion of interest element in the price. If the assessee charges Rs.1 02/- per unit after 45 days and Rs.2/per unit is identifiable as being relatable to time lag in payment, this amount of Rs.2/- per unit will not form a part of the value. This is based on the decision of the Supreme Court in GOI vs MRF Ltd. 1995 (77) ELT 449. 3.10.5 Role of notional interest on the advances/deposits ta ken by the manufacturer from the buyer in influencing the assessable value: Inte rest on advance deposits is includible in the assessable value only if there is a nexus between the advance deposit and the sale price. The ratio decided in the Metal Box case 1995 (75) ELT 449(SC) requires, before adding notional interest, establishment of the facts that the interest free advance reflected favoured or special treatment and that advances had the effect of pegging down the wholesal e price. If the assessee charges the same price from those who give advances and those who do not, the question of including notional interest on advances does not arise VST Industries Ltd vs CCE 1998 (97) ELT 395 (SC). 3.10.6 Value of trad e mark and assessable value: Where a manufacturer is the owner of the brand name , the price including the value of the brand name, at which he sells the goods i n the course of wholesale trade, would constitute the normal price. But where th e goods are manufactured by somebody else and then sold to a dealer who owns the brand name, the value of the brand name cannot be added for computing the asses sable value for the brand name owner cannot be treated as manufacturer and the p rice at which the brand name owner sells the goods cannot be taken as assessable value. 3.10.7 Consultancy /technical services and assessable value: The costs t owards drawing, designing and technical specifications are clearly elements of m achinery costs and are to be included in the assessable value. However, the cost towards project report, plant layout, civil works and training are in the natur e of services and are not includible in the assessable value. 3.10.8 Inspection charges and testing charges, whether includible in the assessable value: Where t he manufacturer bears the cost towards inspection and testing of goods prior to their removal, such costs are included in the assessable value. The inspection a nd testing charges incurred subsequent to the clearance of the goods are also to be included in the assessable value if they form part of agreement for sale of goods. The new definition of transaction value would rope in such amounts also.

3.32 Central Excise 3.10.9 Excess amounts charged to customer whether dutiable: If the amounts recovered from the customers is in excess of expenditure actually incurred on permissible deductions, the excess amount will form part of the ass essable value. Amount charged and recovered from customers by separate bills wil l be considered as gross receipts or cum duty price and duty payable is to be ca lculated after working out the assessable value from the gross receipts. 3.10.10 Handling cost and assessable value: Handling cost incurred before the clearance of the goods from the place of removal is includible in the assessable value. 3 .10.11 Assessable value in case of repair activities: If the assessee replaces c ertain parts while repairing a manufactured product, he is liable to pay duty on ly on value of spare parts manufactured and used in the said manufactured produc t. 3.10.12 Maintenance charges, whether part of assessable value: Maintenance ch arges (being optional and distinct from warranty obligations), and sight service charges recovered for rendering special services are not includible in the asse ssable value. But if the price is marked up to cover servicing costs, prima faci e such amount would form a part of the assessable value. 3.10.13 Warranty expens es and the assessable value: After sales service expenses for warranty are a par t of the value. 3.10.14 The cost of accessories supplied by the buyer, whether p art of the assessable value: There is a distinction between a component and an a ccessory. A thing is a part or a component of the other only if the other is inc omplete without it. A thing is an accessory of the other if the thing is not ess ential for the other, but only acts to its convenience or effectiveness. The cos t of accessory supplied by the buyer as a package of sale of the manufactured go ods will be included in the value if cenvat credit is taken in respect of the ac cessories. 3.11 MAXIMUM RETAIL PRICE (MRP) BASED VALUATION [SECTION 4A] The prov ision relating to duty based on MRP is dealt in section 4A. Section 4A was intro duced with effect from 14.5.97 and today covers more than 83 Tariff headings. Th e said section would apply to those goods, which are covered under the Standards of Weights and Measures Act, 1976, or any other similar law for the purpose of declaring the retail sale price on the package thereof. The section further stat es that the Government may notify such of the aforesaid categories of goods to w hich the revised principle of excise valuation would apply. The revised principl e would require payment of excise duty on the basis of the said MRP less such de ductions/abatements as the Central Government may allow in the notification. Thu s the goods, which are coved under this new principle, would be required to disc harge excise duty on the basis of the MRP instead of the basis of the wholesale selling price. The Government thought it fit to introduce the said section to fi ght the evil of

Valuation of Excisable Goods 3.33 manufacturers transferring cost to trading companies and reducing the excise dut y payable by them. The conditions under which this section will apply are as und er: (a) The goods are required under Standard Weights and Measures Act, 1976 or rules made there under or under any other law to declare on the package the reta il sale price thereof. (b) The Government may notify such products for the purpo se of this Section. However, it must be noted that if products are to be so noti fied, law must require such products to declare the retail sale price on the pac kage. (c) The valuation has to be done on the basis of retail sale price declare d on the package less abatement. Abatements can be given by the Central Governme nt after taking into account the amount of duties and taxes. Abatements are also given in the notification as explained above. The basis of such abatements have not been made public. (d) The retail sale price has been defined to mean the ma ximum price at which the excisable goods in packaged form may be sold to the ult imate consumer inclusive of all taxes and expenses and price is the sole conside ration for such sale. However, if the provisions of the Act, rules or other law referred to in (a) above requires the retail sale price to exclude any taxes, lo cal or otherwise, the retail sale price shall be construed accordingly. (e) It i s also stated that where there is more than one retail sale price the maximum of such retail sale price will be deemed to be the retail sale price for the purpo se of this section. (f) The excisable goods shall be confiscated and the retail sale price will be ascertained in the manner prescribed by the Central Governmen t if the manufacturer does any of the following acts: (i) removes excisable good s from the place of manufacture, without declaring the retail sale price of such goods on the packages, or (ii) declares a retail sale price which is not the retail sale price as required to be declared under the provisions of the Act, rules or other law referred to in (a) above or (iii) tampers with, obliterates or alters the retail sale price declared on the package of such goods after their removal from the place of manu facture. (g) Where different retail sale prices are declared on different packag es for the sale of any excisable goods in packaged form in different areas, each such retail price shall be the retail sale price for the purposes of valuation of the excisable goods intended to be sold in the area to which the retail sale price relates. (h) If the retail sale price declared on the package of any excis able goods at the time of its clearance from the place of manufacture, is altere d to increase the retail sale

3.34 Central Excise price, such altered retail sale price shall be deemed to be the retail sale price The basis of this type of valuation is based on the decisi on of the Supreme Court in the case of UOI Vs. Bombay Tyres International 1986 ( 14) ELT 1896, which lays down the principle that although the taxable event for the charge of the duty of excise is manufacture of goods, nevertheless the basis for the levy need not necessarily be restricted to the so called manufacturing costs/profits. In other words, the excise duty on goods would not be transformed into a sales tax merely because the value for the purpose of the levy would be based on the MRP. For the purpose of valuation under Section 4A of the Central E xcise Act, 1944, retail sale price has been defined to mean the maximum price at w hich the excisable goods in packaged form may be sold to the ultimate consumer a nd includes all taxes, local or otherwise, freight, transport charges, commissio n payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole considera tion for such sale. However, if the provisions of the Act, rules or other law re ferred to in (a) above requires the retail sale price to exclude any taxes, loca l or otherwise, the retail sale price shall be construed accordingly. For the pu rpose of valuation under Section 4A, care should be taken to see that unless the products are required under the Standards of Weights and Measures Act 1976 or t he rules made thereunder to declare on the package the retail sale price of such goods, the question of applying section 4A does not arise. This has been accept ed by the Board vide its circular No. 625/16/2002-cx dt. 28.02.02, wherein the B oard says as follows: The wording of Section 4A (1) makes it very clear that it will apply only to such goods in relation to which it is required, under the prov isions of the Standards of Weights and Measures Act, 1976, or the rules made the reunder or under any other law for time being in force, to declare on the packag e thereof the retail sale price of such goods. In other words, if there is no sta tutory requirement under the provisions of Weights and Measures Act to declare t he retail sale price on the packages, Sec.4A will not apply. As for example, in respect of bulk sale of ice cream to hotels/restaurants, which are not meant for retail sales as such, the provisions of the Weights and Measures Act will not a pply. Chapter V of the Weights & Measures (Packaged Commodity) Rules, 1977 menti ons the instance where MRP is not required to be printed on the packages. Thus, in these cases valuation will have to be done under sec.4 of the Central Excise Act, 1944. It is, therefore, clarified that, in respect of all goods which are n ot statutorily required to print/declare the retail sale price on the packages u nder the provisions of the Standards of Weight & Measures Act, 1976, or the rule s made there under or any other law for the time being in force, valuation will be done u/s.4 of the Central Excise Act, 1944 or under section 3(2) of the Centr al Excise Act, 1944, if tariff values have been fixed for the commodity.

Valuation of Excisable Goods Self-examination questions 1. 2. 3. Differentiate b etween Tariff value, Transaction value and Normal value. 3.35 How are goods valued when they are sold partly to a related person and partly to an unrelated person? On 25.02.2007 goods were removed from the factory at Chand igarh for sale from the depot at Mumbai. On that date the normal transaction val ue of the goods at Chandigarh factory was Rs.10,000 and tariff rate was 8%. Thes e goods were sold ex Mumbai depot on 3.3.2007. On that date the normal transacti on value at Mumbai Depot was 11,000 and tariff rate was 16%. The normal transact ion value at Mumbai depot on 25.02.2007 was Rs.9,000 and tariff rate was 8%. The manufacturer has paid duty @ 8% on Rs.10,000, but the department claims duty @ 16% on Rs.11,000. Discuss the correct approach to be adopted in the case. ABC Lt d. of Kanpur agreed to sell an electric motor to DEF Ltd. of New Delhi for Rs.15 000.00 on ex-factory basis. Other particulars are: (i) Transportation and transi t insurance were arranged by ABC Ltd. at the request of DEF Ltd. for Rs.1250.00 and Rs.1500.00 respectively which were charged separately. Actual transportation charges amounted to Rs.1000.00 only. 4. (ii) A discount of Rs.1000 was given to DEF Ltd. on the agreed price on payment of an advance of Rs.3500.00 with the order. (Ignore notional interest on advance ) (iii) Interest of Rs.800.00 was charged from DEF Ltd. as it failed to make the payment within 30 days. (iv) Packing charges of the motor amounted to Rs.1300.0 0. (v) The expenditure incurred by ABC Ltd. towards free after sale service during warranty period comes out to be Rs.500 per motor. (vi) Dharmada charges of Rs.2 00 were recovered from DEF Ltd. (vii) ABC Ltd. sold a lubricant worth Rs.250.00 along with the motor to the interested customers. Lubricant which was purchased from the market by ABC Ltd. at Rs.200 ensured durability and high efficiency of the motor. DEF Ltd. opted for the said lubricant. Compute the assessable value.

3.36 Central Excise 5. Pristine Industries has got a contract from Cantburry Aut omobiles for supply of a machine used for welding the steel sheets. The various details are: Particulars Price of machine (net of taxes and duties) Machinery er ection expenses Packing (normally done by him for all machines) Design and drawi ng charges relating to manufacture of machinery (Net of taxes and duties) Centra l Sales Tax Central Excise Duty Cash discount (offered if full payment is receiv ed before dispatch of goods) Bought out accessories supplied along with the mach ine (accessories were optional) Cost of loading the machinery in the truck in th e factory (not charged separately to Cantburry Automobiles) Rs. 5,45,000.00 35,0 00.00 20,000.00 60,000.00 4% 20% 15,000 10,000 3,500.00 Cantburry Automobiles made all the payment before delivery. You are required to compute the assessable value and the duty payable on the machine for Pristine In dustries. 6. M/s. Well Welders manufactures welding electrodes that are put firs t in polythene bags and then packed together in cardboard cartons. They sell ele ctrodes at the factory gate packed in cardboard cartons where such electrodes ar e also packed in wooden boxes when sold to outstation customers. Is the Departme nt justified to include the cost of wooden boxes in the assessable value of the welding electrodes? Discuss with the help of case laws, if any. M/s. Cool Air ma nufactures complete ceiling fans excluding regulators that are purchased from ot her manufacturers. The contention of M/s. Cool Air is that since the regulators are not manufactured by them but, instead are purchased from outside, the value of the same should not form part of the assessable value of fans. Do you agree t o the stand taken by M/s. Cool Air? Give reasons in support of your answer. 7.

Valuation of Excisable Goods 8. 3.37 Alpha Industries Ltd. manufactures shoes on the basis of bulk orders received fr om various Government Departments. Footwear is covered under the Third Schedule to the Central Excise Act, 1944. Alpha Industries Ltd. does not make any retail sale to individual buyers, nor does it affix any MRP on shoe packages sold by it . Even the necessary declarations required under statues are not filed by it. Ho w should the goods be valued? The value of the operational software should not b e included in the value of the computer. Discuss the correctness of the statemen t with reference to the provisions of the Central Excise Act, 1944. 9. 10. M/s. Della Traders is in the practice of charging each of its customers comp ulsorily, a certain amount as labour charges for repair of the finished products during warranty period. This repair is done by the dealers. The Central Excise Officer added the value of such charges in the assessable value of the finished products for the purpose of computation of duty, on the ground that such repair charges are in the nature of after sale service done by M/s. Della Traders to prom ote marketability. However, the contention of M/s. Della Traders is that such ch arges are recovered as service charges for repairs, a service being provided by the dealers. Do you agree to the stand taken by the Central Excise Officer? Give reasons. 11. Infotech systems manufactured mini computer processing systems wit h floppy drive, keyboard, and CPU. In around 30% of cases, Infotech Systems boug ht duty paid monitors and printers from the market and supplied to customers on their request. A classification list which did not include monitors and printers was filed by Infotech systems and was approved. Chapter Note 5 to Chapter 84 sp ecifies that a monitor or printer has to be classified along with the computer. Therefore, by virtue of this Chapter Note the Central Excise Officer took a view that the value of monitors and printers should be included in the value of the computers. Give your opinion on the issue with the help of decided case laws, if any. 12. Beta Ltd. has sold refractories to Omega Steel Plant under a contract at a particular price. For the supply of refractories, Beta Ltd. has availed the duty exemption scheme contained in the Export and Import Policy. In order to en able Beta Ltd. to avail the duty exemption scheme, Omega Steel Plant has surrend ered the advance licences held by them for import of refractories. Against such surrender, advance intermediate licences for import of inputs have been issued t o Beta Ltd. Consequently, Beta Ltd. has imported the inputs without payment of c ustoms duty as well as got them at a lower price than what they would have paid had they purchased the same in India. The excise department has claimed that the benefit derived by Beta Ltd. under the advance intermediate licence, issued

3.38 Central Excise to them as a result of surrender of licence by Omega Steel P lant, is additional consideration towards the value of the refractories and that this additional consideration forms part of the price of the refractories for p urposes of excise duty. Do you think that the stand taken by the excise departme nt is correct in law? Discuss. Answers 2. There is no specific rule covering suc h a contingency. Transaction value in respect of sales to unrelated buyers canno t be adopted for sales to related buyers since as per section 4(1) transaction v alue is to be determined for each removal. For sales to unrelated buyers valuati on will be done as per section 4(1)(a) and for sale of the same goods to related buyers recourse will have to be taken to the residuary rule 11 read with rule 9 (or 10). Rule 9 cannot be applied in such cases directly since it covers only t hose cases where all the sales are made to related buyers only. According to Rul e 7 of Central Excise Valuation Rules, 2000, in cases where the goods are not so ld at the factory gate or at the warehouse but they are transferred by the asses see to his depots or consignment agents or any other place for sale, the assessa ble value for the goods cleared from factory/warehouse shall be the normal trans action value of such goods at the depot, etc. at or about the same time on which the goods as being valued are removed from the factory or warehouse. In the giv en case, Rs.10,000 represents value on 25.02.2007 (time of removal) but it is no t the value prevalent on the depot. Similarly, Rs.11,000 represents depot price, but then it is not the price prevalent on 25.02.2007 (time of removal). The cor rect value to be adopted in this case is the depot price of such goods (normal t ransaction value) on 25.02.2007 i.e., Rs.9,000 and the correct rate will be 8%. 4. (i) Transportation charges will not be included in the assessable value as th e sale is at the factory gate and the seller has merely arranged for the deliver y. The payment made by the buyer in this case is not in connection with the sale but in connection with the transportation as the sale is over at the factory ga te itself. Transit insurance will also not be included in the assessable value a s delivery of goods to transporter is prima facie delivery of goods to buyer hen ce sale gets over at the factory gate itself. [Escorts JCB Ltd. v. CCE 2002 146 ELT 31 (SC)]. Profit of Rs.250 earned on transportation charges will not be incl uded in the assessable value [Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 1 3 (SC)]. 3. (ii) Discount of Rs.1000 is given on Rs.15000 (agreed price) i.e., the discounte d price is Rs.14000 however, as in this case price is not the sole consideration , the extra discount of Rs.1000.00 will be included in the assessable value.

Valuation of Excisable Goods 3.39 (iii) Interest of Rs.800 will not be included in the assessable value as the pay ment of such interest is not in connection with the sale but in connection with the payment of the consideration for sale. CBEC Circular No. 643/34/2002-CX date d 1.7.2002 has confirmed that delayed payment charges will not be includible in the assessable value, if shown or indicated separately in invoice and charged ov er and above the sale price. (iv) Packing charges will form part of the assessab le value. (v) Charges for free after sale service during warranty period are inclu dible in the assessable value. (vi) Dharmada charges are includible in the asses sable value [CBEC Circular No. 763/79/2003 C.X. dated 21.11.2003]. (vii) Value o f such lubricant will not be included in the assessable value as it is a purely trading activity and the sale of main article (motor) is independent of sale of optional bought out item (lubricant). Even the profit earned on such bought out item is not included in the assessable value of manufactured product [Triveni En gineering v. CCE 2000 (122) ELT 386 CEGAT]. Therefore, the assessable value will be: Rs.14000 + Rs.1000 + Rs.1300 + Rs.500 + Rs.200 = Rs.17000.00. 5. Computatio n of assessable value and duty payable Particulars Price of machine (net of taxe s and duties) Machine installation expenses (See Note 1) Packing Design and draw ing charges relating to manufacture of machinery (Net of taxes and duties) Bough t out accessories supplied along with the machine (See Note 2) Cost of loading t he machine in truck in the factory (See Note 3) Total Less : Cash discount (See Note 4) Assessable Value Excise duty @ 20% Education cess @ 2% Total duty payabl e Rs. 5,45,000.00 20,000.00 60,000.00 6,25,000.00 15,000.00 6,10,000.00 1,22,000.00 2,440.00 1,24,440.00

3.40 Central Excise Note 1: Installation expenses are not includible in assessab le value [Thermax Ltd. v. CCE 1998 (99) E.L.T. 481]. Note 2: Duty is not payable on optional bought out accessories supplied along with the machinery as it is a purely trading activity. Note 3: The cost of Rs 3500.00 is already included in the selling price of machine (as it is not charged separately) and hence is not to be added again. Note 4: Cash discount is allowable as deduction if actually p assed on to buyer [CBEC Circular No. 643/34/2002 CX dated 01.07.2002]. 6. Yes, d epartment is justified to include the cost of wooden boxes in assessable value o f welding electrodes because from the given facts it is clear that the cost of w ooden boxes has been incurred by the reason of or in connection with the sale ma de to outstation customers. As per Section 4(3)(d) of Central Excise Act, transa ction value is the price actually paid, or payable, for the goods when sold and includes any amount that the buyer is liable to pay to, or on behalf of, the ass essee, by reason of, or in connection with the sale. Further, Board has clarifie d by its Circular No.354/81/2000 CE dated 30.06.2000 any charges recovered for p acking are charges recovered in relation to the sale of the goods under assessme nt and will form part of transaction value of the goods. Hence, charges for the wooden packing that are being recovered by M/s. Well Welders are the charges in relation to sale and will form part of assessable value irrespective of the fact whether packing is special or secondary. 7. Value of essential bought out items , supplied with the main article at the time of removal should be included in th e assessable value as goods should be assessed in the stage in which they are re moved. Further, the payment for such items is in connection with the sale and the main article cannot work without the bought out part. This view was followed by the Supreme Court in the case of Khaitan Electricals Ltd. vs. CCE, New Delhi 200 4 (92) ECC 633 (SC). The Court held that value of regulators of fans is includib le in the assessable value of fans because these are parts of fans. 8. A similar issue came up for consideration before the Tribunal in the case of Commissioner of C. EX. & Cus., BBSR II v. Mehar Shoes Industries 2004 (172) E.L.T. 409 (Tri. Kolkata). The question, which arose before the Tribunal, was that whether the go ods had to be valued as per the provisions of section 4 or as per the provisions of section 4A. The Tribunal followed the Circular No. 625/16/2002 C.X.,

Valuation of Excisable Goods dated 28.02.2002 that read: 3.41 Sec.4A of the Central Excise Act, 1944 is applicable in respect of those cases on ly where the manufacturer is legally obliged to print the MRP on the packages of the goods, under the provisions of the Standards of Weights and Measures Act, 1 976 or the rules made there under or any other law for the time being in force. The basic issue, therefore, is to determine the circumstances in which sec.4A of the C.E. Act can be applied. The wording of Sec.4A (1) makes it very clear that it will apply only to such goods " in relation to which it is required, under the provisions of the Standards of Weights and Measures Act,1976, or the rules made there under or under any other law for the time being in force, to declare on t he package thereof the retail sale price of such goods.". In other words, if ther e is no statutory requirement under the provisions of Weights and Measures Act t o declare the retail sale price on the packages, Sec.4A will not apply. As for e xample, in respect of bulk sale of ice-cream to hotels/restaurants which are not meant for retail sales as such, the provisions of the Weights and Measures Act will not apply. Chapter V of the Weights & Measures (Packaged Commodity) Rules, 1977 mentions the instances where MRP is not required to be printed on the packa ges. Thus, in these cases valuation will have to be done under sec.4 of the C.E. Act, 1944. It is, therefore, clarified that, in respect of all goods (whether n otified u/s.4A or not) in which there is no statutory requirement to print/decla re the retail sale price on the packages under the provisions of the Standards o f Weight & Measures Act, 1976, or the rules made there under or any other law fo r the time being in force, valuation will be done u/s.4 of the C.E. Act, 1944 (o r under section 3(2) of the Central Excise Act, 1944, if tariff values have been fixed for the commodity). Thus, there could be instances where the same notifie d commodity would be partly assessed on the basis of MRP u/s.4A and partly on th e basis of normal price (prior to 1.7.2000) or transaction value (from 1.7.2000) , u/s.4 of the C.E. Act, 1944. It may be kept in mind that if an assessee does n ot declare or print the retail sale price in respect of a notified commodity, wh ich it is statutorily required to do under the provisions of the Weights & Measu res Act, or any other law for the time being in force, the goods, on removal, wi ll be liable to confiscation u/s. 4A(4) of the C.E. Act, 1944. In the situation r eferred to in the question there is no legal obligation on the manufacturer to p rint the MRP on the shoe packages as the shoes are not sold in retail. Therefore , the basic condition for the shoes to be valued as per provisions of section 4A is absent i.e, the MRP is not affixed on the goods. Thus, abovementioned Circul ar should be followed in this case also and the valuation of the goods sold in b ulk should be done as per section 4 and not as per section 4A.

3.42 Central Excise 9. The issue was discussed in detail by the Supreme Court in the case of CCE, Pondicherry v. Acer India Ltd. 2004 (172) E.L.T. 289 (S.C.) wh erein it was held by the Apex Court that the value of the operational software l oaded on the computer is not includible in the assessable value of the computers . Computer and operative softwares are different marketable commodities. They ar e available in the market separately and are classified differently. The rate of excise duty for computer is 16% whereas that of software is nil. The computer a nd software are distinct and separate, both as a matter of commercial parlance a nd also under the statute. A computer may not be capable of functioning effectiv ely without being loaded with software. However, it will not tantamount to bring ing them within the purview of the part of the computer so as to include their v alue in the assessable value of the computers. Both computer and software must b e classified under their respective headings viz., 84.71 and 85.24 and must be s ubjected to corresponding rates of duties separately. Although the information c ontained in software is loaded in the hard disc, but the operational software do es not lose its value and is still marketable as a separate commodity. It does n ot lose its character as a tangible goods being of the nature of CD-ROM. The fac t that the manufacturers put different prices for the computers loaded with diff erent types of operational software does not make any difference as regards natu re and character of the computer . Even if the manufacturers in terms of the prov isions of a licence are obliged to preload software on the computer before clear ing the same from the factory, the characteristic of the software cannot be said to have transformed into hardware so that it can be charged to excise duty alon g with the computer. As regards valuation it was pointed out by the Apex court t hat the valuation of goods would be subjected to the charging provisions contain ed in section 3 of the Act and also subsection (1) of section 4. The definition of transaction value must be read in the text and context of section 3, the ch arging section i.e., the expressions by reason of sale or in connection with the sale contained in the definition of transaction value cannot be used to j ustify the chargeability of software to excise duty. These expressions refer to such goods, which are excisable to excise duty and not the one, which are not ex cisable. The legal text contained in Chapter 84, as explained in Chapter Note 6, clearly states that software, even if contained in hardware, does not lose its character as such. When an exemption has been granted from levy of any excise du ty on software whether it is operating software or application software in terms of heading 85.24, no excise duty can be levied thereupon indirectly as it is im permissible to levy a tax indirectly. The excise duty is chargeable on the excis able goods and not on the goods, which are not excisable. Thus, if non-excisable goods are transplanted into excisable

Valuation of Excisable Goods 3.43 goods, the assessee is not liable to pay excise duty on the combined value of bo th. Excise duty, in other words, is leviable only on the goods, which answer the definition of excisable goods and satisfy the requirement of section 3. A mac hinery provision contained in section 4 and that too the explanation contained t herein by way of definition of transaction value can neither override the char ging provision nor by reason thereof goods which is not excisable will become excisable only because one is fitted into the other. While computing costs of ma nufacturing, expenses that add to the value of the excisable goods are to be con sidered and not the value of non-excisable goods. 10. The facts of the case are similar to the case of Collector of Central Excise, Chandigarh v. Eicher Tractor s Ltd. 2004 (164) E.L.T. 129 (S.C.). On this issue, the Supreme Court observed t hat service is distinct and separate from repairs. Dealers providing service have nothing to do with repairs during warranty period. If there is a provision for fre e repair during warranty period then that is something which is being provided b y manufacturers. Such service may be provided through dealers for benefit of the customer to whom an additional value is provided. Hence, it was held by the Ape x Court that cost of labour charges recovered from the buyers for free repair pr ovided by dealers during warranty period should be included in the assessable va lue. Applying the ratio of the abovementioned decision in the given case, it can be said that the contention of M/s. Della Traders of service being provided by dealer is erroneous. Therefore, the stand taken by the Central Excise Officer is correct in law. 11. This issue was taken up by the Supreme Court in the case of CCEx., Mumbai v. C.M.S. Computers P. Ltd. 2005 (182) E.L.T. 20 (S.C). The facts of the given situation are similar to that of the above-mentioned case. In this case, the Apex Court opined that a monitor or a printer is not an essential par t of the computer. It is a peripheral item which may be required along with a co mputer. Merely because a Tariff Entry may also include a monitor or printer, it would not lead to the conclusion that a monitor or printer is an essential part of a computer. All that the Chapter Note indicates is that not only the computer but a monitor and a printer are also excisable products. However, the monitor a nd/or printer would be excisable only in the hands of their manufacturer. The as sessee did not manufacture the monitor or the printer. The Supreme Court observe d that in approximately 70% of the cases monitors and printers were not supplied along with the computer sold by the assessee. Thus, it could be concluded that the assessee did not sell their computer as a unit including a monitor and a pri nter. Therefore, Apex Court held that as monitor and printer were not essential parts of the computer their value could not be included in the value of computer . However, it was clarified by the Supreme Court

3.44 Central Excise that the situation may be different where a manufacturer sel ls a computer with a monitor and a printer as a unit. Therefore, in view of the above-mentioned case law the stand taken by the Central Excise Officer is not co rrect. 12. The facts of the problem are similar to that of the case of CCEx. Bhu baneshwar-II v IFGL Refractories Ltd. 2005 (186) ELT 529 (SC). In this case, the Supreme Court has held that surrendering of licences by buyer and as a result t hereof, assessee getting licences has nothing to do with any Import and Export p olicy. This is directly a matter of contract between two parties which has resul ted in additional consideration by way of advance intermediate licence flowing fro m buyer to the assessee. The Apex Court stated that had the seller procured the advance intermediate licence on its own i.e. without buyer having to surrender i ts licence for the purposes of the contract, then there would have been no addit ional consideration. However, since the licence is obtained in pursuance of the contract of sale, there is directly a flow of additional consideration from the buyer to seller. Thus, the Supreme Court held that the value thereof has to be a dded to the price of the refractories. The Apex Court further clarified that whe re parties take advantage of policies of Government and benefits flow therefrom, then such benefit can be said to be an additional consideration. In view of the abovementioned decision, the stand taken by the excise department holds good.

4 CENVAT CREDIT RULES, 2004 4.1 INTRODUCTION & BRIEF LEGISLATIVE HISTORY The powers conferred on the Central Government under clause (xviaa) and clause (xvia) of section 37(2) of the Centr al Excise Act, 1944 lead to introduction of Central Value Added Tax (CENVAT). Se ction 37(2) (xvia) empowers the Central Government to make rules to provide for the credit of duty paid or deemed to have been paid on the goods used in or in r elation to manufacture of excisable goods. Section 37(2) (xviaa) empowers Centra l Government to make rules to provide for credit of service tax leviable under C hapter V of the Finance Act, 1994, paid or payable on taxable services used in, or in relation to, the manufacture of excisable goods. Cenvat was initially intr oduced as Modvat. With effect from 1.3.1986 manufacturers were entitled to avail credit of duty paid on inputs used in or in relation to manufacture of the end products. The scheme ensured that duty paid on input stage is offset against the duty payable at the final product stage. The object was to prevent cascading ef fect of duty on the final products. Later, this scheme was extended to capital g oods to be effective from 1-3-94. In the year 1997, the entire rules were recast ed but distinct rules were maintained for inputs and capital goods. Over the yea rs, disputes between the department and assessees on the interpretation of Modva t rules and procedures plagued the system. With the intention to put an end to t his situation, Budget 2000 unified the rules for capital goods and inputs into o ne set of rules (Rules starting from Rule 57AA to 57AK) which were simple and tr ansparent. Subsequently, Cenvat Credit Rules, 2001 were introduced vide Notifica tion No. 31/2001 dated 21 st June 2001 which were similar to the old rules 57AA to 57AK of Central Excise Rules, 1944. These rules were again superseded by Cenv at Credit Rules, 2002 which were notified vide notification No.5/2002 dated 1.3. 2002. 4.2 CENVAT CREDIT RULES, 2004 On 10.09.2004 yet another new set of rules, Cenvat Credit Rules, 2004 have been released

4.2 Central Excise to replace the existing Cenvat Credit Rules, 2002 and Service Tax Credit Rules, 2002. These rules provide for integration of manufacturing sector and service se ctor, for the purpose of setting off the duty incidence. The new Cenvat Credit R ules 2004 are a follow up of the Union Finance Minister Mr P. Chidambaram s assu rances in the Parliament for taking steps to integrate the tax on goods and serv ices. The new rules mark a beginning towards a fully integrated Goods and Servi ce tax" recommended by the Kelkar committee in July 2004. In other words, duties of excise paid on inputs/capital goods and service tax paid on input services c an be adjusted against a manufacturers excise duty liability or a service provide rs service tax liability. Excise duty and service tax shall continue to be separa te levies. The Cenvat Credit Rules, 2004 extend to the whole of India. However, the provisions of these rules in relation to availment and utilization of credit of service tax shall not apply to the State of Jammu and Kashmir as service tax law is not applicable to Jammu & Kashmir. The rules cover all the three categor ies, namely manufacturers, service providers and manufacturers-cum-service provi ders. 4.3 RULE 2 - DEFINITIONS The Cenvat rules have to be interpreted progressively to ensure that the purpose of the scheme is preserved. Therefore, the Rules are to be read liberally and n ot literally. 4.3.1 Capital goods : Rule 2(a) defines capital goods to mean (A) the following goods, namely:(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the Fir st Schedule to the Excise Tariff Act; (ii) pollution control equipment; (iii) co mponents, spares and accessories of the goods specified at (i) and (ii); (iv) mo ulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi ) tubes and pipes and fittings thereof; and (vii) storage tank, used(1) in the f actory of the manufacturer of the final products, but does not include any equip ment or appliance used in an office; or (2) for providing output service; (B) mo tor vehicle registered in the name of provider of output service for providing t axable

Cenvat Credit Rules, 2004 4.3 service as specified in sub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of section 65 of the Finance Act. 4.3.2 Exempted Goods: Rule 2(d ) defines "exempted goods" as goods which are exempt from the whole of the duty of excise leviable thereon and includes goods which are chargeable to "Nil" rate of duty. 4.3.3 Exempted Services: Rule 2(e) defines exempted services as taxabl e services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of th e Finance Act. 4.3.4 Final Products : Rule 2(h) defines final products as excisabl e goods manufactured or produced from input, or using input service. Excisable g oods are defined in section 2(d) of the Act to mean goods which are specified in the Tariff as being subject to a duty of excise. Therefore, this term is wide en ough to cover all products, whether final or intermediate, which are manufacture d by the assessee by a manufacturing process. This may also include the goods wh ich are exempted by way of notification. 4.3.5 First Stage Dealer: from(i) Rule 2(ij) means a dealer who purchases the goods directly the manufacturer under the cover of an invoice issued in terms of the provision of Central Excise Rules, 2002 or from the depot of the said manufacturer, or fro m premises of the consignment agent of the said manufacturer or from any other p remises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the co nsignment agent of the importer, under cover of an invoice. 4.3.6 Inputs : Rule 2(k) defines input as (i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the ma nufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oil s, coolants, accessories of the final products cleared along with the final prod uct, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production; (ii) all goods, exce pt light diesel oil, high speed diesel oil, motor spirit, commonly known as petr ol and motor vehicles, used for providing any output service; Explanation 1.- Th e light diesel oil, high speed diesel oil or motor spirit, commonly known as pet rol, shall not be treated as an input for any purpose whatsoever. Explanation 2. - Input include goods used in the manufacture of capital goods which are

4.4 Central Excise further used in the factory of the manufacturer. For the purpose of better under standing, if split, the above definition it comes out as follows: Input means a. All goods (except HSD, LDO and Petrol) used in or in relation to the manufactur e of final products directly or indirectly and whether contained in the final pr oduct or not; and Includes i. ii. iii. iv. v. vi lubricating oils; greases, cutt ing oils, coolants, accessories of the final products cleared along with the fin al products, goods used c. as paints as packing material, as fuel, for generatio n of electricity or steam used for manufacture of final products or for any othe r purpose, within the factory of production. b. All goods, except light diesel oil, high speed diesel oil, motor spirit, commonl y known as petrol and motor vehicles, used for providing any output service. It would be worthwhile to examine the scope of the term input. The definition of t he term is given in two parts. The first part gives the wide definition covering all the goods used in or in relation to manufacture. The use may be direct or i ndirect. Also it is not relevant whether the inputs form an identifiable part in the finished product on which duty has to be paid. The second part of the defin ition gives the list of various examples of inputs to be included in the definit ion of inputs. The said examples are basically given to clarify the issues which were persisting in the earlier Modvat scheme. In the Modvat scheme there was an issue as to eligibility of the Modvat on goods used as paints, fuel, packing ma terials, used for generation of electricity and also regarding parts and assesso ries just fitted in the final product or given along with the final product. Fur ther, if we analyse, inputs mean anything that is put into the stream of manufac ture. Manufacture in excise is an inclusive definition that includes incidental and ancillary

Cenvat Credit Rules, 2004 4.5 processes necessary for completion of a manufactured product. The term inputs is only given an inclusive definition in the Rules and would therefore tend to hav e a wide meaning so as to cover raw materials, components, consumables, parts et c. but will exclude capital goods as defined in Rule 2(a). The cardinal tests wo uld be to see whether: (a) the inputs are used in or in relation to manufacture of the goods (b) the inputs do not fall within the excluded category, for e.g., pl ant/machinery/tools, etc. which are eligible for capital goods credit. If the ab ove tests are satisfied, then the item would be an eligible input for the purpos e of Cenvat. The term input should be viewed in the light of the fact that the Cen vat scheme is a beneficial legislation and should be given as wide a meaning as possible. A combined reading of definition of capital goods and inputs shows tha t capital goods which are used as component parts in the manufacture of final pr oducts are eligible for Cenvat credit as inputs. The Tribunal in case of Digital Equipments case - 1996 (86) E.L.T. 127 has held that small computers would be co nsidered as a component part of large computers thereby, making them eligible fo r MODVAT credit as an input. The large bench of the Tribunal in Union Carbide In dia Ltd v. CCE - 1996 (86) E.L.T. 613 held that parts of machines are also eligi ble for MODVAT credit as inputs. The decision was rendered in respect of a case prior to introduction of MODVAT on capital goods under MODVAT Scheme. However, t his goes to show the wide scope given to the term inputs. Considering the above definition of inputs, we need to examine the definition in detail: Inputs used a s fuel With effect from 1-3-1994, inputs used as fuel were made specifically eli gible for MODVAT credit. Fuel is basically raw material for fire. Even prior to this amendment, there were several Tribunal decisions holding that oxygen and ac etylene gas were eligible inputs when used as fuel. Explanation to Rule 2(g) exc ludes HSD, LDO and petrol from the scope of inputs irrespective of the use to wh ich they are put. It is also unfortunate to note that clause 108 of the Finance Act, 2000 disallowed HSD as an input with retrospective effect from 163-1995 and recover all duties which have been taken from that date. There is no basis for this bias towards the fuel by the Legislature which is unfortunate. Inputs used for generation of electricity or steam This clause was introduced originally in Explanation to Rule 57A with effect from 16-3-95. In Ballarpur Industries Ltd v. CCE 2000 (116) E.L.T. 312, the Larger Bench of the Tribunal and in Reliance Ind ustries Ltd v. CCE - 1997 (93) E.L.T. 213 (T-WZB) the Tribunal has held that fur nace oil, light diesel oil and low sulphur heavy stock used as fuel in producing steel which in turn is used in the manufacture of final products is eligible fo r credit. However, now

4.6 Central Excise light diesel oil has been excluded from the list of inputs eligible for cenvat c redit. The Tribunal has noted that this is the position even prior to 1995 when the amendment was introduced. The only condition is that the electricity or stea m generated is to be used in the factory of production for any purpose. The Trib unal has held in Rathi Alloys and Steel Ltd v. CCE - 1997 (93) E.L.T. 594 (T-NZB ) that residual fuel oil and low density oil used in generators for making elect ric arch furnace operational is covered by the clause inputs used as fuel and the later amendment including inputs used for electricity or steel is only clarifica tory and therefore retrospective in effect. In the new definition of the input i t is clearly spelt out that the goods used for generation of electricity or stea m used for manufacture of final products or for any other purpose, within the fa ctory of production are eligible for credit. It would be pertinent to note that steam falls within Chapter 28.51 of the Excise Tariff but electricity is not an excisable good since it is not found in the Tariff at all. This would be clear w hen one looks at Customs Tariff wherein electrical energy is included in Chapter 27.16 of the Tariff. Irrespective of whether they are excisable goods or not, i nputs used for their generation are eligible provided they are consumed captivel y within the same factory. Therefore, power plants whose end product is generati on of electricity would not be eligible for Cenvat credit unless they are locate d inside the factory of manufacture of other excisable goods. Packing materials Rule 2(k) includes in its definition the goods used as packing materials whereby it allows credit on packing materials. There seems to be no restriction on thos e packing materials which do not enter the assessable value. It would be worthwh ile to look briefly at the chequered history of packing materials as regards its eligibility. In the erstwhile Explanation to Rule 57A, packaging material was e ligible for MODVAT credit. This was interpreted by the Department as including o nly ready to use packages and not raw materials used for manufacturing such pack ages. However, this controversy was set at rest by the Madras High Court in Pond s India Ltd v. CCE 1993 (63) E.L.T. 3 wherein the High Court held that the term packaging materials means not only ready to use packages but also raw materials used to manufacture such packages. Rule 57B very specifically says packing mater ials and materials from which such packing materials are made are eligible input s provided the cost of such packs is included in the value of finished product. Accessories [2(k)] The term accessories is defined in Oxford English Dictionary as something contributing in a subordinate degree to a general result or effect as distinguished from parts which are essential to make the commodity and on whi ch credit is available under Rule 3. Websters Dictionary defines it as something extra or something added to help in a secondary way. Generally, an accessory is an object that is not essential in itself but, adds to the beauty, convenience or effectiveness of something else. The amendment to include accessories as

Cenvat Credit Rules, 2004 4.7 an eligible input came about with effect from 29.6.95 in the erstwhile Explanati on to Rule 57A (vide notification 28/95). However, the Tribunal took a view in B PL Sanyo Ltd v. CCE 1996 (82) E.L.T. 337 (T-SRB SM) that accessories have never been excluded from the scheme of MODVAT. The present Rule as it stands today is that accessories which are cleared along with the final product is eligible for Cenvat credit. Therefore, if accessories are supplied after clearance of the fin al products, they will not be eligible for MODVAT credit. The Supreme Court has held in CCE v. Jay Engg. Works Ltd. - 1989 (39) E.L.T. 169, that name plate affi xed on the fan is an eligible input since they are essential for marketing the f ans. This view was reiterated by the Supreme Court in HMM Ltd v. CCE - 1994 (74) E.L.T. 19, wherein it was held that metal screw cap put on Horlicks bottle is a component part of the finished product. Lubricating oils, greases, cutting oils and coolants These items are now specifically included in the definition of the inputs. With effect from 1.3.97, lubricating oils, greases, cutting oils and co olants were excluded from the scope of inputs and they were specifically held el igible under Rule 57Q pertaining to MODVAT on capital goods. But, with effect fr om 1.9.97, lubricating oils, greases, cutting oils and coolants had been given t he benefit of both Rules 57B and 57Q. However, it must be noted that prior to 1. 3.97, there were numerous judgements in which lubricating oils were held eligibl e for MODVAT credit as inputs. See Tribunal decision in Pragati Paper Mills Ltd v. CCE -1996 (88) E.L.T. 137 (T-NZB SM) and CCE v. Kunal Engg. Co. Ltd - 1992 (6 2) E.L.T. 560 (TSRB). Even this controversy is settled by decision of Larger Ben ch in CCE v. Modi Rubber Ltd. - 2000 (119) E.L.T. 197 (T-LB), wherein the Larger Bench held that lubricating oils and greases are eligible for Modvat. Inputs ma nufactured and used within the factory of production Though there is no express provision for such cases in Rule 3, it is implied that credit is allowable since the final product manufactured is dutiable. If an assessee manufactures certain goods that are consumed by him in the further manufacture of other end products , Rule 4 of the Central Excise Rules, 2002, deems captive consumption as amounti ng to removal under the Excise Rules. This concept was brought about vide notifi cation 20/82, dated 20.2.82 with retrospective effect from 1944 in Rules 9 & 49 of CER, 1944. This amendment was upheld by the Supreme Court in J.K.Spinning and Weaving Mills Ltd v. UOI - 1987 (32) E.L.T. 234. Therefore, captive consumption of inputs attracts the levy of excise which can be modvated by virtue of this R ule. It would also be pertinent to note that currently Notification No. 67/95, d ated 16.3.95 exempts inputs manufactured and consumed captively for production o f final products on which duty is payable. The Board in its supplementary instru ction dated 1-9-2001, has clarified that Cenvat credit should not be denied if t he inputs are used in any intermediate product arising in the course of manufact ure of the final product (dutiable) even if such intermediate product is exempt from payment of duty.

4.8 Central Excise Paints Paint has been specified as an input under Rule 2(k) though normally it i s used only after the product is completed. Painting ensures that the final prod uct becomes marketable and therefore, they have expressly included it as input. Thinners that are used to dilute paints are also eligible for MODVAT credit as p er the decision of the Tribunal in CCE v. Facit Asia Ltd. - 1992 (60) E.L.T. 157 (T-SRB). A combined reading of definition of capital goods and inputs shows tha t capital goods which are used as component parts in the manufacture of final pr oducts are eligible for Cenvat credit as inputs. The Tribunal in case of Digital Equipments case - 1996 (86) E.L.T. 127 has held that small computers would be co nsidered as a component part of large computers thereby, making them eligible fo r MODVAT credit as an input. The large bench of the Tribunal in Union Carbide In dia Ltd v. CCE - 1996 (86) E.L.T. 613 held that parts of machines are also eligi ble for MODVAT credit as inputs. The decision was rendered in respect of a case prior to introduction of modvat on capital goods under Modvat Scheme. However, t his goes to show the wide scope given to the term inputs. ILLUSTRATIVE LIST OF J UDICIAL DECISIONS ON INPUT CREDIT UNDER MODVAT/CENVAT Input (1) Alumina Regeneta l Abrasive Paper Final product (2) pellets/ Oxygen Acetylene Emery In general No Yes Yes Yes Eligibility Authority (3) Yes (4) CCE v. Indian Oxygen Ltd 1995 (78 ) E.L.T. 270 (T-SZB) Bajaj Auto Ltd. v. CCE 1998 (101) E.L.T. 638 (T-WZB) Maruti Udyog Ltd v. CCE 1999 (107) E.L.T. 118 (T-NZB) Bharat Forges Ltd v. CCE 1999 (1 12) E.L.T. 68 (T-WZB) Bajaj Auto Ltd v. CCE 1998 (99) E.L.T. 479 (T-WZB) Being u sed in relation to manufacture. Jaypee Rewa Cement v. CCE 2001 (133) E.L.T. 3 (S C) Clock assembly, Deluxe model radio, audio system of Maruti car Cutting oil quenc hing oil Electrodes & Forgings Used in welding machines for spot welding Cement Explosives Yes

Cenvat Credit Rules, 2004 Filter bags Luggage carrier Sugar Tata Sumo No Yes 4.9 Gwalior Sugar Co. Ltd v. CCE 1992 (59) E.L.T. 482 (T-NZB) Telco Ltd v. CCE 1999 (106) E.L.T. 84 (T-WZB SM) Inputs used in or in relation to manufacture : Rule 2(k) specifies that credit o f specified duty shall be allowed only on those inputs which are used in or in r elation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not. The Cenvat scheme allows credit o n inputs used in or in relation to the manufacture of final products. The Suprem e Court in case of J.K.Cotton Spinning and Weaving Mills Co. Ltd v. S.T.O. 1997 (91) E.L.T. 34, has held that the expression in the manufacture of goods should no rmally encompass the entire process carried on by the dealer of converting raw m aterials into finished goods. Where any particular process of activity is so int egrally related to the ultimate manufacture of goods, so that, without that proc ess or activity manufacture may, even if theoretically possible, be commercially inexpedient, goods intended for use in the said process or activity would fall within the expression in the manufacture of goods. They need not be ingredients of commodities used in the process, nor must they be directly and actually needed for turning out the creation of goods. This decision is rendered in relation to sales tax legislation, still it is frequently used in modvat cases also. In Coll ector v. East End Paper Industries Ltd - 1989 (43) E.L.T. 201 the Supreme Court held that anything that enters into and forms the part of the manufacturing proc ess or is required to make the article marketable must be deemed to be a raw mat erial or component part of the end product and must be deemed to have been used in completion or manufacture of the end product. In this specific case, wrapping paper was held to be a raw material and component of wrapped paper. It is also clear from Rule 2(k) that the inputs may be used directly or indirectly. In CCE v. Rajasthan Chemical Works - 1991 (55) E.L.T. 444 the Supreme Court while decid ing on the scope of the term in relation of manufacture held that even processes l ike handling of raw materials would be a process in relation to manufacture if i t is integrally connected with further operations leading to manufacture of end products. In Telco v. State of Bihar - 1994 (74) E.L.T. 193, the Supreme Court h eld that the term raw material varies from industry to industry and decided that items like batteries, tyres and tubes, which, though are finished products in t hemselves, can be considered as raw materials for vehicles. Similarly, in CCE v. Jay Engg. Works Ltd. - 1989 (39) E.L.T. 169, the Supreme Court held that name p late fixed on a fan is an input eligible for set off under Notification 201/79 i n view of the fact that without the said name plate the fans cannot be

4.10 Central Excise marketed. Definition clearly says that inputs need not be co ntained in the final product. In CCE v. Ballarpur Industries Ltd - 1989 (43) E.L .T. 804, the Supreme Court held that sodium sulphate used for chemical reaction at pulp stage is treatable as raw material used in the manufacture of paper even though, sodium sulphate is burnt up and does not retain its identity in the end product. The Supreme Court specifically held that the test would be to see whet her without the presence of the said raw material it would be possible to manufa cture the end product. The Madras High Court in Ponds India Ltd v. Collector - 1 993 (63) E.L.T. 3 has held that the words in relation to must be given an extended meaning. Consequently, all processes which are preparatory in nature, but witho ut which the manufacturing process cannot carry on would also be in relation to manufacture. In Indian Farmers Fertilisers Co-op Ltd v. CCE - 1996 (86) E.L.T. 1 77, the Supreme Court had to decide whether raw naphtha used in offsite plants t o produce ammonia which is in turn is used in water treatment plant, steam gener ation plant, effluent treatment plant and inert gas generation plant, could be e ligible for the benefits of exemption notification which was issued exempting am monia used for manufacture of fertilizers. The Supreme Court specifically held t hat water treatment plant, steam generation and inert gas generation plant are n ecessary parts of the process of manufacture of urea. They also held that pollut ion control plant is a part and parcel of the manufacturing process, in view of the emphasis laid on environmental protection. Rule 2(k) allows credit on packin g materials. There seems to be no restriction on those packing materials which d o not enter the assessable value. Madras High Court in Ponds India Ltd v. CCE 19 93 (63) E.L.T. 3 held that the term packaging materials means not only ready to use packages but also raw materials used to manufacture such packages. Raw mater ials used for making cartons eligible for MODVAT - Britannia Industries Ltd v. C CE 1993 (67) E.L.T. 980 (T-EZB) Oil paint used to mark under Rule 51 on packages eligible - Sterlite Inds Ltd v. CCE 1995 (75) E.L.T. 712 (T-WZB) Duplex boards used for producing cartons which was used to pack torches is eligible for MODVAT - Geep Indl Syndicate Ltd v. CCE 1995 (76) E.L.T. 399 (T-NZB) Cellophane tapes used for sealing cartons eligible - Kashmir Vanaspati Ltd v. CCE 1996 (85) E.L.T . 150 (T-NZB SM) 4.3.7 (i) Input service: Rule 2(l) defines input service as any service used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the

Cenvat Credit Rules, 2004 4.11 manufacture of final products and clearance of fi nal products from the place of removal, and includes services used in relation t o setting up, modernization, renovation or repairs of a factory, premises of pro vider of output service or an office relating to such factory or premises, adver tisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, aud iting, financing, recruitment and quality control, coaching and training, comput er networking, credit rating, share registry, and security, inward transportatio n of inputs or capital goods and outward transportation upto the place of remova l. 4.3.8 Input Service Distributor: Rule 2(m) defines input service distributor as an office of the manufacturer or producer of final products or provider of ou tput service, which receives invoices issued under rule 4A of the Service Tax Ru les, 1994 towards purchases of input services and issues invoice, bill or, as th e case may be, challan for the purposes of distributing the credit of service ta x paid on the said services to such manufacturer or producer or provider, as the case may be. 4.3.9 Job Work: Job work has been defined in Rule 2(n) as processi ng or working upon of raw material or semi-finished goods supplied to the job wo rker, so as to complete a part or whole of the process resulting in the manufact ure or finishing of an article or any operation which is essential for aforesaid process and the expression "job worker" shall be construed accordingly. 4.3.10 Manufacturer or Producer: Manufacturer or producer in relation to articles of je wellery falling under heading 7113 of the First Schedule to the Central Excise T ariff Act includes a person who is liable to pay duty of excise leviable on such goods under sub-rule (1) of rule 12AA of the Central Excise Rules, 2002 [Rule 2 (na)]. 4.3.11 Output service: Rule 2(p) defines output service as any taxable se rvice provided by the provider of taxable service, to a customer, client, subscr iber, policy holder or any other person, as the case may be, and the expressions provider and provided shall be construed accordingly. Here, provider of taxable serv ice" shall include a person liable for paying service tax. "Person liable for pa ying service tax" has the meaning as assigned to it in clause (d) of subrule (1) of rule 2 of the Service Tax Rules, 1994. 4.3.12 Second stage dealer: Rule 2(s) defines "second stage dealer" as a dealer who purchases the goods from a first stage dealer. 4.4 RULE 3 CENVAT CREDIT Sub-rule (1) of Rule 3 allows a manufacturer or producer of final products or a provider of taxable service to take Cenvat credit of

4.12 Central Excise i. ii. iii. iv. v. vi. the duty of excise specified in the F irst Schedule to the Tariff Act, leviable under the Act; (basic excise duty) the duty of excise specified in the Second Schedule to the Tariff Act, leviable und er the Act; (special excise duty) the additional duty of excise leviable under s ection 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1 978; the additional duty of excise leviable under section 3 of the Additional Du ties of Excise (Goods of Special Importance) Act, 1957; the National Calamity Co ntingent duty leviable under section 136 of the Finance Act, 2001; as amended by section 169 of the Finance Act 2003 the Education Cess on excisable goods levia ble under section 91 read with section 93 of the Finance (No.2) Act, 2004; vii. the additional duty leviable under section 3 of the Customs Tariff Act, equ ivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v ) and (vi); vii(a) the additional duty leviable under section 3(5) of the Custom s Tariff Act. It is levied to counter balance the sales tax, value added tax, lo cal tax etc. leviable on a like article on its sale, purchase or transportation in India. However, a provider of taxable service shall not be eligible to take c redit of such additional duty. viii. the additional duty of excise leviable unde r section 157 of the Finance Act, 2003; ix. x. the service tax leviable under se ction 66 of the Finance Act; and the Education Cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004 paid on(i ) any input or capital goods received in the factory of manufacture of final pro duct or premises of the provider of output service on or after the 10th day of S eptember, 2004; and (ii) any input service received by the manufacturer of final product or by the p rovider of output services on or after the 10th day of September, 2004. xi. the additional duty of excise leviable on pan masala and tobacco products under clau se 85 of the Finance Act, 2005. Cenvat credit is also allowed in respect of the said duties, tax or cess paid on any inputs or input service used in the manufacture of intermediate products, b y a job-worker availing the benefit of exemption specified in the Notification N o. 214/86 and received by the manufacturer for use in, or in relation to, the ma nufacture of final products on or after 10.9.2004.

Cenvat Credit Rules, 2004 4.13 It has been clarified that the manufacturer of th e final products and the provider of output service shall be allowed Cenvat cred it of additional duty leviable under section 3 of the Customs Tariff Act on good s falling under heading 9801 of the First Schedule to the Customs Tariff Act. Su b-rule (2) lays down that in respect of goods which are exempt from duty or are nonexcisable goods, if any duty has been paid on inputs lying in stock or in pro cess or inputs contained in the final products lying in stock, Cenvat Credit in respect of such duty will be allowed to the manufacturer or producer of final pr oducts on the date on which such goods cease to be exempted goods or such goods become excisable. Sub-rule (3) lays down that in respect of services which are e xempt from service tax, if any duty has been paid on inputs (received on and aft er the 10th day of September, 2004) lying in stock and used for providing such s ervice, Cenvat Credit in respect of such duty will be allowed to the provider of output service on the date on which such service ceases to be an exempted servi ce. As per Rule 3(4), Cenvat credit can be utilised for: (1) payment of duty of excise levied on any final products. (2) payment of duty on inputs removed as su ch or after being partially processed or capital goods removed as such. (3) paym ent of duty when duty paid goods are returned to factory and are subsequently re moved after being remade, refined or reconditioned. (4) for payment of service t ax on any output service. However, while paying excise duty or service tax, the Cenvat Credit shall be utilised only to the extent such credit is available on t he last day of the month or quarter for payment of duty or tax relating to that month or the quarter. Also the CENVAT credit of the duty, or service tax, paid o n the inputs, or input services, used in the manufacture of final products clear ed after availing of the exemption under the following Notifications (i) No. 32/ 99-CE, dated 8 th July, 1999 (ii) No. 33/99-CE dated 8 th July, 1999 (iii) No. 3 9/2001-CE, dated 31 st July, 2001 (iv) No. 56/2002-CE, dated 14 th November, 200 2 (v) No. 57/2002- CE, dated 14 th November, 2002 (vi) No. 56/2003-CE, dated 25 th June, 2003 and (vii) No. 71/2003-CE, dated 9th September, 2003

4.14 Central Excise shall, respectively, be utilized only for payment of duty on final products, in respect of which exemption under the said respective notific ations is availed of. Also no credit of the additional duty leviable under of se ction 3(5) of the Customs Tariff Act shall be utilised for payment of service ta x on any output service. Further, CENVAT credit of only additional duty of excis e shall be utilised for payment of said additional duty of excise on final produ cts. Rule 3(5) states that if the inputs or capital goods on which Cenvat credit has been taken are removed as such from the factory or premises of the provider of output service, the manufacturer of the final products or provider of output service shall pay an amount equal to the credit availed in respect of such inpu ts or capital goods. Such removal shall be made under the cover of an invoice re ferred to in Rule 9. However, such payment shall not be required to be made wher e any inputs are removed outside the premises of the provider of output service for providing the output service. Further such payment shall not be required to be made when any capital goods are removed outside the premises of the provider of output service for providing the output service and the capital goods are bro ught back to the premises within 180 days, or such extended period not exceeding 180 days as may be permitted by the jurisdictional Deputy Commissioner of Centr al Excise, or Assistant Commissioner of Central Excise, as the case may be, of t heir removal. Sub-rule (5A) provides that if the capital goods are cleared as wa ste and scrap, the manufacturer shall pay an amount equal to the duty leviable o n transaction value. Sub-rule (6) lays down that amount paid under sub-rule (5) and sub-rule (5A) shall be eligible as Cenvat credit as if it was a duty paid by the person who removed such goods under sub-rule (5) and sub-rule (5A). Sub-rul e (7) lays down the method of calculating the amount of Cenvat Credit available in respect of inputs or capital goods produced or manufactured in a 100% Export Oriented Unit or by a unit in a Electronic Hardware Technology Park or Software Technology Park, and used in the manufacture of the final products or in providi ng output service in any other place in India. Cenvat Credit = [X {(1 + BCD/400) CVD/100}] Where BCD = the ad valorem rate of basic customs duty CVD = the ad va lorem rate of additional duty of customs X = assessable value Manner of utilisat ion of Cenvat credit (1) Clause (b) of sub-rule 7 further lays down the manner o f utilisation of Cenvat Credit. It provides that Cenvat credit in respect of -

Cenvat Credit Rules, 2004 4.15 (i) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act , 1978 ; (ii) the National Calamity Contingent duty leviable under section 136 of the Fin ance Act, 2001; (iii) the education cess on excisable goods leviable under secti on 91 read with section 93 of the Finance (No.2) Act, 2004; (iv) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under items (i), (ii) and (iii) above; (v) the additional du ty of excise leviable under section 157 of the Finance Act, 2003; (vi) the educa tion cess on taxable services leviable under section 91 read with section 95 of the Finance (No.2) Act, 2004; and (vii) the additional duty of excise leviable u nder clause 85 of the Finance Act, 2005, the clause which has, by virtue of the declaration made in the said Finance Act under the Provisional Collection of Tax es Act, 1931, the force of law, shall be utilized only towards payment of duty o f excise or as the case may be, of service tax leviable under the said Additiona l Duties of Excise (Textiles and Textile Articles) Act, 1978 or the National Cal amity Contingent duty leviable under section 136 of the Finance Act, 2001, or th e education cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004, or the additional duty of excise leviable un der section 157 of the Finance Act, 2003, or the education cess on taxable servi ces leviable under section 91 read with section 95 of the said Finance (No.2) Ac t, 2004, or the additional duty of excise leviable under clause 85 of the Financ e Act, 2005, the clause which has, by virtue of the declaration made in the said Finance Act under the Provisional Collection of Taxes Act, 1931, the force of l aw, respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service. However, credit of th e education cess on excisable goods and education cess on taxable services can b e utilised, either for payment of the education cess on excisable goods or for t he payment of the education cess on taxable services. It has been clarified that the credit of the additional duty of excise leviable under section 3 of the Add itional Duties of Excise (Goods of Special Importance) Act, 1957 paid on or afte r the 1st day of April, 2000, may be utilised towards payment of duty of excise leviable under the First Schedule or the Second Schedule to the Excise Tariff Ac t. Thus, Basic excise duty, Special excise duty and the Additional excise duty ( GSI) are inter-changeable i.e. credit of duty paid under one head can be utilise d for payment of duty under other head.

4.16 Central Excise (2) The Cenvat credit, in respect of additional duty leviabl e under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falli ng under sub-heading No. 2504.21 or 2504.31 respectively of the First Schedule t o the Tariff Act shall be allowed to the extent of thirty rupees per square metr e; It has been explained that where the provisions of any other rule or notifica tion provide for grant of whole or part exemption on condition of non-availabili ty of credit of duty paid on any input or capital goods, or of service tax paid on input service, the provisions of such other rule or notification shall prevai l over the provisions of these rules. Though there is no reference to waste, ref use or by-product, the C.B.E.C. Circular No.B/4/7/2000-TRU, dated 3.4.2000 has c larified that cenvat credit shall be admissible on the part of the input contain ed in waste, refuse or by-product. Further, the guidelines issued by the Board o n 1 st September 2001 reiterate the same. 4.5 RULE 4 CONDITIONS FOR AVAILING THE CENVAT CREDIT Rule 4 specifies the conditions for allowing Cenvat credit. Sub-r ule 1 allows instant credit on inputs after receipt into the factory of the manu facturer or in the premises of the provider of output service. However, in respe ct of final products, namely, articles of jewellery falling under heading 7113 o f the First Schedule to the Excise Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered pre mises of the person who get such final products manufactured on his behalf, on j ob work basis, subject to the condition that the inputs are used in the manufact ure of such final product by the job worker. Sub-rule 2(a) however restricts the quantum of credit in respect of capital goods received in a factory or in the p remises of the provider of output service at any point of time in a given financ ial year as under: a. b. Upto 50% in the same financial year; Balance in one or more subsequent financial years provided the capital goods is still in the posse ssion and use of the manufacturer; If the capital goods are cleared as such in the same financial year, Cenvat cred it in respect of such capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year. Further, the CENVAT credit of the additional duty leviable under section 3(5) of the Customs Tariff Act in respect of capital goods shall be allowed for the whole amount of the du ty, immediately on receipt of the capital goods in the factory of a manufacturer . In respect of certain capital goods like components, spares and accessories, r efractories and refractory materials, moulds and dies and goods falling under He ading 68.02/6801.10, of the Central Excise Tariff, the condition regarding posse ssion of the capital goods in the

Cenvat Credit Rules, 2004 4.17 second year is not there since these are consumab le items, provided they are not sold. Illustration.- A manufacturer received mac hinery on the 16th day of April, 2002 in his factory. Cenvat of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of on e lakh rupees in the financial year 2002-2003, and the balance in subsequent yea rs.. Sub-rule (3) allows Cenvat credit for capital goods acquired on lease, hire -purchase or through loan from a financing company. Sub-rule (4) provides that n o Cenvat credit shall be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manu facturer or provider of output service claims as depreciation under section 32 o f the Income-tax Act, 1961. In other words the manufacturer or provider of outpu t service cannot enjoy the benefit of both depreciation allowance as well as Cen vat Credit. Sub-rule 7 provides that Cenvat credit in respect of input service s hall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or , as the case may be, challan referred to in rule 9. 4.6 JOB WORK PROVISIONS [RU LE 4(5) AND 4(6)] The goods (being inputs or capital goods) may be sent to the job worker for furt her processing, testing, repair, reconditioning or for the manufacture of interm ediate goods necessary for the manufacture of final products or any other purpos e. Rule 4(5) lays down that in order to avail Cenvat credit on such goods a time limit of 180 days has been fixed before which the goods must be ordinarily retu rned to the factory. In case the goods are not returned within 180 days the cred it on such goods has to be reversed. However, credit can be retaken once the goo ds come back. Sub-rule 5(b) extends the Cenvat credit in respect of moulds, dies , jigs and fixtures sent by a manufacturer of final products to a job worker for production of goods on his behalf according to his specifications without any t ime limit for its return. Sub-rule (6) allows direct despatch or clearance of fi nal products from job workers premises subject to the approval of Deputy Commissi oner of Central Excise or Assistant Commissioner of Central Excise, as the case may be, in each such case of removal. This approval can be granted on an annual basis to each job worker. 4.7 RULE 5 REFUND OF CENVAT CREDIT This rule provides a benefit for inputs or input services that are used

4.18 Central Excise (i) in the manufacture of final product which is cleared for export under bond or letter of undertaking (LUT), or (ii) in the intermediate product cleared for export, or (iii) in providing outpu t service which is exported. The CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of, (i) duty of excise on any final product cl eared for home consumption or for export on payment of duty; or (ii) service tax on output service, Where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed re fund of such amount subject to such safeguards, conditions and limitations, as m ay be specified, by the Central Government, by notification. It is important to note here that cash refund of CENVAT is possible only for exports and not for ho me clearance. However, no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and C entral Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Ce ntral Excise Rules, 2002, in respect of such duty; or claims rebate of service t ax under the Export of Service Rules, 2005 in respect of such tax. Further no cr edit of the additional duty leviable under sub-section (5) of section 3 of the C ustoms Tariff Act shall be utilised for payment of service tax on any output ser vice. Here, output service which is exported means the output service exported in accordance with the Export of Services Rules, 2005. The safeguards, conditions a nd limitations, subject to which the refund under Rule 5 of CENVAT Credit Rules, 2004 shall be granted, are as follows: 1. The final product or the output servi ce is exported in accordance with the procedure laid down in the Central Excise Rules, 2002, or the Export of Services Rules, 2005, as the case may be. The clai ms for such refund are submitted not more than once for any quarter in a calenda r year. However, where,(a) the average export clearances of final products or th e output services in value terms is 50% or more of the total clearances of final products or output services, as the case may be, in the preceding quarter; or ( b) the claim is filed by Export Oriented Unit, 2.

Cenvat Credit Rules, 2004 4.19 the claim for such refund may be submitted for ea ch calendar month. 3. The manufacturer or provider of output service, as the cas e may be, submits an application in the prescribed Form to the Deputy/Assistant Commissioner of Central Excise, as the case may be, in whose jurisdiction,(a) th e factory from which the final products are exported is situated, along with the Shipping Bill or Bill of Export, duly certified by the officer of customs to th e effect that goods have in fact been exported; or (b) the registered premises o f the service provider from which output services are exported is situated, alon g with a copy of the invoice and a certificate from the bank certifying realizat ion of export proceeds 4. The refund is allowed only in those circumstances wher e a manufacturer or provider of output service is not in a position to utilize t he input credit or input service credit allowed under rule 3 of the said rules a gainst goods exported during the quarter or month to which the claim relates (he reinafter referred to as the given period). The refund of unutilised input service credit will be restricted to the extent of the ratio of export turnover to the total turnover for the given period to which the claim relates i.e. Maximum refu nd = Total CENVAT credit taken on input services during the given period export turnover Total turnover Illustration: If total credit taken on input services fo r a quarter = Rs. 100 Export turnover during the quarter = Rs 250 Total Turnover during the quarter = Rs 500 Refund of input service credit under Rule 5 of the CENVAT Credit Rule, during the quarter = 100*250/500 i.e. Rs 50 Explanation: For the purposes of condition no.5,1. Export turnover shall mean the sum total of the value of final products and output services exported during the given period in respect of which the exporter claims the facility of refund under this rule. Tot al turnover means the sum total of the value of,(a) all output services and exemp ted services provided, including value of services exported; (b) all excisable a nd non excisable goods cleared, including the value of goods exported; (c) the v alue of bought out goods sold, 5. 2.

4.20 Central Excise during the given period. 6. The application in the prescribe d form along with the prescribed enclosures and the relevant extracts of the rec ords maintained under the Central Excise Rules, 2002, CENVAT Credit Rules, 2004, or the Service Tax Rules, 1994, in original, are filed with the Deputy/Assistan t Commissioner of Central Excise, as the case may be, before the expiry of the p eriod specified in section 11B of the Central Excise Act, 1944. The refund of ex cise duty or service tax is allowed by the Deputy/Assistant Commissioner of Cent ral Excise, as the case may be. 7. 4.8 RULE 6 - OBLIGATION OF MANUFACTURER OF DUTIABLE AND EXEMPTED GOODS AND PROVI DER OF TAXABLE AND EXEMPTED SERVICES Rule 6(1) provides that Cenvat credit shall not be allowed on such input or input service which is used in the manufacture of exempted goods or exempted services. The credit to the extent taken on inputs used for exempted products and exempted services must be reversed subject to th e Rule 6(2). CBE&C has clarified vide its Circular No. 754/70/2003-CX dated 9.10 .2003 that no credit can be taken on inputs which are used exclusively in or in relation to the manufacture of exempted final products. However, the CENVAT cred it on inputs shall not be denied to job worker referred to in rule 12AA of the C entral Excise Rules, 2002, on the ground that the said inputs are used in the ma nufacture of goods cleared without payment of duty under the provisions of that rule. Rule 6(2) provides for reversal of Cenvat credit when a manufacturer or pr ovider of output service avails of Cenvat credit in respect of any inputs or inp ut services and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services. The Rule gives an option to the manufacturer or the provider of output service to do the following: (a) The manufacturer or the provider of output service may maint ain separate accounts for receipts, consumption and inventory of inputs meant fo r use in the manufacture of dutiable final products or in providing output servi ce and the quantity of input meant for use in the manufacture of exempted goods or services. He may then take Cenvat credit only on that quantity of inputs or i nput services which are intended for use in the manufacture of dutiable goods or in providing output service on which service tax is payable. (b) The manufactur er opting not to maintain separate accounts may do any of the following : (i) If the exempted goods are :

Cenvat Credit Rules, 2004 4.21 goods falling within heading No.22.04 of the Firs t Schedule Low Sulphur Heavy Stock (LSHS) falling under Chapter 27 used in the g eneration of electricity Naptha (RN) falling under Chapter 27 used in the manufa cture of fertilizer newsprint, in rolls or sheets, falling uner heading no.48.01 final products under Chapter 50 to 63. Naptha (RN) and furnace oil falling with in Chapter 27 used for generating electricity goods cleared for supply to defenc e personnel, defence projects or to the Ministry of Defence for official purpose s under Notification No. 70/92-C.E., dated the 17.06.1992, 62/95-C.E., 63/95-C.E . and 64/95-C.E. all dated the 16.03.1995 Liquefied Petroleum Gases (LPG) fallin g within tariff item 2711 12 00, 2711 13 00 and 2711 19 00 of the First Schedule Kerosene falling within heading 2710 of the said First Schedule, for ultimate s ale through public distribution system. the manufacturer shall pay an amount equivalent to the Cenvat credit attributabl e to the inputs and input services used in, or in relation to, the manufacture o f such goods at the time of their clearance from the factory. (ii) If the exempt ed goods are other than those mentioned in (i), the manufacturer shall pay an am ount of 10% of the total price (excluding sales tax and other taxes paid on such goods) charged by the manufacturer for the sale of the exempted final product a t the time of clearance from the factory. (iii) the provider of output service s hall utilize credit only to extent of an amount not exceeding 20% of the amount of service tax payable on taxable output service. For the above purpose, the amo unt mentioned in (i) and (ii) above shall be paid by debiting the Cenvat credit or otherwise. If the manufacturer or provider of output service fails to pay the amount it shall be recovered along with interest in the same manner under rule 14 for recovery of Cenvat credit wrongly taken. It is clarified that the credit shall not be allowed on inputs and input services used exclusively for the manuf acture of exempted goods or exempted services. Sub-rule (4) specifies that no Ce nvat credit would be allowed on capital goods used exclusively in the manufactur e of exempted goods or in providing exempted services, other

4.22 Central Excise than the final products which are exempt under any notificat ion on the basis of the value or quantity of clearances made in a financial year . This would mean that for the clearances undertaken through Notifications 8/200 3, Cenvat credit on capital goods can be availed, though the utilisation will be subject to the conditions of that notification. Sub-rule (5) lays down that if the following input services are used commonly, either in the manufacture of bot h dutiable as well as exempted goods or in rendering taxable as well as exempted goods, the obligations prescribed under the rules, will not be attracted. Howev er, if these services are exclusively used either in the manufactured of exempte d goods or in rendering exempted service, no credit can be availed. (i) Consulti ng engineer. (ii) Architect. (iii) Interior decorator. (iv) Management consultan t. (v) Real estate agent. (vi) Security agency. (vii) Scientific or technical co nsultancy. (viii) Banking and other financial services. (ix) Insurance auxiliary services. (x) Erection, commissioning and Installation agency. (xi) Maintenance or repair. (xii) Technical testing and analysis. (xiii) Technical inspection an d certification. (xiv) Foreign exchange brokers. (xv) Construction service. (xvi ) Intellectual property service. Sub rule (6) exempts the following clearances f rom the operation of sub rule 1 to 4 of this Rule. In other words, where common inputs are utilised for clearances of exempt products to the aforesaid categorie s, the need to follow the procedure of reversal need not be adhered to. Category to whom supplied 1. Units in Special Economic Zone

Cenvat Credit Rules, 2004 4.23 2. 3. 4. 5. 6. 7. 8. Units in 100% EOU Units in E lectronic Hardware Technology Park (EHTP) Units in Software Technology Park (STP ) United Nations or International Organisations vide Notification 108/95, dated 28.8.1995 cleared for export under bond in terms of the provisions of the Centra l Excise Rules, 2002 gold or silver falling within Chapter 71 of the said First Schedule, arising in the course of manufacture of copper or zinc by smelting or. all goods which are exempt from the duties of customs leviable under the First Schedule to the Customs Tariff Act, 1975 and the additional duty leviable under section 3 of the said Customs Tariff Act when imported into India and supplied a gainst International Competitive Bidding in terms of notification No. 6/2002-Cen tral Excise dated the 1st March, 2002. OPTION TO PAY DUTY 4.9 An interesting question which arises is whether a manufacturer can continue to p ay duty and avail Cenvat even if his product is exempt from duty. It is quite tr ue that the Supreme Court has held in CCE v. Parle Exports Ltd. - 1988 (38) E.L. T. 741 that notifications are to be construed as part of the statute itself. The A.P. High Court in Ganesh Metal Processing Industries v. UOI - 1996 (81) E.L.T. 11 held in the context of Notification 202/88 that once an exemption notificati on exists Modvat credit cannot be availed and that clearance cannot be added. Ho wever, the Tribunal has been consistently holding (even after the AP High Court decision) that the assessee has an option to either go for Cenvat or to opt for exemption notification. Few examples of such cases are a. b. c. d. e. Bansal Aut o Parts Industries v. CCE - 1998 (79) ECR 850 (T-NZB); Everest Convertors v. CCE - 1995 (80) E.L.T. 91(T-EZB); Polychem Ltd. v. CCE - 1997 (90) E.L.T. 156 (T-NZ B), Gothi Plastic Industries v. CCE - 1996 (83) E.L.T. 123 (T-SZB); Mechciv Engi neers v. CCE - 1997 (20) RLT 200 (T-NZB SM) In view of the fact that the definition of final products contained in Rule 2 is w ide enough to cover exempted goods, it seems as if this controversy is set to cont inue. The Department could take a stance that since there are two separate defin itions for final products and exempted goods, one does not include the other.

4.24 Central Excise 4.10 RULE 7 MANNER OF DISTRIBUTION OF CREDIT BY INPUT SERVIC E DISTRIBUTOR In real life situations, many a time the bill / invoice is raised in the name of head office/regional office etc. for services which are actually received in the factory (or factories) or premises of service provider. In addit ion, the bill for services which are not specific for any factory/premises, such as advertising, market research, management consultancy etc. would also be rece ived only in these offices. Rule 7 tends to provide a way to distribute such cre dit to the factory or the premises of the output service provider. Rule 2(m) rea d with rule 7 defines an "input service distributor" as an office of manufacture r or provider of out put service which receives invoices towards purchase of inp ut services and issues invoice, bill or challan for the purpose of distributing the credit of service tax paid on the services to its manufacturing units or uni ts providing output service. Thus the distributor is comparable to dealers under the CENVAT scheme of inputs and capital goods. The document issued by him is be ing accepted under law as eligible document under rule 9(1)(g) for availing cred it. To pass on the credit, the input service distributor has to obtain service t ax registration, comply with new rule 4A of Service Tax Rules and file half-year ly statement with the Superintendent under rule 9(10) of Cenvat rules 2004. The input service distributor may distribute the Cenvat credit in respect of the ser vice tax paid on the input service to its manufacturing units or units providing output service, subject to the following condition, namely:(a) the credit distr ibuted against a document referred to in rule 9 does not exceed the amount of se rvice tax paid thereon; or (b) credit of service tax attributable to service use in a unit exclusively engaged in manufacture of exempted goods or providing of exempted services shall not be distributed. 4.11 RULE 8 STORAGE OF INPUTS OUTSID E THE FACTORY OF THE MANUFACTURER The Assistant/Deputy Commissioner can also per mit the inputs in respect of which Cenvat has been taken to be stored outside th e factory of the manufacturer concerned. However, such storage of inputs outside the factory shall be allowed only in the exceptional circumstances having regar d to the nature of the goods and shortage of storage space at the premises of su ch manufacturer, and shall be subject to suitable safeguards against any loss of revenue. Where such inputs are not subsequently brought into the factory for us e in the manner prescribed in the Cenvat Credit Rules for any reason whatsoever, it has been stipulated that the manufacturer of the final products shall pay a duty of excise equal to the amount of credit that has been availed in respect of such inputs.

Cenvat Credit Rules, 2004 4.25 4.12 RULE 9 - DOCUMENTS AND ACCOUNTS Sub-rule (1) allows manufacturer or the provider of output service or input service distribu tor to avail Cenvat credit on the basis of the following documents Nature of doc ument 1. Invoice issued by manufacturer for clearance of inputs or capital goods from his factory, his depot, premises of the consignment agent, any other premi ses from where the goods are sold by or on his behalf 2. 3. Invoice issued by ma nufacturer for clearance of inputs or capital goods as such Invoice issued by an importer 4. Invoices issued by an importer from his depot, premises of his consignment ag ent if the said depot or the premises are registered in terms of the provisions of the Central Excise Rules 2002. 5. Invoice issued by a first stage dealer or s econd stage dealer under Central Excise Rules, 2002 6. Bill of entry 7. Supplementary invoice issued by manufacturer or importer of inputs or capital goods for payment of additional duty of customs 8. Certificate issued by an app raiser of customs in respect of goods imported through a foreign post office. 9. a challan evidencing payment of service tax by the person liable to pay service tax under sub-clauses (iii), (iv), (v) and (vii) of clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994 10. an invoice, a bill or challan iss ued by a provider of input service on or after the 10th day of, September, 2004 11. an invoice, bill or challan issued by an input service distributor under rul e 4A of the Service Tax Rules, 1994. Sub rule 2 provides that the Cenvat credit shall not be denied on technical grou nds of the input document not containing all the particulars required to be indi cated therein. However, for allowing credit on such documents, it is necessary t hat such documents contain details of payment of duty or service tax, descriptio n of the goods or taxable service, assessable value, name and address of the fac tory or warehouse or provider of output service.

4.26 Central Excise The Deputy Commissioner of Central Excise or the Assistant C ommissioner of Central Excise, as the case may be, having jurisdiction over the factory of a manufacturer or provider of output service intending to take Cenvat credit, or the input service distributor distributing Cenvat credit on input se rvice, is satisfied that the duty of excise or service tax due on the input or i nput service has been paid and such input or input service has actually been use d or is to be used in the manufacture of final products or in providing output s ervice, then, such Deputy Commissioner of Central Excise or the Assistant Commis sioner of Central Excise, as the case may be, shall record the reasons for not d enying the credit in each case. The manufacturer or producer of excisable goods or provider of output service taking Cenvat credit on input or capital goods or input service, or the input service distributor distributing Cenvat credit on in put service shall take all reasonable steps to ensure that the input or capital goods or input service in respect of which he has taken the Cenvat credit are go ods or services on which the appropriate duty of excise or service tax as indica ted in the documents accompanying the goods or relating to input service, has be en paid.. The manufacturer or producer of excisable goods or provider of output service taking Cenvat credit on input or capital goods or input service or the i nput service distributor distributing Cenvat credit on input service on the basi s of, invoice, bill or, as the case may be, challan received by him for distribu tion of input service credit shall be deemed to have taken reasonable steps if h e satisfies himself about the identity and address of the manufacturer or suppli er or provider of input service, as the case may be, issuing the documents speci fied in sub-rule (1), evidencing the payment of excise duty or the additional du ty of customs or service tax, as the case may be, either(a) from his personal kn owledge; or (b) on the basis of a certificate given by a person with whose handw riting or signature he is familiar; or (c) on the basis of a certificate issued to the manufacturer or the supplier or, as the case may be, the provider of inpu t service by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or such supplier or provider of output service has his place of business or where the provider of input service has paid the servi ce tax. Where the identity and address of the manufacturer or the supplier or th e provider of input service is satisfied on the basis of a certificate, the manu facturer or producer or provider of output service taking the Cenvat credit or i nput service distributor distributing Cenvat credit shall retain such certificat e for production before the Central Excise Officer on demand [Sub-rule 3]. Sub-r ule (4) lays down that the Cenvat credit in respect of input or capital goods pu rchased from a first stage dealer or second stage dealer shall be allowed only i f such first stage

Cenvat Credit Rules, 2004 4.27 dealer or second stage dealer, as the case may be , has maintained records indicating the fact that the input or capital goods was supplied from the stock on which duty was paid by the producer of such input or capital goods and only an amount of such duty on pro rata basis has been indica ted in the invoice issued by him. As per sub-rule (5), the manufacturer of final products or the provider of output service shall maintain proper records for th e receipt, disposal, consumption and inventory of the input and capital goods in which the relevant information regarding the value, duty paid, Cenvat credit ta ken and utilized, the person from whom the input or capital goods have been proc ured is recorded and the burden of proof regarding the admissibility of the Cenv at credit shall lie upon the manufacturer or provider of output service taking s uch credit. Sub-rule (6) specifies that the manufacturer of final products or th e provider of output service shall maintain proper records for the receipt and c onsumption of the input services in which the relevant information regarding the value, tax paid, Cenvat credit taken and utilized, the person from whom the inp ut service has been procured is recorded and the burden of proof regarding the a dmissibility of the Cenvat credit shall lie upon the manufacturer or provider of output service taking such credit. The manufacturer of final products shall sub mit within ten days from the close of each month to the Superintendent of Centra l Excise, a monthly return in the form specified, by notification, by the Board. However, a manufacturer availing exemption under a notification based on the va lue or quantity of clearances in a financial year shall file a quarterly return in the form specified, by notification, by the Board within twenty days after th e close of the quarter to which the return relates [Sub-rule 7]. A first stage d ealer or a second stage dealer, as the case may be, shall submit within fifteen days from the close of each quarter of a year to the Superintendent of Central E xcise, a return in the form specified, by notification, by the Board [Sub-rule 8 ]. Sub-rule (9) lays down that the provider of output service availing Cenvat cr edit, shall submit a half yearly return in form (ST-3) specified, by notificatio n, by the Board to the Superintendent of Central Excise, by the end of the month following the particular quarter or half year. Sub-rule (10) prescribes that th e input service distributor, shall submit a half yearly return, giving the detai ls of credit received and distributed during the said half year to the Superinte ndent of Central Excise, by the end of the month following the half year. 4.13 R ULE 9A INFORMATION RELATING TO PRINCIPAL INPUTS A manufacturer of final products has to furnish to the Superintendent of Central Excise a declaration in the pre scribed Form (ER 5) in respect of the principal inputs and the quantity of such principal inputs required for use in the manufacture of unit quantity of each of the excisable goods manufactured or to be manufactured by him. Such declaration has to be

4.28 Central Excise filed annually by 30th April of each Financial Year. However , for the year 2004-05, such information can be furnished by 31st December, 2004 . If a manufacturer of final products intends to make any alteration in the info rmation so furnished he shall furnish information to the Superintendent of Centr al Excise together with the reasons for such alteration before the proposed chan ge or within 15 days of such change in the prescribed Form. Further, as manufact urer of final products has to submit, a monthly return in the prescribed Form (E R 6), in respect of information regarding the receipt and consumption of each pr incipal inputs with reference to the quantity of final products manufactured by him. Such return shall be filed within ten days from the close of each month, to the Superintendent of Central Excise. The Central Government may, by notificati on and subject to such conditions or limitations, as may be specified in such no tification, specify manufacturers or class of manufacturers who may not be requi red to furnish such declaration or monthly return. Here, principal inputs means any input which is used in the manufacture of final products where the cost of s uch input constitutes not less than 10% of the total cost of raw-materials for t he manufacture of unit quantity of a given final product. 4.14 RULE 10 - TRANSFE R OF CREDIT (1) If a manufacturer of the final products shifts his factory to an other site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a jo int venture with the specific provision for transfer of liabilities of such fact ory, then, the manufacturer shall be allowed to transfer the Cenvat credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgam ated factory. (2) If a provider of output service shifts or transfers his busine ss on account of change in ownership or on account of sale, merger, amalgamation , lease or transfer of the business to a joint venture with the specific provisi on for transfer of liabilities of such business, then, the provider of output se rvice shall be allowed to transfer the Cenvat credit lying unutilized in his acc ounts to such transferred, sold, merged, leased or amalgamated business. (3) The transfer of the Cenvat credit under sub-rules (1) and (2) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also tran sferred along with the factory or business premises to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Deputy Commissioner of Central Excise o r, as the case may be, the Assistant Commissioner of Central Excise.

Cenvat Credit Rules, 2004 4.29 4.15 RULE 11 - TRANSITIONAL PROVISIONS Sub-rule ( 1) is a transitional provision which allows credit earned under Cenvat Credit Ru les, 2002 and Service tax Credit Rules, 2002 remaining unutilized as on 10.09.20 04 to be used under the new Cenvat Credit Rules 2004. Sub-rule (2) specifically provides that whenever the manufacturer opts out of Cenvat and opts for exemptio n based on value of clearances, he shall pay the amount equivalent to the Cenvat credit allowed to him in respect of the inputs lying in stock or in process or contained in final products lying in stock and the balance, if any, would lapse. 4.16 RULE 12 - SPECIAL DISPENSATION IN RESPECT OF INPUTS MANUFACTURED IN FACTOR IES LOCATED IN SPECIFIED AREAS OF NORTH EAST REGION, KUTCH DISTRICT OF GUJARAT, STATE OF JAMMU AND KASHMIR AND STATE OF 0 SIKKIM Notification 32/99-CE and 33/99 -CE both dated 8.7.99 have granted exemptions from excise duty for encouraging d evelopment of North Eastern India. Notification no. 39/2001-CE dated 31.7.2001 h as granted exemption to units located in Kutch district of Gujarat to resurrect the industry post the Gujarat earthquake. Similarly, Notifications no. 56/2002-C .E., 57/2002 C.E. both dated 14.11.2002, 56/2003-C.E.dated 25.06.2003 and 71/200 3 C.E. dated 9.07.2003 has granted exemption to units located in the state of Ja mmu and Kashmir and Sikkim respectively. Rule 10 hereby encourages persons in ot her parts of India to buy goods from such regions, as goods procured from such r egions would be deemed to be duty paid. 4.17 RULE 13 POWER OF CENTRAL GOVERNMENT TO NOTIFY GOODS FOR DEEMED CENVAT CREDIT This Rule seeks to empower the Governm ent to declare vide notifications certain input or input service on which the ex cise duty, additional duty of customs or service tax paid shall be deemed to hav e been paid at a rate or equivalent to such amount as may be mentioned in the no tification. Cenvat credit shall be allowed on such inputs or input services even if such input or input services are not used directly by the manufacturer of fi nal products or by the provider of taxable service but are contained in the fina l products or used in providing taxable service. 4.18 RULE 14 - RECOVERY OF CENV AT CREDIT WRONGLY TAKEN OR ERRONEOUSLY REFUNDED This rule allows for recovery of Cenvat credit taken or utilised wrongly or erroneously refunded along with inte rest from the manufacturer as provided for in sections 11A and 11AB of the Centr al Excise Act, 1944 or sections 73 and 75 of the Finance Act.

4.30 Central Excise 4.19 RULE 15 - CONFISCATION AND PENALTY Sub-rule (1) provide s for confiscation and penalty if any person takes Cenvat credit in respect of i nputs or capital goods, wrongly or without taking reasonable steps to ensure tha t appropriate duty on the said inputs or capital goods has been paid. This would be indicated in the document accompanying the inputs or capital goods specified in rule 9. Further if he contravenes any of the provisions of these rules in re spect of any inputs or capital goods, then consequently all such goods shall be liable to confiscation and such person shall be liable to a penalty not exceedin g the duty on the excisable goods in respect of which any contravention has been committed, or ten thousand rupees, whichever is greater. Sub-rule (2) provides that in a case, where the Cenvat credit has been taken or utilized wrongly on ac count of fraud, willful mis-statement, collusion or suppression of facts, or con travention of any of the provisions of the Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Act. Sub-rule (3) lays down that a person shall be liable to a penalty if he takes Cenvat cred it in respect of input services, wrongly or without taking reasonable steps to e nsure that appropriate service tax on the said input services has been paid as i ndicated in the document accompanying the input services specified in rule 9. Fu rther, contravention of any of the provisions of these rules in respect of any i nput service shall also be liable to be penalized. The penalty may extend to an amount not exceeding ten thousand rupees. Sub-rule (4) provides that in a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, willful mis-statement, suppression of fac ts, or contravention of any of the provisions of the Finance Act or of the rules made thereunder with intention to evade payment of service tax, then, the provi der of output service shall also be liable to pay penalty in terms of the provis ions of section 78 of the Finance Act. Sub rule (5) provides that any order unde r sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule (4) shall be issued by th e Central Excise Officer following the principles of natural justice. 4.20 RULE 16 - SUPPLEMENTARY PROVISION Any notification, circular, instruction, standing o rder, trade notice or other order issued under Cenvat Credit Rules, 2002 or the Service Tax Credit Rules, 2002, by the Board, Chief Commissioner or Commissioner of Central Excise and in force at the commencement of these rules shall, to the extent it is relevant and consistent with these rules be deemed to be valid. Re ferences in any rule, notification, circular, instruction, standing order, trade notice or other order to the Cenvat Credit Rules, 2002 and any provision thereo f or, as the case be, the Service Tax Credit Rules, 2002 and any provision there of shall, on the commencement

Cenvat Credit Rules, 2004 4.31 of these rules, be construed as references to the Cenvat Credit Rules, 2004 and any corresponding provision thereof. 4.21 CBEC GU IDELINES ON CENVAT CREDIT The Board vide its guidelines issued on 1st September, 2001, had given following clarification regarding Cenvat Credit. Though these g uidelines were relevant for Cenvat Credit Rules, 2001, they are largely relevant for the 2004 rules as well. 1. Once the SSI exemption limit of Rs. 100 lakhs is crossed and assessee starts paying duty, he is eligible to take CENVAT credit i n respect of inputs lying in stock, on the inputs contained in finished goods ly ing in stock and on the inputs in process. For this purpose, it is obligatory on the assessee to quantify the amount of admissible credit on the basis of docume ntary evidence and records maintained for this purpose. 2. The Cenvat credit can be utilised for payment of duty on waste and scrap as waste and scrap are final products within the definition given in the Credit Rules. 3. Cenvat credit is per missible on the raw material used for making packing material. This is for the r eason that the packing material being an input, the raw material used for making packing material is also to be construed as inputs used in or in relation to th e manufacture of finished products. 4. There is no bar for a manufacturer to rem ove the inputs or capital goods as such for export under bond. 5. Manufacturer i s entitled to take the Cenvat credit in a situation where capital goods were rec eived before 1-4-2000 and also installed before that date but Modvat/Cenvat was not taken due to some reason prior to 1-4-2000 because even though the modvat cr edit was not taken by the manufacturer, the modvat credit had been earned by him. 6. Cenvat credit is required to be taken immediately on receipt of inputs in the factory. This, however, does not mean, nor is it even intended that if the manu facturer does not take credit as soon as the inputs are received in the factory, he would be denied the benefit of Cenvat credit. Such interpretation is not ten able. 7. In respect of capital goods, which are included in the project import, the Cenvat credit shall be admissible only to the extent of an amount not exceed ing 50% of the Additional Duty of Customs paid on such capital goods. However, o n the other materials, which are not in the nature of capital goods, the Cenvat credit of the Additional Duty paid shall be allowed to the full extent. 8. Air-c onditioners and refrigerating equipment and computers would be eligible to Cenva t credit as capital goods. The only condition is that the manufacturers should u se them in the manufacture of final product. For example, an air-conditioner use d in the office premises or a computer used in the office premises of the factor y shall not be eligible to Cenvat credit.

4.32 Central Excise 9. Cenvat credit shall be admissible in respect of the amoun t of inputs contained in any of the aforesaid waste, refuse or bye product. Simi larly, Cenvat should not be denied if the inputs are used in any intermediate of the final product even if such intermediate is exempt from payment of duty. The basic idea is that Cenvat credit is admissible so long as the inputs are used i n or in relation to the manufacture of final products, and whether directly or i ndirectly. 10. If the inputs or capital goods are cleared to a job worker, they should be received back within 180 days. If they are not received, the manufactu rer shall debit the Cenvat credit attributable to such inputs or capital goods, otherwise it will be an offence. However, the manufacturer shall be entitled to take Cenvat credit as and when the goods sent to the job worker are received bac k. If part of the goods is received back within 180 days and the rest of the goo ds are received back after 180 days, the obligation for debiting the credit shal l arise only in respect of Cenvat credit attributable to that part which is not received within 180 days. 11. Provision has been made for permitting the Cenvat credit when the inputs or capital goods are purchased from the first stage deale r or from the second stage dealer. These dealers should be registered under rule 9 of the Central Excise Rules, 2002. The other procedural requirements in respe ct of first stage dealer and second stage dealer will continue as in the case of Modvat rules. 12. In the case of capital goods, the Cenvat rules do not provide installation of capital goods as a pre-requisite for taking Cenvat credit. The credit can be taken as and when the capital goods are received in the factory. F or example if such capital goods were received prior to 1.4.2001 but not install ed up to 1.4.2001, the Cenvat credit would be admissible. 13. The documents on w hich Cenvat credit can be taken have been prescribed to enable verification, whe re needed, by the department. The admissibility of the amount of CENVAT credit s hould be discernible from the records of the manufacturer, including the payment made to the sellers of inputs and capital goods. The basic responsibility is up on the manufacturer to prove that inputs or capital goods were purchased and wer e used by him for the intended purpose. 4.22 CENVAT AND ASSESSABLE VALUE In case of CCE v. Dai Ichi Karkaria Ltd. - 1999 (112) E.L.T. 353, the Supreme Court has held that since modvat (now Cenvat) element is not reckoned as a cost of the ra w materials by a man of commerce, the question of including the same in the asse ssable value of the final product does not arise. 4.23 CENVAT ON DEFECTIVE GOODS RETURNED In CCE v. Tin Manufacturing Co -2000 (119) E.L.T. 290 (T-LB) the Large Bench of the Tribunal held that so long as the defective goods were specified a nd were duty paid, they

Cenvat Credit Rules, 2004 4.33 would become inputs since they would have to be r emade. Now this concept has been brought in under rule 16 of Central Excise Rule s, 2002 giving benefit of the Cenvat credit on the goods returned for repair, re processing, remaking or for any other purpose. 4.24 BALANCE OF CENVAT CREDIT LYI NG UNUTILIZED AT YEAR END It should be kept in mind that if such unutilised cred it has been claimed as expenditure for the year, the same should be written off in the Balance Sheet. It should not be used subsequently for the purpose of paym ent of duty. 4.25 PROCEDURE FOR REMOVAL OF INPUTS 1. The provisions relating to removal of inputs to job worker for test, repairs, or carrying out any other ope ration for the purposes of manufacture of intermediate products/final product ar e contained in Rule 4(5). The procedures are as under: The manufacturer shall re move the goods to job worker using his own challan (similar to Annexure-II chall ans) and entering the same in own register (similar to Annexure-IV register). Th e challan could be pre-printed with the name and address of the manufacturer, in book form, pre-numbered, by the manufacturer and could be in triplicate. Challa ns generated on computer should be kept in bound form at the end of month. Where the goods are directly sent to job worker, the name and address of such supplie r should also be indicated in the challan. The goods should be sent to job-worke r along with original and duplicate copy of challan mentioning therein the quant ity of inputs sent, its tariff classification, the process for which it is sent, value of the inputs / semi-finished goods, amount of duty debited and reference to entry number. The goods sent to job-worker should be received back after pro cessing within 180 days. If delayed, amount of duty is to be debited / reversed. The goods from the job-worker should come back along with duplicate copy of cha llan i.e., duly filled for the process carried out, quantity of processed goods being returned and quantity of waste or scrap returned. After receiving all the goods (full quantity) the credit of duty debited if any after lapse of 180 days may be taken and credit proportionate to quantity received may be availed. The d uty on scrap not received back could be discharged by the job worker or the prin cipal manufacturer if the material sent is not fully processed or the scrap is n ot returnable / returned. 2. In case of direct despatch of inputs directly to jo b worker without receipt in factory the manufacturer shall follow the procedures set out above in addition to a few more

4.34 Central Excise procedures as listed down in the following points The manufac turer in above case shall instruct the supplier to send the inputs directly to t he job worker and would be eligible to Cenvat credit though the input is not rec eived directly at his factory premises. The challan would be raised after receiv ing the duplicate copy of the supplier s invoice from the job worker. This chall an should also indicate the name of and address of the supplier apart from the n ame of the manufacturer. The manufacturer shall make only stock entry for receip t and a contra entry for issue with reference of the Annexure II challan being i ssued. The manufacturer shall take credit of duty in format U/R 7 only when the inputs are received in full from the job worker. The credit shall be taken on th e basis of duly filled in challan and on the strength of valid duty paying docum ent prescribed U/R 7. 3. The procedure in case of removal of inputs from job wor ker to job worker is listed below in following points The first job worker after he has completed the process should make out a challan in Form Annexure -III ch allan. The challan book should be prepared in triplicate sets and as in the case of suggested Annexure II. The first job-worker should send the processed goods to the second job-worker with original and duplicate copies of the challan in An nexure III. The first job-worker should make an endorsement on the earlier chall an i.e. suggested Annexure II challan (under which he originally received the ma terials) providing the name of the second job-worker and return the duplicate co py to the manufacturer. (Supplier of the material) After the completion of opera tion the second job worker shall make an endorsement on both the copies of the c hallan in Annexure III (original and duplicate) and return the goods to the pare nt factory (manufacturer) with the duplicate challan duly filled. The first and second job-workers should maintain an account in the form suggested in Annexure V wherein the entries relating to the receipt of goods and issue of processed go ods is to be recorded. The subsequent job worker shall store, process and despat ch the goods challan-wise i.e. each challan shall be equal to one lot. Where it is not possible and goods are despatched in batches, separate accounts for such batch-wise despatch should be maintained.

Cenvat Credit Rules, 2004 4.35 If the appropriate duty of excise leviable on the waste or scrap is paid, it need not be received back. The manufacturer has to e nsure that the goods are received back within 180 days from the date on which th e raw materials were despatched to the first job-worker. The manufacturer would be able to take recredit of duty reversed where 180 days have lapsed, on receipt of the full consignment from the second or subsequent job worker on the bases o f Annexure II challan from the original job worker and the duplicate of the Anne xure III challan from the subsequent job worker. Self-examination questions 1. 2 . What are the duties in respect of which CENVAT credit can be availed under the CENVAT Credit Rules, 2002? Discuss the provisions prescribed in CENVAT Credit R ules, 2004 for a situation where an output service provider renders both taxable as well as exempted output services by using common inputs/input services and m aintains only one set of books of accounts for taxable and exempted services. Di scuss the provisions relating to information on principal inputs in context of C ENVAT Credit Rules, 2004. Can credit be taken only after making payment against the bill/invoice/challan? Discuss. Who is an input service distributor? Credit for inputs is not available if the final products are exempted goods. What are the exceptions to this rule? A machine was received in a factory at 5 p.m. on 31.03. 2006. It was not erected at that time. The machine was meant for the manufacture of dutiable as well as zero duty goods. The assessee decided to claim depreciat ion under section 32 of Income-tax Act on the sans duty price of machinery. Can the manufacturer take CENVAT Credit? If yes, what is the amount of credit that h e can avail? A manufacturer produces product A chargeable to 16% duty and product B falling under heading 22.04 chargeable with nil duty. The inventory for the inpu ts is common. Whenever the Nil duty product B is removed, he debits 10% of its sal e price (excluding sales tax) to CENVAT account. He gets a show cause notice (SC N) on the following ground: 10% reversal is wrong; the credit actually attributa ble to the inputs used in the manufacture of Nil duty goods should be reversed. Discuss whether the contention of the Department is correct. 3. 4. 5. 6. 7. 8.

4.36 Central Excise 9. India Cements Ltd. is engaged in the business of manufact uring cement. For this purpose, limestone is excavated from a mine, which is sit uated at a distance of few kilometres from the plant where the cement is manufac tured. The mine is connected to the main plant through a ropeway. Explosives are used for blasting the mine to excavate limestone. Can CENVAT credit be taken on such explosives? Discuss. (a) A manufactures a certain final product in which pet rol is used among other inputs. Can he avail CENVAT credit on petrol? (b) B is an outdoor caterer. He has purchased a lorry for carrying utensils, tables, groceri es, vegetables etc. to the place of service. Can B avail credit of the excise duty paid by him on the purchase of the lorry? (c) Can a manufacturer located in Jam mu utilize the credit of service tax availed on input services received in New D elhi for payment of excise duty on his final products cleared in Jammu? (d) R has taken CENVAT credit on inputs without ensuring that excise duty as indicated in the invoice has been paid on such inputs. Is he liable to any penalty? If yes th en what penalty can be imposed on him? (e) Inputs are received in the factory of the manufacturer on 10.11.2006 but are issued for the production process on 10. 12.2006. When should the manufacturer avail credit? 10. Answer the following with reference to CENVAT Credit Rules, 2004: 11. With reference to CENVAT Credit Rules, 2004, discuss giving reasons whether the following statements are true or false: (a) Motor vehicles are eligible capi tal goods both for manufacturers and all output service providers. (b) An input service distributor has to furnish a half yearly statement in the form specified by the Board to the jurisdictional Superintendent of Central Excise. (c) Cenvat credit shall be allowed on inputs which are sent to the job worker for the manu facture of intermediate goods necessary for the manufacture of final products, i f they are received back in the factory within 180 days of their being sent to t he job worker. (d) Where the capital goods are cleared as waste and scrap, the m anufacturer has to pay an amount equal to the duty leviable on transaction value . Such amount paid can be availed as CENVAT credit. (e) Credit of basic excise d uty can be utilized for payment of education cess whereas the vice versa is not possible.

Cenvat Credit Rules, 2004 4.37 Answers 7. As per Rule 4 of CENVAT Credit Rules, 2002 CENVAT credit on capital goods can be availed on the following propositions --: (1) The capital goods should have been actually received in the factory (Phy sical receipt is a must, as in the case of inputs. Erection of the machinery is not compulsory for the first year). (2) The capital goods might have been receiv ed at any point of time in a financial year. (3) Not more than 50% of the duty p aid on the capital goods in the same financial year can be taken as CENVAT credi t. Credit for the balance can be taken in any subsequent year, provided the good s are in the possession and use of manufacturer. (4) Capital goods must not be u sed exclusively in the manufacture of exempted goods. (5) Depreciation under sec tion 32 of the Income tax Act on the part of the value of the capital goods that represents excise duty cannot be claimed, if the manufacturer avails CENVAT cre dit. As all the conditions specified above are fulfilled in the given case, 50% of the duty paid by the manufacturer can be availed as CENVAT credit in the firs t year and the balance in any subsequent year, if the machine remains to be in h is possession and use. 8. As per rule 6(3)(a)(i) of the CENVAT Credit Rules, 200 4, in case of goods falling under heading 22.04, the manufacturer has to pay an amount equivalent to the CENVAT credit attributable to inputs used in the manufa cture of such final products at the time of their clearance from the factory. Si nce, in this particular case manufacturer produces product B which falls under Tar iff heading 22.04 carrying Nil duty, reversal of CENVAT credit is on actual basi s only and not at the thumb rule of 10% on sale price. Hence, the department is correct in issuing show cause notice. 9. The Supreme Court in the case of Vikram Cement v. CCEx. (2006) 194 ELT 3 (SC) has held that CENVAT credit on inputs bei ng explosives used for blasting mines to produce limestone for use in manufactur e of cement/clinkers in factory situated at some distance away from mines could not be denied on the ground that they were not used as inputs within the factory . Note: The above-mentioned decision overrules the contrary opinion of the Supre me Court in the case of J.K. Udaipur Udyog Ltd. 2004 (171) E.L.T. 289 (SC). In t his

4.38 Central Excise case, the credit on explosives used for blasting mines was d isallowed on the ground that the same were not used within the factory but in a mine which could not qualify to be a factory. Further, it may be noted that in V ikram Cement v. CCE 2006 (197) ELT 145 (SC), it has been held that CENVAT credit is available only when mines are captive mines i.e. they constitute one integra ted unit with the main cement factory. Credit would not be available if the supp lies from the mine are made to various cement factories of different assessees. 10. (a) No. Petrol (motor spirit) is specifically excluded from the list of elig ible inputs under Rule 2(k). (b) Yes. As per Rule 2(a) motor vehicles are treate d as capital goods in the case of an outdoor caterer. (c) No. Cenvat Credit Rule s, 2004 in relation to availment and utilization of service tax credit are not a pplicable in the State of Jammu and Kashmir, as service tax law does not apply i n Jammu and Kashmir. (d) Yes. R shall be liable to a penalty not exceeding the dut y on the goods in question or Rs.10,000.00 whichever is greater. (e) Credit can be availed on 10.11.2006 immediately on receipt of the inputs in the factory of the manufacturer [Rule 4(1)]. 11. (a) False. Rule 2(a) defines capital goods to mean (A) the following goods, namely:(i) all goods falling under Chapter 82, Cha pter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 o f the First Schedule to the Central Excise Tariff Act; (ii) pollution control equipment; (iii) components, spares and accessories of th e goods specified at (i) and (ii); (iv) moulds and dies, jigs and fixtures; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof ; and (vii) storage tank, used(1) in the factory of the manufacturer of the fina l products, but does not

Cenvat Credit Rules, 2004 4.39 include any equipment or appliance used in an off ice; or (2) for providing output service; (B) motor vehicle registered in the na me of provider of output service for providing taxable service as specified in s ub-clauses (f), (n), (o), (zr), (zzp), (zzt) and (zzw) of clause (105) of sectio n 65 of the Finance Act. Motor Vehicles fall under Chapter 87. Thus, the manufac turers cannot avail credit on motor vehicles. However, in case of taxable servic es credit on motor vehicles can be availed in case of abovementioned specific ou tput services. These services are: (1) Courier services (2) Tour operators servic es (3) Rent-a-cab scheme operators services (4) Cargo handling agencys services (5 ) Goods transport agencys services (6) Outdoor caterers services (7) Pandal or sha miana contractors services (b) False. The sub-rule 10 of rule 9 provides that the input service distributor shall furnish a half yearly return in the form specif ied by the Board to the jurisdictional Superintendent of Central Excise. (c) Tru e. Rule 4(5) lays down that CENVAT credit shall be allowed on goods (being input s or capital goods) sent to the job worker for further processing, testing, repa ir, reconditioning or for the manufacture of intermediate goods necessary for th e manufacture of final products or any other purpose, if they are received back in the factory within 180 days of their being sent to the job worker. In case th ey are not returned within 180 days the credit on such goods has to be reversed. However, credit can be retaken once the goods come back. (d) True. Sub-rule (5A ) of rule 3 provides that if the capital goods are cleared as waste and scrap, t he manufacturer shall pay an amount equal to the duty leviable on transaction va lue. Rule 3(6) provides that the amount paid under sub-rule (5A) shall also be e ligible as CENVAT credit as if it was duty paid by the person who removed such g oods under sub-rule (5A). (e) True. As per rule 3(4) read with rule 3(1) and rul e 3(7)(b), the Cenvat credit of basic excise duty, special excise duty, service tax and AED(GSI) can be utilised for payment of any duty or service tax as credi t of all duties together is known as Cenvat credit. Hence, credit of basic excise duty can be utilised for

4.40 Central Excise payment of education cess on excisable goods. However, as pe r rule 3(7)(b), credit of education cess paid on excisable goods can be utilised only for payment of education cess on excisable goods or taxable services.

5 GENERAL PROCEDURES UNDER CENTRAL EXCISE 5.1 INTRODUCTION Till 1969, there was physical control system wherein each clearance of manufactu red goods from the factory was done under the supervision of the Central Excise Officers. Introduction of Self-Removal procedure was a welcome procedure in the industry. Under the Self Removal procedure the assessees were allowed to quantif y the duty on the basis of approved classification list and the price list and c lear the goods on payment of appropriate duty. In 1994, the gate pass system gav e way to the invoice-based system, and all clearances are now effected on manufa cturers own invoice. Another major change was brought about in 1996, when the Sel f-Assessment system was introduced. This system is continuing today also. The as sessee himself assesses his returns and the Department scrutinises it or conduct s selective audit to ascertain correctness of the duty payment. Even the classif ication and value of the goods have to be merely declared by the assessee instea d of obtaining approval of the same from the Department. The system of classific ation of goods and price lists have now been done away with. Prior to March 2000 , the duty had to be discharged before removing the goods from the factory and i n some circumstances on the day on which it is removed. In 2000, the fortnightly payment of duty was introduced for all commodities as an extension of the month ly payment system which was introduced for Small Scale Industries. However, with effect from 1.04.2003 the monthly payment system of duty has been reinforced. I n 2001, new Central Excise (No.2) Rules, 2001 replaced the Central Excise Rules, 1944 with effect from 1st July, 2001. These were again superseded by the Centra l Excise Rules, 2002 with effect from 1st March, 2002. With the introduction of the new rules several changes have been effected in the procedures. The new proc edures are simplified. There are less numbers of rules, only 32 as compared to 2 34 earlier. Classification declaration and Price declarations under erstwhile Ru le 173B and 173C respectively have also been dispensed with. The declaration of inputs for availing the Modvat (now Cenvat) was

5.2 Central Excise dispensed with from April 2000 itself. 5.2 REMOVAL OF EXCISABLE GOODS [RULE 4] In terms of Rule 4 of the Central Excise Rules 2002, no excisable goods shall be removed from the place of manufacture or from warehouse, when the goods are sto red in warehouse, without payment of duty, whether for consumption, export or ma nufacture of any other commodity in or outside the place of manufacture, until t he excise duty leviable thereon has been paid in such manner as provided in Rule 8 or under any other law. Section 12A casts a liability on every person who is liable to pay duty of excise on any goods. It prescribes that at the time of cle arance of the goods the amount of such duty which will form part of the price at which such goods are to be sold should be prominently indicated in all the docu ments relating to assessment, sales invoice, and other like documents. 5.2.1 Spe cial provisions for molasses: Sub-rule (2) specially provides that where molasse s are produced in a Khandsari sugar factory, the person who procures such molass es, whether directly from the factory or otherwise, for use in the manufacture o f any commodity shall pay the duty leviable on such molasses as if the molasses had been produced by the procurer. Duty on the molasses shall be payable whether or not the goods, which are manufactured with the use of the molasses, are exci sable or not. In certain industries like sugar, the production is seasonal but t he off-take from the factory is throughout the year. In such cases storage of hu ge quantities within the factory is burdensome. Further, since a large quantity of off-take is controlled by the Government, the management may not be in a posi tion to remove the goods on payment of duty. Sub-rule (4) of Rule 4 takes care o f these situations. It provides that the Commissioner may, in exceptional circum stances, having regard to the storage of goods and of storage space at the premi ses, permit a manufacturer to store his goods in any other place outside his pre mises without payment of duty. This will be subject to such conditions as may be prescribed. 5.2.2 Procedure to remove the excisable goods on payment of duty un der Self Removal Procedure : Today, except cigarettes which is still under physi cal control, all other products fall under the self-removal procedure. The manuf acturers working under SelfRemoving Procedure can remove the excisable goods by following, the under mentioned procedure 1. The manufacturer may ensure that the goods, which are sought to be removed, have been duly intimated to the departme nt providing the process flow chart of manufacture as well as list of critical r aw materials. He shall ensure that the finished goods are all duly entered in th e production register daily. The manufacturer should authenticate the first and last pages of this register. 2.

General Procedures Under Central Excise (This was called the RG-I register earli er). 3. 4. 5.3 The invoice raised should be in line with the purchase order if any, received fr om the customer. Care is to be exercised in calculations in the invoice. The ass essable value (whether cum-duty price or otherwise) is to be arrived at accurate ly by applying section 4 read with Central Excise Valuation Rules, 2000. If the value is based on MRP or Tariff Value fixed under section 3(2) the same may be a pplied. He shall prepare an invoice under Rule 11 and calculate the assessable v alue and Excise duty payable. He shall make the removal entry in production regi ster providing details of value, quantity and duty payable. It is to be ensured that the person / carrier who/ which carries the goods is provided with " duplic ate for transporter" copy of invoice. He shall ensure that at the end of the mon th (1st to 30th ) he debits the duty payable in the Cenvat Credit a/c and if the balance is not sufficient, pay through the Personal Ledger Account (PLA) by the 5th of the next month. For the month of March, payment will be made by the end of that month itself. The units claiming 8/2003 (SSI Exemption) are required to pay the monthly duty by the 15th of the subsequent month. Here also, for the mon th of March payment is to be made by the end of that month itself. 5. 6. 7. 8. 9. 10. It is hereby clarified that the duty liability shall be deemed to have been discharged only if the amount payable is credited to the account of the Central Government by the specified date. The Board has clarified that the liability wou ld be discharged only on the date of realization of the cheque and not earlier a s per the CBEC Circular No.28/2002 dt. 24.5.2002. 5.3 DATE FOR DETERMINATION OF DUTY AND TARIFF VALUATION [RULE 5] Rule 5 of Central Excise Rules, 2002 lays dow n that rate of duty or tariff value applicable to any excisable goods other than khandsari molasses, shall be the rate or value in force on the date when such g oods are removed from a factory or a warehoue, as the case may be. In the case o f khandsari molases, the applicable rate shall be the rate in force on the date of receipt of such molasses in the factory of the procurer of such molasses. For the excisable goods which are used within the factory, the date of removal of s uch goods shall be the date on which the goods are issued for such use.

5.4 5.4 Central Excise ASSESSMENT [RULE 6] As per the Central Excise Rules, 2002 the term assessment is defined to include se lfassessment of duty made by the assessee and provisional assessment under Rule 7 of the said Rules. An Assessee is defined to mean any person who is liable for p ayment of duty assessed or a producer or manufacturer of excisable goods or a re gistered person of a private warehouse in which excisable goods are stored and i ncludes an authorized agent of such person. Duty is payable on removal of goods as Rule 4 of the said Rules provides that every person who produces or manufactu res any excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in Rule 8 of the said Rules o r under any other law. No excisable goods, on which any duty is payable, shall b e removed without payment of duty from any place, where they are produced or man ufactured, or from a warehouse, unless otherwise provided. However there is in e xception for the goods falling under Chapter 62 of CTA, 1985 and kandsari molass es which is dealt separately. 5.4.1 Self Assessment : As per Rule 6 of the Centr al Excise Rules, 2002, the assessee himself is required to determine duty liabil ity at the time of removal of excisable goods and discharge the same. In other w ords, the assessee should apply correct classification and value on the quantiti es being removed by him and indicate the same in the invoice (except in the case of an assessee manufacturing cigarettes, in which case the Superintendent or In spector of Central Excise has to assess the duty payable before removal by the a ssessee). Therefore before each removal, whether outside the factory of manufact ure or production or for captive consumption, duty has to be assessed on the exc isable goods. The main ingredients of assessment are: a. b. c. d. Ascertainment of date and time of intended removal; Ascertainment of classification and rate o f duty (dealt in Chapter II) at that point of removal; Valuation of goods (dealt in chapter III) at that point of removal; and Quantity intended to be removed. As a part of self assessment, assessee is also required to assess his return for a month and submit to the Range Office having jurisdiction over his factory wit hin ten days of the succeeding month. They are also required to submit CENVAT Ret urn for a month within 10 days of the succeeding month. A manufacturer availing e xemption notification for Small Scale Industries is permitted to file his return on quarterly basis within 20 days from the end of the quarter.

General Procedures Under Central Excise 5.5 5.4.2 Scrutiny of assessment: In view of the self-assessment procedure wherein t he assessee himself assesses the duty liability, the responsibility of the depar tmental officers is to scrutinise the assessment made for verification of its co rrectness. The Central Excise Officers having jurisdiction over the factory/prem ises of the assessee is responsible for the scrutiny of returns. For this purpos e, the said officer(s) may require the relevant documents. Though the statutory records have been dispensed with, the assessee is required to maintain private r ecords containing all requisite information as required by different rules and a lso provide a list of all records maintained by him to the Range Office. The Off icer responsible for scrutiny of return may require the invoices issued by the a ssessee, Daily Stock Account, Cenvat Account, cash ledgers, ledger of all receip ts and payments and the source documents etc. It shall be compulsory for the ass essee to provide the necessary records upon receiving the Requisition Letter fro m the Range Officer or other superior officers. He shall hand over the records u nder proper acknowledgement and receive them back under proper acknowledgement. The officer scrutinizing return may require presence of the assessee or his auth orised person at mutually convenient time, for seeking certain information relat ing to the records. The Superintendent of Central Excise in charge of the Range Office, with assistance of the Inspectors in-charge of the factory of an assesse e, will scrutinise all the returns. They shall, in selected cases, call for all connecting documents including invoices and the records and scrutinise the corre ctness of assessment. The Deputy/Assistant Commissioner of Central Excise will s crutinise the returns of the units, which pay duty exceeding rupees one crore bu t less than Rs.5 crores from PLA per annum every six months. They shall requisit ion all connecting documents including invoices and the records and scrutinise t he correctness of assessment. The Additional/Joint Commissioner of Central Excis e will scrutinise the returns of the units which pay duty of Rs. 5 crores or mor e from PLA per annum every six months. They shall requisition all connecting doc uments including invoices and the records and scrutinise the correctness of asse ssment. 5.4.3 Provisional Assessment [Rule 7] : As per Rule 7 of the Central Exc ise Rules 2002, provisional assessment can be resorted to in the event the duty can not be determined at the point of clearance of the goods. The rule, read wit h the guidelines issued by the Board on 1.9.2001, sets out the procedure for pro visional assessment as follows: Wherever an assessee finds that final assessment is not possible at the point of removal he will make a detailed request in writ ing to the Divisional Deputy/Assistant Commissioner of Central Excise, indicatin g:a. Specific grounds/reasons, and the documents or information, for want of whi ch final

5.6 Central Excise assessment cannot be made. b. c. d. period for which provisional assessment is required. the rate of duty or the val ue or both, as the case may be, proposed to be applied by the assessee, for Prov isional Assessment; and that he undertakes to appear before the Assistant/Deputy Commissioner of Central Excise within 7 days or such date fixed by him, and fur nish all relevant information and documents within the time specified by the Ass istant/Deputy Commissioner of Central Excise in his order, so as to enable the p roper officer to finalise the provisional assessment. On receipt of the request, the Deputy/Assistant Commissioner of Central Excise w ill examine it, if necessary, in consultation with the concerned Range Officer, to ascertain whether provisional assessment is necessary at all. If the reasons/ grounds are not sufficient, he may ask the assessee to appear before him on an appointed day and time, and if he is satisfied that provisional assessment is no t necessary, he may pass a reasoned order rejecting the same and also ordering t he rate of duty or the value, to be applied by the assessee. Where the Deputy/As sistant Commissioner of Central Excise is satisfied with the genuineness of the assessees request he will issue a specific order directing provisional assessment clearly stating:a. b. c. The grounds on which Provisional Assessment has been o rdered. The rate and /or value, as the case may be, at which duty has to be prov isionally paid. The amount of differential duty for which bond is to be executed covering the period, if any, during which assessee paid duty provisionally unde r the deeming provisions, after applying the rate and/ or value specified in (b) above. The amount of security or surety as may be fixed by Assistant Commission er keeping in view the instructions issued by the Board from time to time. d. The assessee is required to mark the E.R.1 (monthly/quarterly return) and docume nts covered under Provisional Assessment as "PROVISIONALLY ASSESSED" vide Order No.......... dated .............." . There is a declaration in E.R.1 where asses sees have to mention the goods under provisional assessment. Notwithstanding self-a ssessment, all cases of provisional assessment have to be finalised by the Deputy /Assistant Commissioner of Central Excise, within a maximum period of 6 months f rom the date of communicating the order of provisional assessment. The Commissio ner can extend it if sufficient cause is showed which is recorded in writing, th e period of 6 months. If the period of extension is beyond 6 months, then the pe rmission

General Procedures Under Central Excise of Chief Commissioner is required. 5.7 Finalisation of provisional assessment means finalisation of an issue/ground and thereafter finalisation of each E.R.1s. The amount will be communicated to the assessee at the earliest. The amount of each differential duty shall be paid alo ng with interest at the rate of twenty four percent per annum from the first day of the month succeeding the month for which such amount is determined, till the date of payment thereof. In the event the assessee will be in a position to asc ertain the duty himself. He may pay the duty on his own at the earliest and in t hat case he will not have to incur interest on account of time taken by the Depa rtment to finalise assessment and communicate the amount. Where any refund becom es due to the assessee, order shall be passed for such refund, but disbursement shall be subject to further verification about incidence of such duty. The asses see will be required to submit proof to the Assistant/Deputy Commissioner of Cen tral Excise that the duty incidence was borne by him (assessee). If the assessee fails to produce such proof/evidence, the Assistant/Deputy Commissioner of Cent ral Excise will pass an order for depositing the amount in Consumer Welfare Fund in the prescribed manner. Otherwise, the refund shall be given along with inter est at the rate of fifteen percent per annum from the first day of the month suc ceeding the month for which such refund is determined, till the date of refund. As mentioned earlier, provisional payment of duty is allowed if the assessee exe cutes a bond in the prescribed form with such surety or security in such amount as the Assistant/ Deputy Commissioner may order. Such bond shall bind the assess ee for payment of the difference between the amount of duty finally assessed and the amount of duty paid provisionally. Though it is incumbent upon the assessee to ensure that the bond amount and corresponding securities are sufficient, the Divisional as well as the Range Officer will also keep a strict vigil on such c ases with the help of Provisional Assessment Register . The Assistant/Deputy Co mmissioner of Central Excise will be held responsible to ensure that bonds for p roper amount i.e., 3 times of the estimated differential duty are taken, in case of general bonds and that these are backed by proper (25%) security/ bank guara ntee of the bond amount. The format of bond for provisional assessment has been specified in Notification No. 56/2001-Central Excise (N.T.) dated 3.7.2001. It i s important to note that Rule 7 of the said Rules does not provide for the Depar tment, suo motu, issuing directions for resorting to provisional assessment. The refore, when the Central Excise Officers, during scrutiny or otherwise, find tha t self-assessment is not in order the assessee may be asked for all necessary do cuments, records or other information for issue of duty demand for differential duty, if any, after conducting inquiry. Where the

5.8 Central Excise assessee fails to provide the records or information and Department is unable to issue demand, Best Judgement method may be used to raise demand based on collater al evidences. The burden will be on the assessee to provide information for appr opriate redetermination of duty, if any. As per the general law, the provisions of Provisional Assessment relating to interest clause and statutory time limit c an only be prospective. Therefore the provisions of interest and statutory time limit shall be applicable only to those cases of provisional assessment, which a re ordered on or after 1st July, 2001. 5.5 MANNER OF PAYMENT [ RULE 8 ] Rule 8 deals with the manner of payment of duty. The sub-rule (1) provides that the duty on the goods removed from the factory or the warehouse during the month shall be paid by the 5th day of the following month. However, in the case of go ods removed during the month of March, the duty shall be paid by the 31st day of March. Further, where an assessee is availing the exemption under a Notificatio n based on the value of clearances in a financial year, the duty on goods cleare d during a calendar month shall be paid by the 15th day of the following month e xcept in case of goods removed during the month of March for which the duty shal l be paid by the 31st day of March. Explanation - For the purpose of this rule, (a) the duty liability shall be deemed to have been discharged only if the amoun t payable is credited to the account of the Central Government by the specified date. (b) if the assessee deposits the duty by cheque, the date of presentation of the cheque in the bank designated by the Central Board of Excise & Customs fo r this purpose shall be deemed to be the date on which the duty has been paid su bject to the realisation of that cheque Sub-rule 1(A) provides that in case of g oods removed from the State of Gujarat during the second fortnight of February, 2002 and the month of March, 2002 duty shall be paid by the 31st March, 2002. Fo r units (located in the state of Gujarat) availing the benefit of exemption unde r a notification based on the value of clearances, the duty on goods cleared dur ing the month of February, 2002 shall be paid by the 31 st March, 2002. Further, it is clarified that the duty liability shall be deemed to have been discharged only if the amount payable is credited to the account of the Central Government by the specified date. The duty of excise shall be deemed to have been paid on the excisable goods removed in the manner provided under sub-rule(1) and the cre dit of such duty allowed ,as provided by or under any rule[Sub-rule(2)]. Sub-rul e 3 lays down that if the assessee fails to pay the amount of duty by due date, he shall be liable to pay the outstanding amount along with interest at the rate specified by the

General Procedures Under Central Excise 5.9 Central Government vide notification under section 11AB of the Central Excise Ac t on the outstanding amount, for the period starting with the first day after du e date till the date of actual payment of the outstanding amount. If the assesse e makes a default in payment of duty by due date and the same is discharged beyo nd a period of 30 days from the due date, then he shall loose the facility to pa y the duty in monthly instalments for a period of two months. This period will s tart from the date of communication of the order passed by the Assistant Commiss ioner of Central Excise or the Deputy Commissioner of Central Excise, as the cas e may be, in this regard or from such date on which all dues including interest thereof are paid, whichever is later. Further, during this period the assessee s hall not be able to utilize the Cenvat credit for the payment of duty on final p roducts as per rule 3(4) of CENVAT Credit Rules, 2004. He shall compulsorily pay the excise duty for each consignment by debit to the account current and in the event of any failure, it shall be deemed that such goods have been cleared with out payment of duty and the consequences and penalties as provided in these rule s shall follow. Sub-rule (4) lays down that the provisions of section 11 of the Act shall be applicable for recovery of duty as assessed under rule 6 and the in terest under sub-rule (3) in the same manner as it is applicable for recovery of any duty or other sums payable to the Central Government. Rule 8A provides that in case of the certain specified goods the duty liability for the goods removed during the period from 1st March 2002 to 31st May 2002, shall be paid by the 15 th day of June, 2002. 5.5.1 Duty payment under protest Sometimes it happens that the classification and assessable value of goods determined by the excise autho rities are not agreeable to or acceptable to the assessee. In such cases, the as sesee can file an appeal and in the meanwhile he can pay duty under protest if n o stay is obtained from Appellate Authorities. Section 11B of the Central Excise Act, 1944 provides that the time limit of one year for claiming refund of excis e duty shall not apply where the duty has been paid under protest. As per the Su pplementary Instructions issued by Central Board of Excise and Customs, any asse ssee who desires to pay duty under protest, may do so by following the procedure mentioned below: (a) The assessee shall inform the Superintendent or Inspector of Central Excise in writing giving reasons for paying duty under protest and da ted acknowledgement will be given to him. (b) The assessee shall mark invoices o r monthly/quarterly returns indicating the goods on which duty is paid under prot est. If it is a lump-sum duty payment in respect of past

5.10 Central Excise demand, he may record the fact of duty payment under protest in the Personal Ledger Account, CENVAT Account and the Daily Stock Account. (c) If a case is appealed against by the assessee or where the appeal period for fu rther appeal is available, he may continue to pay duty under protest. However, i f decision is not in his favour and he exhausts the appellate remedy or does not appeal within stipulated period, he shall not have any right to pay duty under protest. 5.5.2 Removal of Goods at concessional rate of duty for manufacture of excisable goods Under Notification No.34/2001-C.E. (N.T.) dated 21.6.2001 the Ce ntral Excise (Removal Of Goods At Concessional Rate Of Duty For Manufacture Of E xcisable Goods) Rules, 2001 has been issued by the Central Government. Under Rul e 3 of the said Rules, a manufacturer who intends to receive the specified goods at concessional rate of duty, is required to make an application in quadruplica te in the specified form to the jurisdictional central Excise authorities. Howev er, he is required to make separate application in respect of each supplier of s ubject goods. Further the manufacturer is required to execute a general bond wit h surety or security to cover the recovery of duty liability estimated to be inv olved at any given point of time. The application shall be countersigned by the jurisdictional authorities certifying that the manufacturer has executed the req uired bond. Of the four copies of application, one copy shall be forwarded to th e jurisdictional range superintendent of the manufacturer of the subject goods a nd two copies shall be handed over to the applicant manufacturer and one copy sh all be retained by the Assistant / Deputy Commissioner of Central Excise. Under Rule 4 the manufacturer of the goods can avail the exemption from duty based on the above referred application. The manufacturer receiving the above goods is re quired to maintain the simple account indicating the quantity and value of subje ct goods received, consumed and quantity remaining in stock. Further he is also required to submit a monthly return in the specified form. If the material recei ved at concessional rate of duty is not used for intended purpose, manufacture i s liable to pay differential duty along with interest. Provisions of Section 11A and section 11AB shall apply mutatis mutandis for effecting such recoveries. If the manufacturer on receiving the subject goods finds them to be defective or d amaged or unsuitable or surplus to his needs, he may return the subject goods to the original manufacturer of the goods. Such returned goods shall be added to t he non duty -

General Procedures Under Central Excise 5.11 paid stock of the manufacturer of t he subject goods and dealt with accordingly. If the goods are lost or destroyed by natural causes or by unavoidable accident during transport from place of procurement to the manufacturer s premises or fro m place of manufacturer to the place of procurer (if goods are returned) during handling or storage in the manufacturer s premises, it will not be treated as us ed for intended purpose . Consequently, differential duty and interest will beco me payable. REGISTRATION [RULE 9] 5.6 For the administration of the Central Excise Act, 1944 and the Central Excise Ru les, 2002 manufacturers of excisable goods or any person who deals with excisabl e goods with some exceptions, are required to get the premises registered with t he Central Excise Department before commencing business. 5.6.1 Persons requiring registration : In accordance with Rule 9 of the Central Excise Rules, 2002 read with section 6 of Central Excise Act, 1944 and Notifications issued thereunder, the following category of persons are required to register with jurisdictional Central Excise Officer in the Range office having jurisdiction over his place of business/factory: i. Every manufacturer of excisable goods (including Central/S tate Government undertakings or undertakings owned or controlled by autonomous c orporations) on which excise duty is leviable. First stage or second stage deale rs (including manufacturers depot and importers) desiring to issue cenvattable in voices. Persons holding private warehouses for storing non-duty paid goods. Pers ons who obtain excisable goods for availing end-use based exemption notification . Exporters manufacturing or processing export goods by using duty paid inputs a nd intending to claim rebate of such duty or by using inputs received without pa yment of duty and exporting the finished export goods. ii. iii. iv. vi. The registration is not as a company or the entity as a whole. Separate registra tion is required in respect of separate premises except in cases where two or mo re premises are actually part of the same factory (where processes are interlink ed), but are segregated by public road, canal or railway-line. However, in case of textile and textile articles falling under Chapter 50 to 63, if a person has more than one premises within the jurisdiction of one Commissioner, he can obtai n single registration. According to the Boards instruction issued on 1 st Sep 20 01, the fact that the two premises are part of the same factory will be decided by the Commissioner of Central Excise based on factors, such as:

5.12 Central Excise 1. 2. 3. 4. 5. 6. 7. Interlinked process products manufactur ed/produced in one premises are substantially used in other premises for manufac ture of final products. Large number of raw materials are common and received/pr oposed to be received commonly for both/all the premises Common electricity supp lies. There is common labour /work force Common administration/ works management . Common sales tax registration and assessment Common Income Tax assessment Any other factor as may be indicative of inter-linkage of the manufacturing proc esses. This is neither an exhaustive list of indicators nor each indicator is ne cessarily in each case. The Commissioner has to decide the issue from case to ca se. Registration Certificate may be granted to minors provided they have legal g uardians i.e. natural guardians or guardians appointed by the Court, as the case may be, to conduct business on their behalf. 5.6.2 Exemption from Registration: Rule 9(2) gives power to the Board to issue the notification for giving exempti on from registration subject to the conditions and safeguards. Accordingly the C entral Board of Excise and Customs (CBEC), by Notification No. 36/2001CE (NT) dt .26.6.2001, has exempted the following specified categories of persons/premises from obtaining registration i. Persons who manufacture the excisable goods, whic h are chargeable to nil rate of excise duty or are fully exempt from duty by a n otification subject to the declaration to be made in the specified form. Small s cale units availing the slab exemption based on value of clearances under a noti fication. However, such units will be required to give a declaration in a specif ied form once the value of their clearances touches Rs.40 lakhs. In respect of f inal products falling under Chapter 61 or 62 the job-worker need not get registe red if the principal manufacturer undertakes to discharge the duty liability. Pe rsons manufacturing excisable goods by following the warehousing procedure under the Customs Act, 1962 subject to the following conditions: a. the said excisabl e goods and any intermediary or by-product including the waste and refuse arisin g during the process of manufacture of the said goods under the Customs Bond are either destroyed or exported out of the country to the satisfaction of the Assi stant Commissioner of Customs or the Deputy ii. iii. iv.

General Procedures Under Central Excise 5.13 Commissioner of Customs, in charge of the Customs Bonded Warehouse; b. c. v. vi. the manufacturer shall file a decl aration in the specified form in triplicate for claiming exemption under this no tification; no drawback or rebate of duty of excise paid on the raw materials or components used in the manufacture of the said goods, shall be admissible. The person who carries on wholesale trade or deals in excisable goods (except fi rst and second stage dealer, as defined in Cenvat Credit Rules, 2004). A hundred per cent Export Oriented Undertaking or a unit in Export Processing Zone or a u nit in Special Economic Zone licensed or appointed, as the case may be, under th e provisions of the Customs Act, 1962. These units are deemed to be registered f or the purpose of rule 9. However, such 100% EOU or a unit in EPZ shall not be d eemed to be registered if such undertaking or unit procures excisable goods from the domestic tariff area or removes excisable goods to the domestic tariff area . vii. Persons who use excisable goods for any purpose other than for processing o r manufacture of goods availing benefit of concessional duty exemption notificat ion. 5.6.3 Application for Registration : Under authority of section 6 of the Ce ntral Excise Act, 1944 read with rule 9 of the said Rules, the CBEC has prescrib ed the format for Application as well as Registration Certificate. The applicati on has to be made to the jurisdictional Central Excise Officer in Form E-1. The application for registration should be signed by: i. The applicant or by his aut horised agent having general power of attorney. The Range Officer shall have pow er to call the original documents to verify power of attorney. Such document shall not be retained by the Range Officer but be returned immediately after verifica tion. In case of unregistered partnership firms, by all partners. In case of reg istered partnerships, by the managing partner or other partner so authorised in the Partnership Deed. ii. iii. In the application for Registration, the applicant has to submit ground plan. Un der the Central Excise Rules, 2002, there is no stipulation of any specified mar ked area for storing the finished goods (traditionally called the bonded store ro om). Thus there is no need for marking such area in the ground plan. As per the i nstruction of the Board, the only verification that the jurisdictional officers should conduct are that the premises mentioned in the application for registrati on, are genuine and are intended for the purposes for which the application has been made.

5.14 Central Excise Assessees, however, shall be responsible for proper storage and accountal of goods manufactured in his factory at any point of time. 5.6.4 F iling of Declaration in lieu of registration : When a manufacturer who is exempt from the registration is required to file a declaration, the same will be filed with the Assistant Commissioner of the jurisdictional Central Excise Division. The manufacturers who are exempted from the operation of Rule 9 by virtue of Not ification no. 36/2001-Central Excise (NT) dt.26/6/2001 have to file a declaratio n with the Assistant Commissioner of the respective Divisions. Such declarations received from the assessee will have to be filed separately, tariff head-wise i n the divisional office. As per the Boards guidelines issued on 1st September, 20 01, genuine delay in filing the required declaration need not be viewed seriousl y and the assessee may be allowed to enjoy the exemption from the operation of R ule 9 as well as from the payment of duty provided the conditions stipulated in the respective exemption Notifications have been duly fulfilled. 5.6.5 Procedure of issue of Registration Certificate : The Inspector or Superintendent of Centr al Excise having jurisdiction over the premises shall make the verification in r espect of which the applicant has sought registration within 5 working days of t he receipt of application. As per the rules/notification, the registration certi ficate shall be issued within 7 working days. As per the Boards guidelines, the R ange Officer (Superintendent) either himself or through the Inspector shall veri fy whether the declared address and operations (intended) are genuine and the de clarations made in the application are correct. If it is found in order, he will endorse the correctness of the same and append his dated signature on the offic e copies of the Registration application and the copy of the application with th e registrant. If any deviations or variations are noticed during the verificatio n, the same should be got corrected. Any major discrepancy, such as fake address , non-existence of any factory etc. shall be reported in writing to the Division al Officer within 3 working days and the Range Officer shall initiate action to safeguard revenue. 5.6.6 Issue of Registration Certificate: All registrations of each type should be numbered in a single series for the Range as a whole , comm encing with serial no. 1 for each calendar year . The issuing authority should m ake every effort to complete all formalities and grant the Registration Certific ate within 7 days of receipt of application in his office. Every Registration Ce rtificate granted / issued by the registering authority shall be under his signa ture. He should also countersign the ground plan accompanying the Registration C ertificate. The Registration Certificate and the duplicate copy of the plan shou ld be returned to the registered person who shall exhibit his Registration Certi ficate or a certified copy thereof in a conspicuous part of the registered premi ses. The Registering authority in a permanent file shall keep the application as well as the ground plan.

General Procedures Under Central Excise 5.15 In case of partnership firms, the R egistration Certificate which is granted in the name of the said firm [which is registered or not under the Partnership Act] shall contain the names of all the partners. The Registration Certificate or a certified copy thereof is required t o be exhibited in a conspicuous part of the registered premises. 5.6.7 Period of validity of registration: Once Registration Certificate is granted, it has a pe rmanent status unless it is suspended or revoked by the appropriate authority in accordance with law or is surrendered by the person or company concerned. If th e person who applies for registration with the department is an individual, then the Certificate would cease to be valid in the event of the death of the said i ndividual. Any other person who wishes to continue with the operations for which the deceased person was registered, would then have to apply afresh as per the notification no. 35/2001 CE (NT) dt. 26.06.2001 In the case of limited company, death of a director would not affect the status of registration, since registrat ion is issued to the body corporate recognizing the same as a legal person. In t he case of partnership firms also normally no difficulty would arise with regard to succession, since the surviving partners will continue either in the same na me or with the change of name of the business. However, in the case of proprieta ry business when the proprietor dies, the successor in estate has to apply for a fresh registration. Ordinarily fresh registration would be issued to the person who happens to be in the actual possession of the business. However, grant of f resh registration to the successor in estate shall not be regarded that the Gove rnment has accepted the said person as the legal successor/heir to the deceased. 5.6.8 Surrender, Cancellation, Suspension or Revocation of Registration : Regis tration Certificate may be surrendered as per application in prescribed form. Th is is subject to compliance of the statutory obligations under the excise law, p articularly the payment of all dues to the Government including the duty on fini shed excisable goods lying in the factory/warehouse. In case of mis-declaration regarding compliance, the surrender of registration shall not be valid. The Regi stering authority may cancel Registration Certificate when the registered person voluntarily surrenders the Certificate due to closure of business. Registration Certificate may be revoked or suspended by the Deputy/Assistant Commissioner of Central Excise, if the holder or any person under his employ has committed a br each of any condition of the Central Excises Act or the rules made thereunder or has been convicted of an offence under Section 161 read with section 109 or Sec tion 116 of the Indian Penal Code [45 of 1860]. Suspension or revocation of the registration is a heavy punishment since it amounts to suspending or stopping th e business and could result in grave damage to the person

5.16 Central Excise concerned. Hence this penalty should be resorted to only in cases where there is persistent misdemeanor involving serious loss of revenue. T hough technically, a registration Certificate can be suspended or revoked by the issuing authority, the power to revoke or suspend the Registration is vested on ly with the Deputy/Assistant Commissioner. In case of suspension or revocation, the Range Officer should refer the matter to the Deputy/Assistant Commissioner w ho will pass appropriate orders after affording a reasonable opportunity. Appeal against this order lies with the Commissioner [Appeals] and this should be spec ifically spelt out in the order -in-original of the Deputy/Assistant Commissione r (Preamble). 5.6.9 Lost Registration Certificates : When a Registration Certifi cate is reported to be lost, the registered person shall submit a written applic ation to the Range Officer for issuing a DUPLICATE REGISTRATION CERTIFICATE. The same shall be issued after making necessary entries in the record or logs in th e computer data. An importer who intends to issue invoice under Cenvat Credit Ru les will have to Register himself in the manner specified earlier. 5.6.10 Proced ure for Assessee : The Registration Procedure can be summed up from the angle of the assessee as follows. 1. 2. Form A-1: The applicant should file an applicati on in Form A-1 to the jurisdictional Superintendent of Central Excise properly s igned. Ground Plan: The application should be accompanied by the ground plan of the premises of the factory. There is no necessity of clear demarcation of the b oundaries, storeroom, production area as required under old rule 174 of CER, 194 4. Manufacturing Process: The applicant may also enclose a brief write up on the manufacturing process for his products starting from receipt to dispatch for fu ture benefits and avoiding future confusion. Documents: The copy of the partners hip deed, board resolution, memorandum of association and power of attorney in c ase of application being made by person other than the proprietor, partner or di rector may be provided. [Neither the rule nor the form specifies this requiremen t] Tariff Classification: The tariff classification of the excisable goods, whic h are going to be manufactured, is also required to be given in the form A-1. Re gistration Grant: The Superintendent of Central Excise shall grant the Registrat ion Certificate in specified form containing registration number within 7 days f rom the receipt of the duly completed application after conducting the inspectio n within 5 days from the receipt of application. 3. 4. 5. 6.

General Procedures Under Central Excise 5.17 7. 8. 9. Certificate Exhibit: The c ertificate of registration or its certified copy should be exhibited in a conspi cuous part of the premises. Fresh registration: Fresh registration has to be sou ght in the event of change in premises or in case of change in the ownership of the business. Surrender of Registration Certificate: The assessee can surrender his registration certificate by applying in the specified form after fulfilling his obligations under this Act. 10. Lost Certificate: The assessee can give a written application for losing the registration certificate upon which a duplicate registration certificate will b e issued. 5.7 RECORDS [RULE 10] Prior to April 2000, the rules had prescribed the records to be maintained, refe rred to as Statutory records. The statutory records under Central Excise Rules, 19 44 were dispensed with in the year 2000 and it was decided to rely on private re cords of the assessee which they usually maintain for their activities. This was done as a measure of simplification and for adopting a common accounting system . While framing the Central Excise (No.2) Rules, 2001, Cenvat Credit Rules, 2001 and subsequently, the new 2002 Rules issued under Central Excise Act, 1944, the Government has continued with the policy of relying on the private records of t he assessee. The main features of the acceptance of private records are as below : i. The fact that the rules do not prescribe statutory records shall not be const rued that no record has to be maintained. Every assessee has to compulsorily mai ntain private records. The rules which require certain records to be maintained are self contained and they specify the minimum information that an assessee MUS T enter in their own record by which the assessee has to decide himself as to th e form in which they are going to maintain such information. There is no format for recordkeeping, except in the case of Rule 17 of the said Rules where it is pr ovided that the 100% EOU unit or a unit in FTZ/SEZ shall maintain in proper form appropriate account relating to production, description of goods, quantity remo ved, duty paid and each removal shall be made on an invoice. This format has bee n notified by Notification No. 59/2001-Central Excise (N.T.) Dated 6th August, 2 001. This means that the assessee is free to devise his record-keeping, dependin g upon his accounting requirements but shall ensure that the requirements of par ticular rules are met. There is a specific requirement about maintenance of Daily Stock Account in Rule 10 of the Central Excise Rules, 2002. It provides that eve ry assessee shall maintain ii. iii. iv. v.

5.18 Central Excise proper records, on a daily basis, in a legible manner indica ting the particulars regarding a. b. c. d. e. f. g. description of the goods pro duced or manufactured, opening balance, quantity produced or manufactured, inven tory of goods, quantity removed, assessable value, the amount of duty payable; a nd particulars regarding amount of duty actually paid. The first page and the last page of each such account book shall be duly authent icated by the producer or the manufacturer or his authorised agent. All such rec ords shall be preserved for a period of five years immediately after the financi al year to which such records pertain. vi. There is no requirement of authenticat ion of records by jurisdictional Central Excise Officer before a book/register is brought into use by an assessee. These records (relevant for Central Excise) sh all, however, be authenticated on the first and last page by the assessee in the same manner as the Daily Stock Account. They shall also be preserved for a peri od of five years immediately after the financial year to which such records pert ain. vii. Every assessee is statutorily required to furnish to the Range Officer, a l ist in duplicate, of all the records prepared or maintained by him for accountin g of transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of the goods including inputs and capital goods. viii. Every assessee shall, on demand make available to the Range officer duly empowered by Commissio ner or the audit party deputed by the Commissioner or the Comptroller and Audito r General of India,a. b. c. d. the records maintained or prepared by him in term s of sub-rule (2) of rule 22 of the said Rules; the cost audit reports, if any, under section 233B of the Companies Act, 1956 (1 of 1956); and the Income-tax au dit report, if any, under section 44AB of Income-tax Act, 1961 ( 43 of 1961), fo r the scrutiny of the officer or audit party, as the case may be.

General Procedures Under Central Excise 5.19 e. Every assessee who is having mor e than one factory and maintains separate records in respect of every factory fo r the purpose of audit, then, he shall produce the said records for audit purpos es. Records shall mean all the records prepared or maintained by the assessee for ac counting of transactions with regard to receipt, purchase, manufacture, storage, sales or delivery of the goods including inputs and capital goods. All accounts , agreements, invoice, price-list, return, statement or any other source documen t, whether in writing or in any other form shall be treated as records. Source d ocuments are those documents which form the basis of accounting of transactions and include sales invoice, purchase invoice, journal voucher, delivery challan a nd debit or credit note. Under Rule 22, every assessee is required to furnish th e list of all records prepared or maintained by him for accounting of transactio ns in regard to receipt, purchase, manufacture, storage, sales or delivery of go ods including inputs and capital goods, as that of old Rule 173G(5). If there is any modification in the list, the same may be communicated to the Department as and when such modification takes place. Non-maintenance of daily stock account as contemplated under rules or other information mentioned in other rules mentio ned above by the assessee in his private records will mean contravention of spec ified rules attracting appropriate penal action. If such non-maintenance of reco rds is with intent to evade payment of Central Excise duty, the more stringent p enal provisions of the Central Excise Act and Central Excise Rules shall be attr acted. The private records relevant for Central Excise including the Daily Stock Account maintained in compliance with the provisions of the said Rules shall ne cessarily be kept in the factory to which they pertain. 5.8 ELECTRONIC MAINTENAN CE OF RECORDS AND PREPARATION OF RETURNS AND DOCUMENTS Any person may electronic ally maintain or generate all or any of the records, returns, invoices and other documents prescribed under the rules made under Central Excise Act, 1944, using a computer, in electronically readable format. No specific permission from the Central Excise Department is required for this purpose. Such person is also not required to give any intimation to the Department. However, the department will record in Scrutiny Register or any other record indicating a persons profile the fa ct that such person is electronically maintaining records or generating returns, invoices or other documents, using computer. The records can be kept on any ele ctronic media, such as hard disk of computers, floppies, CDs or tapes and preser ved. The records, returns and documents should be in electronically readable for mat. This also

5.20 Central Excise means that a person who uses computerized system to generate records/books of accounts, returns etc., must keep the electronic record, even when a hard copy is kept. It is suggested to take the printouts (hard copies) of records and documents at the end of each month and kept in bound folders, separ ately for each type of record, return, documents etc. The person should ensure t hat proper back-up records are also maintained and preserved so that in the even t of destruction due to unavoidable accidents or natural causes, the information can be restored within reasonable period of time. All such records, returns, in voices and other documents (both electronic and hard copy, including back-ups) s hall be preserved for a period of five years (counted from the first day of the financial year following the financial year to which a record, return, invoice o r document pertains). It shall be incumbent upon a person (who maintains electro nic records, returns, documents etc.) to produce, on demand, the relevant record s, returns or documents, in hard copy and/or in the form of tapes or floppies or cartridges or compact disk or any other media in an electronically readable for mat (duly authenticated by the assessee), documentation including policy and pro cedure manuals, instructions to record the flow and treatment of transactions th rough accounting system, from the stage of initiation to closure and storage to the Central Excise Officers, or the audit parties deputed by the Commissioner or the Comptroller and Auditor General of India. Such records, returns, invoices o r other documents will be produced pertaining to such period (subject to the per iod of preservation) as may be requested including the daily entries in electron ic format relating to the current month for which the printouts are not taken ou t. He shall also provide account of the audit trail and inter-linkages including the source document, whether paper or electronic, and the financial accounts re cord layout, data dictionary and explanation for codes used and total number of records in each field alongwith sample copies of documents. Whenever changes are made in the aforesaid systems adopted by the assessee, he shall inform the Cent ral Excise Officers and submit the relevant document. In case any person is foun d to be misusing this facility or not providing access to the information or if there are any other cogent reasons, the Assistant Commissioner or the Deputy Com missioner of Central Excise may, after recording such reasons and after taking i nto consideration the explanation tendered by the person regarding the discrepan cies, if any, prohibit a person from electronically maintaining or generating an y records, returns, invoices or other documents using computer and inform the im mediate superior officer. 5.9 INVOICING [RULE 11] An invoice is the document under cover of which the excisable goods are to be cl eared by

General Procedures Under Central Excise 5.21 the manufacturer. This is also the document which indicates the assessment of the goods to duty. No excisable goods can be cleared except under an invoice. The invoice is the manufacturers own doc ument and though the Department has specified the entries thereon, the format et c. is left to the manufacturers choice. The provisions of this rule shall apply m utatis mutandis to goods supplied by a first stage dealer or a second stage deal er. 5.9.1 Removals only on invoice : Rule 11 of the Central Excise Rules, 2002 p rovides that no excisable goods shall be removed from a factory or a warehouse e xcept under an invoice signed by the owner of the factory or his authorised agen t. However, textile yarns, fabrics and readymade garments can be cleared on prof orma invoice. No duty is payable on such invoice but the manufacturer should pre pare the final invoice within five days after making adjustments of goods reject ed and returned by the buyer. Such a period of five days can be extended to 21 d ays with the permission of commissioner. The final invoice and proforma invoice should have cross reference to each other. In case of cigarettes, which are unde r physical control, the Factory Officers are posted by rotation in the factory. If the factory is operational 24 hours, the officers are posted 24 hours. They c heck the operations of the assessee as per instructions. Each invoice has to be countersigned by the Inspector of Central Excise or the Superintendent of Centra l Excise before the cigarettes are removed from the factory. 5.9.2 Serially numb ered invoice: As per Rule 11, the invoice shall be serially numbered and shall c ontain the registration number, name of consignee, description, classification, time and date of removal, rate of duty, quantity, mode of transport, vehicle reg istration number and value of goods and the duty payable thereon. The serial num ber shall commence from 1st April every year [beginning of a financial year]. Th e serial number can be given at the time of printing or by using franking machin e. But when the invoice book is authenticated in the manner specified in sub-rul e (5) of rule 11, each leaf should contain serial number. Hand written serial nu mber shall not be accepted. In case of computer-generated invoice, the serial nu mber may be allowed to be generated and printed by computer at the time of prepa ration of invoice only if the software is such that computer automatically gener ates the number and same number cannot be generated more than once. For this pur pose, the Central Excise Officers may check the system/software from time to tim e. 5.9.3 Number of invoice copies The invoice shall be prepared in triplicate in the following manner, namely:i. ii. the original copy being marked as ORIGINAL FOR BUYER; the duplicate copy being marked as DUPLICATE FOR TRANSPORTER;

5.22 Central Excise iii. the triplicate copy being marked as TRIPLICATE FOR ASSE SSEE. However, the assessee may make more than three copies for his other requirements . But it is suggested by the Board to mark on them prominently NOT FOR CENVAT PUR POSES. 5.9.4 Number of Invoice book : Rule 11 of the said Rules provides that onl y one invoice book shall be in use at a time, unless otherwise allowed by the De puty/Assistant Commissioner of Central Excise in the special facts and circumsta nces of each case. But if assessee requires two different invoice books for the purposes of removals for homeconsumption, and removals for export they may do so by intimating the jurisdictional Deputy/Assistant Commissioner of Central Excis e. No permission is required to use two different invoice books for home consump tion and export. Wherever an assessee is allowed to keep more than one invoice b ook, he should be asked to keep different numerical serial numbers for the diffe rent sets. In case of running stationary used in computers, the bound book shall not be insisted upon provided the stationary is pre-printed with distinctive na mes and marks of the assessee. After the invoices are prepared, the triplicate c opy shall be retained in bound-book form. Where invoices are to be type written, the leaves have to be first taken out from the book for typing. In such cases a lso the triplicate copy shall be retained in bound-book form. 5.9.5 Authenticati on of Invoices : The reading of the rule 11 provides that the owner or working p artner or Managing Director or Company Secretary has to authenticate each foil o f the invoice book, before being brought into use. However, the Board has relaxe d this due to the difficulty faced by the assessees. It is now provided that any person duly authorised in this regard by the company, owner or working partner may also authenticate invoices. Copy of the letter of authority should be submit ted to the Range Officer before doing so. 5.9.6 Intimation of serial numbers : B efore making use of the invoice book, the serial numbers of the same shall be in timated to the Superintendent of Central Excise having jurisdiction over the fac tory of the assessee. This can be done in writing by post/email/fax/hand deliver y or any other similar means. 5.9.7 Rounding off of duty in invoice : The amount of duty being shown in invoices issued under Rule 11 of the said Rules should b e rounded off to the nearest rupee as provided for under section 37D of the Cent ral Excise Act, 1944 and the duty amount so rounded off should be indicated both in words as well as in figures. 5.9.8 Cancellation of invoices : As per the Boa rds guidelines, when an assessee is compelled to cancel invoice, the following ac tions should be taken:i. Intimation of a cancelled invoice should be sent to the Range Superintendent on the same date, whenever possible. However, in case of e xceptional circumstances beyond the control of the assessee, should this not be possible, the intimation should be sent on the next working day;

General Procedures Under Central Excise 5.23 ii. iii. Along with the intimation of the cancelled invoice sent to the Range Superintendent the original copy of t he cancelled invoice should also be sent. Triplicate copy of the cancelled invoi ce may be retained by the assessee in the invoice book so that the same can be p roduced whenever required by audit parties, preventive parties and other visitin g officers. However the new rules do not speak of any procedure to be adopted for the cancel lation of invoices as in the case of old rules. Therefore the question arises as to whether the Board can issue a method not warranted either by the Act or Rule s. 5.10 RETURNS [RULE 12] The Central Excise Rules, 2002 provide that the assess ee shall be required to file certain periodic returns, which relate to his tax l iability and other transactions, such as relating to CENVAT credit . 5.10.1 Mont hly/Quarterly Return : Rule 12(1) provides that every assessee shall submit to t he Superintendent of Central Excise a monthly return in proper form, of producti on and removal of goods and other relevant particulars, within ten days after th e close of the month to which the return relates. However, an assessee availing exemption under a notification based on the value of clearances in a financial y ear (SSI), and textile units in textile sector manufacturing yarn, unprocessed f abrics and readymade garments falling under Chapter 50, 51, 52, 53, 54, 55, 58, 60, 61 or 62 shall file a quarterly return in proper form, of production and rem oval of goods and other relevant particulars, within twenty days after the close of the quarter to which the return relates as under: Clearances for SSI & texti le articles First Quarter of the year Second Quarter of the year Third Quarter o f the year Fourth Quarter of the year Due date 20th of July 20th of October 20th of January 20 th of April The prescribed monthly and quarterly returns are E.R.-1 and ER 3 returns respect ively. Sub-rule 2 of Rule 12 requires every assessee to submit to the Superinten dent of Central Excise, an Annual Financial Information Statement for the preced ing financial year to which the statement relates in the prescribed form (ER 4) by 30 th day of November of the succeeding year. The Central Government may, by notification, and subject to such conditions or limitations as may be specified in such notification, specify assessee or class of assessees who may not require to submit such an Annual Financial Information Statement.

5.24 Central Excise The assesses who pay less than Rs.100 lakhs as excise duty f rom account current during the financial year to which the Annual Financial Info rmation Statement relates are exempted from filing of such annual information re turn. Sub-rule 3 lays down that the proper officer may on the basis of informati on contained in the return filed by the assessee under sub-rule (1), and after s uch further enquiry as he may consider necessary, scrutinize the correctness of the duty assessed by the assessee on the goods removed, in the manner to be pres cribed by the Board. Sub-rule 4 casts a responsibility on every assessee to make available to the proper officer all the documents and records for verification as and when required by such officer. The assessee has to submit alongwith the E .R.-1 and E.R.-3 returns for the month/quarter, as the case may be, copies of th e PLA and relevant TR6 challans. The PLA extracts will give details of all the c redits made through TR6 challans during the month and upto the 5 th of the follo wing month upto which the duty liability can be discharged for the month. A summ ary could also be put at the end of the PLA extracts indicating the following: a . b. c. d. e. opening balance, after discharging the duty liability for the seco nd fortnight of the previous month; the credits made during the month; and upto the 5th of the following month; total duty discharged through PLA for the first fortnight; total duty discharged through PLA for the second fortnight; and closi ng balance in the PLA after discharging the second fortnight duty liability. The units in the SSI sector could suitably modify this summary, as they are requ ired to pay duty on monthly basis. Return to be filed by Hundred per cent Export Oriented Undertakings/Units in Free Trade Zones/Units in Special Economic Zones is the E.R.2 Return, notified by Notification No. 49/2001-Central Excise (N.T.) dated 26.6.2001. 5.10.2 Procedure to file the ER 1 returns under Self-Assessmen t Procedure : The manufacturers working under Self-Removal Procedure are require d to file monthly / quarterly returns in form ER-1 in terms of provisions of Rul e 12. Thus all the assessees are required to file the ER-1 return within 10th da y of subsequent month. The manufacturers claiming benefits of exemption notifica tions 8/2003 (SSI Exemption/ Concession) could file the same by the 20th of mont h succeeding the quarter. The following are the requirements at the time of fili ng ER-1 return 1. 2. 3. The return shall be filed in quintuplicate. The return s hall be filed with the jurisdictional Range Superintendent. The assessee shall o btain an acknowledgement for having filed the return.

General Procedures Under Central Excise 5.25 4. The ER-1 return shall be complet e in respect of all the columns. It is also suggested to provide details of remo vals of non-excisable goods (including exempted goods). Further the export remov als under rebate, bond, advance licence, drawback and removals as such under Rul e 4(5) may be disclosed separately. It is also advisable to keep an ongoing runn ing abstract in the first sheet of the RT-12 to disclose the totality of the tra nsactions for the year up to the previous month as well as the clearances in the current month including exempted clearances. The return shall be filed with the following documentsi. ii. 6. 7. TR-6 challans for any deposits made in PLA. Ori ginal and duplicate copies of extracts of PLA. 5. The return shall give details of opening stock, manufacture, and removals of eac h final product sub-heading wise. The Monthly returns under Cenvat Credit Rules on inputs and capital goods has to be filed within 5 days from the end of the mo nth in case of SSIs availing the benefit of 8/2003 within 5 days from the end of the quarter. This is independent of the return to be filed under Rule 12(ER-1) of Central Excise Rules, 2002. Even when there are no transactions of manufacture and/or removal of a particula r excisable goods in a particular month / quarter, a nil return has to be filed. Penalty would be imposed if no return is filed within the stipulated time. 5.11 JOB WORK IN ARTICLE OF JEWELLERY [RULE 12AA] (1) Every person (except an export -oriented unit or a unit located in special economic zone) who gets article of j ewellery falling under heading 7113 of the First Schedule to the Central Excise Tariff Act, 1985 produced or manufactured on his behalf, on job work basis, (her einafter referred to as "the said person") shall obtain registration, maintain ac counts, pay duty leviable on such goods and comply with all the relevant provisi ons of these rules, as if he is an assessee. However, the job worker may, at his option, agree to obtain registration, maintain accounts, pay the duty leviable on such goods, prepare the invoice and comply with the other provisions of these rules and in such a case the provisions of these rules shall not apply to the s aid person. (2) If the said person desires clearance of excisable goods for home consumption or for exports from the premises of the job worker, he shall pay du ty on such excisable goods and prepare an invoice, in the manner referred to in rules 8 and 11 respectively except for mentioning the date and time of removal o f goods on such invoice. (3) The original and the duplicate copy of the invoice so prepared shall be sent by him to

5.26 Central Excise the job worker from whose premises the excisable goods after completion of job work are intended to be cleared, before the goods are cleared from the premises of the job worker. (4) The job worker shall fill up the parti culars of date and time of removal of goods before the clearance of goods and af ter such clearance the job worker shall intimate to the said person, the date an d time of the clearance of goods for completion of the particulars by the said p erson in the triplicate copy of the invoice. (5) The said person may supply or c ause to supply to a job worker, the following goods, namely:(a) inputs in respec t of which he may or may not have availed CENVAT credit in terms of the CENVAT C redit Rules. 2004, without reversal of the credit thereon; or (b) goods manufact ured in the factory of the said person without payment of duty; under a challan, consignment note or any other document (herein referred to as document") with su ch information as specified in sub-rule (2) of rule 11 of the Central Excise Rul es, 2002, duly signed by him or his authorised agent. (6) The responsibility in respect of accountability of the goods, referred to in sub-rule (5) shall lie on the said person. (7) The job worker shall not be required to get himself regist ered or shall not be required to maintain any record evidencing the processes un dertaken for the sole purposes of undertaking job work under these rules unless he has exercised his option to do the same. (8) The job worker, with or without completing the job work may,(i) return the goods without payment of duty to the said person; or (ii) clear the goods for home consumption or for exports, subjec t to receipt of an invoice from the said person, as mentioned in sub-rule (4). ( 9) The job worker shall clear the goods after filling in invoice the time and da te of removal and authentication of such details. The rate of duty on such goods shall be the rate in force on date of removal of such goods from the premises o f the job worker and no excisable goods shall be removed except under the invoic e. For the purpose of this rule, "job worker" means a person engaged in manufact ure or processing on behalf and under the instructions of the said person from a ny inputs or goods supplied by the said person or by any other person authorized by the said person, so as to complete a part or whole of the process resulting ultimately in manufacture of articles of jewellery falling under heading 7113 of the First Schedule to the Central Excise Tariff Act, 1985, and the term "job wo rk" shall be construed accordingly. Article of jewellery shall mean articles of jewellery on which brand name or trade name is indelibly affixed or embossed on itself. Brand name or trade name means a brand name or

General Procedures Under Central Excise 5.27 tradename, whether registered or no t, that is to say, a name or a mark, such as a symbol, monogram, label, signatur e or invented words or any writing which is used in relation to a product, for t he purpose of indicating, or so as to indicate, a connection in the course of tr ade between the product and some person using such name or mark with or without any indication of the identity of that person. It has been clarified that if any goods or part thereof is lost, destroyed, found short at any time before the cl earance of articles of jewellery falling under heading 7113 of the First Schedul e to the Tariff Act or waste, by-products or like goods arising during the cours e of manufacture of such goods, the said person shall be liable to pay duty ther eon as if such goods were cleared for home consumption. 5.12 MAINTENANCE OF RECO RDS AND PAYMENT OF DUTY BY THE INDEPENDENT WEAVER OF UNPROCESSED FABRICS [RULE 1 2C] An independent weaver of unprocessed fabrics falling under Chapter 50, 51, 5 2, 53, 54, 55, 58,or 60 of the First Schedule to the Central Excise Tariff Act c an authorise another person to maintain accounts, pay duty, prepare invoice and comply with other provisions of these rules except Rule 9. However, the primary responsibility of complying with the provisions of these rules shall be with the independent weaver. In case of short payment or non-payment of duty on such unp rocessed fabrics, the independent weaver and the authorised agent will bear the consequences and penalty. Independent weaver is defined as a weaver who works on his own, purchases the yarn himself and sells the grey fabrics manufacture by h im. 5.13 SPECIAL PROCEDURE FOR PAYMENT OF DUTY [RULE 15] Rule 15(1) gives power to the Central Government to generally specify the goods in respect of which an assessee shall have the option to pay the duty of excise on the basis of such fa ctors as may be relevant to production of such goods and at such rate as may be notified for this purpose by issuing the notification. Rule 15(2) also gives pow er to the Central Government to specify the procedure for making an application for availing of the special procedure for payment of duty, the abatement, if any , that may be allowed on account of closure of a factory during any period, and any other matter incidental thereto. 5.14 RETURN OF DUTY PAID GOODS TO THE FACTO RY [RULE 16] Prior to 1st of July 2001, the provision relating to return of duty paid goods into the factory of manufacture covered by erstwhile Rule 51A read w ith old Rule 173H were very stringent and there was a lot of difficulty and liti gation on this aspect. Since 1st July, 2001 Rule 16 of Central Excise Rules, 200 1 deals with return of any duty paid

5.28 Central Excise goods. Rule 16 of the Central Excise Rules, 2002 is also dra fted along similar lines. The said rule is wide enough to cover all the purposes including the goods received for being remade, refined, re-conditioned. The rul e provides that the assessee shall state the particulars of such return in his r ecords and shall be entitled to have cenvat credit of the duty paid as if such g oods are received as inputs under the Cenvat Credit Rules, 2002 and utilise this credit according to the said rules. The narrow proposition of this rule implies the applicability of this rule only to the factory where the goods were manufac tured or produced. Once the goods are returned, two propositions would follow: 1 . 2. Where the returned goods are put through a process not amounting to manufac ture; Where the returned goods are put through a process amounting to manufactur e In the first situation i.e. the process not amounting to manufacture, the amount equal to the Cenvat credit availed on such goods has to be debited on removal. The manufacturer shall thereby pay an amount equal to the Cenvat credit taken. I n the second situation i.e. the process conducted on such goods amounts to manuf acture, duty at the rate applicable on the date of removal and on the value dete rmined under section 4 or section 4A or 3(2) of the Act, as the case may be, has to be paid on removal of such goods. The amount paid as such shall be allowed a s Cenvat credit as if it was a duty paid by the manufacturer who removes the goo ds. Sub-rule (3) of Rule 16 says in the event the assessee has any difficulty, t he Commissioner is empowered to resolve the same and permit the entry of the goo ds into the factory and the availment of Cenvat credit thereon. For this the Com missioner may , either on case to case basis by special order or to be applied t o particular type of case by general order, impose such conditions as may be neces sary for safeguarding interest of revenue. 5.15 REMOVAL OF GOODS FOR JOB WORK, e tc. [RULE 16A] Rule 16A provides that any inputs received in a factory may be re moved as such or after being partially processed to a job-worker for further pro cessing, testing, repair, reconditioning or any other purpose subject to the ful fillment of conditions specified in this behalf by the Commissioner of Central E xcise having jurisdiction. 5.16 SPECIAL PROCEDURE FOR REMOVAL OF SEMI-FINISHED G OODS FOR CERTAIN PURPOSES [RULE 16B] The Commissioner of Central Excise may by s pecial order and subject to conditions as may be specified by the Commissioner o f Central Excise, permit a manufacturer to remove excisable goods which are in t he nature of semi-finished goods, for carrying out certain manufacturing process es, to some other premises and to bring back such goods to his

General Procedures Under Central Excise 5.29 factory, without payment of duty, o r to some other registered premises and allow these goods to be removed on payme nt of duty or without payment of duty for export from such other registered prem ises. 5.17 SPECIAL PROCEDURE FOR REMOVAL OF EXCISABLE GOODS FOR CARRYING OUT TES TS [RULE 16C] The Commissioner of Central Excise may by special order and subjec t to conditions as may be specified by the Commissioner of Central Excise, permi t a manufacturer to remove excisable goods manufactured in his factory for carry ing tests to some other premises and to bring back such goods to his factory, wi thout payment of duty, or to some other registered premises and allow these good s to be removed on payment of duty or without payment of duty for export from su ch other registered premises. However, this rule shall not apply to the goods kn own as prototypes that are sent out for trial or development test 5.18 REMOVAL OF GOODS BY A 100% EXPORT ORIENTED UNDERTAKING FOR DOMESTIC TARIFF AREA [RULE 17] R ule 17 provides that where any goods are removed from a 100% EOU to domestic tar iff area, such removal shall be made under an invoice in the procedure specified under rule 11. Further, removal shall be made only after payment of appropriate duty by debiting the account current maintained for this purpose or by utilizin g the Cenvat credit. Such unit is required to maintain appropriate accounts rela ted to production in the prescribed form giving the following details : (i) desc ription of goods (ii) quantity removed (iii) duty paid. Such unit is further req uired to submit a monthly return in the specified form (E.R. 2) in respect of th e excisable goods manufactured in, and receipt of inputs and capital goods, in t he unit. The return is to be submitted to the Superintendent of Central Excise w ithin 10 days from the close of the month to which the return relates. 5.19 POWE RS OF CENTRAL EXCISE OFFICERS Central Excise Act and Central Excise Rules, 2002 provide certain powers to the Central Excise Officers. As per section 12E, a Cen tral Excise Officer may exercise the powers and discharge the duties conferred o r imposed on any other Central Excise Officer who is subordinate to him. However , Commissioner (Appeals) can not exercise the powers and discharge the duties co nferred or imposed on a Central Excise Officer other than those

5.30 Central Excise specified in section 14 or Chapter VIA (Appeals). 1. Access to a registered premises [Rule 22] (1) An officer empowered by the Commissioner in this behalf shall have access to any premises registered under these rules for the purpose of carrying out any s crutiny, verification and checks as may be necessary to safeguard the interest o f revenue. (2) Every assessee, and first stage and second stage dealer shall fur nish to the officer empowered under sub-rule (1), a list in duplicate, of(i) all the records prepared and maintained for accounting of transaction in regard to receipt, purchase, manufacture, storage, sales or delivery of the goods includin g inputs and capital goods, as the case may be; (ii) all the records prepared and maintained for accounting of transaction in re gard to payment for input services and their receipt or procurement; and (iii) a ll the financial records and statements including trial balance or its equivalen t. (3) Every assessee, and first stage and second stage dealer shall, on demand make available to the officer empowered under sub-rule (1) or the audit party de puted by the Commissioner or the Comptroller and Auditor General of India, (i) t he records maintained or prepared by him in terms of sub-rule (2); (ii) the cost audit reports, if any, under section 233B of the Companies Act, 19 56 ; and (iii) the Income-tax audit report, if any, under section 44AB of the In come-tax Act, 1961 ; for the scrutiny of the officer or audit party, as the case may be. It has been clarified that for the purposes of this rule, first stage de aler and second stage dealer shall have the meanings assigned to them in CENVAT Cre dit Rules, 2004. 2. Power to stop and search [Rule 23] Any Central Excise Officer may search any conveyance carrying excisable goods in respect of which he has reason to believe that the goods are being carried with the intention of evading duty. 3. Power to detain or seize goods [Rule 24] If a Central Excise Officer has reason to believe that any goods, which are liab le to excise duty but no duty has been paid thereon or the said goods were remov ed with the intention of evading the duty payable thereon, the Central Excise Of ficer may detain or seize such goods.

General Procedures Under Central Excise 5.31 4. Power to arrest [Section 13] Any Central Excise Officer not below the rank of Inspector of Central Excise may , with prior approval of the Commissioner of Central Excise, arrest any person w hom he has reason to believe to be liable to punishment under the Central Excise Act or the rules made thereunder. 5. Power to summon persons to give evidence a nd produce documents in inquiries under this Act [Section 14] Any Central Excise Officer may summon any person whose attendance he considers necessary either: ( a) to give evidence; or (b) or to produce a document; or (c) any other thing in any inquiry which he is making for any of the purposes of the Central Excise Act . Such Central Excise Officer should be duly empowered by the Central Government for this purpose. A summons to produce documents or other things may be (a) for the production of certain specified documents or things; or (b) for the product ion of all documents or things of a certain description in the possession or und er the control of the person summoned. All persons so summoned shall be bound to attend, either in person or by an authorized agent, as such officer may direct. Further, all persons so summoned shall be bound to state the truth upon any sub ject in respect of which they are examined or making statements. They shall also be bound to produce such documents and other things as may be required: Every s uch inquiry as aforesaid shall be deemed to be a judicial proceeding within the me aning of section 193 and section 228 of the Indian Penal Code, 1860. 5.20 ACCOUN T CURRENT AND PROCEDURES RELATING THERETO 5.20.1 Personal Ledger Account (PLA): In order to open a new Personal Ledger Account, the manufacturer, quoting his re gistration number, shall obtain the New Excise Control Code Number (New ECC Numb er), which is a Permanent Account Number (PAN)based number. Once Department adop ts common number for registration and accounts, separate ECC number shall not be r equired. The manufacturer working under the procedure shall maintain an account current (Personal Ledger Account) in the specified Form.

5.32 Central Excise Each credit and debit entry should be made on separate lines and assigned a running serial number for the financial year. The PLA must be pr epared in triplicate by writing with indelible pencil and using doublesided carb on. Original and duplicate copies of the PLA should be detached by the manufactu rers and sent to the Central Excise Officer in charge along with the monthly/qua rterly periodical return in form E.R.1. 5.20.2 Credit and debit in account curre nt : The assessee may make credit in the PLA by making cash payment into the Tre asury/or Authorised Bank. If allowed by the Commissioner, in exceptional cases, such as sudden strike in bank, natural calamity, riot etc., after sending by Reg istered A.D. post or by a messenger a cheque for the requisite amount to the Chi ef Accounts Officer of the Commissionerate, provided procedure specified in this regard are followed. Deposit into the Treasury of the authorised bank should be made in a Challan in form TR 6 under the correct Head of Account. The Assessees ECC No. should also be indicated in the challans. A copy of each Treasury Challa n bearing Treasury/Bank seal and the signature of the authorised officer of the Treasury/Bank which is received back from the Treasury/Bank in token of having m ade the deposit, should be sent by the assessee to the Central Excise Office alo ng with the monthly/periodical return. There is an Explanation to sub-rule (1) of rule 5 that the duty liability shall be deemed to have been discharged only if t he amount payable is credited to the account of the Central Government by the sp ecified date. It is being interpreted that it refers to deposit of duty amount b y the focal point banks into the account of Government. This is not the intentio n. Once the assessee has deposited a cheque in bank and the same is honoured or pays in cash/drafts and the bank gives receipt stamp on TR-6 Challans, the same shall be treated as credited to the account of the Central Government. No restrict ion exists with regard to any minimum amount, which should necessarily remain in balance to the credit of an assessee in his PLA. With the fortnightly/monthly p ayment system, there should be enough credit at the time of payment of duty for the fortnight. Where an assessee is required/chooses to pay duty consignment wis e (for the reasons of defaults earlier): i. Duty on each clearance should be pai d by the assessee by making debit entry in the PLA prior to the removal of the g oods outside the factory premises or for being taken into use inside the factory premises. If any goods are removed from the factory without such debit entry th ey will be treated as non-duty paid. Duty on clearances of any excisable goods a s samples in such small quantities as the Commissioner may approve in respect of any commodity may be paid on the last working day of the month by a single debi t in the account current. ii.

General Procedures Under Central Excise 5.33 Mutilations or erasures of entries once made in the PLA are not allowed. If any correction becomes necessary, the o riginal entry should be neatly scored out and attested by the assessee or his au thorised agent. 5.20.3 Payment of rents, fines or penalties : In case where misc ellaneous dues like rents, fines or penalties are to be paid by the holder of ac count current he may be advised to make payments of such accounts directly into the authorised bank under Challan in form T R 6 supported by order of demand, if any. Such challans need not be counter-signed by the Departmental Officer but s hould indicate the particulars of penalties, rent etc, deposited. If, however, t he account holder desires that such miscellaneous dues should also be paid throu gh an account current, he may be permitted to open a separate account current fo r this purpose under the group minor head "E-Miscellaneous-1 Miscellaneous". 5.2 0.4 Account Code Directory : Regarding the Account Code Directory for the purpos e of computerisation, separate instructions have been issued by the Principal Ch ief Controller of Accounts C.B.E.C., which may be referred to. These are not rep roduced here since it is not necessary for the students to go into this at all. 5.20.5 Procedure for deposit of Central Excise duties during bank strikes, natur al calamities etc., : This procedure is to be followed only when all the banks n ominated to collect revenues within a Commissionerate are unable to transact bus iness, due to strike of banks or sudden closure of banks due to riots, impositio n of curfew or natural calamities such as flood, cyclones, etc. Normally in all cases of closure of bank business due to strike by bank employees, the public ge ts advance intimation either through the press, or otherwise. In all such cases, the assessees should make advance arrangements to deposit money into the banks and keep sufficient amounts in their account current [PLA] so that they do not f ace any difficulty in the clearance of the goods during the period of the strike . In cases where the strike of bank employees is without notice, or where the st rike called for after due notice is prolonged beyond a reasonable time (say over 3-4 days) or where there is sudden closure of banks due to riots, imposition of curfew or natural calamities such as flood, cyclones, etc., the Commissioner ma y adopt the procedure specified hereinafter in partial relaxation of the provisi ons contained in the Manual for collection of Revenue and payment of refunds etc. (hereinafter referred to as Manual) only for the duration of the strike or the sudd en closures. The Commissioners are expected to issue a Trade Notice stating that during the days of the closure of bank business due to such strikes (specifying the dates wherever possible), the assessees can send their cheques by registere d post, acknowledgement due (R.P.A.D.) or special messenger, with the TR-6 chall ans (in quadruplicate) duly filled in, to the Chief Accounts Officers of the Com missionerates, with a clear declaration that they have sufficient balance in the ir bank account.

5.34 Central Excise i. ii. iii. They should be advised to send a copy of the let ter forwarding the cheque, to the concerned Range Officer also. On the strength of a cheque so sent, they may take credit in the P.L.As. On receipt of the chequ e in his office, the Chief Accounts Officer will immediately intimate the concer ned Range Officer about the name of the assessee, the number and date of the che que and its amount. Immediately after the strike is over, all such cheques shoul d be deposited by the Chief Accounts Officer into the Focal Point Bank/State Ban k of India at the Headquarters or Reserve Bank of India, as the case may be, thr ough TR-6 challans (in quadruplicate) according to the procedure prescribed in t he Manual. The Chief Accounts Officer will send the Duplicate/Triplicate copies of the receipted challans to the assessees and the quadruplicate copy to the R.O s. concerned to enable them to exercise necessary checks and prepare the monthly statement of revenue. Bank commission or collection charges, if any, chargeable by the banks should be debited in the P.L.A of the assessees by the Chief Accou nts Officer under intimation to them as also the R.Os. iv. v. vi. vii. If any of the cheques sent by the assessees are dishonoured, the Commission ers shall take appropriate penal action as prescribed under the rules. viiii. Th e Chief Accounts Officer should maintain a suitable record in regard to receipt and disposal of such cheques. 5.20.6 Payment by cheque when not permitted : For removal of doubts and to ensure uniformity of application of the procedure it is clarified that the payment of duty/other dues through cheques should not be per mitted in the following cases: i. If there is a strike in or closures of only on e nominated bank of the Commissionerate and the assessee still remains in a posi tion to deposit money in the other nominated banks or Departmental Treasury (whe rever they exist) unless the assessees bank is the only nominated bank in the Com missionerate. In the case of declared bank holidays because such holidays are kn own well in advance. Where the public has been given advance intimation of a str ike, unless the strike is unduly prolonged (say over 3-4 days). Where bank emplo yees adopt go-slow tactics. ii. iii. iv. 5.20.7 Procedure of transshipment of goods en route final destination : The tran sshipment of goods from one vehicle to other vehicle(s) en route the destination (s) can

General Procedures Under Central Excise 5.35 be of two categories:(a) Where the entire quantity is transhipped from one vehicle to another vehicle, which may be on account of (i) Breakdowns; (ii) Non-availability of inter-state transport per mit. (b) Where the consignment originally cleared on an invoice issued under Rul e 11, is required to be split up en route for transport by different vehicles on account of i. ii. iii. breakdown of the original vehicle and non-availability o f the substitute vehicle of the appropriate capacity, or requirement of splittin g up of the consignment and loading in vehicle other than the vehicle on which g oods were cleared from the factory, or part consignment/package(s) misplaced dur ing transhipment, but recovered later on. Regarding category (a) and (b), the owner of goods or his agent or the person in charge of the vehicle, at the material time, acting as his agent, shall make a suitable endorsement at the back of the transports copy of the invoice accompanyi ng the consignment indicating the date and time of breakdown of the vehicle and the registration number of the new vehicle in which the consignment is re-loaded . In cases of splitting up and transhipment on account of any other reason, incl uding predetermined distribution of goods from an intermediate point, the assess ee should be prepared separate invoice for each lot. At the intermediate point, the owner of goods or his agent or the person in charge of the original vehicle shall endorse the registration number of the new vehicle. Upon receipt of goods in the factory, the assessee shall confirm by endorsing on the invoice that the goods were received in the factory in the specified vehicle. 5.21 SAMPLES There is no specific provision in Central Excise Rules, 2002 (hereinafter referred to as the said Rules) governing drawl and testing of samples of manufactured goods or i nputs to ascertain their correct identity or classification or eligibility of an y exemption. However, under various procedures, such as relating to exports, ass essment etc. drawal of samples is required. The Board vide its instructions issu ed on 1.9.2001 dealt with samples separately. The same are discussed below. 5.21 .1 i. Categorization of samples : The samples can be categorized, as follows: Tr ade samples sent to customers for trial;

5.36 Central Excise ii. iii. iv. v. Samples for test purposes; Samples for suppl y against sale contracts or for enforcement of control measures; Samples for dis play at exhibitions, fairs and in show-cases; and Samples for market inquiries b y Central Excise Officers. Apart from the assessee requiring the samples for cogent reasons, the Central Ex cise Department may also require drawal and testing of samples and the assessee shall comply with such directions as may be given in this regard. However, there shall not be any drawal and testing of samples in routine manner. 5.21.2 Proced ure for the drawal and accounting of samples Trade Samples: The manufacturers gen erally give such samples to their customers for trial and approval. The removal sh all be in the same manner as the removal of goods for home consumption. The manu facturer shall prepare an invoice under Rule 11 of the said Rules and record the details in his Daily Stock Account. He shall discharge duty in the manner speci fied in Rule 8 of the said Rules unless the removal of samples are exempted from duty by a notification issued under Section 5A of the Central Excise Act, 1944. Samples of certain goods sent to the trade by manufacturers are likely to be re turned. In such cases, the procedure specified in Rule 16 of the said Rules and the instructions relating thereto shall be followed. Samples for test purposes : The samples of this category will generally include:i. ii. iii. iv. Samples draw n by in-house laboratory for testing quality and adherence to product specificat ions; Samples drawn for preservation for investigation of complaints; Samples dr awn for test at other concerns and independent testing agencies; Samples require d to be sent to Government Test Centers including the Chemical Examiners for tes t. The assessee is required to maintain a proper account of receipts and the utilis ation of samples in the test in the laboratory. The removal shall be in the same manner as when the goods are removed for home consumption. The manufacturer sha ll prepare invoice under Rule 11 the said Rules and make issue entries for the g oods (samples) in the Daily Stock Account. Appropriate duty shall be paid by the assessee on these samples before their removal for test purposes unless otherwi se exempted by a duty exemption notification. Samples for other purposes : Where samples are required for the purposes specified at (iii), (iv) and (v) of parag raph 5.12.1 above, the procedure specified at earlier shall be

General Procedures Under Central Excise 5.37 followed. However, it is clarified that when a manufacturer preserves the samples of their product for some period for investigation of complaints, if any, no duty should be charged on these samp les considering that the goods remain within the factory. Duty shall be charged, unless exempted by a notification, once the samples are cleared from the factor y. If at any time the manufacturer desires to destroy these samples, procedure s pecified in Rule 21 of the said Rules shall be followed. 5.21.3 Quantity of samp les: Samples should be drawn in reasonable quantity. However, in some cases a sp ecific quantity is asked for which should be supported by requisition order from the Chemical Examiner. An account of all departmental samples drawn and sent to the Chemical Examiner should be maintained by the Range Officer. 5.21.4 Test Me mo : A test memo should always be prepared in triplicate, the original to be sen t to the Chemical Examiner, triplicate to the Deputy/Assistant Commissioner and duplicate retained on the Range Officers record. 5.21.5 Preservation of samples : The samples drawn by the Range staff but not sent for test to laboratories shou ld be preserved for six months from the date of analytical report on the sample tested. In case of any discrepancy being noticed, the samples have to be preserv ed till the period of appeal or revision application is over or till disposal of appeal/revision application. The remnants, which are not required by the concer ned assessee, may be destroyed soon after the parties specially inform that they accept the analytical report furnished by the Chief Chemist or after completion of the period of appeal or revision petition is over, as the case may be. 5.21. 6 Cost of samples when drawn by the Department: In respect of samples drawn by t he officers of the Central Excise Department for ascertaining the identity of go ods/its classification or any other official purposes relating to Central Excise , the cost of samples may be reimbursed on manufacturers request out of the conti ngency by the divisional officer. The cost of the containers required for drawl of samples may not be much and if the same cannot be borne by the assessee throu gh persuasion the same should be borne by the Department. 5.21.7 Procedure for t esting and re-testing of samples drawn by the Department Except where there are special instructions for particular kind of samples, the representative samples from such or any lot must be drawn in quadruplicate in the presence of the owner /manager of the factory or his representatives. The quantities of excisable good s or materials taken for testing should be the minimum necessary for testing and the Commissioner will, in consultation with the Chemical Examiner concerned, sp ecify for each kind of excisable goods or materials the size of samples for this purpose. The samples should be sealed with Excise seals and a declaration obtai ned from the

5.38 Central Excise owners (manufacturers) to the effect that the samples drawn are representative of the lot. The assessee, if he so desires, may also be permi tted to affix his seal on the samples. The four samples drawn for test should be clearly marked as: a. Original for Chemical Examiner (to be despatched to him a long with the declaration and the relative test memorandum under intimation to t he Assistant/Deputy Commissioner concerned). Duplicate to be sent to the Deputy/ Assistant Commissioner of Central Excise (to be forwarded to him for safe custod y for further use in case a dispute arises). Triplicate for Range Officer (to be retained for any future reference or to cover loss by post or other emergency). Quadruplicate to be given to the manufacturer (for his own record). b. c. d. Before despatch of sample to the Deputy/Assistant Commissioner of Central Excise and the Chemical Examiner, the samples should be packed properly, sealed and ma rked in such a way that they suffer no loss or deterioration in transit or subse quent storage. The Chemical Examiner after test, will return the remnant sample, if fit for re-test and not in other cases, together with his test report, to th e Assistant Commissioner concerned. The Chemical Examiner will be in position to indicate whether or not a remnant is fit for re-test and the Deputy/Assistant C ommissioner of Central Excise or other adjudicating authority will in most cases be able to anticipate whether the assessee will demand a re-test or not. The te st results should be speedily communicated to the Assessee. The Department shall carefully preserve the remnant sample. Whenever the assessee is dissatisfied wi th the test carried out by the Chemical Examiner he can apply to the Deputy/Assi stant Commissioner of Central Excise concerned, after payment of the prescribed test fees, for a retest within 90 days from the date on which the test result wa s communicated to the him. Where the remnant sample is available in sufficient q uantity in its original state, re-test should ordinarily be on such remnant samp le. Where such remnant sample was received from the Chemical Examiner but it is not in sufficient quantity or in original state, or where the party concerned de sires, for one or the other reasons, a re-test on duplicate or triplicate sample , Deputy/Assistant Commissioner of Central Excise, the adjudicating authority or , as the case may be, the appellate authority should pass an appropriate order f or re-test on duplicate or triplicate sample. Where an assessee requests for retest in a laboratory other than a Control Laboratory (hereinafter in this paragr aph referred to as outside laboratory) whether on the remnant or the duplicate or triplicate sample, such request may be allowed for testing the sample from

General Procedures Under Central Excise 5.39 an outside Government or Semi-Gover nment laboratory with the prior permission of the Commissioner or the Appellate or the reversionary authority, as the case may be after Chief Chemist has confir med that the departmental laboratories do not have the facilities for performing the particular test in question. The request for re-test in outside laboratorie s will be conditional upon the party concerned meeting the cost of the re-test. It is always open to the assessee concerned to get the authenticated sample, in its possession, analysed in any laboratory of his own choice and submit the find ings of such laboratory for due consideration on merits of each case, by the app ropriate adjudicating/appellate authority. However, the assessee should ensure t hat the laboratory which analyses the samples indicates clearly in its test repo rt the full particulars of the samples and whether the central excise seals affi xed to the samples were intact or not at the time of its receipt by such laborat ory. The payment of a fee for re-test does not entitle the assessee to a copy of chemical report. The result of any such retest must however be communicated to the owner at the earliest. Where a copy of the test report is to be furnished to the assessee at its request, the Department shall have the option to provide on ly a concise edited form of the Test Report. The editing of the Test Report shou ld be done in consultation with the Chemical Examiner. For the purpose of market enquiries regarding the value of excisable goods, samples can be drawn by Centr al Excise Officer on written order of the Deputy/Assistant Commissioner of Centr al Excise, on returnable basis. There is no need to make any issue entries in Da ily Stock Account for such samples as the same are to be returned to the factory . The Range Officer should maintain a simple account showing the date of taking the sample, quantity taken and date of return. There should be proper acknowledg ement of drawl and return of sample. The officer who draws sample, will also giv e acknowledgement to the assessee and take acknowledgement when he returns the s ample. 5.21.8 Clearance of model/proto-type without payment of duty for trial et c. : Where a finished excisable goods falling in the category of model/proto-typ e are to be sent out for trail purposes by actually putting them to effective us e after conducting certain test to ensure that they meet with certain standard/s pecified norm, clearance may be allowed on payment of duty. Their subsequent ret urn to the factory may be regulated in terms of rule 21 of the said Rules. 5.21. 9 Samples drawn at the time of export of goods Three sets of samples are drawn a t the time of examination or sealing of export goods. Two sets of samples, duly sealed, are handed over by the Central Excise Officer examining the consignment to the exporter or his authorised agent for delivery to the Custom Officer at th e point of export. The Central Excise Officer for his record retains the third s et of sample. The Customs Officer will check the export goods with the sample be fore allowing export.

5.40 Central Excise The samples shall be dealt with in accordance with instructi ons/standing orders of the Board or the Commissioner of Customs. Self-examinatio n questions 1. 2. 3. When and how is the assessee required to discharge his liab ility towards payment of duty under the Central Excise Rules, 2002? Who is requi red to obtain registration under Rule 9 of the Central Excise Rules, 2002? Discu ss the mechanism for removal of goods at concessional rate of duty for manufactu re of excisable goods with reference to the Central Excise Act, 1944 and the rul es made thereunder. Discuss the provisions in respect of removal of goods by a u nit in Hundred Percent Export Oriented Undertaking for Domestic Tariff Area. Wha t do you mean by payment of excise duty under protest? Explain the procedure tha t has to be followed by an assessee who opts to pay duty under protest. Discuss the special provisions for removal of excisable goods in respect of molasses. Ex plain the provisions relating to provisional assessment. What is an invoice? Des cribe the special considerations in respect of an invoice with respect to rule 1 1 of the Central Excise Rules, 2002. Discuss the special provisions in respect o f job work relating to articles of jewellery. 4. 5. 6. 7. 8. 9. 10. Write a brief note on powers of Central Excise Officers.

6 EXPORT PROCEDURES 6.1 INTRODUCTION The procedures relating to export can be classified into two. Firstly export of goods without payment of duty and secondly export of goods on payment of duty un der rebate. The conditions and procedure relating to export without payment of d uty are contained in Notification Nos. 42/2001-Central Excise (N.T.) to 45/2001Central Excise (N.T.), all dated 26th June, 2001 issued under rule 19 of the Cen tral Excise 2002. Export without payment of duty [Rule 19] (1) Any excisable goo ds may be exported without payment of duty from a factory of the producer or the manufacturer or the warehouse or any other premises, as may be approved by the Commissioner. (2) Any material may be removed without payment of duty from a fac tory of the producer or the manufacturer or the warehouse or any other premises, for use in the manufacture or processing of goods which are exported, as may be approved by the Commissioner. (3) The export under sub-rule (1) or sub-rule (2) shall be subject to such conditions, safeguards and procedure as may be specifi ed by notification by the Board. 6.2 EXPORT UNDERTAKING WITHOUT PAYMENT OF DUTY UNDER BOND/LETTER OF Export without payment of duty is further classified into the export to the coun tries other than Nepal and Bhutan for which there is a different procedure. 6.2. 1 Export to all countries except Nepal and Bhutan: Procedures and conditions for export to all countries except Nepal and Bhutan are specified in notification N o. 42/2001CE(N.T.) dated 26.6.2001. The details are mentioned in this part. 1. C onditions : Merchant exporter shall furnish bond in Form B-1 and obtain certific ate in Form CT-1. A manufacturer-exporter may furnish annual Letter of Undertaki ng in Form

6.2 Central Excise The export shall be subject to the following UT-1(no CT-1 is required in this case). conditions: (i) The goods shall be exported within six months from the date on which these were cleared for export from the factory of the production or the manufacture or ware house or other approved premises within such extended period as the Deputy/Assis tant Commissioner of Central Excise or Maritime Commissioner may in any particul ar case allow; (ii) When the export is from a place other than registered factory or warehouse, the excisable goods are in original packed condition and identifiable as to the ir origin; 2. Forms to be used: ARE.1 is the export document for export clearanc e which shall be prepared in quintuplicate (5 copies). This document shall bear running serial number beginning from the first day of the financial year. On A.R .E.1, certain declarations are required to be given by the exporter. These shoul d be signed by the exporter or his authorised agent. If the export is under bond executed by merchant exporter, the form should be signed by both manufacturer a s well as merchant exporter. The different copies of ARE.1 forms should be of di fferent colours indicated below: Original Duplicate Triplicate Quadruplicate Qui ntuplicate White Buff Pink Green Blue It will be sufficient if the copies of ARE.1 contain a color band on the top or right hand corner in accordance with above color scheme. An invoice shall also b e prepared in terms of rule 11 of the said Rules. It should be prominently menti oned on top FOR EXPORT WITHOUT PAYMENT OF DUTY. The Letter of Undertaking (LUT) is to be furnished in the Form UT-1 specified in the Notification No. 42/2001-Cent ral Excise (N.T.). Any manufacturer, who is an assessee for the purposes of the Central Excise Rules, 2002, shall furnish a Letter of Undertaking only to the De puty/Assistant Commissioner of Central Excise having jurisdiction over his facto ry from which he intends to export. The Letter of Undertaking should not be furn ished to the Maritime Commissioner or any other officer authorised by the Board. A Letter of Undertaking shall be valid for twelve calendar months provided the ex porter complies with the conditions of the Letter of Undertaking, especially the procedure for

Export Procedures 6.3 acceptance of proof of export under this instruction. In case of persistent defaul ts or noncompliance causing threat to revenue, the manufacturer-exporter may be asked to furnish bond with security/surety. For the sake of clarification, it is mentioned that this Letter of Undertaking should not be taken for each consignm ent of export. The obligation of the manufacturer flows from statutory requireme nt of exporting the goods within six months or such extended period as the Deput y/Assistant Commissioner of Central Excise may allow. Failing this, the exporter is required to deposit the requisite sum (duty and interest) suo motu, consider ing that the manufacturer has to do self-assessment. Any non-payment within 15 day s of expiry of the stipulated time period, shall be treated as arrears of revenu e and the Department will proceed to recover the same as sum due to Government. Su o motu payment within 15 days of expiry of the stipulated time period will not b e treated as default. On repeated failure of the manufacturer-exporter to comply w ith the conditions of the Letter of Undertaking or the procedure for acceptance o f proof of export under this instruction, the Deputy/Assistant Commissioner of Ce ntral Excise may direct him in writing that the Letter of Undertaking is not val id and he should furnish B-1 Bond with sufficient security/surety. The Letter of Undertaking shall not be discharged unless the goods are duly exported, to the satisfaction of the Assistant Commissioner of Central Excise or the Deputy Commi ssioner of Central Excise within the time allowed for such export or are otherwi se accounted for to the satisfaction of such officer, or until the full duty due upon any deficiency of goods, not accounted so, and interest, if any, has been paid. Though any exporter (manufacturer-exporter or merchant-exporter) can furni sh bond, the merchant-exporters are necessarily required to furnish bond in the B-1 Form specified in notification no. 42/2001-Central Excise (N.T.), with such security or surety as may be specified by the concerned bond accepting authority . The bond shall be in a sum equal at least to the duty chargeable on the goods for the due arrival of export goods at the place of export and their export ther efrom under Customs or as the case may be postal supervision. The officer who wi ll accept the bond, will also be responsible for discharging that bond upon furn ishing proof of export by the exporter. The bond shall not be discharged unless the goods are duly exported, to the satisfaction of the Deputy/Assistant Commiss ioner of Central Excise or Maritime Commissioner or such other officer as may be authorised by the Board on this behalf within the time allowed for such export or are otherwise accounted for to the satisfaction of such officer, or until the full duty due upon any deficiency of goods, not accounted so, and interest, if any, has been paid. Certificate CT-1, in specified form have to be obtained by mer chant-exporters for procuring goods from a factory or warehouse. Such certificat es need not be obtained for each consignment but will be given in lots of 25.

6.4 Central Excise 3. Procedure for clearance from the factory or warehouse : A manufacturer-export er who has furnished a Letter of Undertaking will prepare the export documents ( A.R.E.1 and invoice under rule 11) for clearance from his factory of production. A merchant-exporter who has furnished a bond shall be provided sufficient numbe r of certificates (CT-1), duly signed/certified, in multiples of 25 copies, norm ally covering a period of one to three months, depending upon the track record o f compliance by the exporter. The bond accepting authority shall be responsible fo r verifying and accepting the proof of export and in case of any defaults by the exporter, to recover the sum and enforcing the bond. The certificate should be provided according to the volume of exports projected by the exporter (which sho uld also reflect in the amount of bond). The compliance of the exporter in submi tting the requisite documents towards proof of export shall be another criterion. The second part of CT-1 is very important. The exporter shall determine the desc ription of goods for procurement from a particular factory or warehouse or an ap proved place of storage, quantum, value of procurement (provisional figures) and duty involved therein (provisional figures but based on correct rate of duty an d contracted transaction value). This duty element will be debited provisionally. The exporter shall ensure that at the time of debit, sufficient credit is availa ble at that point of time to cover the said debit. The provisional debit shall b e converted into final debit within a period of seven days from the date of remo val of goods on A.R.E.1, based on the duty payable in goods cleared for export ref lected in the said A.R.E.1 and invoice. The manufacturer shall record the cleara nce in his Daily Stock Account indicating, inter alia, the invoice number/date, A.R.E.1 number/date and duty payable but foregone under Rule 19. The exporter ha s two optional procedures regarding the manner in which he may clear the export consignments from the factory or warehouse or any other approved premises, namel y: (i) Examination and sealing of goods at the place of despatch by a Central Ex cise Officer (ii) Self-sealing and self-certification 4. Sealing of goods and examination at place of despatch : The exporter is required to prepare five copies of applicati on in the Form ARE-1. The Form is specified in Annexure-I to notification No. 42 /2001-Central Excise (N.T.) dated 26.6.2001. The goods shall be assessed to duty in the same manner as the goods for home consumption, though duty is not requir ed to be paid considering clearance is meant for export without payment of duty. The classification and rate of duty should be in terms of Central Excise Tariff Act, 1985 read with any exemption notification and/or the said Rules. The value shall be the transaction value and should conform to section 4 or section 4A, as the case may be, of the Central Excise Act, 1944. It is clarified that this valu e may be less than, equal to or more than the

Export Procedures F.O.B. value indicated by the exporter on the Shipping Bill. 6.5 The duty payable shall be determined on the ARE.1 and invoice and recorded in th e Daily Stock Account as duty foregone on account of export under rule 19. The exp orter may request the Superintendent or Inspector of Central Excise having juris diction over the factory of production or manufacture, warehouse or approved pre mises for examination and sealing at the place of despatch 24 hours in advance, or such shorter period as may be mutually agreed upon, about the intended time o f removal so that arrangements can be made for necessary examination and sealing . In case of exports under Duty Exemption Entitlement Certificate Scheme (DEEC), Duty Exemption Pass Book Scheme (DEPB) and claim for Drawback, the Superintende nt of Central Excise shall also examine and seal the consignment and sign the do cuments in token of having done so. In exceptional cases, where the exporter has unblemished track record of compliance (Central Excise) and where there is nonavailability of Superintendent of Central Excise due to leave, vacant post or ot her reasonable causes, the jurisdictional Deputy/Assistant Commissioner of Centr al Excise may permit examination and sealing by Inspector. All other types of ex port may be examined and sealed by the Inspector of Central Excise. The Superint endent or Inspector of Central Excise, as the case may be, will verify the ident ity of goods mentioned in the application and also verify whether the duty selfa ssessed is appropriate and that the particulars of the duty payable has been has recorded in the Daily Stock Account. If he finds that the declaration in ARE.1 and the invoices are correct from the point of view of identity of goods and its assessment to duty, he shall seal each package or the container ensuring that t he goods cannot be tampered with after the examination. Normally, individual pac kages should be sealed by using wire and lead seals and an all-sides-closed cont ainer by using numbered one time Lock/Bottle seals or in such other manner as ma y be specified by the Commissioner of Central Excise by a special or general wri tten order. Thereafter, the said officer shall endorse and sign each copy of the application in token of having such examination done and put his stamp with his name and designation below his signature. 5. Distribution of ARE.1 in the case of export from the factory or warehouse : The said Superintendent or Inspector o f Central Excise shall return to the exporter immediately after endorsements and signature. The said Superintendent or Inspector of Central Excise shall return to the exporter immediately after endorsements and signature. Sent to the bond s anctioning authority, either by post or by handing over to the exporter in a tam per proof Original (First Copy) Duplicate (Second Copy) Triplicate (Third Copy)

6.6 Central Excise sealed cover after posting the particulars in official records. Quadruplicate (Fourth Copy) Quintuplicate (Fifth Copy) Retain for official records. Optional copy - The said Superintendent or Inspecto r of Central Excise shall return to the exporter immediately after endorsements and signature. 6. Distribution of ARE.1 in the case of export from other than factory or wareho use: Where goods are not exported directly from the factory of manufacture or wa rehouse, the distribution of A.R.E.1 will be the same as above except that the t riplicate copy of application shall be sent to the Superintendent having jurisdi ction over the factory of manufacture or warehouse who shall, after verification forward the triplicate copy in the manner specified above. 7. Despatch of goods by self-sealing and self-certification : Self-sealing and selfcertification is a procedure by which the exporter who is a manufacturer or owner of a warehouse, may remove the goods for export from his factory or warehouse without examinati on by a Central Excise Officer. This procedure will also be permitted in the cas es where a merchant-exporter procures the goods directly from a factory or wareh ouse. In both cases, the manufacturer of the export goods or owner of the wareho use shall take the responsibility of sealing and certification. For this purpose the owner, the working partner, the Managing Director or the Company Secretary, of the manufacturing unit of the goods or the owner of warehouse or a person (w ho should be permanent employee of the said manufacturer or owner of the warehou se holding reasonably high position) duly authorised by such owner, working part ner or the Board of Directors of such company, as the case may be, shall certify on all the copies of the application (A.R.E. 1) that the goods have been sealed in his presence. The exporter shall distribute the copies of A.R.E. 1 in the fo llowing manner: Original (First copy) and Duplicate (Second copy) Triplicate (Th ird copy) Quadruplicate (Fourth copy) Quintuplicate (Fifth copy) and Send to the place of export along with the goods Superintendent or Inspector of Central Exc ise having jurisdiction over the factory or warehouse within twenty four hours o f removal of the goods Optional copy - Send to the place of export along with th e goods The said Superintendent or Inspector of Central Excise shall verify the particul ars of assessment, the correctness of the amount of duty paid or duty payable, i ts entry in the Daily Stock Account maintained under Rule 10 of the Central Exci se Rules, 2002 (the manufacturer or warehouse owner will be required to present proof in this regard),

Export Procedures 6.7 corresponding invoice issued under Rule 11. If he is satisfied with the particul ars, he will endorse the relevant A.R.E. 1 and append his signatures at specifie d places in token of having done the verification. In case of any discrepancy, h e will take up the matter with the assessee for rectification and also inform th e jurisdictional Assistant/Deputy Commissioner. Once verification is complete an d the A.R.E. 1 is in order, he shall distribute the documents (A.R.E. 1) in the following manner: Triplicate (Third copy) Send to the bond accepting authority, either by post or by handing over to the exporter in a tamper proof sealed cover after posting the particulars in official records. Where manufacturer has given LUT, triplicate shall be retained and will be forwarded to the Deputy/Assistant Commissioner of the Division along with Statement, after matching them with ori ginal copies of A.R.E.1s. Retain for Range records (The notification does not sp ecify this distribution of this copy) Quadruplicate (Fourth copy) 8. Export by parcel post : In case of export by parcel post after the goods inte nded for export has been sealed, the exporter shall affix to the duplicate appli cation sufficient postage stamps to cover postal charges and shall present the d ocuments, together with the package or packages to which it refers, to the postm aster at the office of booking. 9. Examination of goods at the place of export : The place of export may be a port, airport, Inland Container Depot, Customs Fre ight Station or Land Customs Station. The exporter shall present together with o riginal, duplicate and quintuplicate (optional) copies of the application (A.R.E . 1) to the Commissioner of Customs or other duly appointed officer normally goo ds are presented in the designated export shed. The goods are examined by the Cu stom officers for the purposes of Central Excise to establish the identity and q uantity, i.e. the goods brought in the Customs area for export on an A.R.E. 1 ar e the same which were cleared from the factory. The Customs authorities also exa mine the goods for Customs purposes such as verifying for certain export incenti ves such as drawback, DEEC, DEPB or for determining exportability of the goods. For Central Excise purposes, the Officers of Customs at the place of export shal l examine the consignments with the particulars as cited in the application (A.R .E. 1) and if he finds that the same are correct and the goods are exportable in accordance with the laws for the time being in force (for example, they are not prohibited or restricted from being exported), shall allow export thereof. Ther eafter, he will certify on the copies of the A.R.E. 1 that the goods have been d uly exported citing the shipping bill number and date and other particulars of e xport and distribute in the following manner:

6.8 Central Excise The officer of customs shall return the original and quintuplicate (optional cop y for exporter) copies of application to the exporter and forward the duplicate copy of application either by post or by handing over to the exporter in a tampe r proof sealed cover to the officer specified in the application, from whom expo rter wants to claim rebate. Quintuplicate A.R.E. 1 is the Export Promotion Copy and the exporter shall use this copy for the purposes of claiming any other expo rt incentive. 10. Procedure relating to proof of export and re-credit against su ch proof : The procedure relating to acceptance of proof of export or the validat ion of actual export has been simplified. The original and duplicate copies of A. R.E. 1 are presented to the Customs authorities at the place of export [with opt ion for exporter to also present quintuplicate copy]. The Customs authority cert ifies the actual export on these documents and distributes the copies as specifi ed. The exporter shall submit a Statement, at least once in a month, in specifie d form along with the original copies of A.R.E. 1 with due certification of expo rt (Pass for Shipment Order) by Customs authorities at the place of export to th e Divisional office (through Range)or in the office of the bond-accepting author ity. Other supporting documents shall also be furnished, namely, self-attested p hotocopy of Bill of Lading and self-attested photocopy of Shipping Bill (Export Promotion Copy). The Range office or the Office of the bond-accepting authority immediately on receipt shall acknowledge the Statement. The exporter is permitte d to take credit in his running bond account on the basis of copy of the Stateme nt referred to above, duly acknowledged by the Range office or the office of the bond-accepting authority It shall be the responsibility of the Range Office and Division Office or the other bondaccepting authority to verify the correctness of Statement and A.R.E.1 furnished by the exporter within the shortest possible time. The Statement and A.R.E.1 will be tallied by the Range Officers with the t riplicate copies of A.R.E.1 already with them and the A.R.E.1 or its summary rec eived directly from the place of export (hard copies or electronic summary or em ail) within 15 days of the receipt. The Divisional Officer shall accept the proo f of export or initiate necessary action in case of any discrepancy. In case of other bond-accepting authority, their office will do this work. The bond-accepti ng authority shall accept the proof of export or initiate necessary action in ca se of any discrepancy. He will also intimate about the acceptance of proof of ex port or any other action to the Deputy/Assistant Commissioner of Central Excise from whose jurisdiction goods were cleared for export. In case of non-export wit hin six months from the date of clearance for export (or such extended period, i f any, as may be permitted by the Deputy/Assistant Commissioner of Central Excis e or the bond-accepting authority) or discrepancy, the exporter shall himself de posit the excise duties along with interest on his own immediately on completion of the

Export Procedures 6.9 statutory time period or within ten days of the Memorandum given to him by the R ange/Division office or the Office of the bond-accepting authority. On failure t o do so necessary action can be initiated to recover the excise duties along wit h interest and fine/penalty. Failing this, the amount shall be recovered from th e manufacturer-exporter along with interest in terms of the Letter of Undertakin g furnished by the manufacturer. In cases where the exporter has furnished bond, the said bond shall be enforced and proceedings to recover duty and interest sh all be initiated against the exporter. In case of any loss of document, the Divi sional Officer or the bond accepting authority may get the matter verified from the Customs authorities at the place of export or may call for collateral eviden ces such as remittance certificate, Mates receipt etc. to satisfy himself that th e goods have actually been exported. 6.2.2 Export to Nepal and Bhutan without Pa yment of Duty The conditions and procedure for export to Nepal and Bhutan withou t payment of duty (under bond) have been given by the Board in Notification No. 45/2001-Central Excise (N.T.) dated 26.6.2001. 1. Places from where goods can be exported : Under the said notification, export can be made from any of the foll owing places: (i) the factory of production or manufacture (ii) warehouse, or (i ii) any other premises as may be approved by the Commissioner of Central Excise. 2. Forms to be used : The export shall be required to file a general bond in th e Form specified in the said notification with such security or surety as may be specified by the concerned bond accepting authority. The bond shall be in a sum equal at least to the duty chargeable on the goods for the due arrival of expor t goods at the place of export (Land Customs Station) and their export therefrom under Customs supervision. The officer who will accept the bond, will also be r esponsible for discharging that bond upon furnishing proof of export by the expo rter. The bond shall not be discharged unless the goods are duly exported, to th e satisfaction of the Deputy/Assistant Commissioner of Central Excise or Maritim e Commissioner or such other officer as may be authorised by the Board on this b ehalf within the time allowed for such export or are otherwise accounted for to the satisfaction of such officer, or until the full duty due upon any deficiency of goods, not accounted so, and interest, if any, has been paid. Invoice in the Form specified in the said notification shall be used for export clearances. Si x copies of invoice shall be prepared. This document shall bear running serial n umber beginning from the first day of the financial year. During this year, for the sake of continuity,

6.10 Central Excise the serial number, as started from 1.4.2001, may continue. The stationery for in voice under erstwhile notification no. 50/94-Central Excise (N.T.) dated 22.9.19 94 may be used for the time being during this financial year. On the invoice, ce rtain declarations are required to be given by the exporter. They should be sign ed by the exporter or his authorised agent. Certificate shall be required in the Form specified in the said notification from the Reserve Bank of India or any o ther bank authorised to deal in foreign exchange by the Reserve Bank of India, f or the receipt of full payment in freely convertible currency. Certificate may a lso be required where remittance is received in Indian rupee. 6.3 CATEGORIES OF EXPORTS AND THE CONDITIONS AND SAFEGUARDS THERETO 6.3.1 Export under bond to Nep al or Bhutan where payment is in freely convertible currency : Export under bond to Nepal or Bhutan where payment is in freely convertible currency, shall be su bject to following conditions, namely: (i) the importer of the goods in Nepal or Bhutan, as the case may be, shall make full payment for said goods to the expor ter thereof by furnishing Foreign Inward Remittance Certificate for such payment from any bank authorized to deal with foreign exchange by Reserve Bank of India or shall open an irrevocable letter of credit in favour of such exporter in Ind ia, before the export of such goods takes place. (ii) condition (i) shall not apply if the excisable goods other than consumer go ods, but excluding motor vehicles, are exported without payment of duty as:(a) s upplies to projects financed by any United Nations agency, the International Ban k for Reconstruction and Development, International Development Association, the Asian Development Bank or any other multilateral agency of like nature; (b) to all diplomatic missions in Nepal or Bhutan provided the Indian Embassy or the Mi nistry of External Affairs certifies that the import is for the personnel of the diplomatic community; (iii) the exporter shall furnish a bond in the prescribed form before the Assistant/Deputy Commissioner of Central Excise having jurisdic tion over the factory, warehouse, or the approved premises or such other officer as authorized by the Board on this behalf, from where the goods are removed for export to Nepal, as the case may be, or Bhutan; (iv) where the export is agains t an irrevocable letter of credit, the exporter shall furnish a certificate in t he prescribed form from the Reserve Bank of India or any other bank authorized t o deal in foreign exchange by the Reserve Bank of India, showing that

Export Procedures 6.11 full payment for the goods has been duly received in free ly convertible currency. On receipt of such a certificate and on the satisfactio n that the goods have been exported in terms of the bond, the Assistant/Deputy C ommissioner of Central Excise or such other officer as authorized by the Board o n this behalf shall discharge the exporter of his liabilities under the bond. 6. 3.2 Export to Nepal in bond against payment in Indian rupee: As an exception to the above category of export, capital goods, as defined in the said notification may be exported under bond directly from the factory of manufacture to Nepal ag ainst any global tender invited by His Majesty s Government of Nepal without pay ment of duty, for which payment is received in Indian currency. Such exports sha ll be subject to the following further conditions, namely: (i) the exporter shal l furnish a bond in specified form before the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise or such other officer as aut horised by the Board on this behalf; and (ii) the exporter shall furnish a certificate of remittances in specified form f rom a bank in India showing that full payment for the goods has been duly receiv ed in Indian currency by the said bank. On receipt of the certificate of remitta nces and on the satisfaction that the goods have been exported in terms of bond, the bond accepting authority shall discharge the exporter of his liabilities un der the bond. 6.3.3 Export in bond of petroleum oil and lubricant products to Ne pal: The export in bond without payment of duty of excise of petroleum oil and l ubricant products to Nepal is permitted through the agency of Nepal Oil Corporat ion from calibrated stocks of M/s Indian Oil Corporation registered as a warehou se in accordance with the provisions of Rule 20 of the said Rules, and situated at places notified for the purpose or purchased without payment of duty from tan ks of other Oil companies or undertakings. For this facility, the Indian Oil Cor poration shall be required to furnish a bond in the specified Form to the Deputy /Assistant Commissioner of Central Excise having jurisdiction over the installat ion from which the petroleum oil and lubricant products are to be exported. 6.3. 4 Export in bond for supplies to Government of India Aided Projects in Nepal and the Embassy Co-operative Store and Embassy Petrol Pump located in Nepal for the bonafide use of officers and staff of the Embassy in Nepal : Export in bond for supplies to Government of India Aided Projects in Nepal and the Embassy Co-oper ative Store and Embassy Petrol Pump located in Nepal for the bonafide use of off icers and staff of the Embassy in Nepal shall be subject to the following condit ions, namely: (i) the exporter shall furnish a bond in specified Form to the Dep uty/Assistant Commissioner of Central Excise; and

6.12 Central Excise (ii) the First Secretary (Economic), Embassy of India, Nepal, certifies the sign ature and stamp or seal of the person authorised to place the order for supply o f excisable goods to the specified Government of India Aided Projects in Nepal. 6.3.5 Export without payment of duty to Kurichu Hydro Electric Project and Tala Hydro Electric Project in Bhutan Export of all excisable goods without payment o f duty to Kurichu Hydro Electric Project and Tala Hydro Electric Project in Bhut an shall be subject to the following conditions, namely: (i) The exporter shall furnish a bond in specified Form before the Deputy/Assistant Commissioner of Cen tral Excise having jurisdiction over the factory or warehouse from which the goo ds have to be cleared. (ii) The goods are supplied against one or more specified contract which have be en registered with the Directorate General of Inspection, Customs and Central Ex cise in the following manner: (a) Every Project Authority specified in the notif ication (notification no. 45/2001CE(N.T.), supra, desirous of obtaining supplies under benefits of this notification shall apply in writing to the Director Gene ral, Directorate General of Inspection (Customs and Central Excise) [hereinafter referred to as DGICCE], 5 th Floor, Drum Shape Building, I.P. Estate, New Delhi for registration of the contract through Ministry of External Affairs as soon a s the contract has been concluded with the suppliers. (b) The application shall be accompanied by the original deed of contract and list of items duly approved by the Ministry of External Affairs. (c) The Project Authority shall also furnis h such other documents or other particulars as may be required by the DGICCE in connection with the project. (d) DGICCE, on being satisfied, shall register the contract by entering the particulars in a Register maintained separately for eac h project and shall assign a number in token of registration and communicate the same to the Project Authority and shall also return to the project authority al l original documents which are no longer required. This number shall be indicate d on all the invoices and other related documents. (e) A copy of the contract so registered along with the approved list of items shall be forwarded to the Comm issioner of Central Excise having jurisdiction over the factory/warehouse to whi ch the contract pertains for extending benefits under this notification and cons equent benefits under the CENVAT Credit Rules, 2002 to the supplier.

Export Procedures 6.13 Amendment of Contract If any contract referred to hereina bove is amended, whether before or after registration, the Project Authority sha ll make an application for registration of amendments to the said contract to th e DGICCE. The application shall be accompanied by the original deed of contract relating to the amendment and a list of items pertaining to amendment, if any, d uly approved by the Ministry of External Affairs. On being satisfied that the ap plication is in order the DGICCE shall make note of the amendments in the releva nt entries. The DGICCE shall forward a copy of the amended contract and the amen ded list of items, if any, to the concerned Commissioner of Central Excise. Fina lisation of Contract (a) Each Project Authority shall submit a statement of supp lies received on quarterly basis along with relevant invoices and other document s to the DGICCE within one month from the last date of the quarter. (b) The Comm issioner of Central Excise to whom a registered contract has been forwarded shal l forward a statement, after all the items covered under the contract have been exported, to the DGICCE. (c) The DGICCE shall, on receipt of the statement, reco ncile both and, if satisfied, finalise the contract and close the entry in the r egister. There should be a release order from the officer authorised by the Gene ral Manager of the concerned project authority covering the goods. The exporter shall furnish a bond in the specified Form to the Deputy/Assistant Commissioner of Central Excise having jurisdiction over the factory or warehouse or the appro ved premises or from where the goods are removed for export to the specified pro ject. 6.4. EXPORT PROCEDURE 6.4.1 Procedure at the place of despatch: Six copies of invoice shall be present ed to the Superintendent or Inspector of Central Excise having jurisdiction over the factory, warehouse or any other approved premises along with the export goo ds. In case of export for supplies to Government of India Aided Projects in Nepa l and the Embassy Co-operative Store and Embassy Petrol Pump located in Nepal fo r the bonafide use of officers and staff of the Embassy in Nepal, the order from Project Implementation Authority shall also be presented. The Superintendent or Inspector of Central Excise having jurisdiction over the factory,

6.14 Central Excise warehouse or any other approved premises shall verify the identity of goods with reference to description mentioned in the invoice and the particulars of the du ty payable but for export, and if found in order, he shall seal the consignment, tank or container with Central Excise seal or in such other manner as may be sp ecified by the Commissioner of Central Excise and endorse each copy of the expor t invoice in token of having such verification and examination done by him. The said Superintendent or Inspector will allow export and distribute invoices in th e following manner: Original (First copy) Duplicate, triplicate and quadruplicat e (second, third and fourth copies) Hand over to the exporter Hand over to the e xporter or his agent in a sealed cover for delivery to the Customs officer in-ch arge of the Land Customs Station through which the goods are intended to be expo rted. Forwarded to the Assistant Commissioner of Central Excise or the Deputy Co mmissioner of Central Excise who has accepted the bond Retain for official recor d Quintuplicate copy (Fifth copy) Sixtuplicate (Sixth copy) The exporter or his agent shall then be free to remove the goods for export to N epal through the Land Customs Station indicated on the respective invoices. Wher e the goods are exported by land, the export shall take place through any of the following land customs stations, namely, Sukhiapokhri, Panitanki, Jogbani, Jaya nagar, Bairgania, Bhimnagar, Bitamore (Sursand), Raxaul, Sonauli, Barhni, Nepalg anj Road, Shohratgar (Khunwa), Jarwa, Katarniaghat, Gauriphanta, Banbasa, Jhulag hat, Dharchula, Naxalbari, Galgalia, Kunauli, Sonabarsa, Tikonia, or such other check-post as may be specified by the Board. 6.4.2 Procedure at the Land Customs Station : The exporter or his agent shall present the goods to the officer of c ustoms in-charge of the land customs station along with the original copy of the invoice and the sealed cover containing duplicate, triplicate and quadruplicate copies and obtain acknowledgement; Where the contents of all the copies of invo ices tally and the packages, goods or container are satisfactorily identified wi th their seals in tact, the officer of customs in-charge of the land customs sta tion shall make necessary entries in the register maintained at the land customs station and allow the goods to cross into the territory of Nepal or Bhutan and certify accordingly on each of the four copies of the invoice and indicate the r unning serial number in red ink prominently visible and encircled. In case the s eals are not found intact, the officer of customs in charge of the land customs station may re-seal the containers with

Export Procedures 6.15 his own seal after satisfying himself as to the identity of the containers and the goods from the particulars shown on the invoice by ope ning and examining the goods, if necessary; Distribution of invoices by Customs Officer Original (First copy) Hand over to the exporter or his agent alongwith t he goods for presentation to the Customs Officer of Nepal or Bhutan. Send to the Nepalese or Bhutanese Customs Officer incharge of the check post through which the goods are to be imported into Nepal or Bhutan, as the case may be Duplicate and triplicate (Second and third copy) Presentation of goods to Nepalese or Bhutanese Customs Officers: The goods are t hen to be produced before the Nepalese or Bhutanese Customs Officer, as the case may be, at the corresponding border check-post alongwith the original copies of the invoice. The Nepalese or Bhutanese Customs Officer shall deal with the orig inal and triplicate copies of the invoice as directed by His Majesty s Governmen t of Nepal or His Majestys Government of Bhutan and return the duplicate copy, af ter endorsing his certificate of receipt of goods in Nepal or Bhutan, as the cas e may be, directly to the officer of customs-in-charge of the land customs stati on in India. Further distribution of invoices: The officer of customs in-charge of the land customs station shall forward the duplicate copy to the Central Exci se Officer in charge of the factory or warehouse from which the goods were remov ed for export without payment of duty. For this purpose, the said officer in cha rge of the land customs station should keep a note of the return of duplicate co pies from the Customs Officer of Nepal or Bhutan and remind the exporter for suc h copies as have not been received, failing which the exporter may be liable to pay full duty on such consignments. The customs officers, at the land customs st ation shall also maintain a separate record of all such in-bond exports of the g oods without payment of duty and shall assign running serial number on the invoi ce at the time of export as indicated earlier. 6.5 PROCEDURE FOR DISCHARGE OF BO ND OR THE DUTY LIABILITY each Essential ingredients for discharge of bond have already been mentioned under ca tegory of exports. The general procedure would be - the exporter shall submit the quadruplicate cop y duly endorsed by the officer of customs in-charge of land customs station to t he Central Excise officer who has accepted the bond along with bank, certificate evidencing receipt of payment in freely convertible currency (in Indian Rupee i n particular category), within six months from the date of removal of the goods. It may be noticed that earlier, the above

6.16 Central Excise mentioned period has been extended from three months to six months, as compared to e rstwhile notification. The Central Excise officer will tally the particulars wit h quintuplicate copy of the invoice received from the Central Excise officer who has allowed clearance from the factory or warehouse or any other approved premi ses and make suitable entries in Bond Account of the exporter, giving provisiona l credit or discharging the bond provisionally. On receipt of the duplicate copy of invoice, duly endorsed by customs officer of Nepal or Bhutan from the custom s officer in charge of land customs station, certifying export of the goods and after tallying the particulars with those in quadruplicate copy of the invoice m ake suitable entries in Bond Account and the obligation under the said bond will then be discharged. In case of failure to export within six months from the dat e of removal from the factory or warehouse or any other approved premises, or sh ortages noticed, the exporter shall discharge the duty liability on the goods no t so exported or shortage noticed along with twenty four per cent interest there on from the date of removal for export without payment of duty till the date of payment of duty in terms of the bond. 6.6 CANCELLATION OF EXPORT DOCUMENTS If the excisable goods cleared under A.R.E.1 are not exported for any reason and the exporter intends to divert the goods for home consumption, he may request i n writing the authority who accepted the bond or letter of undertaking to allow cancellation of application, and diversion of goods for consumption in India. He will be permitted to do so if he pays the duty as specified in the application along with interest at the rate of twenty four percent per annum on such duty fr om the date of removal for export from the factory or warehouse till the date of payment of duty. The permission shall be granted within 3 working days. Since d uty assessment on A.R.E 1 has to be done in normal course, there will not be any need for re-assessment by the Department or the assessee unless there are reaso ns to believe that the assessment was not correct. After the duty is discharged, the exporter may take credit in his running bond (where bond is furnished) on t he basis of letter of permission, invoice and TR-6 Challans on which duty is pai d. He shall record these facts in the Daily Stock Account. If the exporter, afte r clearing the goods for export without payment of duty, intends to change the d estination or buyer or port/place of export, he may do so provided he informs th e bond/LUT accepting authority in writing about the changes and makes necessary changes in all the copies of A.R.E.1 and the invoices. If he intends to cancel t he original export documents and issue fresh ones, the same may be done under pe rmission and authentication by bond/LUT accepting authority who will ensure that the serial no. and date of the initial documents are endorsed on the fresh docu ments. In such cases, if bond was furnished for single consignment, fresh bond m ay not be asked.

Export Procedures 6.17 6.7 RE-ENTRY OF THE GOODS CLEARED FOR EXPORT UNDER BOND B UT NOT ACTUALLY EXPORTED, IN THE FACTORY OF MANUFACTURE The excisable goods clea red for export under bond or undertaking but not actually exported for any genui ne reasons may be returned to the same factory provided (i) such goods are retur ned to the factory within six months along with original documents (invoice and A.R.E.1); (ii) the assessee shall give intimation of the re-entry of each consignment in F orm D-3 within twenty-four hours of such re-entry; (iii) such goods are to be st ored separately for at least for 48 hours from the time intimation is furnished to Range Office or shorter period if verification is done by the Superintendent of Central Excise in the manner mentioned subsequently ; and (iv) the assessee s hall record details of such goods in the daily stock account and taken in the st ock in the factory. The Superintendent of Central Excise will verify himself or though Inspector in charge of the factory, about the identity of such goods with reference to invoice, A.R.E.1 and the daily stock account in respect of 5% of i ntimations, within another 24 hours of receipt of intimation. 6.8 RE-IMPORT OF E XPORTED GOODS FOR REPAIRS ETC. AND SUBSEQUENT REEXPORT It has been provided in t he Notification 42/2001-Central Excise (N.T.), supra, that the exported excisabl e goods which are re-imported for carrying out repairs, re-conditioning, refinin g, re-making or subject to any similar process may be returned to the factory of manufacture for carrying out the said processes and subsequent re-export. It ma y be noted that re-import and re-export shall be governed by the provisions of the Customs Act, 1962. So far Central Excise is concerned, the manufacturer shall m aintain separate account for return of such goods in a daily stock account and m ake suitable entry on the said account after goods are processed, repaired, re-c onditioned, refined or re-made. When such goods are exported, the usual export p rocedure shall be followed. Any waste or refuse arising as a result of the said processes shall be removed from the factory on payment of appropriate duty or de stroyed after informing the proper officer in writing at least 7 days in advance and after observing such conditions and procedure as may be specified by the Co mmissioner of Central Excise and thereupon the duty payable on such waste or ref use may be remitted by the said Commissioner of Central Excise.

6.18 Central Excise 6.9 ENTRY OF GOODS IN ANOTHER FACTORY OF THE SAME MANUFACTURER FOR CONSOLIDATION AND LOADING OF CONSIGNMENT FOR EXPORT Goods removed without payment of duty for export on A.R.E.1 from one factory (hereinafter referred to as the first factory) of a manufacturer are allowed to enter in another factory of the said manufactu rer (hereinafter referred to as the subsequent factory) only for the purpose of co nsolidation and loading of goods manufactured in subsequent factory and export t herefrom subject to following conditions: (i) The exporter shall be required to get his goods examined and sealed at each factory (the places of despatch) by a Central Excise Officer. (ii) The export goods shall be brought under cover on invoice and A.R.E.1 in the subsequent factory in original packing and duly sealed by Central Excise Office rs. In case goods are stuffed in a container, Central Excise Officer shall duly seal the container in the first factory and the sealing of each package shall no t be insisted upon. The Central Excise Officer having jurisdiction over the subs equent factory shall supervise the opening of the seal of container, loading of goods (duly sealed if these goods are to be loaded in open truck/vehicle) belong ing to the subsequent factory in vehicle or container and sealing of the contain er. (iii) The exporter or the manufacturer shall pay the supervision charges. 6. 10 SAMPLES OF EXPORT GOODS The Central Excise Officer examining the consignment shall draw representative samples wherever necessary in triplicate. He shall han d over two sets of samples, duly sealed, to the exporter or his authorized agent , for delivering to the Customs Officer at the point of export. He shall retain the third set for his records. The instructions and procedure for drawl of sampl es specified by the Board should be followed. 6.11 EXPORT UNDER CLAIM FOR REBATE The conditions and procedures relating to export under claim of rebate are cont ained in Notification No. 19/2004 -Central Excise (N.T.) dated 6th September, 20 04 and Notification No. 20/2004 - Central Excise (N.T.) dated 6th September, 200 4 issued under rule 18 of the Central Excise Rules, 2002. It is worth mentioning that as per the definition of the term refund in section 11B of the Central Excis e Act, 1944, refund includes rebate of duty of excise on excisable goods exported out of India or on excisable materials used in the manufacture of goods which ar e exported out of India. Thus, the procedure specified in the said Rules and the notification issued thereunder are subject to section 11B of the said Act.

Export Procedures 6.19 6.11.1 (i) Categories of exports There are mainly three categories of exports: Export of all excisable goods to a ll countries except Nepal and Bhutan; Export of excisable goods to all countries except Nepal and Bhutan (ii) Export to Nepal. 6.11.2 1. Conditions relating to the said export are as follows: (a) The excisable goods shall be exported after payment of duty, directly from a factory or warehouse. The condition of payment o f duty is satisfied once the exporter records the details of removals in the Dail y Stock Account maintained under Rule 10 of the said Rules, whereas the duty may be discharged in the manner specified under Rule 8 of the said Rules, i.e. on m onthly basis. (b) In certain cases, the Board may issue instructions/procedures for exporting the duty paid goods from a place other than the factory or the war ehouse. In this regard, a general permission has been granted in respect of good s where it is possible to correlate the goods and their duty paid character. (c) The excisable goods shall be exported within 6 months from the date on which th ey were cleared for export from the factory of manufacture or warehouse. This da te will be indicated on the ARE.1 and invoice issued for the purpose. However, t he Commissioner of Central Excise has powers to extend this period, for reasons to be recorded in writing in any particular case. The exporter will be required to submit written request to the Commissioner specifying the reasons why they co uld not export within the stipulated 6 months period. The Commissioner should giv e his decision within 7 working days of the receipt of the request. It should al so be noted that such permissions should not given in a routine manner. (d) The excisable goods supplied as ships stores for consumption on board a vessel bound for any foreign port are in such quantities as the Commissioner of Customs at th e port of shipment may consider reasonable. (e) The rebate claim by filing elect ronic declaration shall be allowed from such place of export and such date, as m ay be specified by the Board in this behalf. (f) The market price of the excisab le goods at the time of exportation is not less than the amount of rebate of dut y claimed. (g) The amount of rebate of duty admissible is not less than Rs.500. (h) The reb ate of duty paid on those excisable goods, export of which is prohibited under a ny law for the time being in force, shall not be made.

6.20 2. Central Excise Forms to be used ARE.1 is the export document which shall be prepared in quadruplicate. The asses ee can optionally have quintuplicate copy (5th copy) which can be used for claim ing other export incentives. This document shall bear running serial number begi nning from the first day of the financial year. On A.R.E.1, certain declarations are required to be given by the exporter. They should be read carefully and sig ned by the exporter or his authorised agent. The different copies of ARE.1 forms should be of different colours indicated below: OriginalDuplicate Triplicate Qu adruplicate Quintuplicate White Buff Pink Green Blue It will be sufficient if the copies of ARE.1 contain a color band on the top or right hand corner in accordance with above color scheme. An invoice shall also b e prepared in terms of Rule 11 of the said Rules. For filing rebate claim: There is no specified form for filing claim of rebate. The same may be done by the ex porter on their letterhead and filed with the requisite documents. 3. Procedure for clearance for export The exporter has two optional procedures regarding the manner in which he may clear the export consignments from the factory or warehou se, namely: (i) Examination and sealing of goods at the place of despatch by a C entral Excise Officer. (ii) Under self-sealing and self-certification 4. Sealing of goods and examination at place of despatch The exporter is required to prepa re five copies of application in the Form ARE-1, as per format specified in Anne xure-I to Notification No. 19/2004-Central Excise (N.T.) dated 06.9.2004. The go ods shall be assessed to duty in the same manner as the goods for home consumpti on. The classification and rate of duty should be in terms of Central Excise Tar iff Act, 1985 read with any exemption notification and/or Central Excise Rules, 2002. The value shall be the transaction value and should conform to section 4 or section 4A, as the case may be, of the Central Excise Act, 1944. It is clarified that this value may be less than, equal to or more than the F.O.B. value indica ted by the exporter on the Shipping Bill. The duty payable shall be determined o n the ARE.1 and invoice and recorded in the Daily Stock Account. It should be pa id in the manner specified in Rule 8 of the said Rules.

Export Procedures 6.21 The exporter may request the Superintendent or Inspector of Central Excise having jurisdiction over the factory of production or manufact ure, warehouse or approved premises for examination and sealing at the place of despatch 24 hours in advance, or such shorter period as may be mutually agreed u pon, about the intended time of removal so that arrangements can be made for nec essary examination and sealing. In case of exports under Duty Exemption Entitlem ent Certificate Scheme (DEEC), Duty Exemption Pass Book Scheme (DEPB) and claim for Drawback, the Superintendent of Central Excise shall also examine and seal t he consignment and sign the documents in token of having done so. In exceptional cases, where the exporter has unblemished track record of compliance (Central E xcise) and where there is non-availability of Superintendent of Central Excise d ue to leave, vacant post or other reasonable causes, the jurisdictional Deputy/A ssistant Commissioner of Central Excise may permit examination and sealing by In spector. Other types of export may be examined and sealed by the Inspector of Ce ntral Excise. The Superintendent or Inspector of Central Excise, as the case may be, will verify the identity of goods mentioned in the application and the part iculars of the duty paid or payable. If he finds that the declaration in ARE.1 a nd the invoices are correct from the point of view of identity of goods and its assessment to duty, and that the exporter has recorded the duty payable in Daily Stock Account, he shall seal each package or the container ensuring that the go ods cannot be tampered with after the examination. Normally, individual packages should be sealed by using wire and lead seals and an all-sides-closed container by using numbered One time Lock/Bottle seals or in such other manner as may be specified by the Commissioner of Central Excise by a special or general written order. Thereafter, the said officer shall endorse and sign each copy of the appl ication in token of having such examination done and such examination report mus t accompany the export goods to the port/airport of export. 5. Distribution of d ocuments (ARE.1) Export from the factory or warehouse In the case when export ta kes place from the factory of warehouse, the distribution of ARE.1 shall be, as follows: Original (First Copy) The said Superintendent or Inspector of Central E xcise shall return to the exporter immediately after endorsements and signature The said Superintendent or Inspector of Central Excise shall return to the expor ter immediately after endorsements and signature. Duplicate (Second Copy)

6.22 Central Excise Sent to the officer with whom rebate claim is to be filed, either by post or by handing over to the exporter in a tamper proof sealed cover after posting the particulars in official records. Retain for official records Option al copy - The said Superintendent or Inspector of Central Excise shall return to the exporter immediately after endorsements and signature. Triplicate (Third Copy) Quadruplicate (Fourth Copy) Quintuplicate (Fifth Copy) Export from place other than factory or warehouse (including diversion of duty p aid goods for export) Where goods are not exported directly from the factory of manufacture or warehouse, the distribution of A.R.E.1 will be same as above exce pt that the triplicate copy of application shall be sent by the Superintendent h aving jurisdiction over the factory of manufacture or warehouse who shall, after verification forward the triplicate copy in the manner specified above. 6. Desp atch of goods by self-sealing and self-certification Self-sealing and self-certi fication is a scheme where the exporter who is a manufacturer or owner of a ware house, may remove the goods for export from his factory or warehouse without exa mination by a Central Excise Officer. This procedure will also be permitted in t he cases where a merchant-exporter procures the goods directly from a factory or warehouse. In both cases, the manufacturer of the export goods or owner of the warehouse shall take the responsibility of sealing and certification. For this p urpose the owner, the working partner, the Managing Director or the Company Secr etary, of the manufacturing unit of the goods or the owner of warehouse or a per son (who should be permanent employee of the said manufacturer or owner of the w arehouse holding reasonably high position) duly authorised by such owner, workin g partner or the Board of Directors of such company, as the case may be, shall c ertify on all the copies of the application (A.R.E. 1) that the goods have been sealed in his presence. The exporter shall distribute the copies of A.R.E. 1 in the following manner: Original (First copy) Duplicate (Second copy) and Send to the place of export along with the goods Superintendent or Inspector of Central Excise having jurisdiction over the factory or warehouse within twenty four hour s of removal of the goods Optional copy - Send to the place of export along with the goods Triplicate (Third copy) and Quadruplicate (Fourth copy) Quintuplicate (Fifth cop y)

Export Procedures 6.23 The said Superintendent and Inspector of Central Excise s hall verify the particulars of assessment, the correctness of the amount of duty paid or duty payable, its entry in the Daily Stock Account maintained under Rul e 10 of the said Rules (the manufacturer or warehouse owner will be required to present proof in this regard), corresponding invoice issued under Rule 11. If he is satisfied with the particulars, he will endorse the relevant A.R.E. 1 and ap pend their signatures at specified places in token of having done the verificati on. In case of any discrepancy, he will take up the matter with the assessee for rectification and also inform the jurisdictional Deputy/Assistant Commissioner. Once verification is complete and the A.R.E. 1 is in order, he shall distribute the documents (A.R.E. 1) in the following manner: Triplicate (Third copy) Send to the officer with whom rebate claim is to be filed, either by post or by handi ng over to the exporter in a tamper proof sealed cover after posting the particu lars in official records Send to the officer with whom rebate claim is to be fil ed, either by post or by handing over to the exporter in a tamper proof sealed c over after posting the particulars in official records Quadruplicate (Fourth copy) 7. Examination of goods at the place of export The place of export may be a port, airport, Inland Container Depot, Customs Frei ght Station or Land Customs Station. The exporter shall present together with or iginal, duplicate and quintuplicate (optional) copies of the application (A.R.E. 1) to the Commissioner of Customs or other duly appointed officer normally good s are presented in the designated export shed. The goods are examined by the Cus toms for the purposes of Central Excise to establish the identity and quantity, i.e. the goods brought in the Customs area for export on an A.R.E. 1 are the sam e which were cleared from the factory. The Customs authorities also examine the goods for Customs purposes such as verifying for certain export incentives such as drawback, DEEC, DEPB or for determining exportability of the goods. For Centr al Excise purposes, the Officers of Customs at the place of export shall examine the consignments with the particulars as cited in the application (A.R.E. 1) an d if he finds that the same are correct and the goods are exportable in accordan ce with the laws for the time being in force (for example, they are not prohibit ed or restricted from being exported), shall allow export thereof. Thereafter, h e will certify on the copies of the A.R.E. 1 that the goods have been duly expor ted citing the shipping bill number and date and other particulars of export.

6.24 Central Excise The officer of customs shall return the original and quintuplicate (optional cop y for exporter) copies of application to the exporter and forward the duplicate copy of application either by post or by handing over to the exporter in a tampe r proof sealed cover to the officer specified in the application, from whom expo rter wants to claim rebate. However, where exporter claims rebate by electronic declaration on Electronic Data Inter-change system of Customs, the duplicate sha ll be sent to the Excise Rebate Audit Section at the place of export. The export er shall use the quintuplicate copy for the purposes of claiming any other expor t incentive. 8. (i) Sanction of claim for rebate by Central Excise Deputy/Assist ant Commissioner of Central Excise having jurisdiction over the factory of produ ction of export goods or the warehouse; or The rebate claim can be sanctioned by any of the following officers of Central Excise:(ii) Maritime Commissioner. It shall be essential for the exporter to indicate o n the A.R.E. 1 at the time of removal of export goods the office and its complet e address with which they intend to file claim of rebate. The following document s shall be required for filing claim of rebate: (i) A request on the letterhead of the exporter containing claim of rebate, A.R.E. 1 numbers and dates , corresp onding invoice numbers and dates amount of rebate on each A.R.E. 1 and its calcu lations, (ii) original copy of the A.R.E.1, (iii) invoice issued under rule 11, (iv) self attested copy of shipping Bill, and (v) self attested copy of Bill of Lading. ( vi) Disclaimer Certificate (in case where claimant is other than exporter). Afte r satisfying himself that the goods cleared for export under the relevant A.R.E. 1 applications mentioned in the claim were actually exported, as evident by the original and duplicate copies of A.R.E.1 duly certified by Customs, and that th e goods are of duty paid character as certified on the triplicate copy of A.R.E. 1 received from the jurisdictional Superintendent of Central Excise (Range Office) , the rebate sanctioning authority will sanction the rebate, in part or full. In case of any reduction or rejection of the claim, an opportunity shall be provid ed to the exporter to explain the case and a reasoned order shall be issued.

Export Procedures 6.25 Where the individual rebate claim exceeds 5 lakh rupees, they shall be pre-audited before these are disbursed. 9. Export by parcel post I n case of export by parcel post, after the goods intended for export have been s ealed, the exporter shall affix to the duplicate application sufficient postage stamps to cover postal charges and shall present the documents, together with th e package or packages to which it refers, to the postmaster at the office of boo king. 10. Filing of rebate claims by electronic declaration and sanction thereof through Electronic Data Inter-change (EDI) The new concept of filing of rebate claim and its sanction through EDI established by the Customs formations at diff erent ports/airports/ICDs/CFSs has been incorporated in the new procedure. Howev er, its implementation is dependent upon development of software and formats of electronic forms, administrative set-up at the places of exports for auditing su ch claims and putting in place the necessary hardware. The new process will also require to be tested. This may take some time. Accordingly, the provision has b een made that this facility will be available at such places and from such time as may be specified by the Board. For this purpose, the expression electronic dec laration has been defined as the declaration of the particulars relating to the e xport goods, lodged in the Customs Computer System, through the data-entry facil ity provided at the Service Centre or the date communication networking facility provided by the Indian Customs and Central Excise Gateway (called ICEGATE), fro m the authorised persons computer. 6.11.3 Export to Nepal or Bhutan : For export to Nepal, a different procedure has to be followed considering that the rebate i s granted to the His Majestys Government of Nepal based on Indo-Nepal Treaty. Cur rently, the procedure is specified only for exports through specified Land Custo ms Stations. There is no rebate procedure for Bhutan. 1. Conditions of export Th e conditions of export are similar to export to other countries. For clarity, th ese are explained below: (i) It is essential that the excisable goods shall be e xported after payment of duty, directly from a factory or warehouse. The conditi on of payment of duty is satisfied once the exporter records the details of remova ls in the Daily Stock Account maintained under Rule 10 of the Central Excise Rul es, 2002 (hereinafter referred to as the said Rules), whereas the duty may be di scharged in the manner specified under rule 8 of the said Rules, i.e. on monthly basis. (ii) In certain cases, the CBEC may issue instructions/procedures for exporting the duty

6.26 Central Excise paid goods from a place other than the factory or the warehouse. (iii) The excisable goods shall be exported within six months from the date on w hich they were cleared for export from the factory of manufacture or warehouse. This date will be indicated on the Nepal Invoice issued for the purpose. However , the Commissioner of Central Excise has powers to extend this period, for reaso ns to be recorded in writing in any particular case. The exporter will be requir ed to submit written request to the Commissioner specifying the reasons why they could not export within the stipulated six months period. The Commissioner shoul d give his decision within seven working days of the receipt of the request. It should also be noted that such permissions should not given in a routine manner. (iv) The rebate shall not, in each case, exceed the aggregate of the duty of Cu stoms and additional duty of Customs levied by His Majesty s Government of Nepal on such goods when they are imported into Nepal from any country other than Ind ia. (v) The goods exported by land can only be exported through the specified la nd customs stations. 2. Nepal Invoice The Format of Nepal Invoice has been specifi ed in the notification no. 20/2004-Central Excise (N.T.) dated 6.9.2004. 3. Proc edure for export to Nepal The exporter is required to prepare five copies of Nep al Invoice. The goods shall be assessed to duty in the same manner as the goods for home consumption. The classification and rate of duty should be in terms of Central Excise Tariff Act, 1985 read with any exemption notification and/or the said Rules. The value shall be the transaction value and should conform to section 4 or section 4A, as the case may be, of the Central Excise Act, 1944. It is cla rified that this value may be less than, equal to or more than the F.O.B. value indicated by the exporter on the Bill of Export. The duty payable shall be deter mined on the Nepal Invoice and recorded in the Daily Stock Account. It should be paid in the manner specified in Rule 8 of the said Rules. The exporter may requ est the Superintendent or Inspector of Central Excise having jurisdiction over t he factory of production or manufacture, warehouse or approved premises for exam ination and sealing at the place of despatch 24 hours in advance, or such shorte r period as may be mutually agreed upon, about the intended time of removal so t hat arrangements can be made for necessary examination and sealing. In case of e xports under Duty Exemption Entitlement Certificate Scheme (DEEC), Duty Exemptio n Pass Book Scheme (DEPB) and claim for Drawback, the Superintendent of Central Excise shall also examine and seal the consignment and sign the documents in tok en of having done so. In exceptional cases, where the exporter has unblemished t rack

Export Procedures 6.27 record of compliance (Central Excise) and where there is non-availability of Superintendent of Central Excise due to leave, vacant post o r other reasonable causes, the jurisdictional Assistant/Deputy Commissioner of C entral Excise may permit examination and sealing by Inspector. Other types of ex port may be examined and sealed by the Inspector of Central Excise. The Superint endent or Inspector of Central Excise, as the case may be, will verify the ident ity of goods mentioned in the application and the particulars of the duty paid o r payable. If he finds that the declaration in Nepal Invoice are correct from th e point of view of identity of goods and its assessment to duty, and that the ex porter has recorded the duty payable in Daily Stock Account, he shall seal each package or the container ensuring that the goods cannot be tampered with after t he examination. Normally, individual packages should be sealed by using wire and lead seals and an all-sides-closed container by using numbered One time Lock/Bo ttle seals or in such other manner as may be specified by the Commissioner of Ce ntral Excise by a special or general written order. Thereafter, the said officer shall endorse and sign each copy of the application in token of having such exa mination done. The distribution of the Nepal invoice shall be, as follows: Origi nal (First copy) Duplicate (Second Copy) Triplicate (Third Copy) Quadruplicate ( Fourth Copy) Hand over to the Exporter or his agent along with the goods, packag es or container after sealing it. To be put in a sealed cover and given to the e xporter or his agent by the Central Excise Officer for being handed over to the officer of Customs In-Charge of the concerned land customs station To be put in a sealed cover and given to the exporter or his agent by the Central Excise Offi cer for being handed over to the officer of Customs In-Charge of the concerned l and customs station To be retained by the Central Excise Officer. The exporter or his agent shall then be free to remove the goods for export to N epal, through the specified land customs stations. 4. Procedure at the land cust oms station The exporter or his agent shall present the goods to the officer of Customs in-charge of the land customs station along with the original copy of in voice and the sealed cover containing duplicate and triplicate copies; The said officer shall examine the goods with reference to the declarations in the Nepal Invoice. Where the contents of all the copies of invoices tally and the packages , goods or container are satisfactorily identified with their seals intact, the said customs officer shall make necessary entries in the register maintained at the land customs station and allow the

6.28 Central Excise goods to cross into the territory of Nepal. He may, to satisfy himself as to the identity of the packages, goods or containers from the particulars shown on the invoice, open container or packages and examine the goods, especially where the seals are broken. He will also certify on each of the three copies of the invoi ce to this effect and simultaneously indicate the running serial number in red i nk prominently visible and encircled against Item 3 on all the three copies of t he invoice. The customs officer, then deliver the original copy of the invoice d uly endorsed to the exporter or his agent alongwith the goods for presentation t o the Nepalese Customs Officer. He shall also send directly the duplicate and tr iplicate copies of the invoice to the Nepalese Customs Officer in-charge of the check post through which the goods are to be imported into Nepal. The goods will then be produced before the Nepalese Customs Officer at the corresponding borde r check post along with the original copy of the invoice. The Nepalese Customs O fficer, shall deal with the original copy as directed by His Majesty s Governmen t of Nepal and return the duplicate copy, after endorsing his certificate of rec eipt of goods in Nepal directly to the officer of customs in-charge of the Land Customs Station. The officer in-charge of the land customs station shall forward the duplicate copy to the Deputy Director of Inspection, Customs and Central Ex cise, Nepal Refund Wing, New Delhi. For this purpose, the said officer in-charge of the land customs station should keep a note of the return of duplicate copie s from the Nepalese Customs Officer and remind the exporter for such copies as h ave not been received. 5. Procedure to be followed by the Directorate General of Inspection, Customs and Central Excise (Nepal Refund Wing), New Delhi The Direc torate General of Inspection, Customs and Central Excise (Nepal Refund Wing), Ne w Delhi (hereinafter referred to as the Directorate) shall maintain separate regis ters for each Indian Border Customs Check Post. The duplicate invoice will be en tered in the respective registers showing the running serial number in the recap itulation statement register prescribed for the purpose. At the end of every mon th he shall calculate the amount of rebate due in respect of all certificates of exports received during that month and shall prepare a consolidated statement t o arrive at the amount of rebate due to His Majesty s Government of Nepal. One c opy of the recapitulation statement shall be forwarded to the Commissioner of Ce ntral Excise concerned for verifying the payment of rebate to Nepal Government a nd for issue of a post audit certificate in respect of the amount allowed as reb ate against each invoice passed in that bill. In order to detect errors in the d uty amount and quantity indicated, Internal Audit Department of the Commissioner ate concerned should check this factor by

Export Procedures 6.29 comparison with the recapitulation statement forwarded by the Directorate and the monthly return of the factories concerned. Where any ov er payment is noticed the fact should be brought to the notice of the Directorat e for making necessary adjustment. One copy of the recapitulation statement shal l be forwarded to His Majesty s Government of Nepal. One copy of the recapitulat ion statement shall remain as office copy with the Directorate. After receiving the recapitulation statement, the Commissioner will get a verification conducted that the concerned factories have actually paid the duty of excise against whic h the rebate is to be given and the Commissioner/PAO of that Commissionerate sha ll furnish a certificate to the Directorate to the effect that all the concerned factories have paid the amounts of duty as indicated in the Annexure to the rec apitulation statement. In case the Directorate does not receive the duplicate co py of the invoice from the Officer in-charge of the Indian Land Customs Station and the triplicate copy is not received by the Nepal Government, necessary check should be made with the officer in-charge of the Indian Land Customs Station co ncerned as to the whereabouts of the particular invoice. 6.12 MISCELLANEOUS MATT ERS 6.12.1 Time limit for disposal : The rebate sanctioning authority should poi nt out deficiency, if any, in the claim within 15 days of lodging the same and a sk the exporter to rectify the same within 15 days. Queries/ deficiencies shall be pointed out at one of and piecemeal queries should be avoided. The claim of r ebate of duty on export of goods should be disposed of within a period of two mo nths. 6.12.2 Supplementary Rebate Claim : The Supplementary Rebate Claim, if any , should be filed within the stipulated time provided under section 11B of the C entral Excises Act, 1944. 6.12.3 Entry of goods in another factory of the same m anufacturer for consolidation and loading of consignment for export: Goods remov ed on A.R.E.1 from one factory of a manufacturer may be allowed to enter in anot her factory of the said manufacturer ONLY for the purpose of consolidation and l oading of goods in second or subsequent factory(ies) and export therefrom. For t his facility the exporter shall be required to get his goods examined and sealed at each factory (the places of despatch) by a Central Excise Officer. The packa ges loaded in the vehicle shall be in sealed condition in their original packing . Where goods are stuffed in a container, the container shall be sealed. The Cen tral Excise Officer having jurisdiction over the second or subsequent factory(ie s) shall supervise the opening of the seal of container, loading of goods (duly sealed if these goods are to be loaded in open truck/vehicle) belonging to the s ubsequent factory in vehicle or

6.30 Central Excise container and sealing of the container. 6.12.4 Cancellation of documents : After the goods are cleared for export on payment of appropriate duties of excise und er claim of rebate but are not exported for any reason, the Assistant Commission er of Central Excise or the Deputy Commissioner of Central Excise having jurisdi ction over the factory or the warehouse, shall, on being requested by the export er in writing, cancel the export documents and make necessary endorsements. Ther eafter, the goods shall be treated as if these were cleared for home consumption . The goods need not be brought back to the factory or warehouse. Self-examinati on questions 1. 2. 3. 4. What are the conditions to be followed while exporting to Bhutan under bond, where payment is in freely convertible currency? What is a CT-1 certificate? Discuss the provisions in respect of re-entry of the goods cl eared for export under bond but not actually exported, in the factory of manufac ture. Answer the following questions relating to export of excisable goods under Rule 18 of the Central Excise Rules, 2002 to countries other than Nepal or Bhut an? (i) Should a bond be executed in such export? Support your answer with prope r reason. (ii) What is the form for clearance of excisable goods in such export? (iii) How can the rebate of duty on the exports be claimed? Is there any time limit for t he same? (iv) Is there any duty limit below which the rebate of duty cannot be g ranted? If yes, then, what is the limit? Is there any other restriction on the g rant of rebate? (v) Which duties of excise are eligible for rebate under Rule 18 ? (vi) Is it necessary that in order to claim rebate, excise duty should be paid in cash? 5. Answer in brief the following questions relating to export without payment of duty other than to Nepal and Bhutan under Rule 19 of the Central Exci se Rules, 2002: (i) What is the type of bond to be executed? Who is exempted fro m furnishing such bond? (ii) What is the export document for export clearance? H ow many copies are required to be prepared for it? (iii) Is it necessary to prep are an invoice also? If yes, how should it be prepared? (iv) What will be the du ty payable, if goods are not exported within six months after clearance?

Export Procedures 6.31 Answers 4. Under Rule 18 of Central Excise Rules, 2002, t he rebate of excise duty paid on exported goods is granted. Procedures and condi tions for export of excisable goods under claim of rebate to countries other tha n Nepal or Bhutan are specified in Notification No.19/2004 C.E. (N.T.) dated 06. 09.2004. Answers to each part of the question are as follows: (i) There is no ne ed to execute a bond in such a case as the goods are exported under claim of reb ate after full payment of duty under an invoice. (ii) Export under claim for rebate should be made under ARE-1 form. (iii) A clai m of rebate of duty paid, along with the original copy of the ARE-1, shall be lo dged with the Assistant/Deputy Commissioner of Central Excise having jurisdictio n over the factory of manufacture or warehouse or, as the case maybe, the Mariti me Commissioner. As per section 11B of the Central Excise Act, 1944, the claim m ust be filed within one year from the date of export. (iv) The rebate will not b e granted if amount of rebate of duty is less than Rs.500. Further, the rebate w ill also not be granted if the market price of the excisable goods at the time o f exportation is less than the amount of rebate. (v) Following duties are eligib le for rebate: (a) duties of excise collected under the Central Excise Act, 1944 ; (b) duties of excise collected under the Additional Duties of Excise (Goods of Special Importance) Act, 1957; (c) duties of excise collected under the Additio nal Duties of Excise (Textiles and Textile Articles) Act, 1978; (d) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001, a s amended from time to time; (e) special excise duty collected under a Finance A ct; (f) additional duty of excise as levied under section 157 of the Finance Act , 2003; (g) education cess on excisable goods levied under Finance (No.2) Act, 2 004; (h) additional duty of excise leviable on pan masala and specified tobacco products under Finance Act, 2005. (vi) No. It is not necessary that rebate can b e obtained only if duty is paid in cash. Duty on final products can be paid eith er through cash or PLA or Cenvat credit [CBE&C Circular No. 262/96/96-CX 6 dated 06.11.96]. 5. Procedures and conditions for export without payment of duty to a ll countries except Nepal and Bhutan are specified in Notification No.42/2001 C. E. (N.T.) dated 26.6.2001. Part-wise answers to the questions are given below: ( i) A bond in Form B-1 is required to be executed by a merchant exporter in case of export without payment of duty. The bond should be at least equal to the duty

6.32 Central Excise chargeable on the goods, with such surety or security as the exci se officer may approve. Manufacturer- exporter is exempted from furnishing such bond. He can furnish an annual Letter of Undertaking (LUT) in Form UT-1. (ii) AR E-1 is the export document for export clearance which shall be prepared in five copies (quintuplicate). The fifth copy is the optional copy which the assessee c an use for claiming other export incentives. (iii) Yes, the goods have to be cle ared from the factory under an invoice which shall be prepared in terms of rule 11 of the Central Excise Rules, 2002. The invoice should be prominently marked a s FOR EXPORT WITHOUT PAYMENT OF DUTY. (iv) Goods must be exported within 6 months from the date of clearance for export, unless extension is granted by Assistant Commissioner/Deputy Commissioner. If goods are not exported within 6 months from the date of clearance for export, the exporter should deposit the applicable ex cise duty on such goods along with the interest. As per rule 5 of the Central Ex cise Rules, 2002, the applicable duty shall be computed as per the rate and tari ff value applicable on the date of removal of such goods from the factory.

7 BONDS 7.1 BOND Bond is an instrument by which the obligation to pay money is created expressly. It is also a legal agreement whereby a person undertakes to do or not to do any thing subject to conditions stipulated in the agreement. The primary purpose of the bond is to secure due compliance with the rules and procedures laid down und er the Excise law. A bond is a collateral security, which is secured by the depa rtment to ensure payment of appropriate duty in addition to the available statut ory provisions. 7.2 TYPES OF BONDS Bonds are basically two types,i.e. surety and security. Under a surety bond anot her person stands as surety to guarantee the performance on the part of obligor. The surety should be for the full value of the bond and the person standing as surety should be solvent to the extent of the bond amount. Under the Contract Ac t the liability of the surety is co-extensive with that of the principal debtor and hence the department is at liberty to enforce the recovery of the dues eithe r from the obligor or from the surety. The following are the types of bonds, whi ch are presently in vogue : (a) B-1 Surety / Security (General Bond) - for expor t of goods without payment of duty under Rule 19; (b) B-2 Bond Surety / Security (General Bond) - for provisional assessment; (c) B-3 Bond (General Bond) for due dispatch of excisable goods removed for rewarehousing and export therefrom with out payment of duty. (d) B-11 Bond - for provisional release of seized goods, an d (e) B-17 Bond (General) Surety / Security -composite bond for EPZ/ 100% EOUs f or assessment, export, accounting and disposal of excisable goods obtained free of duty. (f) In terms of Rule 3(3) and 3(4) of the Central Excise (Removal of go ods at concessional rate of duty for manufacture of excisable goods) Rules, 2001 , the receiver of the goods is also required to execute a General Bond with the jurisdictional A.C./D.C.

7.2 Central Excise Also, a surety for a bond is to be for the full amount of the bon d, and it should be ensured that surety is financially sound. Further, undertaki ng owned and managed directly through any Ministry, Directorate/Directorates by the Central Government or State Government is exempt from furnishing any securit y or surety or a bond. 7.3 GUIDELINES FOR EXECUTING BONDS The bond should be executed on the non-judicial stamp paper of appropriate value . The bond amount should be sufficient to cover the duty liability. The bond sho uld be signed by the obligor or by the authorised agent. The surety should be fo r the full amount and the person standing as surety should be solvent to extent of the amount covered. The security should normally be limited to the 25% of the bond amount. In case of exporters, certain specific categories i.e. Super Star Trading House, Star Trading House, Exporters registered with Export Promotion Co uncil & Registered Exporters need not furnish any bank guarantee/cash security w hile executing export bonds. They may furnish sureties only. This is a modificat ion over the previous instruction contained in Boards Circular No.284/118/96-Cx d ated 31.12.96. In the case of 100% E.O.Us obtaining indigenous goods without pay ment of duty under a notification issued under section 5A of the Central Excise Act, 1944, acceptance of surety bond instead of bank guarantee is permissible. I n respect of 100% EOUs & EPZ s units may continue to execute bond in the Format given in Form B-17 under the erstwhile Central Excise Rules, 1944. While executi ng combined B17 Bond security to the extent of 5% of the value of the bond in th e form bank guarantee or cash deposit or any other mode of security may be accep ted in lieu of surety (Boards letter F.No.305/86/98-FTT dated 19./6/98). Fresh bo nd may not be taken, where the existing units have already furnished bond in B-1 7 Form prior to 1.7.2001. The existing bond may be simply re-validated under the new rules. The export bonds executed under rule 19 of the said Rules should be accepted within 24 Hours or the next working day and communicated to the exporte r by the Deputy/Assistant Commissioner of Central Excise or Maritime Commissione r or any other officer authorised by the Board in this behalf. Bonds should be e xecuted in favour of and in the name of the President of India. They should be p roperly stamped. The prescribed wordings of the bond form must be copied out on a non judicial stamp paper of the appropriate amount (to be locally ascertained) , except where arrangement can be made for embossing printed forms or where the State Government rules require otherwise. The bonds must be executed on stamp pa per of the respective State Government in which the registered persons business is situated.

Bonds 7.4 (i) BONDS FOR PROVISIONAL ASSESSMENT 7.3 The amount of the bond in Form B-2 should be fixed on the following basis: The a mount of the specific bond in Form B-2 should be sufficient to cover the differe nce between the duty payable on provisional assessment and the probable duty pay able if the highest rate / value applicable such goods has to be applied. The am ount of the general bond in Form B-2(Surety)/(Security) should be equal to the d ifference between the duty payable on provisional assessment and the probable du ty payable applying the highest rate / value applicable to such goods for a peri od of 3 months. If the provisional assessment cannot be completed within the 3 m onths and longer time is required, say a period of one year, in appropriate case s, differential duty likely to arise during such period shall be the basis/ dete rmination of the bond amount. When the security bond is executed, the amount of security will be generally fixed at 25% of the bond amount. However, in appropri ate cases, for special reasons to be recorded, the proper officer under Rule 7 o f the said Rules may order for a higher security amount. In the event of death o r insolvency or insufficiency of the surety / security, the proper officer may d emand fresh bond. If the security furnished is found to be inadequate, he may de mand additional security also. In the case of provisional assessment, if the ass essee fails to make the due adjustment within the period of 15 days after the fi nal assessment is made, the proper officer may proceed to enforce the bond or en cash the bank guarantee after due notice to the assessee. STAMPS ON BOND (ii) 7.5 All bonds must bear stamps on the scale prescribed by article 57 of the Schedule I to the Indian Stamp Act 1899, modified as may be, by State Legislation. Commi ssionerate should circulate to their staff the rate of stamp duty required in ea ch State within Commissionerate for each type of bond. Whoever affixes an adhesi ve stamp to any instrument chargeable with duty which has been executed by any p erson shall when affixing such stamp cancel the same so that it cannot be used a gain and who so ever has executed any instrument on any paper bearing an adhesiv e stamp shall at the time of execution unless such stamp has been already been c ancelled in the manner aforesaid, cancel the same so that it cannot be used agai n. Any instrument bearing an adhesive stamp, which has not been cancelled so tha t it cannot be used again, shall so far as such stamp is concerned be deemed to be un-stamped. The person required to cancel an adhesive stamp may cancel it by writing on or cross the stamp with his name or initials or the name or initial o f his firm with the true date of his so writing, or in any other effectual manne r. 7.6 EXECUTION OF BOND BY GOVERNMENT UNDERTAKINGS OR AUTONOMOUS CORPORATIONS T he Board has decided that every undertaking owned and managed directly through a ny

7.4 Central Excise Ministry, Directorate or Directorates by the Central Government is exempt from t he execution of any bond; or a State Government is hereby exempt from furnishing any security or surety for bond, where the execution of such bond, or, as the c ase may be furnishing of security or surety is required by or under any other pr ovision of the rules made under Central Excise Act, 1944. An undertaking owned o r controlled by the Central Government or State Government does not include any undertaking belonging to corporation owned or controlled by the Central Governme nt or State Government and established by or under a Central Provisional or Stat e Act; or any undertaking belonging to Government Company within the meaning of Section 617 of the Companies Act, 1956 (I of 1956). 7.7 (i) SECURITY The securit y furnished should either be cash, Government promissory notes, post office savi ngs, bank deposits, national savings Certificates, National Defence Bonds, Natio nal Defence Gold Bonds, 1980 or similar realisable Government papers. Promissory Notes and stock Certificates of the Central Government or a State Government sh all be accepted subject to the conditions laid down in clause (ii) of Rule 274 o f GFR. Deposit receipt of bank can also be pledged as securities for Central Exc ise Bonds subject to certain specific conditions under Rule 274 (vi) of G.F.R. T he conditions inter alia are: (a) The deposit receipt shall be made out in the n ame of the pledgee or if it is made out in the name of the pledger, the bank sha ll certify on it that the deposit can be withdrawn only on demand or with the sa nction of the pledgee. (b) The depositors shall agree in writing to undertake an y risk involved in the investment and make good the depreciation, if any. (c) Th e depositors shall receive the interest when due, direct from the bank on a lett er from the pledgee authorising the bank to pay it to him. (d) The responsibilit y of the pledgee in connection with the deposit and the interest on it will ceas e when he issues a final withdrawal order to the depositor and sends an intimati on to the Bank that he has done so. (e) Only the larger scheduled banks are to b e considered as recognized banks approved by Government for the purpose of item of Rule 274 of G.F.R. (f) Interest on the securities will, however, continue to accrue and will be realised by the holders on discharge of the bond and return o f the securities. The security to be furnished in respect of the bonds will be a s follows: (ii) (g) Where the same bond and security continue for over one year, arrangements mu st be made for credit or payment of the interest on such securities to the bonde rs.

Bonds 7.5 (h) On cash securities no interest is payable. In the case of Savings Bank Accou nt, the interest may be paid to the parties on claim preferred by them periodica lly or can be collected after the amount is returned to them. In respect of othe r securities, arrangements are to be made for the payment of interest at regular intervals of 6 months. 7.8 SURETY Whenever surety bond is executed it is to be ensured that both the obligor and s urety sign the bond. Field officers will ensure that surety is financially sound and have been verified from time to time. Whenever bank guarantee is accepted f or security, care should be taken to get the guarantee renewed before expiry fro m time to time, so as to enable the enforcement of liability as and when such ne ed arises. Execution of B17 Bonds is optional and if the assessee does not wish to avail of this facility, he may execute individual bonds prescribed for differ ent purposes. A partner or a director of a limited company can also stand as sur ety in his individual capacity to guarantee the performances of the firm or a co mpany as the case may be. Since, in law, a limited company is a distinct legal e ntity and the member of the company including directors are distinct from the co mpany, there should be no objection to allow the directors of the limited compan y to stand as surety for the companies provided they fulfill all the other condi tions applicable to sureties. (F. No. 8/10/16/CX II dt 5/8/1960) 7.9. (i) GUARAN TEE BOND EXECUTED BY BANK When the State Bank of India or a scheduled bank gives a guarantee for a registered person with or without deposit of security, the gu arantee bond should provide a period of validity and an extra period during whic h obligations arising during the period of validity to be enforced. The time lim it for enforcement of obligation should be at least two years. Where there is a need for extension of the period of validity of bank guarantee furnished by the bank on behalf of a party in pursuant to an order of an original or appellate au thority or any other reasons, it should be done by means of supplementary deed o f bank guarantee on a stamp paper. The provisions governing the execution of bonds by banks are as follows: (ii) 7.10 PRESERVATION OF BOND AND RETENTION OF SECURITIES Proper preservation of bon ds is to be ensured in the interest of the revenue. Bonds must be preserved as l ong as they are valid and should be returned only after all the obligations unde r the bond had been discharged. All officers who filled Central Excise bonds mus t be careful not to enforce the words cancelled on the bonds even after the appare nt fulfilment of obligation ; otherwise it is likely to be argued that persons l iable under the bond have been thereby discharged from the

7.6 Central Excise liabilities imposed by the bond. The obligations under the bond are not legally extinguished so long as the bond is not returned to the obligor or is not cancel led on execution of a deed of cancellation. 7.11 VERIFICATION OF SURETIES In res pect of surety bonds, periodical verification, preferably on an annual basis wil l be made by the jurisdictional Central Excise Officers so as to ensure the sure ties are financially sound, solvent and alive. The enquiry to verify the financi al stability of the sureties will be made by any of the following methods: (i) ( ii) By reference to the suretys bankers. By making personal enquiries and ascerta ining whether the surety possesses a house or other immovable property, industri al equipment, shop etc. which would cover the bond amount. Alternatively, the su reties may themselves be asked to furnish a list of their property, which may be verified by the Officer. (iii) By reference to Revenue Officer not below the rank of Tahsildar or a Mamal akdar. (iv) The result of enquiry as well as the solvency of the surety should b e incorporated in the records of the Department. 7.12. BOND ACCEPTING AUTHORITY Bond may be accepted by any of the following officers: The Deputy/Assistant Comm issioner of Central Excise having jurisdiction over the factory or warehouse or any other premises approved by the Commissioner for storing non-duty paid goods; Maritime Commissioners under whose jurisdiction one or more of the port, airpor t, land customs station or post office of exportation is located. The Deputy/Ass istant Commissioner of Central Excise(Export) as officers authorised by the Boar d for this purpose. Exporters are required to clearly indicate on the ARE.1 the complete postal address of the authority before whom the bond is executed and to whom the documents are to be submitted/ transmitted for admission of proof of e xport. Self-examination questions 1. 2. 3. 4. 5. What is a bond? What are the va rious types of bonds? Who can accept a bond? Discuss the provisions in respect o f bonds for provisional assessment. Briefly explain the provisions in respect of execution of bonds by banks.

8 DEMAND, ADJUDICATION AND OFFENCES 8.1 DEMAND The word demand as per Blacks Law Dictionary means assertion of a legal right; an i mperative request preferred by one person to another, under a claim of right, re quiring the latter to do or yield something or to abstain from some act. In acco rdance with the principles of natural justice the central excise law rightly pro vides that before any action is taken against an assessee he must be given reaso nable opportunity of presenting his case. One such situation would be that relat ing to the demand of duty not paid, short paid or erroneously refunded. The show cause notice is invariable to be issued if the department contemplates any acti on prejudicial to the assessee. Thus, if on account of an infraction of the prov isions of the central excise law it is considered appropriate to penalise the de faulter, it is necessary to first issue a show cause notice. The show cause noti ce would detail the provisions of law allegedly violated and ask the noticee to show cause why action should not be initiated against him. Thus, a show cause no tice gives the noticee the opportunity to present his case. 8.2 ISSUE OF DUTY DE MAND NOTICE Section 11A of the Central Excise Act, 1944 provides that if excise duty has not been levied or short levied or not paid or short paid, a notice has to be issue d demanding the differential duty. The section reads as provides that (1) When a ny duty of excise has not been levied or paid or has been short-levied or shortp aid or erroneously refunded, whether or not such non-levy or non-payment, short levy or short payment or erroneous refund, as the case may be, was on the basis of any approval, acceptance or assessment relating to the rate of duty on or val uation of excisable goods under any other provisions of this Act or the rules ma de thereunder, a Central Excise Officer may, within one year from the relevant d ate, serve notice on the person chargeable with the duty which has not been levi ed or paid or which has been

8.2 Central Excise short-levied or short-paid or to whom the refund has erroneously been made, requ iring him to show cause why he should not pay the amount specified in the notice : Provided that where any duty of excise has not been levied or paid or has been shortlevied or short-paid or erroneously refunded by reason of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any o f the provisions of this Act or of the rules made thereunder with intent to evad e payment of duty, by such person or his agent, the provisions of this sub-secti on shall have effect, as if, for the words "one year", the words "five years" we re substituted. Explanation.Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesai d period of one year or five years, as the case may be. (2) The Central Excise O fficer shall, after considering the representation, if any, made by the person o n whom notice is served under sub-section (1), determine the amount of duty of e xcise due from such person (not being in excess of the amount specified in the n otice) and thereupon such person shall pay the amount so determined. (3) For the purposes of this section, (i) "refund" includes rebate of duty of excise on exc isable goods exported out of India or on excisable materials used in the manufac ture of goods which are exported out of India; (a) in the case of excisable good s on which duty of excise has not been levied or paid or has been short-levied o r short-paid (A) where under the rules made under this Act a periodical return, s howing particulars of the duty paid on excisable goods removed during the period to which the said return relates, is to be filed by a manufacturer or a produce r or a licensee of a warehouse, as the case may be, the date on which such retur n is so filed; (B) where no periodical return as aforesaid is filed, the last da te on which such return is to be filed under the said rules; (C) in any other ca se, the date on which the duty is to be paid under this Act or the rules made th ereunder; (b) in a case where duty of excise is provisionally assessed under thi s Act or the rules made thereunder, the date of adjustment of duty after the fin al assessment thereof; (c) in the case of excisable goods on which duty of excis e has been erroneously refunded, the date of such refund. (ii) "relevant date" means,

Demand, Adjudication and Offences 8.3 Therefore according to section 11A, the notice of demand will be issued by Commi ssioner of Central Excise or the officers subordinate to him if the amount deman ded does not exceed one crore rupees. This will be done only with the prior appr oval of the Commissioner. Where amount exceeds one crore rupees, prior approval of the Chief Commissioner of Central Excise is required. The Board has also empo wered the Officers of Director General of Central Excise Intelligence to issue s how-cause notices in accordance with the powers of Central Excise Officers confe rred on them under Rule 3 of Central Excise Rules, 2002. 8.3 WAIVER OF NOTICE In order to provide mechanism for early dispute resolution, it has also been pro vided in the Act that an assessee may request for waiver of notice, if he deposi ts the amount of differential duty on the basis of his own ascertainment of such duty or on the basis of duty ascertained by a Central Excise Officer along with interest in respect of only such cases where such non-levy or short levy or non -payment or short payment is by reason other than suppression of facts, fraud, c ollusion etc. By opting for waiver of issue of notice, the assessee may avoid lo ng drawn process of adjudication and appellate process including interest on the differential duty demanded. It is therefore, advisable that in cases where the assessee is convinced that the Department is correct in demanding duty, he may o pt for this facility. Normally, a proceeding starts with the issue of a show cau se notice to the assessee and giving him an opportunity of representing his case . 8.4 CERTAIN COMMON QUESTIONS ABOUT THE PROVISIONS RELATING TO DEMAND 1. When c an proceedings be taken under Sec. 11A? 2. What is the difference between non-le vy and short levy? 3. What is the difference between short payment and non-payme nt? 4. What is the difference between short levy and Whenever there is a short l evy/short payment or non-levy or non-payment, erroneous refund of duty, the proc eedings can be undertaken. When excise duty has not at all been charged on the p roduct, it becomes non-levy. When the levy has been charged but not correctly, t here is short levy. Short payment means payment of an amount less than what is d ue. Non-payment means the levy itself has not been paid. Short levy arises when the charge itself is done at lower rates, for eg., wrong classification of the p roduct. Short payment can be due to short levy or short payment of a correct lev y (when

8.4 Central Excise payment is made less than what is due). It is mandatory for the D epartment to issue a show cause notice. short payment ? 5. Should the Department intimate the assessee? 6. Within what time should Where there is fraud, collusion, willful mis-statemen t or the show cause notice be suppression of facts or contravention of any provi sions with an intent to evade payment of duty, 5 years from relevant served? dat e. In other cases, 1 year from relevant date. Where the service of notice is sta yed by court order, the period of such stay would be excluded in computing this time limit. If the matter is before the Settlement Commission, Sec. 32L(3) speci fies that the time commencing from date of application to receipt of order sendi ng back the case shall be excluded. It is very important to note that such notic e must be received by the assessee within the time limit stipulated above. 7. Wh at is this relevant date? Relevant date is defined in Sec. 11A(3)(ii) to mean a. in case of short levy/non-levy or short payment/nonpayment the date on which th e monthly/quarterly return is filed or required to be filed; If there is no such time limit, date of payment of duty. b. In cases of provisional assessment, the date of adjustment of duty after final assessment. c. 8. Is it obligatory on th e part of the Department to take on record the assessees representation ? 9. Is i t mandatory for the officer to pass a written order or will a simple letter from the department suffice? 10. Should the assessee pay the amount after In case of erroneous refund, the date of such refund Sub-section 2 makes it mandatory for the officer to consider the representation of the assessee. The officer has to comply with the principles of natural justic e. It is mandatory for the officer to pass a speaking order. Speaking order is one which gives the reasons for the decision. A simple letter asking for payment of duty is not an order. The assessee has a right of further appeal which grants hi m rights of obtaining stay of demanded amounts. Please see

Demand, Adjudication and Offences passsing the order? 11. Should the officer adj udicate cases within a particular time limit? 12. Can the assessee pay duty befo re issue of show cause notice? Chapter on Appellate Procedures. 8.5 For cases involving fraud, etc. adjudication should complete within 1 year and o ther cases within 6 months. No notice would be issued if full duty is paid and i ntimated to the Department. However this will not apply to cases of fraud etc. M oreover, if there is still some short payment, the officer can recover within 1 year of such intimation. 8.5 ADJUDICATION Central Excise law is a self-contained provision. Besides containing the provisi ons for levy of duty, the law also provides for the adjudication of matters rela ting to the legal provisions. The adjudication is done by the departmental offic ers, and in this capacity they act as quasi-judicial officers. 8.5.1 Adjudicatio n and determination of duty: Adjudication of confiscation and penalty has to be done by Officers specified in section 33 of the Central Excise Act, 1944. Centra l Excise Officers have the power to determine duty short paid or not paid, but e rroneously refunded under section 11A of the said Act. For this purpose, the Boa rd has decided that the powers of adjudication and determination of duty shall b e exercised, based on monetary limit (duty involved in a case) as follows: (a) A ll cases involving fraud, collusion, any willful mis-statement, suppression of f acts, or contravention of Central Excise Act/ Rules made thereunder with intent to evade payment of duty and / or where extended period has been invoked in show -causenotices, (including Cenvat cases), will be adjudicated as follows:Central Excise Officers Powers of Adjudication (Amount of duty involved) (i) (ii) Commis sioners Additional Commissioners Without limit Above Rs.20 lakhs & upto Rs.50 la khs Above Rs.5 lakhs & upto Rs.20 lakhs Upto Rs 5 lakhs (iii) Joint Commissioners (iv) Deputy/Assistant Commissioners (b) Cases which do not fall under the category (a) above, including all cases re lating to determination of classification and valuation of excisable goods and c envat credit will be adjudicated as follows:

8.6 Central Excise Powers of Adjudication (Amount of duty involved) Without limit Ab ove Rs. 20 lakhs and upto Rs. 50 lakhs Above Rs. 5 lakhs and up to Rs. 20 lakhs Upto Rs. 5 lakhs. Central Excise Officers (i) Commissioners (ii) Additional Commissioner (iii) Joi nt Commissioners (iv) Deputy/Assistant Commissioners (c) Cases related to issues mentioned under first proviso to section 35B(1) wher e the cases do not go to Tribunal and have to be referred for the revision petit ion to Central Government under Section 35EE of Central Excise Act, 1944 would b e adjudicated by the Addl. Commissioners/ Joint Commissioners without any moneta ry limit. (d) All cases relating to determination of classification and valuatio n will be adjudicated by the Deputy/Assistant Commissioner of Central Excise wit hout any monetary limit. 8.5.2 Adjournment restricted to three times [Section 33 A] Section 33A provides that Adjudicating Authorities shall give an opportunity of being heard to a party in a proceeding if the party so desires. The Adjudicating Authority may, if sufficient cause is shown, at any stage of proceeding, grant time, from time to time, to the parties and adjourn the hearing for reasons to b e recorded in writing. However, such adjournment shall not be granted for more t han three times to a party during the proceeding. 8.5.3 Extended time limit for issuing the show cause notice in terms of proviso to section 11A : The first pro viso to the section provides that in cases of fraud, collusion, willful mis-stat ement or suppression of facts where the short payment or non-payment was with an intent to evade payment of duty, the time period of the year shall be extended to five years. This provision is very important because the department seeks to always invoke this provision for getting the benefit of extended time limit and also to levy penalty on the defaults made under section 11AC. The important term s used in the said proviso are fraud, collusion, willful mis-statement, suppressi on of fact and with an intent of evading the payment of duty. Fraud may be defined as deceit, imposture, criminal deception done with the intention of gaining an ad vantage.

Demand, Adjudication and Offences 8.7 Collusion may be defined as to act in concert especially in fraud; a secret agree ment to deceive. Willful mis-statement may be explained as stating wrongly or fals ely deliberately. Suppression of facts may also be explained as to hold back the f acts. Intent of evading the payment of duty may be analysed as the person acting up on to avoid the payment of duty which he was entitled to pay. Intent shows that mens-rea (knowledge) should be present. 8.5.4 Related cases : There are numerous decision regarding this section and proviso. Some of them are listed below : 1. Mere inaction or failure to do something does not constitute suppression. There must be something positive to prove suppression - CCE v. Chemphar Drugs and Lin iments 1989 (40) E.L.T. 276 - (SC) and also in Padmini Products v. CCE 1989 (43) E.L.T. 195(SC). Demand against approved classification list only prospective CCE v. Cotspun Ltd. 1999 (113) E.L.T. 353 (SC -LB). Extended period cannot be in voked where classification list is approved. - Nat Steel Equipment v. CCE 1988(3 4) E.L.T. 8; Prabhu Steel Industries v. CCE 1997 (95) E.L.T. 164 (SC). Extended period not invokable when bonafide belief arises out of court judgements Cosmic Dye Chemicals v. CCE 1995 (75) E.L.T. 72(SC). Intention to evade payment of duty necessary in addition to proving fraud, etc - Tamil Nadu Housing Board v. CCE 1 994 (74) E.L.T. 9(SC). Extended period not invokable when there are conflicting decisions prevailing and non-requirement under law to do something.- Pushpam Pha rmaceuticals Co.v. CCE 1995 (78) E.L.T. 401 (SC). Proviso to Sec. 11A does not r equire that notice should be issued within 6 months of knowledge of Department. Notice can be issued anytime within 5 years of relevant date. - Nizam Sugar Fact ory v. CCE 1999 (114) E.L.T. 429 (T-LB). Wrongful understanding of law does not constitute suppression - Vinod Paper Mills Ltd. v. CCE 1997 (91) E.L.T. 245 (SC) . Mere change in opinion regarding classification not sufficient to invoke exten ded period - Prabhu Steel Industries Ltd. v. CCE 1997 (95) E.L.T. 164 (SC). 2. 3. 4. 5. 6. 7. 8. 9. 10. Information not required to be supplied under law when not supplied does not amount to suppression - Apex Electricals Pvt.Ltd. v. UOI 1992 (61) E.L.T. 413 ( Guj).

8.8 Central Excise 11. Department cannot sleep over the matter for years and accuse the assessee of suppression - Mutual Industries Ltd v. CCE 2000 (117) E.L.T. 578 (T-LB). 8.6 IN TEREST Interest of duty not paid on time is provided for in the Central Excise statute. It is expected that the interest provision would normally not have to be invoke d as the assessee would make the duty payment on time. Section 11AA is made redu ndant after passing of the Finance Act 2001 and the provisions would be containe d in section 11AB. All cases of short payment etc. will carry interest from the month following the month when the duty should have been paid whether it involve s fraud, collusion, willful mis-statement or suppression of fact with an intent to evade the payment of duty or not. Therefore if the demand is raised, the inte rest under section 11AB will follow. The interest as said above is payable at a rate not below 10% per annum and not exceeding 36% per annum starting from the d ate of the next month succeeding the month in which the duty ought to have been paid. Currently, the rate specified is 13% per annum vide Notification no. 66/20 03 dtd. 12.09.2003 However, if in the appeal the demand is increased or decrease d the interest is accordingly increased or decreased. 8.7 OFFENCES 8.7.1 Meaning of offence : The term offence is not defined in the Central Excise A ct, 1944 (the Act for short). The Constitution of India also does not define the term. According to Article 367 of the Constitution of India, the General Clause s Act, 1897 shall apply for the interpretation of not only the Constitution but also to any enactment of the Legislature in India. However, this is subject to t he enactment itself. For example, specific definitions in the Act will override the definition of the same term in the General Clauses Act, 1897. The General Cl auses Act, 1897 in 3(38) defines an offence to mean any Act or omission made pun ishable by any law for the time being in force. Therefore, not only a positive a ct but also inaction where action is required can constitute an offence. 8.7.2 S cheme of offence under Excise Law : The provisions of section 9 of the Act enume rate what will constitute an offence under the Act. The following type of acts w ill constitute an offence: (i) contravening any of the provisions of Sec. 8, dea ling with restriction on possession of certain goods specified in the Second Sch edule (presently tobacco).

Demand, Adjudication and Offences 8.9 (ii) contravening any of the provisions of Section 37(2)(iii) which relates to t ransit of excisable goods to any part of India and Section 37(2)(xxvii) relates to registration of persons. (iii) evading payment of duty. (iv) removing or conc erning himself in removing any excisable goods in contravention of the Act or Ru les made thereunder. (v) acquiring possession of or otherwise dealing (includes possession, transporting, storing, keeping etc.) in goods which is known to be l iable for confiscation. (vi) failing to supply information which is required und er the Act or supplying false information. (vii) attempting to abetting the comm ission of any of the acts mentioned in (i), (ii) or (iii) above. The punishment for the above offences is prescribed in the section itself as upto 7 years impri sonment and/or fine where the offence relates to duty exceeding one lakh of rupe es. in any other case, with imprisonment for a term upto three years with or wit hout fine. If any person is convicted of an offence more than once, for the second and subs equent offences, he shall be liable for imprisonment for a term which may extend to seven years and with fine. The Court trying the offence is given powers to r estrict the term of imprisonment for not less than six months but while doing so must record the reasons which shall be special and adequate. The section furthe r adds that conviction for the first time or the age or that any penalty is bein g imposed or that the person was not the principal offender shall not be an adeq uate or special reasons (see also discussion on offences and age below). There a re other types of offences which are found throughout the Central Excise Rules, 2002 (The Rules for short) which we are not going to enumerate. However, mention may be made of Rule 25 which deals with certain type of offences which will res ult in confiscation and penalty. These offences include removing any excisable g oods in contravention of any rule, non-accountal of manufactured goods, engaging in the production / manufacture without registration, irregular availment of cr edit, falsification of documents; and contravening any rule with an intent to ev ade duty. The penalty prescribed is not exceeding the duty amount or Rs. 10,000, whichever is higher. Also, the goods will be liable for confiscation under thes e Rules. Besides, as per Section 12 of the act, the provisions of the Customs Ac t, 1962 become applicable to in respect of offences, penalties, confiscations et c. In pursuance to Section 12, Notification No. 68/63 dated 4-5-1963 has been is sued which makes certain provisions of the Customs Act, 1962 applicable to the E xcise Act.

8.10 Central Excise As per Section 9A, offence under Section 9 are non-cognisabl e within the meaning of the Code of Criminal Procedure, 1973. According to Secti on 2(1) of the Code of Criminal Procedure, 1973 a non-cognisable offence means a n offence where the arrest of a person can be made with a warrant only. It will be pertinent to note that offences under Central Excise come under what is terme d warrant case. Warrant case according to Section 2(x) of the Code of Criminal Pro cedure, 1973 means a case relating to an offence punishable with death, imprison ment for life or imprisonment for a term exceeding two years. Other offences are called as summons case under Section 2(w) of the Code of Criminal Procedure, 1973 . Sub-section (2) of section 9A provides for compounding of offences, either bef ore or after the institution of prosecution, under Chapter II of the Central Exc ise Act by Chief Commissioner of Central Excise on payment of compounding amount prescribed by the rules. Such amount shall be paid to the Central Government by the person accused of the offence. Section 37 empowers Central Government to ma ke rules for specifying the amount to be paid for compounding of offences under section 9A. 8.7.3 Burden of proof : The Supreme Court in Gian Chand v. State of Punjab, 1983 (13) E.L.T. 1365 has held the burden of proof is on the prosecution to prove that the person is guilty of an offence. That means to say that the pe rson who points the finger must also prove that the other person is guilty. 8.7. 4 Retrospective applicability of offences : A question that arises is whether of fences can be made applicable retrospectively. Article 20(1) of the Constitution specifically says that no person shall be convicted of any offence except for v iolation of law in force at the time of commission of the act charged as an offe nce. Therefore, if at the time of commission of the act, there was no offence, b y a subsequent legislative amendment, that very act cannot be made an offence. I n J.K. Spinning and Weaving Mills Ltd. v. UOI - 1987 (32) E.L.T. 234, the Suprem e Court has held that it would be against principles of legal jurisprudence to i mpose a penalty on a person or to confiscate his goods for an act or omission wh ich was lawful at the time when such act was performed or omission made, but sub sequently made unlawful by virtue of any provision of law. 8.8 CIVIL AND CRIMINA L PROCEEDINGS 8.8.1 Introduction : One look at the Act and the Rules and we would often wonder whether the person is being charged again and again with the same offences. For example, removal of goods without payment of duty is an offence under Section 9 as well as Rule 173Q. but it must be understood that the same act can provide f or civil as well as criminal proceedings. Central Excise being a taxing statute must necessarily provide for measures to safeguard the revenue. This would mean that the property of persons is going to be affected. Therefore, confiscation an d penalty proceedings are proceedings in

Demand, Adjudication and Offences 8.11 rem and not in personam. However, arrest of a person is a proceeding in personam since it curtails the individuals freedom of movement. A Central Excise Officer is empowered to confiscate and impose pen alty and by virtue of Section 13 also has the power to arrest. However, on arres t, he has to forthwith take the person to the police station or to the designate d Central Excise Officer under Section 19 who shall forthwith release him or pro duce him before a Magistrate. Thereafter, the proceedings in personam can be hel d only by the court. This is the reason why we find an apparent duplication but in actuality, it is so made to recognise the nature of proceedings. Moreover, se ction 34A of the Act clearly spells out that confiscation and penalty will not a ttract other punishments under the act or under any other law. Therefore, we are faced with the question whether we can face different consequences for the same offence. 8.8.2 Principle of Autrefois convict or Double Jeopardy : This concept is enshrined in Article 20(2) of the Constitution of India which reads as under: No person shall be prosecuted and punished for the same offence more than once. Basi cally, this means that for the same offence, the person must not be put to peril more than once. The conditions for application of this Article, as enumerated b y the Supreme Court in State of Bombay v. Apte AIR 1961 (SC) 578, Kalawati v. St ate of HP (1953) SCR 548, Thomas Dana v. State of Punjab, AIR 1959 (SC) 375 are : (a) there must have been a previous proceeding before a Court of law or judici al Tribunal. (b) the person must have been prosecuted in such proceeding. (c) th e person must have been punished in such proceeding. (d) the offence in both the proceeding must be the same. (e) the subsequent proceeding must be a fresh proc eeding and not a mere continuation of the previous proceeding. Prosecution means an initiation or starting of proceeding of a criminal nature before a court of law or a judicial Tribunal in accordance with the statute. In Maqbool Hussain v. State of Bombay, 1983 (13) E.L.T. 1284, the Supreme Court held that customs aut horities are not judicial tribunals or courts while adjudging confiscation and p enalty. Therefore the principle of double jeopardy cannot be invoked by the pers on proceeded against. In that case, the prosecution proceeding under the Foreign Exchange Regulation Act consequent to confiscation under the Customs Act, 1962 was held not to constitute double jeopardy. It would be odd to note that the Sup reme Court in another case Sewpujanrai Indrasanarai Ltd. v. Collector of Customs , 1983 (13) E.L.T. 1305 had held that penalty, confiscation and fine were judici al acts and not executive acts but had

8.12 Central Excise made a distinction between proceedings in rem and in persona m. 8.8.3 Plea of Limitation : We often take the plea of limitation when issues a re time barred and this constitutes a convenient escape route for otherwise legi timate demands made. In fact, Chapter XXXVI of the Code of Criminal Procedure, 1 973 talks about limitation for taking cognizance of offences by the Courts tryin g the offence. The limitation is contained in section 468 of the Code. However, the Parliament has enacted The Economic Offences (Inapplicability of Limitation Act, 1974) which makes the provisions of the Code of Criminal Procedure inapplic able to economic offences. Central Excise Law and Customs law figure in this Act to which the Code will not apply. Therefore, the Parliament has chosen to stick to the maxim nullum tempus occurrit regi lapse of time does not bar the right of the Crown. It must also be noted that section 473 of the Code specifically empow ers the Court to take cognizance of offence barred by limitation if the delay is properly explained and it is necessary in the interests of justice. 8.8.4 Scope of section 482 of Code of Criminal Procedure, 1973 : As can be seen from the ab ove analysis, the proceedings are taken before the Magistrates Court. However, in certain circumstances the party to the proceeding can approach the High Court u nder section 482 of the Code of Criminal Procedure, 1973. Section 482 reads as u nder : Nothing in this Code shall be deemed to limit or affect the inherent power s of the High Court to make such orders as may be necessary to give effect to an y order under this Code, or to prevent abuse of the process of any Court or othe rwise to secure the ends of justice. The scope of this provision has been discuss ed by the Supreme Court in Madhu Limaye v. Maharashtra, AIR 1978 (SC) 47 wherein it has been held that: (i) the power is not to be restored to if there is a spe cific provision in the Code of redressal of the grievance (ii) it should be used sparingly and for preventing abuse of the process of the Court or to secure the ends of justice. (iii) It should not be exercised against express bar of the law. This provision, therefore, enables the prosecution to b e quashed at the process stage itself. In Sharadchandra Shripad Marathe v. Gurus hant Kamble, 1989 (44) E.L.T. 11, and Bhalchandra Keshav Gadre v. Gurushant Kamb le, 1989 (43) E.L.T. 617, the Bombay HighCourt held that if ex-facie reading of the complaint shows that no grounds have been made for substantiating the compla int, then the process will be quashed. In the latter case, a proceeding against an Ex-Director of the company was quashed since prima facie, a Director who had quit on 29-7-1983 could not have been held responsible for offences arising from 30-9-1983. The Supreme Court has also held in several cases that in

Demand, Adjudication and Offences 8.13 invoking Section 482, normally appreciati on of evidence cannot be done by the High Court since that would mean going into the merits which has to be done by the lower courts. Therefore, as can be seen from the above, for the sake of preventing abuse of the process of the Court and for securing the ends of justice, it is possible to approach the High Court dir ectly without undergoing trial before the lower courts. 8.8.5 Presence of culpab le mental state : Section 9C of the Act presumes that a culpable mental state wa s present at the time the offence was committed unless proved otherwise. The wor d Culpable means faulty or criminal. It implies that the offence was committed with a criminal state of mind. The section includes within the meaning of culpable me ntal state the intention, motive, knowledge of a fact and belief or reason to be lieve a fact. That means when an offence is committed, the law presumes that the person did it intentionally with a motive and he had sufficient knowledge or re ason to believe that it was an offence. However, the fact has to be proved beyon d reasonable doubt. As held by the Madras High Court in Lakshmichand v. GOI - 19 83 (12) E.L.T. 322, penal proceedings should not be allowed to be proceeded with on vague and camouflaged hypothesis. The Supreme Court in Asstt. Collector v. S ayed Mohammed 1983 (12) E.L.T. 193 held that the accused cannot be convicted on mere conjectures and surmises and the prosecution must prove the guilt beyond re asonable doubt. One may be tempted to think that while the burden of proof lies on the person accusing, however culpable mental state is presumed. What this mea ns that once the burden of proof is discharged, the onus will be on the accused to prove that he had no culpable mental state. 8.8.6 Offences by companies : Thi s concept is known as the principle of vicarious liability. Section 9AA of the A ct makes every person responsible to and every person in charge of the business of the company at the time of commission of the offence to be guilty of offence besides the company itself. However it will be a defence for such a person that the offence was committed without his knowledge or that he had exercised due dil igence to prevent the commission of the offence. The section also deems any dire ctor, manager, secretary or other officer to be guilty where the offence is attr ibutable to their consent or connivance or neglect. The term company includes a fi rm and association of individuals and the term director will mean a partner in rel ation to a firm. The Delhi High Court has held in Vidya Wati v. State - 1988 (37 ) E.L.T. 341 that the term incharge of and responsible to the company would mean t hat the person was in overall control of the day-to-day affairs of the company. Only if this can be proved, can the person be deemed guilty of offence. 8.8.7 At tempt/abet to commit an offence : In the earlier paragraph on the scheme of offe nces under Excise Law, it was pointed that attempting or abetting the commission of

8.14 Central Excise certain offences under section 9 also amounts to an offence. Lexically, the term abet would mean to assist, to cause and would include a posit ive act in aid of the commission of an offence. The meaning of the word attempt ha s been brought out by the Supreme Court in State of Maharashtra v. Mohd. Yakub, 1983 (13) E.L.T. 1637 wherein the Supreme Court has held that to constitute an a ttempt, there must be an intention to commit an offence and some act must also b e done which is having close proximity with and is necessary towards the commiss ion of the offence. The Supreme Court made a thin distinction between preparatio n and attempt and held that attempt starts where preparation ends. It was also h eld that to constitute an attempt the act need not be the penultimate act toward s the commission of the offence but must be an act during the course of committi ng the offence. Thus, it will be seen that even an attempt may amount to an offe nce under the Act. 8.8.8 Offence and age : Section 9E of the act makes it clear that the provisions of section 562 of the Code of Criminal Procedure, 1989 (sect ion 360 of the new code) shall not be applicable unless the person is under eigh teen years of age. Section 360 of the code of criminal procedure allows the cour t to relax the rigours in certain circumstances for persons below 21 years. Inst ead of sentencing him, an option is given to prove good conduct and behaviour. H owever, in central excise cases, only persons below 18 years of age can take she lter under this provision of the code. Moreover, as per section 9E, this provisi on will form a special circumstance wherein the court under section 9(3) can tak e cognisance of the fact that the person is below 18 years of age and sentence h im to a lesser term of imprisonment or not to sentence him at all. 8.9 PENALTY A ND CONFISCATION Penalty and confiscation of offending goods i.e. which have violated the provisi on of the Central Excise law are an outcome of the adjudication proceedings. The se are deterrents aimed at cautioning the dishonest taxpayer. 8.9.1 Penalty : Pe nalty is imposed under any of the following provisions of the Central Excise Act , 1944 or the rules made thereunder: (i) Section 11AC prescribes a mandatory pen alty equal to the duty not levied or paid or short paid or erroneously refunded by reason of fraud, suppression etc. However, in the event the duty and interest thereon is paid within 30 days of the communication of the order, the penalty s hall be 25% of the duty subject to it being paid within the said period of 30 da ys. (ii) Rule 25 of the Central Excise Rules 2002 provides for penalty on any produc er, manufacturer, registered person of a warehouse or a registered dealer not ex ceeding the duty on the excisable goods in respect of which any of the specified contravention have been committed, or rupees ten thousand, whichever is greater .

Demand, Adjudication and Offences 8.15 The penalty is subject to the provisions of section 11 AC of the Central Excise Act, 1944. The offending goods are also l iable to confiscation. The specified contraventions are: (a) Removal of any exci sable goods in contravention of any of the provisions of the said rules or the n otifications issued under the said rules; or (b) Non-accountal of any excisable goods produced or manufactured or stored; or (c) Manufacture, production or stor age of any excisable goods without having applied for the registration certifica te required under section 6 of the Central Excise Act; or (d) Contravention of a ny of the provisions of the said rules or the notifications issued under the sai d rules with intent to evade payment of duty. (iii) Under rule 26 of the Central Excise Rules 2002 it is provided that any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, conceal ing, selling or purchasing, or in any other manner deals with, any excisable goo ds which he knows or has reason to believe are liable to confiscation under the Act or the said Rules, shall be liable to a penalty not exceeding the duty on su ch goods or rupees ten thousand, whichever is greater. (iv) Rule 27 of the Centr al Excise Rules, 2002 provides for imposition of a general penalty which may ext end to five thousand rupees and with confiscation of the goods in respect of whi ch the offence is committed. This is attracted when no other specific penalty is provided for. If penalty is imposed under section 11AC, penalty under Rule 25 w ill not be imposed. This, however, does not preclude the Department from confisc ating the goods, imposing any fine in lieu of confiscation and prosecuting a per son. Rule 26 of the said Rules also provides that before any order of penalty or confiscation is passed the adjudicating authority shall follow the principles o f natural justice. In other words a notice explaining the reasons why penalty sh ould not be imposed or goods confiscated has to be given to the person. Thereaft er, reasonable opportunity shall be given to such person to explain or defend hi s case. The adjudicating Officer shall pass a reasoned order, incorporating the defence arguments given by such person or his authorised representative. As per Rule 28 of the said Rules, when any goods are confiscated under these rules, suc h thing shall thereupon vest in the Central Government. Accordingly, the Central Excise Officer adjudging confiscation shall take and hold possession of the thi ngs confiscated, and every Officer of Police, on the requisition of such Central Excise Officer, shall assist him in taking and holding such possession.

8.16 Central Excise Rule 30 provides that if the owner of the goods, the confisc ation of which has been adjudged, exercises his option to pay fine in lieu of co nfiscation, he may be required to pay such storage charges as may be determined by the adjudicating officer. Provisions for disposal of goods confiscated are co ntained in Rule 29 of the said Rules. Goods of which confiscation has been adjud ged and in respect of which the option of paying a fine in lieu of confiscation has not been exercised, shall be sold, destroyed or otherwise disposed of in suc h manner as the Commissioner may direct. 8.9.2 Search : Provisions of search and seizure are used by the Central Excise Officers to enforce the provision of the Central Excise Law. These provisions are used as an exception when the direct p hysical intervention becomes necessary. At the same time the search and seizure is to be done in accordance with the laid down law. In this regard reference is to be made to the applicable provisions of other statutes, i.e. Code of Criminal Procedure. The provisions relating to search are given in section 18 of the Cen tral Excise Act,1944, which provides that all searches should be made in accorda nce with the provisions of the Code of Criminal Procedure. Rules 22 & 23 of the Central Excise Rules, 2002 (hereinafter referred to as the said Rules), empower the authorized officer to enter and search any premises, conveyance or other pla ce. Further, Rule 24 ibid specifically empowers such officer to effect a seizure or detention. Moreover, Section 12 of the Central Excise Act, 1944, empowers th e Central Government to apply the provisions of the Customs Act to the Central E xcise also. In exercise of such powers the Central Government has issued Notific ation No.68/63, dated 4.5.1963 modifying and extending the various sections of C ustoms Act, 1962 to Central Excise matters. In terms of the said rules, an offic er not below the rank of the Inspector of Central Excise, duly authorized by Com missioner by special or general order, can search at any time, any premises or c onveyance where he has reason to believe that excisable goods are manufactured, stored or carried in contravention of the provisions of the Act or rules. For a registered premises or for stopping and searching any conveyance in transit no s earch warrant is required. However, in other cases, normally search warrants are issued by the Deputy/Assistant Commissioner authorizing the search. The Central Excise Officer is also authorized to stop and search any conveyance as well. Th e search is to be carried out in the presence of two independent witnesses. Sect ion 22 deals with vexatious searches, seizure etc. by Central Excise Officers. I n such case the Central Excise office will be liable to punishment under the law . Similar provision is made applicable to any person wilfully and malaciously gi ving false information leading to vexatious search.

Demand, Adjudication and Offences 8.17 8.9.3 Seizure : Rule 24 of the said Rules provides for power to detain goods or seize the excisable goods. It must be not ed that seizure is an act depriving the owner of the possession of the goods. Co nfiscation however results in the ownership of the goods getting transferred to the Central Government. If a Central Excise Officer, has reason to believe that any goods, which are liable to excise duty but no duty has been paid thereon or the said goods were removed with the intention of evading the duty payable there on, the Central Excise Officer may detain or seize such goods. The power to rele ase seized goods emanates from power to seize itself. The goods seized may be re leased provisionally under bond in the Format specified under erstwhile Central Excise Rules, 1944 [B-8 bond] along with 25% security or surety by the officer w ho is normally competent to adjudicate the case. The adjudicating officer will a lso consider the importance of such goods for evidence, and will release the goo ds provisionally if the bond is furnished. Wherever necessary, sample may also b e drawn. The adjudicating officer, however, will ask the owner or in-charge of t he goods to whom the goods were released provisionally to produce the goods any time before the issue of adjudication order, if he is of the view that the goods are liable for confiscation. In case the person to whom goods were released pro visionally fails to produce the goods at appointed time, the bond may be enforce d for recovering. 8.9.4 Arrest : Provisions for arrest are contained in sections 13 and 18 of Central Excise Act, 1944. These provisions provide for power to ar rest, searches and arrests how to be made, disposal of persons arrested, procedu re to be followed. Any Central Excise Officer not below the rank of Inspector of Central Excise with the prior approval of Commissioner of Central Excise can ar rest any person under Section 13 whom he has reason to believe that he is liable to punishment under the Central Excise Act. In normal circumstances, prior appr oval of Commissioner will be taken before arresting a person. The arrested perso n shall be produced before the Jurisdictional Magistrate or the Chief Judicial M agistrate, as the case may be, within twenty-four hours of the arrest. Power to grant bail is normally to be exercised by a Jurisdictional Magistrate. 8.9.5 Pro secution : Besides the departmental adjudication, prosecution may also be launch ed under section 9 of the Central Excise Act, 1944 for the offences under sectio n 9(1) of the Act. As per provisions of section 9AA prosecution may be launched against any person, Director, Manager, Secretary or other officers of a company or partner/ proprietor of the firm, who is responsible for the conduct of the bu siness of the company/firm and is found guilty of the offences under the Central Excise Act/Rules. Section 9 of the Central Excise Act, 1944, provides for prose cution of offenders in a court of law and prescribes a minimum imprisonment of s ix months. However, in cases where the duty involved is more than one lakh or th e offender has been convicted previously

8.18 Central Excise under this section, the court can award maximum imprisonment for a term not exceeding seven years. Prosecution proceedings in a Court of Law are generally initiated after departmental adjudication of an offence has been completed. However, prosecution may be launched even where adjudication is not c omplete. Generally, the adjudicator should indicate whether a case is fit for pr osecution, though this is not a necessary pre-condition. Confiscation and penalt y in departmental adjudication and prosecution in criminal proceedings are indep endent and do not amount to double jeopardy. Prosecutions are launched in cases of serious nature and where sufficient evidence to prove fraudulent intention is available. Under executive instructions the Chief Commissioner of Central Excis e or in specified cases the Director General of Central Excise Intelligence, has power to sanction prosecution. 8.9.6 Over time fee : Wherever an assessee or ex porter requires services of Central Excise Officers for supervision in accordanc e of any procedure specified in this regard by rules or instructions beyond offi ce hours or on Sundays, Saturday or public holidays and where there is no specif ic posting of officers in shifts by any Office order, he shall be required to pa y Merchant Overtime at the rates specified under the Customs Act, 1961 under Cus toms (Fees for Rendering Services by Customs Officers) Regulation, 1998. If a ma nufacturer or exporter requisitions services of Central Excise Officers for supe rvision and examination of export cargo and stuffing in containers at his premis es, such officers also discharge functions of Customs Officers. 8.10 RECOVERY OF D UES Section 11 contains the provisions, which determine the procedure for recove ring the sums payable by any person to the credit of the Government. The section provides that: The officer empowered by the Central Board of Excise and Customs may recover the duty and any other sums of any kind payable to the Central Gove rnment by: (i) deducting the amount so payable from any money owing to the perso n from whom such sums may be recoverable or due which may under his control, or (ii) attachment and sale of excisable goods belonging to such person. However, i f the amount payable is not so recovered, he may prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send i t to the Collector of the district in which such person resides or conducts his business. The said Collector, on receipt of such certificate, shall proceed to r ecover from the said person the amount specified therein as if it were an arrear of land revenue.

Demand, Adjudication and Offences 8.19 Further, if a person from whom some recov eries are due, transfers his business in whole or in part to another person, the n all excisable goods, materials, preparations, plants, machineries, vessels, ut ensils, implements and articles in the possession of the transferee can be attac hed and sold for recovery. An officer empowered by the Central Board of Excise a nd Customs, after obtaining written approval from the Commissioner of Central Ex cise, can make such recovery. Central Excise Officers not below the rank of Assi stant Commissioner have been empowered vide Notification No.4/2004 C.E.(N.T.), d ated 17.02.2004 to require the payment of duty and any other sums of any kind pa yable to the Central Government, under any of the provisions of the Act or of th e rules made thereunder (including the amount required to be paid to the credit of the Central Government under Section 11D of the Act), within their jurisdicti on and thereby to exercise all the powers of such officers specified under secti on 11. Further, for the recovery of dues the provisions of section 142 of the Cu stoms Act, 1962 have been made applicable to like matters in Central Excise by N otification No. 68/63Central Excise dated 4.5.1963 issued under Section 12 of th e Central Excise Act, 1944. If the stay application is filed by the assessee aga inst the order-in-original confirming the duty demand, no coercive action should be taken to realise the dues till the disposal of the stay application by the C ommissioner of Central Excise (Appeal). However, the Commissioner (Appeal) must dispose of the stay application within one month of its filing. A period of 3 mo nths from the date of communication of the order-in-original/ order-in appeal sh ould normally be provided for (one month for filing appeal and stay application and two more months for obtaining orders on the stay application), before taking coercive measures to recover the dues. However, if a stay application of an ass essee is rejected by an appellate authority even before the lapse of the time li mit of three months, recovery proceedings should be initiated immediately therea fter. In respect of cases decided by Commissioner of Central Excise (Appeals), T ribunal, Government of India or High Court, the assessee should be given a maxim um period of one month from the date of communication of the order to pay up the dues before resorting to any coercive action. In case of decision of Supreme Co urt of India, the assessee should pay the Government dues, if any, forthwith or else the recovery proceedings shall be initiated within 15 days of the communica tion of the order. Self-examination questions 1. 2. 3. Can a manufacturer make s uo moto payment of duty short paid? Discuss. Explain briefly whether the penalty can be attracted on short levy of duty. When can the penalty be reduced? Discus s the provisions regarding issue of duty demand notice under section 11A.

8.20 Central Excise 4. A sum of Rs.50,00,000.00 is due from A towards his excise d uty liability. How does the Central Excise Act, 1944 provide for recovery of suc h money? Will it make any difference if A transfers his whole business to B? Discuss . Write a note on search and seizure. 5.

9 REFUND 9.1 REFUND OF DUTY Refund of any duty of excise is governed by section 11B of the Central Excise Ac t, 1944. By definition, refund includes rebate of duty paid on goods exported ou t of India or on materials used in the manufacture of goods exported out of Indi a. The refund claim can be filed within one year from the relevant date in the s pecified Form by an assessee or even a person who has borne the duty incidence, to the Deputy/Assistant Commissioner of Central Excise having jurisdiction over the factory of manufacture. The relevant date has been defined in the said section and refund of duty paid can be sought provided the manufacturer has not passed on the burden of duty. In case the burden of duty has been passed on, the refund can be claimed by the person who has actually paid the duty or, in the alternat ive, the amount can be deposited in the Consumer Welfare Fund created by the sta tute. 9.2 INTEREST ON DELAYED REFUND The Central Excise Act also provides for payment of interest on delayed payment of refund. As per section 11BB, if any duty ordered to be refunded under section 11B has not been refunded within three months from the date of receipt of the r efund application in the prescribed manner and form along with the supporting do cumentary evidence as laid down in the relevant rules, interest at the rate noti fied by the Government which should not be below 5% and should not exceed 30% pe r annum (notified as 6% p.a. as per Notification no. 67/2003 dated 12.9.2003) sh all have to be paid on such duty from the date immediately after the expiry of t hree months from the date of receipt of application till the date of refund of s uch duty. 9.3 THEORY OF UNJUST ENRICHMENT Section 11B of the Central Excise Act, 1944 is perhaps the most important provis ion governing refunds. Explanation to section 11B defines the term refund to inclu de rebate of duty of excise on excisable goods exported out of India or on excis able materials used in the manufacture of goods exported out of India. The defin ition is inclusive and therefore would govern all refunds except for which there could be a special procedure.

9.2 Central Excise Section 11B was inserted with effect from 11.7.1980. The most important amendmen t took place on 20.9.91 wherein the theory of unjust enrichment was built into t he statute. This theory postulates that only the person who has not passed on th e incidence of duty will be eligible to claim the refund. The section today reco gnises that a buyer of goods can also claim refund. The most important decision on refund is by a Nine Member Bench of the Supreme Court in Mafatlal Industries Ltd. v. U.O.I.- 1997 (89) E.L.T. 247. The salient features of this judgment can be summarised as under : (a) The theory of unjust enrichment is valid and consti tutional. However, the theory that the manufacturer would be unjustly impoverish ed in case of demands has not been agreed to. (b) All pending applications as on 20-9-1991 would be governed by this theory of unjust enrichment. (c) Sections 1 1B and 27 (Customs Act) are self contained codes for refunds and resort to civil suits or writs is not permissible unless the taxing provision is struck down as unconstitutional. The general theory laid down in certain judgments of both the Supreme Court and High Courts that refund could be claimed within three years o f discovery of mistake has been disapproved. (d) Unless the levy is struck down as unconstitutional, all Courts must exercise jurisdiction in terms of section 1 1B and refuse to grant relief if the incidence of tax has been passed on. (e) Wh atever amount is collected as duty will have to paid to the Government. If exces s is collected than that payable, it would be credited to the Consumer Welfare F und or given as refund to the person who has borne the incidence of duty. The Su preme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refunds wi ll not be allowed on captive consumption of inputs. Further, the Supreme Court i n the case of CCE v. Allied Photographics 2004 (166) ELT 3 has held that doctrin e of unjust enrichment applies even when duty is paid under protest. It has been held that even if there is no change in price before and after assessment (i.e. before and after imposition of duty), it does not lead to the inevitable conclu sion that incidence of duty has been passed on to the buyer, as such uniformity may be due to various factors. According to section 11B(2), the Assistant Commis sioner, on being satisfied that excise duty is refundable, shall grant refund to the applicant only in the following cases : (a) Rebate of duty of excise on exc isable goods exported out of India or on excisable materials used in the manufac ture of goods which are exported out of India; (b) Unspent advance deposits lyin g in balance in the applicants account current maintained with the Commissioner o f Central Excise; (c) Refund of credit of duty paid on excisable goods used as i nputs in accordance with the rules made, or any notification issued, under this Act;

Refund 9.3 (d) The duty of excise paid by the manufacturer, if he had not passed on the inc idence of such duty to any other person; (e) Duty of excise borne by the buyer i f he has not passed on the incidence of such duty to any other person; (f) The d uty of excise borne by any other such class of applicants as the Central Governm ent may, by Notification in the Official Gazette, specify. (No notification under clause (f) shall be issued unless the Central Government is of the opinion that the incidence of duty has not been passed on by the perso ns concerned to any other person. No refund shall be made except herein provided ). In other cases, the Assistant Commissioner shall make an order that the whole or any part of the duty is refundable and the amount so determined shall be cre dited to the Consumer Welfare Fund established under section 12C. The following sh all be credited to the Fund: (a) the amount of duty of excise as per section 11B (2) or section 11C(2) or section 11D(2); (b) the amount of duty of customs as pe r section 27(2) or section 28A(2), or section 28B(2) of the Customs Act, 1962; ( c) any income from investment of the amount credited to the Fund and any other m onies received by the Central Government for the purposes of this Fund; (d) the surplus amount referred to in sub-section (6) of section 73A of the Finance Act, 1994. Any money credited to the Fund shall be utilized by the Central Governmen t for the welfare of the consumers. The Central Government shall maintain or, if it thinks fit, specify the authority which shall maintain, proper and separate account and other relevant records in relation to the Fund in such form as may b e prescribed in consultation with the Comptroller and AuditorGeneral of India. I t must be noted that as per rule 7(6) of the Central Excise Rules, 2002 refunds pertaining to finalisation of provisional assessments are also governed by the l aw of unjust enrichment. Other than the cases mentioned listed above, the courts have laid few circumstances for which the unjust enrichment concept does not ap ply. They are (a) If the refund relates to pre-deposit of duty made under sectio n 35F - Suvidhe Ltd. v. U.O.I. - 1996 (82) E.L.T. 177 (Bom). (Contrarily AP High Court has held in case of ITW Signode India Ltd. v. AC - 2000 (122) E.L.T. 651, pre-deposit under section 35F will also be subject to the provisions of section 11B). (b) Refunds arising out of settlements between parties under contract - L iving Media Ltd. v. U.O.I. - 1998 (104) E.L.T. 3 (S.C.). 9.4 1. ASSESSMENT DOCUM ENTS TO SHOW DUTY PAYMENT PARTICULARS Section 12A makes it obligatory on the per son liable to pay duty to indicate on the invoice

9.4 Central Excise or like documents, the amount of duty which will form part of the price at which such goods are sold. 2. 3. Section 12B casts a presumption that duty has been passed on to the buyer. This presumption is rebuttable. The amount of excise duty to be mentioned is not the actual duty paid or payable on the goods but only the actual duty being passed o n to the buyer as part of the price of goods sold. The document relating to asse ssment are : (a) Invoices/AR1 (b) Monthly RT-12 return (c) Receipted treasury ch allans on which deposits were being made. of account in (d) Original and duplica te copies of the account-current and also Cenvat credit records as the case may be. 4. (e) The obligation under this section is applicable only to persons who are liab le to pay excise duty viz. manufacturers, curers etc. It does not apply to whole sale dealers, traders etc. 9.5 1. 2. 3. TIME-LIMIT FOR MAKING THE APPLICATION FO R REFUND OF DUTY Under Section 11B, the application for refund has to be made wi thin one year from the relevant date. The meaning of the term relevant date is set out in the Explanation (B) to section 11B. The relevant date in the various cas es is as follows : (a) in the case of goods exported out of India where a refund of excise duty paid is available in respect of the goods themselves or, as the case may be, the excisable materials used in the manufacture of such goods, (i) (ii) if the goods are exported by sea or air, the date on which the ship or the aircraft in which such goods are loaded, leaves India, or, if the goods are expo rted by land, the date on which such goods pass frontier, or the (iii) if the goods are exported by post, the date of despatch of goods Office co ncerned to a place outside India; by the Post (b) in the case of goods returned for being remade, refined, reconditioned or su bjected to any other similar process, in any factory, the date of entry into the factory for the purposes aforesaid;

Refund 9.5 (c) in the case of goods to which banderols are required to be affixed if remove d for home consumption but not so required when exported outside India, if retur ned to a factory after having been removed from such factory for export out of I ndia, the date of entry into the factory; (d) in the case where a manufacturer i s required to pay a sum, for a certain period, on the basis of the rate fixed by the Central Government by notification in the Official Gazette in full discharg e of his liability for the duty leviable on his production of certain goods, if after the manufacturer has made the payment on the basis of such rate for any pe riod but before the expiry of that period such rate is reduced, the date of such reduction; (e) in the case of a person, other than the manufacturer, the date o f purchase of the goods by such person; (f) in case of goods which are exempt fr om payment of duty by a special order under section 5A(2), the date of issue of such order; (g) in case of provisional assessment, the date of adjustment of duty after fina l assessment; (h) in any other case, the date of payment of duty. 4. The aforesa id period of limitation will not apply if duty is paid under protest. Unless the duty is paid under protest, the application for refund claim should b e filed within one year from the relevant date. In this context, the Supreme Cou rt in the case of CCE Vs Flock (India) Pvt. Ltd., 2000 (120) ELT 285 (S.C.) has held that where the assessee has not challenged the adjudication order in time d espite being appealable, such order cannot be questioned by filing refund claim after the time limit on the ground that adjudicating authority has committed an error in passing earlier order. 9.6 PRESENTATION OF REFUND CLAIM Any person, who deems himself entitled to a refund of any duties of excise or ot her dues, or has been informed by the department that a refund is due to him sha ll present a claim in proper Form, along with all the relevant documents support ing his claim and also the copies of documents/records supporting his declaratio n that he has not passed on the duty incidence. The claim will be filed with the Deputy/Assistant Commissioner of Central Excise with a copy to the Range Office r. The claim shall be presented in duplicate and shall be duly signed by the cla imant or by a duly authorised person on his behalf and shall be pre-receipted (w ith revenue stamp on original copy, where necessary). It may not be possible to scrutinise the claim without the accompanying documents and decide about its adm issibility. If the claim is filed without requisite documents, it may lead to de lay in sanction of the refund. Moreover, the claimant of refund is entitled for interest in case refund is

9.6 Central Excise not given within three months of the filing of claim. Incomplete claim will not be in the interest of the Department. Consequently, submission of refund claim w ithout supporting documents will not be allowed. Even if post or similar mode fi les the same, the claim should be rejected or returned with Query Memo (dependin g upon the nature/importance of document not filed). The claim shall be taken as filed only when all relevant documents are available. In case of nonavailabilit y of any document due to reasons for which the Central Excise or Customs Departm ent is solely accountable, the claim may be admitted that the claimant is not in disadvantageous position with respect to limitation period. Subsequent to filin g of the application, the Range Officer will complete the scrutiny of the papers within 2 weeks from the date of receipt of the claim in the Range Office and se nd a report to their scrutiny to the Divisional Deputy/Assistant Commissioner of Central Excise. The Divisional Office will scrutinise the claim, in consultatio n with Range, and check that the refund application is complete and is covered b y all the requisite documents. This should be done, as far as possible, the mome nt refund claim is received and in case of any deficiency, the same should be po inted out to the applicant with a copy to the Range Officer within 15 days of re ceipt. In the Divisional Offices, final processing of refund claims after the re ceipt of Range Officers report should be completed including the verification of the fact whether the assessee has passed on the duty incidence to their buyer (i n cases where the refund claim is filed by a manufacturer or owner of warehoused goods). The types of cases to which this provision will not be attracted are al ready specified in section 11B itself. Where the duty incidence has been passed on, the duty refund, if otherwise admissible, will be ordered in file, but will also be ordered to be credited to the Consumer Welfare Fund. The burden of provi ng that the duty incidence has not been passed on, is on the claimant and the la tter may be required to submit sufficient documentary proof for this purpose. It is clarified that the question of unjust enrichment has to be looked into case by case. There cannot be a general instruction indicating the documents and /or record, which the claimant should produce as a proof that he has not passed on t he duty incidence to any other person. Claim for refund of less than Rs. 100 sha ll not be entertained in respect of all excisable commodities. 9.7 PAYMENT OF RE FUND Where the claim has been admitted whether in part or in full, and claimant is el igible for refund, the Deputy/Assistant Commissioner of Central Excise should en sure that payment is made to the party within 3 days of the order passed after d ue audit, if any. All claims shall be paid to the applicant by a cheque on the a uthorised bank with which the sanctioning authority maintains account. 9.8 POST AUDIT All refund claim papers should be sent by the Divisional Deputy/Assistant Commis sioner to the Commissionerate Headquarters (to the Additional/Joint CommissionerA udit) within a week

Refund 9.7 after the payment thereof irrespective of the amount involved. At the Commission erate Headquarters, a special cell comprising Deputy/Assistant Commissioner (Aud it) for immediate supervision one superintendent, one Inspector and two Deputy O ffice Superintendents - may be created out of the sanctioned strength of the aud it staff in the Commissionerate for post -audit of these claims. This cell may u ndertake examination on merits of each such claim where the amount of refund gra nted is Rs. 5 lakh or more. In regard to the remaining refund claims involving a mounts below Rs. 5 lakh, post audit may be undertaken on the basis of random sel ection by the Deputy/Assistant Commissioner (Audit). This post audit may be comp leted before the expiry of three months from the date of payment and where ever the grant of refund is not found to be correct, action should be taken in terms of provisions contained in section 35E of the Central Excise Act, 1944. This spe cial Cell may work directly under the charge of Additional/Joint Commissioner (A udit). 9.9 MONITORING AND CONTROL FOR TIMELY DISPOSAL OF REFUNDS The Commissioner of Central Excise should devise appropriate control to ensure t hat the refund/rebate claims are expeditiously sanctioned within the time limit stipulated above. 9.10 PROVISIONS RELATING TO INTEREST ON DELAYED REFUNDS [SECTI ON 11BB] Statutory provisions: 1. Interest is payable to the assessee if the amo unt claimed as refund is not paid within three months of receipt of refund claim . The interest shall be paid at such rate not below 5% and not exceeding 30% p.a . The interest rate has been fixed by the Board as 6% per annum (Notification No . 67/2003 C.E. (N.T.) dated 12.9.2003). The person must take the following safeg uards: a. b. c. 4. the application must be in the proper form (Form R or C) the application must be filed before the Assistant Commissioner only. A checklist of the documents must be enclosed with the application. See CBEC Circular 130/41/9 5 CX dt..30.5.95 1995 (77) ELT T64. The application should be scrutinised within 48 hours of receipt of application and the acknowledgement must be given forthw ith. If the application is deficient, a letter must be issued forthwith to the a ssessee pointing out the deficiencies. Only when the deficiencies are made good, will the application be acknowledged. 2. 3. The Department must take the following measures: a. b. c.

9.8 Central Excise Interest will start from the expiry of three months after date of acknowledgemen t of application. However, if the matter is pending before the Settlement Commis sion, the period commencing from date of filing of application and ending with t he date of receipt of the case sent back to the officer will be excluded for cal culation of interest [Sec.32L(3)]. 9.11 DUTY OF EXCISE NOT LEVIED OR SHORT-LEVIE D AS A RESULT OF GENERAL PRACTICE NOT TO BE RECOVERED [SECTION 11C] Sometimes it may happen that goods may be liable to excise duty but on account of generally prevalent practice no excise duty is charged on them or a lower rate of duty tha n the applicable rate is levied on the excisable goods. In such cases, the Centr al Government has the power to direct by notification that such not-levied excis e duty or short levied excise duty shall not be required to be paid in respect o f such goods. When such a notification in respect of any goods is issued, the wh ole of the excise duty (in case of non-levy) or excess excise duty (in case of s hort levy) which would not have been paid if the said notification had been in f orce, shall be dealt with in accordance with the provisions of section 11B(2). T he person claiming the refund of such duty or the excess duty has to make an app lication to the Assistant/Deputy Commissioner of Central Excise in the prescribe d form (same form for making a refund claim under section 11B) before the expiry of six months from the date of issue of the said notification. 9.12 OBLIGATIONS OF PERSONS WHO HAVE COLLECTED EXCISE DUTY FROM BUYERS [SECTION 11D] 1. Section 11D(1) makes it obligatory on every person who is liable to pay duty and has col lected any amount from the buyer of any goods in any manner as representing duty of excise to pay the amount so collected to the credit of the Central Governmen t. Sec.11D gets attracted only when goods are sold and not otherwise (Eternit Ev erest Ltd vs UOI 1996 (89) ELT 28 (Mad). Where any amount is required to be paid to the credit of the Central Government under sub-section (1) and which has not been so paid, the Central Excise Officer may serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as speci fied in the notice, should not be paid by him to the credit of the Central Gover nment. The Central Excise Officer shall, after considering the representation, i f any, made by the person on whom the notice is served under sub-section (2), de termine the amount due from such person (not being in excess of the amount speci fied in the notice) and thereupon such person shall pay the amounts so determine d The amount paid to the credit of the Central Government under sub-section (1) or subsection (3) shall be adjusted against the duty of excise payable by the pe rson on 2. 3. 4.

Refund 9.9 finalisation of assessment or any other proceeding for determination of the duty of excise relating to the excisable goods referred to in sub-section (1). 5. Wh ere any surplus is left after the adjustment under sub-section (4), the amount o f such surplus shall either be credited to the Fund or, as the case may be, refu nded to the person who has borne the incidence of such amount, in accordance wit h the provisions of section 11B and such person may make an application under th at section in such cases within six months from the date of the public notice to be issued by the Assistant Commissioner of Central Excise for the refund of suc h surplus amount. It should be noted that section 11D will operate only if any a mount has been collected from the buyer as representing duty of excise. If the d uty collected is not deposited it becomes an offence. It may also be interesting to note that excess duty retained is addable to assessable value as per decisio n in Pravara Pulp & Paper Mills vs CCE 1997 (96) ELT 497 (SC). 9.13 INTEREST ON THE AMOUNTS COLLECTED IN EXCESS OF THE DUTY [SECTION 11DD] When the amount of du ty collected from the buyer exceeds the amount of duty assessed or determined un der this Act, the person who is liable to pay such amount shall, in addition to the amount, be liable to pay interest at such rate, not below ten percent, and n ot exceeding thirtysix per cent per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first day of the month succeeding the month in which the amount ought to have been paid u nder this Act, till the date of payment of such amount. Currently the rate is 15 % as notified vide Notification no. 68/2003 C.E. dated 12.09.2003. However, in c ases where the amount becomes payable consequent to issue of an order, instructi on or direction by the Board under section 37B, and such amount payable is volun tarily paid in full, without reserving any right to appeal against such payment at any subsequent stage, within forty-five days from the date of issue of such o rder, instruction or direction, as the case may be, no interest shall be payable and in other cases the interest shall be payable on the whole amount, including the amount already paid. The provisions of sub-section (1) shall not apply to c ases where the amount had become payable or ought to have been paid before 14.05 .2003. Where the amount determined under section 11D(3) is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or the court, as the case may be, the interest payable thereon shall be on such reduced or increased amoun t respectively. Self-examination questions 1. 2. What is the time limit for maki ng the application for refund of duty? What are the relevant dates as set out in the explanation (B) to section 11B?

9.10 Central Excise 3. 4. Enumerate the circumstances under which refund of duty would be granted to the assessee instead of being credited to the Consumer Welf are Fund. ABC Ltd. has removed the goods manufactured by it by paying excise dut y @ 20% ad valorem. However, in the invoice for sale of goods, ABC Ltd. shows an amount, which is 25% of the value of the goods as excise duty and collects it f rom the buyer as part of the total sale price. Can the Department ask ABC Ltd. t o pay the amount so collected by him to the credit of the Central Government? Di scuss the related legal provisions in detail. The refund of an encashed bank gua rantee for all or part of the disputed excise duty, pursuant to an order of the Court, is governed by the provisions of section 11B. Discuss the correctness or otherwise of the statement with the help of decided case law, if any. Refer sect ion 11D Supreme Court in the case of Oswal Agro Mills Ltd. v. Assistant Collecto r of C.Ex., Ludhiana 1994 (70) ELT 48 (SC) has held that refund of an encashed b ank guarantee for all or part of the disputed excise duty pursuant to an order o f the Court is not governed by the provisions of section 11B, since furnishing o f a bank guarantee is not equivalent to payment of excise duty. The Supreme Cour t stated that section 11B applies when an assessee claims refund of excise duty. A claim for refund is a claim for repayment. It presupposes that the amount of the excise duty has been paid over to the excise authorities. It is then that th e excise authorities would be required to repay or refund the excise duty. The A pex Court explained that a bank guarantee is a security for the Revenue for reco vering the dues in the event the Revenue succeeds in the dispute concerning the duty. However, if the bank refuses to honour its guarantee, the revenue or the p rincipal administrative officer of the Court (where the bank guarantee is in his favour) has to file a suit against the bank for the amount due upon the bank gu arantee. Therefore, the amount of the disputed tax or duty that is secured by a bank guarantee cannot be considered as having been paid to the Revenue. Thus, th ere arises no question of its refund and hence provisions of section 11B would n ot be attracted. 5. Answers/Hints 4. 5.

10 APPEALS 10.1 INTRODUCTION The provisions for appeal are contained in Chapter VI A of the Central Excise Act,1944. The rules pertaining to Appeals i.e. Central Excise (A ppeals) Rules, 2001 (may be referred to as Appeal Rules) have been notified w.e.f. 1.7.2001. These provisions provide for appeals to Commissioner (Appeals), Appel late Tribunal, procedure orders of Appellate Tribunal, powers of revisions of Bo ard, revision by Central Government, appeal to High Court (up to the date when t he National tax Tribunal (NTT) is constituted), appeal to NTT (after the NTT is constituted - refer Note at the end of the Chapter), appeal to the Supreme Court , transfer of certain pending proceedings and transitional provisions. 10.2 APPE LLATE STAGES Under Chapter VIA of the Central Excise Act, 1944 both assessee and department have been conferred with a right of three stage remedies against the orders passed under Central Excise Act and Rules. Briefly, it consists of three stages of appeal two stages of revision and further appeal to Supreme Court. Th e three stages of Appellate Authorities are the Commissioner (Appeals), CESTAT a nd High Court. For orders passed by officers lower than the rank of Commissioner of Central Excise, the first appeal lies to the Commissioner (Appeals) and ther e from to the Appellate Tribunal, and then to High Court and finally to the Supr eme Court. Where the order of the Tribunal does not relate to determination of r ate of duty or value of goods, an appeal is made to the High Court under section s 35G, instead of appeal to Supreme Court. In cases where the order-in-original is passed by a Commissioner of Central Excise, appeal lies directly to the Appel late Tribunal. As per the provisions of section 35 read with sections 35B, 35G, 35H and 35L of the Central Excise Act, any person aggrieved by the order passed by the Central Excise Officer, can file an appeal to the following authorities:-

10.2 Central Excise Order passed by Appellate Authority Commissioner (Appeals) 1 All officers upto & including Additional Commissioner Commissioner or Commission er (Appeals) 2 CESTAT except in cases where order relates to: a case of loss of goods, where the loss occurs in transit from a factory to a warehouse or to another factory, or from one warehouse to another, or during the course of processing of the goods i n a warehouse or in storage, whether in a factory or in a warehouse; a rebate of duty of excise on goods exported to any country or territory outside India or o n excisable materials used in the manufacture of goods which are exported to any country or territory outside India; goods exported outside India (except to Nep al or Bhutan) without payment of duty; credit of any duty allowed to be utilized towards payment of excise duty on final products under the provisions of this A ct or the rules made thereunder and such order is passed by the Commissioner (Ap peals) on or after the date appointed under section 109 of the Finance (No.2) Ac t, 1998]. 3. Commissioner or Commissioner (Appeals) Revision application to Central Govt. (in matters relating to baggage, drawback, export without payment of duty, goods short landed, loss of goods in transit). No further appeal. Supreme Court (Classification and valuation cases) High Court (Other than classification and valuation matters) Supreme Court 4 5 6 CESTAT CESTAT High Court 10.3 APPEALS TO COMMISSIONER (APPEALS) All decisions and orders passed under the Central Excise Act or the rules made thereunder are subject to two departmental appeals except in the case where the order-inoriginal is passed by the Commissi oner as an adjudicating authority when only one right of appeal to the Tribunal is conferred. The First Appeal as per the provisions of section 35

Appeals 10.3 of the Central Excise Act lies to the Commissioner (Appeals) if the order or dec ision is of an officer lower in rank than the Commissioner of Central Excise. Su ch an appeal can be filed within sixty days from the date of the communication o f decision/ order. This period can be extended by a further period of thirty day s by Commissioner (Appeals) on sufficient cause being shown. Commissioner (Appea ls) may, if sufficient cause is shown, at any stage of proceeding, grant time, f rom time to time, to the parties and adjourn the hearing for reasons to be recor ded in writing. However, such adjournment shall not be granted for more than thr ee times to a party during the proceeding. The Second Appeal against the order o f the Commissioner (Appeals) can be filed to the Appellate Tribunal except for t he type of cases referred to in Sl.No.2 of the chart above. As per Rule 3 of Cen tral Excise (Appeals) Rules, 2001 an appeal under sub-section (1) of section 35 to the Commissioner (Appeals) shall be made in Form No.E.A.-1(in duplicate) and shall be accompanied by a copy of the decision or order appealed against. As per Rule 3(2), of Appeal Rules, 2001 the grounds of appeal and the form of verifica tion as contained in Form No.E.A.-1 shall be signed (a) in the case of an indivi dual, by the individual himself or where the individual is absent from India, by the individual concerned or by some person duly authorized by him in this behal f; and where the individual is a minor or is mentally incapacitated from attendi ng to his affairs, by his guardian or by any other person competent to act on hi s behalf; (b) in the case of a Hindu undivided family, by the karta and, where t he karta is absent from India or is mentally incapacitated from attending to his affairs, by any other adult member of such family; (c) in the case of a company or local authority, by the principal officer thereof; (d) in the case of a firm , by any partner thereof, not being a minor; (e) in the case of any other associ ation, by any member of the association or the principal officer thereof; and (f ) in the case of any other person, by that person or some person competent to ac t on his behalf. As per Rule 4 of Appeal Rules, an application is made by the authorised officer of the department for revision (under sub-section (4) of Section 35E) to the Com missioner(Appeals) shall be made in Form No.E.A.2 & such an application shall be treated as appeal. The form of application in Form No.E.A.2 shall be filed in d uplicate and accompanied by two copies of the decision or order passed by the ad judicating authority (one of which at least shall be a certified copy) and a cop y of the order passed by the Commissioner of Central Excise directing such autho rity to apply to the Commissioner (Appeals).

10.4 10.3.1 Central Excise Procedure in appeal [Section 35A] The Commissioner (Appeals) shall give an opportunity to the appellant to be hear d, if he so desires. At the hearing of an appeal, Commissioner (Appeals) may all ow an appellant to go into any ground of appeal not specified in the grounds of appeal, if he is satisfied that the omission of that ground from the grounds of appeal was not willful or unreasonable. The Commissioner (Appeals) shall, after making such further inquiry as may be necessary, pass such order, as he thinks j ust and proper, confirming, modifying or annulling the decision or order appeale d against. However, an order enhancing any penalty or fine in lieu of confiscati on or confiscating goods of greater value or reducing the amount of refund shall not be passed unless the appellant has been given a reasonable opportunity of s howing cause against the proposed order. Further, where the Commissioner (Appeal s) is of opinion that any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, no order requiring the appe llant to pay any duty not levied or paid, short-levied or short-paid or erroneou sly refunded shall be passed unless the appellant is given notice within the tim e-limit specified in section 11A to show cause against the proposed order. The o rder of the Commissioner (Appeals) disposing of the appeal shall be in writing a nd shall state the points for determination, the decision thereon and the reason s for the decision. The Commissioner (Appeals) shall, where it is possible to do so, hear and decide every appeal within a period of six months from the date on which it is filed. On the disposal of the appeal, the Commissioner (Appeals) sh all communicate the order passed by him to the appellant, the adjudicating autho rity, the Chief Commissioner of Central Excise and the Commissioner of Central E xcise. 10.4 PRODUCTION OF ADDITIONAL EVIDENCE BEFORE COMMISSIONER (APPEALS) As p er Rule 5 of the Appeal Rules, the appellant shall not be entitled to produce be fore the Commissioner (Appeals) any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before t he adjudicating authority except in the following circumstances, namely : (a) Wh ere the adjudicating authority has refused to admit evidence which ought to have been admitted; or (b) Where the appellant was prevented by sufficient cause fro m producing the evidence which was called upon to produce by the adjudicating au thority; or (c) Where the appellant was prevented by sufficient cause from produ cing before the adjudicating authority any evidence which is relevant to any gro und of appeal; or (d) Where the adjudicating authority has made the order appeal ed against without giving sufficient opportunity to the appellant to adduce evid ence relevant to any ground of appeal.

Appeals 10.5 No additional evidence shall be admitted as said above unless the Commissioner ( Appeals) records in writing the reasons for its admission. The Commissioner(Appe als) shall not take any additional evidence unless the adjudicating authority or an officer authorized in this behalf by the said authority has been allowed a r easonable opportunity (a) to examine the evidence or document or to cross-examin e any witness produced by the appellant, or (b) to produce any evidence or any w itness in rebuttal of the additional evidence produced by the appellant under su b-rule (1). It is also important to note that the power of the Commissioner(Appe als) to direct the production of any document, or the examination of any witness , to enable him to dispose of the appeal is independent of the above provisions relating to additional evidence and his powers will be not affected by the said provisions. 10.5 APPEALS TO APPELLATE TRIBUNAL 10.5.1 CESTAT : In response to th e long outstanding demand of trade and industry for establishing an independent machinery to redress the grievances of the Excise and Customs assesses, the Cent ral Government set up the Customs, Excise and Gold Control Appellate Tribunal (C EGAT) in the year 1982 to hear and dispose of appeals in Central Excise, Customs and Gold Control matters. The Tribunal has been renamed as Central Excise Custo ms and Service Tax Appellate Tribunal (CESTAT). The Benches of the Tribunal are composed of Judicial and Technical Members. Single member Bench has the jurisdic tion to hear appeals involving an amount of duty, fine or penalty not exceeding Rs.50,000/-. As per Rule 6, of Appeal Rules, an appeal under sub-section (1) of section 35B to the Appellate Tribunal shall be made in Form No.E.A.3 and the fol lowing shall be observed: 1. Where an appeal under sub-section (1) of section 35 B or a memorandum of crossobjections (under sub-section (4) of that section) is made by any person other than the Commissioner of Central Excise, the grounds of appeal, the grounds of crossobjections and the forms of verification as contain ed in Form Nos.E.A.3 and E.A.-4, as the case may be respectively shall be signed by the persons listed above in case of appeal to Commissioner (Appeals). A memo randum of cross objections to the Appellate Tribunal shall be made in Form No.E. A.4. The form of appeal in Form No.E.A.-3 and the form of memorandum of crossobj ections in Form No.E.A.-4 shall be filed in quadruplicate and accompanied by an equal number of copies of the order appealed against (one of which at least shal l be a certified copy ). 2. 3.

10.6 Central Excise 10.5.2 Form of application to Appellate Tribunal : As per Rule 7, of the Appeal Rules an application under sub-section (1) of section 35E (to be made by the Boa rd on its own motion to the Appellate Tribunal) shall be made in Form No.E.A.5. The form of application in Form No.E.A.-5 shall be filed in quadruplicate and ac companied by an equal number of copies of the decision or order passed by the Co mmissioner of Central Excise (one of which at least shall be a certified copy) a nd a copy of the order passed by the Board directing such Commissioner to apply to the Appellate Tribunal. 10.5.3 Appeal to Appellate Tribunal against order of Commissioner (Appeals) : Section 35B contains the provisions in respect of appea ls to the Appellate Tribunal. The provisions are summarized as under: (1) Any pe rson aggrieved by any of the following orders may appeal to the Appellate Tribun al against such order (a) a decision or order passed by the Commissioner of Cent ral Excise as an adjudicating authority; (b) an order passed by the Commissioner (Appeals) under section 35A; However, no appeal shall lie to the Appellate Trib unal and the Appellate Tribunal shall not have jurisdiction to decide any appeal in respect of any order referred to in clause (b) if such order relates to, (a) a case of loss of goods, where the loss occurs in transit from a factory to a w arehouse or to another factory, or from one warehouse to another, or during the course of processing of the goods in a warehouse or in storage, whether in a fac tory or in a warehouse; (b) a rebate of duty of excise on goods exported to any country or territory outside India or on excisable materials used in the manufac ture of goods which are exported to any country or territory outside India; (c) goods exported outside India (except to Nepal or Bhutan) without payment of duty ; (d) credit of any duty allowed to be utilized towards payment of excise duty o n final products under the provisions of Central Excise Act or the rules made th ereunder. The Appellate Tribunal may, in its discretion, refuse to admit an appe al in respect of an order passed by the Commissioner (Appeals) under section 35A where (i) in any disputed case, (other than a case relating to the determinatio n of rate of duty or valuation of goods) the difference in duty involved or the duty involved; or (ii) the amount of fine or penalty determined by such order, does not exceed Rs. 50,000.

Appeals 10.7 The Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 may by notification in the Official Gazette, constitute such C ommittees as may be necessary for the purposes of the Act. Every Committee so co nstituted shall consist of two Chief Commissioners of Central Excise or two Comm issioners of Central Excise, as the case may be. (2) A Committee of Commissioner s may, if it is of the opinion that an order passed by the Commissioner (Appeals ) under section 35A is not legal or proper, direct any Central Excise Officer au thorized by him in this behalf to appeal on its behalf to the Appellate Tribunal against such order. (3) Every appeal under this section shall be filed within t hree months from the date on which the order sought to be appealed against is co mmunicated to the Commissioner of Central Excise, or, as the case may be, the ot her party preferring the appeal. (4) On receipt of notice that an appeal has bee n preferred under this section, the party against whom the appeal has been prefe rred may, notwithstanding that he may not have appealed against such order or an y part thereof, file, within forty-five days of the receipt of the notice, a mem orandum of cross-objections verified in the prescribed manner against any part o f the order appealed against and such memorandum shall be disposed of by the App ellate Tribunal as if it were an appeal presented within the time specified in s ub-section (3). (5) The Appellate Tribunal may admit an appeal or permit the fil ing of a memorandum of cross-objections after the expiry of the relevant period referred to in sub-section (3) or sub-section (4), if it is satisfied that there was sufficient cause for not presenting it within that period. (6) An appeal to the Appellate Tribunal shall be in the prescribed form and shall be verified in the prescribed manner and shall, irrespective of the date of demand of duty and interest or of levy of penalty in relation to which the appeal is made, be acco mpanied by a specified amount of fee. The fee payable in different cases has bee n tabulated as under: Amount of duty, interest demanded and penalty levied Less than or equal to Rs. 5,00,000 More than Rs.5,00,000 but not exceeding Rs.50,00,0 00 More than Rs.50,00,000 Fee for filing an appeal Rs. 1,000.00 Rs. 5,000.00 Rs. 10,000.00 However, no such fee shall be payable in the case of an appeal preferred by Comm issioner of Central Excise. Also, no fee shall be payable in the case of filing of a memorandum of crossobjections. Further, a fee of Rs.500 shall be paid for e very application made before the Appellate Tribunal. The application can be an a ppeal for grant of stay or for rectification of mistake or for any other purpose ; or for restoration of an appeal or an application. However, no such fee

10.8 Central Excise shall be payable in the case of an application filed by or on behalf of the Comm issioner of Central Excise. Under Section 35C of the Central Excise Act, the App ellate Tribunal may, after giving the parties to the appeal an opportunity of be ing heard, pass such orders thereon as it thinks fit, confirming, modifying or a nnulling the decision or order appealed against. The Tribunal may even refer the case back to adjudicating authority for fresh adjudication. CESTAT may, if suff icient cause is shown, at any stage of proceeding, grant time, from time to time , to the parties and adjourn the hearing for reasons to be recorded in writing. However, such adjournment shall not be granted for more than three times to a pa rty during the proceeding. Under Section 35C (2) the Appellate Tribunal may, at any time within six months form the date of order, with a view to rectifying any mistake apparent from the record, amend any order passed by it and the Tribunal shall make such amendments if the mistake is brought to its notice by either of the party to the Appeal. Every appeal shall be decided by the Appellate Tribuna l within a period of three years from the date on which such appeal is filed, if it is possible to do so. Further where a order of stay is made in the proceedin gs of a appeal, the Appellate Tribunal is required to dispose of the appeal with in 180 days from the date of such order of stay. However, if such appeal is not disposed within the above specified period, the stay order shall stand vacated o n the expiry of the period of 180 days. The orders passed by the Appellate Tribu nal are final unless an appeal is made to the High Court or the Supreme Court un der section 35G or 35L respectively, up to the date when the NTT is constituted. Thereafter, the orders passed by the Appellate Tribunal shall be final unless a n appeal is made to the NTT under section 15 of the NTT Act. 10.6 STAY OF DEMAND /ORDER [SECTION 35F] Section 35F which is applicable to all appeals whether to C ommissioner Appeals of the Appellate Tribunal specifies that the duty amount wil l have to be paid unless stayed. The procedure for this purpose is set out hereu nder: 1. For an application to the Commissioner (Appeals), there is no prescribe d form under section 35F. In the EA1 memorandum, the fact that a stay applicatio n is made must be mentioned. Stay application is necessary only when a duty is d emanded. Therefore, appeal pertaining to refund cases and classification orders (not quantifying demand) need not be accompanied by stay applications. The appli cation for stay / waiver before the Commissioner (Appeals) should be in duplicat e. It should be typed in double space and on one side of foolscap size paper. Th e applicant should show that the pre-deposit would cause undue hardship to him. For this purpose, the application should set out the merits of the case as well as financial hardship being faced by the assessee. It is advisable to file copie s of profit 2. 3.

Appeals 10.9 and loss account, balance-sheet and other documentary evidence may be furnished to establish financial hardship. To establish merits, the applicant must give a gist of the case laws supporting his stand. 4. The applicant can also state whet her he is prepared to offer any security. The exact amount sought to be stayed s hould be stated clearly and concisely in the prayer of the application. The appl ication for stay/waiver should be filed along with the appeal in form EA-1. 5. 10.7 LEGAL DECISIONS RELATING TO STAY APPLICATIONS PARTICULARS 1. Relevant consi derations for deciding stay applications are (a) hardship likely to caused to ap pellant and their business (b) whether in the event of dismissal of appeal, suff icient assets will be available for recovery (c) interests of revenue. 2. Appell ant should show prima facie case. Prima facie case does not mean that it should be a case bound to succeed but one which is arguable and fit for consideration. 3. Asking for pre-deposit where the appellant has prima facie case amounts to un due hardship. CITATION Triton Valves Ltd. v. CEGAT 1995 (77) E.L.T. 829 (Mad). Ruby Rubber Industries v. CCE 1998 (104) E.L.T. 330 (Cal). Ruby Rubber Industries v. CCE 1998 (104) E.L.T. 330 (Cal); Sri Krishna v. UOI 19 98 (104) E.L.T. 325 (Del); Hooghly Mills Co. Ltd. v. UOI 1999 (108) E.L.T. 637 ( Cal). UOI v. Jesus Sales Corporation 1996 (83) E.L.T. 486 (SC). Sangfroid Remedi es Ltd. v. UOI 1998 (103) E.L.T. 5 (SC) CCE v. Coronation Litho Works 1994 (69) E.L.T. 238 (Mad) 4. Personal hearing not mandatory for deciding stay applications but can be gran ted if the authority deems it fit. 5. Pre-deposit not required if company is sic k industry declared by BIFR. 6. Predeposit figure normally not to exceed profits of the company. Appellate authority not to take into account amount set apart f or depreciation or amount due from sundry debtors. 7. Pre-deposit in RG23 A Part II also possible. 8. Conflicting decisions of Courts sufficient for granting fu ll stay . India Casting Company v. CEGAT 1998 (104) E.L.T. 17 (All). Partap Steel Rolling Mills Ltd. v. CEGAT 1993 (67) E.L.T. 216 (MP)

10.10 Central Excise 10.8 REVISION APPLICATION Sections 35E and 35EE of Central Excise Act provide for review of an order passed by the adjudicating authorities . Section 35E gives powers to Committee of Chief Commissioners of Central Excise or Commissioner of Central Excise to pass certain orders. The Committee of Chie f Commissioners of Central Excise may of its own motion, call for and examine th e record of any proceeding in which a Commissioner of Central Excise has passed any order so as to satisfy itself upon the legality or propriety of the order. T hereafter, the Committee of Chief Commissioners may direct such Commissioner or any other Commissioner to apply to the Appellate Tribunal to determine such poin ts as may be specified by it. Similar powers are also given to the Commissioner of Central Excise in respect of decisions taken by the adjudicating officers sub ordinate to him. In this case, the application is to be made to the Commissioner (Appeals). The above orders must be issued within 6 months but not beyond a per iod of one year from the date of the order/decisions of the adjudicating officer . Section 35EE gives the power of revision to the Central Government in the foll owing cases: (a) loss of goods in transit from factory to warehouse or from ware house to warehouse; (b) rebate of duty of excise of goods exported; (c) goods ex ported outside India (except Nepal and Bhutan) without payment of duty; (d) proc essing loss; (e) Cenvat credit. As per Rule 9 & 10 of the Appeal Rules, the revi sion application under section 35EE shall be in Form E.A.-8 & presented in perso n to the Under-Secretary Revision Application Unit, Government of India, Ministr y of Finance, Department of Revenue, New Delhi or sent by registered post addres sed to such officer. 1. The revision application sent by registered post shall b e deemed to have been submitted to the said Under Secretary on the date on which it is received in the office of such officer. The grounds of revision applicati on and the form of verification as contained in Form EA-8 shall be signed by the person specified in sub-rule (2) of Rule 3. The application shall be filed in d uplicate & shall be accompanied by two copies of following documents, i.e. i. ii . Order referred to in 1st proviso to section 35B(1) Decision or order passed by Central Excise Officer which was the subject matter of the order referred to in Rule 9(4)(i) 2. 3.

Appeals 10.11 10.9 APPEAL TO HIGH COURT [SECTION 35G] An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal on or af ter the 1st day of July, 2003 (not being an order relating, among other things, to the determination of any question having a relation to the rate of duty of ex cise or to the value of goods for purposes of assessment), if the High Court is satisfied that the case involves a substantial question of law. The Commissioner of Central Excise or the other party aggrieved by any order passed by the Appel late Tribunal may file an appeal to the High Court and such appeal shall be(a) f iled within one hundred and eighty days from the date on which the order appeale d against is received by the Commissioner of Central Excise or the other party; (b) accompanied by a fee of two hundred rupees where such appeal is filed by the other party; (c) in the form of a memorandum of appeal precisely stating therei n the substantial question of law involved. Where the High Court is satisfied th at a substantial question of law is involved in any case, it shall formulate tha t question. The appeal shall be heard only on the question so formulated, and th e respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question. However, the Court has the power to hear, f or reasons to be recorded, the appeal on any other substantial question of law n ot formulated by it, if it is satisfied that the case involves such question. Th e High Court shall decide the question of law so formulated and deliver such jud gment thereon containing the grounds on which such decision is founded and may a ward such cost as it deems fit. The High Court may determine any issue which has not been determined by the Appellate Tribunal or has been wrongly determined by the Appellate Tribunal, by reason of a decision on a question of law. When an a ppeal has been filed before the High Court, it shall be heard by a bench of not less than two Judges of the High Court, and shall be decided in accordance with the opinion of such Judges or of the majority, if any, of such Judges. Where the re is no such majority, the Judges shall state the point of law upon which they differ and the case shall, then, be heard upon that point only by one or more of the other Judges of the High Court and such point shall be decided according to the opinion of the majority of the Judges who have heard the case including tho se who first heard it. The provisions of the Code of Civil Procedure, 1908, rela ting to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section. Note: This section shall be omitted with effect from the date when the NTT is constituted.

10.12 Central Excise 10.10 APPEAL TO SUPREME COURT [SECTION 35L] The Central Exc ise Act, 1944, provides a two tier machinery for redressal of grievances against the decision of the Appellate Tribunal. In cases where the decision of the Appe llate Tribunal relates to any question having relation with the determination of rate of duty or value of goods amongst other things, the same is directly appealabl e to the Supreme Court under section 35L of the Central Excise Act. However, whe re the order of the Appellate Tribunal does not relate to rate of duty or value of goods, first an appeal is made to the High Court and thereafter an appeal against the judgment of the High Court can be made to the Supreme Court provided the Hi gh Court certifies it to be a fit case for appeal to the Supreme Court. An appea l shall lie to the Supreme Court from (a) any judgment of the High Court deliver ed(i) in an appeal made under section 35G,or (ii) on a reference made under sect ion 35G by the Appellate Tribunal before the 1 st day of July, 2003, or (iii) on a reference made under section 35H, if the High Court certifies the case to be fit for appeal to the Supreme Court. The High Court can certify any case on its own motion or on an oral application made by or on behalf of the aggrieved party , immediately after passing of the judgement. (b) any order of the Appellate Tri bunal passed before the establishment of NTT having relation to the determinatio n of rate of duty or value of goods, among other things. After the establishment of the NTT, the appeal from any order of the Appellate Tribunal having relation to the determination of rate of duty or value of goods, among other things shal l first lie to NTT. 10.11 SUMMARY The law and procedure relating to appeal can b e summarized in the form of following table. Order passed by Appeal lies to Form to be used Section referenc e Sec. 35 1. Assistant/Deputy/ Joint/Additional Commissioner Commissioner (Appeals) Within 60 days of receipt of order EA1(assessee) EA2(Department)

Appeals 10.13 2. Commissioner/ Commissioner (Appeals) Note: If order of Commissioner (Appeals) relates to loss of goods, in transit, processing loss, rebate on exports/export s in bond without payment of duty (other than Nepal and Bhutan) and cenvat credi t revision lies to Central Government 3. Appellate Tribunal (not involving rate of duty or valuation) 4. Appellate Tribunal (relating to rate of duty/valuation) Appellate Tribunal (within 3 months from receipt of order) EA3 Cross objections to EA3 to be filed in EA4 by opposing party EA5 for applicat ion by Department Sec. 35B High Court Within 180 days of receipt of order Supreme Court Within 60 days of r eceipt of order Government of India (Revisionary Authority) Within 3 months of r eceipt of order EA6 (Appellant) EA7 (cross objections) No specified form Sec. 35H Sec. 35L 5. Commissioner (Appeals) relating to loss of goods, in transit, processing loss , rebate on exports/exports in bond without payment of duty (other than Nepal an d Bhutan) and cenvat credit. EA 8 Sec. 35EE Note: National Tax Tribunal means the National Tax Tribunal established under se ction 3 of the National Tax Tribunal Act, 2005. The National Tax Tribunal Act, 2 005 has been enacted by the Parliament in pursuance of Article 323B of the Const itution. It came into force with effect from December 28th, 2005. The notified d ate of establishment of the National Tax Tribunal (NTT) by the Central Governmen t is 6 th January, 2006. The objective behind the enactment of the National Tax Tribunal Act is to modify the present system of appeals under the Central Excise Act by substituting the National Tax Tribunal for the High Court, for facilitat ing quick adjudication of disputes under direct and indirect tax laws and achiev e uniformity in the interpretation of central legislation. This Act provides tha t on establishment of the National Tax Tribunal, High Court will not have appell ate jurisdiction in matters of direct and indirect taxes. This Act vests jurisdi ction in

10.14 Central Excise NTT to decide direct and indirect tax disputes on appeal fr om the decision of the respective Appellate Tribunals. Appeal to NTT can be file d both by the assessee and the revenue, from order passed by the CESTAT, on a su bstantial question of law. Appeal to NTT will lie only if the NTT is satisfied t hat the case involves a substantial question of law. The NTT shall formulate the substantial question of law for the purpose of hearing of appeal by it. A party to an appeal, other than the Government, may either appear in person or authori ze one or more chartered accountants or legal practitioners or any person duly a uthorized by him or it to present the case before the NTT. The Government may au thorize one or more legal practitioners or any of its officers to present its ca se before the NTT. It may be noted that the Act does not permit chartered accoun tants to present the case of the Government before the NTT. The Act provides tha t any person, including any department of the Government, aggrieved by any decis ion or order of NTT may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the NTT to him. The Suprem e Court can allow filing of the appeal beyond 60 days, if the appellant was prev ented by sufficient cause from filing the appeal within the said period of 60 da ys. The Bombay High Court in P.C. Joshi vs. Union of India (2006) 152 Taxman 285 has passed an ad-interim order restraining the Government from constituting the NTT and transferring the matters pending in the High Court to the NTT. Therefor e, the constitution of the NTT will take effect only after the stay is vacated. Self-examination questions 1. 2. 3. 4. 5. What are the matters on which appeal d oes not lie with CEGAT? redressal lie in such cases? Where does Discuss the revisionary powers of the Central Excise Authorities under section 3 5E and section 35EE of the Central Excise Act, 1944. Who can sign the grounds of appeal and the form of verification as contained in Form No. E.A. 1? What are th e orders that are appelable to the Supreme Court? Write a note on production of additional evidence before Commissioner (Appeals).

11 REMISSION OF DUTY AND DESTRUCTION OF GOODS 11.1 STATUTORY PROVISIONS Rule 21 of the Central Excise Rules, 2002 provides for remission of duty in certain situations. Where it is shown to the satisfaction of the Central Excise Officers specified in the Table below that goods have been lost or destroyed by natural causes or by unavoidable accident or are claimed b y the manufacturer as unfit for consumption or for marketing, at any time before removal, he may remit the duty payable on such goods as specified in the corres ponding entry in the said Table, subject to such conditions as may be imposed by him by order in writing. The competence to supervise destruction of excisable g oods claimed by the manufacturer as unfit for consumption or for marketing, at a ny time before removal has also been specified in column 4 of the said Table. De struction shall be carried on only after the competent officers have passed the order for remission. Competent Central Excise Officer Amount of empowered to rem itted duty be Monetary limit to supervise destruction 1. Commissioner Without limit, but normally any amount exceeding Rs. 5,000 Rs. 2,500 to Rs. 5,00 0 Not required 2. Additional/Joint Commissioner Deputy/Assistant Commissioner Not required 3. Rs. 1,000 to Rs. 2,500 Exceeding Rs. 20,000

11.2 Central Excise 4. Superintendent Below Rs. 1,000 Rs. 5,000 but not exceeding Rs. 20,000 Below Rs. 5,000 5. Inspector None The proper officer may not demand duty (remit duty) due on any excisable goods, including tea, claimed by the manufacturer as unfit for consumption or marketing p rovided the goods are destroyed irrecoverably under the supervision of the prope r officer, and subject to the procedure, specified hereinafter. 11.2 PROCEDURE F OR DESTRUCTION OF GOODS AND REMISSION OF DUTY The procedure to be followed for d estruction of goods and remission of duty thereon shall be, as follows: (i) A ma nufacturer desiring to destroy and seek remission of duty in respect of the exci sable goods manufactured in his factory on the grounds that the said goods have been rendered unfit for consumption or for marketing, will make an application i n duplicate to the Range Officer indicating complete details of the goods and re asons for destruction, along with the proof that the goods have become unfit for consumption or for marketing such as report of chemical test or any other test, conducted by a Government recognised laboratory. (ii) The application will be quickly processed by the Range Officer. In case the Range Officer is competent to allow destruction and remission (in terms of para 2.2 above) he will proceed to take necessary action at his level. In case the m atter falls within the competency of superior officer, he will forward the appli cation along with his recommendation to the Deputy/Assistant Commissioner within 15 days of receipt. (iii) The Deputy/Assistant Commissioner will scrutinise the application and based upon the information given by the assessee, if found in o rder, allow destruction of goods and remission of duty, if the case relates to h is competency. Otherwise, he will forward the application with his remarks to th e superior authority competent to give permission for destruction and remission (Additional/Joint Commissioner or Commissioner, as the case may be) within 3 day s. (iv) Where only physical verification is required, the same may be conducted by the remission granting authority (proper officer), as specified above and upo n his satisfaction, destruction of goods and remission of duty may be allowed. ( v) In case of any doubts, the competent authority may, for reasons to be recorde d in

Remission of Duty and Destruction of Goods 11.3 writing, order for drawing of samples and its testing by the Central Revenue Con trol Laboratory or the Customs House Laboratories or any other Government recogn ised laboratories where the aforementioned laboratories cannot test the samples. The testing of samples will be done in the manner specified in the Basic Excise Manual as modified by the instructions issued, if any, by the Board in this reg ard. (vi) Ordinarily the views of the assessees that the goods are rendered unfi t for consumption or marketing, should be accepted and necessary permission shou ld be granted within a period of 21 days or earlier, if possible. Where samples are drawn, such permission should be granted within 45 days. (vii) Actual destru ction of goods should be supervised by the officers according to the monetary li mits specified in column (4) of the Table in para 11.1 above. The date and time for destruction should be fixed by mutual convenience of the proper officer and the assessee and it should be ensured that the same date and time are not fixed for more than one assessee. It should also be ensured that there is no inordinat e delay once permission for destruction and remission is granted. (viii) In case of frequent requests for destruction of goods by an assessee, necessary enquiri es into the cause thereof should be conducted before according permission for de struction of goods. (ix) The proper officer personally supervising the destructi on will check the quantity by physical verification i.e. by weight or by countin g or using appropriate method in case of liquid, as the case may be, and the ide ntity of goods by reference to relevant records and the application for destruct ion. The clearance of goods, within or outside the factory premises, shall be do ne on an invoice, indicating nil duty. The order of the proper officer permitting destruction and remission, should be quoted on the invoice. (x) As far as possib le, destruction should be made inside the factory. 11.3 MANNER OF DESTRUCTION Th e goods intended and presented before the proper officer for destruction must be destroyed in such a manner that they become irretrievable as excisable commodit y. The actual method of destruction will depend upon the nature of the goods to be destroyed. For example, matches, cotton, rayon and woollen fabrics, paper, ci gar and cheroots may be destroyed by fire. Electric bulb and batteries may be de stroyed by crushing into bits and scraps. Vegetable oils and vegetables products may be destroyed by mixing earth or kerosene and dumping into pits. Whatever me thod of destruction is adopted, the officer

11.4 Central Excise supervising the destruction will satisfy himself that the destroyed goods cannot be marketed. If there is any doubt with regard to the suitability of any partic ular method for destruction of any goods, the officer destroying the goods will refer the matter to his superior officer for orders. The officer supervising the destruction must endorse under his signature the relevant records/ documents su ch as AR-1, invoices, RG-1, EB-4, RG23A, RG23C(presently no such prescribed reco rds are to be maintained by the assessees) or other relevant factory records ind icating the description and quantity of the goods destroyed in his presence at w hich time and on which day. Immediately after destruction of the goods is comple ted, the officer supervising destruction must also send a certificate to his imm ediate superior, countersigned by the factory manager and the factory officer in the prescribed form. Where excisable goods are manufactured out of inputs goods on which Cenvat credit was availed, proportionate credit should be reversed bef ore destruction of such goods. There will be no limit on the executive powers of the Commissioners to order remission of duty in such cases. However, it has bee n decided that as a measure of administrative control and information, where the duty amount exceeds Rs.5 lakhs in a case, the Commissioners will send a report to the Board giving sufficient details of such cases. No remission of duty in ca se of theft should be allowed, since the goods are available for consumption som ewhere. This Boards instruction is contrary to case laws decided. 11.4 CASE LAWS PERTAINING TO REMISSION OF DUTY Particulars 1. Theft of goods is loss due to unavoidable accident. Hence, remiss ion of duty is allowable. Citation CitCitation CCE v. GTC Industries Ltd. 1994 (71) E.L.T. 806 (T). See co ntrary decision in CCE v. International Woollen Mills 1987 (28) E.L.T. 310 (T). Authors note: Theft is an unavoidable accident. In Sialkot Industrial Corporatio n v. UOI 1979 (4) E.L.T. J329, the Delhi High Court held in the context of Sec.2 3 of

Remission of Duty and Destruction of Goods 11.5 Customs Act, that the term lost or destroyed postulates theft, fire, accident in cluding pilferage. Though the excise rules use loss by unavoidable accident or n atural causes, we feel that a narrow interpretation should not be given. 2. Loss of mollasses due to rain not a loss due to natural cause. No remission grantabl e. (The latest decisions do not conform to this view) CCE v. Dhampur Sugar Mills 1993 (66) E.L.T. 416 (T). See contrary decision in Saroj Sahakar Chini Mills Lt d. v. CCE 1995 (75) E.L.T. 336 (T) Author s note: It is strange that everywhere rain and floods are held to be natural causes but this is not recognised by this decision. 3. Loss of molasses due to auto combustion is an unavoidable accident and remission is admissible. 4. Remission of duty should be granted even if it could be argued that the loss could have been prevented. 5. Under second proviso , once the goods are ordered for destruction, duty will be extinguished on goods claimed as unfit for marketing or consumption. 6. Though second proviso uses th e word may duty cannot be demanded when there is no allegation that the goods are marketable/fit for consumption. 7. Remission of duty is grantable though the ass essee has received compensation for fire accident. Shankar Sugar Mills v. CCE 19 94 (71) E.L.T. 753 (T) Purna Sahakari Sakhar Kharkhana Ltd. vs CCE 1998 (100) E.L.T. 513 (T) Yashwant SSK Ltd. v. CCE 1990 (49) E.L.T. 534 (T) Godavari Sugar Mills Ltd. v. CCE 1992 (57) E.T.L. 159 (T) Sarada Plywood Industries Ltd. v. CCE 1987 (32) E.L.T. 116 (T)

11.6 Central Excise 8. Remission of duty is permitted when the assessee has taken steps to prevent t he combustion of molasses in the tank including the spraying of water on the tan k. Self-examination questions 1. 2. 3. Balarmpur Chini Mills Ltd. v. CCE 2000 (120) E.L.T. 184 (T) Discuss the provisions in respect of remission of duty. Explain the procedure fo r destruction of goods and remission of duty. Briefly outline the manner of dest ruction of goods.

12 WAREHOUSING 12.1 STATUTORY PROVISIONS Rule 20 of the Central Excise Rules 2002, contains pro visions relating to warehousing. Under Rule 20(1), the Central Government is aut horised to extend the warehousing provisions by issue of notifications. Warehous ing allows removal of goods from factory to warehouse or from one warehouse to a nother warehouse without payment of duty. Under Rule 20(2) the Board is authoris ed to prescribe the conditions, limitations and safeguards subject to which this procedure would operate. Rule 20(3) fixes the responsibility of payment of duty on goods removed from factory to warehouse or one warehouse to another on the c onsignee. However, if the goods despatched are not received in the warehouse, th e liability will be on the consignor. The procedure for warehousing and export w arehousing is given by the Board in its guidelines issued in the form of Central Excise Manual issued on 1 st September, 2001, the salient features of which are set out below. 1. Facility of warehousing of excisable goods without payment of duty has been provided in respect of the specified commodities by Notification No.17/2004 CE(NT) dated 4 th September, 2004. The Central Board of Excise and Cu stoms has also specified detailed procedure including the conditions, limitation s and safeguards for removal of excisable goods from warehouse. Any goods wareho used may be left in the warehouse in which they are deposited, or in any warehou se to which such goods have been removed, till the expiry of three years from th e date on which such goods were first warehoused. 2. 12.2 PLACE OF REGISTRATION OF WAREHOUSE The Commissioner of Central Excise will specify the places under his jurisdiction where

12.2 Central Excise warehouse can be registered, by issuing Trade Notice. Any person desiring to hav e warehouse will get himself registered under the provisions of Rule 9 of the sa id Rules. 12.3 PROCEDURE FOR WAREHOUSING OF EXCISABLE GOODS REMOVED FROM A FACTO RY OR A WAREHOUSE 1. The consignor (i.e. the manufacturer or the registered pers on of the warehouse) shall prepare an application for removal of goods from a fa ctory or a warehouse to another warehouse in quadruplicate in the specified Form . The consignor shall also prepare an invoice in the manner specified in Rule 11 of the said Rules in respect of the goods proposed to be removed from his facto ry or warehouse. The consignor shall send the original, duplicate and triplicate application and duplicate invoice along with the goods to the warehouse of dest ination. The consignor shall send quadruplicate copy of the application to the S uperintendentin-charge of his factory or warehouse within twenty-four hours of re moval of the consignment. On arrival of the goods at the warehouse of destinatio n, the consignee (i.e. the registered person of the warehouse who receives the e xcisable goods from the factory or a warehouse) shall, within twenty-four hours of the arrival of goods, verify the same with all the three copies of the applic ation. The consignee shall send the original application to the Superintendent-i n-charge of his warehouse, duplicate to the consignor and retain the triplicate for his record. The Superintendent-in-charge of the consignee shall countersign the application received by him and send it to the Superintendent-in-charge of t he consignor. The consignor shall retain the duplicate application duly endorsed by the consignee for his record. 2. 3. 4. 5. 6. 7. 12.4 FAILURE TO RECEIVE A WAREHOUSING CERTIFICATE The consignor should receive t he duplicate copy of the warehousing certificate, duly endorsed by the consignee , within ninety days after the removal of the goods. If the warehousing certific ate is not received within ninety days of the removal or such extended period as the Commissioner may allow, the consignor shall pay appropriate duty leviable o n such goods.

Warehousing 12.3 If the Superintendent-in-charge of the consignor of the excisable goods does not receive the original warehousing certificate, duly endorsed by the consignee an d countersigned by the Superintendent-in-charge of the consignee, within ninety days of the removal of the goods, weekly reminders must be issued by him to the Superintendent-in-charge of the consignee. If despite such reminders the origina l warehousing certificate is not received within a further period of sixty days after the expiry of the ninety days period, the Superintendent-in-charge of the consignor shall inform his Assistant Commissioner/ Deputy Commissioner who shall either secure a satisfactory proof of the goods having been duly received by th e consignee or ensure that the duty of excise due on the goods not received at d estination is recovered from the consignor. 12.5 ACCOUNTAL OF GOODS IN A WAREHOU SE The registered person of the warehouse shall maintain a register showing all entries in to and removals of the goods from his warehouse and shall indicate th e value, quantity of the goods removed, their marks and numbers as well as the r ate of duty and amount of duty involved. The processes carried out on the wareho used goods, if any, shall also be recorded. The first and last pages of the regi ster should be pre-authenticated by the owner of the warehouse or his authorised agent. 12.6 RESPONSIBILITY OF THE REGISTERED PERSON The registered person of th e warehouse shall be responsible for due reception of the goods in to the wareho use and delivery therefrom including their safety during the period they are lod ged in the warehouse. The registered person shall be responsible for the payment of penalty or interest leviable in respect of the goods which are warehoused as per the provisions of the Central Excise Act, 1944 and the rules made thereunde r. 12.7 REVOKED OR SUSPENDED REGISTRATION OF A WAREHOUSE If the registration of a warehouse is revoked or suspended, the excisable goods lodged therein shall ei ther be cleared for home consumption on payment of duty or shall be removed to a nother warehouse without payment of duty.

12.4 Central Excise 12.8 WAREHOUSE TO STORE GOODS BELONGING TO THE REGISTERED PERSON A warehouse sha ll be used solely for storing excisable goods belonging to the registered person of the warehouse alone. He shall not admit or retain in the warehouse any excis able goods on which duty has been paid. The Commissioner of Central Excise havin g jurisdiction over the warehouse may permit storage of excisable goods along wi th the excisable goods belonging to another manufacturer. The Commissioner of Ce ntral Excise having jurisdiction over the warehouse may permit the registered pe rson of the warehouse to store duty paid excisable goods or duty paid imported g oods along with non-duty paid excisable goods in the warehouse. 12.9 REGISTERED PERSONS RIGHT TO DEAL WITH THE WAREHOUSED GOODS The owner of the warehouse may so rt, separate, pack or re-pack the goods and make such alterations therein as may be necessary for the preservation, sale or disposal thereof. 12.10 EXPORT WAREH OUSING In pursuance of sub-rule (1) of rule 20 of the Central Excise Rules, 2002 (hereinafter referred to as the said Rules) the Board has issued notification no. 46/2001-Central Excise (N.T.) dated 26 th June, 2001 which has come into force on 1 st July, 2001, whereby the warehousing provisions have been extended to all excisable goods specified in the First Schedule to the Central Excise Tariff Ac t, 1985 intended for storage in a warehouse registered at such places as may be specified by the Board and export therefrom. In pursuance of the above-mentioned notification the Board has also specified by Circular No. 581/18/2001-CX dated 29 th June, 2001 the places and class of persons to whom the provisions of the n otification No.46/2001-Central Excise (N.T.) dated 26 th June, 2001 shall apply. In the same Circular, the Board has specified the conditions (including interes t), limitations, safeguards and procedures. 12.10.1 Eligibility: The facility of export warehousing is available to the following exporters and places, namely: 1. Exporters: The exporters who have been accorded status of Super Star Trading House or Star Trading House, the foreign departmental stores of repute and the a utomobiles manufacturers who have signed Memorandum of Understanding with

Warehousing Directorate General of Foreign Trade in the Ministry of Commerce and Industry. 12.5 2. Places: The warehouses may be established and registered in Ahmedabad, Bangal ore, Kolkata, Chennai, Delhi, Hyderabad, Jaipur, Kanpur, Ludhiana, District of P une and Mumbai. 12.10.2 Conditions of export warehousing: The exporter shall fur nish a general Bond (B-3) under Rule 19 of the said Rules read with notification s issued thereunder, backed by twenty five per cent security of the bond amount. Where any goods are diverted to home consumption from the warehouse, interest s hall be charged at the rate of twenty four per cent per annum on the duty payabl e, calculated from the date of clearance from the factory of production or any o ther premises approved by the Commissioner, till the date of payment of duty and clearances. 12.10.3 Registration: The exporter shall make a written request alo ng with application for registration under Rule 9 to the Commissioner for being allowed to establish a export warehouse under this provision. The Commissioner m ay cause an enquiry to be made in respect of the security of the premise for war ehouse indicated by the exporter in the application. If found in order, the Comm issioner will accord his approval subject to such directions, terms and manners as he may specify and forward the application to the jurisdictional Superintende nt of Central Excise through the jurisdictional Assistant Commissioner of Centra l Excise or Deputy Commissioner of Central Excise (having jurisdiction over the premise) within seven working days of the receipt of the application. The regist ration certificate containing registration number will be issued by the jurisdic tional Superintendent of Central Excise immediately on receipt. Procedure relati ng to registration will be same as notified in Notification No.35/2001-Central E xcise (N.T.) dated 26.6.2001. 12.10.4 Execution of bond : Every exporter registe red in the aforesaid manner, shall execute before the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise having jurisdiction over the warehouse a general bond under Rule 19 of the said Rules for export of goods from the warehouse in the B-3 Bond (General Security) Format prescribed. T he exporter availing this scheme shall be required to furnish security equal to 25% of the bond amount. In case any bank guarantees are furnished, it shall be t he sole responsibility of the exporter to renew its validity from time to time. A Running Bond Account will be opened in the format specified. This register s hall be maintained by the exporter in the warehouse and shall be made available to the officer-in-

12.6 Central Excise charge or officers of Internal Audit for scrutiny and checking. 12.10.5 Removal of goods to warehouse: For removal of excisable goods from a factory or any othe r premise approved by the Commissioner to a warehouse, procedure laid down in Ci rcular No. 579/16/2001-CX dated 26.6.2001 issued under Rule 20 of the said Rules will be applicable. It is clarified that the Notification No. 46/2001-CE(NT) da ted 26.6.2001 do not cover removal from one warehouse to another. The Central Ex cise Officer in-charge of the warehouse will issue certificate of removal in dup licate in the Form CT-2 specified indicating details of the general bond execute d by the exporter. The CT-2 shall bear pre-printed serial numbers running for th e whole financial year beginning on the 1st April of each year. The said officer will issue twenty five CT-2 certificates at a time, signing each leaf with the official stamp. More certificates can be issued if it is so requested by the exp orter on the grounds of large number of procurements. The exporter will fill up the relevant information in CT-2. After making provisional debit in the Running Bond Account, he will indicate the same in the CT-2. One copy of CT-2 will be fo rwarded to Officer-in charge of the warehouse. One copy will be sent to the cons ignor and one copy will remain with the exporter. The consignor will prepare an application for removal in the Form specified in AnnexureIV (hereinafter referre d to as ARE-3) and an invoice (under Rule 8 taking into account CT2 certificate) and follow the procedure specified in Circular No. 579/16/2001-CX dated 26.6.20 01 issued under Rule 20. The serial number of the corresponding CT-2 shall be me ntioned on the top of the each copy of ARE-3. Any nominal variations between the provisional debit indicated in the CT-2 and the actual duty involved in the goo ds removed as indicated in ARE-3, can be ignored. Immediately on receipt of good s, the provisional debit shall be converted into actual debit on the basis of th e details mentioned in ARE-3. The officer-in-charge of the warehouse will counte rsign application and despatch to the Range Office having jurisdiction over the factory / other approved premise of removal within one working day of receipt of the application. He will make suitable entry in his own record accordingly. The exporter [warehouse owner] shall maintain private record (Warehousing Register) containing information relating to details of ARE-3 and invoice, date of wareho using certificate, description of goods received including marks and numbers, qu antity, value, amount of duty, details of operation in the warehouse and new pac kages and their marks and number, clearance from the warehouse for export (ARE-1 No., Invoice No., quantity, value, duty) and clearance for home consumption. Th ey shall produce this Register to the

Warehousing Central Excise Officers in-charge of the warehouse whenever required . 12.7 12.10.6 Receipt and storage of goods in warehouse: Receipt of goods will be gove rned by the procedure specified Circular No. 579/16/2001-CX dated 26.6.2001 issu ed under rule 20. Ten percent of the consignments, subject to minimum of two, re ceived in a month will be randomly selected, spread over the entire month, for v erification by officer-in-charge after the receipt of the written intimation. Go ods brought under the cover of each ARE-3 shall be stored separately or proper a ccountal shall be maintained, till these are exported or diverted for home-consu mption. 12.10.7 Packing, re-packing, labelling or re-labelling within the wareho use: The operations of packing, re-packing, labelling or re-labelling in relatio n to excisable goods received and stored in the warehouse are be governed by the procedure specified under Rule 20. Suitable entries must be made in the ExportWarehouse register. In case of nonreconciliation of quantity, after adjusting an y wastage or refuse, the differential quantity shall be treated as unaccounted a nd action for recovery of duty will be initiated. The exporter may procure packi ng or labelling material and bring the same into the warehouse under the warehou sing procedure itself. No duty paid goods will be permitted to be brought into t he warehouse. Where the process of packing, repacking, labelling or relabelling amounts to manufacture in terms of the provisions of the Central Excise Tariff A ct, 1985, the goods permitted for clearance for home consumption shall be assess ed accordingly. 12.10.8 Goods supplied by a SSI unit exempted from registration: An SSI Unit exempted from registration under Rule 9 of the said rules will also prepare ARE-3 against CT-2 except that he will use his own invoice. Registratio n under Rule 9 shall not be insisted. The Warehousing Certificate forwarded to t he Range Office having jurisdiction over such SSI Unit shall be retained in the office and will be tallied with the details submitted by the SSI Unit in the qua rterly statement. The procedure to be followed is based on Board s Circular No. 212/46/96-CX dated 20th May, 1996, which continues to be applicable under the sa id Rules. The clearances on those ARE-3 in respect of which Warehousing Certific ate is not received within ninety days of removal or such extended period as the Commissioner may allow, will be treated as clearances for homeconsumption. If t he Warehousing Certificate is subsequently produced, the clearances, which were treated as "clearance for home consumption" as aforesaid, shall be expunged.

12.8 Central Excise 12.10.9 Clearance of goods for export outside India: For the export of goods fro m the warehouse, the procedure relating to preparation of application for export (ARE.1), examination and sealing, acceptance of proof of export etc. shall be g overned by Notification No. 42/2001-Central Excise (N.T.) dated 26.6.2001 and in structions applicable for this notification. The requisite copies of application will be filed with the Deputy Commissioner or Assistant Commissioner having jur isdiction over the warehouse and with whom the Bond was executed, for acceptance of proof of export and issue of a certificate to this effect. The credit in Run ning Bond Account shall be made by the exporter on the basis of the application (ARE.1) duly endorsed by Customs at the place of export evidencing that the good s have actually been exported. The exporter will submit list of ARE.1 along with the date of export for the goods exported in each month, within six months of t he removal from the warehouse and the original copies of the respective ARE.1 du ly certified by Customs authorities that the goods have actually been exported ( containing Pass for Shipment Order). The exporter shall be liable to pay duty wi th interest where such proof of export is not available with him within six mont hs from the date of removal from the warehouse. The Superintendent in-charge of the warehouse is empowered to issue certified attested copies of ARE.1 (more tha n one copies may be required by exporter as one application (ARE.1) may consist of goods of several ARE-3s) and hand over to the exporter for forwarding to the factory whose goods were exported so that such factories can avail other export benefits, such as refund of Cenvat credit accumulated on account of export in te rms of the Cenvat Credit Rules, 2004. This refund will be given only after goods covered on an ARE-3 is entirely exported. In case of any diversion to home-cons umption, refund will be reduced on pro-rata basis. For the sake of clarification , it is stated that the removal from the factory of production to export warehou se on ARE-3 is removal under bond for export. Thus, the manufacturer shall not be asked to reverse Cenvat Credit @ 10% of price of the said goods. On request from exporter, copies of proof of export may be sent directly, by post to the Range Office having jurisdiction over the factory or handed over to the exporter in se aled cover for delivery to such Range Office. Photocopies of the Shipping Bill/ Export Application and Bill of Lading duly attested by the Superintendent in-cha rge of the Warehouse along with certificate of proof of export should be accepte d as valid documents for the purposes of refund of accumulated credit under

Warehousing 12.9 the Cenvat Credit Rules, 2004 on account of exports without payment of duty. The proof of export received directly or in official sealed cover from the Superint endent in-charge of the warehouse may be used to verify the authenticity. Where neither the duplicate copy of ARE.1 nor the original copy of ARE-1 duly attested at the port of export, are made available within the time stipulated period of six months, it shall be presumed that export of goods cleared from warehouse has not taken place. The demand shall be raised by the Deputy/Assistant Commissione r having jurisdiction over the warehouse for non-fulfilment of the conditions of bond executed by the exporter. 12.10.10 Diversion of goods for home consumption : Goods can be diverted for homeconsumption from the warehouse with the permissi on of the jurisdictional Deputy/Assistant Commissioner of Central Excise. The cl earance shall be effected on invoice prepared under Rule 8 on payment of duty, i nterest and any other charges on TR6 Challans and after making necessary entries in the export warehouse register maintained by the exporter in the warehouse. C redit will be permitted in the Running Bond Account equivalent to the duty invol ved in the goods so diverted, which shall not exceed amount of duty debited on t he basis of ARE-3 on which such goods were received in the warehouse. If entire quantity is not diverted, calculation shall be done on pro-rata basis. Goods can be diverted for home-consumption even after the clearance from the warehouse on ARE.1. For cancellation of documents, provisions of Notification No. 46/2001-CE (NT) dated 26.6.2001 shall be followed. The intimation shall be given to Deputy/ Assistant Commissioner having jurisdiction over the warehouse. Credit in Running Bond Account will be permitted in the same manner as mentioned above. Where the goods are diverted for home-consumption in full or in part the exporter shall b e liable to pay interest @ 24% per annum on the amount of duty payable on such g oods from the date of clearance from the factory of production or any other prem ises approved, till the date of payment of duty and clearance. 12.10.11 Waiver o f physical warehousing in case of exigency: The officer- in-charge of the wareho use may permit waiver from physical warehousing (i.e. permitting export without physically storing the goods in the warehouse) where exporter so requests in wri ting provided all the formalities relating to record-keeping shall be completed in usual manner with suitable record in the Warehousing Register: warehousing w aived . This permission will be given in exceptional cases where delay occurred due to delayed supply from the factory or longer transit-period or requirement o f immediate export or any other genuine reasons, provided the entire consignment is entered for export in the original

12.10 Central Excise packing. Such cases of permission granted will be reported to Superintendent-in-charge of the warehouse at the earliest. 12.10.12 Providing of accommodation for the officer: The exporter shall provide adequate office ac commodation and furniture for the Officer deployed for examination and supervisi on, in the warehouse. Where the exporter is willing to bear the cost of the post ing of Officers on cost recovery basis, the Commissioner, depending upon the admin istrative feasibility, may consider the deployment. Self-examination questions 1 . 2. 3. 4. 5. Discuss the statutory provisions in respect of warehousing. Descri be the procedure for warehousing of excisable goods removed from a factory or a warehouse. Discuss the provisions governing packing, re-packing, labelling or re -labelling within the warehouse in respect of export warehousing. What will happ en if the consignor fails to receive the warehousing certificate within 90 days? Discuss the provisions in respect of waiver of physical warehousing in case of exigency.

13 EXEMPTION BASED ON VALUE OF CLEARANCES (SSI) 13.1 INTRODUCTION The Small Scale Units (SSI) are given certain relief under the Central Excise Law by passing exemption notifications. These exemption notifica tions are popularly called SSI exemption notification because they were original ly meant to be an incentive to SSIs. But presently, it must be noted, that any u nit can take the benefit of an exemption notification provided they satisfy the conditions therein. The exemption to SSIs started with the notification No. 175/ 86 and continued with similar notifications. Till 31.03.2005 two notifications 8 /2003 and 9/2003 dtd. 1.03.2003 were relevant for the exemption for Small Scale units. However, w.e.f. 1.04.2005 Notification No. 9/2003 dated 1.03.2003 which p rovided concessional rate of duty of 60% of the normal rate with Cenvat credit h as been rescinded vide Notification No. 11/2005 C.E., dated 1.03.2005. Further, Notification No. 8/2003 has been amended to increase the eligibility limit for g eneral SSI exemption from Rs.300 lakhs to Rs. 400 lakhs. 13.2 MEANING OF SMALL S CALE UNITS Small Scale Units are not defined in the Central Excise Act 1944 or r ules made thereunder. The Small Scale Unit is defined in Industries (Development and Regulation) Act, 1951 for the purpose of exempting them from Registration u nder that Act. The definition basically takes the investment made on the plant a nd machinery by any industries as the basis for determining the small scale indu stries. But however it would be pertinent to note that the definition given unde r the said Act is not applicable for the purpose of getting the benefit of exemp tion under Central Excise. The basis for ascertaining the Small Scale Units as g iven in the notification mentioned in the earlier paragraph is the value of the clearances made by any units in the previous financial year. Therefore the defin ition that has to be adopted for ascertaining the Small Scale Units is not as un derstood generally by the industry and other sectors like banking but has to be ascertained on the basis of the value of clearances(i.e. Rs.400 lakhs).

13.2 Central Excise 13.3 PRODUCTS COVERED UNDER THE SSI EXEMPTION NOTIFICATION The exemption to be g iven to SSIs are not applicable for all the goods. The benefit of the said notif ication is restricted to the products listed in the notification. The notificati on covers most of the products to fulfill the intention of the notification. How ever, tobacco products, pan masala, watches, matches and some textile products a re specifically excluded from SSI exemption. 13.4 ELIGIBILITY The units whose va lue of clearances computed in accordance of the notification is less than 400 la khs (4 crores) in the previous financial year are eligible for the benefit of th e notification 8/2003. For example if ABC Ltd. wants to claim the benefit of the notification in the year 2006-2007, then it has to see whether the clearances o f the year 2005-2006 has exceeded Rs. 4 crores. In the same example if ABC Ltd h as started up the business only in the year 2006-2007, then it is entitled for t he benefit of the said notification for the year 2006-2007 as its previous year clearances is nil (even with the fact that the company has not started the opera tion). The limit will be calculated by taking into account the clearances in res pect of one manufacturer from one or more factories or from a factory by one or more manufacturers. There are many issues and cases on the issue which is popula rly known as clubbing of clearances. The basic idea behind this is to curtail th e creation of dummy units for availing the benefit of the notification for each such units. Exempted units whose turnover is more than prescribed limit (called specified limit) have to file a declaration in prescribed form with Assistant Co mmissioner of Central Excise and should obtain a dated acknowledgement. Such dec laration is filed only once in the lifetime of the assessee and not every year. The specified limit for this purpose is Rs.60 lakhs below exemption limit. In pres ent provisions this limit works out to be Rs.40 lakhs (Rs.100 lakhs Rs.60 lakhs) . Therefore the declaration shall be filed by units whose turnover exceeds Rs.40 lakhs. Small units whose turnover is below the specified limit (Rs.40 lakhs) pe r annum shall not file any declaration at all. 13.5 RELAXATION IN THE DUTY The e xemption given vide notifications 8/2003 can be summarised in the following tabl e: Notification 8/2003 Value of clearances in Rs. lakhs in a financial year 0- 1 00 lakhs >100 lakhs Duty Structure 0% Normal duty

Exemption Based on Value of Clearances (SSI) 13.6 AVAILABILITY OF CENVAT CREDIT 13.3 In respect of units availing the benefits of notification 8/2003 (i.e. full exem ption) no Cenvat Credit is available in respect of inputs upto clearances of Rs. 100 lakhs. Capital goods Cenvat can be availed but utilized only after clearance s of Rs.100 lakhs. 13.7 VALUE OF CLEARANCES TO BE EXCLUDED FOR THE CALCULATION O F LIMIT OF Rs.100 LAKHS & Rs.400 LAKHS Value for the purpose of the SSI notifica tion (8/2003) would mean value fixed under section 4 or 4A or tariff value fixed under section 3(2) of the Act. For the purposes of determining the first cleara nces upto an aggregate value not exceeding 100 lakh rupees made on or after the 1st day of April in any financial year, the following clearances shall not be ta ken into account: (a) clearances, which are exempt from the whole of the excise duty leviable thereon (other than an exemption based on quantity or value of cle arances) under any other notification or on which no excise duty is payable for any other reason; (b) clearances bearing the brand name or trade name of another person, which are ineligible for the grant of this exemption; (c) clearances of the specified goods which are used as inputs for further manufacture of any spe cified goods within the factory of production of the specified goods. Here, spec ified goods are those goods, which are eligible for SSI concession; (d) clearanc es of strips of plastics used within the factory of production for weaving of fa brics or for manufacture of sacks or bags made of polymers of ethylene or propyl ene. For the purposes of determining the aggregate value of clearances of all ex cisable goods for home consumption, i.e. 400 lakhs, the following clearances sha ll not be taken into account,: (a) clearances of excisable goods without payment of duty(i) to a unit in a free trade zone; or (ii) to a unit in a special economic zone; or (iii) to a hundred percent. export -oriented undertaking; or (iv) to a unit in an Electronic Hardware Technology Pa rk or Software Technology Park; or

13.4 Central Excise (v) supplied to the United Nations or an international organizati on for their official use or supplied to projects funded by them, on which exemp tion of duty is available under Notification No.108/95- C.E., dated 28.08.1995. (b) clearances bearing the brand name or trade name of another person, which are ineligible for the grant of this exemption; (c) clearances of the specified goo ds which are used as inputs for further manufacture of any specified goods withi n the factory of production of the specified goods. Here, specified goods are th ose goods, which are eligible for SSI concession; (d) clearances of strips of pl astics used within the factory of production for weaving of fabrics or for manuf acture of sacks or bags made of polymers of ethylene or propylene. (e) clearance s which are exempt from the whole of the excise duty leviable thereon under spec ific job work notifications, viz. Notification No. 214/86-C.E., dated 25.03.1986 or No. 83/94-C.E., dated 11.04.1994 or No. 84/94-C.E., dated 11.04.1994 For com puting the turnover of Rs.100 lakhs, the clearances of goods exempted under any other notification is to be excluded. It is important to note here that while co mputing the limit of Rs.400 lakhs, turnover of goods exempted under any other no tification (except clearance to FTZ, SEZ, 100%EOU, EHTP/STP, UN etc. and specifi c job work Notifications) has to be included. 13.8 IMPORTANT CASE LAWS ON VALUE OF CLEARANCES Decision Citation 1. If manufacture of P&P medicines takes place Aldoc Pharmaceuticals v. CCE 1994 on job work basis and not as a loan licencee, (74) E.L.T. 94 (T-NRB) value of c learances of the two units would be clubbed 2. Value of captive consumption not to be CCE v. Gadgets India Ltd.. 1994 (71) included even if final products are c leared. E.L.T. 835 (T-NRB) 3. Goods initially cleared to third party who CCE v. Nirmal Electric Industries 1996 exported them. Value of such exports was held (8 8) E.L.T. 115 (T-WRB) to be includible in the value of clearances. Authors Note : There is a contrary decision in International Minelmech P Ltd. v. CCE 1983 (14) E.L.T. 2367 which is a bench consisting of three judges. Therefore, the contrar y decision should prevail. Also, CBEC Circular allow exports through Merchant ex porters.

Exemption Based on Value of Clearances (SSI) 13.5 4. Value of clearances of branded goods to be Akhil Pharma Pvt.Ltd. v. CCE 1996 excluded from value of clearances (83) E.L.T. 385 (T-SRB) 5. Value of clearances of gramophone records CCE v. Saraswathi Stores 1995 (75) manufactured by one un it not to be clubbed with E.L.T. 538 (T-NRB) the value of cassettes cleared by a nother unit. 6. Value of clearances of return of processed Sangita Printers & Ex porters v. CCE fabrics under bond to originating factory not to 1994 (73) E.L.T. 182 (T-NRB) be included in value of clearances 7. Value of clearances would be arrived at Padma Packages Ltd. v. CCE 1996 under section 4 of the Act after dedu cting (17) RLT 883 (T-NRB) excise duty from cum duty price 8. Total value of exc isable goods shall exclude Mahavir Metal Mart v. UOI 1997 (90) amounts of excise duty, sales tax and other E.L.T. 20 (SC). taxes 13.9 BRAND NAME The notificatio n denies the benefit of the exemption for clearances done on products which bear a brand name of another person. This means that such clearances would attract n ormal rate of duty. Brand name or trade name is defined in Explanation to Notifi cation as any mark, symbol, monogram, label, signature or inventor word or writi ng which may or may not be registered. This brand or trade name must indicate a connection in the trade between the goods and the person using such mark or name . The predecessor Notification 175/86 also contained similar provisions which wa s challenged under Article 14 on the ground that the classification of goods int o two categories (i) own branded goods and (ii) branded goods of another person was not reasonable. The Allahabad High Court in Machine Well Engineers v. UOI 19 94 (73) E.L.T. 19 and the Calcutta High Court in Banner & Co. v. UOI 1994 (70) E .L.T. 181 struck down the notification while the Karnataka High Court in Nectar Beverage Ltd. v. UOI 1994 (70) E.L.T. 54 (DB) and Madras High Court in Kali Aera ted Water Works v. UOI 1995 (76) E.L.T. 265 upheld the notification. The Supreme Court in UOI v. Paliwal Electricals P Ltd. 1996 (83) E.L.T. 241 upheld the vali dity of the notification. However, a perusal of the decision of the Supreme Cour ts would surprise the readers that there is no detailed discussion on most of th e above judgments.

13.6 Central Excise There are however the following exceptions given to the usage of brand name: (a) Where the manufacturer manufactures component/parts of any machinery, equipment or appliance for use as original equipment in the factory even if such componen ts have a trade name or brand name, the exemption would be available subject to provisions of Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 in respect of clearances exceeding r upees hundred lakhs. This provision is there to cater to the needs of ancillary units which manufacture components for big industrial units. Such ancillary unit s used to mark their goods with the name of the large unit and refer to a code n umber or product number. They were being denied the exemption on the ground that the code number or product number is a brand name. The Madras High Court in BHE L Ancillary Association v. CCE 1990 (49) E.L.T. 33 had held that this code numbe r or product number would not constitute a brand name. (b) When the goods bear a brand name of Khadi and Village Industries Commission or a State Khadi and Vill age Industry Board or National Small Industries Corporation or a State Small Ind ustries Development Corporation or a State Small Industrial Corporation. . (c) T he Supreme Court has held in E.L.T. 214 that in respect of manufacturers would b e called a Therefore, the monograph which brand name. Astra Pharmaceuticals P Lt d. v. CCE 1995 (75) medicinal preparations the mark made by the house mark and wou ld not be the brand name. identifies a manufacturer s name would not be a (d) In the case of CCE v. ESBI Transmission Private Ltd. 1997 (91) E.L.T. 292, t he Division Bench of the Calcutta High Court held that if the brand name belonge d to the foreign company but the Indian company was given the exclusive right to use the same being the owner through assignment, then the benefits of the notif ication cannot be denied. The Tribunal decisions have also held that assignment of brand name is valid for availing the benefit of SSI exemption in the followin g cases: (i) (iii) Opus India v. CCE 1992 (62) E.L.T. 447 (T) CCE v. Bigen Indus tries 1999 (107) E.L.T. 213 (T) (ii) Vikshara Trading and Investment P.Ltd. v. C CE 1996 (87) E.L.T. 499 (T) (e) In Namtech Systems Ltd. v. CCE 2000 (115) E.L.T. 238, the Larger Bench of the Tribunal held that when the goods are affixed with the brand name or trade name of a foreign person whether manufacturer or trader , the benefit of the exemption notification cannot be taken. It must however be noted that this decision will not apply to cases where the brand name is assigne d as the Calcutta High Court decision in (d) above holds good.

Exemption Based on Value of Clearances (SSI) (f) 13.7 Raw materials received by manufacturers which may bear a brand name are entitled to benefit of Notification, see CBEC Circular 509/5/2000-CX., dated 18-1-2000, (115) E.L.T. T 58 extracting Supreme Court order. (g) When the goods bear the brand name of any person, if such goods are manufact ured in a rural area. Rural area means the area comprised in a village as define d in the land revenue records, excluding (i) the area under any Municipal Commit tee, Municipal Corporation, Town Area Committee, Cantonment Board or Notified Ar ea Committee (ii) any area that may be notified as an urban area by the Central Government or a State Government. (h) The Larger Bench of the Tribunal in Intertec v. CCE 200 1 (127) E.L.T. 609 (T-LB) has held that if the goods manufactured by the SSI uni t fall outside paragraph 1 consequent to their being branded goods, payment of d uty on such branded goods will not disentitle the other products from getting th e benefits of the Notification. 13.10 CLUBBING OF CLEARANCES As per section 2(f) of the Central Excise Act, 1944 a manufacturer means not only a person who empl oys hired labour but also any person who engages in production or manufacture on his own account. The words on his own account has caused considerable litigation. The question regarding who is a manufacturer has been often invoked to deny the benefit of exemption notifications. The Department normally denies the benefit of the exemption notification on the ground that one manufacturer wants to split up one unit into various units to take advantage of Nil duty clearances upto Rs . 100 lakhs in respect of each unit. It is the contention of the Department that there is considerable revenue loss when the manufacturer deliberately plans his affairs in this manner while continuing to exercise managerial control over all the units. Therefore, the Department denies the benefit of the exemption notifi cation when they find common directors or common shareholders or common employee s or common usage of facilities including funds. On the other hand, judicial dec isions have always stressed the point that unless there is a flow back of profit s from all the other units to the parent unit in whose hands the turnover of all the units is clubbed, clubbing clearances would not be possible. Therefore, it would be imperative for the Department to prove that the other units are sham un its and that there is a profit flow back to the manufacturer who has set up the various units. In fact, the Supreme Court in Calcutta Chromotype Ltd. v. CCE 199 8 (99) E.L.T. 202 held that the principle that a company is a separate entity is not of universal application and in fit circumstances, the veil of incorporatio n can be lifted to see who is behind the actual

13.8 Central Excise operations. Though this decision pertains to who is a related person under secti on 4, the principles enunciated could well be applied here also. A perusal of th e case laws available on the subject clearly shows that the Tribunal has been re luctant to accept departmental view unless there is a profit flow back or common funding. However, no other generalisation can be made since each matter is to b e decided based on the facts of the case. 13.11 CASE LAWS RELATING TO CLUBBING O F CLEARANCES Particulars Citation 1. If one person owns a factory and is a AC v. Jayanthilal Balubhai & Ors. 1978 (2) partner in another factory, the production of E.L.T. J317(SC) all factories cannot be clubbed. 2. Factors such as common location of factories, common expen ses, common partners, common trade mark, sharing of machinery usage, mutual fina ncial transaction without interest not enough to club clearances. Jagjivandas & Co. v. CCE 1985 (19) E.L.T. 441 (T) affirmed by Supreme Court in 1989 (44) E.L.T . A24. Authors note: This is a landmark judgment often used by assessees. 3. Turnover of limited companies being Spring Fresh Drinks v. CCE 1991 (54) inde pendent not clubbable in the absence of E.L.T. 333 (T) financial flowback. 4. Co mmon employees, proximity of Renu Tandon v. UOI 1993 (66) E.L.T. 375 factories, closeness of relationship are not (Raj) sufficient to club clearances in the abs ence of flow back of profits. 5. When two units are functioning in the Nikhildee p Cables P. Ltd. v. CCE 1994 same Commissionerate and have been (70) E.L.T. 273 (T) granted separate registrations and facility of job work under Rule 57F, turn over not clubbable. 6. Units separately incorporated with Alpha Toyo Ltd. v. CCE 1994 (71) E.L.T. separate plant not clubbable because of few 689 (T) common dir ectors or grant of interest free loans. 7. Manufacture of same products in CCE v . MM Khambatwala 1996 (84) E.L.T. factory as well as job workers factory not 161 (SC) clubbable unless common control shown.

Exemption Based on Value of Clearances (SSI) 13.9 8. Small scale exemption Notification Mayo India Limited v. CCE, Aurangabad No.1 75/86-CE dated 1-3-1986- clubbing of 1999 (32) ELT 55 (T) clearances P&P medicin es value of medicines manufactured and cleared by job worker not to be clubbed w ith those manufactured and cleared by raw material supplier when transactions ar e on principal to principal basis. 9. Assessable value Related person Plus Cosme tics Pvt. Ltd. v. CCE 1999 (31) Section 4(4) (c ) of CEA, 1944 Mutuality of ELT 496 (T) interest factors namely (a) Common promoter and directors not considered sufficient by adjudicating authority for holding manufacturer and buyer as the related person (b) giving of unsecured loans by sole buyer, promoters, their HUF and group companies, (c) sale of acid slurry by buyer to manufacturer for whom payment was adjusted against sale price of finished goods, (d) payment of buyer direct to suppliers of goods to manufacturer,(e) providing cash by buyer to manu facturer for meeting day to day requirement (f) incurring of sale promotion expe nses by buyer (g) doing of research & development work by buyer, and (h) non-pay ment of royalty by buyer for using manufacturers brand name individually and join tly not sufficient to hold them related person as there is no share holdings by the buyer and the manufacturer in each others company and, therefore, no mutualit y of interest. 10. SSI units Registration of SSI units/ Kemtrode Pvt. Ltd. v. Jo int Director (SSI), undertakings by Director of Industries Govt. of Karnataka 19 99 (108) E.L.T. 616 Clubbing of units/ undertakings for (Kar.) computing investm ent in plant and machinery A proprietor can be common if he is the same person. Similarly , a partner can be common if two firms are constituted with similar nu mber of partners Same is

13.10 Central Excise the position of a company having common director If the num ber of partners / directors differs, then it cannot be said that the unit is set up with common partner or director. Self-examination questions 1. 2. Enumerate five instances when small scale exemption will be available to the excisable goo ds bearing the brand name of another person. Answer the following questions with reference to Notification No. 8/2003-CE dated 01.03.2003 relating to small scal e units: (i) What is the eligible turnover for claiming exemption under the said notification? (ii) How will the turnover be computed when the manufacturer has more than one factory? (iii) What does value mean for the purposes of the said not ification? (iv) Comment on the availability of CENVAT credit on capital goods un der the said notification. (v) What is the treatment in respect of clearances of excisable goods without payment of duty as specified in the said notification? 3. ABC Ltd. is a manufacturing unit situated in Kanpur. In the financial year 2006 -2007 the total value of clearances for the unit was Rs.550 lakhs. The break-up of clearances is as under: (a) Clearances worth Rs.50 lakhs without payment of d uty to a unit in special economic zone. (b) Clearances worth Rs.50 lakhs exempte d under job-work Notification No. 214/86 CE, dated 25.03.1986. (c) Export cleara nces worth Rs.100 lakhs (75 lakhs to Sweden and 25 lakhs to Nepal). (d) Clearanc es worth Rs.50 lakhs which are used captively to manufacture finished products t hat are exempt under notification other than 8/2003. (e) Clearances worth Rs.300 lakhs of excisable goods in the normal course. Briefly state whether the unit w ill be eligible to the benefits of exemption under notification 8/2003 for the y ear 2007-2008.

Exemption Based on Value of Clearances (SSI) 13.11 4. Tasty Biscuits Ltd. manufa ctures biscuits under the brand name of Tasty on its own account and under the bra nd name of Chocopie on job work basis, on behalf of M/s. Excellent Confectioners. Tasty Biscuits Ltd. has been availing the benefit of SSI exemption for the goods cleared under its own brand name. Tasty Biscuits Ltd. now files an application for availing the Cenvat benefit in respect of Chocopie brand biscuits manufactured by it on job work basis. However, the Central Excise Officer rejects the applic ation. Is the stand taken by the Central Excise Officer correct? Examine the cas e with the help of decided case laws, if any. 5. M/s. RKR manufactures footwear bearing the brand name "Lotus" which is owned by M/s. Lotus Industries Ltd. for manufacture of detergent powder. When the department disallowed the benefit of s mall scale exemption under Notification No. 8/2003-C.E. dated 01.03.2003 on the ground that their goods are bearing brand name of another person, M/s. R.K.R. co ntended that M/s. Lotus Industries Ltd. owns brand name Lotus only for deterge nt power and not for footwear. Decide the case with reasons and mention case law , if any. Answers 2. (i) The eligible turnover for claiming exemption under the said notification is Rs.400 lakhs. The units whose value of clearances computed in accordance with Notification No.8/2003 is less than or equal to 400 lakhs (4 crores) in the previous financial year are eligible for the benefit of exemption in the current financial year. (ii) When a manufacturer clears the goods from one or more factories, the turnov er of all the factories have to be aggregated for the purpose of claiming exempt ion under the said notification. (iii) The value for the purposes of the said no tification would mean the value fixed under section 4 or section 4A or the tarif f value fixed under section 3(2). (iv) The units availing the benefit of said no tification cannot avail CENVAT credit on inputs. However, they can avail CENVAT credit on capital goods but the same can be utilized for payment of duty on fina l products only after the turnover reaches Rs. 100 lakhs. (v) Paragraph 3A of th e said notification lays down that for computing the value of clearances of all excisable goods for home consumption (Rs.400 lakhs), the following clearances of excisable goods without payment of duty shall not be taken into account, namely(a ) to a unit in the Free Trade Zone (b) to a unit in the Special Economic Zone

13.12 Central Excise (c) to a 100% Export Oriented Undertaking (d) to a unit in the Electronic Hardware or Software Park (e) supplies to United Nations or an in ternational organization for their official use or supplied to projects funded b y them on which exemption of duty is available in terms of Notification No.108/9 5-CE dated August, 28, 1995. 3. In order to claim the benefit of SSI exemption t he total turnover of a unit must not exceed Rs.400 lakhs. While calculating turn over of Rs.400 lakhs, some of turnover of SSI is not to be considered, while som e has to be considered. This has been discussed below: (a) Clearances of excisab le goods without payment of duty to a unit in special economic zone has to be ex cluded. Therefore, Rs.50 lakhs worth clearances to a unit in special economic zo ne without payment of duty is not to be considered for computing the turnover of Rs.400 lakhs. (b) Exempted clearance under Job work notifications are not to be considered for computing the turnover of Rs.400 lakhs. Therefore, exempted clea rances worth Rs.50 lakhs under job work notification will not be considered. (c) Export turnover has to be excluded from the turnover of Rs.400 lakhs. However, export to Nepal and Bhutan cannot be excluded as it is treated as clearance for h ome consumption. Therefore, clearances worth Rs.75 lakhs exported to Sweden will not be included in computing Rs.400 lakhs while clearances worth Rs.25 lakhs exp orted to Nepal will be included in the said turnover. (d) Value of intermediate products manufactured while producing final products which are exempt under Noti fications other than 8/2003 has to be considered for calculating limit of Rs.400 lakhs. (e) Clearances of excisable goods worth Rs.300 lakhs in the normal cours e will be considered for computing the limit of Rs.400 lakhs. Therefore, the eli gible total turnover can be calculated as: Rs. 550 lakhs - (50 lakhs + 50 lakhs+ 75 lakhs) = Rs.375 lakhs. Since the eligible turnover comes out to be less than 400 lakhs, ABC Ltd. will be eligible to the SSI concession. 4. The facts of the given case are similar to those of CCEx. Ahmedabad v. Ramesh Food Products 2004 (174) ELT 310 (SC). In this case, the Supreme Court observed that the Notificat ion No.175/86-C.E., clearly demarcated the two categories of manufacturers. A cl ear-cut distinction was explicit between a manufacturer availing Modvat credit u nder Rule 57A (new Rule 3 of Cenvat Credit Rules, 2004) and

Exemption Based on Value of Clearances (SSI) 13.13 another not opting for the Mo dvat scheme. Input duty relief was given under the scheme to the manufacturers w ho had opted to operate under the scheme by applying for it in the prescribed ma nner. Ultimately, the manufacturers had the choice of choosing one of the two co ncessions, i.e. either the Modvat scheme or Notification 175/86-C.E. It was held by the Apex Court that since there was no one to one correlation between the in puts and final products under Modvat Scheme, it would not be possible to allow t he manufacturer to simultaneously avail Modvat for some products and avail full exemption for others under small-scale exemption scheme. The same analogy can be applied in the present case too. Notification No.8/2003 also differentiates bet ween manufacturer availing Cenvat credit under Rule 3 of Cenvat Credit Rules, 20 04 and the one not opting for the Cenvat scheme. Thus, here also simultaneous av ailment of Cenvat for some products and full exemption for others under the sche me of small-scale exemption shall not be permissible. Thus, the stand taken by t he Central Excise Officer is correct. 5. Notification No. 8/2003-CE dated 01.03. 2003 inter alia provides that the benefit of Small Scale Industry (SSI) exemptio n shall not apply to the goods bearing a brand name or trade name, whether regis tered or not, of another person. As per Explanation (A) to the notification, bra nd name or trade name means: a brand name or trade name, whether registered or n ot, that is to say a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods fo r the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person. Supreme Court has held in the case of CCEx, v. Bhalla Enterprises 2004 (173) E.L.T. 225 (S.C) that: (i ) clause 4 of the Notification read with Explanation (A) clearly debars those pe rsons from the benefit of the SSI exemption who use someone elses name in connect ion with their goods, either with the intention of indicating, or in a manner so as to indicate a connection between their goods and such other person; there is no requirement for the owner of the trade mark using the name or mark with refe rence to any particular goods; (ii) (iii) The object of the Notification is clearly to grant benefits only to those industries which otherwise do not have the advantage of a brand name.

13.14 Central Excise In other words, if brand name of another person is used eve n in respect of goods of other class or kind (different from the nature of the g oods of the owner of brand name), benefit of SSI exemption shall not be availabl e. In view of the aforementioned provisions, M/s RKR will not be entitled to the SSI exemption as their goods bear the brand name Lotus owned by M/s. Lotus Indust ries Ltd. The fact that M/s. RKR uses the brand name on footwear while the same is being used by M/s. Lotus Industries Ltd. on detergent powder will have no rel evance.

14 NOTIFICATIONS, DEPARTMENTAL CLARIFICATIONS AND TRADE NOTICES It can be seen from the earlier chapters that the mechanism employed by the Mini stry of Finance to effect changes in excise law and rules is through the issuanc e of Notifications. Further, the procedural requirement of the various provision s of the Central Excise Rules are laid down from time to time through issuance o f Trade Notices by the individual Commissionerates. 14.1 POWER OF THE CENTRAL GO VERNMENT TO MAKE RULES Section 37 of the Central Excise Act, empowers the Centra l Government to make rules to carry into effect the purposes of this Act. The ru les may lay down the procedures governing several specific situations. A total o f 38 different situations have been explicitly enumerated under section 37(2). S uch rules may 1. 2. provide for determining under section 4 the nearest ascertai nable equivalent of the normal price; having regard to the normal practice of th e wholesale trade, define or specify the kinds of trade discount to be excluded from the value under section 4 including the circumstances in which and the cond itions subject to which such discount is to be so excluded; provide for the asse ssment and collection of duties of excise, the authorities by whom functions und er this Act are to be discharged, the issue of notices requiring payment, the ma nner in which the duties shall be payable, and the recovery of duty not paid; pr ovide for charging or payment of interest on the differential amount of duty whi ch becomes payable or refundable upon finalisation of all or any class of provis ional assessments; 3. 4.

14.2 5. Central Excise provide for the remission of duty of excise leviable on any excis able goods, which due to any natural cause are found to be deficient in quantity , the limit or limits of percentage beyond which no such remission shall be allo wed and the different limit or limits of percentage for different varieties of t he same excisable goods or for different areas or for different seasons; prohibi t absolutely, or with such exceptions, or subject to such conditions as the Cent ral Government thinks fit, the production or manufacture, or any process of the production or manufacture, of excisable goods, or of any component parts or ingr edients or containers thereof, except on land or premises approved for the purpo se; prohibit absolutely, or with such exceptions, or subject to such conditions, as the Central Government thinks fit, the transit of excisable goods from any p art of India to any other part thereof; regulate the removal of excisable goods from the place where produced, stored or manufactured or subjected to any proces s of production or manufacture and their transport to or from the premises of a registered person, or a bonded warehouse, or to a market; regulate the productio n or manufacture, or any process of the production or manufacture, the possessio n, storage and sale of salt and so far as such regulation is essential for the p roper levy and collection of the duties imposed by this Act, or of any other exc isable goods, or of any component parts or ingredients or containers thereof; 6. 7. 8. 9. 10. provide for the employment of officers of the Government to supervise the ca rrying out of any rules made under this Act; 11. require a manufacturer or the l icensee of a warehouse to provide accommodation within the precincts of his fact ory or warehouse for officers employed to supervise the carrying out of regulati ons made under this Act and prescribe the scale of such accommodation; 12. provi de for the appointment, licensing, management and supervision of bonded warehous es and the procedure to be followed in entering goods into and clearing goods fr om such warehouses; 13. provide for the distinguishing of goods which have been manufactured after registration, of materials which have been imported under lic ence, and of goods on which duty has been paid, or which are exempt from duty un der this Act; 14. impose on persons engaged in the production or manufacture, st orage or sale (whether on their own account or as brokers or commission agents) of salt, and, so far as such imposition is essential for the proper levy and col lection of the duties

Notifications, Departmental Clarifications and Trade Notices 14.3 imposed by this Act, of any other excisable goods, the duty of furnishing inform ation, keeping records and making returns, and prescribe the nature of such info rmation and the form of such records and returns, the particulars to be containe d therein, and the manner in which they shall be verified; 15. require that exci sable goods shall not be sold or offered or kept for sale in India except in pre scribed containers, bearing a banderol, stamp or label of such nature and affixe d in such manner as may be prescribed; 16. provide for the issue of registration certificates and transport permits and the fees, if any, to be charged therefor : provided that the fees for the licensing of the manufacture and refining of sa lt and saltpetre shall not exceed, in the case of each such licence, the followi ng amounts, namely: Rs. Licence to manufacture and refine saltpetre and to separa te and purify salt in the process of such manufacture and refining ... ... ... L icence to manufacture saltpetre ... ... Licence to manufacture sulphate of soda (Kharinun) by solar heat in evaporating pans ... ... Licence to manufacture sulp hate of soda (Kharinun) by artifical heat ... Licence to manufacture other salin e substances ... 50 2 10 2 2 17. provide for the detention of goods, plant, machinery or material, for the pu rpose of exacting the duty, the procedure in connection with the confiscation, o therwise than under section 10 or section 28, of goods in respect of which breac hes of the Act or rules have been committed and the disposal of goods so detaine d or confiscated; 18. authorise and regulate the inspection of factories and pro vide for the taking of samples, and for the making of tests, of any substance pr oduced therein, and for the inspection or search of any place or conveyance used for the production, storage, sale or transport of salt, and so far as such insp ection or search is essential for the proper levy and collection of the duties i mposed by this Act, of any other excisable goods; 19. authorise and regulate the composition of offences against, or liabilities incurred under this Act or the rules made thereunder;

14.4 Central Excise 20. provide for the grant of a rebate of the duty paid on goods which are export ed out of India or shipped for consumption on a voyage to any port outside India including interest thereon ; 21. provide for the credit of duty paid or deemed to have been paid on the goods used in, or in relation to, the manufacture of ex cisable goods; 22. provide for the giving of credit of sums of money with respec t to raw materials used in the manufacture of excisable goods; 23. provide for c harging and payment of interest as the case may be, on credit of duty paid or de emed to have been paid on the goods used in, or in relation to the manufacture o f excisable goods where such credit is varied subsequently; 24. exempt any goods from the whole or any part of the duty imposed by this Act; 25. provide incenti ves for increased production or manufacture of any goods by way of remission of, or any concession with respect to, duty payable under this Act; 26. define an a rea no point in which shall be more than one hundred yards from the nearest poin t of any place in which salt is stored or sold by or on behalf of the Central Go vernment, or of any factory in which saltpetre is manufactured or refined, and r egulate the possession, storage and sale of salt within such area; 27. define an area round any other place in which salt is manufactured, and regulate the poss ession, storage and sale of salt within such area; 28. authorise the Central Boa rd of Excise and Customs constituted under the Central Boards of Revenue Act, 19 63 (54 of 1963) or Commissioners of Central Excise appointed for the purposes of this Act to provide by written instructions, for supplemental matters arising o ut of any rule made by the Central Government under this section; 29. provide fo r the publication, subject to such conditions as may be specified therein of nam es and other particulars of persons who have been found guilty of contravention of any of the provisions of this Act or of any rule made thereunder 30. provide for the charging of fees for the examination of excisable goods intended for exp ort out of India and for rendering any other service by a Central Excise Officer under this Act or the rules made thereunder; 31. specify the form and manner in which application for refund shall be made under section 11B; 32. provide for t he manner in which money is to be credited to the Fund; 33. provide for the mann er in which the Fund shall be utilised for the welfare of the consumers;

Notifications, Departmental Clarifications and Trade Notices 14.5 34. specify the form in which the account and records relating to the Fund shall be maintained; 35. specify the persons who shall get themselves registered unde r section 6 and the manner of their registration.; 36. provide for the lapsing o f credit of duty lying unutilised with the manufacturer of specified excisable g oods on an appointed date and also for not allowing such credit to be utilised f or payment of any kind of duty on any excisable goods on and from such date. 37. provide for credit of service tax paid or payable on taxable services used in, or in relation to, the manufacture of excisable goods. 38. provide for the amoun t to be paid for compounding of offences under section 9A. 14.2 POWER OF THE CEN TRAL GOVERNMENT TO EMPOWER CENTRAL EXCISE AUTHORITIES In addition to section 37, section 37A authorises the Central Government, by issuance of a notification, t o empower any of the excise authorities, from the Board to the Asst. Commissione r, to exercise such of those powers as may be delegated by the Central Governmen t. In other words, the Central Government has unfettered power to delegate its p owers to the authorities specified in section 37A. 14.3 EMERGENCY POWER OF THE C ENTRAL GOVERNMENT UNDER CENTRAL EXCISE TARIFF ACT, 1985 TO INCREASE THE DUTY The Tariff Act with its two schedules is an Act of Parliament and can be amended on ly by Parliament. This is usually done through the Finance Bill in the Annual Bu dget. Any increase in the duties proposed in the Finance Bill will have immediat e effect (from the midnight of the Budget Day). Any decrease will have effect on ly after the bill is enacted. However, the Government has the power to grant exe mption from the whole or part of the duty, by notification as per Section 5A of the Central Excise Act, 1944. So whenever duty is reduced in the Budget, it is n ormally given effect to by an exemption notification. Generally, the Government increases the duty only through the Finance Bill. However, as per Section 3 of t he Central Excise Tariff Act, the Government also has emergency powers to increa se the duty by amending the rates in the First and Second Schedules, subject to certain conditions. This is only an emergency power and is rarely used. Section 3 of CETA provides that:

14.6 Central Excise Where, in respect of any goods, the Central Government is satisfied that the dut y leviable thereon under section 3 of the Central Excise Act, 1944 should be inc reased and that circumstances exist which render it necessary to take immediate action, the Central Government may, by notification in the Official Gazette, dir ect an amendment of the First Schedule and the Second Schedule to be made so as to substitute for the rate of duty specified in the First Schedule and the Secon d Schedule in respect of such goods, (i) in a case where the rate of duty as spe cified in the First Schedule and the Second Schedule as in force immediately bef ore the issue of such notification is nil, a rate of duty not exceeding fifty pe r cent ad valorem expressed in any form or method; (ii) in any other case, a rate of duty which shall not be more than twice the ra te of duty specified in respect of such goods in the First Schedule and the Seco nd schedule as in force immediately before the issue of the said notification. H owever, the Central Government shall not issue any notification for substituting the rate of duty in respect of any goods as specified by an earlier notificatio n issued under these provisions by the Government before such earlier notificati on has been approved with or without modifications. Explanation. Form or method, i n relation to a rate of duty of excise, means the basis, namely, valuation, weig ht, number, length, area, volume or other measure with reference to which the du ty may be levied. Every notification under the above provisions shall be laid be fore each House of Parliament, if it is sitting, as soon as may be after the iss ue of the notification. However, if the Parliament is not sitting the notificati on shall be placed within seven days of its reassembly. The Central Government s hall seek the approval of Parliament to the notification by a resolution moved w ithin a period of fifteen days beginning with the day on which the notification is so laid before the House of the People. However, if the Parliament makes any modification in the notification or directs that the notification should cease t o have effect, the notification shall thereafter have effect only in such modifi ed form or be of no effect, as the case may be, but without prejudice to the val idity of anything previously done thereunder. It has been clarified that any not ification issued under the above provisions including any such notification appr oved or modified may be rescinded by the Central Government at

Notifications, Departmental Clarifications and Trade Notices any time by notific ation in the Official Gazette. 14.4 EXEMPTION NOTIFICATIONS IN CENTRAL EXCISE 14.7 Central excise legislation is driven by exemption notifications. Under section 5 A, the Central Government is empowered to grant exemption in public interest eit her absolutely or subject to conditions (either before or after removal) from th e whole or any part of the duty of excise payable. Notifications issued under se ction 5A(1) are not applicable to the excisable goods manufactured in FTZ/SEZ/10 0% EOU and brought to any other place in India, unless otherwise specified. This is because the goods manufactured in such units are exempted under other notifi cations issued specially for them. It is clarified that where an exemption under sub-section (1) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacturer of such e xcisable goods shall not pay the duty of excise on such goods. Sub section (2) o f section 5A states that the Central Government can exempt excisable goods from the payment of duty by a special order if it is satisfied that it is necessary i n the public interest to do so, under circumstances of an exceptional nature whi ch are to be stated in such order. Sub-section (2A) empowers the Central Governm ent, if it considers it necessary or expedient so to do, to insert an explanatio n in such notification or order, by notification in the official gazette at any time within one year of issue of the notification under Section 5A (1) or (2), f or the purpose of clarifying the scope or applicability of such notification. Th is enables the Central Government to issue clarifications retrospectively. In Ka sinka Trading v. U.O.I. 1994 (74) E.L.T. 782, the Supreme Court held that the po wer to exempt includes the power to modify or withdraw in terms of Section 21 of the General Clauses Act, 1897. It was held that even a time bound exemption not ification issued under section 5A of the Central Excise Act, 1944, or section 25 of the Customs Act, 1962 can be modified and revoked if it is in public interes t and the doctrine of Promissory Estoppel cannot be invoked since a notification cannot be said to be making a representation or a promise to a party getting be nefit thereof. Date of effect of Notification - Section 5A provides that the dat e of effect of the notification will be the date of its issue. It also provides for statutory obligation on the

14.8 Central Excise part of the Department to publish and sell the notifications to the public throu gh Directorate of Publicity and Public Relations on or before the date on which the notification will be effective. Notification to be treated as a part of the enactment itself - CCE v. Parle Exports P. Ltd. 1998 (38) ELT 741 (SC). Interpre tation given at the time of enactment or issue to be given weight - CCE v. Parle Exports P. Ltd. 1988 (38) E.L.T. 741 (S.C.) In ITC Ltd. v. CCE 1996 (86) E.L.T. 477 the Supreme Court said that non-availability of the Gazette on the date of issue of the notification will not affect the operation and enforceability of th e notification particularly when there are radio announcements and press release s explaining the changes on the very day. 14.5 EFFECT OF AMENDMENTS, ETC., OF RU LES, NOTIFICATIONS OR ORDERS [SECTION 38A] Where any rule, notification or order made or issued under this Act or any notification or order issued under such ru le, is amended, repealed, superseded or rescinded, then, unless a different inte ntion appears, such amendment, repeal, supersession or rescinding shall not (a) revive anything not in force or existing at the time at which the amendment, rep eal, supersession or rescinding takes effect; or (b) affect the previous operati on of any rule, notification or order so amended, repealed, superseded or rescin ded or anything duly done or suffered thereunder; or (c) affect any right, privi lege, obligation or liability acquired, accrued or incurred under any rule, noti fication or order so amended, repealed, superseded or rescinded; or (d) affect a ny penalty, forfeiture or punishment incurred in respect of any offence committe d under or in violation of any rule, notification or order so amended, repealed, superseded or rescinded; or (e) affect any investigation, legal proceeding or r emedy in respect of any such right, privilege, obligation, liability, penalty, f orfeiture or punishment as aforesaid, and any such investigation, legal proceedi ng or remedy may be instituted, continued or enforced and any such penalty, forf eiture or punishment may be imposed as if the rule, notification or order, as th e case may be, had not been amended, repealed, superseded or rescinded.

Notifications, Departmental Clarifications and Trade Notices 14.6 DEPARTMENTAL C IRCULARS AND TRADE NOTICES IN CENTRAL EXCISE 14.9 Departmental circulars and trade notices are a form of delegated legislation. Un der section 37B, which is titled Instructions to Central Excise Officers, the Cent ral Board of Excise and Customs (CBEC or Board), which is constituted under the Central Boards of Revenue Act, 1963, shall issue instructions to officers who ar e bound to follow them. These instructions or orders can be for the purpose of e nsuring uniformity in the classification of excisable goods or with respect to l evy of duty of excise on goods. However, such orders cannot be passed to direct any officer to dispose of a case in a particular manner or interfere with the di scretion of the Commissioner (Appeals). 14.7 BINDING NATURE OF BOARD CIRCULARS I t is well settled in law today that Board Circulars are not binding on the Supre me Court, High Court or the Tribunal. Departmental clarifications are also not b inding on the assessee. These judicial bodies as well as the assessee can take a view different from that taken in the Board Circular. Since Board Circulars are for the purpose of administration, it cannot be binding on an officer who is ex ercising quasi-judicial function as is seen from proviso to Sec. 37B as also the decision of the Supreme Court in Orient Paper Mills Ltd. v. U.O.I. 1978 (2) E.L .T. J345 (SC). However, from the recent Supreme decisions, which are emanating, it seems as if the Departmental officers cannot take a stand contrary to benefic ial Board Circulars. In Ranadey Micronutrients v. CCE 1996 (87) E.L.T. 19, the S upreme Court held that even if it be contended that a circular is not issued und er section 37B, circulars issued have to be treated as if issued under the said Section and the Department will be estopped from arguing that the circular is no t valid. The Supreme Court also held that such circulars are not advisory in cha racter but binding on central excise officers. The Supreme Court went on to add that the Department cannot take a plea that the circular is contrary to the stat ute since consistency and discipline is more important than winning or losing a case. This far reaching decision seems to suggest that in a given case even if t he Tribunal wants to take a different view from a circular, it would be difficul t for the Department to justify its stand since a beneficial Board Circular exis ts.

14.10 Central Excise 14.8 CAN DEPARTMENTAL AUTHORITIES OF ONE REGION REFUSE TO A CCEPT A CIRCULAR ISSUED BY ANOTHER REGION? It was the customary practice of the Departmental authorities of one region to contend that the circulars issued by a nother region or Commissionerate do not bind them. It is important to note that the Supreme Court has held in Steel Authority of India v. CC 2000 (115) E.L.T. 4 2 that authorities cannot take different stand in different states and that trad e notice issued by customs house will bind all customs authorities. 14.9 CAN DEP ARTMENTAL CIRCULARS BE INCONSISTENT WITH THE LAW ? In the context of section 119 of the Income Tax Act, 1961 which provides for the Board to issue circulars for the proper administration of the Act, the three member Bench of the Supreme Cou rt in UCO Bank v. CIT (1999) 237 ITR 889 has held the law as laid down in 210 IT R 129 as bad and reverted back to the old position that circulars can be issued to relax the rigor of the law and just because they do so, it should not be pres umed that they are inconsistent with the law. 14.10 CAN A BOARD CIRCULAR BE CONT RARY TO A TRIBUNAL DECISION? The Gujarat High Court has held in Raymon Glues and Chemicals v. UOI 2000 (117) E.L.T. 29 (Guj.) that the Board is not empowered to issue circulars contrary to Tribunal decisions and instead has to take up the m atter in appeal. 14.11 DATE FROM WHICH BOARD CIRCULARS ARE EFFECTIVE The Supreme Court has held in HM Bags v. CCE 1997 (94) E.L.T. 3 that Board Circulars are ef fective from the date of their issue and demands prior to such circular are not valid. Self-examination questions 1. 2. 3. 4. 5. Explain the emergency power of the Central Government under Central Excise Tariff Act, 1985 to increase the dut y. Write a note on exemption notifications in central excise. Describe the effec t of amendments, etc. of rules, notifications or orders. Can Central Government delegate its powers to the excise authorities? Discuss. Enumerate any five matte rs in respect of which the Central Government can make rules.

15 ADVANCE RULING 15.1 DEFINITIONS Chapter IIIA was inserted in the Central Excise Act, 1944 with effect from 11-5-1999. This Chapter contains section 23A to section 23H setting out the provisions on advance ruling. Finance Act 2005 has renamed Authority for Advance Rulings as Authority for Advance Rulings (Central Excise, Customs and serv ice tax). The provisions relating to advance ruling have been summarised as under : 15.1.1 Advance ruling: Under section 23A(b) advance ruling means determinatio n of question of law or fact regarding liability to duty in relation to an activ ity proposed to be undertaken. 15.1.2 (i) Applicant: Section 23A(c) defines appl icant to mean: "applicant" means (a) a non-resident setting up a joint venture in India in collaboration with a nonresident or a resident; or (b) a resident sett ing up a joint venture in India in collaboration with a non-resident; or (c) a w holly owned subsidiary Indian company, of which the holding company is a foreign company, who or which, as the case may be, proposes to undertake any business a ctivity in India; (ii) a joint venture in India; or (iii) a resident falling wit hin any such class or category of persons, as the Central Government may, by not ification in the Official Gazette, specify in this behalf, and which or who, as the case may be, makes application for advance ruling under subsection(1) of sec tion 23C.

15.2 Central Excise Non-resident is assigned the meaning as in section 2(30) of the Income-tax Act, 1961 [section 23A(f)]. The collaboration would mean either technical or financia l collaboration. 15.2 PROCEDURE FOR APPLICATION FOR ADVANCE RULING Under section 23C, advance ruling can be asked only for (a) classification of goods under the Tariff; (b) application of tariff notification issued under section 5A of the A ct; (c) Principles to be adopted for purpose of determining value of goods. (d) notifications issued, in respect of duties of excise under the Act, the Central Excise Tariff Act, 1985 and any duty chargeable under any other law for the time being in force in the same manner as duty of excise leviable under the Act. (e) admissibility of credit of excise duty paid or deemed to have been paid on t he goods used in or in relation to the manufacture of the excisable goods. (f) determinat ion of the liability to pay duties of excise on any goods under the Act. Apart from the above, no other matter can be referred for advance ruling. CBE&C has clarified vide Circular No. 779/12/2004 CX dated 11.3.2004 that determinatio n of a question as to whether a particular process amounts to manufacture is not within the scope of advance ruling. It would also be noted that as per section 23D(2), applicants (whether resident or nonresident) who apply for such facility should not have the matter pending before the Appellate Tribunal or Court or if the same is already decided by Appellate Tribunal or Court. The applicant may w ithdraw the application within 30 days from date of application. [Section 23C(4) ] An application fee of Rs. 2500/- is payable alongwith the application. Under s ection 23F, advance ruling will be void if, on a representation from Commissione r or otherwise, it can be proved that it was obtained by fraud or misrepresentat ion of facts.

Advance Ruling 15.3 As per section 23E, it is binding only on the applicant who sought it for matter s specified in section 23(C)(2) and on the Commissionerate in respect of the app licant. Change in the law or facts may however make the advance ruling obsolete. 15.3 CONSTITUTION OF AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) The Authority can formulate its own procedure. This Authority can e xamine people on oath and compel production of documents like a Civil Court unde r Code of Civil Procedure. It is a civil court for purposes of section 195 of Co de of Criminal Procedure and proceedings are deemed to be judicial proceedings u nder section 193 and 228 of the IPC. Under section 28F of the Customs Act, 1962, the authority shall consist of a Chairperson who shall be retired judge of Supr eme Court along with officer of Indian customs and excise service qualified to b e a Member of the Board and officer of Indian Legal Service qualified to be Addi tional Secretary to Government of India. As per section 28F supra, the authority shall be situated at Delhi. Under section 23D(5), the applicant can appear in p erson or through authorised representative as set out in section 35Q. 15.4 PROCE DURE TO BE FOLLOWED BY AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) ON RECEIPT OF APPLICATION [SECTION 23D] 1. 2. On receipt of applic ation for advance ruling, the Authority shall forward a copy to the relevant Com missioner. The records shall be returnable after the ruling is given. The Author ity has the sole discretion to accept or reject the application. However, a hear ing has to be given before rejection. Application is liable to be rejected in th e following cases: (i) where the question raised in the application is already p ending before any Central Excise Officer, the Appellate Tribunal or any court; o r (ii) where the question raised is the same as in a matter already decided by any Appellate Tribunal or any court.

15.4 3. Central Excise The Authority shall pass an order admitting or rejecting the appl ication. A copy should be given to the applicant and the Commissioner. The Autho rity can further examine any material placed before him after admission of the a pplication. The Authority should pronounce the final order within 90 days of rec eipt of application. Copies of the order have to be given to the applicant and t he Commissioner. 4. 5. 6. Self-examination questions 1. 2. 3. 4. 5. State briefly as to who can make an ap plication for Advance Ruling under section 23A of the Central Excise Act, 1944? En umerate the matters on which the advance ruling can be sought under the Central Excise Act, 1944. Explain the circumstances when an advance ruling will be void under the Central Excise Act, 1944. Discuss the procedure to be followed by the Authority for Advance Rulings on receipt of application for advance ruling. Rame sh, a non-resident intends to manufacture certain excisable goods but has entert ained some doubts about the admissibility of credit of excise duty paid on the g oods used in the manufacture of the said excisable goods. He wants to seek an Ad vance Ruling on this issue under Chapter IIIA of the Central Excise Act from the Authority for Advance Rulings. Can he do so? Discuss.

16 ORGANISATION STRUCTURE OF THE EXCISE DEPARTMENT 16.1 ORGANISATION STRUCTURE The structure of the Excise Department is largely si milar to the structure of the Income Tax Department. However, in view of the fac t that the area of indirect taxes encompasses both customs duties as well as exc ise duties, the Department is structured in a manner that facilitates collection of both the indirect taxes. 16.1.1 Central Board of Excise and Customs (CBEC): Recruitment to the Customs and Excise Department is through the Indian Revenue Service. The successful cand idates in the Civil Service examinations are required to choose between the dire ct and indirect tax streams. The apex body in charge of administration of the co llection of both customs duties and central excise duties is the Central Board o f Excise and Customs (CBEC). This is statutory board, setup under the Central Bo ard of Revenue Act, 1963. The Board currently consists of a Chairman. The Chairm an is the first among equals. The Chairman and the Members are currently of the rank of ex-officio Additional Secretaries to the Government of India. 16.1.2 Com missionerates: Immediately below the CBEC are the Chief Commissioners. These Chief Commissioners are administratively in-charge of sever al Commissionerates, ranging from two to four, each of which is headed by a Comm issioner. Chief Commissioners are responsible for all matters under their jurisd iction and report to the CBEC as a whole. The Commissionerate, as its name impli es, is the main organizational mechanism for the

16.2 Central Excise collection of excise duties. The organization structure of a Commissionerate is as follows:(i) Commissioner (ii) Commissioner (Appeals) (iii) Additional Commissioner (iv) Joint Commissione rs (v) Deputy Commissioner (vi) Assistant Commissioner (incharge of Divisions) ( vii) Superintendent (incharge of range) (viii) Sector Officers (Sectors) like In spectors etc. Apart from the Executive Commissioner who heads the Commissionerat e, there is also a Commissioner (Adjudication), who is exclusively engaged in pa ssing of adjudicating orders in terms of the powers granted under various sectio ns of the Central Excise Act, depending of course, on jurisdiction and on the mo netary amounts involved in the demands. Apart from the above specified commissio ners, who operate on the executive side of the Department every Commissionerate also consists of a Commissioner (Appeals), who shall act as an appellate authori ty and pass orders on appeal in relation to all adjudication orders passed by an authority subordinate to the rank of a Commissioner. In other words, the Commis sioner (Appeals) has jurisdiction to hear and dispose off all appeals filed agai nst orders of the Assistant Commissioner, Deputy Commissioner, Joint Commissione r as well as the Additional Commissioner. Prior to the amendment of Rule 2(ii) o f the Central Excise Rules, governing the definition of a Commissioner, an Addit ional Commissioner was equivalent to a Commissioner for all purposes. Hence, app eals against orders passed by the Additional Commissioner lay directly with the Tribunal. However, the rule was amended vide Notification No. 11/92-CE (N.T.) da ted 14/5/92, whereby the Additional Commissioner was made equivalent to a Commis sioner for all purposes other than for the purposes of the appellate procedures incorporated

Organisation Structure of the Excise Department 16.3 under Chapter VIA of the Central Excise Act. Consequently, after the amendment, appeals against orders of the Additional Commissioner lie with the Commissioner (Appeals) only. The senior most of these three Commissioners would be the execut ive Commissioner. On the executive side, the Additional Commissioner is the imme diate senior most officer after the Commissioner. However, as explained above, i n terms of the legal definition, an Additional Commissioner is also a Commission er. Thereafter are the Joint Commissioner, Deputy Commissioners and then the Ass istant Commissioner. The Assistant Commissioner is the highest-ranking field lev el authority who holds active jurisdiction over manufacturing units and is charg ed with the collection of duties. The Assistant Commissioner is also the quasi-j udicial authority who normally passes orders on all matters of revenue concernin g units falling under his jurisdiction and for which show cause notices have bee n issued under various sections of the Act. Direct recruits to the All India Rev enue Service are confirmed as Assistant Commissioners after their period of prob ation. Consequently, the post of Assistant Commissioner is the entry-level post for all direct recruits into the service. In addition to the direct recruitment on an all India level, staffing of subordinate level officers is done also at th e level of the Commissionerate, based on sanctioned strength agreed between the Board and the Commissionerate. The subordinate officers in central excise consis t of Sector Officers (earlier known as Inspectors) and Superintendents. The Sect or Officers are assigned responsibilities concerning specific units and hence ar e the first level of contact between assessees and the Excise Department. The Se ctor Officers are also functionally in charge of day-to-day matters pertaining t o assessees. The Sector Officers report to the Superintendents, who are function ally responsible for collection of revenues pertaining to all units located in t heir jurisdiction. The Superintendents, in turn, report to the Assistant Commiss ioners. Whereas Sector Officers are jurisdictionally in charge of Sectors, the S uperintendents are jurisdictionally in charge of Ranges. The Ranges are thereaft er consolidated together into Divisions, which are headed by the

16.4 Central Excise Assistant Commissioners. Finally, all such Divisions are grouped together to for m a Commissionerate. The Commissionerate holds territorial jurisdiction for coll ection of revenues from units located within the Commissionerate. Self-examinati on questions 1. 2. Write a brief note on the Central Board of Excise and Customs . Discuss the organizational structure of the excise department.

17 EXCISE AUDIT 17.1 AUDIT UNDER CENTRAL EXCISE ACT, 1944 Central Excise Act, 1944 provides for two types of audit: (a) Special audit for valuation purposes under section 14, a nd (b) Special audit for Cenvat credit purposes under section 14AA. The provisio ns in respect of each of the audit have been discussed below: 1. Valuation audit [Section 14A] Any Central Excise Officer not below the rank of an Assistant/Deputy Commissione r of Central Excise can order for valuation audit at any stage of enquiry, inves tigation or any other proceedings before him if he is of the opinion that the va lue has not been correctly declared or determined by a manufacturer or any perso n. However, for ordering such an audit prior approval of the Chief Commissioner of Central Excise is necessary. The Central Excise officer will direct such manu facturer/person to get the accounts of his factory, office, depots, distributors or any other place, as may be specified by the said Central Excise Officer, aud ited by a Cost Accountant. Cost accountant shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959. Such Cost Accountant will be nominated by the Chief Commissioner of Central Excise in this behalf. The Cost Accountant has to submit the duly signed and certified audit report within the period specified by the Central Excise Of ficer. He shall also mention in the report such other particulars as may be pres cribed by such Central Excise Officer. Such period can be extended by the Centra l Excise Officer at the request of the manufacturer/person for material and suff icient reason. However, the maximum period of submission of audit report shall b e 180 days from the date of receipt of the cost audit order by the manufacturer. This audit shall be in addition to any other audit under any other law for the time being in force or otherwise.

17.2 Central Excise The manufacturer/person shall be given an opportunity of being heard in respect of any material gathered on the basis of audit and proposed to be utilized in an y proceedings under the Central Excise Act or rules made thereunder. 2. CENVAT c redit audit [Section 14AA] The Commissioner of Central Excise may call for an audit if he has reason to bel ieve that the credit of duty availed of or utilized by a manufacturer of any exc isable goods (a) is not within the normal limits having regard to the nature of the excisable goods produced or manufactured, the type of inputs used and other relevant factors, as he may deem appropriate; (b) has been availed of or utilize d by reason of fraud, collusion or any willful misstatement or suppression of fa cts. The Commissioner shall direct such manufacturer to get the accounts of his factory, office, depot, distributor or any other place, as may be specified by h im, audited by a Cost Accountant nominated by him. Cost Accountant shall have th e meaning assigned to it in clause (b) of sub-section (1) of section 2 of the Co st and Works Accountants Act, 1959. The Cost Accountant has to submit the duly s igned and certified audit report within the period specified by the Central Exci se Officer. He shall also mention in the report such other particulars as may be prescribed by such Central Excise Officer. This audit shall be in addition to a ny other audit under any other law for the time being in force or otherwise. The manufacturer shall be given an opportunity of being heard in respect of any mat erial gathered on the basis of the audit and proposed to be utilized in any proc eeding under the Central Excise Act or rules made thereunder. 17.2 AUDIT PRESCRI BED BY CENTRAL EXCISE DEPARTMENT The Central Excise Department also has evolved a system of departmental audit in view of the fact that all the statutory record s to be maintained by the assessee have been abolished in year 2000/01. 17.2.1 H istory of provisions In conventional sense, audit means scrutiny and verification of documents, events and processes in order to verify facts and, draw conclusions regarding the corre ctness of recording of facts and the efficiency of a system under study. For Cen tral Excise purposes audit means scrutiny of the records of assessee and the verif ication of the actual process of receipt, storage, production and clearance of g oods with a view to check whether the assessee is paying the central excise duty correctly and following the central excise procedures.

Excise Audit 17.3 Under the conventional /traditional system of central excise audit, audit partie s visit assessees unit without much preparation and verify all the statutory rec ords (i.e. those prescribed under the Central Excise law) to check compliance of procedures and also leakage of revenue, if any. Experiences show that such audi ts do not result in detection of major aberrations. Most of the audit objections pertain to either minor procedural irregularity or duty short payment of small amounts mostly due to human error. Further, this method of auditing does not env isage checking of the internal records of the assessee as well as those records which are maintained by the assessee under the other laws like Income-tax Act, S ales Tax Act, Companies Act etc. One of the announcements made during Budget 200 0 as a measure of simplification of procedures, was the dispensation of all stat utory records under the central excise law. No longer was the assessee required to record the receipt of raw material, production and clearance/sale of finished goods etc. in registers/documents prescribed by the central excise department. As a result, the assessees are now allowed to maintain all their records in whic hever form they like (including maintenance of the entire records in electronic form) provided the essential information required for calculation of central exc ise duty liability can be obtained from such records. Under these circumstances it becomes necessary for the auditors to look into the assessees own (private) r ecords to verify whether the assessee is paying central excise duty correctly an d following the laid down procedures. Another change brought in recent years is doing away the system of assessment of the returns by the departmental officers. Now the assessee is required to self assess his monthly tax returns (called the E.R.1/E.R.2) before filing the same with the department. The departmental offic ers only scrutinise this return to check for any apparent mistake made by the as sessee. They are not required to carry out detailed verification. Therefore, the entire burden of checking whether the assessee actually paying his taxes correc tly, now lies with audit. The statutory changes resulting in dispensation of sta tutory records as well as self assessment of central excise duty by the assessee has led to the conventional/traditional system of audit becoming irrelevant. 17 .3 WHAT IS EXCISE AUDIT 2000? Traditional audit will eventually be replaced by E xcise Audit 2000 (EA 2000), a new system of audit. This new system was initiated from 1 st December 1999 when it was implemented in case of all assessees paying cash duty of over Rs.5 crores per annum. In September 2000, the Central Board o f Excise and Customs made this audit applicable in case of all assessees paying cash duty of over Rs. 1 crore per annum. Under Excise Audit (EA 2000), units pay ing cash duty of Rs.10 lakhs or more but less than Rs.1 crore per annum are audi ted once in two years. Units paying cash duty of less than Rs.10 lakhs per

17.4 Central Excise annum are audited once in 5 years. Units paying cash duty of more than Rs.1 cror e per annum are audited once a year. The essential philosophy of EA 2000 is that this audit is based on the scrutiny of business records of the assessee. This i s a more systematic form of audit wherein the auditors are required to gather ba sic information about the assesee and analyze them to find out vulnerable areas before conducting the actual audit. The audit is therefore more focused and in-d epth as compared to the traditional audit. Further, at every stage of audit, the assessee is consulted. This makes EA2000 audit user friendly. 17.4 PROCEDURE OF EXCISE AUDIT 2000 17.4.1 Selection of Assessee : The process of EA 2000 begins with identification of a unit to be audited. Normally, there are about 1000 to 1 500 assessees under the jurisdiction of a Central Excise Commissionerate. It is not possible for the audit staff to conduct audits of all the units every year. Therefore, depending upon the manpower availability, about 300 to 400 units are selected for conducting audit during a financial year. Under the conventional sy stem of audit the units were picked up randomly without any scientific basis of selection. Under EA 2000, the selection of the unit is based taking into account in the risk-factors . This means that the assessees who have a bad track recor d (having past duty evasion cases, major audit objections, past duty dues etc.) are given priority for conducting audit over those having clean track record. 17 .4.2 Desk Review: The auditors are assigned the assessees to be audited at the b eginning of the financial year. The auditors are required to gather as much info rmation about the assessee as possible. They can gather information from the dep artmental records, published documents like balance sheets annual statements etc ., and through market enquirer. Since this can be done without interacting with the assessee, this step called as desk-review . 17.4.3 Documenting Information: At the stage of Desk Review the auditors may have already identified certain area s, which warrant closer examination. The auditor may also require certain docume nts or information from the assessee to complete his preliminary investigation. For this he may write letter to the assessee or send him a questionnaire to obta in this information. This step is called gathering and documenting assessee inf ormation . 17.4.4 Touring: The auditor then visits the unit of the assessee to s ee the actual running of the unit, the systems that are followed for maintaining records in various sections and the system of movement of goods and the related documents within the unit. This step is called touring of the premises . This gives the auditors a general overview about the procedure adopted by the assesse e and the possible loopholes through which revenue leakage can take place.

Excise Audit 17.5 17.4.5 Audit Plan: Based on his experiences and the information gathered so far about the assessee, the auditor now makes a audit plan . The idea of developing audit plan is to list the areas which, as per the auditor are the vulnerable ar eas from the revenue point of view. Since number of documents/records maintained by assessee is huge in number, it also necessary that the auditor should select only some of them for the actual verification. The preparation of audit plan he lps him to do that. It must be remembered that audit plan is not rigid but a dyn amic concept. During the course of audit if the auditor notices certain new fact s or new aspects of the planned area of audit, he can always alter the audit pla n accordingly, with the approval of his supervisor. Similarly, during the actual audit, if the auditor is convinced that any area which was earlier planned for verification does not require in-depth scrutiny, he may alter the plan midway af ter obtaining approval of the superior officers. Preparation of audit plan is on e of the most important steps of EA 2000. A well thought audit plan generally in creases the success of audit result manifolds. 17.4.6 Verification: The most imp ortant step of audit is the conduct of actual audit, which in technical parlance is called Verification . The auditors visit the unit of the assessee on a sche duled date (informed to the assessee in advance) and carry out the scrutiny of t he records of the assessee as per the audit plan. The auditor is required to com pare the documentation of a fact from different documents. For example, the audi tor may check the figures of clearance of finished goods showed by the assessee in central excise return with the sales figures of the said goods in Balance She et, Sales Tax Returns, Bank statements etc. The auditor may also enquire about t he entries which appear vague (say an entry like Misc. Income ) in various reco rds and documents. The idea behind conduct of verification is to reasonably ensu re that no amount, which as per the Central Excise law is chargeable to duty, es capes taxation. The process of verification is always carried out in presence of the assessee so that he can clarify the doubts and provide required information to the auditor. 17.4.7 Audit Objection and Audit Para: Where the auditor finds instances of short payment of duty or non-observance of Central excise procedure s, he is required to discuss the issue with the assessee. After explanation prov ided by the assessee, if the auditor is satisfied that such non-tax compliance h as occurred, he records the same as an Audit Objection or Audit Para of the draft audit report that he would be preparing at the end of the verification p rocess. Auditor is advised not to take formal objections to mere procedural laps es/ infractions/ adoption of wrong procedures, which do not result in any short payment of duty or do not have bearing upon the duty payment. In such cases the auditor is required to discuss the matter with the assessee and advise him to fo llow the correct procedure in future. Further, while making an audit para, attem pt should be made to tabulate the duty short paid by the assessee at the spot an d incorporate it in the para itself. However, if this is not possible for the pa ucity of time or for the want of some information not available at that time, th e auditor should make a note of the same in his report.

17.6 Central Excise 17.4.8 Audit Report: At the end of the process of verification the auditor prepa res an Draft Audit Report which incorporates all the audit objections/audit pa ras. An audit report provides (issue or para wise) the issue in brief, the reply or the explanation of the assessee, the reason for the auditor not being satisf ied with the reply, the amount of short payment (if tabulated) and the recoverie s of the same (if could be made at the spot). The draft audit report is then sub mitted to the superior officers for review, who examine the sustainability of th e objections raised by the auditors. After such review, the audit report becomes final and in cases where the disputed amounts have not already been paid by the assessee at the spot, demand notices are issued by the department for their rec overies. 17.4.9 Conclusion: EA 2000 is a modern, transparent and interactive met hod of audit wherein the auditor proceeds with audit fully conversant with the b usiness of the assessee. On his part, the assessee is given full opportunity to explain his stand on any particular matter so that matters are resolved in full appreciation of legal position. EA 2000 is thus a participative audit. A require ment of EA 2000 is that the auditors must be thorough in their knowledge of Cent ral Excise law and procedures, notifications, instructions and circulars issued by the Finance Ministry and the judicial decisions on issues relating to central excise laws. To be successful auditor, knowledge about financial bookkeeping, a ccountancy and proficiency in understanding commonly used commercial books and d ocuments is of great help. Further, being computer literate is an added requirem ent while auditing an assessee who maintains his accounts in electronic format. Self-examination questions 1. 2. 3. 4. Discuss the provisions of section 14A in respect of valuation audit. Briefly explain the provisions of section 14AA in re spect of CENVAT Credit audit. What is Excise Audit 2000? Discuss. Explain the pr ocedure of Excise Audit 2000.

18 SETTLEMENT COMMISSION 18.1 INTRODUCTION Chapter V was inserted in the Central Excise Act, 1944 by Fina nce (No. 2) Act, 1998 to evolve a mechanism for speedy settlement of cases invol ving high revenue stakes. This Chapter contains sections 31 to 32P. While these provisions came into effect from 1-81998, the Settlement Commission was constitu ted vide Notification 40/99-CX(NT) dated 96-1999 - 1999 (111) E.L.T. N4. 18.2 SA LIENT FEATURES OF SETTLEMENT COMMISSION Questions 1. Who can make an application for settlement? Can it be withdrawn? Answers Sec. 32E states that an assessee m ay make a case for settlement. An assessee is defined in Sec. 31(a) as any perso n who is liable to pay excise duty assessed and includes, manufacturer/producer or a registered person of a private warehouse. An application once made cannot b e withdrawn [Sec. 32E(4)] 2. What is it that can be settled? A case at any stage can be settled. Case is defined in Sec. 31(c) as any proceeding for levy, asses sment or collection or any proceeding by way of appeal or revision pending befor e a Central Excise officer or Central Government. However, cases filed late wher e delay is not condoned are not cases which can be settled.

18.2 Central Excise 3. What categories of cases cannot be settled? 4. What is the procedure to be fo llowed by the Settlement Commission on receipt of application? 5. Can Settlement Commission grant immunity from prosecution and penalty/ interest/ fine? See Table below for such cases. See Procedure below for details. Under Sec. 32K, the Commission can grant immunity from prosecution and penalty/i nterest/fine in whole or in part if it is satisfied that the applicant has made full and true disclosure an co-operated with the Commission. However, if prosecu tion is launched before receipt of application, immunity against such prosecutio n cannot be granted. Immunity can be withdrawn under Sec. 32K only if the person fails to pay the sums due within such time as may be specified by the Commissio n or where the applicant has concealed any material to the settlement or given f alse evidence relating to the settlement. Under Sec. 32L, this can be done only where the Commission is satisfied that the person has not cooperated. The conseq uences of this are that it would be deemed that no application has been made bef ore the Commission. Yes as per Sec. 32L. 6. Can such immunity be withdrawn? 7. Can the case be sent back by the Settlement Commission to the Central Excise officer ? 8. Can the Central Excise officer who received the case back use the m aterials produced before the Commission?

Settlement Commission 18.3 9. Is the order of settlement final? As per Sec. 32M, except as provided in Chapter V, the order is final and conclus ive and shall not be reopened in any proceeding under this Act or under any othe r law. For example, Sec. 32F(9) provides that if the order was obtained by fraud or misrepresentation, it would become void. The Commission has the power to voi d the order. Under Sec. 32F(4), the Commission will pass an order admitting the application. Within 30 days thereof or such extended period given by the Commiss ion, the amount has to be deposited. If not paid even then, the amount would be recovered with interest at 18% p.a. or such interest fixed by the Board. Under S ec. 32F(10), after final orders, the duty due has to be paid within 30 days. The Settlement Commission may give further time or grant instalment facility. Howev er, interest would be charged at 18% p.a. or such rate as fixed by the Board on all amounts due after the said period of 30 days. Only with the concurrence of t he applicant, if the Settlement Commission feels that for the proper disposal of the case pending it has the power to reopen completed proceeding. However, no p roceeding can be re-opened after 5 years from the date of application. Under Sec . i. 32O, 10. What is the time limit for payment of amounts ordered by Settlement Commissi on? 11. Can a completed proceeding be re-opened? 12. Can a bar be imposed on a person who has applied once to apply for settlemen t again? if an order of the Commission imposes penalty for concealment of particulars of his duty liability; after passing the order such person is convicted of any offe nce in relation to that case; the case is sent back under non-cooperation. Sec. 32L for ii. iii.

18.4 Central Excise The person cannot apply for settlement in relation to any other matter. 13. Is t he proceeding before the Settlement Commission a judicial proceeding? 14. What i s the time limit envisaged for such Settlement? 15. Where are the Benches of the Settlement Commission located? Sec. 32P deems that the proceeding is a judicial proceeding within the meaning of Sec. 193 and 228 of the IPC. Departmental inst ructions reported in 1999 (113) E.L.T. T11 talks of a period of six months to on e year. The principal Bench is at New Delhi with other Benches at Chennai, Calcu tta and Mumbai. The Central Govt. has appointed a Chairman, three Vice Chairmen and eight members (Notification 40/99C.E.(NT), dated 9-6-1999. The jurisdiction of the Bench is decided not by the place of business of the applicant but by the location of the headquarters of the Commissionerate passing the order. See Proc edure below. 16. What is the procedure to make an application and what are the fees? 17. Can the applicant take legal assistance? 18. Can the property of the applicant be at tached? Under Sec. 32F(7), assistance representative can be taken. of authorised Provisional attachment by Settlement Commission possible under Sec.32G. See proc edure to be followed by Commission below for details. 18.3 CATEGORIES OF CASES THAT CANNOT BE SETTLED The following categories of case s cannot be settled as proviso to section 32E : a. b. c. If the applicant has no t filed returns showing production, clearance and central excise duty paid. Wher e the applicant has not received a show cause notice; Where the case is pending before the Appellate Tribunal or any Court;

Settlement Commission d. e. f. Where the dispute relates to interpretation of cl assification; 18.5 Where excisable goods/books/documents are seized, the applicant cannot prefer an application for 180 days from the date of such seizure. The amount in the appli cation should be at least rupees two lakhs or more. In other words, cases less t han rupees two lakhs cannot be settled. The Department has issued a detailed note as reported in 1999 (113) E.L.T T11. 1 8.4 PROCEDURE TO MAKE AN APPLICATION BEFORE THE SETTLEMENT COMMISSION 1. The ass essee must examine whether his case can be settled before the Settlement Commiss ion. Kindly see the previous title Categories of cases that cannot be settled. Onc e it is certain that the case can be settled, Rules 220 and 220A/B/C of the Cent ral Excise Rules, 1944 must be followed. The applicant must note that the jurisd iction of the Bench is decided not by his place of business or residence but by the location of the headquarters of the Commissionerate which passed the order. Benches have been set up in Delhi, Mumbai, Chennai and Calcutta. The application to the Settlement Commission must be in Form SC(E)-I. (For Form see Annexure) P ersons authorised to sign under rule 213 must sign the application. (Kindly see Chapter on Appeals for persons authorised to sign appeals). The application form must be filled properly alongwith the Annexure. The assessee should give full d etails of the information which has not been correctly declared in the monthly r eturns and additional duty payable. The assessee may also give the amount which he thinks he is liable in respect of the show cause notice and the computation t hereof. The application form alongwith the annexures should be presented in a se aled cover to the Designated Officer at the Settlement Commission. A fee of Rs.1 000 should accompany the application. This should be paid in the branch of autho rised bank or branch of SBI or RBI and the triplicate copy of the challan should be sent alongwith the application. No cheques, drafts, hundies or other negotia ble instruments will be accepted. The fees should be deposited under Heading 038 -C Excise - Other Receipts-fees, fine, penalties, etc. for Central Excise cases and 037-Customs - Other receipts fines, penalties etc. The TR-6 challan 2. 3. 4. 5. 6.

18.6 Central Excise must be countersigned by the departmental officer having jurisdic tion over assessee. 7. Section 32PA gives an option to the assessee to withdraw appeals filed before Ap pellate Tribunal on or before 29-2-2000 and apply for settlement within 30 days of receipt of Tribunal order permitting the withdrawal of the appeal. Sub-sectio n (6) of section 32PA provides that an application made under this section shall be deemed to be an application made under sub-section (1) of section 32E and al l the provisions of the said Chapter shall apply accordingly. However, provision s of section 32F(11) and 32L(1) shall not apply to such an application. Section 32F(11) provides that if an order of Settlement Commission has been obtained by fraud or misrepresentation of facts, it becomes void, and the Central Excise Off icer may complete the proceedings before expiry of two years from date of receip t of communication that the order has become void. Section 32L(1) provides that the Settlement Commission may, if it is of opinion that any person who made an a pplication for settlement has not cooperated with the Settlement Commission in t he proceedings before it, send the case back to the Central Excise Officer havin g jurisdiction who shall thereupon dispose of the case in accordance with the pr ovisions of the Act as if no application under section 32E had been made. Sub-se ction (8) of section 32PA provides for sending a case back to the Tribunal by th e Settlement Commission in the event of non co-operation by an applicant. Depart mental appeals are not covered herein, where the Settlement Commission refuses t o accept the application, the appeal is deemed to be restored. 18.5 PROCEDURE TO BE FOLLOWED BY THE SETTLEMENT COMMISSION [SECTION 32F] 1. 2. O n receipt of an application, the Settlement Commission will call for a report fr om the Commissioner of Central Excise. The Commissioner must furnish a report wi thin one month of receipt of the communication from Settlement Commission failin g which it may be presumed that he has no objections. However, the Commissioner may raise objections at the time of hearing. Depending on the report, the comple xity of the materials contained therein and nature of the case, the Commission m ay proceed with the application or reject the same. The application cannot be re jected without giving the applicant an opportunity of hearing. The hearing will be fixed within two months of receipt of application or within such extended tim e as decided in writing by the presiding officer of the Bench. 3. 4.

Settlement Commission 5. 18.7 The Commission would pass orders admitting the application, if thought fit, and give a copy to the applicant and the Commissioner. During pendency of the procee ding, if the interests of the revenue have to be protected, Sec. 32G authorises the Settlement Commission to order for provisional attachment of property. This attachment will be discharged by the Commission on submission of proof of paymen t of dues. Attachment is done in accordance with Rule 220B wherein the Commissio ner may authorise his subordinate to prepare an inventory of assets details of i mmovable property and movable property with copies thereof to the Commissioner a nd the Commission. It would be pertinent to note that attachment can be done by the Commissioner who has jurisdiction over the place where the applicant holds m ovable or immovable property or resides or carries on his business or has his ba nk account. The applicant has to deposit the additional amount due within 30 day s of receipt of order. The Commission may extend this period or allow payment by instalments if there are good and sufficient reasons. This amount, if not paid, will be recovered alongwith interest at 18% per annum or such interest as fixed by Board by the officer having jurisdiction over the assessee. After examining the application and the report of the Commissioner, the Settlement Commission ma y require further examination and in such cases, it may direct the Commissioner (Investigation) to make such inquiry or investigation. Final orders will be pass ed after this. Every final order for settlement shall provide the terms of settl ement, the amounts due alongwith penalty or interest, manner of settlement of du es and shall state that if the order has been obtained by fraud or misrepresenta tion of facts, it shall be void. If the order becomes void, the central excise o fficer can complete proceedings before expiry of two years from date of receipt of communication that the order has become void. 6. 7. 8. 9. 10. Dues should be discharged within 30 days of receipt of order failing which t he same will carry interest at 18% per annum or such rate as fixed by the Board. This interest has to be paid even if the Settlement Commission has ordered inst alment facility. 11. The dues shall be recovered under section 32N by the centra l excise officer having jurisdiction over the assessee. 12. As per section 32M, the order of settlement, save as provided in Chapter V, cannot be reopened in an y proceeding under the Act or any other law for the time being in force.

18.8 Central Excise 13. The order of the Commission can grant immunity from penalty/interest/fine an d prosecution if the applicant has made full and true disclosure and has co-oper ated with the Commission. However, if prosecution is launched before the date of receipt of application, such prosecution cannot be granted immunity. 14. This i mmunity shall be withdrawn if the sums due under section 32F(7) after final orde rs are not paid within the time/extended time given by the Commission or for con cealment of materials or false evidence given by the applicant. Note: Kindly ref er to the Chapter on Settlement Commission in the Customs section as additional reading. Self-examination questions 1. 2. 3. 4. 5. Who can make an application f or settlement? withdrawn? Can such an application be Can all cases of disputed excise duty be settled in a Settlement Commission? If no, then enlist the exceptions? Describe the procedure to make an application be fore the Settlement Commission. Explain whether the Settlement Commission can gr ant immunity from prosecution and penalty/interest/fine? Can a case be sent back by the Settlement Commission to the Central Excise Officer? Discuss.

SECTION B SERVICE TAX & VAT

1 INTRODUCTION 1.1 NEED FOR A TAX ON SERVICES Service tax is a tax of the future. As per General Agreement on Trade and Tariffs (GATT), Excise & Customs tariffs have been coming down and in the ensuing years have to come down further. The shortfall in revenue necessitated exploring new a venues of taxation. Thus service tax was born. Secondly, services contribute to approximately 50% of the GDP. Government s argument hence, is substantial revenu e should come from the service sector. Thus the tax on goods (excise duty) has t o be complemented with the tax on services. The Government s plan is to introduc e service tax on all services and exempt a few. 1.2 GENESIS OF SERVICE TAX IN IN DIA The imposition of service tax was in sequel to the Report of the Chelliah Commit tee on Tax Reforms. On these recommendations Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new c oncept of Service Tax and stated that There is no sound reason for exempting serv ices from taxation, when goods are taxed and many countries treat goods and serv ices alike for tax purposes. The Tax Reforms Committee has also recommended impo sition of tax on services as a measure for broadening the base of indirect taxes . I, therefore, propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers. Thus, ser vice tax was imposed on 3 services. The baton then passed on to successive finan ce ministers who widened the service tax net in their budgets. It is expected th at all services would be in the service tax net except a few exempted services. Since the introduction of Service Tax in 1994, revenue collected from Service Ta x has been increasing slowly but steadily. Service tax collection is primarily f rom metro areas and bigger towns. The Directorate General of Service Tax, Mumbai in their website www.servicetax.gov.in have given the vital statistics on servi ce tax which is reproduced under :

1.2 Service tax & VAT Year 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 20012002 2002-2003 2003-2004 No. of assessees 3943 4866 13982 45991 107479 115495 122326 187577 232048 403856 Gross Collections (Rs. Crores) 410 846 1022 1515 1787 2072 2540 3305 4125 7890 Percentage(%) of growth Base Year 101 24 49 18 16 23 26 25 91 No. of Services 3 3 6 18 30 27 26 41 51 58 Trends of revenue indicate that the Service Tax collection is growing at fast ra te since its inception. 1.3 CONSTITUTIONAL AUTHORITY The Government derives its power to levy taxes from the Constitution of India. E laborate provisions have been made in the Constitution of India to regulate the power of taxation of both the Central Government and the State Governments. Arti cle 265 of the Constitution of India prohibits arbitrary collection of tax. It r eads as: "No tax shall be levied or collected except by authority of law." Thus the Government may levy a tax on the citizens only under the authority of the Co nstitution of India. The Constitution, in its Schedule VII, has enumerated the m atters on which the Central Government and the State Government can make laws. S uch matters are divided into three categories-a) b) c) List I : List II : List I II : Union List (It contains the matters in respect of which only the Central Go vernment has the power of legislation) State List (It contains the matters in re spect of which only the State Government has the power of legislation) Concurren t List (It contains the matters in respect of which both the Centraland the Stat e Governments have power of legislation). Entries 82 to 92C of List I enumerate the subjects where the Central Government has power to levy taxes. Entries 45 to 63 of List II enumerate the subjects wher e the State Governments have power to levy taxes.

Introduction 1.3 Entry 92C of the Union List of the Seventh Schedule to the Constitution of India enables the Union to levy Taxes on Services. Initially there was no specific entr y in the Union List for levying service tax. Service tax was levied by the Centr al Government by drawing power from entry 97 of the Union List. Entry 97 is a r esiduary entry in List-I, which has been reproduced below: 97 - Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. The residuary entry provides wide powers to the Central Govern ment in respect of taxation of the subjects not mentioned in the Lists given by the constitution. However, as a result of deliberations between the States and t he Centre and as per the recommendations of the various expert committees, entry 92C was introduced in the VII Schedule in the Union List vide Constitution (92n d Amendment) Act, 2003 with effect from 07.01.2004. Entry 92C reads as under: 92C - Taxes on services. A new Article 268A was inserted in the Constitution which r eads as follows: "268 (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of Ind ia and the State in the manner provided in clause (2). (2) The proceeds in any f inancial year of any such tax levied in accordance with the provisions of clause (1) shall be-(a) Collected by the Government of India and the States; (b) Appro priated by the Government of India and the States, in accordance with such princ iples of collection and appropriation as may be formulated by the Parliament by law." A consequential amendment to Article 270 of the Constitution was also made to enable Parliament to formulate by law, principles for determining the modali ties of levying the service tax by the Central Government and collection of the proceeds thereof by the Central Government and the State Government. With this a mendment in the Constitution, the Central Government has become competent to ena ct a separate legislation on service tax. 1.4 SERVICE TAX LAW Service tax was introduced in 1994 but there is no independent statute on servic e tax as yet. However, following sources provide statutory provisions relating t o service tax and can be broadly grouped under the following categories: 1.4.1 F inance Act, 1994: The statutory provisions relating to service tax were first

1.4 Service tax & VAT promulgated through Chapter V of the Finance Act, 1994. Since then, Chapter V of the Finance Act, 1994 is working as the Act for the service tax provisions. Lat er, in the year 2003, the Finance Act 2003 inserted Chapter VA relating to advan ce rulings on service tax in the Finance Act, 1994. In the year 2004, the provis ions relating to charging of education cess on the amount of service tax were made applicable through Chapter VI of the Finance (No.2) Act, 2004. 1.4.2 Rules on s ervice tax: Section 94 of Chapter V and section 96 -I of Chapter VA of the Finan ce Act, 1994 grants power to the Central Government to make rules for carrying o ut the provisions of these Chapters. Using these powers, the Central Government has issued Services Tax Rules 1994, Service Tax (Advance Rulings) Rules, 2003, C ENVAT Credit Rules, 2004, Export of Service Rules, 2005, Service Tax (Registrati on of Special Category of Persons) Rules, 2005, Service Tax (Determination of Va lue) Rules, 2006 and Taxation of Services (Provided from Outside India and Recei ved in India) Rules, 2006 which are amended from time to time. Rules should be r ead with the statutory provisions contained in the Act. Rules are made for carry ing out the provisions of the Act. The rules can never override the Act and cann ot be in conflict with the same. 1.4.3 Notifications on service tax: Sections 93 and 94 of Chapter V, and section 96-I of Chapter VA of the Finance Act, 1994 em power the Central Government to issue notifications to exempt any service from s ervice tax and to make rules to implement service tax provisions. Accordingly, n otifications on service tax have been issued by the Central Government from time to time. These notifications usually declare date of enforceability of service tax provisions, provide rules relating to service tax, make amendments therein, provide or withdraw exemptions from service tax or deal with any other matter wh ich the Central Government may think would facilitate the governance of service tax matters. 1.4.3 Circulars or Office Letters (Instructions) on service tax: Th e Central Board of Excise and Customs (CBEC) issues departmental circulars or in struction letters from time to time to explain the scope of taxable services and the scheme of service tax administration etc. These circulars/instructions have to be read with the statutory provisions and notifications on service tax. The circulars clarify the provisions of the Act and thus, bring out the real intenti on of the legislature. However, the provisions of any Act of the Parliament cann ot be altered or contradicted or changed by the departmental circulars. 1.4.5 Or ders on service tax: Orders on service tax may be issued either by the CBEC or b y the Central Government. Rule 3 of the Service Tax Rules, 1994, empowers the CB EC to appoint such Central Excise Officers as it thinks fit for exercising the p owers under Chapter V of the Finance Act, 1994. Accordingly, orders have been is sued by the CBEC, from time to time, to define jurisdiction of Central Excise Of ficers for the purposes of service tax.

Introduction 1.5 1.4.6 Trade Notices on service tax: Trade Notices are issued by the Central Exci se/Service Tax Commissionerates. These Commissionerates receive various instruct ions from the Ministry of Finance or Central Board of Excise & Customs for effec tive implementation and administration of the various provisions of service tax law. The same are circulated among the field officers and the instructions which pertain to trade are communicated to them in the form of trade notices. Trade A ssociations are supplied with the copies of these trade notices. Individual asse sses may also apply for copies of trade notices. The trade notice disseminate th e contents of the notifications and circulars/letters/orders, define their juris diction; identify the banks in which service tax can be deposited; give clarific ations regarding service tax matters, etc. The various components making service tax law have been represented in the following diagram: SOURCES OF SERVICE TAX LAW Finance Act, 1994 Rules Notifications Circulars or Office Letters (Instructions) Orders Trade Notices 1.5 SELECTIVE VS. COMPREHENSIVE COVERAGE Depending on the socio-economic compulsions, each country evolved a taxation sys tem on services adopting either a comprehensive approach or a selective approach . In comprehensive approach all services are made taxable and a negative list is given in case some services are to be exempted. In selective approach, selectiv e services are subjected to service tax. While most of the developed countries t ax all the services with very few and limited exemptions, most of the developing countries have opted for taxation of select services only. India has adopted a selective approach to taxation of services. In India, service tax has been levie d on specified taxable services and the responsibility of payment of the tax is cast on the service provider (barring few exceptional cases). The service tax is leviable on the gross amount charged by the service provider from the client. S ystem of self assessment of service tax by the assesses has been introduced. Tax returns are expected to be filed half yearly. Central Board of Excise & Customs is the central authority to regulate service tax matters. Directorate of Servic e Tax at Mumbai oversees the activities at the field level for technical and pol icy level coordination.

1.6 1.6 Service tax & VAT ADMINISTRATION OF SERVICE TAX The Department of Revenue of the Ministry of Finance exercises control in respec t of matters relating to all the direct and indirect taxes through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, wherea s those relating to levy and collection of indirect taxes (customs duties, centr al excise duties etc.) fall within the purview of CBEC. The two Boards were cons tituted under the Central Board of Revenue Act, 1963. The responsibility of admi nistration and collection of service tax has also been vested upon the CBEC ( Bo ard ). The Board administers service tax matters through the Central Excise Zone s and each Zone, in turn works through Central Excise Commissionerate falling un der its territory. Each zone is headed by a Chief Commissioner of Central Excise , while each Commissionerate is headed by a Commissioner of Central Excise. The Chief Commissioner of Zone exercises supervision and control over the working of the Commissionerates in the Zone and is mainly responsible for monitoring reven ue collection, disposal of pendencies, redressal of grievances of trade, etc. He also ensures coordination among the Commissionerates within the Zone. 1.6.1 Dir ector General (Service Tax): Considering the increasing workload due to the expa nding coverage of service tax, it was decided to centralise all the work and ent rust the same to a separate unit supervised by a very senior official. According ly, the office of Director General (Service Tax) was formed in the year 1997. It is headed by the Director General (Service Tax). The functions and powers of Di rector General (Service Tax) are as follows: (1) To ensure that proper establish ment and infrastructure has been created under different Central Excise Commissi onerates to monitor the collection and assessment of service tax. (2) To study t he staff requirement at field level for proper and effective implementation of s ervice tax. (3) To study as to how the service tax is being implemented in the f ield and to suggest measures as may be necessary to increase revenue collection or to streamline procedures. (4) To undertake study of law and procedures in rel ation to service tax with a view to simplify the service tax collection and asse ssment and make suggestions thereon. (5) To form a data base regarding the colle ction of service tax from the date of its inception in 1994 and to monitor the r evenue collection from service tax. (6) To inspect the service tax cells in the Commissionerate to ensure that they are functioning effectively. (7) To undertak e any other functions as assigned by the Board from time to time. The Directorat e of Service Tax coordinates between the CBEC and Central Excise Commissionerate s. It also monitors the collection and the assessment of service tax. It

Introduction 1.7 compiles the service tax revenue reports received from various Central Excise Co mmissionerates and monitors the performances of the Commissionerates. It scrutin ises the correspondences received from field formations and service providers an d replies to the clarifications sought for, wherever possible. In cases where th e doubts/clarification sought involves policy matter, the Directorate apprises t he Board for issuing clarification/instruction. The administrative machinery of the service tax law can be understood with the help of the following diagram: ADMINISTRATION OF SERVICE TAX MINISTRY OF FINANCE (1) DEPARTMENT OF REVENUE (2) CENTRAL BOARD OF EXCISE AND CU STOMS (3) CENTRAL EXCISE ZONES HEADED BY CHIEF COMMISSIONERS (4) CENTRAL EXCISE COMMISIONERATES HEADED BY COMMISSIONERS (5) DIRECTOR GENERAL OF SERVICE TAX (Co-ordinator between 3 & 5) 1.7 SERVICE TAX PROCEDURES Service tax procedures include registration, maintenance of books and records, p ayment of service tax, availment and utilization of CENVAT credit, filing of ser vice tax returns, self assessment, provisional assessment and recovery of servic e tax, interest and penalties, rectification of mistakes, revision of assessment order, appeals, search and seizure, advance rulings, refund etc. 1.8 ROLE OF A CHARTERED ACCOUNTANT As the gamut of service tax expands there would be a great need for professional s to advice and assist the assessees. A chartered accountant with his training a nd experience is wellequipped to position himself in the new role as an advisor and facilitator for due compliance of service tax law. The nature of services wo uld be: 1.8.1 Advisory services : With the selective coverage of service tax on certain specified services a great deal of professional acumen would be required to interpret and understand the law and advise the applicability of service tax qua an activity or service. A chartered accountant would be able to fill this v oid.

1.8 Service tax & VAT 1.8.2 Procedural compliance: The service tax law envisages registration, payment of tax, filing returns and assessments involving interface with the excise depa rtment. A chartered accountant with his experience and expertise would be the be st person to assist the assessee in all the above functions and ensure complianc e. 1.8.3 Personal representation: As per the service tax law read with the Centr al Excise Act and Rules, a chartered accountant is allowed to appear before the assessment authority, Commissioner (Appeals) (first appeal) and Tribunal (second appeal). Here too with his experience and expertise a chartered accountant woul d be well positioned to represent his clients in these fora. 1.8.4 Certification and audit: With the widening of tax base there will be a phenomenal growth in t he number of service tax assessees. In the ensuing years the department would ha ve to evolve a mechanism where there is management by exception i.e. generally a ccept all the returns as correct and pick and choose those returns which need de tailed scrutiny. In this mechanism a chartered accountant could be of great assi stance. Service tax returns and financial statements could be certified by the c hartered accountant from the perspective of service tax similar to an audit unde r section 44AB of the Income-tax Act. 1.8.5 Onerous task to keep pace : The serv ice tax like excise is administered more by way of trade notices issued by vario us Commissionerates. A chartered accountant will have to keep himself abreast of the latest notifications and trade notices in addition to the changes in law so as to meet the client expectations. Thus, in order to render good value added s ervices in the area of service tax a chartered accountant has an onerous task to keep pace with the latest in the legal front. Self-examination questions 1. 2. 3. 4. 5. 6. 7. 8. 9. Which committee recommended the introduction of service tax ? Who has the power to levy service tax Union or States? Discuss. From which Ent ry of the Union List of the Constitution, does the authority to levy service tax arise? Under which Act, does the service tax is levied? Which were the first th ree services to be brought under the service tax net? Write a note on administra tion of service tax. What do you mean by selective and comprehensive coverage of services for the purpose of service tax? Which system is being adopted in India ? Write briefly about the role of a chartered accountant in the field of service tax consultancy. Describe the various sources that provide statutory provisions relating to service tax. 10. Discuss the functions and powers of Director General (Service Tax).

2 PRELIMINARY LEGAL PROVISIONS 2.1 EXTENT, COMMENCEMENT AND APPLICATION [SECTION 64] The Finance Act, 1994 came into force from 1.7.1994. By section 64(1), the Act e xtends to the whole of India except the state of Jammu and Kashmir, and by secti on 64(3), the levy applies to taxable services provided. Thus, services provided i n the State of Jammu and Kashmir are not liable to service tax. As per Article 3 70 of the Constitution, any Act of Parliament applies to Jammu & Kashmir only wi th concurrence of State Government. Since, no such concurrence has been obtained in respect of Finance Act, 1994, service tax provisions are not applicable in J ammu and Kashmir. Service tax will not be payable if service is provided in Jamm u & Kashmir. However, if a person from Jammu & Kashmir provides the service outs ide Jammu & Kashmir in any other part of India, the service will be liable to se rvice tax, as the location where service is provided is relevant. Merely because the office of the service provider is situated in Jammu & Kashmir, it does not mean that service is provided in Jammu & Kashmir. Levy of service tax extends to services rendered in designated areas in the continental shelf and exclusive ec onomic zone. The exclusive economic zone extends upto 200 nautical miles inside th e sea from base line. Service provided within the territorial waters will be lia ble to service tax as levy of service tax extends to whole of India except Jammu and Kashmir and India includes territorial waters. Indian territorial waters ext end upto 12 nautical miles from the Indian land mass. 2.2 DEFINITIONS [SECTION 6 5] This section contains definitions of various important terms used in the Finance Act, 1994. The adoption of selective coverage necessitates the definition of va rious service categories/service providers. These definitions are contained in s ection 65 of the Act. The Act defines the categories of services to which the Ac t applies by defining the term taxable service which is contained in section 65(10 5) of the Act. Further, various

2.2 Service tax & VAT service providers like stock brokers, advertisement agencies, courier agency, etc. are also defined in this section. These definitions form the crux of the entire Act , and are analysed in Chapter 2 hereinafter. 2.3 CLASSIFICATION OF TAXABLE SERVI CES [SECTION 65A] Section 65A provides that classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of section 65. When f or any reason, a taxable service is, prima facie, classifiable under two or more subclauses of clause (105) of section 65, classification shall be effected as f ollows: (a) the sub-clause which provides the most specific description shall be preferred to subclauses providing a more general description; (b) composite ser vices consisting of a combination of different services which cannot be classifi ed in the manner specified in clause (a), shall be classified as if they consist ed of a service which gives them their essential character, in so far as this cr iterion is applicable; (c) when a service cannot be classified in the manner spe cified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the subclauses which equally merit consideration. It ha s been clarified vide C.B.E.&C. Circular No. 51/13/2002 - ST, dated 07.01.2003 t hat any service (transaction) can be taxed only once, even if it appears to fall under two or more categories. Therefore, before levying service tax it is essen tial to determine under which category a particular service falls. It should be kept in mind that service tax is a tax on the service provided and is recovered from the service provider (in some cases even from the service recipient). The p osition is akin to Central Excise duty which is charged on manufactured goods. J ust as Central Excise duty cannot be charged twice on the same goods under two s eparate chapters/headings/sub-headings of the Central Excise Tariff, so also Ser vice tax cannot be charged twice on the same service (transactions). However, on e service provider may provide more than one taxable service. In such cases, the service provider need only take one registration, but it shall be endorsed for all the taxable services and tax liability will have to be discharged for each o f the taxable services separately. However, in the absence of any interpretative rules, it may become difficult at times to decide the classification of a parti cular service. The guiding principle should be that a service should be categori sed under that category which is more specific. As for example, a hotel may rent out a conference room for an official conference where lunch is also served. A dispute could arise in this case as to whether this particular service would fal l under the category of mandap keeper and exempt from tax vide Notification No .12/2001ST dated 20.12.2001, or it will fall under the category of convention s ervices and charged

Preliminary Legal Provisions 2.3 to service tax. Between the two competing categories, in this case, the more spe cific one would be that of a convention service since a mandap keeper includ es official, social as well as business functions whereas a convention service covers conventions only which is like an official function. Hence in this case the service would not be exempt from service tax. 2.4 CHARGE OF SERVICE TAX [SEC TION 66]

Section 66 is the charging section of the Act, which provides that there shall b e levied a service tax @ 12% of the value of taxable services referred to in sec tion 65(105) of the Act. Section 65(105) provides that taxable service shall not only include service provided but also the service to be provided. Thus, (a) the charge is on the services provided or to be provided; (b) the services provided or to be provided must be the one which is covered in section 65(105) (c) the ra te of tax is 12% (d) the measure of tax is on value of taxable services provided w hich is defined in section 67 discussed later in this chapter. 2.5 EDUCATION CES S An Education Cess is levied @ 2%, calculated on the service tax on all taxable s ervices. Thus, the effective rate of service tax works out to be 12.24%. The ces s paid on input services is available as credit for payment of cess on output se rvices or final products. The Education Cess on taxable services is in addition to the tax chargeable on such taxable services, under Chapter V of the Finance A ct, 1994. The Education Cess so collected is utilized for providing and financin g universalised quality basic education. The provisions of Chapter V of the Fina nce Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax and imposition of penalty, apply in relation to the lev y and collection of the Education Cess on taxable services, as they apply in rel ation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules, as the case may be. The fully exempted t axable services would not be subjected to education cess. In case of a partial e xemption, say by way of abatement, the cess would be calculated on the net tax p aid and not on the entire amount of tax that would have been payable, but for th e exemption

2.4 2.6 Service tax & VAT NATURE OF SERVICE TAX Service tax is a tax on services provided. This is not a tax on profession, trad e, calling or employment but is in respect of service rendered. If there is no s ervice, there is no tax. [Addition Advertising vs. Union of India (1998) 98 ELT 14 (Guj) ]. Service tax like excise duty is an indirect tax. 2.7 VALUATION OF TA XABLE SERVICES FOR CHARGING SERVICE TAX [SECTION 67] Section 67 provides for the valuation of taxable services. The provisions of thi s section are discussed below: (1) If the consideration for a taxable service is in terms of money, the value of such service shall be the gross amount charged by the service provider for such service provided or to be provided by him. (2) If the consideration for a taxable service is not wholly or partly in terms of m oney, then the value of such service shall be such amount in money, with the add ition of service tax charged, is equivalent to the consideration. (3) If the con sideration for a taxable service is not ascertainable, the value of such service shall be the amount as may be determined in the prescribed manner. (4) Consider ation includes any amount that is payable for the taxable services provided or t o be provided. (5) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the val ue of such taxable service shall be such amount as, with the addition of tax pay able, is equal to the gross amount charged. (6) The gross amount charged for the taxable service shall include any amount received towards the taxable service b efore, during or after provision of such service. (7) Subject to the provisions mentioned in points (1), (2), (3), (5) and (6) above, the value of a taxable ser vice shall be determined in such manner as may be prescribed. (8) Money includes any currency, cheque, promissory note, letter of credit, draft, pay order, trav ellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value. (9) Gross amoun t charged includes payment by cheque, credit card, deduction from account and an y form of payment by issue of credit notes or debit notes and book adjustment. 2 .8 SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 Notification No.12/2006-ST, dated 19.04.2006 has notified the Service Tax (Deter mination of Value) Rules, 2006. They have come into force from 19.04.2006.

Preliminary Legal Provisions Rule 2 Definitions Clause (c) defines Value to have t he meaning assigned to it in section 67. 2.5 The words and expressions used in these rules and not defined but defined in the Finance Act, 1994 shall have the meaning respectively assigned to them in the A ct. Rule 3 - Manner of determination of value The value of taxable service, the consideration for which is not wholly or partly consisting of money, shall be de termined by the service provider in the manner described below. However, the sam e is subject to the provisions of section 67. (a) the value of such taxable serv ice shall be equivalent to the gross amount charged by the service provider to p rovide similar service to any other person in the ordinary course of trade. The gross amount charged is the sole consideration. (b) where the value cannot be de termined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration. However, such value shall, in no case be less than the cost of provision of such taxable service. Rule 4 - Reject ion of value (1) The Central Excise Officer shall have the power to satisfy hims elf as to the accuracy of any information furnished or document presented for va luation. In other words, where there are adequate reasons warranting verificatio n of the value adopted by the service provider for payment of service tax, rule 4 specifically enables verification of records in such cases. (2) The provisions contained in rule 3 shall not restrict or put to question such power of the Cen tral Excise Officer. (3) A show cause notice shall be issued to the service prov ider, if the Central Excise Officer is satisfied that the value determined by su ch service provider is not in accordance with the provisions of the Act or these rules. (4) Such show cause notice will specify the amount of service tax fixed by the Central Excise officer. (5) The Central Excise Officer shall provide a re asonable opportunity of being heard, to the service provider. Thereafter, he sha ll determine the value of such taxable service for the purpose of charging servi ce tax in accordance with the provisions of the Act and these rules. Rule 5 - In clusion in or exclusion from value of certain expenditure or costs (1) The expen diture or costs incurred by the service provider taxable service forms integral part of the taxable value of be provided. Therefore, they shall be included in t he charging service tax on the said service. It shall not in the course of provi ding the service provided or to value for the purpose of be relevant that variou s

2.6 Service tax & VAT expenditure or costs are separately indicated in the invoice o r bill issued by the service provider to his client. (2) There could be situations where the client of the service provider specifica lly engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases, such goods o r services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure pur ely on behalf of his client in his capacity as an agent, i.e. pure agent of the cl ient. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and shall not be included in the taxable value. (3) However, if the service provider acts as an undisclos ed agent i.e. acts in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as r eimbursable expenditure. (4) Subject to the provisions mentioned in point (1) ab ove, the expenditure or costs incurred by the service provider as a pure agent o f the recipient of service shall be excluded from the value of the taxable servi ce if all the following conditions are satisfied: (i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; (ii) the recipient of service receives and uses the goods or services so procure d by the service provider in his capacity as pure agent of the recipient of serv ice; (iii) the recipient of service is liable to make payment to the third party ; (iv) the recipient of service authorises the service provider to make payment on his behalf; (v) the recipient of service knows that the goods and services fo r which payment has been made by the service provider shall be provided by the t hird party; (vi) the payment made by the service provider on behalf of the recip ient of service has been separately indicated in the invoice issued by the servi ce provider to the recipient of service; (vii) the service provider recovers fro m the recipient of service only such amount as has been paid by him to the third party; and (viii) the goods or services procured by the service provider from t he third party as a pure agent of the recipient of service are in addition to th e services he provides on his own account. Pure agent means a person who (a) enters into a contractual agreement with the recipient of service to act as his pure a gent to incur expenditure or costs in the course of providing taxable service;

Preliminary Legal Provisions 2.7 (b) neither intends to hold nor holds any title to the goods or services so proc ured or provided as pure agent of the recipient of service; (c) does not use suc h goods or services so procured; and (d) receives only the actual amount incurre d to procure such goods or services. It is clarified that the value of the taxab le service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual componen ts of the total consideration is indicated separately in the invoice. Illustrati on 1. X contracts with Y, a real estate agent to sell his house and thereupon Y g ives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not ac t as an agent on behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice iss ued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent. Illustra tion 2. In the course of providing a taxable service, a service provider incurs c osts such as traveling expenses, postage, telephone, etc., and may indicate thes e items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely bec ause they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 3. A contracts with B, an architect fo r building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, et c., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separ ately itemised expense or as part of an inclusive overall fee, service tax is pa yable on the total amount charged by B. Value of the taxable service for chargin g service tax is what A pays to B. Illustration 4. Company X provides a taxable s ervice of rent-a-cab by providing chauffeur-driven cars for overseas visitors. T he chauffeur is given a lump sum amount to cover his food and overnight accommod ation and any other incidental expenses such as parking fees by the Company X du ring the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charge s these amounts from the recipients of service. The cost incurred by the chauffe ur and billed to the recipient of service constitutes part of gross amount charg ed for the provision of services by the company X.

2.8 Service tax & VAT In view of the comprehensive provisions on value of taxable services, all the ci rculars issued relating to value of taxable services have been withdrawn. Rule 6 - Cases in which the commission, costs, etc., will be included or excluded (1) Subject to the provisions of section 67, the value of the taxable services shall include (i) the commission or brokerage charged by a broker on the sale or purcha se of securities including the commission or brokerage paid by the stock-broker to any sub-broker; (ii) the adjustments made by the telegraph authority from any deposits made by t he subscriber at the time of application for telephone connection or pager or fa csimile or telegraph or telex or for leased circuit; (iii) the amount of premium charged by the insurer from the policy holder; (iv) the commission received by the air travel agent from the airline; (v) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance a gent from the insurer; (vi) the reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; ( vii) the commission or any amount received by the rail travel agent from the Rai lways or the customer; (viii) the remuneration or commission, by whatever name c alled, paid to such agent by the client engaging such agent for the services pro vided by a clearing and forwarding agent to a client rendering services of clear ing and forwarding operations in any manner; and (ix) the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointin g such agent in relation to insurance auxiliary services provided by an insuranc e agent. (2) Subject to the provisions contained in sub-rule (1), the value of a ny taxable service, as the case may be, does not include (i) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit; the airfare coll ected by air travel agent in respect of service provided by him; (ii) (iii) the rail fare collected by rail travel agent in respect of service provide d by him; and

Preliminary Legal Provisions (iv) interest on loans. 2.9 Rule 7 - Actual consideration to be the value of taxable service provided from o utside India (1) The value of taxable service received under the provisions of s ection 66A (i.e. the services which are provided from outside India and received in India) shall be such amount as is equal to the actual consideration charged for the services provided or to be provided. (2) The value of taxable services w hich are partly performed in India and are specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, shall be the total consideration paid by the recipient for such services includi ng the value of service partly performed outside India. Nothing mentioned in poi nt (1) above shall have any effect in this respect. Specified taxable services, which involve physical performance, fall under rule 3(ii) of Taxation of service s (Provided from Outside India and Received in India) Rules, 2005. The same are treated as services provided from outside India and received in India if such se rvices are partly or wholly performed in India. Self-examination questions 1. Wh ether a person, having a business in any of the Indian States other than the Sta te of Jammu & Kashmir, who provides the services to the client in the State of J ammu & Kashmir be liable to pay service tax? What is the extent and application of the provisions of the Finance Act, 1994 relating to service tax? Discuss the provisions governing classification of taxable services. Write short notes on ed ucation cess on service tax. Briefly explain the concept of charge of service ta x. How will a taxable service be valued when the consideration thereof is not in wholly or partly in terms of money? How will a taxable service be valued when t he gross amount charged for it includes service tax payable? Discuss whether the central excise officer has power to satisfy himself as to the accuracy of the f urnished information/document presented for valuation. 2. 3. 4. 5. 6. 7. 8.

2.10 Service tax & VAT 9. Who is a pure agent? Discuss. 10. What shall be the value of taxable services which are partly performed in In dia and are specified in clause (ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006?

3 BASIC CONCEPTS APPLICABLE TO ALL SERVICES 3.1 BASIC EXEMPTION FOR SMALL SERVICE PROVIDERS An exemption scheme for small se rvice providers has been prescribed by the Central Government vide Notification No.6/2005 ST, dated 1.3.2005. The exemption scheme (hereinafter referred to as t he said exemption ) is applicable from 1 st April 2005. The taxable services of aggregate value not exceeding Rs.4 lakhs in any financial year shall be exempted from the whole of service tax leviable thereon. The exemption is however, subjec t to the following conditions: (i) the provider of taxable service has the optio n not to avail the exemption contained and pay service tax on the taxable servic es provided by him and such option, once exercised in a financial year, shall no t be withdrawn during the remaining part of such financial year; (ii) the provider of taxable service shall not avail the Cenvat credit of servic e tax paid on any input service under Rule 3 or Rule 13 of Cenvat Credit Rules, 2004, used for providing the said taxable service, for which the said exemption is availed; (iii) the provider of taxable service shall not avail Cenvat credit under Rule 3 of Cenvat Credit Rules, 2004 on capital goods received in his premi ses during the period in which the said exemption is availed; (iv) the provider of taxable service shall avail the Cenvat credit only on such inputs or input se rvices which are received on or after the date on which the service provider sta rts paying service tax, and are used for the provision of taxable services for w hich service tax is payable; (v) be ny, the the provider of taxable service who starts availing the said exemption shall required to pay an amount equivalent to the Cenvat credit taken by him, if a in respect of such inputs lying in stock or in process on the date on which provider of taxable service starts availing the said exemption;

3.2 Service tax & VAT (vi) the balance of Cenvat credit lying unutilized in the account of the taxable service provider after deducting the amount referred to in sub-paragraph (v), i f any, shall not be utilized as per rule 3(4) of the Cenvat Credit Rules, 2004 a nd shall lapse on the day such service provider starts availing the said exempti on; (vii) where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and (viii) the aggregate val ue of taxable services rendered by a provider of taxable service from one or mor e premises, does not exceed Rs.4 lakhs in the preceding financial year. As per E xplanation B to the Notification aggregate value not exceeding Rs.4 lakhs shall in clude the sum total of first consecutive payments totaling to Rs.4 lakhs receive d during a financial year towards the gross amount, as prescribed under section 67, charged by the service provider towards the taxable services. However, payme nts received towards such gross amount, which are exempt from whole of service t ax, shall not be covered within such limit of Rs.4 lakhs. In case of goods trans port agency services, the payments received towards taxable service in respect o f which the service tax thereon is paid by the person paying freight pursuant to section 68(2) shall not be considered for the above limit of Rs.4 lakhs. 3.1.1 Exemption not available in certain cases The above exemption shall not apply to: (i) taxable services provided by a person under a brand name or trade name, whe ther registered or not, of another person (use of own brand name will not be a d isqualification for the exemption); or (ii) such value of taxable services in respect of which service tax shall be pai d by such person and in such manner as specified under sub-section (2) of sectio n 68 of the said Finance Act read with Service Tax Rules,1994. As per Explanatio n A to the Notification brand name or trade name means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, mo nogram, logo, label, signature, or invented word or writing which is used in rel ation to such specified services for the purpose of indicating, or so as to indi cate a connection in the course of trade between such specified services and som e person using such name or mark with or without any indication of the identity of that person.

Basic Concepts Applicable to All Services 3.3 The following taxable services have been notified for the purposes of sub-sectio n (2) of section 68: (A) the services,(i) in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communicat ion or a leased circuit; (ii) in relation to general insurance business; (iii) in relation to insurance a uxiliary service by an insurance agent; and (iv) in relation to transport of goo ds by road in a goods carriage, where the consignor or consignee of goods is,(a) any factory registered under or governed by the Factories Act, 1948; (b) any co mpany formed or registered under the Companies Act, 1956; (c) any corporation es tablished by or under any law; (d) any society registered under the Societies Re gistration Act, 1860 or under any law corresponding to that Act in force in any part of India; (e) any co-operative society established by or under any law; (f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the rules made thereunder; or (g) any body corporate established, or a partnership firm registered, by or unde r any law (v) in relation to business auxiliary service of distribution of mutua l fund by a mutual fund distributor or an agent, as the case may be. (vi) in rel ation to sponsorship service provided to any body corporate or firm. (B) any tax able service provided or to be provided from a country other than India and rece ived in India, under section 66A of the Finance Act, 1994. 3.2 PAYMENT ONLY ON R ECEIPT It is to be noted that though the service provider charges service tax in his bi ll raised on his client as and when the service is provided, the service tax is payable to the Government only when the value of taxable services is received. Thu s, if a chartered accountant raises a bill for auditing services say, on 15 th D ecember, 2006 for Rs.105000/(including service tax Rs.5000/-) and the client pay s his bill only in February 2007, the liability to pay service tax to the Govern ment would arise only in February 2007. This alleviates the major grievance of t he service providers who otherwise would be required to pay service tax on amoun ts not received or not likely to be received. The situs of taxation

3.4 Service tax & VAT is on service provided but the payment of service tax to the Government is defer red till the receipt of the value of the taxable service. This concept is dealt with later under payment of service tax in Chapter 5. 3.3 SERVICE TAX PAYABLE ON ADVANCE RECEIVED Service tax is payable as soon as any advance is received as: (i) the taxable se rvice includes service to be provided, and (ii) the payments received before, during, or after the provision of taxable ser vice, form part of the gross amount charged for the taxable services. 3.4 IMPORT OF SERVICES Internationally, services provided by a foreign supplier to a domes tic customer are subjected to VAT/GST under reverse charge or tax shift mechanis m. Under the reverse charge method, a legal fiction is created treating as if th e recipient had himself provided the services domestically and accordingly, the recipient of services is treated as deemed service provider. Charging of service tax in the hands of the recipient of service, where the taxable service is prov ided from outside the country, is required to prevent distortion of competition. Section 66A provides a separate mechanism for levying service tax on services r eceived from outside India. Section 66A is to be read with the Taxation of Servi ces (Provided from outside India and Received in India) Rules, 2006. It may be n oted that only services received in India are taxable under these provisions. Se ction 66A provides that: (1) Where any service specified in clause (105) of sect ion 65 is, (a) provided or to be provided by a person who has established a busin ess or has a fixed establishment from which the service is provided or to be pro vided or has his permanent address or usual place of residence, in a country oth er than India, and (b) received by a person (recipient) who has his place of bus iness, fixed establishment, permanent address or usual place of residence, in In dia, such service shall be a taxable service. Such service shall be treated as i f the recipient had himself provided the service in India. Accordingly all the p rovisions of Chapter V of the Finance Act, 1994 shall apply to such services. (2 ) However, a service received by an individual for a purpose other than for use in any business or commerce shall not be a taxable service.

Basic Concepts Applicable to All Services 3.5 (3) If the provider of the service has his business establishment both in that c ountry and elsewhere, the country, where the establishment of the provider of se rvice directly concerned with the provision of service is located, shall be trea ted as the country from which the service is provided or to be provided. (4) Whe re a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section. In other words, permanent establishment in India and the perman ent establishment outside India shall be treated as two separate legal persons f or taxation purposes. (5) A person carrying on a business through a branch or ag ency in any country shall be treated as having a business establishment in that country. (6) In relation to a body corporate, the place where it is incorporated or otherwise legally constituted shall be its usual place of residence. 3.5 TAX ATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN INDIA) RULES, 200 6 Notification No.11/2006-ST 19.04.2006 has notified the Taxation of Services (P rovided from Outside India and Received in India) Rules, 2006. These rules have come into force from 19.04.2006. Rule 2 Definitions Input, input service and output s ervice shall have the meaning assigned to them in clause (k), (l) and (p) of rule 2 of the CENVAT Credit Rules, 2004. [Refer Chapter 4 of Part A of this Study Ma terial] As per clause (e) of rule 2, India includes the designated areas in the Co ntinental Shelf and Exclusive Economic Zone of India as declared by the notifica tions of the Government of India. The words and expressions used in these rules and not defined, but defined in the Finance Act 1994 shall have the meanings res pectively assigned to them in the Act. Rule 3 - Taxable services provided from o utside India and received in India Rule 3 classifies taxable services provided f rom outside India and received in India in to three categories. However, this cl assification shall be subject to section 66A of the Finance Act, 1994. The three categories are: (a) when the immovable property in respect of which the service is provided or to be provided is situated in India [Rule 3(i)] (b) when the ser vice is performed in India [Rule 3(ii)]

3.6 Service tax & VAT (c) when service is received by a recipient located in India for use in relation to business or commerce [Rule 3(iii)] (a) As per Rule 3(i) the following servic es provided or to be provided from outside India in relation to immovable proper ty situated in India shall be taxable services and thus, chargeable to service t ax: Sub-clause of section 65(105) (d) (p) (q) (v) (zzq) (zzza) Service covered G eneral insurance services Architects services Interior decorators services Real es tate agents services Commercial or industrial construction services Site preparat ion and clearance, excavation, earth moving and demolition services Dredging ser vices of rivers, ports, harbours, backwaters and estuaries Survey and map making services other than by Government departments Construction services in respect of residential complexes Auctioneer services, other than auction of property unde r directions or orders of a court of law or auction by the Central Government (zzzb) (zzzc) (zzzh) (zzzr) (b) As per rule 3(ii) the following services shall be taxable service and charge d to service tax, only if they are performed in India: Sub-clause of section 65( 105) (a) (f) (h) (i) (j) (l) (m) (n) Service Covered Stock broking Courier agenc ys services Custom house agents services Steamer agents services Clearing and forwa rding agents services Air travel agents services Mandap keepers services Tour opera tors services

Basic Concepts Applicable to All Services (o) (s) (t) (u) (w) (x) (y) (z) (zb) ( zc) (zi) (zj) (zn) (zo) (zq) (zr) (zt) (zu) (zv) (zw) (zza) (zzc) (zzd) (zzf) (z zg) (zzh) (zzi) (zzl) (zzm) (zzn) Rent-a-cab scheme operators services Practising services chartered 3.7 accountants Practising cost accountants services Practising company secretarys services Securi ty agencys services Credit rating agencys services Market research agencys services Underwriters services Photography services Convention services Video tape produc tion services Sound recording services Port services Authorised service stations services Beauty parlours services Cargo handling services Dry cleaning services E vent management services Fashion designers services Health club and fitness centr es services Storage and warehousing services Commercial training or coaching serv ices Erection, commissioning or installation services Internet cafs services Manag ement, services maintenance or repair Technical testing and analysis services Technical inspection and certification s ervices Other port services Airport services Transport of goods by air services

3.8 Service tax & VAT (zzo) (zzp) (zzs) (zzt) (zzv) (zzw) (zzx) (zzy) (zzzd) Busines s exhibition services Transport of goods by road Opinion poll services Outdoor c aterers services Survey and services exploration of mineral Pandal or shamiana contractors services Travel agent services Forward contract se rvices Cleaning services other than in relation to agriculture, horticulture, an imal husbandry or dairying Services in respect of Membership of clubs or associa tions Packaging services Transport of goods in containers by rail by any person, other than Government railway (zzze) (zzzf) (zzzp) It has been clarified that even if such a taxable service is partly performed in India, it shall be considered to have been performed in India. The value of suc h taxable service shall be determined under section 67 of the Act and the rules made thereunder. (c) Rule 3(iii) covers the following services: Sub-clause of se ction 65(105) (b) (c) (d) (e) (g) (k) (r) (za) (zd) (ze) Service Covered Telepho ne services Pager services General insurance services (other than immovable prop erty) Advertising agencys services Consulting engineers services Manpower recruitm ent agencys services Management consultants services Scientific services and techn ical consultancy Leased circuit services Telegraph services

Basic Concepts Applicable to All Services (zf) (zg) (zh) (zk) (zl) (zm) (zs) (zx ) (zy) (zz) (zzb) (zze) (zzj) (zzk) (zzr) (zzu) (zzz) (zzzc) Telex services Facs imile (FAX) services On-line information and data base access or retrieval servi ces Broadcasting services Insurance auxiliary (General Insurance) services Banki ng and financial services Cable operators services Life insurance services Insura nce services auxiliary (Life insurance) 3.9 Rail travel agents services Business auxiliary services Franchise services Author ised service stations services in respect of light motor vehicle Foreign exchange broking services Intellectual property services Programme production (of TV or radio programmes) services Transport of goods through pipeline or other conduit Survey and map making services other than by government departments (other than immovable property) Mailing list services compilation and mailing (zzzg) (zzzi) (zzzj) (zzzk) (zzzl) (zzzm) Registrar to an issues services Share transfer agents services Automated teller ma chine operations, maintenance or management services Recovery agents services Sal e of space or time for advertisement, other than in print media

3.10 Service tax & VAT (zzzn) Sponsorship services provided to any body corporat e or firm, other than sponsorship of sports events Business support services Auc tioneer services, other than auction of property under directions or orders of a court of law or auction by the Central Government (other than immovable property ) Public relations services Ship management services Internet telephony services Credit card, debit card, charge card or other payment card related services (zzzq) (zzzr) (zzzs) (zzzt) (zzzu) (zzzw) The abovementioned services shall be taxable services and subject to service tax , when they are received by a recipient located in India for use in relation to business or commerce. In respect of all the services covered in the above-mentio ned three categories, it shall be deemed that the recipient of the service has h imself provided the service in India. Therefore, he shall pay the service tax. I t is to be noted that services in relation to transport of passengers embarking on international journey by air, other than economy class passengers and transpo rt of persons by cruise ship are not covered in any of the three categories. Rul e 4 - Registration and payment of service tax The recipient of taxable services provided from outside India and received in India shall make an application for registration. All the provisions for registration contained in section 69 of the Finance Act, 1994 and rule 4 of Service Tax Rules, 1994 shall apply in this cas e. Rule 5 - Taxable services not to be treated as output services The treatment of the recipient of service, as the deemed service provider under section 66A is only for the purpose of charging service tax on taxable services received from outside the country. The taxable services provided from outside India and receiv ed in India, therefore, shall not be treated as output services for the purpose of availing credit of duty of excise paid on any input or service tax paid on an y input services under CENVAT Credit Rules, 2004. However, where such service is used as an input service for providing any taxable output service or final prod ucts, the service tax paid on such service can be taken as input credit.

Basic Concepts Applicable to All Services 3.11 3.6 EXPORT OF SERVICES Service tax is a destination-based consumption tax and it is not applicable on e xport of services. Export of Service Rules, 2005 provide a scientific criteria t o decide what is export of service. The rules make it clear that exemption from se rvice tax/rebate of service tax and excise duty paid is admissible only if there is export of service as defined in these rules. 3.7 EXPORT OF SERVICE RULES, 2005 RULE 2 - DEFINITIONS 1. 2. 3. Act means the Finance Act, 1994 [Rule 2(a)]. input sh all have the meaning assigned to it in clause (k) of rule 2 of the CENVAT Credit Rules, 2004 [Rule 2(b)]. (refer Chapter 4 of Part A of this Study Material) inpu t service shall have the meaning assigned to it in clause (l) of rule 2 of the CE NVAT Credit Rules, 2004 [Rule 2(c)]. (refer Chapter 4 of Part A of this Study Ma terial) RULE 3 - EXPORT OF TAXABLE SERVICE Rule 3 classifies the taxable services in thr ee categories (a) when the immovable property in respect of which the service is rendered is situated abroad [Rule 3(1)(i)] (b) when the service is performed ou tside India [Rule 3(1)(ii)] (c) when service is provided from India, but recipie nt of service is outside India [Rule 3(1)(iii)]. In order to be treated as expor t of services, different requirements in each of the three categories have to be fulfilled. (a) As per Rule 3(1)(i) the following services provided in relation to an immovable property shall be eligible for exemption as export of service only when the immovable property is situated outside India: Sub-clause of section 65 (105) (d) (p) (q) (v) (zzq) Service covered General insurance services Architect s services Interior decorators services Real estate agents services Commercial or i ndustrial construction services

3.12 Service tax & VAT (zzza) Site preparation and clearance, excavation, earth moving and demolition services Dredging services of rivers, ports, harbours, bac kwaters and estuaries Survey and map making services other than by Government de partments Construction services in respect of residential complexes Auctioneer se rvices, other than auction of property under directions or orders of a court of law or auction by the Central Government (zzzb) (zzzc) (zzzh) (zzzr) Thus, in the first category, the service shall be treated as export of taxable se rvice only if the immovable property is situated abroad. (b) As per Rule 3(1)(ii) the following services shall be eligible for exemption as export of services only if they are performed outside India: Sub-clause of section 65(105) (a) (f) (h) (i) (j) (l) (m) (n) (o) (s) (t) (u) (w) (x) (y) Service Covered Stock broking Co urier agencys services Custom house agents services Steamer agents services Clearin g and forwarding agents services Air travel agents services Mandap keepers services Tour operators services Rent-a-cab scheme operators services Practising chartered accountants services Practising cost accountants services Practising company secr etarys services Security agencys services Credit rating agencys services Market res earch agencys services

Basic Concepts Applicable to All Services 3.13 (z) (zb) (zc) (zi) (zj) (zn) (zo) (zq) (zr) (zt) (zu) (zv) (zw) (zza) (zzc) (zzd) (zzf) (zzg) (zzh) (zzi) (zzl) ( zzm) (zzn) (zzo) (zzp) (zzs) (zzt) (zzv) (zzw) (zzx) (zzy) (zzzd) Underwriters se rvices Photography services Convention services Video tape production services S ound recording services Port services Authorised service stations services Beauty parlours services Cargo handling services Dry cleaning services Event management services Fashion designers services Health club and fitness centres services Stor age and warehousing services Commercial training or coaching services Erection, commissioning or installation services Internet cafs services Management, maintena nce or repair services Technical testing and analysis services Technical inspect ion and certification services Other port services Airport services Transport of goods by air services Business exhibition services Transport of goods by road O pinion poll services Outdoor caterers services Survey and exploration of mineral services Pandal or shamiana contractors services Travel agent services Forward co ntract services Cleaning services other than in relation to

3.14 Service tax & VAT agriculture, horticulture, animal husbandry or dairying ( zzze) (zzzf) (zzzp) Services in respect of membership of clubs or associations P ackaging services Transport of goods in containers by rail by any person, other than Government railway It has been clarified that even if such a taxable service is partly performed ou tside India, it shall be considered to have been performed outside India. (c) Ru le 3(1)(iii) covers the following services: Sub-clause of section 65(105) (b) (c ) (d) (e) (g) (k) (r) (za) (zd) (ze) (zf) (zg) (zh) (zk) (zl) (zm) (zs) (zx) (zy ) (zz) Service Covered Telephone services Pager services General insurance servi ces (other than immovable property) Advertising agencys services Consulting engin eers services Manpower recruitment agencys services Management consultants services Scientific and technical consultancy services Leased circuit services Telegraph services Telex services Facsimile (FAX) services On-line information and data b ase access or retrieval services Broadcasting services Insurance auxiliary (Gene ral Insurance) services Banking and financial services Cable operators services L ife insurance services Insurance auxiliary (Life insurance) services Rail travel agents services

Basic Concepts Applicable to All Services 3.15 (zzb) (zze) (zzj) (zzk) (zzr) (zz u) (zzz) (zzzc) Business auxiliary services Franchise services Authorised servic e stations services in respect of light motor vehicle Foreign exchange broking se rvices Intellectual property services Programme production (of TV or radio progr ammes) services Transport of goods through pipeline or other conduit Survey and map making services other than by government departments (other than immovable p roperty) Mailing list compilation and mailing services Registrar to an issues ser vices Share transfer agents services Automated teller machine operations, mainten ance or management services Recovery agents services Sale of space or time for ad vertisement, other than in print media Sponsorship services provided to any body corporate or firm, other than sponsorship of sports events Business support ser vices Auctioneer services, other than auction of property under directions or ord ers of a court of law or auction by the Central Government (other than immovable property) Public relations services Ship management services Internet telephony services Credit card, debit card, charge card or other payment card related ser vices (zzzg) (zzzi) (zzzj) (zzzk) (zzzl) (zzzm) (zzzn) (zzzq) (zzzr) (zzzs) (zzzt) (zzzu) (zzzw) The abovementioned services when provided in relation to business or commerce sh all be eligible for exemption as export of services when the recipient of such ser vices are located outside India. When provided otherwise such services shall be eligible for exemption as export of services when the recipient of such services a re

3.16 Service tax & VAT located outside India at the time of provision of such se rvice. However, where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as e xport of service only when order for provision of such service is made from any of his commercial establishment or office located outside India. It is to be not ed that services in relation to transport of passengers embarking on internation al journey by air, other than economy class passengers and transport of persons by cruise ship are not covered in any of the three categories. As per sub-rule ( 2) of rule 3, any taxable service shall be treated as exported only when the fol lowing conditions are satisfied: (a) such service is delivered outside India and used outside India; and (b) payment for such service provided outside India is r eceived by the service provider in convertible foreign exchange. It has been cla rified by an Explanation in rule 3 that India includes the designated areas in the Continental Shelf and Exclusive Economic Zone of India. The Exclusive Economic Z one extends up to 200 nautical miles inside the sea from baseline. India also inclu des territorial waters, i.e., up to 12 nautical miles from landmass. Thus, servi ce tax is leviable if services are provided within territorial waters or in desi gnated areas of continental shelf and exclusive economic zone. In other words, s ervices provided in this area/zone will be treated as service provided in India. R ULE 4 - EXPORT WITHOUT PAYMENT OF SERVICE TAX Any service, which is taxable unde r clause (105) of section 65 of the Act, may be exported without payment of serv ice tax. RULE 5 - REBATE OF SERVICE TAX Where any taxable service is exported, t he Central Government can grant rebate of service tax paid on such taxable servi ce or service tax or duty paid on input services or inputs, as the case may be, used in providing such taxable service. Such rebate will be granted by issuing a notification. The rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the notification . 1. Rebate of service tax paid on exported taxable services Notification No.11/ 2005 ST, dated 19.04.2005 has been issued by the Central Government under Rule 5 of the Export of Services Rules, 2005 (hereinafter referred to as said rules). Such notification grants rebate of the whole of the service tax and cess paid

Basic Concepts Applicable to All Services 3.17 on all taxable services exported in terms of rule 3 to any country other than Nepal and Bhutan, subject to certai n conditions, limitations and procedures. Conditions and limitations (a) the tax able service should have been exported in terms of rule 3 of the said rules and payment for export of such taxable service should be received in India in conver tible foreign exchange; (b) the service tax and cess, rebate of which has been c laimed, should have been paid on the taxable service exported; (c) the amount of rebate of service tax and cess admissible should not be less than Rs.500; and ( d) in case,(i) the service tax and cess, rebate of which has been claimed, have not been paid; or (ii) the taxable service, rebate on which has been claimed, has not been exporte d, the rebate paid, if any, shall be recovered with interest as per the provisio ns of section 73 and section 75 of the Finance Act, 1994 as if no service tax an d cess have been paid on such taxable service. Procedure:(i) claim of rebate of service tax and cess paid on all taxable services exported shall be filed with t he jurisdictional Assistant/Deputy Commissioner of Central Excise; a. documentar y evidence of receipt of payment against taxable service exported and for which rebate is claimed, payment of service tax and cess on such taxable service expor ted; a declaration that such taxable service, rebate of service tax and cess pai d on which is claimed, has been exported, in terms of rule 3 of the said rules, along with the documents evidencing the export of such taxable service; (ii) such application shall be accompanied by, b. (iii) The jurisdictional Assistant/Deputy Commissioner of Central Excise, if sat isfied that the claim is in order, shall sanction the rebate either in whole or in part. Here, Cess means education cess on taxable service levied under section 9 1 read with section 95 of the Finance (No.2) Act, 2004. 2. Rebate of excise duty /service tax paid on inputs/input service used in providing exported taxable ser vices Notification No.12/2005 ST, dated 19.04.2005 has been issued by the Centra l

3.18 Service tax & VAT Government under Rule 5 of the Export of Services Rules, 2005 (hereinafter referred to as said rules). Such notification grants rebate of the whole of the duty paid on excisable inputs or the whole of the service tax and cess paid on all taxable input services (hereinafter referred to as input ser vices), used in providing taxable services exported in terms of rule 3 to any cou ntry other than Nepal and Bhutan, subject to certain conditions, limitations and procedures. Conditions and limitations (a) the taxable service should have been exported in terms of rule 3 of the said rules and payment for export of such ta xable service has been received in India in convertible foreign exchange; (b) th e duty, rebate of which has been claimed, should have been paid on the inputs; ( c) the service tax and cess, rebate of which has been claimed, should have been paid on the input services; (d) the total amount of rebate of duty, service tax and cess admissible should not be less than Rs.500; (e) no Cenvat credit should have been availed on inputs and input services on which rebate has been claimed; and (f) in case,(i) the duty or, as the case may be, service tax and cess, reba te of which has been claimed, have not been paid; or (ii) the taxable service, rebate for which has been claimed, has not been export ed; or (iii) Cenvat credit has been availed on inputs and input services on whic h rebate has been claimed, the rebate paid, if any, shall be recoverable with in terest as per the provisions of section 73 and section 75 of the Finance Act, 19 94 as if no service tax and cess have been paid on such taxable service. Procedu re:1. Filing of declaration- The provider of taxable service to be exported shal l, prior to date of export of taxable service, file a declaration with the juris dictional Assistant/Deputy Commissioner of Central Excise describing the taxable service intended to be exported with,(a) description, quantity, value, rate of duty and the amount of duty payable on inputs actually required to be used in pr oviding taxable service to be exported;

Basic Concepts Applicable to All Services 3.19 (b) description, value and the am ount of service tax and cess payable on input services actually required to be u sed in providing taxable service to be exported. 2. Verification of declarationThe Assistant/Deputy Commissioner of Central Excise shall verify the correctnes s of the declaration filed prior to such export of taxable service, if necessary , by calling for any relevant information or samples of inputs and if after such verification, the Assistant/Deputy Commissioner of Central Excise is satisfied that there is no likelihood of evasion of duty, or as the case may be, service t ax and cess, he may accept the declaration. 3. Procurement of input materials an d receipt of input services- The provider of taxable service shall,(i) obtain th e inputs required for use in providing taxable service to be exported, directly from a registered factory or from a dealer registered for the purposes of the Ce nvat Credit Rules, 2004 accompanied by invoices issued under the Central Excise Rules, 2002; (ii) receive the input services required for use in providing taxable service to be exported and an invoice, a bill or, as the case may be, a challan issued und er the provisions of Service Tax Rules, 1994. 4. Presentation of claim for rebat e claim of rebate of the duty paid on the inputs or the service tax and cess pai d on input services shall be filed with the jurisdictional Assistant/Deputy Comm issioner of Central Excise after the taxable service has been exported; (a) (i) (ii) such application shall be accompanied by, a. invoices for inputs issued und er Central Excise Rules, 2002 and invoice, a bill, or as the case may be, a chal lan for input services issued under Service Tax Rules, 1994 in respect of which rebate is claimed; documentary evidence of receipt of payment against taxable se rvice exported, payment of duty on inputs and service tax and cess on input serv ices used for providing taxable service exported, rebate of which is claimed; a declaration that such taxable service, has been exported in terms of rule 3 of t he said rules, along with documents evidencing such export. b. c. (b) The jurisdictional Assistant/Deputy Commissioner of Central Excise having re gard to the declaration, if satisfied that the claim is in order, shall sanction the rebate either in whole or in part. Here, Cess means education cess on taxable service levied under section 91 read with section 95 of the Finance (No.2) Act, 2004. Duty means, duties of excise leviable under

3.20 Service tax & VAT the following enactments, namely:(a) the Central Excise A ct, 1944; (b) the Additional Duties of Excise (Goods of Special Importance) Act, 1957; (c) the Additional Duties of Excise (Textiles and Textile Articles) Act, 1978; (d) National Calamity Contingent duty leviable under section 136 of the Fi nance Act, 2001 as amended from time to time; (e) special excise duty collected under a Finance Act; (f) additional duty of excise as levied under section 157 o f the Finance Act, 2003; (g) Education Cess on excisable goods as levied under s ection 91 read with section 93 of the Finance (No.2) Act, 2004; and (h) the addi tional duty of excise leviable under section 85 of the Finance Act, 2005. 3.8 CO NCEPT OF DEEMED SERVICE NON-EXISTENT Section 67(1)(iii) and Service Tax (Determination of Value) Rules, 2006 (as inse rted w.e.f. 19.04.2006) make provisions for valuation even when consideration is not ascertainable. However, these provisions apply only when there is considera tion. If there is no consideration i.e., in case of free service, section 67 and Service Tax (Determination of Value) Rules, 2006 cannot apply. In Bharti Cellul ar Ltd. v. CCE (2005) 179 ELT 334 (CESTAT), it has been held that no service tax is payable if SIM cards are given free as bonus, as when value of service is ze ro, its 12.24% (that time it was 8%) will also be zero. However, this principle applies only when there is really a free service and not when its cost is recovere d through different means. 3.9 SERVICES PROVIDED BY MUTAL CONCERNS TO ITS MEMBER S SUBJECT TO SERVICE TAX The explanation after clause (121) of section 65 clarif ies that taxable service includes any service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, def erred payment or any other valuable consideration. Thus, the concept of mutualit y will no longer hold good. 3.10 SERVICES PROVIDED TO UNITED NATIONS ORGANISATIO N EXEMPT FROM PAYMENT OF SERVICE TAX OR INTERNATIONAL Central Government vide Notification No. 16/2002-ST, dated 2.08.2002 has exempte d all the taxable service specified in section 65 of the Act provided by any per son to the United

Basic Concepts Applicable to All Services 3.21 Nations or an International Organ isation, from whole of the service tax leviable under section 66 of the Act. Int ernational Organisation means an International Organisation declared by the Cent ral Government in pursuance of section 3 of the United Nations (Privileges and I mmunities) Act, 1947 to which the provisions of the schedule to the said Act app ly. 3.11 SERVICES PROVIDED TO A DEVELOPER OR UNITS OF SPECIAL ECONOMIC ZONE EXEM PT FROM PAYMENT OF SERVICE TAX Taxable service provided to a developer of Specia l Economic Zone or a unit (including a unit under construction) of Special Econo mic Zone by any service provider for consumption of the services within such Spe cial Economic Zone, are exempt from the whole of service tax leviable thereon un der section 66 of the Act. However, such an exemption is subject to the followin g conditions, namely:(i) the developer has been approved by the Board of Approva ls to develop, operate and maintain the Special Economic Zone; (ii) the unit of the Special Economic Zone has been approved by the Development Commissioner or Board of Approvals, as the case may be, to establish the unit in the Special Economic Zone (iii) the developer or unit of a Special Economic Zon e shall maintain proper account of receipt and utilization of the said taxable s ervices. Here, (1) "Board of Approvals" means the combined Board of Approvals fo r export oriented unit and Special Economic Zone units, as notified in the Offic ial Gazette, from time to time by the Government of India in the Ministry of Com merce and Industry; (2) "developer" means a person engaged in development or ope ration or maintenance of Special Economic Zone, and also includes any person aut horized for such purpose by any such developer; (3) "Special Economic Zone" mean s a zone specified as Special Economic Zone by the Central Government in the not ification issued under clause (iii) of Explanation 2 to the proviso to sub-secti on (1) of section 3 of the Central Excise Act, 1944 (1 of 1944) [Notification No . 17/2002-S.T., dated 21.11.2002]. 3.12 EXEMPTION TO GOODS AND MATERIALS SOLD BY SERVICE PROVIDER TO RECEIPIENT OF SERVICE With effect from 1.07.2003 so much of the value of all the taxable services, as is equal to the value of goods and ma terials sold by the service provider to the recipient of service

3.22 Service tax & VAT has been exempt from the service tax leviable thereon und er section 66, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials. However, the said exempti on shall apply only in such cases where: (i) no credit of duty paid on such good s and materials sold, has been taken under the provisions of the Cenvat Credit R ules, 2004; or (ii) where such credit has been taken by the service provider on such goods and materials, such service provider has paid the amount equal to such credit availe d before the sale of such goods and materials [Notification No. 12/2003-S.T, dat ed 20.6.2003]. Self-examination questions 1. 2. 3. 4. 5. What is the value based exemption available to the service providers? What are the conditions for avail ment of the value based exemption from service tax? Is the value based service t ax exemption compulsory? What are the circumstances when the value based exempti on is not available? A service provider raised a bill for the taxable services r endered by him on 15.12.2006. However, he receives the payment for the services only in February 2007. When would the liability to pay service tax arise? Explai n whether service tax is payable on advance received towards the value of the ta xable services. Is there any tax liability for the services received in India, w hich are provided by a person from outside India? Discuss. Who is liable to pay service tax for the services provided from outside India? What are the benefits available for export of services? 6. 7. 8. 9. 10. What is the procedure for claiming the rebate of service tax paid on exporte d taxable services?

4 GAMUT AND COVERAGE OF SERVICE TAX LAWS This chapter elucidates the specific provisions governing the services covered i n the gamut of service tax. 4.1 STOCK BROKING SERVICES Effective date: 1st July 1994. Definitions: Stock-broker means a person, who has e ither made an application for registration or is registered as a stock-broker or sub-broker, as the case may be, in accordance with the rules and regulations ma de under the Securities and Exchange Board of India Act, 1992 [Section 65(101)]. Sub-broker means a sub- broker who has either made an application for registratio n or is registered as a sub-broker in accordance with the rules and regulations made under the Securities and Exchange Board of India Act, 1992 Section 65(103). Securities has the meaning assigned to it in clause (h) of section 2 of the Secur ities contracts (Regulation) Act, 1956 Section 65(93). Securities include (i) shar es, scrips, stocks, bonds, debentures, debenture stock or other marketable secur ities of a like nature in or of any incorporated company or other body corporate ; (ia) derivative; (ib) Units or any other instrument issued by any collective i nvestment scheme to the investors in such schemes; (ii) Government securities; ( iia) such other instruments as may be declared by the central Government to be S ecurities; and

4.2 Service tax & VAT (iii) rights or interest in securities. [Section 2(h) of The Securities contract s (Regulation) Act, 1956] Scope of taxable service shall include any service pro vided or to be provided to any person, by a stock-broker in connection with the sale or purchase of securities listed on a recognised stock exchange [Section 65 (105)(a)]. 4.2 TELEPHONE SERVICES Effective date: 1st July 1994 Definitions: Telegraph authority has the meaning ass igned to it in clause (6) of section 3 of the Indian Telegraph Act, 1885 and inc ludes a person who has been granted a licence under the first proviso to sub-sec tion (1) of section 4 of that Act Section 65(111). Telegraph authority means the D irector General of Posts and Telegraphs, and includes any officer empowered by h im to perform all or any of the functions of the telegraph authority under this Act - Section 3(6) of the Indian Telegraph Act, 1885 Within India, the Central G overnment shall have the exclusive privilege of establishing, maintaining and wo rking telegraphs: Provided that the Central Government may grant a licence, on s uch conditions and in consideration of such payments as it thinks fit, to any pe rson to establish, maintain or work a telegraph within any part of India; Provid ed further that the Central Government may, by rules made under this Act and pub lished in the Official Gazette, permit, subject to such restrictions and conditi ons as it thinks fit, the establishment, maintenance and working(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or a bove India, or Indian territorial waters, and (b) of telegraphs other than wirel ess telegraphs within any part of India. [Section 4(1) of the Indian Telegraph A ct, 1885] Subscriber means a person to whom any service of a telephone connection or facsimile or a leased circuit or a pager or a telegraph or a telex has been p rovided by the telegraph authority Section 65(104). Scope of taxable service sha ll include any service provided or to be provided to a subscriber, by the telegr aph authority, in relation to a telephone connection. Section 65(105)(b). Releva nt Circulars/Trade Notices Cellular phone operators are also covered under this category. In the case of plastic roaming

Gamut And Coverage of Service 4.3 facility, the liability to pay service tax is on the home operator (home network ), to whom the subscriber is attached, as he is the one, who arranges roaming fa cility in other metro cities through arrangements with other service operators ( visiting network). In case of international roaming facility, it is clarified th at the liability to pay service tax is on the home operator (home network), to w hom the subscriber is attached, as he is the one who arranges roaming facility i n other countries through arrangements with the foreign network operators (visit ing network) [M.F. (D.R.) S.T., Circular No. 22/2/97, dated 3.9.1997]. 4.3 PAGER SERVICES Effective date: 1st November 1996 Definitions: Pager means an instrument, apparatu s or appliance which is a non-speech, one way personal calling system with alert and has the capability of receiving, storing and displaying numeric or alpha-nu meric messages Section 65(77). Telegraph authority has the meaning assigned to it in clause (6) of section 3 of the Indian Telegraph Act, 1885 and includes a pers on who has been granted a licence under the first proviso to sub-section (1) of section 4 of that Act Section 65(111). Subscriber means a person to whom any servi ce of a telephone connection or facsimile or a leased circuit or a pager or a te legraph or a telex has been provided by the telegraph authority Section 65(104). Scope of taxable service shall include any service provided or to be provided t o a subscriber, by the telegraph authority in relation to a pager Section 65(105 )(c). 4.4 GENERAL INSURANCE SERVICES Effective date: 1st July 1994. Definitions: General insurance business has the mea ning assigned to it in clause (g) of section 3 of the General Insurance Business (Nationalization) Act, 1972 Section 65(49). General insurance business means fire , marine or miscellaneous insurance business, whether carried on singly or in co mbination with one or more of them but does not include capital redemption busin ess and annuity certain business. [Section 3(g) of General Insurance Business (N ationalization) Act, 1972] Policy holder has the meaning assigned to it in clause (2) of section 2 of the Insurance Act, 1938 Section 65(80). Policy Holder includes a person to whom the whole of the interest of the policy holder in the

4.4 Service tax & VAT policy is assigned once and for all, but does not include an assignee thereof wh ose interest in the policy is defeasible or is for the time being subject to any condition. [Section 2(2) of the Insurance Act, 1938.] Insurer means any person ca rrying on the general insurance business and includes a reinsurer Section 65(58) . Scope of taxable service shall include any service provided or to be provided to a policyholder or any person, by an insurer, including re-insurer carrying on general insurance business in relation to general insurance business Section 65 (105)(d). Exemptions/Notifications With effect from 11.07.2003 the taxable servi ce provided by an insurer, carrying on general insurance business, to a policyho lder in relation to General Insurance Business provided under the Universal Heal th Insurance Scheme is exempt from the service tax leviable thereon. [Notificati on No. 16/2003-S.T., dated 11.07.2003] It is to be noted that service tax is pay able only on the total amount of the premium charged by an insurer carrying on g eneral insurance business - fire, marine and miscellaneous insurance. 4.5 ADVERT ISING AGENCY SERVICES Effective date: 1st November 1996. Definitions: Advertiseme nt includes any notice, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas Sect ion 65(2). Advertising agency means any person engaged in providing any service co nnected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant - Section 65(3). Scope of taxable service sh all include any service provided or to be provided to a client, by an advertisin g agency in relation to advertisement, in any manner Section 65(105)(e). Relevan t Circulars/Trade Notices/Case Laws It has been clarified that the activity of p rinting and publishing Telephone Directories, Yellow Pages or Business Directori es shall not attract service tax since such activity is essentially of printing readymade advertisement from the advertisers and publishing the same in the dire ctory which are similar to the activities carried out by newspapers or periodica ls. However, any activity relating to making or preparation of an advertisement, such as designing, visualising, conceptualising, etc., will be liable to servic e tax. [Commissioner of Central Excise, Calcutta, Trade Notice No. 99/GL-90/C.E. /PRO/CAL-II/99, dated 16.9.1999]

Gamut And Coverage of Service 4.5 The term canvassing may merely involve contacting potential advertisers and pers uading them to give advertisement to a particular newspaper/periodical/magazine. The making and preparation of the advertisement namely, drafting of the text, p reparation of layout is left either to the advertiser or to newspaper/ periedica l /magazine. Such a service is known as space selling . In such cases, since th e agency undertakes the job of merely bringing the order for an advertisement an d does not undertake any further activity, it would not fall within the definiti on of advertising agency and will not be subjected to service tax. On the other hand, canvassing may involve such agency approaching a customer, receiving the texts of the advertisement (including photographs, monograms etc. of the custom s), estimating the space that such advertisement would occupy in the newspaper/p eriodical/magazine, negotiating the price, informing the general layout of the a dvertisement, that would finally appear in such newspaper etc. In such cases the term canvassing would certainly fall within the phrase any service provided in any manner connected to making preparing, displaying and exhibiting and woul d be taxable service. Therefore, if the canvassing is limited to space selling then such services would not be liable to any service tax. However, if canvassin g is involving receiving the text of advertisement, estimating the space that su ch advertisement would occupy in the newspaper/periodical/magazine, negotiating the price, forming the general layout of the advertisement that would finally ap pear in the newspaper then such activity would be liable to service tax under th e category of Advertising Agency Services. [Circular No. 64/13/2003-ST Oct 28, 2 003] It was clarified by D.G.ST. in October 2003 that cinema theatres cannot be treated as advertisement agencies as they project advertisement only on behest o f advertising agencies. In respect of selling TV serial episodes to the TV chann els, the taxable service i.e. video tape production service is on the process of r ecording of any programme, event or function on magnetic tapes (including editin g thereof). The tax is therefore limited to the technical function of recording or editing what is recorded and is not extended to the sale of the serial to cha nnel by the producer. A producer may allow the telecast of such episodes by the channels in lieu of procurement of Free Commercial Time (FCT). This time is sold by the producer to advertising agencies for showing advertisements. In this cas e, selling the time allotted to a producer does not fall within the purview of ad vertisement service since this activity is not connected to making, preparation, display or exhibition of advertisement [C.B.E.& C. Circular No. 78/08/2004 S.T., dated 23.03.2004].

4.6 Service tax & VAT 4.6 COURIER SERVICES Effective date: 1st November 1996. Definition: Courier agency means any person eng aged in the door-to-door transportation of timesensitive documents, goods or art icles utilising the services of a person, either directly or indirectly, to carr y or accompany such documents, goods or articles Section 65(33). Scope of taxabl e service shall include any service provided or to be provided to a customer, by a courier agency in relation to door-to-door transportation of time-sensitive d ocuments, goods or articles Section 65(105)(f). Relevant Circulars/Trade Notices Transporters who advertise themselves as Express Cargo Service and provide the se rvice of door to door transportation of goods and articles with an assurance of timely delivery are also liable to service tax as the nature of service provided by them is not different from the service provided by the conventional courier agencies. [Based on S.T. Circular F. No. 341/43/96-TRU, dated 31.10.1996] Angadia s are also covered under this category of service and hence liable to pay service tax. [M.F. (D.R.) letter issued under F. No. 168/1/96 CX. 4, dated 10.10.1997] 4.7 CONSULTING ENGINEERS SERVICES Effective date: 7th July 1997 Definition: Consulting engineer means any profession ally qualified engineer or any body corporate or any other firm who, either dire ctly or indirectly, renders any advice, consultancy or technical assistance in a ny manner to a client in one or more disciplines of engineering Section 65(31). Scope of taxable service shall include any service provided or to be provided to a client, by a consulting engineer in relation to advice, consultancy or techni cal assistance in any manner in one or more disciplines of engineering but not i n the discipline of computer hardware engineering or computer software engineeri ng Section 65(105)(g). Relevant Circulars//Trade Notices/Case Laws The scope of services liable for service tax in this category is very wide. The Trade Notice No. 53-C.E. (Service Tax)/97 dated 4/7/97 issued by the Commissioner of Central Excise, New Delhi, explains some of the areas of engineering coming within the a mbit of this clause. The scope of the services of a consultant may include any o ne or more of the following categories.

Gamut And Coverage of Service (i) (ii) Feasibility study. Pre-design services/pr oject report. 4.7 (iii) Basic design engineering. (iv) Detailed design engineering. (v) Procuremen t. (vi) construction, supervision and project management. (vii) Supervision of c ommissioning and initial operation. (viii) Manpower planning and training. (ix) Post-operation and management. (x) Trouble shooting and technical services, incl uding establishing systems and procedures for an existing plant. Though the abov e list is not exhaustive, it illustrates the wide scope and nature of the servic es rendered by a consulting engineer. As noted above, services to be within the ambit of service tax under the category of consulting engineering services shoul d be services in the nature of advice, consultancy or technical assistance in on e or more disciplines of engineering. This means two conditions have to be satis fied. Firstly, the services must pertain to any of the disciplines of engineerin g and secondly, the nature of services should be advice, consultancy or technica l assistance. It has been clarified that the term consulting engineer will not inc lude architects and hence architectural services rendered by architects will be ou tside the ambit of service tax under this clause. However, the Finance (No.2) Ac t, 1998 effective from 16.10.1998 has brought architects also within the purview o f service tax. Services must be provided to a client. Thus, services rendered by a sub-consultant to a prime consultant are outside the ambit of service tax [CC Ex., New Delhi, Trade Notice No. 53-C.E., S.T./97, dated 04.07.1997]. As per C.B .E.&C. S.T. Circular No. 34/2/2001 CX, dated 30.04.2001 the term consulting engin eer does not include those qualified engineers who act as insurance surveyors and loss assessor within its scope. Therefore, service tax levy on the consulting e ngineer in any discipline of engineering will not cover the insurance surveying and loss assessment service rendered by a qualified engineer. Some construction agencies take up turnkey projects for construction of flats, administrative buil ding, etc. For constructing these flats they have to do some designing, drawing and also provide advise and technical assistance. The contract is generally for a lumpsum amount with no separate allocation for the above charges. It has been clarified vide For any civil

4.8 Service tax & VAT construction work to commence, a lot of preparatory work is required, e.g. soil testing, survey, planning, designing, drawing, etc. Once the design and drawings are completed by the construction company, it always seeks the approval of the client before proceeding with the construction. If the client suggests some chan ges they are incorporated in the design. This portion of the work is provided to its client and the service is definitely of a consulting engineer and hence t axable [C.B.E.&C. Circular No. 49/11/2002-S.T., dated 18.12.2002]. Charges for e rection, installation & commissioning are not covered under the category of cons ulting engineer services. Commissioning or installation service will be separate ly taxable under relevant entry and are not chargeable under consulting engineer services [Based on C.B.E.&C. Circular No. 79/9/2004 ST, dated 13.05.2004]. 4.8 CUSTOM HOUSE AGENTS SERVICES Effective date: 15th June 1997. Definition: Custom house agent means a person lice nsed, temporarily or otherwise, under the regulations made under sub-section (2) of section 146 of the Customs Act, 1962 Section 65(35). Scope of taxable servic e shall include any service provided or to be provided to a client, by a Custom house agent in relation to the entry or departure of conveyances or the import o r export of goods Section 65(105)(h). Relevant Circulars/Trade Notices Only pers ons who are licensed under the Customs Act come within the ambit of service tax under this clause. Secondly, only services rendered to a client attracts service tax. Thus, in case a Custom House Agent (CHA) sub-contracts work to another CHA , then in such cases, the bill raised by the latter on the main CHA will not att ract service tax. Service tax will be payable by the main CHA who renders servic es to the client and raises the bill on the client. Refund of service tax arisin g due to discounts given by CHA to their client has to be claimed separately as per the legal procedure therefor. [CCEx., New Delhi, Trade Notice No. 39/97C.E., S.T.39/97, dated 11.06.1997] 4.9 STEAMER AGENTS SERVICES Effective date: 15th June 1997 Definitions: Shipping line means any person who own s or charters a ship and includes an enterprise which operates or manages the bu siness of shipping Section 65(97).

Gamut And Coverage of Service Steamer agent means any person who undertakes, eithe r directly or indirectly, 4.9 (a) to perform any service in connection with the ships husbandry or dispatch inc luding the rendering of administrative work related thereto; or (b) to book, adv ertise or canvass for cargo for or on behalf of a shipping line; or (c) to provi de container feeder services for or on behalf of a shipping line Section 65(100) . Ship means a sea-going vessel and includes a sailing vessel - Section 65(96). Sc ope of taxable service shall include any service provided or to be provided to a shipping line, by a steamer agent in relation to a ships husbandry or dispatch o r any administrative work related thereto as well as the booking, advertising or canvassing of cargo, including container feeder services Section 65(105)(i). Re levant Circulars/Trade Notices The taxable service provided by a steamer agent t o a shipping line, is the service provided by a Steamer Agent in relation to a s hips husbandry or dispatch or any administrative work related thereto as well as the booking, advertising or canvassing of cargo, including container feeder serv ices [CCEx., New Delhi, Trade Notice No. 39-C.E., S.T.39/97, dated 11.06.1997]. 4.10 CLEARING & FORWARDING AGENTS SERVICES Effective date: 16th July 1997 Definit ion: Clearing and forwarding agent means any person who is engaged in providing an y service, either directly or indirectly, connected with the clearing and forwar ding operations in any manner to any other person and includes a consignment age nt Section 65(25). Scope of taxable service shall include any service provided o r to be provided to a client, by a clearing and forwarding agent in relation to clearing and forwarding operations, in any manner Section 65(105)(j). In order to attract service tax under this category (a) The service must be provided by a c learing and forwarding agent as defined in section 65(25); (b) The service must be provided to a client; (c) The service must be in relation to clearing and for warding operations in any manner. A clearing and forwarding agents scope of servi ces is quite wide. Normally, there is a contract between the principal and the c learing and forwarding agent detailing the terms and conditions and also indicat ing the commission or remuneration to which the C&F agent is entitled. A

4.10 Service tax & VAT clearing and forwarding agent normally undertakes the following activities: (a) Receiving the goods from the factories or premises of the principal or his agent s; (b) Warehousing these goods; (c) Receiving despatch orders from the principal ; (d) Arranging despatch of goods as per the directions of the principal by enga ging transport on his own or through the authorised transporters of the principa l; (e) Maintaining records of the receipt and despatch of goods and the stock av ailable at the warehouse; (f) Preparing invoices on behalf of the principal. The value of the taxable service in relation to the services provided by a clearing and forwarding agent to a client for services of clearing and forwarding operat ions in any manner shall deemed to be the gross amount of remuneration or commis sion (by whatever name called) paid to such agent by the client engaging such ag ent. Thus service tax is payable on the said gross amount of remuneration or com mission. Relevant Circulars/Trade Notices Normally C & F agents do the job of cl earing and forwarding. In a typical situation clearing & forwarding agents are a ppointed in outstation location by manufacturers or wholesale distributors so th at they may clear the goods, store them and then forward the goods according to the instructions of the Principal owner. Thus the person concerned is an agent a nd an agent is an authorised representative of a named principal owner. There is a contract between the principal (owner) and C&F agent detailing the terms and conditions and also indicating the commission or renumeration to which the C&F a gent is entitled. Therefore, ICDs(Inland Container Depot)/CFS(Customs Freight St ation) cannot be considered as C&F agents on the following grounds: (i) (ii) The re is no agreement or contract between service Provider (ICD/CFS) and Service re ceiver (importer/exporter); ICDs/CFS are functioning under authority of Govt. of India and not for any principal or owner (importer/exporter) [C.B.E.&C. Circula r No. 39/2/2002-S.T., dated 20.02. 2002]. Coal merchants who act as buyers agents and carry out such jobs/assignments as as ked for by the respective consumers/buyers are liable to service tax as clearing and forwarding agents. It is immaterial as to whether they are working as agent s of buyers or sellers [C.B.E. & C. Letter F. No. 1591/1/2003 CX. 4, dated 10.12 .2003]

Gamut And Coverage of Service 4.11 4.11 MANPOWER RECRUITMENT AGENTS SERVICES Effective date: 7th July 1997 Definitio n: Manpower recruitment or supply agency means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of man power, temporarily or otherwise to a client Section 65(68). Scope of taxable serv ice shall include any service provided or to be provided to a client, by a manpo wer recruitment or supply agency in relation to the recruitment or supply of man power, temporarily or otherwise in any manner Section 65(105)(k). Relevant Circul ars/Trade Notices The coverage of the term Manpower Recruitment Agency is wide and shall include within its ambit a wide range of services. Service tax on manpowe r recruitment agency shall cover within its fold the entire gamut of services pr ovided by a manpower recruitment agency to a client from the incipient stage of selecting/identifying manpower required for any prospective employment, till the stage of actual selection for the same. It may be noted that in certain cases s uch as where a person approaches a manpower recruitment agency for being employe d in a suitable position abroad, the prospective candidate for employment become s the client for purposes of service tax. Modifications may be allowed in the bi lls raised to the client at the time of final payment but after verification [CC Ex., New Delhi Trade Notice No. 53-C.E. (Service Tax)/97 dated 4/7/97]. A large number of business or industrial organizations engage the services of commercial concerns for temporary supply of manpower which is engaged for a specified peri od or for completion of particular projects or tasks. Services rendered by comme rcial concerns for supply of such manpower to clients would be covered within th e purview of service tax. In these cases, the individuals are generally contract ually employed by the manpower supplier. The supplier agrees for use of the serv ices of an individual employed by him to another person for a consideration. The terms of the individuals employment may be laid down in a formal contract or let ter of appointment or on a less formal basis. What is relevant is that the staff are not contractually employed by the recipient but come under his direction. G em and Jewellery Export Promotion Council have represented seeking clarification that hiring of skilled artisans for making jewellery does not constitute supply of manpower taxable under manpower recruitment services. When the artisans are hi red by any organisation or business, directly, without engaging the services of any other person in any manner, in such cases, the artisans are contractually em ployed by the company. There is no intermediary and hence no consideration is pa id to or payable to any intermediary. The service tax would be

4.12 Service tax & VAT leviable only when the services of a person are engaged for recruitment or suppl y of artisans [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.12 AIR TRAVEL AGENTS SERVICES Effective date: 1st July 1997 Definition: Air travel agent means any person engaged in providing any service connected with the booking of passage for travel by air Section 65(4). Scope of taxable service shall include any service provided or to be provided to a customer, by an air travel agent in relation to the booking of passage for travel by air Section 65(105)(l). Exempti ons/Notifications Notification No. 22/97-S.T., dated 26.06.1997 exempts that por tion of the value of taxable service which is in excess of the commission receiv ed by the air travel agent from the airline for booking of passage for travel by air. Relevant Circulars/Trade Notices An option is provided to the air travel a gent to pay the service tax @ 0.5% (now 0.6%) of the basic fare in the case of d omestic booking and 1% (now 1.2%) of the basic fare in the case of international booking towards discharge of his service tax liability instead of paying tax @ 10% (now 12%) on the actual commission received from the airlines. The expressio n basic fare means that part of the air fare on which commission is normally paid to the air travel agent by the airline [CCEx., New Delhi Trade Notice No. 47-C.E . S.T./97, dated 27.06.1997]. This is provided in Rule 6(7) of the Service Tax R ules, 1994 as well. It has been clarified that in respect of tickets issued by G SA/IATA agents directly on collection of fare, it is the GSA/IATA agents who hav e to collect and pay service tax on the commission they get from the airline. Su b-agents, who are not getting commission from the airlines and also not making o ut tickets directly from airlines are not required to collect service tax and ge t registration from service tax authority of the Central Excise Department. [CCE x., New Delhi, Letter C. No. CE/20/ST/Air Travel/97, dated 27.08.1997]. 4.13 MAN DAP KEEPERS SERVICES Effective date: 1st July 1997 Definitions: Mandap means any im movable property as defined in section 3 of the Transfer of Property Act, 1882 a nd includes any furniture, fixtures, light fittings and floor coverings therein let out

Gamut And Coverage of Service for consideration for organising any official, soc ial or business function Section 65(66). 4.13 Immovable property does not include standing timber, growing crops or grass (Secti on 3 of the Transfer of Property Act, 1882). Mandap keeper means a person who allo ws temporary occupation of a mandap for consideration for organising any officia l, social or business function Section 65(67). Caterer means any person who suppli es, either directly or indirectly, any food, edible preparations, alcoholic or n on-alcoholic beverages or crockery and similar articles or accoutrements for any purpose or occasion Section 65(24). Scope of taxable service shall include any service provided or to be provided to a client, by a mandap keeper in relation t o the use of a mandap in any manner including the facilities provided or to be p rovided to the client in relation to such use and also the services, if any, pro vided or to be provided as a caterer Section 65(105)(m). Exemptions/Notification s With effect from 1.07.2003 the taxable services provided to any person by a ma ndap keeper for the use of the precincts of a religious place as a mandap are ex empted from service tax leviable thereon. Here, religious place means a place wh ich is meant for conduct of prayers or worship pertaining to a religion [Notific ation No. 14/2003-S.T., dated 20.06.2003] In case of services provided by a hote l as mandap keeper, where services provided include catering services (i.e. supp ly of food alongwith any service in relation to use of a mandap), an abatement o f 40% of the gross amount charged is granted if the bill issued for this purpose indicates that it is inclusive of charges for catering services. Accordingly, i n such cases, service tax is payable on 60% of the gross amount charged for the above services. However, the exemption is not available in cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of se rvice tax on input services, used for providing such taxable service, has been t aken under the provisions of Cenvat Credit Rules, 2004; or the service provider has availed the benefit under the Notification No. 12/2003 ST, dated 20.06.2003. (ii) Here, food means a substantial and satisfying meal. Hotel means a place that provide s boarding and lodging facilities to public on commercial basis [Notification No .1/2006- ST dated 01.03.2006]. An abatement of 40% of the gross amount charged i s granted in case of services in relation to use of mandap, including the facili ties provided to the client in relation to such use and also for the catering ch arges. Accordingly, in such cases, service tax is payable on 60% of the gross am ount charged for the above services. This exemption shall apply only in such cas es where the mandap keeper also provides catering services, that is, supply of f ood and the invoice, bill

4.14 Service tax & VAT or challan issued indicates that it is inclusive of the charges for catering ser vice. However, the exemption is not available in cases where: (i) the CENVAT cre dit of duty paid on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service, has been taken under the provisions of Cenvat Credit Rules, 2004; or the service provider has availe d the benefit under the Notification No. 12/2003 ST, dated 20.06.2003. (ii) Here, food means a substantial and satisfying meal [Notification No.1/2006- ST dat ed 01.03.2006]. Relevant Circulars/Trade Notices The definition of Mandap is v ery wide. It not only covers immovable property but also includes any furniture, fixtures, light fittings and floor coverings therein. The mandap should be let out for consideration for organising any official, social, or business function so as to attract service tax. Thus, kalyana mandaps or marriage halls, banquet h alls, conference halls, etc. let out will fall within the ambit of service tax. It is also clarified that hotels and restaurants which let out their banquet hal ls, rooms, gardens, etc. for holding/organizing any marriages, parties, conferen ces, shows, etc. will also fall within the ambit of service tax. But, the hall, room or space has to be let out for some period of time and during such period t he room, space or hall should be in exclusive (temporary) possession of the pers on to whom it is let out so as to attract service tax. However, the activity of mere reservation of seats in a restaurant shall not attract service tax. Renting out of hall for the purpose of holding a dance, drama or music programme or a c ompetition is chargeable to service tax as they are deemed to be social function s [Based on CCEx., New Delhi Trade Notice No. 47-C.E.(S.T.)/97, dated 27.06.1997 & C.B.E.& C.F. No. 332/82/97-TRU, dated 24.09.1997]. It has been clarified vide Circular No.42\05\2002-ST dated 29.04.2002 that renting out of premises by art galleries for the exhibition of art and artifacts will not be liable to service tax under the category of Mandap Keeper. The Board, vide letter F.No.332/82/97-T RU dt.24.9.97, had clarified that hotels and restaurants, which let out their ba nquet halls, rooms, gardens etc. for holding/organizing any marriages, parties, conferences, shows etc., are covered under the definition of a Mandap Keeper. It was further clarified that programmes of dance, drama and music are social func tions and letting out of a hall for holding these programmes is liable to servic e tax under the category of Mandap Keeper. However, the art exhibitions held in the premises of an art gallery cannot be treated as social/business functions as the exhibition of art and artifacts do not fall under any of the categories men tioned in Boards letter dt.24.9.97. Therefore, renting out of premises by art gal leries for such exhibition will not be liable to service tax under the category of Mandap Keeper.

Gamut And Coverage of Service 4.14 TOUR OPERATORS SERVICES Effective date: 1st Se ptember 1997 Definitions: 4.15 Tour operator means any person engaged in the business of planning, scheduling, or ganising or arranging tours (which may include arrangements for accommodation, s ightseeing or other similar services) by any mode of transport, and includes any person engaged in the business of operating tours in a tourist vehicle covered by a permit granted under the Motor Vehicles Act, 1988 or the rules made thereun der [Section 65(115)]. Tour means a journey from one place to another irrespective of the distance between such places Section 65(113). Tourist vehicle has the meani ng assigned to it in clause (43) of section 2 of the Motor Vehicles Act, 1988 Se ction 65(114). Tourist vehicle means a contract carriage constructed or adapted an d equipped and maintained in accordance with such specifications as may be presc ribed in this behalf [Section 2(43) of The Motor Vehicles Act, 1988]. Scope of t axable service shall include any service provided or to be provided to any perso n, by a tour operator in relation to a tour Section 65(105)(n). Exemptions/Notif ications In case of services provided in relation to a tour by a tour operator w here the tour operator provides a package tour, an abatement of 60% of the gross amount charged is granted if the bill issued for this purpose indicates that it is inclusive of charges for such a tour. Accordingly, in such cases, service ta x is payable on 40% of the gross amount charged for the above services. However, the exemption is not available in cases where: (i) the CENVAT credit of duty pa id on inputs or capital goods or the CENVAT credit of service tax on input servi ces, used for providing such taxable service, has been taken under the provision s of Cenvat Credit Rules, 2004; or the service provider has availed the benefit under the Notification No. 12/2003 ST, dated 20.06.2003. (ii) Here, package tour means a tour in which the provisions for transportation and acc ommodation for stay of the person undertaking the tour has been afforded by the tour operator [Notification No.1/2006- ST dated 01.03.2006]. In case of services provided in relation to a tour by a tour operator where the services provided a re other than in relation to a package tour, an abatement of 60% of the gross am ount charged is granted if the bill issued for this purpose indicates that the a mount charged in the bill is the gross amount charged for such a tour. According ly, in such cases, service tax

4.16 Service tax & VAT is payable on 40% of the gross amount charged for the above services. However, t he exemption is not available in cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of service tax on input service s, used for providing such taxable service, has been taken under the provisions of Cenvat Credit Rules, 2004; or the service provider has availed the benefit un der the Notification No. 12/2003 ST, dated 20.06.2003. (ii) Here, package tour means a tour in which the provisions for transportation and acc ommodation for stay of the person undertaking the tour has been afforded by the tour operator [Notification No.1/2006- ST dated 01.03.2006]. In cases where the services provided by a tour operator are solely of arranging or booking accommod ation for any person in relation to a tour, an abatement of 90% of the gross amo unt charged is granted if invoice, bill or challan issued for this purpose indic ates that it is towards charges for such accommodation. This exemption shall not apply in such cases where the invoice, bill or challan issued by the tour opera tor to the client only includes the service charges for arranging or booking acc ommodation for any person in relation to a tour and does not include the cost of such accommodation. However, the exemption is not available in cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service, has b een taken under the provisions of Cenvat Credit Rules, 2004; or the service prov ider has availed the benefit under the Notification No. 12/2003 ST, dated 20.06. 2003 [Notification No.1/2006 ST, dated 01.03.2006]. (ii) Relevant Circulars/Trade Notices It is to be noted that in the context of servic es rendered by a tour operator the trade notice does not provide for exemption o f sub-contracted services from service tax in contradistinction to trade notices issued for several other services where it is clearly provided that in case of sub-contracted services service tax is not required to be paid by the sub-contra ctor wherea) b) Service tax has been paid by the principal (who has sub-contract ed the services) for services rendered by him to his client; and the sub-contrac ting in question is in respect of the same service category. Service Tax on tour operators will be chargeable only on services rendered in In dia in respect of tour within Indian territories. Service rendered towards forei gn tours i.e tours abroad does not attract service tax [Based on CCEx, Pune I Tr ade Notice No.1/2000, dated 27.04.2000]. Prior to 10.09.2004, tour operator serv ice covered package tour operators also. However, such package tours attracted s ervice tax only if such tours involved modes of transport other

Gamut And Coverage of Service 4.17 than road (say a combination of air-rail-cab travel). The definition of tour ope rator had been suitably expanded. While the levy on tour operators engaged in op erating tours in tourist vehicles remained as such, in case of a package tour (w hich are planned, scheduled, organized or arranged by tour operators), the scope of the levy has been extended by removing the limitation regarding transportati on by tourist vehicles only. Such tourist operators shall be subjected to servic e tax irrespective of the mode of transport used during such tours [Based on C.B .E.& C. Circular No. 80/10/2004 ST, dated 17.09.2004]. 4.15 RENT-A-CAB SCHEME OP ERATORS SERVICES Effective date: 16th July 1997 Definitions: Rent-a-cab scheme ope rator means any person engaged in the business of renting of cabs Section 65(91). Cab means a motor cab or maxi cab Section 65(20). Maxi cab has the meaning assigned to it in clause (22) of section 2 of the Motor Vehicles Act, 1988 Section 65(70 ). Maxi cab means any motor vehicle constructed or adapted to carry more than six passengers, but not more than twelve passengers, excluding the driver, for hire or reward [Section 2(22) of The Motor Vehicles Act, 1988]. Motor cab has the meani ng assigned to it in clause (25) of section 2 of the Motor Vehicles Act, 1988 Se ction 65(71). Motor cab means any motor vehicle constructed or adapted to carry no t more than six passengers excluding the driver for hire or reward [Section 2(25 ) of The Motor Vehicles Act, 1988]. Scope of taxable service shall include any s ervice provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab Section 65(105)(o). Exemptions/Notification s In case of services provided by a rent-a-cab scheme operator in relation to re nting of cabs, an abatement of 60% of the gross amount charged is granted. Thus service tax is payable on 40% of the total amount charged in the above case. How ever, the exemption is not available in cases where: (i) the CENVAT credit of du ty paid on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service, has been taken under the prov isions of Cenvat Credit Rules, 2004; or

4.18 (ii) Service tax & VAT the service provider has availed the benefit under the Notific ation No. 12/2003 ST, dated 20.06.2003 [Notification No.1/2006 ST, dated 01.03.2 006]. Relevant Circulars/Trade Notices It has been clarified that service tax will not be payable in case where a bill has been raised on a rent-a-cab scheme operator by another rent-a-cab scheme operator who has sublet the motor cab to the first mentioned operator (who has rented to the client) provided the first mentioned operator pays service tax on the amount billed to his client for renting out the motor cab so obtained by him. This is a beneficial trade notice issued by the d epartment considering that the situs of tax is on the services provided "to any person" which is in contradistinction to other services where the situs of tax i s on the services provided "to a client" or "to a customer" [Based on CCEx, Pune I Trade Notice No.1/2000, dated 27.04.2000]. 4.16 ARCHITECTS SERVICES Effective date: 16th October 1998. Definition: Architect means any person whose name is, for the time being, entered in the register of architects maintained under section 23 of the Architects Act, 1972 and also includes any commercial concern engaged in any manner, whether directly or indirectly, in rendering services in the fiel d of architecture Section 65(6). Scope of taxable service shall include any serv ice provided or to be provided to a client, by an architect in his professional capacity, in any manner Section 65(105)(p). Relevant Circulars/Trade Notices Bro adly, the work of an architect starts from providing appropriate advice keeping in view the requirements of the client at the preliminary stage of initial sketc hes, specifications and drawings of plans, and consists of providing detailed dr awings, approval of the drawings from the concerned authorities, supervision at each stage of construction and till the point where the completion certificate i s obtained from the authorities [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dat ed 07.10.1998]. It has been clarified vide CCEx, Delhi-I, Trade Notice No.1/998S.T., dated 05.01.1998 that the term Consulting Engineer will not include architect s within its scope. Therefore, the service tax levy on the services rendered by a consulting engineer in any discipline of engineering will not cover the archite ctural services rendered by architects. Where an engineering firm provides both engineering and architectural services and a lumpsum amount is charged for both the services, service tax will be collected on the entire amount charged. Howeve r, if separate break-up is given in the bill for engineering services and

Gamut And Coverage of Service 4.19 architectural services, then service tax needs to be paid only on the charges fo r engineering services. Para 4.6 of Trade Notice No. 7/98 dated 13.10.98 issued by Commissioner of Central Excise, Mumbai I clarifies that where an architect/in terior decorator sub-contracts part/whole of his work to another architect/inter ior decorator, no service tax is required to be paid by the subcontractor provid ed that the principal architect/interior decorator has paid the service tax on t he services rendered by him to the client and provided the sub-contracting is in respect of the same service category. In other words, work is sub-contracted by one architect to another architect. In such cases, if the principal architect p ays the service tax on services rendered by him to his client, the sub-contracti ng architect is not required to pay the service tax. However, service tax would be required to be paid in a case where sub-contracting is to a different service category. For example where an architect sub-contracts his work to a consulting engineer, then service tax would be required to be paid by both the architect a nd the consulting engineer on the services rendered by them. 4.17 INTERIOR DECOR ATORS SERVICES Effective date: 16th October 1998 Definition: Interior decorator means any person engaged, whether directly or indirectly, in the business of providing by way of advice, consultancy, technical assistance or in any other manner, services relat ed to planning, design or beautification of spaces, whether man-made or otherwis e and includes a landscape designer Section 65(59). Scope of taxable service sha ll include any service provided or to be provided to a client, by an interior de corator in relation to planning, design or beautification of spaces, whether man made or otherwise, in any manner Section 65(105)(q). Relevant Circulars/Trade No tices Services rendered by art directors of films and others who render services of design etc. for setting up temporary structures/settings for shootings etc. do not attract the service tax levy, as such interior decoration has no permanen cy and is only of a temporary nature [Based on M.F. (D.R.) Letter No.11/3/98-TRU , dated 07.10.1998] It has been clarified vide a clarification issued by D.G.S.T . in October, 2003 that Vaastu/FengShui Consultants come under the category of I nterior Decorators as they offer services by way of advice relating to planning and designing of spaces.

4.20 Service tax & VAT 4.18 MANAGEMENT CONSULTANTS SERVICES Effective date: 16th October 1998. Definitio n: "Management consultant" means any person who is engaged in providing any serv ice, either directly or indirectly, in connection with the management of any org anisation in any manner and includes any person who renders any advice, consulta ncy or technical assistance, in relation to financial management, human resource s management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management Section 65(65). Scope of taxable service shall include any service provided or to be provided to a client, by a management consultant in co nnection with the management of any organisation, in any manner Section 65(105)( r). Relevant CircularsTrade Notices It has been clarified that any services rende red in relation to merger and acquisition will be covered under the scope of tax able services provided by management consultant and these services will be liabl e to service tax accordingly [Based on M.F. (D.R.) section 37-B Order No. 1/1/20 01-ST, dated 26.06.2001]. The definition of Management consultant is very wide. Persons rendering services in all areas of management will be liable for service tax. The definition of management consultant reads ...any person engaged in .... The words any person cannot be narrowly construed so as to mean only individuals. Section 3(42) of the General clauses Act, 1847 fortifies this view by defining pe rson as Person shall include any company or association or body of individuals, wh ether incorporated or not. Thus, management consultancy services rendered by comp anies, firms etc. will also be liable for service tax. The term management of any organisation is very wide and it will be very difficult to determine whether cer tain services would fall within the scope of services rendered by Management con sultants. In the context of services rendered in respect of merger and acquisiti on the Board has issued an order no. 1/1/2001 ST dated 27/6/2001 under section 3 7B of the Central Excise Act, 1944 (as applicable to service tax) which brings o ut the views of the Board on the term Management and Management consultancy. The rel evant extracts are given below : In this regard, the Board had consulted the Indi an Institute of Management, Ahmedabad for obtaining an expert opinion on the sub ject matter. They have opined that the term Management is generally understood to mean running the affair of an organisation in an organised and systematic manner . To be able to do this efficiently and effectively, management typically involv es carrying out a host of activities, functions and tasks and at

Gamut And Coverage of Service 4.21 different levels. Thus management encompasses both strategic and operational lev el functioning and would include tasks such as planning, organising, staffing, d irecting, controlling and coordinating. Management also invariably involves desi gning organisational structure around functions such as marketing, manufacturing , research and development and finance and/or business area such as product grou ps or geographical markets. Thus management of any organisation involves carryin g out a wide variety of clearly defined activities across a number of organisati onal sub-units in a coherent and coordinated manner. Since the expression Managem ent is an inclusive term, management consultant would also be equally encompassing expression and would include any adviser who renders services on any aspect of m anagement. They have further opined that financial advisory services rendered in merger and acquisition transactions are clearly in the nature of services in co nnection with the management of an organisation as merger and acquisition themse lves are important dimension of modern management. After considering the ILO pub lication on management consulting, various other literature on the subject, manage ment practices and profiles of practicing management consultants they have concl uded the following : (i) the term management is a broad term to cover the various functions and the multifarious activities required for its efficient and effecti ve functioning; (ii) management consulting is not restricted, but is wide enough to include advisory services rendered on any aspect of management; (iii) merger and acquisition are an important aspect of management of any organisation today ; and (iv) advisory services, including financial advisory services, for merger and acquisition clearly fall with in the realm of management consulting. On the b asis of the above, the Board has clarified vide M.F. (D.R.) Section 37-B order N o. 1/1/2002 S.T., dated 26.06.2001 that services rendered in relation to merger an d acquisition will be covered under the scope of taxable services provided by man agement consultant and these services will be liable to service tax accordingly. It is further clarified that certain agencies such as merchant bankers who are r equired to play only a statutory role under any Act or Regulation such as Takeov er Regulations of SEBI, and do not provide any advice or consultancy but merely verify and submit a report to the concerned authorities, in connection with merg er and acquisition transaction, are not treated as management consultant. However, with the changes brought in by the Finance Act, 2001, the services provided by such agencies would also be covered specifically under the banking and other fina ncial services [section 65(10)(vi)] on which the service tax levy will come into force from a date to be notified by the Government. Though the above proposition were laid down in the context of applicability of merger & acquisition services in the realm of management consultancy services the said propositions about the gamut of management services would equally apply in all cases.

4.22 Service tax & VAT 4.19 PRACTISING CHARTERED ACCOUNTANTS SERVICES Effective date: 16th October 1998. Definition: Practising Chartered accountant means a person who is a member of the Institute of Chartered Accountants of India and is holding a certificate of pra ctice granted under the provisions of the Chartered Accountants Act, 1949 and in cludes any concern engaged in rendering services in the field of chartered accou ntancy Section 65(83). Scope of taxable service shall include any service provid ed or to be provided to a client, by a practising chartered accountant in his pr ofessional capacity, in any manner Section 65(105)(s). 4.20 PRACTISING COST ACCO UNTANTS SERVICES Effective date: 16th October 1998 Definition: "Practising Cost a ccountant" means a person who is a member of the Institute of Cost and Works Acc ountants of India and is holding a certificate of practice granted under the pro visions of the Cost and Works Accountants Act, 1959 and includes any concern eng aged in rendering services in the field of cost accountancy Section 65(84). Scop e of taxable service shall include any service provided or to be provided to a c lient, by a practising cost accountant in his professional capacity, in any mann er Section 65(105)(t). 4.21 PRACTISING COMPANY SECRETARYS SERVICES Effective date : 16th October 1998. Definition: Practising Company Secretary" means a person who is a member of the Institute of Company Secretaries of India and is holding a c ertificate of practice granted under the provisions of the company Secretaries A ct, 1980 and includes any concern engaged in rendering services in the field of company Secretaryship Section 65(85). Scope of taxable service shall include any service provided or to be provided to a client, by a practising company secreta ry in his professional capacity, in any manner Section 65(105)(u).

Gamut And Coverage of Service 4.23 4.22 REAL ESTATE AGENTS SERVICES Effective date: 16th October 1998. Definitions: R eal estate agent means a person who is engaged in rendering any service in relati on to sale, purchase, leasing or renting of real estate and includes a real esta te consultant Section 65(88). Real estate consultant means a person who renders in any manner, either directly or indirectly, advice, consultancy or technical ass istance, in relation to evaluation, conception, design, development, constructio n, implementation, supervision, maintenance, marketing, acquisition or managemen t, of real estate Section 65(89). Scope of taxable service shall include any ser vice provided or to be provided to a client, by a real estate agent in relation to real estate Section 65(105)(v). Relevant Circulars/Trade Notices It may be no ted that some international real estate concerns such as Richard Ellis, colliers and Jardine, etc. have opened shop in India and they are providing comprehensiv e real estate services. Apart from the traditional services in respect of sale/p urchase/leasing of real estate, such concerns are, inter alia, providing service s to real estate developers and promoters in respect of evaluation of a proposed real estate scheme/project by conducting technoeconomic studies, providing feas ibility reports, and by even helping in marketing real estate projects. Such ser vices shall also attract service tax [Based on M.F. (D.R.) Letter No.11/3/98TRU, dated 07.10.1998]. 4.23 SECURITY AGENCYS SERVICES Effective date: 16th October 1 998. Definition: Security agency means any person engaged in the business of rende ring services relating to the security of any property, whether moveable or immo vable, or of any person, in any manner and includes the services of investigatio n, detection or verification, of any fact or activity, whether of a personal nat ure or otherwise, including the services of providing security personnel Section 65(94). Scope of taxable service shall include any service provided or to be pr ovided to a client, by a security agency in relation to the security of any prop erty or person, by providing security personnel or otherwise and includes the pr ovision of services of investigation, detection or verification of any fact or a ctivity Section 65(105)(w).

4.24 Service tax & VAT Relevant Circulars/Trade Notices The ambit of the term security agency is wide e nough to include not only agencies rendering service of providing security but a lso detective agencies which are providing confidential services in respect of s ay, financial credibility of any person, trademark/ copyright infringements etc. [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dated 07.10.1998] 4.24 CREDIT RATI NG AGENCYS SERVICES Effective date: 16th October 1998. Definition: Credit rating a gency means any person engaged in the business of credit rating of any debt oblig ation or of any project or programme requiring finance, whether in the form of d ebt or otherwise, and includes credit rating of any financial obligation, instru ment or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely paymen t of interest or principal Section 65(34). Scope of taxable service shall include any service provided or to be provided to a client, by a credit rating agency i n relation to credit rating of any financial obligation, instrument or security Section 65(105)(x). Relevant Circulars/Trade Notices Service tax is payable only on credit rating of any financial obligation, instrument or security. Hence it is only the services in relation to credit rating which attracts service tax. It therefore follows that information and advisory services and other customised s ervices would fall outside the ambit of service tax [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dated 07.10.1998]. 4.25 MARKET RESEARCH AGENCYS SERVICES Effecti ve date: 16th October 1998. Definition: "Market research agency" means any perso n engaged in conducting market research in any manner, in relation to any produc t, service or utility, including all types of customised and syndicated research services Section 65(69). Scope of taxable service shall include any service pro vided or to be provided to a client by a market research agency in relation to m arket research of any product, service or utility, in any manner Section 65(105) (y). Relevant Circulars/Trade Notices Market research, inter alia, includes rese arch based services in respect of consumer market,

Gamut And Coverage of Service 4.25 industrial marketing, business to business marketing, social and rural marketing etc., and is based on the requirement of the client. Such research services may be carried out by various techniques and may take the form of brand and adverti sing research. Such market research services includes studies such as strategic research and brand positioning development, new product development research, cr eative development research, brand name, logo, pack label research, corporate im age, diagnostic market research, customer research etc. Thus, it is apparent tha t the market research services are of a very diverse nature and of a very wide v ariety [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dated 07.10.1998]. 4.26 UNDE RWRITERS SERVICES Effective date: 16th October 1998. Definitions: Underwriter has t he meaning assigned to it in clause (f) of rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993 Section 65(116). Underwriter means a pe rson who engages in the business of underwriting of an issue of securities of a body corporate. [Rule 2(f) of The Securities and Exchange Board of India (Underw riters) Rules, 1993]. Underwriting has the meaning assigned to it in clause (g) of rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993 Section 65(117). Underwriting means an agreement with or without conditions to su bscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. [Rule 2(g) of The Securities and Exchange Board of India (Underwriters) Rul es, 1993]. Body corporate shall have the meaning assigned to it in clause (7) of s ection 2 of the companies Act, 1956 Section 65(14). Body corporate or corporation in cludes a company incorporated outside India but does not include (a) a corporati on sole; (b) a co-operative society registered under any law relating to co-oper ative societies; and (c) any other body corporate (not being a company as define d in this Act), which the Central Government may, by notification in the Officia l Gazette, specify in this behalf; [Section 2(7) of the companies Act, 1956]. Sec urities has the meaning assigned to it in clause (h) of section 2 of the Securiti es contracts (Regulation) Act, 1956 Section 65(93). (i) Securities include

4.26 (i) Service tax & VAT shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company o r other body corporate; (ia) derivative; (ib) Units or any other instrument issued by any collective inv estment scheme to the investors in such schemes; (ii) Government securities; (ii a) such other instruments as may be declared by the Central Government to be Sec urities; and (iii) rights or interest in securities. Scope of taxable service sh all include any service provided or to be provided to a client, by an underwrite r in relation to underwriting, in any manner Section 65(105)(z). Relevant Circul ars/Trade Notices Underwriting services can be provided by financial institution s, banks, share brokers who are members of stock exchanges and investment compan ies/trusts with adequate financial capacity, appropriate standing and experience . However, as per Rule 3 of the Securities and Exchange Board of India (Underwri ters) Rules, 1993 no person can act as underwriter unless he holds a certificate granted by the SEBI under the Securities and Exchange Board of India (Underwrit ers) Regulations, 1993 [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dated 07.10. 1998]. 4.27 SCIENTIFIC OR TECHNICAL CONSULTANCY SERVICES Effective date: 16th Ju ly 2001. Definition: Scientific or Technical Consultancy means any advice, consult ancy or scientific or technical assistance rendered in any manner, either direct ly or indirectly, by a scientist or a technocrat or any science or technology in stitution or organisation, to a client, in one or more disciplines of science or technology. Section 65(92) Scope of taxable service shall include any service p rovided or to be provided to a client, by a scientist or a technocrat, or any sc ience or technology institution or organisation, in relation to scientific or te chnical consultancy - Section 65(105)(za) Relevant Circulars/Trade Notices The t erms scientist, technocrat, science or technology institution or organisation who shou ld be understood as they occur in common parlance. For example, services rendere d by doctors, medical colleges, nursing homes, hospitals, diagnostic & pathologi cal labs, etc. would

Gamut And Coverage of Service 4.27 not come within the ambit of service tax since in common parlance, these categor ies of service providers are not known as scientists or technocrats or science o r technology institutions or organisations. The nature of services would cover c onsultation, advice or technical assistance provided by a scientist or a technoc rat or a science or technology institution on any issue relating to any branch o f science and technology. Such consultation may be in the nature of an expert op inion/advice in regard to scientific or technical feasibility or any other scien tific or technical aspect of a project, process or design, recommending an apt t echnology, suggestion for improvement in existing technology or process, providi ng consultation on any technical problem or about new technology, etc. The Publi c funded research institutions like CSIR, ICAR, DRDO, IITs and IISc. Regional En gineering colleges, etc,. which are exempt from payment of income tax shall be l iable to pay service tax when any scientific or technical consultancy service is rendered by them. However, grants received by such institutions from the govern ment for conducting research/project work is outside the ambit of service tax si nce no service is rendered to anyone. It is clarified that mere testing will not attract service tax. However, in case testing is an integral part of the consul tancy, then such activity is part and parcel of the taxable service and exigible to service tax. Service tax is also leviable on Scientific & technical consulta ncy services provided to Government departments, public sector undertakings, etc . [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. 4.28 PHOTO GRAPHY SERVICES Effective date: 16th July 2001. Definitions: Photography includes still photography, motion picture photography, laser photography, aerial photogr aphy or fluorescent photography. Section 65(78) Photography studio or agency means any professional photographer or any person engaged in the business of renderin g service relating to photography. Section 65(79) Scope of taxable service shall include any service provided or to be provided to a customer, by a photography studio or agency in relation to photography in any manner; - Section 65(105)(zb) Relevant Circulars/Trade Notices News agency services, that is, press photograp hers are excluded from the purview of service tax. Similarly, concerns which do X-Ray or CT scan by using fluorescent photography technique are not photography studios or agencies in common parlance and hence service

4.28 Service tax & VAT provided by them does not come within the ambit of service tax [Based on M.F. (D .R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. A collection center collects exposed films from photography studios who does not have processing facility/pho tographers, gets such rolls processed from a colour lab and hands over the print s to the photography studio/photographer. Services provided by such centres shal l not be charged to service tax, as they do not undertake the activity of taking the photograph or processing thereof. The merely act as courier/commission agen t who receive commission handling charges from the processing labs [Based on Cir cular No. 37/5/2001-S.T., dated 27.12.2001]. 4.29 CONVENTION SERVICES Effective date: 16th July 2001. Definition: Convention means a formal meeting or assembly wh ich is not open to the general public, and does not include a meeting or assembl y the principal purpose of which is to provide any type of amusement, entertainm ent or recreation. Section 65(32) Scope of taxable service shall include any ser vice provided or to be provided to a client, by any person in relation to holdin g of convention in any manner; - Section 65(105)(zc) Exemptions/Notifications In case of services provided in relation to holding of a convention where services provided include catering services, an abatement of 40% of the gross amount cha rged is granted if the gross amount charged from the client is inclusive of the charges for the catering services. Thus service tax will be leviable on 60% of t he total amount billed. However, the exemption is not available in cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT cred it of service tax on input services, used for providing such taxable service, ha s been taken under the provisions of Cenvat Credit Rules, 2004; or the service p rovider has availed the benefit under the Notification No. 12/2003 ST, dated 20. 06.2003. [Notification (ii) Here, "catering service" means supply of substantial and satisfying meal. No.1/2 006 ST, dated 01.03.2006]. Relevant Circulars/Trade Notices Stage shows, music concerts, sport events will not be considered as convention s ince these events provide some type of amusement, entertainment or recreation. F urther, conventions open to the general public will not be liable to service tax .

Gamut And Coverage of Service 4.29 Hotels and event management companies holding seminars would be liable for servi ce tax in respect of the charges levied towards holding of such seminars. Any se rvice provided for holding a conference, seminar, meetings etc by a commercial c oncern will come under the tax net. The service could be in the nature of provid ing of room/ hall for the convention. The services could also include providing other facilities such as video conferencing, equipment over head projectors, vid eo-roma (LCD projector), speakers, microphones, technical staff for operating th ese equipments and stationery, etc apart from providing space for holding a conv ention. The services provided by a mandap keeper may appear to overlap with conv ention services, but, there is a subtle distinction between the type of events ( official, social or business function in case of mandap keeper as opposed to for mal meeting in case of convention service. It is clarified that the intention is not to charge the service tax twice on the same service. If a service provider is already registered as a mandap keeper and paying service tax, he is not liabl e to pay service tax again under the category of convention services. Similarly, a service provider providing convention services is not liable to tax as mandap keeper service also [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.0 7.2001]. 4.30 LEASED CIRCUIT SERVICES Effective date: 16th July 2001. Definition : Leased circuit means a dedicated link provided between two fixed locations for e xclusive use of the subscriber and includes a speech circuit, data circuit or a telegraph circuit Section 65(60) Scope of taxable service shall include any servi ce provided or to be provided to a subscriber, by the telegraph authority in rel ation to leased circuit ; - Section 65(105)(zd) Relevant Circulars/Trade Notices Inter-connectivity linked charges recovered by Bharat Sanchar Nigam Ltd. (BSN L) from Basic Telephone Service Providers (BSTP) and Cellular Mobile Service Pro viders (CMSP) are chargeable to service tax. Inter connectivity linked charges a re nothing but charges for providing leased circuits [Based on. C.B.E.&C. Circ ular No.46/09/2002-S.T., dated 08.08.2002]. 4.31 TELEGRAPH SERVICES Effective da te: 16th July 2001. Definitions: Telegraph has the meaning assigned to it in claus e (1) of section 3 of the Indian Telegraph

4.30 Service tax & VAT Act, 1885. - Section 65(110) Telegraph means any appliance, instrument, material o r apparatus used or capable of use for transmission or reception of signs, signa ls, writing, images, and sounds or intelligence of any nature by wire, visual or other electro-magnetic emissions, radio waves or Hertzian waves, galvanic, elec tric or magnetic means; - Section 3(1) of the Indian Telegraph Act, 1885 Telegrap h Authority has the meaning assigned to it in clause (6) of section 3 of the Indi an Telegraph Act, 1885 and includes a person who has been granted a license unde r the first proviso to sub-section (1) of section 4 of that Act. - Section 65(11 1) Telegraph authority means the Director General of Posts and Telegraphs, and inc ludes any officer empowered by him to perform all or any of the functions of the telegraph authority under this Act - Section 3(6) of the Indian Telegraph Act, 1885 Within India, the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs: Provided that the Central Gove rnment may grant a licence, on such conditions and in consideration of such paym ents as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India; Provided further that the Central Government may, by r ules made under this Act and published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks fit, the establishment, mainten ance and working(a) of wireless telegraphs on ships within Indian territorial wa ters and on aircraft within or above India, or Indian territorial waters, and (b ) of telegraphs other than wireless telegraphs within any part of India. [Sectio n 4(1) of the Indian Telegraph Act, 1885] Scope of taxable service shall include means any service provided or to be provided to a subscriber, by the telegraph authority in relation to a communication through telegraph; Section 65(105)(ze) 4.32 TELEX SERVICES Effective date: 16th July 2001. Definitions: Telex means a typ ed communication by using teleprinters through telex exchanges Section 65(112) Te legraph Authority has the meaning assigned to it in clause (6) of section 3 of th e Indian Telegraph Act, 1885 and includes a person who has been granted a licens e under the first proviso to sub-section (1) of section 4 of that Act. Section 6 5(111)

Gamut And Coverage of Service 4.31 Telegraph authority means the Director General of Posts and Telegraphs, and includ es any officer empowered by him to perform all or any of the functions of the te legraph authority under this Act - Section 3(6) of the Indian Telegraph Act, 188 5 Within India, the Central Government shall have the exclusive privilege of est ablishing, maintaining and working telegraphs: Provided that the Central Governm ent may grant a licence, on such conditions and in consideration of such payment s as it thinks fit, to any person to establish, maintain or work a telegraph wit hin any part of India; Provided further that the Central Government may, by rule s made under this Act and published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks fit, the establishment, maintenanc e and working(a) of wireless telegraphs on ships within Indian territorial water s and on aircraft within or above India, or Indian territorial waters, and (b) o f telegraphs other than wireless telegraphs within any part of India. [Section 4 (1) of the Indian Telegraph Act, 1885] Scope of taxable service shall include an y service provided or to be provided to a subscriber, by the telegraph authority in relation to a communication through telex. - Section 65(105)(zf) 4.33 FACSIM ILE (FAX) SERVICES Effective date: 16th July 2001. Definition: Facsimile (Fax) mea ns a form of telecommunication by which fixed graphic images, such as printed te xts and pictures are scanned and the information converted into electrical signa ls for transmission over the telecommunication system. 65(42) Scope of taxable s ervice shall include any service provided or to be provided to a subscriber by t he telegraph authority in relation to a Facsimile communication; - Section 65(10 5)(zg) Relevant Circulars/Trade Notices Facsimile services are provided by teleg raph authorities in two ways :(i) (ii) bureau fax where the charges are based on a flat rate per page depending upon paper size; and ordinary fax where the charges are equivalent to the number of telephone calls consumed in faxing the paper. Bureau fax is provided by the Department of Telecom through post and telegraph off ices. It has been clarified that in case of Ordinary fax, no service tax is payabl e since it is already

4.32 Service tax & VAT covered in the ambit of service tax under the category of telephone connections. Private fax operators who are providing ordinary fax services are therefore not l iable to service tax [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.0 7.2001]. 4.34 ON-LINE INFORMATION AND DATABASE ACCESS AND/OR RETRIEVAL SERVICES Effective date: 16th July 2001. Definitions: Data has the meaning assigned to it i n clause (o) of sub-section (1) of section 2 of the Information Technology Act, 2000 Section 65(36) Data means a representation of information, knowledge, facts, concepts or instructions which are being prepared or have been prepared in a for malised manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network, and may be in any form (incl uding computer printouts magnetic or optical storage media, punched cards, punch ed tapes) or stored internally in the memory of the computer; Section 2(1)(o) of the Information Technology Act, 2000 On-line information and database access or retrieval means providing data or information, retrievable or otherwise, to a cus tomer, in electronic form through a computer network. Section 65(75) Electronic f orm has the meaning assigned to it in clause (r) of sub-section (1) of section 2 of the Information Technology Act, 2000. Section 65(39) Electronic form with refer ence to information means any information generated, sent, received or stored in media, magnetic, optical, computer memory, microfilm, computer generated micro fiche or similar device; - Section 2(1)( r) of the Information Technology Act, 2 000. Information has the meaning assigned to it in clause (v) of sub-section (1) o f section 2 of the Information Technology Act, 2000. Section 65(53) Information in cludes data, text, images, sound, voice, codes, computer programmes, software an d databases or micro film or computer generated micro fiche; -Section 2(1)(v) of the Information Technology Act, 2000 Computer Network has the meaning assigned to in clause (j) of sub-section (1) of section 2 of the Information Technology Act , 2000. Section 65(30) Computer network means the interconnection of one or more c omputers through (i) (ii) the use of satellite, microwave, terrestrial line or o ther communication media; and terminals or a complex consisting of two or more i nterconnected computers whether or

Gamut And Coverage of Service not the interconnection is continuously maintained ; [Section 2(1)(j) of the Information Technology Act, 2000] 4.33 Scope of taxable service shall include any service provided or to be provided to a customer, by any person, in relation to on-line information and database acce ss or retrieval or both in electronic form through computer network, in any mann er; - Section 65(105)(zh) Relevant Circulars/Trade Notices/Case Laws In the cont ext of this service, it may be relevant to point out the manner in which on-line information and database access/retrieval is generally made available. First, t he function of what is commonly known as Internet Service Providers (ISPs). The ISPs provide telecommunication network or gateways necessary to access messages and databases and other information holdings of content providers. The second el ement is on-line information provision services which includes database services , provision of information on web-sites, provision of on-line data retrieval ser vices from data bases and other information, to all or limited number of users a nd provision of on-line information by content providers. Internet service provi ders (ISPs) provide access to the web-sites through the computer network and the web-sites. Web-sites, in turn, provide the database or information. Some of the well-known ISPs operating in India are VSNL, MTNL, Satyam online, Bharti, Tata, RPG, HCL, Wipro, BPL, Mantra online, Dishnet. They normally charge the customer s on the basis of usage of time (hours). They also provide dedicated lease lines on lump-sump payment basis. Clearly ISPs provide service in relation to on-line information and database access or retrieval. They are an integral part of the internet operations and without their service, the data or information can neith er be accessed nor retrieved. They are, therefore, liable to pay service tax on the amount charged from the customers whether on usage time basis or on lease li ne basis. As regards paid web-sites, a few examples of Indian dot companies are, Indiainformer.com, CIIonline.com, who charge the customer for certain specific information contained in their website either in advance or credit basis. They s hall be also liable to pay service tax on the paid services provided by them. IS Ps provide inter-connectivity services to one another and recover charges for suc h services. This is done to inter connect various networks so as to reach the se rver where the information is stored. Interconnection of one ISP to another is a commercial and technical arrangement under which service providers connect thei r equipment, networks and services to enable their customers to have access to t he data or information. Through this arrangement, it is the customer of an ISP w ho ultimately receives on-line information and database access and/or retrieval service. Service tax on the amount charged from him is payable. Therefore, inter connection charges paid by one ISP to another ISP are not liable to service tax.

4.34 Service tax & VAT As regards levying service tax on cyber cafs, it has been clarified that the cybe r cafs provide only the infrastructure such as computer terminals and internet co nnection. It is the ISP or web-sites who provide on-line access or retrieval of information, Therefore, cyber cafs are not liable to pay service tax. Services pr ovided by ISP to cyber caf are taxable [Based on M.F. (D.R.) Letter No. B11/1/200 1-TRU, dated 09.07.2001]. Transmission of two-way voice communication through th e medium of Internet is called Internet Telephony. Even if the licences to Inter net Telephony Service Providers are issued under section 4 of the Indian Telegra ph Act, 1885, the two way voice communication is made possible through data tran sfer over the Internet. As per Section 65(19), the term on-line information and d atabase access and/or retrieval means providing data or information, retrievable or, otherwise, to a customer in electronic form through a computer network. Acco rdingly, Internet Telephony Services fall under the category of online informati on and database access and/or retrieval services [C.B.E.&C. Circular No. 54/3/20 0-ST, dated 21.04.2003]. It is to be noted that the Act does not restrict the am bit of taxable service only to provision of data or information through computer network; it also extends the ambit of taxable service to services in relation to provision of data or information. The terms in relation to is a term which might h ave a direct significance as well as indirect significance depending on the cont ext [Doypack Systems (P) Ltd. V. Union Of India (1988) 36 ELT 201 (Sc)]. In the context of on-line information and database retrieval services, it appears that there must be sufficient direct significance and the services must pertain to or b e connected with provision of on-line information and database access or retrieval . 4.35 VIDEO TAPE PRODUCTION SERVICES Effective date: 16th July 2001. Definition s: Video production agency means any professional vidoegrapher or any commercial c oncern engaged in the business of rendering services relating to video-tape prod uction. Section 65(119) Video-tape production means the process of any recording o f any programme, event or function on a magnetic tape or on any other media or d evice and includes services relating thereto such as editing, cutting, colouring , dubbing, title printing, imparting special effects, processing, adding, modify ing or deleting sound, transferring from one media or device to another, or unde rtaking any video post-production activity, in any manner Section 65(120) Scope of taxable service shall include any service provided or to be provided to a cli ent, by a video production agency in relation to videotape production, in any ma nner; - Section 65(105)(i)

Gamut And Coverage of Service Relevant Circulars/Trade Notices 4.35 It may be seen that the taxable service covers the service of recording of any p rogramme, event or function and includes recording of serials, telefilms or any other programme meant for broadcasting. Also, the scope of taxable service cover s any service in relation to video tape production in any manner. Thus facilitat ion activities, such as providing studio, other facility as lights, gadgets, ins truments, devices, providing technical persons for operating the recording devic es or for any other activity in relation to video tape production are taxable. S imilarly, editing, colouring, dubbing, printing titles and special effects, film processing etc by a video production agency will all come within the scope of t his service. It is clarified that reproduction of original master to make furthe r copies of a video-tape will not come within the purview of service tax [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. It has been clarifi ed vide D.G.S.T. in October 2003 that lending/hiring of video/sound recording eq uipment is in the nature of sub-contracts and because the sub-contractors are no t providing the service to the customer directly, they are not required to pay t he service tax. In respect of selling TV serial episodes to the TV channels, the taxable service i.e. video tape production service is on the process of recording of any programme, event or function on magnetic tapes (including editing thereo f). The tax is therefore limited to the technical function of recording or editi ng what is recorded and is not extended to the sale of the serial to channel by the producer. A producer may allow the telecast of such episodes by the channels in lieu of procurement of Free Commercial Time (FCT). This time is sold by the producer to advertising agencies for showing advertisements. In this case, selli ng the time allotted to a producer does not fall within the purview of advertisem ent service since this activity is not connected to making, preparation, display or exhibition of advertisement [C.B.E.& C. Circular No. 78/08/2004 S.T., dated 2 3.03.2004]. 4.36 SOUND RECORDING SERVICES Effective date: 16th July 2001. Defini tions: Sound recording means recording of sound on any media or device including m agnetic storage device, and includes services relating to recording of sound in any manner such as sound cataloguing, storing of sound and sound mixing or re-mi xing or any audio postproduction activity. - Section 65(98) Sound recording studi o or agency means any person engaged in the business of rendering any service rel ating to sound recording. - Section 65(99) Magnetic storage device includes wax bl anks, discs or blanks, strips or films for the purpose of original sound recordi ng. - Section 65(63)

4.36 Service tax & VAT Scope of taxable service shall include any service provided or to be provided to a client, by a sound recording studio or agency in relation to any kind of soun d recording; - Section 65(105)(zj) Relevant Circulars/Trade Notices Any service provided by sound recording studio or agency in relation to recording of sound w ill be covered under the tax net. The activities which fall under the category o f service are providing the facility of studio, technical persons, musical instr uments and other devices or any other facility or all the facilities in a consol idated manner, required for recording of sound, editing thereof, providing diffe rent kinds of sounds from the sound library for use in theater, films and radio etc. The service charges that are paid for the use of these facilities are usual ly in terms of hours of usage. It is clarified that reproduction of original mas ter to make further copies of the audio tape or CDs etc. will not come within th e purview of service tax [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. It has been clarified vide D.G.S.T. in October 2003 that lending/hi ring of video/sound recording equipment is in the nature of sub-contracts and be cause the sub-contractors are not providing the service to the customer directly , they are not required to pay the service tax. 4.37 BROADCASTING (RADIO AND TEL EVISION) SERVICES Effective date: 16th July 2001. Definitions: "Broadcasting" ha s the meaning assigned to it in clause (c) of section 2 of the Prasar Bharati (B roadcasting corporation of India) Act, 1990. It also includes programme selectio n, scheduling or presentation of sound or visual matter on a radio or a televisi on channel that is intended for public listening or viewing, as the case may be. In the case of a broadcasting agency or organisation, having its head office si tuated in any place outside India, the term includes the activity of selling tim e slots or obtaining sponsorships for broadcasting of any programme or collectin g the broadcasting charges or permitting the rights to receive any form of commu nication like sign, signal, writing, picture, image and sounds of all kinds by t ransmission of electro-magnetic waves through space or through cables, direct to home signals or by any other means to cable operator including multisystem oper ator or any other person on behalf of the said agency or organisation, by its br anch office or subsidiary or representative in India or any agent appointed in I ndia or by any person who acts on its behalf in any manner. - Section 65(15) Broa dcasting means the dissemination of any form of communication like signs, signals , writing, pictures, images, and sounds of all kinds by transmission of electromagnetic waves through space or through cables intended to be received by the ge neral public either directly or indirectly through the medium of relay stations and all its grammatical variations and

Gamut And Coverage of Service 4.37 cognate expressions shall be construed accordingly. Section 2(c) of the Prasar B harti (Broadcasting Corporation of India) Act, 1990. Broadcasting agency or orga nisation It means any agency or organisation engaged in providing service in rel ation to broadcasting in any manner. In the case of a broadcasting agency or org anisation having its head office situated in any place outside India, it include s its branch office or subsidiary or representative in India or any agent appoin ted in India or any person who acts on its behalf in any manner, engaged in the activity of selling time slots for broadcasting of any programme or obtaining sp onsorships for programme or collecting the broadcasting charges or permitting th e rights to receive any form of communication like sign, signal, writing, pictur e, image and sounds of all kinds by transmission of electromagnetic waves throug h space or through cables, direct to home signals or by any other means to cable operator, including multisystem operator or any other person on behalf of the s aid agency or organisation. - Section 65(16) Scope of taxable service shall incl ude any service provided or to be provided to a client, by a broadcasting agency or organisation in relation to broadcasting in any manner and, in the case of a broadcasting agency or organisation, having its head office situated in any pla ce outside India, include service provided by its branch office or subsidiary or representative in India or any agent appointed in India or by any person who ac ts on its behalf in any manner, engaged in the activity of selling of time slots for broadcasting of any programme or obtaining sponsorships for programme or co llecting the broadcasting charges or permitting the rights to receive any form o f communication like sign, signal, writing, picture, image and sounds of all kin ds by transmission of electromagnetic waves through space or through cables, dir ect to home signals or by any other means to cable operator, including multisyst em operator or any other person on behalf of the said agency or organisation. Ex planation For the removal of doubts, it is hereby declared that so long as the r adio or television programme broadcast is received in India and intended for lis tening or viewing, as the case may be, by the public, such service shall be a ta xable service in relation to broadcasting, even if the encryption of signals or beaming thereof through the satellite through the satellite might have taken pla ce outside India. Section 65(105)(zk) The service provider is the broadcasting a gency or organisation i.e. All India Radio (AIR), Doordarshan, other Indian TV c hannels and foreign TV channels who broadcast the programme in India. Relevant C irculars/Trade Notices The service covers both radio broadcasting and television broadcasting. While radio broadcasting is done by the All India Radio or any pr ivate radio channel, television broadcasting is done by Doordarshan, Indian TV C hannels and Foreign TV channels. The broadcasting may be of advertisements, seri als/programmes or live events. The client is the person who wants an advertiseme nt to be broadcast or the sponsor of a serial or programme

4.38 Service tax & VAT or event who wants the serial or programme or event to be broadcast. The service provider, that is, broadcasting agency or organisation is the AIR, Doordarshan, other Indian TV Channels and foreign TV channels who broadcast the programme in India. Broadcasting is done either terrestrially or through satellite links. Mo st of the private TV channels are using satellite links for broadcasting their p rogrammes. The uplinking of the programme to the satellite is done through VSNL or other earth stations located in India or through other agencies located abroa d. The up-linking agencies are not broadcasting agencies and are not liable to s ervice tax in respect of such service. The signals beamed by satellite are recei ved either by Multi System Operators (MSO) or directly by cable operators. In th e latter case the cable operator further retransmits the signals to the public ( viewers). However, in the case of MSO, they first retransmit signals to the cabl e operator who in turn retransmits the same to the viewers. The cable TV operato r who merely retransmits the programme is not a broadcasting agency or organisat ion with respect to such retransmitted programmes. The MSO also is not a broadca sting agency to the extent he merely retransmits signals. However in case the MS O operates a local cable channel such as Spectranet, Siticable, Incable, Sumanga li, etc. and broadcasts a programme or serial or advertisement on his own, he wo uld be liable to pay service tax on the amount he charges for the service render ed to his clients in relation to broadcasting of such programmes. Broadcasting s ervice is provided by selling time slots. In the case of advertisements, service charges are recovered based on the duration and frequency of advertisement and the time slot (prime time, non-prime time etc.) provided for the advertisement. In the case of serials/programmes/ events, service charges are made on the basis of factors such as duration, time slot, etc. However, some free commercial time is provided to the sponsor, which he can sell the same to others. In the case o f broadcasting service, the advertisement charges or the sponsorship charges rec eived by the braodcasting agency or organisation are the consideration for the s ervices rendered and service tax is payable on these charges. In the case of bro adcasting service, the advertisement charges or the sponsorship charges received by the broadcasting agency or organisation are the consideration for the servic es rendered and service tax is payable on these charges. In case of foreign sate llite TV channels, their head office may be located outside India. However, they have their branch offices or subsidiary companies located in India. In some cas es, they have appointed agents. These branch offices/ subsidiary companies/agent s act on behalf of these channels, selling time slots and recovering service cha rges and remitting the same to their head office/holding company/principals as t he case may be. In such cases, these branch offices/subsidiary companies/agents are rendering the service in relation to broadcasting and therefore, they are li able to pay the service tax and comply with all other procedural formalities rel ating to service tax [Based on M.F. (D.R.) Letter No. B11/1/2001TRU, dated 09.07 .2001].

Gamut And Coverage of Service 4.39 With effect from 1st April 2003, the Prasar Bharati Corporation (Doordarshan and All India Radio) is liable to pay service sax as the provider of the Broadcasti ng Services [C.B.E.&C. Circular No. 61/10/ 2003-ST, dated 14.07.2003]. In the ca se of radio or TV broadcasting services, the services are subject to tax where t he services are effectively used and enjoyed. Multi System Operators (MSOs) are permitted to receive signals from the broadcasting agencies on payment of prescr ibed amount. Cable operators transmit programmes to customers through cable netw ork after receiving signals from the multisystem operators (MSOs). Service tax i s leviable on services provided by cable operators to their customers, multisyst em operators to cable operators and the charges recovered by the broadcasting ag encies from the multisystem operator for providing the signals. In view of the a dvent of set top boxes, the customers can now access the signals directly withou t the interface of MSO and cable operators. Service tax is leviable on provision of direct to home (DTH) signals by the broadcasting agencies to the customers. The liability for payment of service tax in case of broadcasting agencies or org anizations having their head office outside India would be on the branch office, subsidiary or any representative or any agent appointed by such agency or organ ization in India [M.F. (D.R.) Letter F.No.B1/6/2005TRU dated 27.07.2005]. 4.38 I NSURANCE AUXILIARY SERVICES Effective date: 16th July 2001 (in relation to gener al insurance business) Effective date: 16th August 2002 (in relation to life ins urance business) Definitions: Actuary has the meaning assigned to it in clause (1) of section 2 of the Insurance Act, 1938. Section 65(1) Actuary means an actuary po ssessing such qualifications as may be prescribed. Section 2(1) of the Insurance Act, 1938 Insurance agent has the meaning assigned to it in clause (10) of sectio n 2 of the Insurance Act, 1938. Section 65(54) Insurance agent means an insurance agent licensed under section 42 who receives or agrees to receive payment by way of commission or other remuneration in consideration of his soliciting or procu ring insurance business including, business relating to the continuance, renewal or revival of policies of insurance; - Section 2(10) of the Insurance Act, 1938 Insurance auxiliary service" means any service provided by an actuary, an interm ediary or insurance intermediary or an insurance agent in relation to general in surance business or life insurance business and includes risk assessment, claim settlement, survey and loss

4.40 Service tax & VAT assessment. Section 65(55) Intermediary or insurance intermediary has the meaning assigned to it in sub-clause (f) of clause (1) of section 2 of the Insurance Reg ulatory and Development Authority Act, 1999. Section 65(56) Intermediary or insur ance intermediary includes insurance brokers, reinsurance brokers, insurance cons ultants, surveyors and loss assessors; -Section 2(1)(f) of the Insurance Regulat ory and Development Authority Act, 1999 Policy holder has the meaning assigned to it in clause (2) of section 2 of the Insurance act, 1938. Section 65(80) Policy H older includes a person to whom the whole of the interest of the policy holder in the policy is assigned once and for all, but does not include an assignee there of whose interest in the policy is defeasible or is for the time being subject t o any condition. [Section 2(2) of the Insurance Act, 1938.] Scope of taxable ser vice shall include any service provided or to be provided to a policyholder or a ny person or insurer, including re-insurer, by an actuary, or intermediary or in surance intermediary or insurance agent, in relation to insurance auxiliary serv ices concerning general insurance business - Section 65(105)(zl). It shall also include any service provided or to be provided to a policyholder or any person o r insurer, including re-insurer, by an actuary, or intermediary or insurance int ermediary or insurance agent, in relation to insurance auxiliary services concer ning life insurance business Section 65(105)(zy). Relevant Circulars/Trade Notic es Insurance auxiliary service concerning general insurance business Services co vered in this category are the services provided by the insurance agents to the insurance company in relation to marketing of insurance policies. They also prov ide service to the policy holder by providing information/advice on the types of insurance policies, processing of documentation, remitting of insurance premium , etc. Actuarial services are provided by the actuaries to the insurance compani es. They cover diverse fields such as calculating insurance risks and premia, in surance claims adjustment services such as services of investigating claims, det ermining the amount of loss or damages covered by the insurance policies and neg otiating settlements, services of examining claims which have been investigated and authorisation of payments and damage assessment services, administration of insurance including salvage administration and insurance consultancy services. I t may be emphasized that only such services are taxable which are in relation to general insurance business such as motor vehicle insurance, insurance of buildi ngs and other properties, marine insurance, fire insurance and other miscellaneo us insurance.

Gamut And Coverage of Service 4.41 The service providers are insurance agents, insurance surveyors, loss assessors, actuaries and insurance consultants. In the case of insurance surveyors, loss a ssessors, actuaries and insurance consultants, the service is provided mainly to the insurance companies (insurer) while in the case of insurance agents, the se rvice is provided to both the insurer and the policy holder. Service tax is liab le to be paid by the insurance auxiliary service provider except in case of insu rance agents. Insurance agents normally do not charge the policyholder. However, the insurance company pays the agent a commission (usually as a percentage of t he insurance premium) on a periodic basis. In the case of an insurance agent, it has been provided by Rule 2(1)(d)(iii) that the person liable to pay service ta x will be the concerned insurance company who has appointed the agent [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. Insurance auxiliary se rvice concerning life insurance business Services covered in this category are t he services provided by the insurance agents to the insurer/policy holder, by ac tuary to the insurer or by an intermediary or insurance intermediary to insurer/ policy holders. Insurance agents provide service to insurance company in relatio n to marketing of insurance policies. They also provide service to the policy ho lder by providing information/advice on the types of insurance policies, process ing of documentation, remitting of insurance premium, etc. Actuarial services ar e provided by the actuaries to the insurance companies. They cover diverse field s such as calculating insurance risks and premia, insurance claims adjustment se rvices such as services of investigating claims, determining the amount of loss or damages covered by the insurance policies and negotiating settlements, servic es of examining claims which have been investigated and authorisation of payment s and damage assessment services, administration of insurance including salvage administration and insurance consultancy services. The service providers in this category includes insurance agents, insurance surveyors and loss adjusters, act uaries insurance consultants and insurance brokers. In the case of insurance sur veyors and loss adjusters, actuaries and insurance consultants, the service is p rovided mainly to the insurance companies (insurer) while in the case of insuran ce agents, the service is provided to both the insurer and the policy holder. Se rvice tax is liable to be paid by the insurance auxiliary service provider excep t in case of insurance agents. Insurance agents normally do not charge the polic yholder. However, the insurance company pays the agent a commission (usually as a percentage of the insurance premium) on a periodic basis. As is the case in re spect of general insurance business, it has been provided in the Service Tax Rul es that in the case of an insurance agent for life insurance, the person liable to pay service tax will be the concerned insurance company who has appointed the agent. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002] Note: With ef fect from 01.05.2006, the scope of taxable insurance auxiliary services includes the services provided or to be provided to a policy holder or any person or ins urer, including re-insurer by an actuary, or intermediary or insurance intermedi ary or insurance agent, in

4.42 Service tax & VAT relation to insurance auxiliary services concerning general insurance business a nd life insurance business. 4.39 BANKING AND OTHER FINANCIAL SERVICES Effective date: 16th July 2001 Definitions: Banking and Banking company shall have the meaning s assigned to them in clauses (b) and (c) of section 5 of the Banking Regulation Act, 1949, respectively. Section 65(10) and section 65(11) Banking means the accep ting, for the purpose of lending or investment, of deposits of money from the pu blic, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Section 5(b) of the Banking Regulation Act, 1949 Banking company me ans any company which transacts the business of banking in India. Explanation Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of f inancing its business as such manufacturer or trader shall not be deemed to tran sact the business of banking within the meaning of this clause. - Section 5 (c) of the Banking Regulation Act, 1949 Financial Institution has the meaning assigned to it in clause (c ) of section 45-I of the Reserve Bank of India Act, 1934. Se ction 65(45) Financial institution means any non-banking institution which carries on as its business or part of its business any of the following activities, nam ely: (i) (ii) the financing, whether by way of making loans or advances or other wise, of any activity other than its own; the acquisition of shares, stock, bond s, debentures or securities issued by a government or local authority or other m arketable securities of a like nature; (iii) letting or delivering of any goods to a hirer under a hire-purchase agreem ent as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 (26 of 1972); (iv) the carrying on of any class of insurance business; (v) managing, co nducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or o therwise, by way of subscriptions or by sale of units, or other instruments or i n any other manner and awarding prizes or gifts, whether in cash

Gamut And Coverage of Service 4.43 or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person, but does not include any institution, which ca rries on as its principal business, a) agricultural operations; or aa) industria l activity; or (b) the purchase or sale of any goods (other than securities) or the providing of any services; or (c) the purchase, construction or sale of immo vable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable pr operty by other persons; Explanation- For the purposes of this clause, industrial activity means any activity specified in sub-clauses (i) to (xviii) of clause (c ) of section 2 of the Industrial Development Bank of India Act, 1964 (18 of 1964 ) [Section 45-I (c) of the Reserve Bank of India Act, 1934] Non-Banking Financial company has the meaning assigned to it in clause (f) of section 45-I of the Rese rve Bank of India Act, 1934 . Section 65(74) Non-banking financial company means(i ) (ii) a financial institution which is a company; a non-banking institution whi ch is a company and which has as its principal business the receiving of deposit s, under any scheme or arrangement or in any other manner, or lending in any man ner; (iii) such other non-banking institution or class of such institutions, as the b ank may, with the previous approval of the central Government and by notificatio n in the Official Gazette, specify. [Section 45-I(f) of the Reserve Bank of Indi a Act, 1934] Banking and other financial services means (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or any other person, namely: (i) ( ii) financial leasing services including equipment leasing and hire-purchase; me rchant banking services; (iii) securities and foreign exchange (forex) broking; (iv) asset management inc luding portfolio management, all forms of fund management,

4.44 Service tax & VAT pension fund management, custodial, depository and trust servi ces, but does not include cash management; (v) advisory and other auxiliary fina ncial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; (v i) provision and transfer of information and data processing; and (vii) banker t o an issue; and (viii) other financial services, namely, lending; issue of pay o rder, demand draft, cheque, letter of credit and bill of exchange; transfer of m oney including telegraphic transfer, mail transfer and electronic transfer, prov iding bank guarantee, over draft facility, bill discounting facility, safe depos it locker, safe vaults; operation of bank accounts (b) foreign exchange broking provided by a foreign exchange broker other than th ose covered under sub-clause (a) [Section 65(12)]. Banker to an issue means a bank included in the Second Schedule to the Reserve Bank of India Act, 1934, carryin g on the activities relating to an issue including acceptance of application, ap plication money, allotment money and call money, refund of application money, pa yment of dividend and interest warrants [Section 65(9c)]. "Foreign exchange brok er" includes any authorised dealer of foreign exchange. [Section 65(46)] "Author ised dealer of foreign exchange" has the meaning assigned to "authorised person" in clause (c) of section 2 of the Foreign Exchange Management Act, 1999. [Secti on 65(8)] Authorised person means an authorized dealer, money changer, off-shore b anking unit or any other person for the time being authorized under sub-section (1) of section 10 to deal in foreign exchange or foreign securities [Section 2(c ) of the Foreign Exchange Management Act, 1999] Scope of taxable service shall i nclude any service provided or to be provided to a customer, by a banking compan y or a financial institution including a non-banking financial company or any ot her body corporate or any other person in relation to banking and other financia l services - Section 65(105)(zm) It shall also include any service to a customer , by a foreign exchange broker other than those brokers in relation to banking a nd other financial service referred to in sub-clause (zm). Section 65(105)(zzk) Exemptions/Notifications Banking company or financial institutions have been exe mpted from service tax for the service provided to Government of India or a Stat e Government for collection of any duties or taxes

Gamut And Coverage of Service vide Notification No. 13/2004-S.T., dated 10.09.20 04. 4.45 Notification No. 29/2004-S.T., dated 22.09.2004 exempts so much of the value of taxable service provided to a customer, by a banking company or a financial inst itution including a non-banking financial company, or any other body corporate o r any other person, in relation to,(a) overdraft facility; (b) cash credit facil ity; or (c) discounting of bills, bills of exchange or cheques, as is equivalent to the amount of interest on such overdraft, cash credit or, as the case may be , discount, from the service tax leviable thereon under section 66 of the said A ct, subject to the condition that the said interest amount is shown separately i n an invoice, a bill or, as the case may be, a challan issued for this purpose. Exemption from service tax has been provided to financial leasing services inclu ding equipment leasing and hire-purchase from so much of the service tax as is e quivalent to the service tax calculated on 90% of an amount, forming or represen ting interest. In other words service tax shall be payable only on 10% of the in terest. The interest is the difference between the installment paid towards repa yment of the lease amount and the principal amount contained in such installment . This exemption shall not apply to any amount, other than an amount forming or representing as interest, charged by the service provider such as lease manageme nt fee, processing fee, documentation charges and administration fee [Notificati on No. 4/2006-ST, dated 01.03.2006]. Notification No. 7/2006 ST, dated 01.03.200 6 exempts taxable services, provided or to be provided to any person, by Reserve Bank of India, from the whole of service tax leviable thereon. Relevant Circula rs/Trade Notices Financial Leasing including equipment leasing and hire purchase It is clarified that service tax will be applicable to financial leasing servic es only if the lessor is a body corporate as defined in section 2(7) of the comp anies Act, 1956. The leasing or hire purchase may be of motor vehicles, machiner y and equipments or other goods. Only financial leases are covered. Operating le ases are outside the purview of service tax. Hence lease of immovable properties which are in the nature of operating lease are not covered. It is clarified tha t agreements entered into prior to 16/7/2001 shall not be liable for service tax provided the property/goods has also been received by the lessee prior to 16.7. 2001. In a leasing transaction the lessor recovers from the lessee monies in the form of EMI (Equated Monthly Instalment). The lessor also charges an amount cal led the lease management fee or the processing fee or documentation charges whic h is usually a

4.46 Service tax & VAT percentage of the transaction value. It is clarified that service tax in the cas e of financial leasing including equipment leasing and hire purchase will be lev iable only on the lease management fee/processing fee/documentation charges (rec overed at the time of entering into the agreement) and on the finance/interest c harges (recovered in equated monthly installments) and not on the principal amou nt. Merchant banking services Banks and Financial institutions including NBFCs p roviding merchant banking services are governed by the SEBI (Merchant Bankers) R ules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. As per these rules and regulations, merchant banking service is any service provided in relation to is sue management either by making arrangements regarding selling, buying or subscr ibing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. This, inter-alia, consists of pre paration of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscription for debt/ equity issue management and acting as advisor, consultant , co-manager, underwriter and portfolio manager. In addition, merchant banking s ervices also include advisory services on corporate restructuring, debt or equit y restructuring, loan restructuring, etc. Asset management including portfolio m anagement and all forms of fund management, pension fund management, custodial d epository and trust services. Asset Management Companies are not liable to pay s ervice tax as they do not fall in the category of non banking financial company (NBFC). Custodial depository services attract service tax. However, it is clarif ied that service tax will not be leviable on NSDL or CSDL fees paid to the depos itories and recovered from the customers on actual basis. Service tax will be ch arged on the fee for providing these services. Other auxiliary financial service s Some examples of other auxiliary financial services are investment and portfol io research and advice, advice given on mergers and acquisition, advice on corpo rate restructuring and strategy, market analysis and intelligence. In the case o f banks and financial institutions including NBFCs, while some services may be d one in a centralised way (that is centralised billing and accounting) either at the head office or regional office, in respect of other services such as financi al leasing including equipment leasing, specified branches may be providing the service with separate billing and accounting. In respect of a taxable service, w here the billing and accounting is centralised in an office of the bank, only su ch office needs to be registered and made liable to pay service tax in respect o f such service. Where the billing and accounting is not centralised and is under taken by different branches of a bank or a financial institution including NBFCs , each such branch office

Gamut And Coverage of Service 4.47 will have to be registered and made responsible for payment of service tax and c ompliance with other procedural formalities. Chit Funds Business of a chit fund is to mobilize cash from the subscribers and effectively cause movement of such cash to keep it working. Therefore, the activity of chit fund is in the nature o f cash management, which is specifically excluded from the scope of the banking and other financial services [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, da ted 09.07.2001]. Central Depository Services (India) Limited (CDSL) provides dep ository services in respect of DEMAT stocks to its customers. It has also implem ented "Electronic Access to Securities Information" (EASI), to enable the owner to access accounts in the first phase and transact depository business in the se cond phase of the project. CSDL charges certain fee such as registration fee, an nual fee etc for providing service of EASI. It has been clarified vide C.B.E.&C. Circular No. 50/11/2002-s.t., dated 18.12.2002 that : Depository services In ecommerce transactions, no service of online information and database access/retr ieval is involved and therefore, e-commerce transactions would not, ordinarily, be covered under the service tax net. However, this clarification is not applica ble to services covered under other taxable services including "banking and othe r financial services" which are provided through internet. Service tax has been imposed on banking and other financial service with effect from 16.07.2001. Deposi tory service is one of the services covered under the category of banking and oth er financial services. The definition of Banking and other financial services as gi ven in section 65 of the Finance Act 1994 includes "provision and transfer of in formation and data processing". "Banking and other financial services" and "on l ine information and data base access and/or retrieval service" are two distinct taxable services having distinct coverage. The service of EASI provided by CDSL is a part and parcel of depository service and hence covered under the category of "banking and other financial service". They are liable to pay service tax on al l depository service even if service is provided through Internet. Foreign Excha nge Broking Prior to 1-7-2003 the service of securities and foreign exchange (for ex) broking, when provided by banking company/financial institution/body corporat e was liable to service tax. Through Finance Act, 2003 foreign exchange broking wh en provided by foreign exchange brokers, other than banking company/financial in stitution/body corporate, were also brought under the tax net w.e.f 1-7-2003. As per the definition foreign exchange brokers include authorized dealers of forei gn exchange. Authorised dealer of foreign exchange has been assigned the meaning of authorized person under the FEMA, 1999. Accordingly authorized dealers/money c hanger etc. which are authorized to deal in foreign exchange are covered in

4.48 Service tax & VAT the definition of foreign exchange brokers under service tax provisions. However, as explained above only the service of foreign exchange broking when provided by f oreign exchange brokers (other than banking company/financial institution/body c orporate which are already covered) has been brought under the tax net [C.B.E.&C . Circular No. 62/11/2003-S.T., dated 21.08.2003]. 4.40 PORT SERVICES BY MAJOR P ORTS AND OTHER PORTS Effective date: 16th July 2001. Definitions: "Port" has the meaning assigned to it in clause (q) of section 2 of the Major Port Trusts Act, 1963 Section 65(81) Port means any major port to which this Act applies within su ch limits as may, from time to time, be defined by the central Government for th e purposes of this Act by notification in the Official Gazette, and, until a not ification is so issued, within such limits as may have been defined by the centr al Government under the provisions of the Indian Ports Act Section 2(q) of the M ajor Port Trusts Act, 1963 Port service means any service rendered by a port or ot her port or any person authorised by such port or other port, in any manner, in relation to a vessel or goods Section 65(82) "Other port" has the meaning assign ed to "port" in clause (4) of section 3 of the Indian Ports Act, 1908, but does not include the port defined in clause (81). [Section 65(76)] Port includes also a ny part of a river or channel in which this Act is for the time being in force. [Section 3(4) of the Indian Ports Act, 1908] Vessel" has the meaning assigned to it in clause (z) of section 2 of the Major Port Trusts Act, 1963 Section 65(118) Vessel includes anything made for the conveyance, mainly by water, of human being s or of goods and a caisson; Section 2(z) of the Major Port Trusts Act, 1963 Good s has the meaning assigned to it in clause (7) of section 2 of the Sale of Goods Act, 1930. [Section 65(50)] Goods are defined as every kind of movable property ot her than actionable claims and money, and includes stock and shares, growing cro ps, grass and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale. [Section 2(7) of Sale of G oods Act, 1930] Scope of taxable service shall include any service provided or t o be provided to any person, by a port or any person authorised by the port, in relation to port services, in any manner. Section 65(105)(zn)

Gamut And Coverage of Service 4.49 It shall also include any service to any person, by other port or any person aut horized by that port in relation to port services in any manner. - [Section 65(1 05)(zzl)] The first point to be noted is that the situs is on services provided t o any person in contradistinction to most of the other services where the situs o f taxation is on the services provided to a client or to a customer. It is to be not ed that vessel related and cargo related services are liable to service tax. Ser vices in relation to passengers are excluded. Relevant Circulars/Trade Notices P ort services generally consist of port and dock services (these are for services rendered in relation to vessels), cargo handling and storage services, railway haulage services, and container handling services(these are for services rendere d in relation to goods). The charges for these services will be covered under se rvice tax. It is clarified that demurrage charges will attract service tax since these charges are in relation to goods as these charges are levied only if the goods overstay a prescribed free period in the port. It is also clarified that e state rentals of the port which is charged for renting of accommodation provided to outsiders and port users, lease rental for land, etc. will not be liable to service tax as these are not services rendered in relation to goods or vessels [ Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. Handling/ sto rage of empty containers within a port area would be covered within the scope of port services, as empty containers would come under the definition of goods und er section 65(50) of the Finance Act, 1994. The service rendered by ship chandle rs are services rendered in relation to the vessel under authorization from port authorities and hence come within the ambit of port services and liable to serv ice tax [Vide clarifications issued by D.G.S.T. in October, 2003]. Ship repair s ervices including dry docking within port premises comes within the ambit of por t services and thus is chargeable to service tax [C.B.E.& C. Circular No. 67/16/ 2003 S.T., dated 10.11.2003]. 4.41 AUTHORISED SERVICE STATIONSS SERVICES Effectiv e date: 16th July 2001. Definitions: "Authorised service station" means any serv ice station, or centre, authorised by any motor vehicle manufacturer, to carry o ut any service, reconditioning or restoration or repair of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer. [S ection 65(9)] Motor car has the meaning assigned to it in clause (26) of section 2 of the Motor 15 Vehicles Act, 1988.

4.50 Service tax & VAT Motor car means any motor vehicle other than a transport vehicle, omnibus, road ro ller, tractor, motorcycle or invalid carriage. [Section 2(26) of the Motor Vehic les Act, 1988] "Motor vehicle" has the meaning assigned to it in clause (28) of section 2 of the Motor Vehicles Act, 1988. [Section 65(72)] Motor vehicle or vehicl e means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special ty pe adapted for use only in a factory or in any other enclosed premises or a vehi cle having less than four wheels fitted with engine capacity of not exceeding th irty five cubic centimeters. [Section 2(28) of the Motor Vehicles Act, 1988] Ligh t Motor Vehicle means any motor vehicle constructed or adapted to carry more than six passengers, but not more than twelve passengers, excluding the driver. [Sec tion 65(62)] Scope of taxable service shall include any service provided or to b e provided to a customer, by an authorised service station, in relation to any s ervice or repair, reconditioning or restoration of motorcars, light motor vehicl es or two wheeled motor vehicles, in any manner Section 65(105)(zo) Relevant Cir culars/Trade Notices Not all garages and service stations are covered. Only serv ice stations authorised by a motor vehicle manufacturer is covered. But once an Authorised Service Station is covered, the charges towards repair or service of all motor cars or two wheeled motor vehicles will be includible for service tax, whether the motor car or two wheeled motor vehicle is manufactured by the autho rizing manufacturer or not. Some of the examples of the types of services that m ay be covered under this category are services provided during warranty period, subsequent services such as routine check of performance of engine and vehicle, engine tuning, engine oil check, gear oil check, wheel alignment, wheel balancin g, clutch and brake adjustment, wheel rotation, cleaning/washing and any repairs undertaken [Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001]. It has been clarified that the intention of the legislation was to cover only th e authorised service and repairs of motor car and two wheeled motor vehicles. Th e activity of sales dealer at the pre-sale stage or at the time of sale will not come under the purview of service tax. The activity of providing Teflon Coating at the time of sale cannot be construed as a service or repair provided by an a uthorized service station even though the same dealer may also be authorised to carry out after sale services [C.B.E.&C. Circular No. 699/15/2003-CX., dated 05. 03.2003].

Gamut And Coverage of Service 4.51 A number of motor vehicle manufacturers provide a scheme by which the old vehicl es are sold to the customers after reconditioning or restoration. For this purpo se, old vehicles are reconditioned or restored by such authorized service statio ns or centres. Such reconditioning or restoration of motor cars, two-wheeled and light motor vehicles carried out by the authorized service stations or centers are liable to service tax [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.200 5]. 4.42 BEAUTY PARLOURS SERVICES Effective date: 16th August 2002. Definitions: B eauty treatment includes hair cutting, hair dyeing, hair dressing, face and beaut y treatment, cosmetic treatment, manicure, pedicure or counselling services on b eauty, face care or make-up or such other similar services- Section 65(17) Beauty parlour means any establishment providing beauty treatment services.- Section 65 (18) Scope of taxable service shall include any service provided or to be provid ed to a customer, by a beauty parlour in relation to beauty treatment [Section 6 5(105)(zq)]. Relevant Circulars/Trade Notices This service covers the beauty tre atments such as facial, manicure; pedicure and other make ups provided by beauty parlours. However, it does not include hair cutting and shaving. Further, it do es not include plastic surgery/cosmetics surgery done to improve the appearance, as they are not the kind of service provided by the beauty parlours. These are more appropriately classifiable as medical services [Based on M.F. (D.R.) F. No. B11/1/2002 TRU dt. 01.08.2002]. 4.43 CARGO HANDLING SERVICES Effective date: 16t h August 2002. Definition: "Cargo handling service" means loading, unloading, pa cking or unpacking of cargo and includes cargo handling services provided for fr eight in special containers or for noncontainerised freight terminal, for all mo des of transport and cargo handling services incidental to freight, but does not include handling of export cargo or passenger baggage or mere transportation of goods.- Section 65(23) Scope of taxable service shall include any service provi ded or to be provided to any person, by a cargo handling agency in relation to c argo handling services [Section 65(105)(zr)].

4.52 Service tax & VAT Exemptions/Notifications Taxable service provided to any person by a cargo handl ing agency in relation to agricultural produce or goods intended to be stored in a cold storage is exempt from payment of service tax vide Notification No. 10/2 002 S.T. dated 1.08.2002 Relevant Circulars/Trade Notices The services which are liable to tax under this category are the services provided by cargo handling a gencies who undertake the activity of packing, unpacking, loading and unloading of goods meant to be transported by any means of transportation namely truck, ra il, ship or aircraft. Well known examples of cargo handling service are services provided in relation to cargo handling by the Container Corporation of India , Airport Authority of India, Inland Container Depot, Container Freight Stations. This is only an illustrative list. There are several other firms that are engage d in the business of cargo handling services. The services provided in relation to export cargo and passenger baggage are excluded from tax net. Mere transporta tion of goods is not covered in the category of cargo handling and is therefore not liable to service tax. Cargo handling services are provided in the port also . Whether such service will be covered in the category of port services or cargo handling service. In this context it may be mentioned that port services cover any service provided in relation to goods or vessels by a port or a person autho rized by the port. This includes the cargo handling service provided within the port premises. Therefore to this extent there may be an overlap in cargo handlin g service and the port service. However since port services covers all the servi ce in relation to goods and vessels and therefore more specific to port, the ser vice provided in a port in relation to handling of good would be appropriately c overed under port service and no separate levy will be attracted under the categ ory of cargo handling agency service. Similar would be the case in respect of se rvice provided for storage of goods in the port premises. All goods meant for ex port are excluded from the scope of this levy. There may be cases where goods ma y be transhipped at a place other than the place of packing before reaching a pl ace from where it is exported. For example goods are packed say at Agra for tran sportation to Bhopal where it is transhipped and ultimately reaches Mumbai, from where it is exported. A doubt has been raised as to whether service tax would b e leviable on cargo handling service at Agra . It is clarified service provided in relation to any cargo which is meant for export, would not be taxable irrespe ctive of the fact that it reaches the place of export after transshipment. Howev er, the relevant documents should show that the Goods are for export. Passenger baggage has been excluded from the levy of service tax. In this regard a point h as been raised as to whether unaccompanied baggage of a passenger attracts servi ce tax under the category of passenger baggage. It is clarified that unaccompani ed baggage of a passenger will not be leviable to service tax.

Gamut And Coverage of Service 4.53 A point has been raised by Airports Authority of India (AAI) as to whether servi ce tax will be leviable in respect of handling of transshipment of export cargo from one international carrier to another international carrier or from a domest ic carrier to an international carrier. It is clarified that so long as the carg o is for export, no service tax on handling of such cargo is leviable. For domes tic cargo service tax will be applicable. Some of the cargo handling agencies ma y also act as marketing agents for individual airlines for which they get a comm ission, which seems to range from 5% to 15% of the freight. The question is whet her service tax is payable on this. Marketing or canvassing for cargo for airlin es does not come within the ambit of cargo handling services. Hence no service t ax is payable under the category of cargo handling service. CFSs also sometimes undertake storing/washing/repairing and handling of empty containers for the shi pping lines for which they charge the shipping lines. Empty containers can not b e treated as cargo. Therefore, the activities mentioned above do not come within the purview of cargo handling services. A clarification has been sought as to w hether service tax is payable on abandoned cargo which are auctioned by the CFS as no service is rendered to any person. In the case of auctioned goods, the pro ceeds of the auction goes first to the cost of auction, then towards customs dut ies and then to the custodian of the goods. It is clarified that no cargo handli ng service can be said to have been rendered in such cases, therefore service ta x is not leviable. Another doubt raised in relation to cargo handling services i s that whether individuals undertaking the activity of loading or unloading of c argo would be leviable to service tax. For example, if someone hires labour/labo urer for loading or unloading of goods in their individual capacity, whether he would be liable to service tax as a cargo handling agency. It is clarified that such activities will not come under the purview of service tax as a cargo handli ng agency. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002] 4.44 CABLE OPERATORS SERVICES Effective date: 16th August 2002. Definitions: "Cable operato r" shall have the meaning assigned to it in section 2(a) of the cable Television Networks (Regulation) Act, 1995.- Section 65(21) Cable operator means any person who provides cable service through a cable television network or otherwise contr ols or is responsible for the management and operation of a cable television net work [Section 2(aa) of the Cable Television Networks (Regulation) Act, 1995] "Ca ble service" shall have the meaning assigned to it in section 2(b) of the cable Television Networks (Regulation) Act, 1995.- Section 65(22)

4.54 Service tax & VAT Cable service means the transmission by cables of programmes including re-transmis sion by cables of any broadcast television signals. [Section 2(b) of the Cable T elevision Networks (Regulation) Act, 1995] Scope of taxable service shall includ e any service provided or to be provided to any person, by a cable operator (inc luding multi system operators) in relation to cable services. Section 65(105)(zs ) Relevant Circulars/Trade Notices The taxable service in this case is the cable services provided by the cable operators. The programme broadcast by television channel are received either by Multi System Operator (MSO) or directly by cable operators in the forms of signals. Where MSO receives the signals, the first re transmit signals to the cable operator who is turn retransmits the same to the v iewers through the cable network provided by the cable operator. Service Tax is liable to be paid by the cable operator providing service to ultimate subscriber of cable services [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002]. I n cable TV services, broadcast channels transmit television signals to multi sys tem operators (MSO) who further send them to the cable operator. The services pr ovided by the MSOs to the cable operators have been made taxable w.e.f. 10.09.20 04 [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004]. 4.45 DRY CLEANING SERV ICES Effective date: 16th August 2002. Definitions: Dry cleaning includes dry clea ning of apparels, garments or other textile, fur or leather articles.- Section 6 5(37) "Dry cleaner" means any person providing service in relation to dry cleani ng.- Section 65(38) Scope of taxable service shall include any service provided or to be provided to a customer, by a dry cleaner in relation to dry cleaning [S ection 65(105)(zt)]. Relevant Circulars/Trade Notices Dry cleaner normally perfo rms following process as on cloths during the process of dry cleaning: i) ii) Ta gging and inspection: identification lable. Dry cleaner inspects the cloths and tags them with an Pre-treatment: A stain remover is applied to remove the stains. Use of stain rem over depends on the nature of stains such as stains or grease, oil, ink, colours etc. Fabrics/cloth is then rinsed and dried.

Gamut And Coverage of Service iii) 4.55 Dry cleaning: A dry cleaning machine is a motor driven washer/extractor/dryer an d it holds clothes in a rotating, perforated stainless steel basket. Cloths are washed with a solvent. There may be various types of solvents used for dry clean ing such as perchloethlene (perc), carbon, tetrachloride, trichloethlene and pet rol etc. As the clothes rotate in the perforated basket, there is a constant flo w of clean solvent from the pump and filter system. After cleaning, the cloths a re drained to expel the solvent and ten goes into a dry cycle by circulating war m air. Post spotting: If there is any spot/stain left after the dry cleaning, it is removed using water or any other appropriate chemical. iv) Wet cleaning is a process of cleaning garments in water and water soluble deterg ent. It is clarified that service tax is leviable only on dry cleaning. Accordin gly service tax is not leviable on wet cleaning/washing provided the dry cleaner clearly mentions it in the bill. If details are not mentioned in the bill, it w ould normally be understood that clothes have been dry cleaned and in such situa tion service tax is liable to be paid. It is clarified that since the job of dye ing, darning etc. is not dry cleaning, these service are not taxable provided it is clearly indicated in the bill. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt . 01.08.2002] 4.46 EVENT MANAGEMENT SERVICES Effective date: 16th August 2002. D efinitions: "Event management" means any service provided in relation to plannin g, promotion, organising or presentation of any arts, entertainment, business, s ports or any other event and includes any consultation provided in this regard.Section 65(40) "Event manager" means any person who is engaged in providing any service in relation to event management in any manner.- Section 65(41) Scope of taxable service shall include any service provided or to be provided to a clien t, by an event manager in relation to event management [Section 65(105)(zu)]. Re levant Circulars/Trade Notices An event manager is hired to execute an event suc h as product launch of any corporate, promotional activities, concerts/ rock sho w, official meets, award functions, beauty pageants, entertainment events, exhib itions, private functions, and sports events etc. Event manager uses his experti se and ideas to manage an event. Event manager is supposed to manage a venue, se ts including decoration of sets, mandap, chair, table, barricades, sound, light video, electricals, security, communication, invitations to the event/ sale of t ickets and publicity of the event. He has also to manage the stage show, artist, musician, choreographers and other

4.56 Service tax & VAT miscellaneous items for holding of event. All services provided by the event man ager are liable to service tax. This also covers any consultation provided for o rganizing an event. For managing an event, the event manager hires the services of photographer, videographer, sound recording studio, advertising agency, manda p keeper and security agency. Service tax is already leviable on the amount paid to these agencies by the event manager. It is clarified that the the gross amou nt charged by the event manager from the client for organizing the event is liab le to be included in the value of the taxable service for the purpose of calcula tion of service tax. Sometimes an event is organized/managed in-house but certai n contractors are appointed say for stage/mandap preparation, for lighting/sound system, for advertising the event etc and revenue is generated by renting out t he exhibition space and sale of ticket. It is clarified that service tax is not on the event but on the service provided for managing an event. Therefore in a c ase where the event is organized/managed by the sponsor himself, no service tax is payable as event management. However, the contractors who provide service as ma ndap keeper, videographer, security agency etc are no doubt liable to pay servic e tax on their taxable service. It is clarified that service tax under the catego ry of event management is not leviable on the sale proceeds of tickets or revenu e generated from the sale of space. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU d t. 01.08.2002] Firm/person who undertakes activities of organising Trade Fairs and Exhibitions by soliciting the participation from the trade and industry and pro vides space or may in addition provide furniture, cabins, security, electricity, etc., and charge their customers accordingly do not fall within the ambit of Eve nt Management. In a taxable event management service there has to be a sponsor at w hose behest an event is organised and event manager, who organise such services. Therefore, service tax is not on the event but on the service provided on manag ing event. Therefore, in case where the event is organised/managed by the sponso r himself, no service tax is payable as Event Management [C.B.E.& C. Circular No. 68/17/2003 S.T., dated 28.11.2003]. 4.47 FASHION DESIGNERS SERVICES Effective dat e: 16th August 2002. Definitions: "Fashion designing" includes any activity rela ting to conceptualising, outlining, creating the designs and preparing patterns for costumes, apparels, garments, clothing accessories, jewellery or any other a rticles intended to be worn by human beings and any other service incidental the reto.- Section 65(43) "Fashion designer" means any person engaged in providing s ervice in relation to fashion designing.- Section 65(44)

Gamut And Coverage of Service 4.57 Scope of taxable service shall include any service provided or to be provided to any person, by a fashion designer in relation to fashion designing [Section 65( 105)(zv)]. Relevant Circulars/Trade Notices Fashion designer conceptualise and c reate designs/patterns applying his sense of aesthetic, keen sense of colour, vi sual imagination, knowledge of market trend and as per requirement of the client . Accordingly fashion designer may be involved in designing of any goods which a re intended to be worn by human being and where aesthetic/looks/fashion is a cri terion for wearing it. Fashion designers work include selection of material (for example type of cloth, its colour, design, quantity etc), preparing design as p er the trend or as per his visual imagination, preparation of pattern incorporat ing the requirement of the client. Taxable service in case of fashion designing is designing of goods intended to be worn by human being. A tailor is involved o nly in stitching of clothes. As such no designing activity is involved. Hence ta ilor will not be covered under the tax net. Similarly jeweller essentially makes jewelry and sells it. Therefore, no designing is involved. However a jeweller m ay avail services of a designer to design jewelry. Service provided by designer to jeweller would be covered under the tax net in the category of fashion design ing. Some times the fashion designer not only provide designing service but also make the garments or the intended articles as per the requirement. It is clarif ied that service tax levy covers only the fashion designing service and as such making of garments is outside the purview of the levy. Therefore service tax wou ld be leviable only on the designing charges provided fashion designer show the designing and making charges separately in the bill. However it is also clarifie d that that if a fashion designers designs article for himself and makes these a rticles say garments and sells them, in such a case designing service is provide d to oneself by the designer and therefore not liable to service tax. At times f ashion designer provides stitching service along with designing of cloth as per the requirement of client. In such case the fashion designer is liable to pay se rvice tax only on designing service rendered by him provided designing charges a re shown separately in the bill. However if designing charges and stitching char ges are shown in consolidated manner, service tax will be leviable on entire amo unt. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002] 4.48 HEALTH CLUB AND FITNESS CENTRE SERVICES Effective date: 16th August 2002. Definitions: Healt h and Fitness service means service for physical well-being such as sauna and ste am bath, turkish bath, solarium, spas, reducing or slimming salons, gymnasium, y oga, meditation, massage (excluding therapeutic massage) or any other like servi ce.- Section

4.58 65(51) Service tax & VAT "Health Club and fitness centre" means any establishment, including a hotel or r esort, providing health and fitness service. Section 65(52) Scope of taxable ser vice shall include any service provided or to be provided to any person, by a he alth club and fitness centre in relation to health and fitness services [Section 65(105)(zw)]. Relevant Circulars/Trade Notices Health and fitness services are provided by clubs, fitness centers, health saloons, hotels, gymnasium and massag e centers. The services which fall under this category might be for weight reduc tion and slimming, physical fitness exercise, gyms, aerobics, yoga, meditation, reiki, sauna and steam bath, Turkish bath, sun bath and massage for general well being. However therapeutic massage does not come in the ambit of taxable servic e. Therapeutic massage basically means a massage provided by qualified professio nals under medical supervision for curing diseases such as arthritis, chronic lo w back pain and sciatica etc. Ayurvedic massages, acupressure therapy, etc. give n by qualified professionals under medical supervision for curing diseases/disor ders will come under the category of therapeutic massages. If the massage is per formed without any medical supervision or advice but for the general physical we ll being of a person, such massages do not come under the purview of therapeutic massages and they would be liable to service tax. It is clarified that in a cas e where clubs and fitness centers charge a monthly/periodic amount as membership fee and only members are allowed to avail their services, service tax would be leviable on periodic/monthly membership fee. No service tax will be payable on m embership fee already collected prior to the date on which the new service tax h as come into force. Certain recognized institutes impart diploma courses in yoga . Such institutes and research center do not fall in the category of health club & fitness center and accordingly would not be liable to service tax. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dated 01.08.2002] 4.49 LIFE INSURANCE SERVICES Effective date: 10th September 2004 Definitions: "Life insurance business" has t he meaning assigned to it under section 2(11) of the Insurance Act, 1938.- Secti on 65(61) Life insurance business means the business of effecting contracts of ins urance upon human life, including and contract whereby the payment of money is a ssured on death (except death by accident only) or the happening of any continge ncy dependent on human life, and any contract which is subject to payment of pre miums for a term dependent on human life and

Gamut And Coverage of Service shall be deemed to include4.59 (a) the granting of disability and double or triple indemnity accident benefit, if so provided in the contract of insurance, (b) the granting of annuities upon human life, and (c) the granting of superannuation allowances and annuity payabl e out of any fund applicable solely to the relief and maintenance of person enga ged in any particular profession, trade or employment or of the dependent of suc h person. [Section 2(11) of the Insurance Act, 1938] Policy holder has the meaning assigned to it in clause (2) of section 2 of the Insurance act, 1938. Section 6 5(80) Policy Holder includes a person to whom the whole of the interest of the pol icy holder in the policy is assigned once and for all, but does not include an a ssignee thereof whose interest in the policy is defeasible or is for the time be ing subject to any condition. [Section 2(2) of the Insurance Act, 1938.] Scope o f taxable service shall include any service provided or to be provided to any po licyholder or any person, by an insurer, including re-insurer, carrying on life insurance business in relation to the risk cover in life insurance. [Section 65( 105)(zx)]. Relevant Circulars/Trade Notices In Budget 2004, it has been decided to levy service tax on that portion of the service which pertains to risk elemen t. An insurance policy is a combination of risk cover and savings instrument. Th e premium paid towards policy consist of two components(a) cost of risk cover; a nd (b) the capital contribution for savings which is returned with the bonus to the policy-holder. The amount paid towards risk cover is considered as value of taxable service and therefore shall be chargeable to service tax. The levy would not be applicable to such premium of the existing policies, which were paid bef ore the new levy comes into force. It has been provided that in the case of comp osite policies (risk plus saving) life insurer can at his option pay 1% of the t otal premium towards discharge of service tax liability. This shall not be appli cable in case an insurance policy is towards risk only or where the premium give s details of risk premium and other premium separately. However, those insurance companies who want to pay tax on risk premium as certified by the Appointed Act uary on a company basis can do so. The insurance companies may be allowed to pay monthly service tax provisionally, based on estimates. The monthly estimated (i .e. provisional) duty payment for the entire company would be based on a provisi onal certificate issued by the Appointed Actuary, subject to final certification at the end of the year. At the end of the financial year, when the sum at risk is calculated and certified by the Actuary the liabilities would be finalized

4.60 Service tax & VAT and the companies would pay the balance tax or adjust the excess tax paid [Based on CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004]. 4.50 RAIL TRAVEL AGENTS SERVICES Effective date: 16th August 2002. Definitions: "Rail travel agent" mean s any person engaged in providing any service connected with booking of passage for travel by rail.- Section 65(87) Scope of taxable service shall include any s ervice provided or to be provided to a customer, by a rail travel agent in relat ion to booking of passage for travel by rail [Section 65(105)(zz)]. Relevant Cir culars/Trade Notices Any person whether registered with the Railways or not enga ged in providing any service connected with booking of passage for travel by rai l is liable to service tax. Rail travel agent charges the customer, generally on per ticket/berth basis. Further, cancellation of tickets is also quite frequent and rail travel agent also charges the customer for cancellation of tickets. Se rvice tax is payable in both the cases. [Based on M.F. (D.R.) F. No.B11/1/2002 T RU dt. 01.08.2002] 4.51 STORAGE AND WAREHOUSING SERVICES Effective date: 16th Au gust 2002. Definition Storage and Warehousing includes storage and warehousing ser vices for goods including liquids and gases but does not include any services pr ovided for storage of agricultural products or any services provided by a cold s torage-[(Section 65(102)] Scope of taxable service shall include any service pro vided or to be provided to a person by a storage or warehouse keeper in relation to storage and warehousing of goods-[Section 65(90)(zza)] Relevant Circulars/Tr ade Notices Storage and warehousing service for all kind of goods are provided b y public warehouses, private warehouses, by agencies such as the Central Ware Ho using Corporation, Air Port Authorities, Railways, Inland Container Depots, Cont ainer Freight Stations, storage godown and tankers operated by private individua ls etc. The storage and warehousing service provider normally make arrangement f or space to keep the goods, loading, unloading and stacking of goods in the stor age area, keeps inventory of goods, makes security arrangements and provide insu rance cover etc. Service provided in ports has already been covered under the

Gamut And Coverage of Service category of port service. 4.61 Service provided in relation to agriculture produce and service provided by cold storage is outside the ambit of the levy. The term agricultural produce would c over all cereals, pulses, fruits, nuts and vegetables, spices, copra, sugar cane , jaggery, raw vegetable fibres such as cotton, flax, jute etc., indigo, unmanuf actured tobacco, betel leaves, tendu leaves, and similar products. However, manu factured products such as sugar, edible oils, processed food etc. will not come under the purview of the term agricultural produce. In some case a storage owner o nly rents the storage premises. He does not provide any service such as loading/ unloading, stacking, security etc. It has been clarified that mere renting of sp ace cannot be said to be in the nature of service provided for storage or wareho using of goods. Essential test is whether the storage keeper provides for securi ty of goods, stacking, loading/ unloading of goods in the storage area. As servi ce provided by a cold storage has been specifically excluded from the tax net, t he service of cold storage provided by the Airport Authority of India (AAI) will also be exempt. Cloak room services for passengers luggage in railway stations, bus stations etc. would not come within the purview of storage and warehousing s ervices as these are passenger terminal services incidental to rail transport or road transport. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002] 4.52 BUSINESS AUXILIARY SERVICES Effective date 1st July 2003. Definitions: Business auxiliary service means any service in relation to, (i) (ii) promotion or market ing or sale of goods produced or provided by or belonging to the client; or prom otion or marketing of service provided by the client; or (iii) any customer care service provided on behalf of the client; or (iv) procur ement of goods or services, which are inputs for the client; or Explanation - Fo r the removal of doubts, it is hereby declared that for the purposes of this sub clause, "inputs" means all goods or services intended for use by the client. (v) production or processing of goods for, or on behalf of, the client; or (vi) pro vision of service on behalf of the client; or (vii) a service incidental or auxi liary to any activity specified in sub-clauses (i) to (vi), such as billing, iss ue or collection or recovery of cheques, payments, maintenance of accounts

4.62 Service tax & VAT and remittance, inventory management, evaluation or developmen t of prospective customer or vendor, public relation services, management or sup ervision, and includes services as a commission agent, but does not include any information technology service and any activity that amounts to manufacture within the meaning of clause (f) of section 2 of the Central Excise Act, 1944. Explanation - For the removal of doubts, it is hereby declared that for the purp oses of this clause, (a) "commission agent" means any person who acts on behalf o f another person and causes sale or purchase of goods, or provision or receipt o f services, for a consideration,and includes any person who, while acting on beh alf of another person (i) (ii) deals with goods or services or documents of title to such goods or services; or collects payment of sale price of such goods or s ervices; or (iii) guarantees for collection or payment for such goods or services; or (iv) u ndertakes any activities relating to such sale or purchase of such goods or serv ices. (b) "information technology service" means any service in relation to desi gning, or developing of computer software or system networking, or any other ser vice primarily in relation to operation of computer systems [Section 65(19)]. Sc ope of taxable service shall include any service provided or to be provided to a client, by any person in relation to business auxiliary service. Section 65(105 )(zzb) Exemptions/Notifications The business auxiliary services provided by comm ission agents in relation to sale or purchase of agricultural produce are exempt from service tax. Agricultural produce means any produce resulting from cultiva tion or plantation, on which either no further processing is done or such proces sing is done by the cultivator like tending, pruning, cutting, harvesting, dryin g which does not alter its essential characteristics but makes it only marketabl e and includes all cereals, pulses, fruits, nuts and vegetables, spices, copra, sugar cane, jaggery, raw vegetable fibres such as cotton, flax, jute, indigo, un manufactured tobacco, betel leaves, tendu leaves, rice, coffee and tea but does not include manufactured products such as sugar, edible oils, processed food and processed tobacco [Notification No.13/2003-ST dated 20.06.2003]. The taxable se rvice provided to a client by any person in relation to the business auxiliary s ervice, in so far as it relates to: (a) procurement of goods or services, which are inputs for the client; (b) production or processing of goods for, or on beha lf of, the client;

Gamut And Coverage of Service (c) provision of service on behalf of the client; or (d) a service incidental or auxiliary to any activity specified in (a) to (c) above. 4.63 and provided in relation to agriculture, printing, textile processing or educati on is exempt from the whole of the service tax leviable thereon [Notification No . 14/2004-S.T., dated 10.09.2004]. Notification No. 8/2005 S.T., dated 1.03.2005 exempts the taxable service of production or processing of goods for, or on beh alf of, the client from service tax subject to the following conditions: (i) (ii ) goods are produced or processed using raw material or semi-finished goods supp lied by the client; the goods so produced or processed are returned back to the said client for use in or in relation to the manufacture of any other goods (goo ds falling under the First Schedule of the Central Excise Tariff Act, 1985) on w hich appropriate excise duty is payable i.e., the final product should not be whol ly exempt or subject to Nil rate of duty. In this context the expression production or processing of goods means working upo n raw materials or semi-finished goods so as to complete part or whole of produc tion or processing, subject to the condition that such production or processing does not amount to manufacture within the meaning of clause (f) of section 2 of the Central Excise Act, 1944. This notification intends to exempt that job work from the service tax where the manufacturer ultimately pays the excise duty on t he finished product. The taxable service of production or processing of goods fo r, or on behalf of, the client under the category of business auxiliary service provided by any person in the course of manufacture of,(a) cut and polished diam onds and gem stones; or (b) plain and studded jewellery of gold and other precio us metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985 is ex empt from the whole of service tax leviable thereon [Notification No.21/2005 ST, dated 07.06.2005]. Relevant Circulars/Trade Notices As per the definition of bu siness auxiliary services, services as commission agent are considered business auxiliary services. It may be appreciated that the nature of service provided by a Consignment agent is different than that provided by a commission agent. A co nsignment agents job is to receive the goods from the principal and dispatch them on the directions of the principal, whereas a commission agents job is to cause sale/purchase on behalf of another person. Thus, the essential difference is tha t a commission agent sells or purchases on behalf of the principal while consign ment agent receives and dispatches the goods on behalf of a principal. It is pos sible that a person may be a consignment agent as well

4.64 Service tax & VAT as a commission agent. Such a person would already be covered in the category of Clearing and Forwarding agent and would be liable to pay service tax in that ca tegory. In other words, the present exemption extended to commission agents vide Notification No. 8/2004, dated 9.7.2004 is available only to such commission ag ent who is not a consignment agent and who deals in agricultural produce. Insura nce agents and Clearing & Forwarding agents working on commission basis do not f all under the definition of business auxiliary service as they are specifically covered within the definition of other specified taxable services, namely the In surance service and C&F Service respectively. Under Section 65A of Finance Act 1 994, it has also been provided that in case of overlap, a service would be class ified under the head, (a) which provides most specific description, (b) in case of a composite service having combination of different taxable services, the ser vice which give them their essential character and (c) in case the test of (a) a nd (b) does not resolve, the service which comes earlier in the clauses of Secti on 65, i.e. the service that was subjected to service tax earlier. Since Insuran ce services and C&F Services are more specific description and were also subject ed to service tax prior to imposition of tax on business auxiliary service, the insurance agents, C&F agents working on commission basis would fall under those respective categories. From this, it follows that a particular service can be ta xed only under one head of service. Information technology service is outside th e purview of business auxiliary service. It has been clarified that only if the output service provided by a service provider is in the nature of the operations mentioned in the definition of IT service , such exclusion would operate. The m ere fact that a personal computer or a laptop has been used for providing the se rvice does not, ipso facto, make the service an information technology service. Similarly, the fact that any of the IT services mentioned in the explanation has been used by the service provider as an input service does not automatically ma ke the output service an IT service. Therefore, in such cases, individual servic e has to be examined with reference to the explanation provided to the definitio n of business auxiliary service and only such output services which qualify to b e IT services in terms of the said explanation shall remain excluded from taxabl e service under the heading business auxiliary service [C.B.E.&C. Circular No. 5 9/8/2003, dated 20th June, 2003] All business auxiliary services relating to pro curement, inventory and production are liable to service tax. Thus, the procurem ents of input, capital goods or input services as defined in the CENVAT Credit R ules, by a commercial concern (now any person) for a client i.e. a person produc ing goods or providing services become taxable under this category. Similarly, i f a commercial concern (now any person) produces goods on behalf of the client o r provides service on behalf of a client, such activities come under the scope o f this service, unless the activity of service provider amounts to manufacture i n terms of the Central Excise Law. The aim of all such activities is production of goods or provision of services, the whole or part of which is being carried o ut by the service provider (i.e. the agent) on behalf of the client. Such activi ties include procurements, productions or service providing activities done for the client

Gamut And Coverage of Service [Based on C.B.E&C. Circular No. 80/10/2004 S.T., da ted 17.9.2004]. 4.65 A point was raised whether production of goods on behalf of the client covers situ ations where the service provider undertakes job work for the client. Production or processing (not amounting to manufacture) done either for the client or on b ehalf of the client would be liable to service tax. Another taxable activity cov ered under business auxiliary service is procurement of goods or services, which are inputs for the client. In this case, the term inputs has been clarified by defi ning inputs (under Explanation in section 65(19) of the Finance Act, 1994) for t he purpose of this taxable activity as all goods or services intended for use by the client. Thus, services rendered for procurement of any goods or services in tended for use by the client would be taxable. This definition of input is diffe rent from the definition of input under Cenvat Credit Rules [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.53 COMMERCIAL TRAINING OR COACHING SERVI CES Effective date 1st July 2003. Definitions: "Commercial training or Coaching" means any training or coaching provided by a commercial training or coaching ce nter. [Section 65(26)] Commercial training or Coaching Centre means any institute or establishment providing commercial training or coaching for imparting skill o r knowledge or lessons on any subject or field other than the sports, with or wi thout issuance of a certificate and includes coaching or tutorial classes but do es not include preschool coaching and training centre or any institute or establ ishment which issues any certificate or diploma or degree or any educational qua lification recognised by law for the time being in force. [Section 65(27)] Scope of taxable service shall include any service provided or to be provided to any person, by a commercial training or coaching centre in relation to commercial tr aining or coaching [Section 65(105)(zzc)]. Exemptions/Notifications Taxable serv ices, provided in relation to commercial training or coaching by, (a) a vocation al training institute; (b) a recreational training institute; to any person are exempt from the whole of the service tax leviable thereon. However, this exempti on is not available to the taxable services provided in relation to commercial t raining or coaching by a computer training institute.

4.66 Service tax & VAT Explanation - For the purposes of this notification, (i) a vocational training i nstitute means a commercial training or coaching centre which provides vocational coaching or training that impart skills to enable the trainee to seek employmen t or undertake self-employment, directly after such training or coaching; recreat ional training institute means a commercial training or coaching centre which pro vides coaching or training relating to recreational activities such as dance, si nging, martial arts, hobbies. (ii) (iii) computer training institute means a commercial training or coaching centre w hich provides coaching or training relating to computer software or hardware. [N otification No.24/2004- S.T. dated 10.09.2004] With effect from 1.07.2003 the ta xable services provided by a commercial training or coaching centre, in relation to commercial training or coaching, which form an essential part of a course or curriculum of any other institute or establishment, leading to issuance of any certificate or degree or educational qualification recognised by law for the tim e being in force, to any person, are also exempt from the whole of the service t ax leviable thereon. However, this exemption shall not be applicable if the char ges for such services are paid by the person undergoing such course or curriculu m directly to the commercial or coaching centre. [Notification No.10/2003-S.T.da ted 20.06.2003] Relevant Circulars/Trade Notices Institutes like the Institute o f Chartered Accountants of India some time hire the services of other institutes to impart some part of training (like language or computer training) to the stu dents undertaking courses for obtaining recognized degrees/diplomas (like Charte red Accountancy) from their institute. Whereas institutes like the Institute of Chartered Accountants of India will not be chargeable to service tax because the y confer qualifications recognized by law, the institutes or centers providing s uch part of training may be otherwise under service tax net. Vide notification N o. 10/2003-Service Tax dated 20th June, 2003, exemption has been provided w.e.f. 1st July, 2003 to such services rendered by commercial training or coaching cen ters from service tax which form an essential part of the course or curriculum l eading to issuance of recognized certificate, diploma, degree or any other educa tional qualification. The exemption is subject to the condition that the receive r of such service (for example, student) makes payment for the entire course or curriculum to the institute or establishment issuing such certificate, diploma e tc. and not to the commercial coaching or training center. It is clarified that service tax is leviable on any coaching or training provided by an institution o n commercial basis. Therefore, the coaching provided by postal means would also be covered under the service tax and the charges, including the postal charges c ollected for rendering this service would be subjected to service tax.

Gamut And Coverage of Service 4.67 Some institutes like colleges, apart from imparting education for obtaining reco gnized degrees/diploma/certificates, also impart training for competitive examin ations, various entrance tests etc. It is clarified that by definition, such ins titutes or establishments, which issue a certificate, diploma or degree recogniz ed by law, are outside the purview of "commercial training or coaching institute ". Thus, even if such institutes or establishments provide training for competit ive examinations etc., such services rendered would be outside the scope of serv ice tax. It is clarified that service tax is on institutions/establishments. The refore, only those service providers are covered under the service tax who have some establishment for providing commercial coaching or training i.e. institutio nal coaching or training. Thus, individuals providing services at the premises o f a service receiver would not be covered under service tax. However, if coachin g or training center provides commercial coaching by sending individuals to the premises of service receivers, such services would be chargeable to tax, as in t his case, the individuals are rendering services on behalf of an institution. It is clarified that in case employers provide any free training themselves, no se rvice tax is chargeable. However if an employer hires an outside commercial coac hing or training center for imparting some training to its employees, then the p ayment made by the said employer to such coaching center will be chargeable to s ervice tax [C.B.E.&C. Circular No. 59/8/2003, dated 20th June, 2003] Coaching im parted to students of standard 1 to 9 is taxable as service tax is applicable on commercial coaching provided by institutions that prepare applicants for Board Examinations and competitive exams. Commercial coaching given to the students to prepare for university degree exam is liable for service tax [Vide clarificatio n issued by D.G.S.T. in October, 2003]. 4.54 ERRECTION, COMMISSIONING AND INSTAL LATION SERVICES Effective date 1st July 2003. Definitions: Erection, commissionin g or installation means any service provided by a commissioning and installation agency, in relation to, (i) (ii) erection, commissioning or installation of plant , machinery, equipment or structures, whether pre-fabricated or otherwise; or in stallation of (a) electrical and electronic devices, including wirings or fitting s therefor; or (b) plumbing, drain laying or other installations for transport o f fluids; or (c) heating, ventilation or air-conditioning including related pipe work, duct work and

4.68 Service tax & VAT sheet metal work; or (d) thermal insulation, sound insulation, fire proofing or water proofing; or (e) lift and escalator, fire escape stairca ses or travelators; or (f) such other similar services [Section 65(39a)]. "Commissioning and installation agency" means any agency providing service in re lation to erection, commissioning or installation [Section 65(29)]. Scope of tax able service shall include any service provided or to be provided to a customer by a commissioning and installation agency in relation to erection, commissionin g and installation [Section 65(105)(zzd)]. Exemptions/Notifications In case of e rection, commissioning or installation, under a contract for supplying a plant, machinery or equipment and erection, commissioning or installation of such plant , machinery or equipment, an abatement of 67% of the gross amount charged is gra nted. Accordingly, service tax is payable only on 33% of the gross amount charge d for erection commissioning or installation and supply of plant, machinery or e quipment. It is optional for the commissioning and insatallation agency to avail this abatement. The gross amount (33% of which is chargeable to service tax) ch arged from the customer shall include the value of the plant, machinery, equipme nt, parts and any other material sold by the commissioning and installation agen cy, during the course of providing erection commissioning or installation servic e. However, the exemption is not available in cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service, has been taken under th e provisions of Cenvat Credit Rules, 2004; or the service provider has availed t he benefit under the Notification No. 12/2003 ST, dated 20.06.2003 [Notification No.1/2006- ST dated 01.03.2006]. (ii) Relevant Circulars/Trade Notices The general practice is that erection, commiss ioning and installation are contracted as a composite package. Erection would r efer to the civil works to installation/commissioning of a plant or machinery. W ith effect from 10.09.2004 the scope of service tax under installation and commi ssioning is being extended to include erection also. Erection involves civil wor ks, which would otherwise fall under the category of construction services. Howe ver, in case of a composite contract for erection, commissioning and installatio n, the erection charges would be taxed as part of this category of service [CBE& C Circular No. 80/10/2004 S.T., dated 17.9.2004]

Gamut And Coverage of Service 4.55 FRANCHISE SERVICES Effective date 1st July 20 03. Definitions: 4.69 "Franchise" means an agreement by which the franchisee is granted representation al right to sell or manufacture goods or to provide service or undertake any pro cess identified with franchisor, whether or not a trade mark, service mark, trad e name or logo or any such symbol, as the case may be, is involved [Section 65(4 7)]. "Franchisor" means any person who enters into franchise with a franchisee a nd includes any associate of franchisor or a person designated by franchisor to enter into franchise on his behalf and the term "franchisee" shall be construed accordingly.[Section 65(48)] Scope of taxable service shall include any service provided or to be provided to a franchisee, by the franchiser in relation to fra nchise. Section 65(105)(zze) Relevant Circulars/Trade Notices License Production Agreements where principal allows production of goods bearing his brand name by another person are covered under the purview of service tax under this category . Similarly, if rights are granted for rendering services identified with the pr incipal on his behalf, such services by the principal to the service recipient w ould be taxable. [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.56 INTERNET CAFS SERVICES Effective date 1st July 2003. Definitions: "Internet cafe" means a commercial establishment providing facility for accessing internet. [Sec tion 65(57)] Scope of taxable service shall include any service provided or to b e provided to any person, by any internet caf in relation to access of internet. Section 65 (105)(zzf) 4.57 MANAGEMENT, MAINTENANCE OR REPAIR SERVICES Effective date 1st July 2003. Definitions: "Management, maintenance or repair" means any s ervice provided by(i) (ii) any person under a contract or an agreement; or a man ufacturer or any person authorised by him, in relation to,

4.70 Service tax & VAT (a) management of properties, whether immovable or not; (b) ma intenance or repair of properties, whether immovable or not; or (c) maintenance or repair including reconditioning or restoration, or servicing of any goods, ex cluding a motor vehicle. [Section 65(64)] Scope of taxable service shall include any service provided or to be provided to a customer, by any person in relation to maintenance or repair. Section 65(105) (zzg) Relevant Circulars/Trade Notices It is clarified that irrespective of the fact that the receiver of the service is different from the person making paymen ts for such services, the service tax is leviable on the services provided towar ds maintenance and repair. Therefore, for the services provided during the warra nty period by the dealer or any other authorized person, service tax would be le viable on any amount received by such dealer or such other authorized person fro m manufacturer of such goods [C.B.E.&C. Circular No. 59/8/2003, dated 20th June, 2003] Annual maintenance Contracts for maintenances of roads are not liable to service tax as roads are neither goods nor equipment. Maintenance and repair pro vided without any contract is not liable to service tax since maintenance or rep air service undertaken under a maintenance contract or agreement is only chargea ble to service tax [Vide clarification issued by D.G.S.T. in October, 2003]. Sup reme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh h as observed that all the tests required to satisfy the definition of goods are p ossible in the case of software and in computer software the intellectual proper ty has been incorporated on media for the purpose of transfer and software and m edia cannot be split up. Therefore, sale of computer software falls within the s cope of sale of goods. Supreme Court has also observed that they are in agreemen t with the view that there is no distinction between branded and unbranded softw are. Branded software, also known as canned software, sold off the shelf, is tra nsferred in a media and is sold as such and the Supreme Court has decided that s uch branded software falls within the definition of goods. In the case of unbran ded/customized software, the supplier develops the software and thereafter trans fers the software so developed in a media and it is taken to the customers premis es for loading in their system. Thus, in the case of unbranded/customized softwa re also, the intellectual property namely software is incorporated in a media fo r use. Supreme Court has held that software in a media is goods. Any service pro vided to a customer by any person in relation to maintenance or repair is leviab le to service tax. Accordingly, maintenance or repair means any service provided i n relation to maintenance or repair or servicing of any goods or equipment.

Gamut And Coverage of Service 4.71 Software, being goods, any service in relation to maintenance or repair or servi cing of software is leviable to service tax under section 65(105)(zzg) read with section 65(64) of the Finance Act, 1994 [Circular No. 81/2/2005-ST dated 07.10. 2005]. Maintenance is to keep a machine, building etc. in a good condition by pe riodically checking and servicing or repairing. While repair is a one time activ ity, maintenance is a continuous process of which repairing may be incidental or ancillary. Maintenance or repair, including reconditioning or restoration or se rvicing of any goods or equipment, except motor vehicle (which is taxable under the category of authorized service station), undertaken as part of any contract or agreement (not necessarily maintenance contract or agreement) is liable to se rvice tax under this category of taxable service. To attract service tax under t his category, the contract or agreement need not necessarily be a maintenance co ntract/agreement [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.58 TECHNICAL TESTING AND ANALYSIS SERVICES Effective date 1st July 2003. Definition s: "Technical testing and analysis" means any service in relation to physical, c hemical, biological or any other scientific testing or analysis of goods or mate rial or any immovable property, but does not include any testing or analysis ser vice provided in relation to human beings or animals. It is clarified that techn ical testing and analysis includes testing and analysis undertaken for the purpo se of clinical testing of drugs and formulations; but does not include testing o r analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or disorder in human bei ngs or animals. [Section 65(106)] "Technical testing and analysis agency" means any agency or person engaged in providing service in relation to technical testi ng and analysis. [Section 65(107)] Scope of taxable service shall include any se rvice provided or to be provided to any person, by a technical testing and analy sis agency, in relation to technical testing and analysis. Section 65(105)(zzh) Notification No. 6/2006 ST, dated 01.03.2006 exempts service provided or to be p rovided to any person, by a Government owned State or District level laboratory in relation to testing and analysis of water quality, from the whole of service tax leviable thereon. Relevant Circulars/Trade Notices CBEC vide its order No. 1 /1/2002, dated 26.02.2003, issued under Section 37B (of the Central excise Act a s made applicable to service tax) had clarified that certification given under a uthority of any code or statute cannot be considered as a consulting engineer se rvice.

4.72 Service tax & VAT However, technical inspection and certification services would cover certificati on of all types including that of immovable property. It is clarified that such services become taxable from the notified date. Therefore, certification given i n respect of immovable property will fall under the purview of technical inspect ion and certification services [C.B.E.&C. Circular No. 59/8/2003, dated 20th Jun e, 2003] 4.59 TECHNICAL INSPECTION AND CERTIFICATION SERVICES Effective date 1st July 2003. Definitions: "Technical inspection process or material or material o r immovable functionality or utility or not include any service 65(108)] and cer tification" means inspection or examination of goods or any immovable property t o certify that such goods or process or property qualifies or maintains the spec ified standards, including quality or safety or any other characteristic or para meters, but does in relation to inspection and certification of pollution levels . [Section "Technical inspection and certification agency" means any agency or person engag ed in providing service in relation to technical inspection and certification. [ Section 65(109)] Scope of taxable service shall include any service provided or to be provided to any person by a technical inspection and certification agency, in relation to technical inspection and certification. [Section 65(105)(zzi)] 4 .60 AIRPORT SERVICES Effective date: 10th September 2004 Definitions: Airport has the meaning assigned to it in clause (b) of section 2 of the Airports Authority of India Act, 1994 [Section 65 (3c)]. Airport means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facil ities and includes aerodrome as defined in clause (2) of section 2 of the Aircra ft Act, 1934. Airports authority means the Airports Authority of India constituted under section 3 of the Airports Authority of India Act, 1994 and also includes any person having the charge of management of an airport or a civil enclave [Sec tion 65 (3d)]. Civil enclave has the meaning assigned to it in clause (i) of secti on 2 of the Airports Authority of India Act, 1994 [Section 65 (24a)]. Civil Encla ve means the area, if any, allotted at an airport belonging to any armed force of

Gamut And Coverage of Service 4.73 the Union, for use by persons availing of any air transport services from such a irport or for the handling of baggage or cargo by such service, and includes lan d comprising of any building and structure on such area. Scope of taxable servic e shall include any service provided or to be provided to any person, by airport s authority or any person authorised by it, in an airport or a civil enclave [Se ction 65(105)(zzm)]. Relevant Circulars/Trade Notices Services provided in an ai rport or civil enclave, to any person by Airports Authority of India (AAI), a pe rson authorized by it, or any other person having charge of management of an air port are taxable under this category. This includes variety of services provided to airlines, as well as for cargo and passenger handling such as security, tran sit facilities, landing charges, terminal navigation charges, parking and housin g charges and route navigation facility charges. In case a part of airport/ civi l enclave premises is rented/ leased out, the rental/ lease charges would not be subjected to service tax, as the activity of letting out premises is not render ing a service. [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004] 4.61 TRANSPO RT OF GOODS BY AIR SERVICES Effective date: 10th September 2004 Definitions: Airc raft has the meaning assigned to it in clause (1) of section 2 of the Aircraft Ac t, 1934 [Section 65(3a)]. Aircraft means any machine, which can derive support in the atmosphere from reactions of the air, other than reactions of the air agains t the earths surface and includes balloons, whether fixed or free, airships, kite s, gliders and flying machines. Aircraft operator means any person who provides th e service of transport of goods or passengers by aircraft [Section 65(3b)]. Scop e of taxable service shall include any service provided or to be provided to any person, by an aircraft operator, in relation to transport of goods by aircraft [Section 65(105)(zzn)]. Exemptions/Notifications The taxable service provided to any person, by an aircraft operator, in relation to transport of export goods b y aircraft is exempt from the whole of the service tax leviable thereon [Notific ation No.29/2005 ST, dated 15.07.2005]. Relevant Circulars/Trade Notices In addi tion to the actual air-freight charges, all charges collected towards storing, h andling, loading/unloading (done in relation to air transportation of cargo) by an airlines are also

4.74 Service tax & VAT chargeable to this levy. [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004] 4. 62 BUSINESS EXHIBITION SERVICES Effective date: 10th September 2004 Definition: B usiness exhibition means an exhibition, (a) to market; or (b) to promote; or (c) t o advertise; or (d) to showcase, any product or service, intended for the growth in business of the producer or provider of such product or service, as the case may be [Section 65(19a)]. Scope of taxable service shall include any service pr ovided or to be provided to an exhibitor, by the organiser of a business exhibit ion, in relation to business exhibition [Section 65(105)(zzo)]. Relevant Circula rs/Trade Notices Business exhibition service is a service rendered to an exhibit or by an organizer of a business exhibition that intends to market, promote, adv ertise or show case products or services for growth in business of the producers of providers of such products or services. Thus, organizers of events such as t rade fairs, road shows, fashion show, display show-cases kept in airports, railw ay stations, hotels etc. would be covered under this new levy. A display of cons umer goods in shops or shopping centers for customers to select and purchase wou ld normally not attract any service tax, as normally no separate charges are col lected by the shop-keepers for displaying such goods. However, in case an amount is collected for merely displaying an item, the same would be chargeable to ser vice tax. While event management service (a currently taxable service) also rela tes to organizing such events, by in that case, the services are rendered to the organizer by an event manager in relation to planning, promoting, organizing et c. Thus, an organizer of a business exhibition is not covered under Event Manage ment Services, but would be covered under the new levy of Business Exhibition Ser vices. Similarly, while services rendered in relation to a circular, label, docum ent, hoarding or any other audio visual representation of a product or service f alls under advertisement services, the services relating to actual exhibition or d isplay of the product or services would fall under the category of Business Exhib ition Services. [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004]

Gamut And Coverage of Service 4.63 TRANSPORT OF GOODS BY ROAD (BY A GOODS TRANSP ORT AGENCY) Effective date: 1st January 2005 Definitions: 4.75 Goods carriage has the meaning assigned to it in clause (14) of section 2 of the M otor Vehicles Act, 1988 [Section 65(50a)]. Goods Carriage means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor ve hicle not so constructed or adapted when used for the carriage of goods. Goods tr ansport agency means any person who provides service in relation to transport of goods by road, and issues consignment note, by whatever name called [Section 65( 50b)]. Scope of taxable service shall include any service provided or to be prov ided to a customer, by a goods transport agency, in relation to transport of goo ds by road in a goods carriage [Section 65(105)(zzp)] Exemptions/Notifications N otification No.1/2006 ST, dated 01.03.2006 exempts 75% of the gross amount charg ed from the customer by a goods transport agency for providing the taxable servi ce in relation to transport of goods by road in a goods carriage, from payment o f service tax. In other words, service tax shall be levied only on 25% of the gr oss amount charged from the customer. However, the exemption is not available in cases where (i) the CENVAT credit of duty paid on inputs or capital goods or th e CENVAT credit of service tax on input services, used for providing such taxabl e service has been taken under the provisions of the Cenvat Credit Rules, 2004;o r the service provider has availed the benefit under Notification No. 12/2003-ST , dated the 20.06.2003. (ii) Notification No. 33/2004, ST, dated 03.12.2004 exempts the taxable service provi ded by a goods transport agency to a customer, in relation to transport of fruit s, vegetables, eggs or milk by road in a goods carriage, from the whole of servi ce tax leviable thereon. Notification No. 34/2004, ST, dated 03.12.2004 exempts the taxable service provided by a goods transport agency to a customer, in relat ion to transport of goods by road in a goods carriage, from the whole of service tax leviable thereon where, (i) (ii) the gross amount charged on consignments t ransported in a goods carriage does not exceed Rs.1500; or the gross amount char ged on an individual consignment transported in a goods carriage does not exceed Rs.750.

4.76 Service tax & VAT Here, an individual consignment means all goods transported by a goods transport a gency by road in a goods carriage for a consignee. Notification No. 35/2004-ST, dated 03.12.2004 prescribes that the person making payment towards freight would be liable to pay the service tax, in case the consignor or the consignee of the goods transported is one of the following, (i) (ii) Factory registered under or governed by the Factories Act; Company established by or under the Companies Ac t; (iii) Corporation established by or under any law; (iv) Society registered under Societies Registration Act or similar law; (v) Co-operative society established by or under any law; (vi) Dealer of excisable goods, registered under the Centr al Excise law; or (vii) Any body corporate established, or a partnership firm re gistered, by or under any law. In cases other than those mentioned above, the se rvice tax is to be paid by the goods transport agency. The goods transport agenc ies are required to issue a consignment note (even in the abovementioned seven c ases) other than in cases where the service in relation to transport of goods by road is wholly exempted from service tax. The consignment note should be serial ly numbered and should contain the names of the consignor and consignee, registr ation number of the goods carriage used for transport of goods, details of goods transported, place of origin and destination and person liable for paying servi ce tax. Relevant Circulars/Trade Notices According to provisions of Section 69 o f the Finance Act, 1994, requirement of registration is limited to persons liabl e to pay service tax. Thus those goods transport agencies, which are not liable to pay any service tax, are not required to obtain registration under the servic e tax rules. In case of omission in payment of service tax or procedural lapses by persons liable to pay service tax on the goods transport by road, committed b efore 31.12.2005, the consequences shall be limited to recovery of tax with inte rest payable thereon. No penalty shall be imposed on such defaulters unless the default is on account of deliberate fraud, collusion, suppression of facts or wi llful misstatement or contraventions of the provisions of service tax with inten t to evade payment of service tax. If service tax due on transportation of a con signment has been paid or is payable by a person liable to pay service tax, serv ice tax should not be charged for the same amount from any other person, to avoi d double taxation. [M.F. (D.R.) Letter F. No. 341/18/2004-TRU (Pt.), dated 17-12 -2004 2004 (174) E.L.T. (T15)]

Gamut And Coverage of Service 4.77 4.64 CONSTRUCTION SERVICES IN RESPECT OF COMMERCIAL OR INDUSTRIAL BUILDINGS OR C IVIL STRUCTURES Effective date: 10th September 2004 Definition: Commercial or ind ustrial construction service means (a) construction of a new building or a civil s tructure or a part thereof; or (b) construction of pipeline or conduit; or (c) c ompletion and finishing services such as glazing, plastering, painting, floor an d wall tiling, wall covering and wall papering, wood and metal joinery and carpe ntry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil struct ure; or (d) repair, alteration, renovation or restoration of, or similar service s in relation to, building or civil structure, pipeline or conduit, which is (i) (ii) used, or to be used, primarily for; or occupied, or to be occupied, primari ly with; or (iii) engaged, or to be engaged, primarily in, commerce or industry, or work int ended for commerce or industry, but does not include such services provided in r espect of roads, airports, railways, transport terminals, bridges, tunnels and d ams [Section 65(25b)]. Scope of taxable service shall include any service provid ed or to be provided to any person, by any other person, in relation to commerci al or industrial construction service [Section 65(105)(zzq)]. Exemptions/Notific ations In case of commercial or industrial construction services, service tax sh all be levied only on 33% of the gross charges. This exemption shall not apply i n such cases where the taxable services provided are only completion and finishi ng services in relation to building or civil structure, referred to section 65(c )(25b) of the Finance Act. Further, this exemption shall also not apply in such cases where: (i) the CENVAT credit of duty paid on inputs or capital goods or th e CENVAT credit of service tax on input services, used for providing such taxabl e service has been taken under the provisions of the Cenvat Credit Rules, 2004; or the service provider has availed the benefit under the Notification No. 12/20 03-S.T., dated the 20.06.2003. (ii)

4.78 Service tax & VAT The gross amount charged shall include the value of goods and materials supplied o r provided or used by the provider of the construction service for providing suc h service [Notification No. 1/2006-S.T., dated 01.03.2006]. The commercial or in dustrial construction service provided to any person by any other person in rela tion to construction of port or other port is exempt from the whole of service t ax leviable thereon vide Notification No. 16/2005 ST, dated 07.06.2005. Relevant Circulars/Trade Notices Services provided by a commercial concern (now any pers on) in relation to construction, repairs, alteration or restoration of such buil dings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done, by a building or civil contractor. Estate builders who construct bui ldings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such re al estate owners hire contractor/contractors, the payment made to such contracto r would be subjected to service tax under this head. The leviability of service tax would depend primarily upon whether the building or civil structure is used , or to be used for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such cons tructions which are for the use of organizations or institutions being establish ed solely for educational, religious, charitable, health, sanitation or philanth ropic purposes and not for the purposes of profit are not taxable, being non-com mercial in nature. Generally, government buildings or civil constructions are us ed for residential, office purposes or for providing civic amenities. Thus, norm ally government constructions would not be taxable. However, if such constructio ns are for commercial purposes like local government bodies getting shops constr ucted for letting them out, such activity would be commercial and builders would be subjected to service tax. In case of multi-purpose buildings such as residen tial-cum-commercial construction, tax would be leviable in case such immovable p roperty is treated as a commercial property under the local/municipal laws. The definition of service specifically excludes construction of roads, airports, rai lway, transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pi peline running within such an industrial and commercial establishment is within the scope of the levy [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004]. At p resent, services rendered for construction of commercial or industrial buildings is taxable. However, construction of roads is not liable to service tax. A poin t has been raised that if a commercial complex is constructed which also contain s roads whether the value of

Gamut And Coverage of Service construction of roads would be liable to service t ax. 4.79 If the contract for construction of commercial complex is a single contract and the construction of road is not recognized as a separate activity as per the con tract, then the service tax would be leviable on the gross amount charged for co nstruction including the value of construction of roads. When services provided under a contract consist of a number of different elements, a view has to be tak en on the basis of the facts and circumstances of each case as to whether the se rvice provider has made a single overall supply or a supply of different service s which are to be treated differently [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dat ed 27.07.2005]. 4.65 INTELLECTUAL PROPERTY SERVICES OTHER THAN COPYRIGHTS Effect ive date: 10th September 2004 Definitions : Intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but doe s not include copyright [Section 65(55a)]. Intellectual property service means, (a) transferring, temporarily; or (b) permitting the use or enjoyment of, any intell ectual property right [Section 65(55b)]. Scope of taxable service shall include service provided or to be provided to any person, by the holder of intellectual property right, in relation to intellectual property service [Section 65(105)(zz r)]. Exemptions/Notifications Service provided by the holders of intellectual pr operty rights are exempt from service tax to the extent of cess paid towards the import of technology under the provisions of section 3 of the Research and Deve lopment Cess Act in relation to such intellectual property services [Notificatio n No. 17/2004-S.T., dated 10.09.2004]. Relevant Circulars/Trade Notices Intellec tual property emerges from application of intellect, which may be in the form of an invention, design, product, process, technology, book, goodwill etc. In Indi a, legislations are made in respect of certain Intellectual Property Rights (i.e . IPRs) such as patents, copyrights, trademarks and designs. The definition of t axable service includes only such IPRs (except copyrights) that are prescribed u nder law for the time being in force. As the phrase law for the time being in for ce implies such laws as re applicable in India, IPRs covered under Indian

4.80 Service tax & VAT law in force at present alone are chargeable to service tax and IPRs under India n law in force at present alone are chargeable to service tax and IPRs like inte grated circuits or undisclosed information (not covered by Indian law) would not be covered under taxable services. A permanent transfer of intellectual propert y right does not amount to rendering of service. On such transfer, the person se lling these rights no longer remains a holder of intellectual property right s o as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs. In case a transfer or use of an IPR a ttracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable (ref er Notification No, 17/2004-S.T., dated 10-9-2004). [CBE&C Circular No. 80/10/20 04 S.T., dated 17.9.2004] 4.66 OPINION POLL SERVICES Effective date: 10th Septemb er 2004 Definitions: Opinion poll means any service designed to secure information on public opinion regarding social, economic, political or other issues [Sectio n 65(75a)]. Opinion poll agency means any person engaged in providing any service in relation to opinion poll [Section 65(75b)]. Scope of taxable service shall in clude any service provided or to be provided to any person, by an opinion poll a gency, in relation to opinion poll [Section 65(105)(zzs)]. Relevant Circulars/Tr ade Notices Services provided by an opinion poll agency (i.e. any person providi ng that service) in relation to opinion polls are taxable under this category. O pinion poll means securing information on public opinions regarding social, econ omic, political and other issues. The term securing would include activities like selecting the target groups, preparing questionnaires, gathering opinions from s uch target groups, collating their responses, drawing conclusions or analyzing t rends and preparing report based thereon. A similar service i.e. market research agency service is taxable since 1998. However, that service includes conducting o f market research in relation to product, services and utilities. Opinion polls conducted to secure information on economic issues do not include such market re searches about specific products, services or utilities. Therefore, obtaining op inion of general public on economic issues like price rise, reaction of people t o certain government or corporate policies etc., would fall under the category o f opinion poll services while information gathered in relation to specific produ cts, services etc. would fall under market research agency service. [CBE&C Circula r No. 80/10/2004 S.T., dated 17.9.2004]

Gamut And Coverage of Service 4.67 OUTDOOR CATERING Effective date: 10th Septemb er 2004 Definitions: 4.81 Caterer means any person who supplies, either directly or indirectly, any food, ed ible preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or accoutrements for any purpose or occasion [Section 65(24)]. Outdoor c aterer means a caterer engaged in providing services in connection with catering at a place other than his own but including a place provided by way of tenancy o r otherwise by the person receiving such services [Section 65(76a)]. Scope of ta xable service shall include any service provided or to be provided to a client, by an outdoor caterer [Section 65(105)(zzt)]. Exemptions/Notifications Only 50% of the gross amount of taxable services provided by an outdoor caterer shall be charged to service tax. This exemption shall apply in cases where the outdoor ca terer also provides food and the invoice, bill or challan issued for this purpos e indicates that it is inclusive of charges for supply of food. However, the exe mption is not available in cases where (i) the CENVAT credit of duty paid on inp uts or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service has been taken under the provisions of the C envat Credit Rules, 2004; or the service provider has availed the benefit under the Notification No. 12/2003-Service Tax, dated 20.06.2003. (ii) Here, "food" means a substantial and satisfying meal [Notification No. 1/2006-S. T., dated 01.03.2006]. Relevant Circulars/Trade Notices It is clarified that in case a cafe, hotels, restaurants etc. delivers food to home and no charge, other than that for the cost of the foods, is charged (i.e. free home delivery) no se rvice tax is leviable. [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004] 4.68 TV OR RADIO PROGRAMME PRODUCTION SERVICES Effective date: 10th September 2004 D efinitions: Programme means any audio or visual matter, live or recorded, which is intended to be disseminated by transmission of electro-magnetic waves through s pace or through cables

4.82 Service tax & VAT intended to be received by the general public either directly or indirectly thro ugh the medium of relay stations [Section 65(86a)]. Programme producer means any p erson who produces a programme on behalf of another person [Section 65(86b)]. Sc ope of taxable service shall include any service provided or to be provided to a ny person, by a programme producer, in relation to a programme [Section 65(105)( zzu)]. Relevant Circulars/Trade Notices Services provided by a TV or radio progr amme producer have been brought under the purview of taxable service. Any progra mme produced (or any service rendered in connection of producing such programme) by a programme producer, for telecasting/radio transmission by a broadcaster wo uld fall under this category of taxable service including cases where a programm e is sold to the broadcaster. However, a service rendered by an employee of the service receiver (i.e. the broadcaster) or by an amateur photographer who, say, shoots a footage for himself, would not be charged to service tax. [CBE&C Circul ar No. 80/10/2004 S.T., dated 17.9.2004] 4.69 SURVEY AND EXPLORATION OF MINERAL SERVICES Effective date: 10th September 2004 Definition: Survey and exploration o f mineral means geological, geophysical or other prospecting, surface or sub-surf ace surveying or map making service, in relation to location or exploration of d eposits of mineral, oil or gas [Section 65(104a)]. Scope of taxable service shal l include any service provided or to be provided to a customer, by any person, i n relation to survey and exploration of mineral [Section 65(105)(zzv)]. Relevant Circulars/Trade Notices The service tax would be leviable when the service of s urvey and exploration of minerals is provided by any person to a customer. The s urvey and exploration may result in locating ores, crude etc. Subsequent to surv ey and exploration, the mineral is extracted and transported for refining, proce ssing and production. The service tax under this category would be limited to th e services rendered in relation to survey and exploration only and not on the ac tivity of actual extraction after the survey and exploration is complete. The tr ansport, refining, processing or production of the extracted products would also be out of the ambit of service tax. Activities such as seismic survey, collecti on/processing interpretation of data and drilling or testing in relation to surv ey and exploration would, however, fall within the ambit of taxable service. [CB E&C Circular No. 80/10/2004 S.T., dated 17.9.2004]

Gamut And Coverage of Service 4.70 PANDAL OR SHAMIANA SERVICES Effective date: 1 0th September 2004 Definitions: 4.83 Pandal or shamiana means a place specially prepared or arranged for organizing an official, social or business function [Section 65(77a)]. Pandal or shamiana contr actor means a person engaged in providing any service, either directly or indirec tly, in connection with the preparation, arrangement, erection or decoration of a pandal or shamiana and includes the supply of furniture, fixtures, lights and lighting fittings, floor coverings and other articles for use therein [Section 6 5(77b)]. Scope of taxable service shall include any service provided or to be pr ovided to a client, by a pandal or shamiana contractor in relation to a pandal o r shamiana in any manner and also includes the services, if any, provided or to be provided as a caterer [Section 65(105)(zzw)]. Exemptions/Notifications Where a pandal and shamiana contractor provides taxable services in relation to a pand al or shamiana in any manner, including services rendered as a caterer, service tax shall be paid on 70% of the gross amount. This exemption shall apply only in cases where such pandal or shamiana contractor also provides catering services, that is, supply of food and the invoice, bill or challan issued for this purpos e indicates that it is inclusive of charges for catering service. However, the e xemption is not available in cases where (i) the CENVAT credit of duty paid on i nputs or capital goods or the CENVAT credit of service tax on input services, us ed for providing such taxable service has been taken under the provisions of the Cenvat Credit Rules, 2004; or the service provider has availed the benefit unde r the Notification No. 12/2003-Service Tax, dated 20.06.2003. (ii) Here, "food" means a substantial and satisfying meal [Notification No. 1/2006-S. T., dated 01.03.2006]. Relevant Circulars/Trade Notices A person providing servi ces, directly or indirectly, in connection with preparation, arrangement, erecti on or decoration of a pandal or shamiana (i.e. a place specially prepared for or ganizing official, social or business functions) is a pandal or shamiana contra ctor . Service provided by him in any such manner, including that of a caterer i s liable to service tax under the category of Pandal or Shamiana Contractor ser vice . It is clarified that pandal/shamiana services provided for pure religious ceremonies or congregation, for example, for worship of Gods/Goddesses, are not liable to service tax. [CBE&C Circular No. 80/10/2004 S.T., dated 17.9.2004]

4.84 Service tax & VAT 4.71 TRAVEL AGENTSS SERVICES (OTHER THAN AIR/RAIL TRAVEL AGENTS) Effective date: 10th September 2004 Definition: Travel agent means any person engaged in providing any service connected with booking of passage for travel, but does not include air travel agent and rail travel agent [Section 65(115a)]. Scope of taxable serv ice shall include any service provided or to be provided to a customer, by a tra vel agent, in relation to the booking of passage for travel [Section 65(105)(zzx )]. 4.72 FORWARD CONTRACT SERVICES Effective date: 10th September 2004 Definitio ns: Forward contract has the meaning assigned to it in clause (c) of section 2 of the Forward Contracts (Regulation) Act, 1952 [Section 65(46a)]. Recognised associ ation has the meaning assigned to it in clause (j) of section 2 of the Forward Co ntracts (Regulation) Act, 1952 [Section 65(89a)]. Recognised association means an association to which recognition for the time being has been granted by the Cent ral Government under section 6 in respect of goods or classes of goods specified in such recognition. Registered association has the meaning assigned to it in cla use (jj) of section 2 of the Forward Contracts (Regulation) Act, 1952 [Section 6 5(89b)]. Registered association means an association to which for the time being a certificate of registration has been granted by the Commission under section 14 B. Scope of taxable service shall include any service provided or to be provided to any person, by a member of a recognised association or a registered associat ion, in relation to a forward contract [Section 65(105)(zzy)]. Relevant Circular s/Trade Notices As per the provisions of Forward Contract (Regulation) Act, 1952 , a forward contract is a contract for delivery of goods, which is not a ready d elivery contract. For commodities notified under the Act, forward contracts can be entered into only through members of association recognized under that Act. F or other commodities, future trading can be done through associations registered with Forward Market Commission. The levy of service -tax under this category is on the services provided by members of such associations (commonly called as co mmodity exchanges) to any person in relation to forward contracts. [CBE&C Circul ar No. 80/10/2004 S.T., dated 17.9.2004]

Gamut And Coverage of Service 4.73 TRANSPORT OF GOODS THROUGH PIPELINE OR OTHER CONDUIT Effective date: 16th June 2005 4.85 Scope of taxable service shall include any service provided or to be provided to any person, by any other person, in relation to transport of goods other than w ater, through pipeline or other conduit [Section 65(105)(zzz)]. Relevant Circula rs/Trade Notices Transportation of goods, other than water, through pipeline or conduit is generally employed to transport petroleum and other petroleum product s, natural gas, LPG, chemicals, coal slurry and other similar products [M.F. (D. R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.74 SITE PREPARATION AND CLEAR ANCE, EXCAVATION, EARTH MOVING AND DEMOLITION SERVICES Effective date: 16th June 2005 Definition: Site formation and clearance, excavation and earthmoving and de molition includes, (i) (ii) drilling, boring and core extraction services for cons truction, geophysical, geological or similar purposes; or soil stabilization; or (iii) horizontal drilling for the passage of cables or drain pipes; or (iv) land reclamation work; or (v) contaminated top soil stripping work; or (vi) demoliti on and wrecking of building, structure or road, but does not include such servic es provided in relation to agriculture, irrigation, watershed development and dr illing, digging, repairing, renovating or restoring of water sources or water bo dies [Section 65(97)(a)]. Scope of taxable service shall include any service pro vided or to be provided to any person, by any other person, in relation to site formation and clearance, excavation and earthmoving and demolition and such othe r similar activities [Section 65(105)(zzza)]. Exemptions/Notifications The site formation and clearance, excavation and earthmoving and demolition and such othe r similar activities provided to any person by any other person in the course of construction of roads, airports, railways, transport terminals, bridges, tunnel s, dams, ports or other ports are exempt from the whole of service tax leviable thereon vide Notification No. 17/2005 ST, dated 07.06.2005.

4.86 Service tax & VAT Relevant Circulars/Trade Notices The definition of site formation and clearance, excavation and earthmoving and demolition is an inclusive definition and the ac tivities specifically mentioned are indicative and not exhaustive. Prior to cons truction of buildings, factory or any civil structure, activity of mining or lay ing of cables or pipes, preparation services of site formation and clearance, ex cavation and earthmoving or leveling are normally undertaken for a consideration to make the land suitable for such activities. Such services include blasting a nd rock removal work, clearance of undergrowth, drilling and boring, overburden removal and other development and preparation services of mineral properties and sites, and other similar excavating and earthmoving services. Demolition of str uctures, buildings, streets or highways is also undertaken for a consideration a s a preparatory activity for subsequent construction activity or for clearing th e site for any other purpose. All such activities fall within the scope of this service. However, site formation and clearance, excavation and earthmoving and d emolition services when provided in relation to agriculture, irrigation, watersh ed development and drilling, digging, repairing, renovating or restoring of wate r sources or water bodies are specifically excluded and not within the scope of this service [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.75 DRED GING SERVICES OF RIVERS, PORTS, HARBOURS, BACKWATERS AND ESTUARIES Effective dat e: 16th June 2005 Definition: Dredging includes removal of material including, sil t, sediments, rocks, sand, refuse, debris, plant or animal matter in any excavat ing, cleaning, deepening, widening or lengthening, either permanently or tempora rily, of any river, port, harbour, backwater or estuary [Section 65(36)(a)]. Sco pe of taxable service shall include any service provided or to be provided to an y person, by any other person, in relation to dredging [Section (65)(105)(zzzb)] . Relevant Circulars/Trade Notices This taxable service covers dredging which is generally undertaken for removal of material such as silt, sediments, rocks etc . of rivers, ports, harbour, backwater or estuary for providing adequate draught for ships and other vessels and to maintain shipping channels. Service tax is l eviable only on dredging of river, port, harbour, backwater or estuary and dredg ing in any other cases does not attract service tax. The definition of dredging is an inclusive definition and the activities specified are only indicative and not exhaustive [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005].

Gamut And Coverage of Service 4.87 4.76 SURVEY AND MAP MAKING SERVICES OTHER THAN BY GOVERNMENT DEPARTMENTS Effecti ve date: 16th June 2005 Definition: Survey and map-making" means geological, geop hysical or any other prospecting, surface, sub-surface or aerial surveying or ma p-making of any kind, but does not include survey and exploration of mineral [Se ction 65(104)(b)]. Scope of taxable service shall include any service provided o r to be provided to any person, by any other person, other than by an agency und er the control of, or authorised by, the Government, in relation to survey and m ap-making [Section 65(105)(zzzc)]. Relevant Circulars/Trade Notices This service covers geological, geophysical, geochemical and other prospecting services by s tudying the properties of the earth and rock formation and structures. It also i ncludes services providing information on sub-surface earth formations by differ ent methods such as seismographic, gravimetric, magnetometric methods or other s ub-surface surveying methods. Further, it covers surface surveying, services of gathering information on the shape, position or boundaries of a portion of earths surface by methods such as transit, photogrammetric, or hydrographic, for the p urpose of preparing maps. It also includes surveying or collection of data by sa tellites. Survey and exploration of minerals, which is a taxable service under sub -clause (zzv) of section 65(105) since 2004, covers specified services rendered in relation to location or exploration of deposits of mineral, oil or gas. The t axable service of survey and map-making classifiable under sub-clause (zzzc) of se ction 65(105) of the Finance Act, 1994, covers other such activities excluding su rvey and exploration of minerals classifiable under sub-clause (zzv) of section 6 5(105) since 2004. Map making consists of preparation or revision of maps of all kinds such as topographic, hydrographic, roads, planimetric, cadastral, city ma ps etc. using various information sources. However, survey and map-making servic es rendered by an agency under the control of the Government or authorised by th e Government, such as Survey of India are specifically excluded and are outside th e scope of this service [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005] .

4.88 Service tax & VAT 4.77 CLEANING SERVICES OTHER THAN IN RELATION TO AGRICULTURE, HORTICULTURE, ANIM AL HUSBANDRY OR DAIRYING Effective date: 16th June 2005 Definition: Cleaning acti vity means cleaning, including specialised cleaning services such as disinfecting , exterminating or sterilising of objects or premises, of (i) (ii) commercial or industrial buildings and premises thereof; or factory, plant or machinery, tank or reservoir of such commercial or industrial buildings and premises thereof, but does not include such services in relation to agriculture, horticulture, ani mal husbandry or dairying [Section 65(24)(b)]. Scope of taxable service shall in clude any service provided or to be provided to any person, by any other person, in relation to cleaning activity [Section 65(105)(zzzd)]. Relevant Circulars/Tr ade Notices Generally contracts/agreements are entered into for cleaning of comm ercial complexes such as multiplexes, shopping complexes, office complexes, indu strial buildings etc. The contracts/agreements may be in writing or may be unwri tten. This taxable service includes,(i) specialized cleaning services such as di sinfecting and exterminating, sterilization of objects, etc. Such cleaning servi ces would be taxable when performed for commercial or industrial buildings and t heir premises, factories, plant and machinery, tank or reservoir of such buildin gs; Disinfecting, exterminating insects, rodents and other pests and fumigation services in respect of specified premises would be liable to service tax. In res pect of multi-storeyed commercial buildings, window cleaning is a specialized se rvice. Window cleaning services, including exterior window cleaning using swing stages would be liable to service tax; (ii) (iii) Floor cleaning and waxing, wall cleaning etc. performed on the premises of commercial or industrial buildings; (iv) Specialized cleaning services such as cleaning services for computer rooms, cleaning of machinery or plant, reservoirs and tanks of commercial or industrial buildings, furnace and chimney cleaning s ervices and similar services. However, such cleaning services in relation to agr iculture, horticulture, animal husbandry or dairying would be excluded from the purview of service tax. Further, such cleaning services in respect of non-commer cial buildings and premises thereof would not be covered within the

Gamut And Coverage of Service 4.89 purview of service tax under this category [M.F. (D.R.) Letter F.No.B1/6/2005-TR U dated 27.07.2005]. 4.78 SERVICES IN RESPECT OF MEMBERSHIP OF CLUBS OR ASSOCIAT IONS Effective date: 16th June 2005 Definition: Club or association means any pers on or body of persons providing services, facilities or advantages, for a subscr iption or any other amount, to its members, but does not include (i) (ii) any bod y established or constituted by or under any law for the time being in force; or any person or body of persons engaged in the activities of trade unions, promot ion of agriculture, horticulture or animal husbandry; or (iii) any person or body of persons engaged in any activity having objectives wh ich are in the nature of public service and are of a charitable, religious or po litical nature; or (iv) any person or body of persons associated with press or m edia [Section 65(25)(a)]. Scope of taxable service shall include any service pro vided or to be provided to its members, by any club or association in relation t o provision of services, facilities or advantages for a subscription or any othe r amount [Section 65(105)(zzze)]. Relevant Circulars/Trade Notices Various clubs or associations provide services, facilities or advantages to their members for a subscription or a charge. This taxable service covers within its ambit the ch arges recovered by such clubs or associations for membership and providing vario us services. However, exclusions have been made in respect of specific clubs or associations which will not be covered within the ambit of clubs or associations for the purpose of levy of service tax. These exclusions cover any body establi shed or constituted by or under any law, trade unions, clubs or association form ed for promotion of agriculture, horticulture or animal husbandry, clubs or asso ciation which are non profit making bodies and are engaged in any activity which are in the nature of public service and are of a charitable, religious or polit ical nature, clubs or associations associated with press or media. Legally, bodi es which are established or constituted under a statute are different from bodies which are formed and registered under a statute. Companies and Societies registere d under the respective Acts are merely bodies formed and registered under these Ac ts and cannot be treated as established or constituted under these Acts. Therefore companies or societies would fall outside the scope of clause (25a)(i) of Secti on 65 of Finance Act. In other words, any body formed and registered as a compan y or society which provides services, facilities or advantages for a subscriptio n or any other amount to its members is liable to pay service tax

4.90 Service tax & VAT under section 65(25a) of the Finance Act, 1994. Taxable services are defined as services provided to members by clubs or associations in relation to provision o f services, facilities or advantages for a subscription or any other amount. Fac ilities or advantages are provided to members in return for a subscription or ot her consideration. The scope of the term any other amount is the amount paid by members, apart from membership fee or recurring subscription fee, such as amount s paid for provisions of services to the guests of a member, amount paid for get -togethers and functions charged over and above the subscription amount. This wi ll also be liable to service tax. However, amount charged by club to its members for sale of items such as food or beverages would not be taxable provided the d ocuments evidencing such sale are available. Any additional fee should be treate d in the same way as subscription. Life membership fees must be treated in the s ame way as subscription. In certain professions, persons cannot practice unless they are registered with a statutory body and have paid fees which are prescribe d by law. In such cases, the organization is not providing any service in the co urse of its business and it is merely carrying statutory functions. Since no ser vice is provided, the question of levy of service tax does not arise. However, i f there is no statutory requirement, service tax is liable to be paid [M.F. (D.R .) Letter F.No.B1/6/2005-TRU dated 27.07.2005]. 4.79 PACKAGING SERVICES Effectiv e date: 16th June 2005 Definition: Packaging activity means packaging of goods inc luding pouch filling, bottling, labeling or imprinting of the package, but does not include any packaging activity that amounts to manufacture within the mean ing of clause (f) of section 2 of the Central Excise Act, 1944 [Section 65(76)(b )]. Scope of taxable service shall include any service provided or to be provide d to any person, by any other person, in relation to packaging activity [Section 65(105)(zzzf)]. Relevant Circulars/Trade Notices This taxable service would cov er packaging activity undertaken by a person for any other person. These kinds o f packaging services may be done for pharmaceuticals (aseptic packaging), fragil e goods, heavy machinery and hardware, using variety of automated or manual pack aging techniques, including blister forming, and packaging, shrink or skin wrapp ing, form filling and sealing, pouch filling, bottling or aerosol packaging. Thi s service also includes labeling or imprinting of the package. However, packagin g activity which amounts to manufacture within the definition of section 2(f) of Central Excise Act, 1944 would not be liable to service tax [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005].

Gamut And Coverage of Service 4.80 MAILING LIST COMPILATION AND MAILING SERVICES Effective date: 16th June 2005 Definition: Mailing list compilation and mailing m eans any service in relation to (i) (ii) 4.91 compiling and providing list of name, address and any other information from any source; or sending document, information, goods or any other material in a pack et, by whatever name called, by addressing, stuffing, sealing, metering or maili ng, for, or on behalf of, the client [Section 65(63)(a)]. Scope of taxable service shall include any service provided or to be provided to any person, by any other person, in relation to mailing list compilation and ma iling [Section 65(105)(zzzg)]. Relevant Circulars/Trade Notices Business establi shments such as banks, insurance companies, companies listed on stock exchanges, real estate agents and other similar commercial entities engage the services of persons who compile and provide lists of names, addresses and other information from telephone directories, internet or any other source of information for the benefit of the business. Some agencies also provide services of sending documen ts, materials, information or any other goods by addressing, stuffing, sealing, metering or mailing the envelope or packet for or on behalf of the client. Such services are taxable under this category of service. Mail order business compani es may engage the services of mailing companies to despatch goods to customers. Such mailing companies are also covered under this service [M.F. (D.R.) Letter F .No.B1/6/2005-TRU dated 27.07.2005]. 4.81 CONSTRUCTION SERVICES IN RESPECT OF RE SIDENTIAL COMPLEXES Effective date: 16th June 2005 Definitions: Construction of c omplex means (a) construction of a new residential complex or a part thereof; or ( b) completion and finishing services in relation to residential complex such as glazing,plastering, painting, floor and wall tiling, wall covering and wall pape ring, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; o r (c) repair, alteration, renovation or restoration of, or similar services in r elation to, residential complex [Section 65(30)(a)]

4.92 Service tax & VAT Residential complex means any complex comprising of (i) (ii) a building or building s, having more than twelve residential units; a common area; and (iii) any one or more of facilities or services such as park, lift, parking spac e, community hall, common water supply or effluent treatment system, located wit hin a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is co nstructed by a person directly engaging any other person for designing or planni ng of the layout, and the construction of such complex is intended for personal use as residence by such person. Explanation.For the removal of doubts, it is her eby declared that for the purposes of this clause, (a) "personal use" includes pe rmitting the complex for use as residence by another person on rent or without c onsideration; (b) "residential unit" means a single house or a single apartment intended for use as a place of residence [Section 65(91)(a)]. Scope of taxable s ervice shall include any service provided or to be provided to any person, by an y other person, in relation to construction of complex [Section 65(105)(zzzh)]. Exemptions/Notifications 67% of the value of the taxable service provided to any person by any other person in relation to construction of complex is exempt fro m the service tax leviable thereon. This exemption shall not apply in cases wher e the taxable services provided are only completion and finishing services in re lation to residential complex, referred to in section 65(30a)(b) of the Finance Act. Further, this exemption is not available in cases where, (i) the CENVAT cre dit of duty paid on inputs or capital goods or the CENVAT credit of service tax on input services, used for providing such taxable service has been taken under the provisions of the CENVAT Credit Rules, 2004; or the service provider has ava iled the benefit under Notification No. 12/2003-ST, dated 20.06.2003. (ii) The gross amount charged shall include the value of goods and materials supplied o r provided or used for providing the said taxable service by the service provide r [Notification No. 1/2006 ST, dated 01.03.2006]. Relevant Circulars/Trade Notic es This service would generally cover construction services in respect of reside ntial complexes developed by builders, promoters or developers. Such residential complexes are normally

Gamut And Coverage of Service 4.93 constructed after obtaining approval of the statutory authority for their layout . For the purpose of this levy, residential complex means,(i) (ii) a building or buildings located within a premises; total number of residential units within t he said premises are more than twelve; (iii) having common area; (iv) having common facilities or services; and (v) lay out of the premises has been approved by the appropriate authority. Common area would include roads, staircases and other similar areas where residents of the r esidential complex have easement rights. The list of facilities prescribed is me rely illustrative and not exhaustive. Some residential complexes may also contai n other facilities such as market or shopping complex, schools, security, banks, gymnasium, health club, sports facilities, power back up and the like. However, residential complex having only 12 or less residential units would not be taxab le. Similarly, residential complex constructed by an individual, which is intend ed for personal use as residence and is constructed by directly availing service s of a construction service provider, is also not covered under the scope of the service tax and not taxable. Post construction, completion and finishing servic es such as glazing, plastering, painting, floor and wall tiling, wall covering a nd wall papering, wood and metal joinery and carpentry and similar services done in relation to a residential complex, whether or not new, would be included as part of the construction activity of residential complexes for the purpose of le vy of service tax. Repair, alteration, renovation or restoration of residential complexes would also be liable to service tax. Such services provided in relatio n to residential complexes which are in existence before the levy has come into force and are not new would also be liable to be taxed [M.F. (D.R.) Letter F.No. B1/6/2005-TRU dated 27.07.2005]. 4.82 REGISTRAR TO AN ISSUES SERVICES Effective d ate: 1st May 2006 Definitions: Registrar to an issue means any person carrying on the activities in relation to an issue including collecting application forms fr om investors, keeping a record of applications and money received from investors or paid to the seller of securities, assisting in determining the basis of allo tment of securities, finalising the list of persons entitled to allotment of sec urities and processing and despatching allotment letters, refund orders or certi ficates and other related documents [Section 65(89c)].

4.94 Service tax & VAT Issue means an offer of sale or purchase of securities to, or from, the public or the holder of securities [Section 65(59a)]. Scope of taxable service shall inclu de any service provided or to be provided to any person, by a registrar to an is sue, in relation to sale or purchase of securities [Section 65(105)(zzzi)]. 4.83 SHARE TRANSFER AGENTS SERVICES Effective date: 1st May 2006 Definition: Share tra nsfer agent means any person who maintains the record of holders of securities an d deals with all matters connected with the transfer or redemption of securities or activities incidental thereto [Section 65(95a)]. Scope of taxable service sh all include any service provided or to be provided to any person, by a share tra nsfer agent, in relation to securities [Section 65(105)(zzzj)]. 4.84 AUTOMATED T ELLER MANAGEMENT SERVICES Effective date: 1st May 2006 Definitions: Automated tel ler machine means an interactive automatic machine designed to dispense cash, acc ept deposit of cash, transfer money between bank accounts and facilitate other f inancial transactions [Section 65(9a)]. Automated teller machine operations, main tenance or management service means any service provided in relation to automated teller machines and includes site selection, contracting of location, acquisiti on, financing, installation, certification, connection, maintenance, transaction processing, cash forecasting, replenishment, reconciliation and value-added ser vices [Section 65(9b)]. Scope of taxable service shall include any service provi ded or to be provided to any person, by any other person, in relation to automat ed teller machine operations, maintenance or management service, in any manner [ Section 65(105)(zzzk)]. 4.85 RECOVERY AGENTS SERVICES Effective date: 1st May 200 6 Scope of taxable service shall include any service provided or to be provided to a banking company or a financial institution including a non-banking financia l company or any other body corporate or a firm, by any person, in relation to r ecovery of any sums due to such banking MACHINE OPERATIONS, MAINTENANCE OR

Gamut And Coverage of Service 4.95 company or financial institution, including a non-banking financial company, or any other body corporate or a firm, in any manner [Section 65(105)(zzzl)]. 4.86 SALE OF SPACE OR TIME FOR ADVERTISEMENT, OTHER THAN IN PRINT MEDIA Effective dat e: 1st May 2006 Scope of taxable service shall include any service provided or t o be provided to any person, by any other person, in relation to sale of space o r time for advertisement, in any manner; but does not include sale of space for advertisement in print media and sale of time slots by a broadcasting agency or organisation. Explanation 1. For the purposes of this sub-clause, sale of space or time for advertisement includes, (i) providing space or time, as the case may be, for display, advertising, showcasing of any product or service in video program mes, television programmes or motion pictures or music albums, or on billboards, public places, buildings, conveyances, cell phones, automated teller machines, internet; selling of time slots on radio or television by a person, other than a broadcasting agency or organisation; and (ii) (iii) aerial advertising Explanation 2.For the purposes of this sub-clause, print media means book and newspaper as defined in sub-section (1) of section 1 of the Pres s and Registration of Books Act, 1867 [Section 65(105)(zzzm)]. 4.87 SPONSORSHIP SERVICES PROVIDED TO ANY BODY CORPORATE OR FIRM, OTHER THAN SPONSORSHIP OF SPORT S EVENTS Effective date: 1st May 2006 Definition: Sponsorship includes naming an e vent after the sponsor, displaying the sponsors company logo or trading name, giv ing the sponsor exclusive or priority booking rights, sponsoring prizes or troph ies for competition; but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that th e service provider is under no obligation to provide anything in return to such donors [Section 65(99a)]. Scope of taxable service shall include any service pro vided or to be provided to any body corporate or firm, by any person receiving s ponsorship, in relation to such sponsorship, in any manner, but does not include services in relation to sponsorship of sports events [Section 65(105)(zzzn)].

4.96 Service tax & VAT 4.88 TRANSPORT OF PASSENGERS EMBARKING ON INTERNATIONAL JOURNEY BY AIR, OTHER TH AN ECONOMY CLASS PASSENGERS Effective date: 1st May 2006 Definitions: Aircraft op erator means any person who provides the service of transport of goods or passeng ers by aircraft [Section 65(3b)]. Passenger means any person boarding, at any cust oms airport, an aircraft for performing an international journey, but does not i nclude (i) a person who has arrived at such customs airport from a place outside India and is in transit through India, provided that he does not pass through im migration and does not leave customs area and continues his journey to a place o utside India; and a person employed or engaged by the aircraft operator in any c apacity on board the aircraft [Section 65(77c)]. (ii) Customs airport means an airport appointed as such under clause (a) of sub-section (1) of section 7 of the Customs Act, 1962 [Section 65(35a)]. International journ ey, in relation to a passenger, means his journey from any customs airport on boa rd any aircraft to a place outside India [Section 65(56a)]. Scope of taxable ser vice shall include any service provided or to be provided to any passenger, by a n aircraft operator, in relation to scheduled or non-scheduled air transport of such passenger embarking in India for international journey, in any class other than economy class. Explanation 1.For the purposes of this sub-clause, economy cl ass in an aircraft meant for scheduled air transport of passengers means, (i) (ii ) where there is more than one class of travel, the class attracting the lowest standard fare; or where there is only one class of travel, that class. Explanation 2.For the purposes of this sub-clause, in an aircraft meant for non-s cheduled air transport of passengers, no class of travel shall be treated as eco nomy class [Section 65(105)(zzzo)]. 4.89 TRANSPORT OF GOODS IN CONTAINERS BY RAI L BY ANY PERSON, OTHER THAN GOVERNMENT RAILWAY Effective date: 1st May 2006 Scop e of taxable service shall include any service provided or to be provided to any person,

Gamut And Coverage of Service 4.97 by any other person other than Government railway as defined in clause (20) of s ection 2 of the Railways Act, 1989, in relation to transport of goods in contain ers by rail, in any manner [Section 65(105)(zzzp)]. Exemptions/Notifications In case of transport of goods by containers in rail an abatement of 70% of the gros s amount charged by such service provider for providing the said taxable service , is granted. However, this exemption is not available in cases where: (i) the C ENVAT credit of duty paid on inputs or capital goods or the CENVAT credit of ser vice tax on input services, used for providing such taxable service has been tak en under the provisions of the CENVAT Credit Rules, 2004; or the service provide r has availed the benefit under Notification No. 12/2003-ST, dated 20.06.2003 [N otification No. 1/2006 ST, dated 01.03.2006]. (ii) 4.90 BUSINESS SUPPORT SERVICES Effective date: 1st May 2006 Definition: Support s ervices of business or commerce means services provided in relation to business o r commerce and includes evaluation of prospective customers, telemarketing, proc essing of purchase orders and fulfilment services, information and tracking of d elivery schedules, managing distribution and logistics, customer relationship ma nagement services, accounting and processing of transactions, operational assist ance for marketing, formulation of customer service and pricing policies, infras tructural support services and other transaction processing. Explanation.For the purposes of this clause, the expression infrastructural support services includes providing office along with office utilities, lounge, reception with competent p ersonnel to handle messages, secretarial services, internet and telecom faciliti es, pantry and security [Section 65(104c)]. Scope of taxable service shall inclu de any service provided or to be provided to any person, by any other person, in relation to support services of business or commerce, in any manner [Section 65 (105)(zzzq)]. 4.91 AUCTIONEERS SERVICES, OTHER THAN AUCTION OF PROPERTY UNDER D IRECTIONS OR ORDERS OF A COURT OF LAW OR AUCTION BY THE CENTRAL GOVERNMENT Effec tive date: 1st May 2006 Definition: Auction of property includes calling the aucti on or providing a facility, advertising or

4.98 Service tax & VAT illustrating services, pre-auction price estimates, short-term storage services, repair or restoration services in relation to auction of property [Section 65(7 a)]. Scope of taxable service shall include any service provided or to be provid ed to any person, by any other person, in relation to auction of property, movab le or immovable, tangible or intangible, in any manner, but does not include auc tion of property under the directions or orders of a court of law or auction by the Government [Section 65(105)(zzzr)]. 4.92 PUBLIC RELATIONS SERVICES Effective date: 1st May 2006 Definition: Public relations includes strategic counselling ba sed on industry, media and perception research, corporate image management, medi a relations, media training, press release, press conference, financial public r elations, brand support, brand launch, retail support and promotions, events and communications and crisis communications [Section 65(86c)]. Scope of taxable se rvice shall include any service provided or to be provided to any person, by any other person, in relation to managing the public relations of such person, in a ny manner [Section65 (105)(zzzs)]. 4.93 SHIP MANAGEMENT SERVICES Effective date: 1st May 2006 Definition: Ship management service includes, (i) (ii) the supervisio n of the maintenance, survey and repair of ship; engagement or providing of crew s; (iii) receiving the hire or freight charges on behalf of the owner; (iv) arrange ments for loading and unloading; (v) providing for victualling or storing of shi p; (vi) negotiating contracts for bunker fuel and lubricating oil; (vii) payment , on behalf of the owner, of expenses incurred in providing services or in relat ion to the management of ship; (viii) the entry of ship in a protection or indem nity association; (ix) dealing with insurance, salvage and other claims; and (x) arranging of insurance in relation to ship [Section 65(96a)].

Gamut And Coverage of Service 4.99 Scope of taxable service shall include any service provided or to be provided to any person, under a contract or an agreement, by any other person, in relation to ship management service [Section 65(105)(zzzt)]. 4.94 INTERNET TELEPHONY SERV ICES Effective date: 1st May 2006 Definitions: Internet telephony means telecommun ication service through internet and includes fax, audio conferencing and video conferencing [Section 65(57a)]. Internet means a global information system which i s logically linked together by a globally unique address, based on Internet Prot ocol or its subsequent enhancements or upgradations and is able to support commu nications using the Transmission Control Protocol or Internet Protocol suite or its subsequent enhancements or upgradations and all other Internet Protocol comp atible protocols [Section 65(56b]. Scope of taxable service shall include any se rvice provided or to be provided to any person, by any other person, in relation to internet telephony [Section 65(105)(zzzu)]. 4.95 TRANSPORT OF PERSONS BY CRU ISE SHIP Effective date: 1st May 2006 Scope of taxable service shall include any service provided or to be provided to any person, by any other person, in relat ion to transport of such person embarking from any port or other port in India, by a cruise ship. Explanation.For the purposes of this sub-clause, cruise ship mean s a ship or vessel used for providing recreational or pleasure trips, but does n ot include a ship or vessel used for private purposes or a ship or vessel of, or less than, 15 net tonnage [Section 65(105)(zzzv)]. 4.96 CREDIT CARD, DEBIT CARD , CHARGE CARD OR OTHER PAYMENT CARD RELATED SERVICES Effective date: 1st May 200 6 Definition: Credit card, debit card, charge card or other payment card service i ncludes any service provided, (i) by a banking company, financial institution inc luding non-banking financial company or any other person (hereinafter referred t o as the issuing bank), issuing such card to a card holder;

4.100 Service tax & VAT (ii) by any person to an issuing bank in relation to suc h card business, including receipt and processing of application, transfer of em bossing data to issuing banks personalization agency, automated teller machine pe rsonal identification number generation, renewal or replacement of card, change of address, enhancement of credit limit, payment updation and statement generati on; (iii) by any person, including an issuing bank and an acquiring bank, to any oth er person in relation to settlement of any amount transacted through such card. Explanation - For the purposes of this sub-clause, acquiring bank means any bankin g company, financial institution including non-banking financial company or any other person, who makes the payment to any person who accepts such card; (iv) in relation to joint promotional cards or affinity cards or co-branded cards; (v) in relation to promotion and marketing of goods and services through such card; (vi) by a person, to an issuing bank or the holder of such card, for making use of automated teller machines of such person; and (vii) by the owner of trade mar ks or brand name to the issuing bank under an agreement, for use of the trade ma rk or brand name and other services in relation to such card, whether or not suc h owner is a club or association and the issuing bank is a member of such club o r association. Explanation - For the purposes of this sub-clause, an issuing ban k and the owner of trade marks or brand name shall be treated as separate person s [Section 65(33a)]. Scope of taxable service shall include any service provided or to be provided to any person, by any other person, in relation to credit car d, debit card, charge card or other payment card service, in any manner [Section 65(105)(zzzw)]. Self-examination questions 1. Answer the following with referen ce to the Finance Act, 1994 as amended relating to applicability of service tax: (i) (ii) Services provided by a mandap keeper from a religious place. Services provided by call centres. (iii) Services provided by medical transcription centers. (iv) Surfing facilitie s provided by internet cafes. 2. Answer the following with reference to the Fina nce Act, 1994 as amended relating to applicability of service tax: (i) Services provided by multi-system operator to cable operators.

Gamut And Coverage of Service 4.101 (ii) Maintenance services provided by M/s. C omplete Software Solutions for computers sold by it. (iii) Services provided by Sarwan Tent House in respect of pandal and shamiana f or the purpose of holding a purely religious congregation. (iv) Route navigation services provided by Airports Authority of India to various airlines. 3. Answer the following with reference to the Finance Act, 1994 as amended relating to ap plicability of service tax. (i) (ii) Service provided by a sub-broker to a main broker. Services provided by a banking company or financial institutions to Gove rnment of India or a State government. (iii) Services provided by the outdoor caterer to a client on a railway train. ( iv) Premium paid on a life insurance policy. 4. 5. State the conditions for avai ling the exemption from payment of service tax in respect of production or proce ssing of goods for or on behalf of the client. Answer the following with referen ce to the Finance Act, 1994 as amended relating to applicability of service tax: (i) (ii) Maintenance services provided in respect of shopping malls. Service pr ovided by goods transport agency in respect of transport of fruits, vegetables, eggs or milk. (iii) Service provided by individual videographer. (iv) Bottling services provid ed by a commercial concern. 6. Answer the following with reference to the Financ e Act, 1994 as amended relating to applicability of service tax: (i) (ii) Survey and map-making services provided by Survey of India. Construction services provid ed in respect of a residential complex having 12 residential units. (iii) Membership fee paid by chartered accountants to the Institute of Chartered Accountants of India. (iv) XY Ltd. provides service of sending documents and mate rials by addressing, sealing and mailing the envelope for or on behalf of AB Ltd., its client. 7. What percentage of abatement is available from the gross amount charged in respect of the following services? State the necessary conditions for availing such abatements.

4.102 Service tax & VAT (i) (ii) Commercial or industrial construction service S ervices in relation to pandal or shamiana in any manner, including services rend ered as a caterer (iii) Catering services (iv) Services provided by a tour operator providing serv ices solely of arranging or booking accommodation in relation to a tour (v) Erec tion, commissioning or installation under a contract for supplying a plant, mach inery or equipment and erection, commissioning or installation of such plant, ma chinery or equipment. 8. Answer the following with reference to the Finance Act, 1994 as amended relating to applicability of service tax: (i) (ii) Services pro vided by vaastu/feng shui consultants. Service provided by an individual in resp ect of procuring the inputs and managing the inventory for a company. (iii) Disinfecting services provided in relation to agriculture. (iv) Floor and wall cleaning performed on the premises of non-commercial buildings. 9. Who is a registrar to an issue? Briefly discuss whether the services provided by him in relation to sale or purchase of securities are liable to service tax? 10. Briefly discuss the provisions of the Finance Act, 1994 as amended relating to service tax with respect to the following taxable services: (i) (ii) Business exhibition service Opinion poll service (iii) Dry cleaning service (iv) Storage and warehousing service (v) Real estate agents service

5 SERVICE TAX PROCEDURES 5.1 REGISTRATION [SECTION 69 & RULE 4 OF SERVICE TAX RULES, 1994] 5.1.1 Application: Application for registration is to be made by every person li able for paying the service tax in Form ST-1 within 30 days from the date on whi ch service tax is levied or within 30 days from the date of commencement of busi ness, whichever is later, to the concerned Superintendent of Central Excise havi ng jurisdiction. The Central Government may, by notification in the Official Gaz ette, specify such other person or class of persons, who shall make an applicati on for registration within such time and in such manner and in such form as may be prescribed [Section 69(2)]. The following person or class of persons have bee n notified by the Central Government who shall make an application for registrat ion under the provisions of section 69(2):(i) an input service distributor; and (ii) any provider of taxable service whose aggregate value of taxable service in a financial year exceeds Rs.3,00,000. Where a provider of taxable service provi des one or more taxable services from one or more premises, the aggregate value of all such taxable services and from all such premises and not separately for e ach services or each premises shall be taken into account for computation of agg regate value of taxable service. Here, input service distributor has the meaning a ssigned to it in clause (m) of rule 2 of the CENVAT Credit Rules, 2004. Aggregate value of taxable service means the sum total of first consecutive payments recei ved during a financial year towards the gross amount, as prescribed under sectio n 67, charged by the service provider towards taxable services but does not incl ude payments received towards such gross amount which are exempt from the whole of service tax under any notification other than Notification No. 6/2005-Service Tax, dated the 1st March, 2005. The input service distributor shall make an app lication to the jurisdictional Superintendent of Central Excise in the prescribe d form for registration within a period of 30 days of the commencement of busine ss or 16.06.2005, whichever is later. The input service distributor shall furnis h a return to the jurisdictional Superintendent of Central Excise in such form a nd at

5.2 Service tax & VAT such frequency as prescribed under sub-rule (10) of rule 9 of CENVAT Credit Rule s, 2004. The provider of taxable service whose aggregate value of taxable servic e in a financial year exceeds Rs.3,00,000 shall make an application to the juris dictional Superintendent of Central Excise in the prescribed form for registrati on within a period of 30 days of exceeding the aggregate value of taxable servic e of Rs.3,00,000. Sub-rule (2) of rule 4 lays down that an assessee having a cen tralized billing systems or centralized accounting systems in respect of a taxab le service may provide such service from more than one premises or office. If su ch centralized billing or centralized accounting systems are located in one or m ore offices or premises, the assessee may at his option register such premises o r offices from where such centralized billing is done or where such centralized accounting systems are located. As per sub-rule (3) of rule 4, such registration shall be granted, (a) by the Chief Commissioner/Commissioner of Central Excise, as the case may be, in whose jurisdiction all the premises or offices providing taxable service and the premise or office from where centralized billing or cen tralized accounting is done, are located; and (b) in cases other than (a) above, by such authority, as may be specified by the Board. However, such provisions s hall not be applicable for the registrations granted to the premises or offices having such centralized billing or centralized accounting systems, prior to 1st day of April, 2005. Rule 4(3A) provides that where an assessee is providing a ta xable service from more than one premises or offices, and does not have any cent ralized billing systems or centralized accounting systems, as the case may be, h e shall make separate applications for registration in respect of each of such p remises or offices to the jurisdictional Superintendent of Central Excise. Where an assessee is providing more than one taxable service, he may make a single ap plication mentioning therein all the taxable services provided by him [Rule 4(4) ]. Certificate of Registration in Form ST-2 should also indicate the details of all the taxable services provided by the service provider. Thus an assessee rend ering multiple taxable services will be assessed by one Superintendent of Centra l Excise in respect of all the taxable services rendered by him. Change in any i nformation or details furnished by an assessee in Form ST-1 at the time of obtai ning registration or any additional information or detail intended to be furnish ed should be intimated in writing by the assessee to the jurisdictional Assistan t/Deputy Commissioner of Central Excise. Such intimation should be made within a period of 30 days of such change [Rule 4(5A)]. 5.1.2 Certificate of registratio n: The Superintendent of Central Excise shall after due verification of the Form ST-1, grant a certificate of registration in Form ST-2 within 7 days

Service Tax Procedures 5.3 from the date of receipt of the application. If the registration certificate is not granted within the said period, the registration applied for shall be deemed to have been granted [Rule 4(5)]. This may not be a solution for non granting o f the certificate since the registration number is required for payment of servi ce tax, filing of returns, etc. When a registered assessee transfers his busines s to another person, the transferee shall obtain a fresh certificate of registra tion [Rule 4(6)]. 5.1.3 Surrender of Certificate: Every registered assessee who ceases to provide taxable service shall surrender his registration certificate i mmediately to the Superintendent of Central Excise [Rule 4(7)]. On receipt of th e certificate under sub-rule (7), the Superintendent of Central Excise shall ens ure that the assessee has paid all monies due to the Central Government under th e provisions of the Act/Rules/Notifications and thereupon cancel the registratio n certificate [Rule 4(8)]. Rule 4 does not provide for amendment of the registra tion certificate. 5.1.4 Service Tax Code Number (STC): Presently, different agen cies of the Government use separate numbers for identification of individuals an d business in relation to the activities concerning the agencies. The Director G eneral of Foreign Trade (DGFT) allocates Importer Exporter Code No. (IEC No.) fo r identifying importers and exporters, the Income Tax Department issues the Perm anent Account Number (PAN) for all Income Tax, Wealth Tax assessees, the Central Excise Department is also registering the various manufacturers and allocating a separate series of registration numbers. The RBI separately used to allocate a CNX number for identification of the exporter. CBE&C has also allotted service tax code number to all assesses. STC is a 15 digit alphanumeric code. The first 10 digits of the code are 10 character PAN issued by Income tax authorities. Nex t two are ST. Last three are numeric code 001, 002, 003 etc. The concerned person has to apply in a prescribed form to obtain STC. The main objective of allocatin g an alphanumerical number by the Government agencies is to identify the assesse es/exporters/importers. It is also used to identify in some cases the concerned office where the person would be assessed or registered. Further alphanumeric nu mber helps in processing of the information in relation to the assessee on compu ters. Quoting of service tax code number on all the related documents has become compulsory from 1.7.2002. 5.2 TAXABLE SERVICE TO BE PROVIDED OR CREDIT TO BE DI STRIBUTED ON INVOICE, BILL OR CHALLAN [RULE 4A OF SERVICE TAX RULES, 1994] Rule 4A of the Service Tax Rules, 1994 provides that: (1) Every person providing taxa ble service shall issue an invoice, or a bill, or a challan signed by such perso n or a person authorized by him in respect of such taxable service provided or t o be provided. Such an invoice has to be issued within fourteen days from the da te of completion of such taxable service or receipt of any payment towards the v alue of such taxable service, whichever is earlier. Further, the invoice, bill o r challan shall be serially

5.4 Service tax & VAT numbered and shall contain the following, namely: (i) the name, address and the registration number of such person; (ii) the name and address of the person rece iving taxable service; (iii) description, classification and value of taxable se rvice provided or to be provided; and (iv) the service tax payable thereon. Howe ver, banking companies and financial institution including a non-banking financi al company, or any other body corporate or any other person, providing service t o a customer, in relation to banking and other financial services are exempted f rom the requirement of issuing serially numbered invoices/bills/challans with th e address of the recipient. In case the service provider is a goods transport ag ency, an invoice, a bill or, a challan shall include a document containing the d etails of the consignment note number and date, gross weight of the consignment and other required information. Where any payment towards the value of taxable s ervice is not received and such taxable service is provided continuously for suc cessive periods of time and the value of such taxable service is determined or p ayable periodically, an invoice, a bill, or as the case may be, a challan shall be issued by the person providing such taxable service, not later than 14 days f rom the last day of the said period. (2) Every input service distributor distrib uting credit of taxable services shall, in respect of credit distributed, issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him, for each of the recipient of the credit distributed, a nd such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain the following, namely: (i) the name, address and registration number of the person providing input services and the serial number and date of invoice, bill, or as the case may be, challan issued under sub-rule (1); (ii) the name and address of the said input services distributor; (iii) the name and address of the recipient of the credit distributed; (iv) the amount of the credit distributed. However, an input service distributor which is an office of a banking company or a financial institution including a non-banking financial c ompany, or any other body corporate or any other person, providing service to a customer, in relation to banking and other financial services are exempted from the requirement of serially numbering the invoice, bill or challan. Rule 4B prov ides that any goods transport agency, which provides service in relation to tran sport of goods by road in a goods carriage, shall issue a consignment note to th e customer. However, where any taxable service in relation to transport of goods by road in a goods carriage is wholly exempted under section 93 of the Act, the goods transport agency

Service Tax Procedures shall not be required to issue the consignment note. 5.5 It has been clarified that consignment note means a document, issued by a goods tr ansport agency against the receipt of goods for the purpose of transport of good s by road in a goods carriage, which is serially numbered, and contains(i) the n ame of the consignor and consignee, (ii) registration number of the goods carria ge in which the goods are transported, (iii) details of the goods transported, ( iv) details of the place of origin and destination, (v) person liable for paying service tax whether consignor, consignee or the goods transport agency. 5.3 PAY MENT OF SERVICE TAX [SECTION 68 & RULE 6 OF SERVICE TAX RULES, 1994] 5.3.1 Due d ate for payment: Rule 6(1) provides that service tax on the value of taxable ser vices received during any calendar month is payable by the 5th of the month imme diately following the said calendar month. However, where the assessee is an ind ividual or a proprietary firm or a partnership firm, service tax on the value of taxable services received during any quarter is payable by the 5th of the month immediately following the said quarter. Further, service tax on the value of ta xable services received during the month of March, or the quarter ending in Marc h, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year. It is to be noted here that service tax is not payable on the amounts charged in the bills/invoice, but on the amoun ts actually received. No service tax shall be payable for the part or whole of t he value of services, which is attributable to services provided during the peri od when such services were not taxable. The time of receipt of payment towards t he value of services will not be relevant for this purpose. Rule 6(1) provides t hat service tax is payable only on the value of taxable services received and no t on the value of taxable services billed. The due dates for payment of service tax are given in para 5.27. 5.3.2 Manner of payment: Service tax has to be paid to the credit of the Central Government in Form TR-6 challan (yellow colour) int o the designated bank. TR-6 challan is to be filled in quadruplicate and tendere d to the designated bank alongwith the payment of service tax. The Bank returns two sets of TR-6 Challan duly acknowledging payment, one for the assessee s reco rd and the other to be submitted with the return. Where the amount of service ta x is paid in cash, the date of payment is the date on which cash is tendered to the designated bank. It has been clarified vide ST Instructions F No.V/DGST/21(7 )/Engg/16/2000/1976, dtd. 23.08.2001 of DGST that payment of service tax into no n-designated banks would not amount to payment of service tax. As per sub-rule 2 (A)

5.6 Service tax & VAT of Rule 6, the date of presentation of cheque to the bank designated by Central Board of Excise and Customs, in case the amount of service tax is paid by cheque , shall be considered as the date of payment subject to realization of cheque. P ayment should be rounded off in multiple of rupees [CBE&C Circular No. 53/2/2003 S.T. dated 27.03.2003]. If the last day of payment of service tax is a public h oliday, tax can be paid on next working day. [CBE&C Circular No. 63/12/2003 - S. T., dated 14.10.2003] Under Rule 6(3) the assessee is allowed to adjust against his subsequent period s liability the excess service tax paid by him for service s which is not wholly or partially rendered by him for any reason provided he ha s refunded the amount charged as also the service tax thereon to the client. The Commissioner of Central Excise Mumbai - 1 vide Trade Notice No. 7/98Service tax dated 13.10.1998 has clarified in Para 21.1 that in such cases of adjustment th e assessee is required to file the details in respect of such suo motu adjustmen ts done by him at the time of filing the service tax returns. The Return Form ST -3 also provides for enclosure of documentary evidence for adjustment of such ex cess service tax paid. It is to be noted that rule 6(3) does not allow adjustmen t of excess payment of service tax per se, say due to clerical mistake etc.. In such cases the assessee has to follow the procedure laid down in section 11B of Central Excise Act to claim the refund of excess tax paid. Section 65(7) provide s that assessee means a person liable to pay service tax and includes his agent. P erson liable to pay service tax is the person providing the service except in th e following cases: (i) in relation to general insurance business, the person lia ble to pay service tax is the insurer or re-insurer, as the case may be, providi ng such service. (ii) in relation to insurance auxiliary service provided by an insurance agent, the person liable to pay service tax is the person carrying on general insurance business or the life insurance business as the case may be, in India. (iii) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A o f the Act, the person liable to pay service tax is the recipient of such service . (iv) in relation to taxable service provided by a goods transport agency, wher e the consignor or consignee of goods is,(a) any factory registered under or gov erned by the Factories Act, 1948; (b) any company formed or registered under the Companies Act, 1956; (c) any corporation established by or under any law; (d) a ny society registered under the Societies Registration Act, 1860 or under any la w corresponding to that Act in force in any part of India; (e) any co-operative society established by or under any law; (f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the rules made thereunder; o r

Service Tax Procedures 5.7 (g) any body corporate established, or a partnership firm registered, by or unde r any law, the person liable for paying service tax is any person who pays or is liable to pay freight either himself or through his agent for the transportatio n of such goods by road in a goods carriage. (v) in relation to business auxilia ry service of distribution of mutual fund by a mutual fund distributor or an age nt, as the case be, the person liable for paying service tax is the mutual fund or asset management company, as the case may be, receiving such service. (vi) in relation to sponsorship service provided to any body corporate or firm, the per son liable to pay service tax shall be the body corporate or firm, as the case m ay be, who receives such sponsorship service. Section 68(2) provides that in res pect of any taxable services notified by the Central Government in the Official Gazette the service tax thereon shall be paid by such person in such manner as m ay be prescribed at the specified rate. The Central Government has notified the following taxable services for the purposes of the said sub-section: (A) the ser vices,(i) (ii) in relation to a telephone connection or pager or a communication through telegraph or telex or a facsimile communication or a leased circuit; in relation to general insurance business; (iii) in relation to insurance auxiliary service by an insurance agent; and (iv) in relation to transport of goods by road in a goods carriage, where the consig nor or consignee of goods is,(a) any factory registered under or governed by the Factories Act, 1948; (b) any company formed or registered under the Companies A ct, 1956; (c) any corporation established by or under any law; (d) any society r egistered under the Societies Registration Act, 1860 or under any law correspond ing to that Act in force in any part of India; (e) any co-operative society esta blished by or under any law; (f) any dealer of excisable goods, who is registere d under the Central Excise Act, 1944 or the rules made thereunder; or (g) any body corporate established, or a partnership firm registered, by or unde r any law (v) in relation to business auxiliary service of distribution of mutua l fund by a mutual fund distributor or an agent, as the case may be; (vi) in rel ation to sponsorship service provided to any body corporate or firm;

5.8 Service tax & VAT (B) any taxable service provided or to be provided from a country other than Ind ia and received in India under section 66A of the Finance Act, 1994. Thus, the o nus of paying service tax may be passed on to a person other than the provider o f service. Rule 6(7) provides that the person liable for paying the service tax in relation to the services provided by an air travel agent, shall have the opti on: (i) to pay an amount calculated at the rate of 0.6% of the basic fare in the case of domestic bookings, and (ii) at the rate of 1.2% of the basic fare in the case of international bookings , of passage for travel by air, during any calendar month or quarter, as the cas e may be, towards the discharge of his service tax liability instead of paying s ervice tax at the rate of specified service tax. The option once exercised, shal l apply uniformly in respect of all the bookings of passage for travel by air ma de by him and shall not be changed during a financial year under any circumstanc es. For the purposes of this sub-rule, the expression "basic fare" means that pa rt of the air fare on which commission is normally paid to the air travel agent by the airline. Sub-rule (7A) of Rule 6 provides that an insurer carrying on lif e insurance business liable for paying the service tax shall have the option to pay an amount calculated @ 1% of the gross amount of premium charged by such ins urer towards the discharge of his service tax liability instead of paying servic e tax at the rate specified in section 66 of Chapter V of the Act. However such option shall not be available in cases where: (a) the entire premium paid by the policy holder is only towards risk cover in life insurance; or (b) the part of the premium payable towards risk cover in life insurance is shown separately in any of the documents issued by the insurer to the policy holder. 5.3.3 Interest on delayed payment of service tax (Section 75) : Failure to pay service tax on t ime attracts simple interest at a rate not below 10% p.a. but not exceeding 36% p.a. as may be notified by the Central Government. Currently, the interest rate of 13% has been notified vide Notification No. 26/2004 ST. In case of provisiona l payment of service tax, interest on delayed payment of shortfall of service ta x is to be computed till the date of final payment of such tax [Re: Oriental Ins urance Co. Ltd. (1998) 103 ELT 459 (Comm. App.)]. It has been clarified vide ST Instructions F No.V/DGST/30-Misc-46/2000, dtd. 23.08.2000 of the Mumbai Director ate of ST that in the cases where the service tax amount has been deposited by a n assessee in the authorized Bank, by cheque, before the due date and such chequ e is not dishonoured later, proceedings of recovery of interest/penalty shall no t be initiated. However, if the cheque is not honoured in due course or the clea rance is abnormally delayed for any lapse on the part of the assessee, penal act ion may be taken.

Service Tax Procedures 5.4 RETURNS [SECTION 70 & RULE 7 OF SERVICE TAX RULES, 19 94] 5.9 Section 70 provides that every person liable to pay the service tax shall himsel f assess the tax due on the services provided by him and shall furnish to the Su perintendent of Central Excise, a return in such form and in such manner and at such frequency as may be prescribed. The person or class of persons notified und er sub-section (2) of section 69, shall furnish to the Superintendent of the Cen tral Excise, a return in such form and in such manner and at such frequency as m ay be prescribed. Returns have to be filed in Form ST-3 or ST-3A as the case may be on half yearly basis by the 25th of the month following the particular half year , indicating inter alia, monthwise: (i) the value of taxable services charged/bi lled; (ii) the value of taxable service realised; (iii) the amount of Service Ta x payable/paid etc. The due dates for filing the returns are given in Appendix 3 . If the 25th of the month is a public holiday, the service tax returns are to b e filed on next working day immediately following the holiday. The said Form ST3 has to be filed in triplicate along with a copy of the Form TR-6 challans for the months/quarters covered in the half-yearly return (Rule 7). For an assesee w ho provides more than one taxable service, only a single return will be sufficie nt. However, the details in each of the columns of the Forms ST-3 have to be fur nished separately for each of the taxable service rendered by him. The first ret urn should be accompanied by a list of all accounts maintained by the assessee i n relation to service tax including memoranda received from his branch offices [ Rule 5(2)]. A Nil return (i.e. where no taxes are required to be paid) also ha s to be filed. 5.5 RECORDS [RULE 5 OF SERVICE TAX RULES, 1994] Every person shall furnish to the Superintendent of Central Excise at the time o f filing his return for the first time a list of all accounts maintained by the assessee in relation to service tax including memoranda received from his branch offices. The nature of records required is given in Rule 5(1) which provides th at records (including computerised data) as maintained by an assessee in accorda nce with various laws in force from time to time shall be acceptable. Thus, the records as required under other laws applicable to an assessee will be the recor ds required for service tax e.g. the Council of the Institute of Chartered Accou ntants of India vide Notification No. 1-CA(153)/86 dated 18th August, 1986, has specified the undermentioned books to be maintained by a practising chartered ac countant: (i) Cash Book, (ii) Ledger Rule 6F of the Income Tax Rules, 1962, pres cribes that the person carrying on legal, medical,

5.10 Service tax & VAT engineering, or architectural profession or the professio n of accountancy or technical consultancy or interior decoration or authorised r epresentative or film artist, subject to certain exemptions specified in the pro viso to Rule 6F(1), should maintain the following : (i) Cash Book, (ii) Journal, if accounts are maintained on mercantile system of accounting, (iii) Ledger, (i v) Carbon copies of bills and receipts, (v) Original Bills & Receipts for expens es. All records maintained by an assessee shall be preserved at least for a peri od of 5 years immediately after the financial year to which such records pertain . Every assessee shall make available such records for inspection and examinatio n by the Central Excise Officer. The records should be made available at the reg istered premises at all reasonable time. However, the Central Excise Officer can do such inspection and examination only when he is authorised for this purpose in writing by the jurisdictional Assistant/Deputy Commissioner of Central Excise , as the case may be. For this purpose, the term registered premises shall include all premises or offices from where an assessee is providing taxable services. S ection 12A of the Central Excise Act has been made applicable to Service Tax whi ch implies that the service tax amount should be prominently indicated in all th e documents relating to assessment, sales invoice and other like documents. The words other like documents when used in relation to assessment may also encompass receipts issued by the assessee since under the present dispensation service tax is payable on the basis of amounts received. 5.6 ASSESSMENT Section 70 provides that every person liable to pay the service tax shall himsel f assess the tax due on the services provided by him and shall furnish to the Su perintendent of Central Excise, a return in such form and in such manner and at such frequency as may be prescribed. It is the duty of the assessee to make self -assessment of tax due in respect of services provided by him in a particular pe riod and pay the tax on the basis of self-assessment. 5.6.1 Provisional Assessme nt: Rule 6(4) provides that where an assessee is unable to correctly estimate th e actual amounts of service tax payable for any month or quarter, the assessee m ay make a request in writing to the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise, as the case may be, to make a provisional assessment of tax on the basis of the amount deposited. The Assistant Commissio ner or Deputy Commissioner as the case may be, may, on receipt of such request, order provisional assessment of tax. Accordingly, the provisions of Central Exci se Rules, 2002 relating to provisional assessment shall apply except the provisi ons relating to execution of bond. Rule 6(4A) lays down that if the assessee [re gistered under Rule 4(2)] has paid to the credit of Central Government any amoun t in excess of the amount required to be paid towards service

Service Tax Procedures 5.11 tax liability for a month/quarter for the reason of not receiving details of payments received towards the value of taxable services at his other premises or offices, the assessee may adjust such excess amount so paid as service tax by him against his service tax liability for the subsequent period. The details of such adjustment shall be intimated to the jurisdictional Superintendent of Central Excise within a period of 15 days from the date of su ch adjustment. The provisions of Rule 6(4A) are not subject to the provisions of Rule 6(4). Rule 6(5) provides that in case an assessee requesting for provision al assessment, the assessee shall submit a memorandum in form ST-3A; giving deta ils of difference between the provisional amount of service tax deposited and th e actual amount of service tax payable for each month alongwith the half-yearly return in form ST-3. Where the assessee submits a memorandum, in Form ST-3A unde r sub-rule (5), the AC/DC of Central Excise, as the case may be shall complete t he assessment, wherever he deems it necessary, after calling such further docume nts or records, as he may consider necessary and proper in the circumstances of the case. Rule 6(6) provides that in case the assessee submits a memorandum in F orm ST-3A along with the return in Form ST-3 pursuant to a request for provision al assessment, the AC/DC as the case may be, may complete the assessment after c alling for such further documents and records as he may consider necessary and p roper. 5.7 RECOVERY OF SERVICE TAX NOT LEVIED OR PAID OR SHORT-LEVIED OR SHORT-P AID OR ERRONEOUSLY REFUNDED [SECTION 73] Section 73 deals with the value of taxa ble services escaping assessment. The provisions, as explained below, are simila r to the provisions of section 11A of Central Excise Act. 1. Where any service t ax has not been levied or paid or has been short-levied or short-paid or erroneo usly refunded, the Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person t o whom such tax refund has erroneously been made, requiring him to show cause wh y he should not pay the amount specified in the notice. However, where any servi ce tax has not been levied or paid or has been short-levied or shortpaid or erro neously refunded by reason of (a) fraud; or (b) collusion; or (c) wilful mis-stat ement; or (d) suppression of facts; or (e) contravention of any of the provision s of this Chapter or of the rules made thereunder with intent to evade payment o f service tax, by the person chargeable with the service tax or his agent, the p eriod of one year can be

5.12 Service tax & VAT extended to five years. For this purpose, where the service of the notice is stayed by an order of a court, the period of such stay shall b e excluded in computing the aforesaid period of one year or five years, as the c ase may be. Sub-section (1A) provides an option to the person or his agent to wh om a notice has been served by the Central Excise Officer for short/non levy or short/non payment or erroneous refund of service tax by reason of fraud, collusi on, or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of service tax law with an intent to evade payment of service tax. Such person or his agent may pay service tax in full or in part as may be accepted by him, including the interest payable thereon under section 75 and pen alty equal to 25% of the service tax specified in the notice or the service tax so accepted by such person within 30 days of the receipt of the notice. The Cent ral Excise Officer shall, after considering the representation, if any, made by the person on whom notice is served, determine the amount of service tax due fro m, or erroneously refunded to, such person (not being in excess of the amount sp ecified in the notice) and thereupon such person shall pay the amount so determi ned. However, where such person has paid the service tax in full together with i nterest and penalty, the proceedings in respect of such person and other persons to whom notices have been served under sub-section (1) shall be deemed to have been concluded. Further, in cases where such person has paid service tax in part along with interest and penalty under sub-section (1A), the Central Excise Offi cer shall determine the amount of service tax or interest which will not exceed the amount partly due from such person. (3) Where any service tax has not been l evied or paid or has been short-levied or short-paid or erroneously refunded, th e person chargeable with the service tax, or the person to whom such tax refund has erroneously been made, may pay the amount of such service tax, chargeable or erroneously refunded, on the basis of his own ascertainment thereof, or on the basis of tax ascertained by a Central Excise Officer before service of notice on him in respect of such service tax, and inform the Central Excise Officer of su ch payment in writing, who, on receipt of such information shall not serve any n otice in respect of the amount so paid. However, Central Excise Officer may dete rmine the amount of short payment of service tax or erroneously refunded service tax, if any, which in his opinion has not been paid by such person and, then, C entral Excise Officer shall proceed to recover such amount in the manner specifi ed in this section, and the period of one year shall be counted from the date of r eceipt of such information of payment. It has been clarified that the interest u nder section 75 shall be payable on the amount paid by the person and also on th e amount of short payment of service tax or erroneously refunded service tax, if any, as may be determined by the Central Excise Officer. (4) The provisions of payment of service tax on the basis of the ascertainment of the assessee shall n ot apply to a case where any service tax has not been levied or paid or has

Service Tax Procedures 5.13 been short-levied or short-paid or erroneously refun ded by reason of (a) fraud; or (b) collusion; or (c) wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Cha pter or of the rules made thereunder with intent to evade payment of service tax . (5) Here, relevant date means, (i) in the case of taxable service in respect of which service tax has not been levied or paid or has been short-levied or short -paid (a) where under the rules made under this Chapter, a periodical return, sho wing particulars of service tax paid during the period to which the said return relates, is to be filed by an assessee, the date on which such return is so file d; (b) where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules; (c) in any other case, the date on which the service tax is to be paid under this Chapter or the rules made the reunder; (ii) in a case where the service tax is provisionally assessed under th is Chapter or the rules made thereunder, the date of adjustment of the service t ax after the final assessment thereof; (iii) in a case where any sum, relating to service tax, has erroneously been ref unded, the date of such refund. Any mistake apparent from the records may be rec tified by the Central Excise Officer within two years from the date on which the order was passed. In case the rectification results in increasing the liability of the assessee or reducing a refund he will have to be given a notice and reas onable opportunity of being heard by the Central Excise Officer (Section 74). 5. 8 SERVICE TAX COLLECTED FROM ANY PERSON TO BE DEPOSITED WITH THE CENTRAL GOVERNM ENT [SECTION 73A] (1)) If any person, who is liable to pay service tax, has coll ected any amount in excess of the service tax assessed or determined and paid on any taxable service from the recipient of taxable service in any manner as repr esenting service tax, then he shall forthwith pay the amount so collected to the credit of the Central Government. In other words, this provision prescribes com pulsory payment by any person of any amount collected in excess of the service t ax leviable but not deposited with the Central Government. (2) Where any person who has collected any amount, which is not required to be collected,

5.14 Service tax & VAT from any other person, in any manner as representing serv ice tax, such person shall forthwith pay the amount so collected to the credit o f the Central Government. (3) If any person, who is liable to pay any of the abo vementioned amounts [referred to in points (1) and (2) above], does not pay such amount to the credit of the Central Government, a notice shall be served on him by the Central Excise Officer. The notice will require such person to show caus e why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government. (4) Such person may make a representation to the Central Excise Officer after receiving the notice. The Central Excise Off icer shall consider the said representation and then determine the amount due fr om such person. Such amount will however, not exceed the amount specified in the notice. Thereupon, such person shall pay the amount so determined. (5) Any of t he abovementioned amounts [referred to in points (1), (2) and (4) above] paid to the credit of the Central Government shall be adjusted against the service tax payable by the person on finalisation of assessment or any other proceeding for determination of service tax relating to the taxable service referred to in poin t (1) above. (6) Where any surplus amount is left after the adjustment (referred to in point (5) above), such amount shall either be credited to the (i) (ii) Co nsumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 o r, refunded to the person who has borne the incidence of such amount, in accorda nce with the provisions of section 11B of the Central Excise Act. In such cases, the said person may make an application under that section within 6 months from the date of the public notice to be issued by the Central Excise Officer for th e refund of such surplus amount. INTEREST ON AMOUNT COLLECTED IN EXCESS [SECTION 73B] 5.9 Section 73B provides for charging interest on the amount (referred to in point 5 .8 above) collected in excess of the tax assessed or determined and paid for any taxable service. The provisions of the section are discussed below: (1) Where a n amount has been collected in excess of the tax assessed or determined and paid for any taxable service from the recipient of such service, the person who is l iable to pay such amount shall, in addition to the amount, be liable to pay inte rest. (2) The interest shall be charged at any rate between 10% and 24% per annu m. The exact rate shall be fixed by the Central Government by notification in th e Official Gazette. Notification 8/2006-ST, dated 19.04.2006 has notified the ra te of interest chargeable on amounts collected in excess of service tax assessed or determined under this section as 13% per annum. (3) The interest shall be pa yable from the first day of the month succeeding the month in which the amount o ught to have been paid till the date of payment of such amount. (4) However, no interest shall be payable where the amount becomes payable consequent to issue o f an order, instruction or direction by the Board under section 37B, subject to fulfillment

Service Tax Procedures 5.15 of the following conditions: (a) the full amount is paid voluntarily within 45 days from the date of issue of such order, instructio n or direction; and (b) no right to appeal against such payment at any subsequen t stage is reserved. In other cases, the interest shall be payable on the whole amount, including the amount already paid. (5) Where the amount determined by th e Central Excise Officer under section 73A is reduced or increased by the Commis sioner (Appeals), the Appellate Tribunal, or the Court, the interest payable the reon shall be on such reduced or increased amount. 5.10 PROVISIONAL ATTACHMENT T O PROTECT REVENUE IN CERTAIN CASES [SECTION 73C] (1) During the pendency of any proceeding under section 73 or section 73A, the Central Excise Officer may provi sionally attach any property belonging to the person on whom notice is served un der sub-section (1) of section 73 or sub-section (3) of section 73A, as the case may be, in the prescribed manner. (2) Such an attachment shall be done only whe n the Central Excise officer is of the opinion that the attachment is necessary for the purpose of protecting the interests of revenue. However, a previous appr oval of the Commissioner of Central Excise, by order in writing, is a prerequisi te for such provisional attachment. (3) Such an attachment can be done for a per iod of 6 months. This period will commence from the date of the order of the Com missioner of Central Excise permitting such provisional attachment. (4) However, this period may be extended by the Chief Commissioner of Central Excise by such further period or periods as he thinks fit. The reasons for such an extension s hall be recorded in writing. It is to be noted that the total period of extensio n in any case shall not exceed 2 years. 5.11 PUBLICATION OF INFORMATION IN RESPE CT OF PERSONS IN CERTAIN CASES [SECTION 73D] This section provides for publishin g the name of any person and particulars of any proceedings in relation to such person, in public interest. The provisions are discussed below in detail: (1) Th e Central Government may cause to be published name of any person and any other particulars relating to any proceedings in respect of such person. Such publicat ion shall be done if the Government is of the opinion that it is necessary or ex pedient in the public interest to publish the name and any other particulars. Th e publication shall be done in a prescribed manner. (2) The publication shall be made in relation to any penalty only after the time for presenting

5.16 Service tax & VAT an appeal to the Commissioner (Appeals) or the Appellate Tribunal expires without an appeal being presented or the appeal, if presented, gets disposed of. (3) In the case of a firm, company or other association of per sons, the names of the partners of the firm, directors, managing agents, secreta ries and treasurers or managers of the company, or the members of the associatio n, as the case may be, shall also be published if, in the opinion of the Central Government, circumstances of the case justify it. 5.12 REFUNDS In the event the assessee has to claim a refund he has to comply with section 11B of the Central Excise Act, 1944 which is made applicable to service tax vide section 83 of the Act. In order to claim refund under section 11B of the Central Excise Act, 1944 the assessee has to prove that the incidence of duty has not passed on to the b uyer or to any other person. This restriction known as the bar of unjust enrichme nt, is overriding. The above bar also applies to service tax. Section 11B(1) of t he Central Excise Act, 1944 provides that an application for refund of duty shou ld be made to the AC/DC before the expiry of one year from the relevant date. Rel evant date has been defined in Explanation (B) to section 11B(1) of Central Excis e Act, 1944 and in the context of service tax clause (f) to the said Explanation (B), which defines relevant date as the date of payment of duty, shall apply. Thu s, the limitation period of one year is to be reckoned from the date of payment of duty/service tax. Thus, summarising, a refund claim must comply with the foll owing conditions: (i) It should be in the prescribed Form . (ii) It should be fi led before the expiry of the limitation period of one year from the date of paym ent of tax. (iii) Proof should be adduced that the incidence of tax has not been passed on to any person i.e. tax has been borne by the applicant. The provision s of section 11BB of the Central Excise Act are applicable for the purpose of Se rvice Tax which inter alia provide that in case the refund is not given within 3 months from the date of receipt of refund application, interest should be paid at such rate, not below 5% and not exceeding 30% per annum as is fixed by the Ce ntral Board of Excise and Customs (Board) for the period commencing from the dat e immediately after the expiry of the said 3 months till the date of refund. The existing rate of interest fixed by the Board is 6% per annum. Section 11BB of t he Central Excise Act, 1944 provides that the rate of interest payable on delaye d refunds shall be fixed by the Central Government, by Notification in the Offic ial Gazette.

Service Tax Procedures 5.17 5.13 PENAL CONSEQUENCES Sl. No. 1. Section 76 Nature of Default Failure to pay s ervice tax. Consequences of Default Penalty - Rs.200 for every day during which such failure continues or at the rate of 2% of such tax, per month, whichever is higher. It shall be computed from the first day after the due date till the dat e of actual payment of the outstanding amount of service tax. 2. 77 Contravention of any provision for which no penalty is provided Penalty maximum Rs.1000/-. 4. 78 Suppressing value of taxable service Penalty which shall not be less than, but which shall not exceed twice, the amou nt of service tax so not levied or paid or short-levied or short-paid or erroneo usly refunded. The computation of penalty under section 76 can be understood by the following i llustration: X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays the amount on 15th March. The default has continued for 10 da ys. The penalty payable by X is computed as follows: 2% of the amount of default for 10 days = 2% x 10,00,000 x 10/31 = Rs. 6,451.61 Penalty calculated @ Rs. 200 per day for 10 days = Rs. 2,000 Penalty liable to be paid is Rs. 6,452.00. It m ay be noted that the total amount of the penalty payable under section 76 shall not exceed the service tax payable. Section 78 dealing with penalty for suppress ing value of taxable service provides that: Where any service tax has not been l evied or paid or has been short-levied or short-paid or erroneously refunded, by reason of (a) fraud; or (b) collusion; or

5.18 Service tax & VAT (c) wilful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, the person, liable to p ay such service tax or erroneous refund, as determined under subsection (2) of s ection 73, shall also be liable to pay a penalty, in addition to such service ta x and interest thereon, if any, payable by him, which shall not be less than, bu t which shall not exceed twice, the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded. However, if the service t ax determined under sub-section (1) of section 73 and the interest payable there on under section 75 are paid within 30 days of the communication of order of the Central Excise Officer determining the service tax the amount of penalty will b e reduced to 25% of the service tax, if this reduced penalty is also paid within 30 days. If the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty shall be available, if the amount of service tax so increased, the interest payable thereon and 25% of the consequen tial increase of penalty have also been paid within 30 days of communication of the order by which such increase in service tax takes effect. Any amount paid to the credit of the Central Government prior to the date of communication of the order shall be adjusted against the total amount due from such person. Section 8 3A provides that where any person is liable to a penalty, such penalty may be ad judged by the Central Excise Officer conferred with such power as the Central Bo ard of Excise and Customs constituted under the Central Boards of Revenue Act, 1 963, may, by notification in the Official Gazette, specify. The Central Excise O fficer specified in column (2) of the Table below are conferred with such powers as specified in the corresponding entry in column (3) of the said Table, for th e purposes of adjudging a penalty. S.No Central Excise Officer Amount of service tax or CENVAT credit specified in a notice for the purpose of adjudication unde r section 83A (3) Not exceeding Rs. 5 lakhs (1) 1. (2) Assistant Commissioner of Central Excise or Deputy Commissioner of Central E xcise Joint Commissioner of Central Excise 2. Above Rs. 5 lakhs but not exceeding Rs. 20 lakhs

Service Tax Procedures 5.19 3. 4. Additional Commissioner Central Excise Commiss ioner of Central Excise of Above Rs. 20 lakhs but not exceeding Rs. 50 lakhs Wit hout limit. However, these provisions shall not apply where a decision or order passed under Chapter V of the Finance Act, 1994 or the rules made thereunder has been referr ed back to any authority which passed such decision or order, with such directio ns, for a fresh adjudication or decision, as the case may be. 5.14 REASONABLE CA USE [SECTION 80] Section 80 provides that no penalty under section 76, 77or 78 s hall be imposed if the assessee proves that there is reasonable cause for the fail ure referred to in the said sections. It is mandatory on part of the department to follow the principles of natural justice viz., the audi altarem partem (i.e. hear the other party) rule before imposition of the penalty and provide the asse ssee an opportunity to prove that there was reasonable cause. [Commissioner of C entral Excise, Calcutta I vs. Suraj Ratan Mohta (1999) 113 E.L.T 260 (Tribunal), Eastern Bench, Calcutta; Ashwani & Associates v. Commissioner of Central Excise , New Delhi (2000) 118 ELT 57 (Tribunal)] Penalty for delayed payment of service tax under section 76 has been condoned on the ground that initially there is bo und to be a lack of clear understanding, service tax being a new concept [Re:Ori ental Insurance Co.Ltd. (1998)103 ELT 459 (Commr.Appl); Ashwani & Associates v. Collector of Customs, New Delhi (1999) 105 ELT 40 (Tribunal)]. Similarly, penalt y for failure to file nil returns under section 77 has been condoned on the ground s that service tax was new and the assessee was not conversant with the provisio ns; the assessee did not carry on any business; the return for the period was a n il return; service tax was introduced for the first time and it was the assessees first delay. [ Ashok Rastogi v. Commissioner of Central Excise, Kanpur (1998) 10 4 ELT 480 (Tribunal) Northern Bench, New Delhi; Sri Sajjan Kumar Kariwala v. Com missioner of Central Excise, Allahabad (1997) 20 RLT 885 (Tribunal NZB), New Del hi]. However, penalty has not been condoned, though reduced (since tax was depos ited on time and the default took place during the initial period of the imposit ion of the new tax), even where the return is a nil return, where there has been c onsistent failure on part of the assessee to submit the returns. [Rajinder Kumar Somani v. Commissioner of Central Excise, Kanpur (1999) 113 ELT 111 (Tribunal), Northern Bench, New Delhi; Harilal & co. v. Commissioner of Central Excise, Mum bai I, (2000) 115 ELT 375 (Tribunal), West Zonal Bench, Mumbai; Vijaya Clearing and Forwarding Agency v. Commissioner of Central Excise, Mumbai I (2000) 123 ELT 930 (Tribunal), West Zonal Bench, Mumbai]. Where there was a delay in filing ret urns and payment of tax but the service tax was deposited along with interest as provided in section 75 without collecting it from the clients it was held that benefit of section 80 should be given as service tax was imposed for the very fi rst time; the quarter in question was also very first quarter and the appellant too was new to service tax.[In Re. B.M.Rehan (1999)108 ELT 859 (Commr.Appl.), Gh aziabad]

5.20 Service tax & VAT 5.15 POWER TO SEARCH PREMISES [SECTION 82] The Commission er of Central Excise may, if he has reason to believe that any documents or book s or things which in his opinion will be useful for or relevant to any proceedin g under the Act, are secreted in any place, may authorise the Assistant Commissi oner of Central Excise or the Deputy Commissioner of Central Excise as the case may be, to search for or seize or himself search for or seize such documents or books or things. The search shall be subject to the Code of Criminal Procedure, 1973. 5.16 POWERS OF REVISION [SECTION 84] Section 84 provides that the Commissi oner of Central Excise may call for the record of any proceeding in which any ad judicating authority subordinate to him has passed any decision or order. Therea fter he can make inquiry and pass such orders as he thinks fit. The assessee sha ll be given an opportunity of being heard if the order under this section is pre judicial to him. The order under this section shall be communicated to the asses see, such adjudicating authority and the Board. No order shall be passed under t his section on any issue which is a subject matter of appeal before the Commissi oner of Central Excise (Appeals). No order shall be passed under this section af ter the expiry of 2 years from the date on which the order sought to be revised is passed. It is to be noted that section 84 is analogous to sections 263/264 of the Income Tax Act, 1961. However, the right of an assessee to apply for revisi on is conspicuous by its absence. 5.17 APPEALS TO COMMISSIONER OF CENTRAL EXCISE (APPEALS) - FIRST APPEAL [SECTION 85] An assessee may appeal to the Commissione r of Central Excise (Appeals) if he is aggrieved by any decision or order passed by an adjudicating authority subordinate to the Commissioner of Central Excise. The appeal shall be in Form ST-4 along with the Statement of Facts and the Grou nds of Appeal, all to be filed in duplicate accompanied by a copy of the order a ppealed against. The appeal has to be filed within 3 months from the date of rec eipt of the order of such adjudicating authority. The Commissioner of Central Ex cise (Appeals) may allow a further period of 3 months if sufficient cause is add uced for the delay. 5.18 APPEALS TO THE APPELLATE TRIBUNAL - SECOND APPEAL [SECT ION 86] 5.18.1 Appeal by the assessee: Any assessee who is aggrieved by an order passed by the Commissioner of Central Excise under section 73, or section 83A o r section 84 or any order passed by Commissioner of Central Excise (Appeals) und er section 85, may apply to the Appellate Tribunal against such order. The appea l shall be filed in Form ST-5 along with a Statement of Facts and Grounds of App eal all to be filed in quadruplicate and accompanied by an equal number of copie s of the order

Service Tax Procedures 5.21 appealed against (including one certified copy). Sub -section (6), of section 86 prescribes the following fee for filing an appeal to the Appellate Tribunal: Amount of service tax, interest demanded and penalty le vied Less than or equal to Rs. 5,00,000 More than Rs.5,00,000 but not exceeding Rs.50,00,000 More than Rs.50,00,000 Fee for filing an appeal Rs. 1,000.00 Rs. 5, 000.00 Rs.10,000.00 However, no such fee shall be payable in the case of an appeal preferred by Comm issioner of Central Excise, or Assistant/Deputy Commissioner of Central Excise. Also, no fee shall be payable in the case of a filing of a memorandum of cross-o bjections. Further, sub-section (6A) prescribes a fee of Rs.500 for every applic ation made before the Appellate Tribunal. The application can be an appeal for g rant of stay or for rectification of mistake or for any other purpose; or for re storation of an appeal or an application. However, no such fee shall be payable in the case of an application filed by the Commissioner of Central Excise or Ass istant/Deputy Commissioner of Central Excise. The appeal shall be filed within 3 months from the date on which the order sought to be appealed against is receiv ed by the assessee or within such extended time as may be allowed by the Tribuna l. 5.18.2 Appeal by the Department: Under sub-section (2) of section 86 the Cent ral Board of Excise and Customs (Board) may if it objects to an order passed by the Commissioner of Central Excise under section 73, or section 83A or section 8 4, direct the Commissioner of Central Excise to appeal to the Appellate Tribunal . Under sub-section (2A) of section 86 the Commissioner of Central Excise may, i f he objects to any order passed by the Commissioner of Central Excise (Appeals) under section 85, direct any Central Excise Officer to appeal on his behalf to the Appellate Tribunal against the order. The applications shall be filed in For m ST-7, in quadruplicate, within 3 months from the date on which the order sough t to be appealed against is received by the Board or by the Commissioner of Cent ral Excise, as the case may be. The application should be accompanied by a state ment of facts, grounds of appeal, and (a) A copy of the order passed by Commissi oner of Central Excise (including one certified copy) and a copy of the directio n issued by the Board in case of an appeal filed under para 5.18.2 ; or (b) A co py of the order passed by Commissioner of Central Excise (Appeals) (including on e certified copy) and a copy of the direction issued by the Commissioner of Cent ral Excise in case of an appeal filed under para 5.18.1.

5.22 Service tax & VAT 5.18.3 Memorandum of cross-objections: An assessee or the Commissioner of Central Excise or any Central Excise Officer subordinate to him may present a memorandum of crossobjections in Form ST-6, in quadruplicate, to the Appellate Tribunal, within 45 days from the receipt of notice that an appeal against the order of Commissioner of Central Excise or the Commissioner of Cent ral Excise (Appeals) has been preferred. 5.19 APPEAL TO HIGH COURT AND SUPREME C OURT Appeal may be made to the High Court/Supreme Court in accordance with the p rovisions of the Central Excise Act which are made applicable to service tax. 5. 20 RECOVERY OF ANY AMOUNT DUE TO CENTRAL GOVERNEMNT [SECTION 87] Where any amoun t payable by a person to the credit of the Central Government under any of the p rovisions of Chapter V of the Finance Act, 1994 or of the rules made thereunder is not paid, the Central Excise Officer shall proceed to recover the amount by o ne or more of the modes mentioned below: (a) he may deduct or may require any oth er Central Excise Officer to deduct the amount so payable from any money owing t o such person which may be under the control of the said Central Excise Officer. Further, he may even require any officer of customs to deduct the amount in def ault from any money owing to such person which may be under the control of such customs officer. (b) (i) he may serve a written notice to any other person from whom money is due or may become due to such person, or any other person who hold s or may subsequently hold money for or on account of such person requiring them to pay the specified money to the credit of the Central Governmen t. The money paid shall be so much as is sufficient to pay the amount due from s uch person or the whole of the money when it is equal to or less than the amount due. Such payment should be made either forthwith upon the money becoming due o r being held or at or within the time specified in the notice. However, the spec ified time shall not fall before the money becomes due or is held. (ii) every pe rson to whom a notice is issued under this section shall be bound to comply with such notice. Where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for the Central Excise Officer effectin g recovery to produce any pass book, deposit receipt, policy or any other docume nt for the purpose of any entry, endorsement or the like being made before payme nt is made. Any rule, practice or requirement to the contrary shall not have any effect in this respect.

Service Tax Procedures 5.23 (iii) if the person to whom a notice under this sect ion is sent, fails to make the payment in pursuance thereof to the Central Gover nment, he shall be deemed to be an assessee in default in respect of the amount specified in the notice. Thus, all the consequences of this Chapter shall follow . (c) he may distrain any movable or immovable property belonging to or under th e control of such person and detain the same until the amount payable is paid. H owever, such distrainment shall be made only with the authorisation of the Commi ssioner of Central Excise and in accordance with the rules made in this behalf. The said property may be sold by the Central Excise Officer if any part of the s aid amount payable or of the cost of the distress or keeping of the property rem ains unpaid for a period of 30 days after such distress. The Central Excise Offi cer may satisfy the amount payable and the costs including unpaid cost of sale w ith the proceeds of such sale. The surplus amount, if any, shall be rendered to such person. (d) he may prepare a certificate signed by him specifying the amoun t due from such person and send it to the Collector of the district in which suc h person owns any property or resides or carries on his business. The said Colle ctor, on receipt of such certificate, shall proceed to recover from such person the amount specified thereunder as if it were an arrear of land revenue. 5.21 PO WER OF THE CENTRAL GOVERNMENT TO GRANT EXEMPTION FROM SERVICE TAX [SECTION 93] I f the Central Government is satisfied that it is in public interest to do so, it may by notification in the Official Gazette exempt generally or subject to cert ain conditions specified therein, taxable service of any specified description. Such exemption may be total or partial. The Central Government may also in publi c interest exempt by special order in each case, any taxable service from the wh ole or part of service tax leviable thereon, as it thinks fit. Such special orde r shall be issued only in exceptional circumstances which are to be specified in the order. 5.22 POWER TO GRANT REBATE [SECTION 93A] (1) The Central Government may grant rebate of service tax paid on input services used in the manufacturing or processing of goods and provision of services, which are exported. (2) This provision enables the Central Government to prescribe schemes of neutralization of service tax paid on input services used in export goods or services. (3) Such rebate shall be subject to such extent and manner as may be prescribed. (4) How ever, where any rebate has been allowed on any goods or services under this sect ion and the sale proceeds in respect of such goods or consideration in respect o f such services are not received by or on behalf of the exporter in India within the time

5.24 Service tax & VAT allowed by the Reserve Bank of India under section 8 of t he Foreign Exchange Management Act, 1999, such rebate shall be deemed never to h ave been allowed. (5) Thereupon, the Central Government may recover or adjust th e amount of such rebate in such manner as may be prescribed. 5.23 POWER TO MAKE RULES [SECTION 94] The Central Government has been given the power to make rules which inter alia may provide for all or any of the following matters: (i) (ii) (iii) (iv) (v) (vi) (vii) collection and recovery of service tax under section 6 6 and 68; the determination of amount and value of taxable service under section 67; the time, manner and form in which the application for registration shall b e made under section 69(1) and 69(2); the form, manner and frequency of the retu rns to be furnished under section 70(1) and section 70(2); the manner of furnish ing return under section 71A; the manner of provisional attachment of property u nder sub-section (1) of section 73C; publication of name of any person and parti culars relating to any proceeding under sub-section (1) of section 73D; (viii) the form in which appeals may be filed under sections 85 and 86(6) and th e manner in which they may be verified; (ix) (x) the manner in which the memoran dum of cross objections under section 86(4) may be verified; the credit of servi ce tax paid on the services consumed for providing a taxable service in case whe re the services consumed and the service provided fall in the same category of t axable service; the credit of service tax paid on the services consumed and duti es paid or deemed to have been paid on goods in relation to a taxable service. t he manner of recovery of any amount due to the Central Government under section 87; (xi) (xii) (xiii) provisions for determining export of taxable services; (xiv) grant of exe mption to, or rebate of service tax paid on, taxable services which are exported out of India; (xv) rebate of service tax paid or payable on the taxable service s consumed or duties paid

Service Tax Procedures 5.25 or deemed to have been paid on goods used for provid ing taxable services which are exported out of India; (xvi) rebate of service ta x paid or payable on the taxable services used as input services in the manufact uring or processing of goods exported out of India under section 93A; (xvii) any other matter which by this Chapter is to be or may be prescribed.any other matt er that may be prescribed. Every rule sand notification issued under section 93 shall be laid before each House of Parliament as soon as possible. It shall be l aid for a total period 30 days which may be comprised in one session or two or m ore successive sessions. If, before the expiry of the session immediately follow ing the session(s) aforesaid, both the Houses agree in making a modification in the rule or notification or both Houses agree that the rule or notification shou ld not be issued, then the rule/ notification shall be issued in such modified f orm or not be issued at all, as the case may be. 5.24 POWER TO REMOVE DIFFICULTI ES [SECTION 95] Section 95 empowers Central Government to issue orders for remov ing difficulties, which may arise in respect of implementing or assessing the va lue of any taxable service incorporated by any of the Finance Acts. 5.25 CHAPTER VA ADVANCE RULING Chapter VA provides for the advance ruling in respect of a qu estion of law or fact regarding the liability to pay service tax in relation to a service proposed, in the specified manner. (a) Section 96A Definitions.- In th is chapter unless the context otherwise requires,(a) "advance ruling" means the determination, by the Authority of a question of law or fact specified in the ap plication regarding the liability to pay service tax in relation to a service pr oposed to be provided, by the applicant. (b) "applicant" means :(i) (a) a non-re sident setting up a joint venture in India in collaboration with a non-resident or a resident; or (b) a resident setting up a joint venture in India in collabor ation with a nonresident; or (c) a wholly owned subsidiary Indian company, of wh ich the holding company is a foreign company, who or which, as the case may be, proposes to undertake any business activity in India; (ii) a joint venture in In dia; or

5.26 Service tax & VAT (iii) a resident falling within any such class or categor y of persons, as the Central Government may, by notification in the Official Gaz ette, specify in this behalf, and which or who, as the case may be, makes applic ation for advance ruling under subsection (1) of section 96C. (c) "application" means an application made to the Authority under sub-section (1) of section 96C. (d) "Authority" means the Authority for Advance Rulings (Central Excise, Custom s and Service Tax) constituted under section 28F of the Customs Act, 1962. (e) " non-resident", "Indian company" and "foreign company" have the meanings respecti vely assigned to them in clauses (30), (26) and (23A) of section 2 of the Income -tax Act, 1961. (f) words and expressions used but not defined in this Chapter a nd defined in the Central Excise Act, 1944 or the rules made thereunder shall ap ply, so far as may be, in relation to service tax as they apply in relation to d uty of excise. (b) Section 96B Vacancies, etc., not to invalidate proceedings. No proceeding be fore, or pronouncement of advance ruling by, the Authority under this Chapter sh all be questioned or shall be invalid on the ground merely of the existence of a ny vacancy or defect in the constitution of the Authority. (c) Section 96C Appli cation for advance ruling (1) An applicant desirous of obtaining an advance rulin g under this Chapter may make an application in such form and in such manner as may be prescribed, stating the question on which the advance ruling is sought. ( 2) The question on which the advance ruling is sought shall be in respect of,(a) classification of any service as a taxable service under Chapter V; (b) the val uation of taxable services for charging service tax; (c) the principles to be ad opted for the purposes of determination of value of the taxable services under t he provisions of Chapter V; (d) applicability of notifications issued under Chap ter V; (e) admissibility of credit of service tax; (f) determination of the liab ility to pay service tax on a taxable service under the provisions of Chapter V. (3) The application shall be made in quadruplicate and be accompanied by a fee o f two thousand five hundred rupees. (4) An applicant may withdraw an application within thirty days from the date of the application.

Service Tax Procedures 5.27 (d) Section 96D Procedure on receipt of application (1) On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the Commissioner of Central Excise and, if necessary, call upon hi m to furnish the relevant records. However where any records have been called fo r by the Authority in any case, such records shall, as soon as possible, be retu rned to the Commissioner of Central Excise. (2) The Authority may, after examini ng the application and the records called for, by order, either allow or reject the application. However, the Authority shall not allow the application where th e question raised in the application is(a) already pending in the applicant s ca se before any Central Excise Officer, the Appellate Tribunal or any Court; or (b ) the same as in a matter already decided by the Appellate Tribunal or any Court . However, no application shall be rejected under this sub-section unless an opp ortunity has been given to the applicant of being heard. Also, where the applica tion is rejected, reasons for such rejection shall be given in the order. (3) A copy of every order made under sub-section (2) shall be sent to the applicant an d to the Commissioner of Central Excise. (4) Where an application is allowed und er sub-section (2), the Authority shall, after examining such further material a s may be placed before it by the applicant or obtained by the Authority, pronoun ce its advance ruling on the question specified in the application. (5) On a req uest received from the applicant, the Authority shall, before pronouncing its ad vance ruling, provide an opportunity to the applicant of being heard, either in person or through a duly authorised representative. Explanation.-For the purpose s of this sub-section, "authorised representative" has the meaning assigned to i t in sub-section (2) of section 35Q of the Central Excise Act, 1944. (6) The Aut hority shall pronounce its advance ruling in writing within ninety days of the r eceipt of application. (7) A copy of the advance ruling pronounced by the Author ity, duly signed by the Members and certified in the prescribed manner shall be sent to the applicant and to the Commissioner of Central Excise, as soon as may be, after such pronouncement. (e) Section 96E Applicability of advance ruling (1 ) The advance ruling pronounced by the Authority under section 96D shall be bind ing

5.28 Service tax & VAT only(a) on the applicant who had sought it; (b) in respec t of any matter referred to in sub-section (2) of section 96C; (c) on the Commis sioner of Central Excise, and the Central Excise authorities subordinate to him, in respect of the applicant. (2) The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on th e basis of which the advance ruling has been pronounced. (f) Section 96F Advance ruling to be void in certain circumstances (1) Where the Authority finds, on a representation made to it by the Commissioner of Central Excise or otherwise, th at an advance ruling pronounced by it under subsection (4) of section 96D has be en obtained by the applicant by fraud or misrepresentation of facts, it may, by order, declare such ruling to be void ab initio and thereupon all the provisions of this Chapter shall apply (after excluding the period beginning with the date of such advance ruling and ending with the date of order under this sub-section ) to the applicant as if such advance ruling had never been made. (2) A copy of the order made under sub-section (1) shall be sent to the applicant and the Comm issioner of Central Excise. (g) Section 96G Powers of Authority (1) The Authorit y shall, for the purpose of exercising its powers regarding discovery and inspec tion, enforcing the attendance of any person and examining him on oath, issuing commissions and compelling production of books of account and other records, hav e all the powers of a civil court under the Code of Civil Procedure, 1908. (2) T he Authority shall be deemed to be a civil court for the purposes of section 195 , but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 19 73, and every proceeding before the Authority shall be deemed to be a judicial p roceeding within the meaning of sections 193 and 228, and for the purpose of sec tion 196 of the Indian Penal Code. (h) Section 96H Procedure of Authority The Au thority shall, subject to the provisions of this Chapter, have power to regulate its own procedure in all matters arising out of the exercise of its powers unde r this Act. (i) Section 96I Power to make rules (1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisi ons of this Chapter. (2) In particular, and without prejudice to the generality of the foregoing power, such

Service Tax Procedures 5.29 rules may provide for all or any of the following ma tters, namely:(a) the form and manner for making application under sub-section ( 1) of section 96C; (b) the manner of certifying a copy of advanced ruling pronou nced by the Authority under sub-section (7) of section 96D; (c) any other matter which, by this Chapter, is to be or may be prescribed. (3) Every rule made unde r this Chapter shall be laid, as soon as may be, after it is made, before each H ouse of Parliament, while it is in session for a total period of thirty days whi ch may be comprised in one session or in two or more successive sessions, and if , before the expiry of the session immediately following the session or the succ essive sessions aforesaid, both Houses agree in making any modification in the r ule or both Houses agree that the rule should not be made, the rule shall therea fter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejud ice to the validity of anything previously done under that rule. 5.26 APPLICABIL ITY OF PROVISIONS OF THE CENTRAL EXCISE ACT, 1944 TO SERVICE TAX [SECTION 83] Th e following provisions of the Central Excise Act, 1944 are made applicable to se rvice tax vide section 83. Section No. Section 9C Section 9D Section 11B Section 11BB Section 11C Section 12 Section 12A Section 12B Section Section Section Sec tion 12C 12D 12E 14 Title Presumption of culpable mental state Relevancy of stat ements under certain circumstances Claim for refund of duty. Interest on delayed refunds. Power not to recover duty of excise not levied or short levied as a re sult of general practice Application of provisions of Act No. 52 of 1962 to Cent ral Excise Duties. Price of goods to indicate the amount of duty paid thereon. P resumption that the incidence of duty has been passed on to the buyer. Consumer Welfare Fund. Utilisation of the Fund. Powers of Central Excise Officers. Power to summon persons to give evidence and produce documents in inquiries under this Act. Officers required to assist Central Excise Officers Adjudication Procedure Section 15 Section 33A

5.30 Service tax & VAT Section Section Section Section 35F 35G 35H 35I Deposit, pending appeal, of duty demanded or penalty levied. Statement of case to High Co urt Application to High Court Power of High Court or Supreme Court to require st atement to be amended Case before High Court to be heard by not less than two ju dges Decision of High Court or Supreme Court on the case stated Appeal to the Su preme Court Hearing before Supreme Court Sums due to be paid notwithstanding ref erence, etc. Exclusion of time taken for copy Appearance by authorised represent ative Definitions Presumptions as to documents in certain cases Admissibility of micro films, facsimile copies of documents and computer print outs as documents and as evidence. Delegation of powers Instructions to Central Excise Officers S ervice of decisions, orders, summons, etc. Rounding off of duty, etc. Protection of action taken under the Act. Section 35J Section 35K Section 35L Section 35M Section 35N Section 35O Section 35Q Section 36 Section 36A Section 36B Section Section Section Section Section 3 7A 37B 37C 37D 40 5.27 DUE DATES FOR SERVICE TAX 1. Registration Within 30 days from the date on w hich service tax is levied or within 30 days of commencement of business whichev er is later. 2. Payment of Service Tax Payable on amounts received during the qu arter: 1st April 1st July 1st Oct. 1st Jan. to to to to 30th June 30th Sept. 31s t Dec. 31st March Payable by: 5th July 5th October 5th January 31st March (a) Pa yable by individuals, proprietary concerns and partnership firms :

Service Tax Procedures 5.31 (b) Payable by persons other than individuals, propr ietary concerns and partnership firms: Payable on amounts received during the mo nth April May June July August September October November December January Febru ary March 3. Returns For the half year: 1 st April 1 st Oct. to to 30 th Sept. 3 1 st March To be filed by: 25 th October 25 th April Payable by: 5th May 5th Jun e 5th July 5th August 5th September 5th October 5th November 5 th December 5 th January 5 th February 5 th March 31 st March 5.28 CREDIT OF SERVICE TAX The provisions relating to credit of service tax are dealt in CENVAT Credit Rules, 2004 which have been discussed in Chapter 4 of Sec tion A of this Study Material. Self-examination questions 1. 2. Who should apply for registration under service tax law? What is to be done with registration wh en(a) A registered assessee transfers his business to another person, or (b) A r egistered assessee ceases to carry on the activity for which he is registered? 3 . 4. 5. Discuss the provisions governing the registration of premises of service providers who have centralized billing or centralized accounting system. What i s the relevant date for payment of service tax in case of a company for the mont h of February and March? Who is responsible to make the payment of service tax i n case of service rendered by a

5.32 Service tax & VAT goods transport agency? 6. A Ltd. enters in to an advertisi ng contract with B Ltd. for a sum of Rs.15,000.00 on 05.11.2006. A Ltd. receives a n advance of Rs.10,000.00 on 06.11.2006 and the balance amount on the completion of services on 12.12.2006. Compute the service tax payable by A Ltd. in the mon th of December and January. When is the invoice, in respect of provision of serv ice, issued? Which documents are to be submitted along with the first return? Wh en should the return be filed if the due date happens to be a public holiday? 7. 8. 9. 10. Under what circumstances, provisional assessment is resorted to? What is the procedure to be followed for provisional assessment? 11. What are the obligatio ns of the assessee with regard to the records relating to service tax? 12. Discu ss the provisions in respect of provisional attachment to protect revenue in cer tain cases. 13. What is the relevant date for calculation of limitation period of one year in respect of filing refund claims related to service tax? 14. Under wh at situations, penalty may be imposed by the department on the assessee? 15. Who can apply for an advance ruling for service tax matters?

6 BACKDROP FOR STATE-LEVEL VAT IN INDIA 6.1 INTRODUCTION A really progressive and welfare oriented country should balance the requirement s of direct and indirect taxes in a fair manner. Too much dependence on direct t axes will be repressive but at the same time passing heavy burdens to the genera l public by way of indirect taxes will constitute hardships to the common citize n. Therefore, economic administrators throughout the world have been constantly engaged in the exercise of lightening the burden of indirect taxes on the ultima te consumers. Suppose, for manufacturing a product A, the manufacturer has to pu rchase four types of commodities B, C, D and E on which he pays excise duty. Whe n ultimately he sells his manufactured product A on which he has to discharge hi s liability towards excise, the excise duty leviable on such product will be on a tax base which will include excise duties paid by the manufacturer on products B, C, D and E. Thus, the final excise duty is a duty on duty, which will increa se the cost of production as well as the price of the final product. Suppose, we find a method by which the excise duties paid on commodities B, C, D and E are allowed to be set-off from the final duty liability on product A, it is obvious that the manufacturer will not only be able to avoid payment of duty on duty but the cost of the product will also be reduced leading to a benefit to the consum er. This is the origin of Value added tax (VAT). In simple words, the tax will b e levied and collected at each stage of manufacture only on the value added by t he manufacturer represented by the purchase value and the value of the work perf ormed on such purchased commodities. This will not only result in cost reduction but will also ensure equity. What we have talked about is a value added tax on manufacture. In the same way, there can be a value added tax in respect of tradi ng in commodities also. In other words, the various taxes paid on inputs purchas ed will be allowed as a credit and will be allowed to be set off against the tax liability on the value of sales of the commodity. Thus, there can be a system o f VAT in respect of manufacture and in respect of sales. In

6.2 Service tax & VAT the same way, one can think of a system of VAT in dealing with input and output services. When the individual systems of manufacturing, sales and services VAT a re ultimately combined to form a grand system of VAT on goods and services, such a VAT system will be applicable throughout the country as a common market. 6.2 HISTORICAL BACKGROUND Ever since 1954, when the tax on value added was introduced in France it has spr ead to a large number of countries. This tax was proposed for the first time by Dr. Wilhelm Von Siemens for Germany in 1919 as an improved turnover tax. In 1921 , VAT was suggested by Professor Thomas S. Adams for the United States of Americ a who recommended "sales-tax with a credit or refund for taxes paid by the produ cer or dealer (as purchaser) on goods bought for resale or for necessary use in the production of goods for sales." VAT was also recommended by the Shoup Missio n for the reconstruction of the Japanese Economy in 1949. However, the tax was n ot introduced by any country till 1953. France led the way in 1954 by adopting a VAT that covered the industrial sector alone and the tax was limited up to the wholesale level. The tax was limited to the boundaries of France until the fifti es. VAT has, however, been spreading rapidly since the sixties. The Ivory Coast followed France by adopting VAT in 1960. The tax was introduced by Senegal in 19 61 and by Brazil and Denmark in 1967. The tax has gathered further momentum as i t was made a standard form of sales-tax required for the countries of the Europe an Union (then European Economic Community). In 1968, France extended VAT to the retail level while the Federal Republic of Germany introduced it in its tax sys tem. The Netherlands and Sweden imposed this tax in 1969 while Luxembourg adopte d it in 1970, Belgium in 1971, Ireland in 1972, and Italy, the United Kingdom, a nd Austria in 1973. Of the other members of the European Union, Portugal and Spa in introduced VAT in 1986, Greece in 1987, while this tax was adopted by Finland in 1994. Many other European countries have adopted VAT. Similarly, many countr ies in the North and South America, Africa and Oceania have introduced VAT. VAT has been spreading in the Asian region as well. The Republic of Vietnam adopted VAT briefly in 1973. (VAT was abolished soon but it was reintroduced in 1999 in Vietnam.) South Korea introduced VAT in 1977, China in 1984, Indonesia in 1985, Taiwan in 1986, Philippines in 1988, Japan in 1989, Thailand in 1992, and Singap ore in 1994 while Mongolia has been implementing this tax since 1998. In the Sou th Asian Association for Regional Cooperation (SMRC) region, VAT has been consid ered in great depth in India. In 1986, India introduced VAT in a different way u nder the name of Modified Value Added Tax (MODVAT). Unlike the VAT system of oth er countries, the Indian MODVAT system was designed to cover manufacturing of go ods by giving credit of excise duty paid on inputs. The scope of MODVAT has been extended

Backdrop for State-Level VAT in India 6.3 over the years and has since been renamed as Central Value Added Tax (CENVAT), w hich covers services also. Pakistan adopted VAT in 1990, Bangladesh in 1991, and Nepal in 1997 while Sri Lanka introduced VAT in 1998. As VAT is less distortive and more revenue-productive, it has been spreading all over the world. As on to day, about 130 countries have adopted the same. 6.3 VAT IN INDIAN CONTEXT The Indian Union is a federal structure under the Constitution of India. The Cen tral Government and the State Governments derive their powers through the instru mentality of the Union List, the State List and the Concurrent List. So far as p owers of taxation are concerned there are clearly specified areas over which the Central Government and the States can exercise their jurisdiction. While Income -tax, excise duty and customs duty constitute the major sources of tax revenue t o the Central Government, the State Governments substantially depend on sales-ta x as the main source of revenue. The Central Government undertook a series of re forms in indirect taxes, the major among which was the introduction of Modified VAT, which is currently in operation as CENVAT. However, in view of the constitu tional constraints, CENVAT applies to goods and services but not to sales tax. 6 .4 COMMITTEE OF STATE FINANCE MINISTERS After the introduction of VAT in the are a of manufacture and services, a need for uniformity arose wherein similar syste m was proposed to be incorporated in the area of sales thereby replacing the exi sting sales tax system. To materialize this concept, the then Union Finance Mini ster called a meeting of the State Finance Ministers in May 1994 and a Committee of State Finance Ministers was constituted on sales tax reform following this m eeting. The Committee had to examine all aspects of sales tax reform, including the introduction of VAT. The Committee recommended several measures to rationali ze the existing sales tax with the ultimate aim of introducing VAT at the State level. The major recommendations included simplification of the rate structure, minimization of the exemptions and enhancement of transparency. To this end, the Committee recommended: (i) the adoption of four general floor rates (0, 4, 8, 1 2) and two special floor rates (1 and 20) in place of the existing multiple rate s being levied in different States; (ii) keeping the exemptions to a minimum; (iii) preparing a list of exempt goods and fixing a target date beyond which no State/Union Territory should exempt go ods other than those mentioned in the list, and;

6.4 Service tax & VAT (iv) doing away with sales tax incentives for industrialization. No new tax ince ntives should be given after 1 April, 1997, and the existing ones should be allo wed to lapse in due course. For implementing the above decisions, an Empowered C ommittee of State Finance Ministers was set up. 6.5 EMPOWERED COMMITTEE OF STATE FINANCE MINISTERS The Empowered Committee met regularly, attended by the State Finance Ministers, and also by the Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior officials of the Rev enue Department of the Ministry of Finance, Government of India. Through repeate d discussions and collective efforts of the Empowered Committee, it was possible within a period of about a year and a half to achieve remarkable success in the first two objectives on harmonization of sales-tax structure through implementa tion of uniform floor rates of sales-tax and discontinuation of sale-tax-related incentive schemes. As a part of regular monitoring, whenever any deviation was reported from the uniform floor rates of sales-tax or from decision on incentive s, the Empowered Committee took up the matter with the concerned State and also the Government of India for necessary rectification. After reaching this stage, steps were initiated for the systematic preparation for the introduction of Stat e-Level VAT. In order to avoid any unhealthy competition among the States which may lead to distortions in manufacture and trade, attempts had been made from th e very beginning to harmonize the VAT designs in the States, keeping also in vie w the distinctive features of each State and the need for federal flexibility. T his had been done by the States collectively agreeing, through repeated discussi ons in the Empowered Committee, to certain common points of convergence regardin g VAT, and allowing at the same time certain flexibility for the local character istics of the States. Along with these measures at ensuring convergence on the b asic issues on VAT, steps had also been taken for necessary training, computeriz ation and interaction with trade and industry, particularly at the State level. This interaction with trade and industry was being specially emphasized. 6.6 DR. VIJAY KELKAR S VIEWS The report submitted by Dr. Vijay Kelkar, Advisor to the Union Finance Minister, in the year, 2002 on direct and indirect taxes had significant observations on the issue of VAT. At the very outset he said that VAT eliminates the cascading e ffect of taxes, it promotes competitiveness of exports, it has a simple and tran sparent culture and it improves compliance. Economists have generally shared the view that VAT is best suited as a federal or central tax and not at the State l evel.

Backdrop for State-Level VAT in India Dr. Vijay Kelkar made the following recomm endations in regard to State-Level VAT(i) 6.5 A publicity awareness programme should be started jointly with the Central Gover nment and the State Governments and the former should extend financial support f or this, if required. It is also necessary that the publicity awareness programm e should be implemented at the earliest. (ii) An attempt should be made towards uniformity of all State legislations, pro cedures and documentation relating to VAT. (iii) The issue of compensation to St ates must be primarily tackled through mutually acceptable mechanism of addition al resource mobilization through service tax and not through budgetary support. (iv) With the introduction of VAT all other local taxes should be discontinued a nd the same should be taken into account in determining the Revenue Neutral Rate . (v) Whereas additional duties of excise may continue for textiles up to 2005, it may continue even thereafter for cigarettes, which should not be subjected to VAT. (vi) The VAT schemes should provide for grant of credit of duty by the imp orting States for the duty paid in the exporting State, in the course of inter-S tate movement of goods. (vii) For the stability and continuity of VAT, the setti ng up of a VAT Council or a permanent suitable alternative vested with adequate powers to take steps against discriminatory taxes and practices and eliminate ba rriers to free flow of trade and commerce across the country should be explored. 6.7 WHITE PAPER ON STATE-LEVEL VAT IN INDIA The Empowered Committee of State Finance Ministers met regularly and with the re petitive discussions and collective efforts brought out a White paper on 17.01.2 005, which provided a base for the preparation of various State VAT legislations . It has been recognized that VAT is a State subject and therefore, the States w ill have freedom for appropriate variations consistent with the basic design as agreed upon at the Empowered Committee. Broadly, the White Paper consists of the following: a) b) c) 6.8 Justification of VAT and Background Design of State-Lev el VAT. Steps taken by the States. PRESENT POSITION Finally, State-Level VAT was introduced on 01.04.2005 by majority of the States, though

6.6 Service tax & VAT few States had already implemented it by that time. However, few States like Utt ar Pradesh have yet not introduced VAT. The States have passed State-Level VAT l egislations which are modeled on the draft model VAT law, prescribed by the Cent ral Government. The legislations also incorporate the various principles of Stat e-Level VAT as contained in the White Paper released by the Empowered Committee. However, depending upon the requirements of the States appropriate variations h ave been made in these legislations. The concepts relating to VAT dealt in subse quent chapters are largely based on the principles laid down by the White Paper on State-Level VAT. 6.9 DISCONTINUANCE OF THE CENTRAL SALES TAX With the introduction of State-Level VAT system, it is proposed to phase out the Central sales tax (CST). However, since the States will stand to lose large rev enue on account of its discontinuance a mechanism is being thought of for compen sating the States for such loss of revenue.1 6.10 GOODS AND SERVICE TAX The ulti mate system of indirect taxes in India will be a goods and service tax. Under su ch a system there will be one central authority administering a uniform goods an d service tax. Input tax credit will be available between goods and services thr oughout the country. However, such a development will require constitutional ame ndment. Under such a uniform tax system, there will be no trade barriers like oc troi and entry tax. There will be a free flow of trade and commerce through out the length and breadth of the country. India will then become a vast common mark et. The Union Finance Minister in his Budget speech for the year 2006-07 has ann ounced 1st April, 2010 as the target date to introduce GST. Self-examination que stions 1. 2. 3. 4. 5. Briefly explain the concept of value added tax through a i llustration. Write a brief note on the historical background of VAT. Discuss the recommendations made by the Committee of State Finance Ministers in relation to introduction of State-Level VAT. Explain the recommendations made by Dr.Vijay K elkar in regard to State-Level VAT. Write a short note on the White Paper on Sta te-Level VAT in India. The concepts relating to central sales tax and VAT have been dealt in Chapter 12 of Section B of this Study Material. 1

7 TAXONOMY OF VAT 7.1 DIFFERENT STAGES OF VAT The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value added (i.e. sales minus purchase) which is equival ent to wages plus interest, other costs and profits. To illustrate, a chart of t ransactions is given below: Manufacturer A Sale price Rs.300 Gross VAT Rs.37.50 Net VAT Rs.21 {Rs.37.50 - (1 2.50+4)} Wholesaler B Sale price Gross VAT Net VAT (50-37.50) Rs. 400 Rs. 50 Rs. 12.50 Product X Sale price Rs. 100 Gross VAT Rs. 12.50 Net VAT Rs.12.50 Product Y Sale price Rs. 100 Gross VAT Rs. 4 Net VAT Rs. 4 Retailer C Sale price Rs. 500 Gross VAT Rs. 62.50 Net VAT Rs. 12.50 (62.50 50) Inputs for manufacturer Note: The rate of tax is assumed to be 12.5% on the tran sactions relating to goods manufactured by A. For a manufacturer A, inputs are p roduct X and product Y which are purchased from a primary producer. In practice, even these producers use inputs. For example, a farmer would use seeds, feeds, fertilizer, pesticides, etc. However, for this example their VAT impact is not c onsidered. B is a wholesaler and C is a retailer. The inputs X and Y are purchas ed at Rs. 100 each on which tax is paid @12.5 % and 4% respectively. The manufac turer A would, therefore, take the credit for tax paid by him for the

7.2 Service tax & VAT use of such inputs. The input price of Rs.200 plus tax would include wages, sala ries and other manufacturing expenses. To all this, he would also add his own pr ofit. Assuming that after the addition of all these costs his sale price is Rs.3 00, the gross tax (at the rate of 12.5 per cent) would be Rs.37.50. As manufactu rer A has already paid tax on Rs.200, he would get credit for this tax (i.e. 12. 50+4=16.50). Therefore, his net VAT liability would be Rs.37.50 minus Rs.16.50. Thus, manufacturer A would pay Rs.21 only (because of this he would take the cos t of his inputs to be only Rs.200) Similarly, the sale price of Rs.400 fixed by wholesaler B would have net VAT liability of Rs.12.50 (Rs.50-37.50= Rs.12.50) an d the sales price of Rs.500 by Retailer C would also have net VAT liability of R s.12.50 (Rs. 62.50 - 50 = Rs.12.50). Thus, VAT is collected at each stage of pro duction and distribution process, and in principle, its entire burden falls on t he final consumer, who does not get any tax credit. Thus, VAT is a broad-based t ax covering the value added to each commodity by parties during the various stag es of production and distribution. 7.2 HOW VAT OPERATES The operation of VAT can be further appreciated from the following illustrations: Illustration A is a tr ader selling raw materials to a manufacturer of finished products. He imports hi s stock-in-trade as well as purchases the same in the local markets. If the rate of VAT is assumed to be 12.50 per cent ad valorem, he will pay VAT as under: Sl . No. (i) Particulars A s cost of imported materials (from other State) (A will deposit Rs.1250 duty on the above. Since, this is not a State VAT it will form a cost of input) (ii) A s cost of local materials (VAT charged by local suppliers Rs.2,500. Since the credit of this would be available it will not be included i n cost of input) (iii) (iv) (v) (vi) Other expenditure (such as for storage, tra nsport, interest, etc.) incurred and profit earned by A Sales price of goods VAT on the above @ 12.50% (Approx.) Invoice value charged by A to the manufacturer, B 8,750 40,000 5,000 45,000 Rs. 10,000 1,250 20,000

Taxonomy of VAT 7.3 I. A s liability for VAT Rs. Tax on the sales price Less: Set-off of VAT paid on pu rchases On imported goods On local goods Nil 2,500 2,500 5,000 Net Tax Payable 2,500 In the above illustration (as well as in illustrations tha t follows) it is assumed that set off of VAT paid on imported goods from outside countries or other States is not allowed. Now B manufactures finished products from the raw materials purchased from A and other materials purchased from other suppliers. His liability would be as under: Sl. No. (i) (ii) Particulars Bs cost of raw materials (VAT recovered by A Rs.5,000) Bs cost of other materials Local Purchases (VAT charged on the above Rs.2,500) Inter- State Purchases* (CST paid Rs.400) (iii) (iv) (v) (vi) II. Manufacturing and other expenses incurred and pr ofit earned by B Sale price of finished product VAT on the above Invoice value c harged by B to the wholesaler, C B s liability for VAT Tax on the sales price Le ss: Set-off of VAT on Purchases To A 5,000 2,500 To other suppliers Net Tax Paya ble Rs. 12,500 20,000 10,400 29,600 1,00,000 12,500 1,12,500 Rs. 40,000 7,500 5,000

7.4 Service tax & VAT *Credit / set off for tax paid on inter-State purchases (inputs) is not allowed. When C, after repacking the goods into other packing, sells the finished produc t to a retailer. The following would be the position: Sl. No. (i) (ii) (iii) (iv ) (v) (vi) III. Particulars C s cost of goods (VAT recovered by B Rs.12, 500) Co st of packing material (VAT charged on the above Rs. 250) Expenses incurred and profit earned by C Sale price of goods VAT on the above Invoice value charged by C to D, a retailer Cs liability for VAT Tax on the sales price Less: set-off of VAT paid To B To other suppliers Net Tax payable Rs. 15,000 12,500 250 Rs. 1,00, 000 2,000 18,000 1,20,000 15,000 1,35,000 12,750 2,250 When D sells the goods to the consumers, the position would be as under: Sl. No. (i) (iii) (iv) (v) (vi) IV. Particulars Ds cost of goods (VAT recovered by C Rs. 15,000) Expenses incurred and profit earned by D Sale price of goods VAT on the above Invoice value charged by D to the consumers Ds liability for VAT Tax on the sale price Less: Set-off of VAT paid to C Net Tax Payable Rs. 17,500 15,000 2,5 00 20,000 1,40,000 17,500 1,57,500 Rs. 1,20,000

Taxonomy of VAT Total recovery 7.5 It would be seen that in the above illustrations, at the successive stages which the raw materials and other goods pass till they are sold to the ultimate consu mers, VAT would be collected as under: Sl. No. (i) (ii) (iii) (iv) (v) (vii) (vi ii) Particulars Paid by suppliers selling raw materials to A Net tax paid by A o n his sales to B Paid by suppliers selling other materials to B Net tax paid by B Paid by suppliers selling packing materials to C Net tax paid by C Net tax pai d by D Total Recovery of Revenue Rs. 2,500 2,500 2,500 5,000 250 2,250 2,500 17, 500 Now, if tax was leviable under a sales-tax law at the last stage in a series of successive sales (when the finished product is sold to consumers) the authoritie s in the above case would have recovered the entire tax of Rs.17, 500 from D at 12.50 per cent on his sale price of Rs.1,40,000 and all earlier stages are to be exempted. 7.3. VARIANTS OF VAT VAT has three variants, viz., (a) gross product variant, (b) income variant, and (c) consumption variant. These variants are pre sented in a schematic diagram given below: Different variants of VAT Gross product variant Tax is levied on all sales and deduction for tax paid on inputs excluding capita l inputs is allowed. Income variant Tax is levied on all sales with set-off for tax paid on inputs and only deprecia tion on capital goods. Consumption variant Tax is levied on all sales with deduction for tax paid on all business inputs (i ncluding capital goods). The gross product variant allows deductions for taxes on all purchases of raw ma terials and components, but no deduction is allowed for taxes on capital inputs. That is, taxes on capital goods such as plant and machinery are not deductible from the tax base in the

7.6 Service tax & VAT year of purchase and tax on the depreciated part of the plant and machinery is n ot deductible in the subsequent years. Capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and machinery is d elayed due to this double tax treatment. The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as depreciation on capital goods. This method provides incentives to classify pu rchases as current expenditure to claim set-off. In practice, however, there are many difficulties connected with the specification of any method of measuring d epreciation, which basically depends on the life of an asset as well as on the r ate of inflation. Consumption variant of VAT allows for deduction on all busines s purchases including capital assets. Thus, gross investment is deductible in ca lculating value added. It neither distinguishes between capital and current expe nditures nor specifies the life of assets or depreciation allowances for differe nt assets. This form is neutral between the methods of production; there will be no effect on tax liability due to the method of production (i.e. substituting c apital for labour or vice versa). The tax is also neutral between the decision t o save or consume. Among the three variants of VAT, the consumption variant is w idely used. Several countries of Europe and other continents have adopted this v ariant. The reasons for preference of this variant are: Firstly, it does not aff ect decisions regarding investment because the tax on capital goods is also setoff against the VAT liability. Hence, the system is tax neutral in respect of te chniques of production (labour or capital-intensive). Secondly, the consumption variant is convenient from the point of administrative expediency as it simplifi es tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the othe r hand. In practice, therefore, most countries use the consumption variant. Also , most VAT countries include many services in the tax base. Since the business g ets set-off for the tax on services, it does not cause any cascading effect. 7.4 . METHODS FOR COMPUTATION OF TAX There are several methods to calculate the value added to the goods for levy of tax. The three commonly used methods are: (a) add ition method, (b) invoice method and

Taxonomy of VAT (c) subtraction method. The subtraction method can be further di vided into: (a) direct subtraction method (b) intermediate subtraction method Me thods of computation of VAT Addition method Aggregating all the factor payments and profit. 7.7 Invoice method Deducting tax on inputs from tax on sales. Subtraction method Direct subtraction method Deducting aggregate value of purchase exclusive of tax from the aggregate value of sales exclusive of tax. Intermediate subtraction method Deducting tax inclusive value of purchases from the sales and taxing difference between them. 7.4.1 Addition Method This method aggregates all the factor payments including p rofits to arrive at the total value addition on which the rate is applied to cal culate the tax. This type of calculation is mainly used with income variant of V AT. Addition method does not easily accommodate exemptions of intermediate deale rs. A drawback of this method is that it does not facilitate matching of invoice s for detecting evasion. 7.4.2 Invoice Method This is the most common and popula r method for computing the tax liability under VAT system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage is allowed as set-off. In other words, out of tax so calcul ated, tax paid at the earlier stage i.e., at the stage of purchases is set-off, and at every stage the differential tax is being paid. The most important aspect of this method is that at each stage, tax is to be charged separately in the in voice. This method is very popular in western countries. In India also-, under C entral Excise Law this method is followed. This method is also called the Tax C redit Method or Voucher Method . From the following illustration, the mode of calculation of tax under this method will become clear:

7.8 Service tax & VAT Stage Particulars VAT Liability 125 Less VAT Tax to Credit Government 125 1. Manufacturer/first seller in the State sells the goods to distributor for Rs.100 0. Rate of tax is 12.50%. Therefore, his tax liability will be Rs.125. He will n ot get any VAT credit, being the first seller. Distributor sells the goods to a wholesale dealer for say Rs. 1200 @ 12.50% and will get set-off of tax paid at e arlier stage at Rs. 125. His tax liability will be Rs. 25. Wholesale dealer sell s the goods to a retailer at say Rs. 1500. Here again he will have to pay the ta x on Rs. 1500. He will get credit of tax paid at earlier stage of Rs. 150. His t ax liability will be Rs. 37.50. Retailer sells the goods to consumers at say Rs. 2000. Here again he will have to pay tax on Rs. 2000. He will get credit for ta x paid earlier at. Rs. 187.50. His tax liability will be Rs.62.50. Total 2. 150 125 25 3. 187.50 150 37.50 4. 250 187.50 62.50 712.50 462.50 250 Thus, the Government will get tax on the final retail sale price of Rs. 2,000. H owever, the tax will be paid in instalments at different stages. At each stage, tax liability is worked out on the sale price and credit is also given on the ba sis of tax charged in the purchase invoice. If the first seller is a manufacture r, he gets the credit of tax paid on raw materials, etc. which are used in the m

anufacturing. From the above illustration, it is clear that under this method, t ax credit cannot be claimed unless and until the purchase invoice is produced. A s a result, in a chain, if at any stage the transaction is kept out of the books , still there is no loss of revenue. The department will be in a position to rec over the full tax at the next stage. Thus, the possibility of tax evasion, if no t entirely ruled out, will be reduced to a minimum. However, proper measures sho uld be implemented to prevent the production of fake

Taxonomy of VAT invoices to claim the credit of tax at an earlier stage. 7.9 It is said that in this method the beneficiary is the trade and industry because in the above example, the total tax collection at all the stages is Rs.712.50 w hereas tax received by the State is only Rs. 250. The set-off available is also tax paid. If the profit margin is to be kept at the constant level then the setoff will have to be considered to avoid cascading effects of taxes. 7.4.3 Subtra ction Method While the above-stated invoice or tax-credit method is the most common method of VAT, another method to determine the liability of a taxable person is the cost subtraction method, which is also a simple method. Under this method, the tax is charged only on the value added at each stage of the sale of goods. Since, the total value of goods sold is not taken into account, the question of grant of cl aim for set-off or tax credit does not arise. This method is normally applied wh ere the tax is not charged separately. Under this method for imposing tax, valu e added is simply taken as the difference between sales and purchases. The foll owing illustration will make the working of this system clear: Stage No. Particu lars Turnover for tax under VAT (Rs.) 1. First seller sells the goods to a distr ibutor at say, Rs. 1125 inclusive of tax 1,125 Tax @ 12.50% (Rs.) 125 (1125 12.50) 100 + 12.50 225 25 2. Distributor sells the goods to a whole-seller at say, Rs.1,350. Here taxable tur nover will be Rs.1,350 - Rs.1,125 Wholesaler sells the goods to a retailer at sa y, Rs 1,687.50. Here taxable turnover will be Rs. 1,687.50 - Rs. 1,350 Retailer selling the goods at say, Rs. 2250. Taxable turnover will be Rs.2250 - Rs. 1687 .50 (225 12.50) 100 + 12.50 337.50 37.50 3. (337.50 12.50) 100 + 12.50 562.50 62.50 4.

7.10 Service tax & VAT (562.50 12.50) 100 + 12.50 2,250 250 Tax is calculated by the formula T = Taxable turnover, T R 100 + R R = Rate of Tax Thus, under this system also, the incidence of tax is at each stage and the inci dence of tax on the final sale price to the consumer will remain the same as in the earlier method. However, this holds good till the time the same rate of tax is attracted on all inputs, including consumables and services, added at all the stages of production/distribution. If the rates are not common, then the final tax by the two methods may differ. This is explained in tables given below: Invo ice Method (All inputs taxable under ONE rate) Particulars Inputs for A Product X(@12.50%) Product Y(@12.50%) Invoice Material Value VAT Input tax credit NET 260 450 -----231 400 ------631 1000 1600 2000 2400 2400 29 50 ------79 125 200 250 300 300 ----------79 125 200 250 -29 50 -------79 46 75 50 50 300 A sales goods to B B sales goods to C C sales goods to D D sales goods to E 710 1125 1800 2250 2700 FINAL 2700

Taxonomy of VAT Subtraction Method (All inputs taxable under ONE rate) Particula rs Inputs for A On Input A to B B to C C to D D to E FINAL 710 1125 1800 2250 5 1800 2250 --415 675 450 450 -79 46 75 50 50 300 Invoice Purchase Price Value A dded VAT 12.50% 7.11 @

Invoice Method (Inputs taxable at different rates) Particulars Inputs for A Prod uct X(@12.50%) Product Y(@ 4%) 450 260 -----A sales goods to B B sales goods to C C goods to D D sales goods to E 710 1125 1800 2250 2700 FINAL 2700 400 250 ------650 100 0 1600 2000 2400 2400 50 10 ------60 125 200 250 300 300 ----------60 125 200 25 0 -50 10 -------60 65 75 50 50 300 Invoice Material Value VAT Input tax credit N ET

7.12 Service tax & VAT Subtraction Method (Inputs taxable at different rates) Particulars Invoice Purch ase Price Value Added VAT @ 12.50%

Inputs for A On Input A to B B to C C to D D to E FINAL 710 1125 1800 2250 27 800 2250 --415 675 450 450 -60 46 75 50 50 281 Thus, on the same consumer price of Rs. 2700 under invoice method VAT works out to be Rs.300 where as under the subtraction method it works out to be Rs. 281. T herefore, the method is not considered as a good method. The method is being obj ected to on the ground that under this method, tax is levied on income. The valu e addition at each stage may not be only due to profit but may be partly due to freight/transportation and other services. The incidence of tax is on the sale o f goods. However, the mode of calculation of taxable turnover is value added. Th erefore, the method cannot be said to be imposing tax on income/profit. 7.5. MER ITS AND DEMERITS OF VAT 7.5.1 Merits 1. No tax evasion It is said that VAT is a logical beauty. Under VAT, credit of duty paid is allowed against the liability on the final product manufactured or sold. Therefore, unless proper records are kept in respect of various inputs, it is not possible to claim credit. Hence, su ppression of purchases or production will be difficult because it will lead to l oss of revenue. A perfect system of VAT will be a perfect chain where tax evasio n is difficult. 2. Neutrality The greatest advantage of the system is that it do es not interfere in the choice of decision

Taxonomy of VAT 7.13 for purchases. This is because the system has anti-cascading effect. How much va lue is added and at what stage it is added in the system of production/distribut ion is of no consequence. The system is neutral with regard to choice of product ion technique, as well as business organisation. All other things remaining the same, the issue of tax liability does not vary the decision about the source of purchase. VAT facilitates precise identification and rebate of the tax on purcha ses and thus ensures that there is no cascading effect of tax. In short, the all ocation of resources is left to be decided by the free play of market forces and competition. 3. Certainty The VAT is a system based simply on transactions. Thu s there is no need to go through complicated definitions like sales, sales price , turnover of purchases and turnover of sales. The tax is also broad-based and a pplicable to all sales in business leaving little room for different interpretat ions. Thus, this system brings certainty to a great extent. 4. Transparency Unde r a VAT system, the buyer knows, out of the total consideration paid for purchas e of material, what is tax component. Thus, the system ensures transparency also . This transparency enables the State Governments to know as to what is the exac t amount of tax coming at each stage. Thus, it is a great aid to the Government while taking decisions with regard to rate of tax etc. 5. Better revenue collect ion and stability The Government will receive its due tax on the final consumer/ retail sale price. There will be a minimum possibility of revenue leakage, since the tax credit will be given only if the proof of tax paid at an earlier stage is produced. This means that if the tax is evaded at one stage, full tax will be recoverable from the person at the subsequent stage or from a person unable to produce proof of such tax payment. Thus, in particular, an invoice of VAT will b e self enforcing and will induce business to demand invoices from the suppliers. Another attribute of VAT is that it is an exceptionally stable and flexible sou rce of government revenue. 6. Better accounting systems Since the tax paid on an earlier stage is to be received back, the system will promote better accounting systems. 7. Effect on retail price A persistent criticism of the VAT form has b een that since the tax is payable on the final sale price, the VAT usually incre ases the prices of the goods. However, VAT does not have any inflationary impact as it merely replaces the existing equal sales tax. It may also be pointed out that with the introduction of VAT, the tax impact on raw material is to be

7.14 Service tax & VAT totally eliminated. Therefore, there may not be any increase in the prices. 7.5. 2 Demerits 1. The merits accrue in full measure only under a situation where the re is only one rate of VAT and VAT applies to all commodities without any questi on of exemptions whatsoever. Once concessions like differential rates of VAT, co mposition schemes, exemption schemes, exempted category of goods etc. are built into the system, distortions are bound to occur and the fundamental principle th at VAT will totally eliminate cascading effects of taxes will also be subject to qualifications. In the federal structure of India in the context of sales-tax, so long as Central VAT is not integrated with the State VAT, it will be difficul t to put the purchases from other States at par with the State purchases. Theref ore, the advantage of neutrality will be confined only for purchases within the State. For complying with the VAT provisions, the accounting cost will increase. The burden of this increase may not be commensurate with the benefit to traders and small firms. Another possible weak point in the introduction of VAT, which will have an adverse impact on it is that, since the tax is to be imposed or pai d at various stages and not on last stage, it would increase the working capital requirements and the interest burden on the same. In this way it is considered to be non-beneficial as compared to the single stage-last point taxation system. VAT is a form of consumption tax. Since, the proportion of income spent on cons umption is larger for the poor than for the rich, VAT tends to be regressive. Ho wever, this weakness is inherent in all the forms of consumption tax. While it m ay be possible to moderate the distribution impact of VAT by taxing necessities at a lower rate, it is always advisable to moderate the distribution considerati ons through other programmes rather than concessions or exemptions, which create complications for administration. As a result of introduction of VAT, the admin istration cost to the State can increase as the number of dealers to be administ ered will go up significantly. What are the different stages of VAT? Discuss. Ex plain the mechanism of operation of VAT by an illustration. Briefly discuss the different variants of VAT. Describe the advantages and disadvantages of VAT. Des cribe the invoice method of calculation of VAT. 2. 3. 4. 5. 6. Self-examination questions 1. 2. 3. 4. 5.

8 INPUT TAX CREDIT 8.1 CONCEPTS OF INPUT TAX AND OUTPUT TAX Input tax is the tax paid or payable in the course of business on purchases of a ny goods made from a registered dealer of the State. Output tax means the tax ch arged or chargeable under the Act, by a registered dealer for the sale of goods in the course of business. In simple words input tax is the tax a dealer pays on his local purchases of business inputs, which include the goods that he purchas es for resale, raw materials, capital goods as well as other inputs for use dire ctly or indirectly in his business. Output tax is the tax that a dealer charges on his sales that are subject to tax. 8.2 INPUT TAX CREDIT (ITC) The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax cre dit in relation to any period means setting off the amount of input tax by a reg istered dealer against the amount of his output tax. It is reiterated that tax p aid on the earlier point is called input tax. This amount will be adjusted/rebat ed against the tax payable by the purchasing dealer on his sales. This credit av ailability is called input tax credit; it can also be referred to as tax credit on a sale within the State or in the course of inter- State trade or commerce. 8 .2.1 Scope of input tax credit Input tax credit shall be allowed to a registered dealer for purchase of any goo ds made within the State from a dealer holding a valid certificate of registrati on under the Act. Further, the input tax credit will be given to both manufactur ers and traders for purchase of inputs/supplies meant for both sale within the S tate as well as to other States, irrespective of when these will be utilized/sol d. Even for stock transfer/consignment transfers/branch transfer of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit. It i s also to be noted that in some States partial input tax credit is available in respect of inputs used for manufacture of exempted goods.

8.2 8.2.2 Service tax & VAT Input tax credit available on capital goods Input tax credit on capital goods will also be available for traders and manufac turers. Tax credit on capital goods may be adjusted over a maximum of 36 equal m onthly instalments. The States may at their option reduce this number of instalm ents. The State of Maharastra has decided to give full input tax credit in the m onth of purchases only. However, if the capital asset is sold within the period of 36 months proportionate input credit will be withdrawn. There is a negative l ist for capital goods (on the basis of principles already decided by the Empower ed Committee) not eligible for input tax credit. The concepts relating to input tax credit on capital goods have been discussed in para 8.9 of this chapter. 8.3 VAT LIABILITY The Value Added Tax (VAT) is based on the value addition to the goods, and the r elated VAT liability of the dealer is calculated by deducting input tax credit f rom tax collected on sales during the payment period (say, a month). If, for exa mple, input worth Rs. 1,00,000/- is purchased and sales are worth Rs. 2,00,000/in a month, input tax rate and output tax rate are 4% and 12.5% respectively, t hen input tax credit/set-off and calculation of VAT will be as shown below: (a) Input purchased within the month (b) Output sold in the month (c) Input tax paid (d) Output tax payable (e) VAT payable during the month after set-off/input tax credit [(d) (c)] Subject to the provisions relating to credit for input tax, th e net tax payable by a taxable person for a tax period can be calculated on the basis of the following formula: A-B where A = Total of the tax payable in respec t of taxable supplies made by the taxable person during the tax period and B = T otal input tax credit allowed to the taxable person for the tax period. In short , net tax payable is total tax liability minus input tax credit i.e. net tax is the difference between output tax and tax credit. : : : : : Rs. 1,00,000/Rs. 2,0 0,000/Rs. 4,000/Rs. 25,000/Rs. 21,000/-

Input Tax Credit Following example illustrates how excess VAT credit can be avai led: Tax paid on purchases made in the State within a month (input tax) Tax charged f or sales in the State within a month (output tax) CST Charged for inter-State sa les within a month ITC VAT liability (Rs.4,500 - 10,000) Excess credit CST to be paid to Govt.(Rs.15,000- 5,500) 8.3 Rs.10,000 Rs.4,500 Rs.15,000 Rs.10,000 Nil Rs.5,500 Rs.9,500 In the present case CST to be paid to Govt. is Rs.9,500 (CST of Rs.15,000 will b e reduced by excess VAT Credit of Rs.5,500/-) 8.4 ELIGIBLE PURCHASES FOR AVAILIN G INPUT TAX CREDIT For the purpose of claiming input tax credit, the taxable goods should be purcha sed for any one of the following purposes: (i) (ii) for sale/resale within the S tate; for sale to other parts of India in the course of inter-State trade or com merce; (a) containers or packing materials; (b) raw materials; or (c) consumable stores, required for the purpose of manufacture of taxable goods or in the pack ing of such manufactured goods intended for sale in the State or in the course o f inter-State trade or commerce; (iv) for being used in the execution of a works contract; (v) to be used as capital goods required for the purpose of manufactu re or resale of taxable goods; (vi) to be used as (a) raw materials; (b) capital goods; (c) consumable stores and (d) packing materials/containers for manufactu ring/packing goods to be sold in the course of export out of the territory of In dia; (iii) to be used as-

8.4 Service tax & VAT (vii) for making zero-rated sales other than those referred to in clause (vi) ab ove. 8.4.1 Common goods used for taxable goods and tax-free goods Provisions have been made in most of the States to provide that the purchases sh ould be used for manufacture etc. of taxable goods. Taxable goods means goods ot her than the goods which are specified in the Schedule for tax-free goods. Where the purchased goods are used partially for the purpose specified above, input t ax credit shall be allowed proportionate to the extent the purchases are used fo r the purposes specified above. 8.5 (i) (ii) PURCHASES NOT ELIGIBLE FOR INPUT TA X CREDIT purchases from unregistered dealers; purchases from registered dealer w ho opt for composition scheme1 under the provisions of the Act; Input tax credit may not be allowed in the following circumstances: (iii) purchase of goods as may be notified by the State Government; (iv) purchas e of goods where the purchase invoice is not available with the claimant or ther e is evidence that the same has not been issued by the selling registered dealer from whom the goods are purported to have been purchased; (v) purchase of goods where invoice does not show the amount of tax separately; (vi) purchase of good s, which are being utilized in the manufacture of, exempted goods; (vii) goods i n stock, which have suffered tax under an earlier Act but under VAT Act they are covered under exempted items; (viii) purchase of goods used for personal use/co nsumption or provided free of charge as gifts (partial credit is available in th e State of Maharashtra); (ix) goods imported from outside the territory of India (commonly known as high seas purchases); (x) goods imported from other States v iz. inter-State purchases. 8.6 CARRYING OVER OF TAX CREDIT Input tax credit is first to be utilized for payment of VAT. The excess credit c an be then adjusted against the central sales tax (CST) for the said period. Aft er the adjustment of VAT and CST, excess credit, if any, will be carried over to the end of the next year. If there is any excess unadjusted input tax credit at the second year, then the same will be eligible for refund. However, some State s have decided to grant refund after the end of the first financial year itself. The concepts relating to composition scheme have been discussed in Chapter 9 of Section B of this Study Material. 1

Input Tax Credit Illustration (a) Inputs purchased within a month (b) Outputs so ld in the month (c) Input tax paid @12.50% on (a) (d) Tax @12.5% on sale of good s of Rs.1,50,000/- during the month (e) Net VAT payable during the month (d) - ( c) (f) Tax credit to be carried to the next month (c) - (d) 8.5 Rs. 10,00,000 Rs. 7,50,000 Rs. 1,25,000 Rs. 93,750 NIL Rs. 31, 250 8.7 REFUND TO EXPORTERS WITHIN THREE MONTHS The White Paper provides for the gra nt of refund of input tax paid if the goods are exported out of the country. Und er the basic design of the White Paper this refund is to be granted within a per iod of 3 months from the end of the period in which the transaction for export t ook place. 8.8 EXEMPTION OR REFUND TO SEZ AND EOU UNITS Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) are granted either exemption from payment of input tax or refund of the input tax p aid within three months. State Governments may reduce the time period of 3 month s. 8.9 CONCEPT OF INPUT TAX CREDIT ON CAPITAL GOODS A dealer has to purchase capital goods, which may include plant and machinery, f urniture, fixture, electrical installations, vehicles etc. Similarly, a dealer m ay be creating capital assets himself by purchasing materials for capital assets like, building materials etc. Normally all the above items are taxable and the dealer has to pay sales-tax on purchase of the above goods. Each State-VAT legis lations may define capital goods differently. Normally, under VAT system the deale r should get full credit for tax paid on such purchases, more particularly when the basic principle is to avoid the cascading effect. These assets are used for the business and while fixing sale price of the business products the dealer has to include some portion towards the cost of the acquisition of these assets as part of the sale price. If the input credit is not allowed in full then certainl y, to the extent of disallowance, the principle of VAT gets defeated. For exampl e, a dealer has purchased furniture for his business, costing Rs.1,00,000/-. Ass uming that the vendor has charged tax to him @ 12.5%, he will incur an additiona l cost of Rs.12,500/- by way of VAT. Now, if the credit for VAT paid is allowed, the dealer can consider the cost of acquisition at Rs.1,00,000/-. If the credit of tax paid is not allowed then he has to consider the cost of purchase at Rs.1 ,12,500/-. While marking up his price on account of establishment cost he has to consider this cost of furniture as one of the components. If cost remains highe r, obviously to that extent the mark up will go up. If the cost is lower i.e. af ter considering input credit of Rs.12,500/- the cost will be lower

8.6 Service tax & VAT and to that extent the mark up will also be lower, resulting in an overall lower sale price. When tax paid on purchases is included in cost, the said tax indire ctly gets reflected in the sale price and hence there is also an element of tax upon tax. This cascading effect can very well be imagined from the above example . Depending upon the volume of capital goods and the tax component on the same t he magnitude of the cascading effect can be imagined. When the tax is collected on sales, indirectly there is collection of tax on the cost of capital goods als o which includes tax paid on purchase of such assets. 8.9.1 Policy in the white paper The policy lays down that in relation to capital goods set off will be available to traders and manufacturers. The most important factor is that the White Paper recognizes the fact that set off is to be given to both traders and manufacture rs. It is well known that under traditional sales-tax system, in some States, pa rtial credit was allowed on capital goods to the manufacturers but no credit was allowed to traders. The White Paper, taking into account the very basis of VAT system, laid down a policy statement that set off will be allowed to both manufa cturers and traders. However as per the White Paper, the State Governments can p rovide to give set off on a staggering basis, at the most in 36 instalments. Thi s is subject to the policy of individual States. The States, like Maharashtra, h ave provided set off in one slot and the same is to be claimed immediately on ef fecting purchase. 8.9.2 Restrictions on credit relating to capital goods It shou ld be noted that credit on capital goods is not being allowed across the floor. As per the White Paper, there will be a negative list for capital goods which wi ll be based on certain preagreed principles by the Empowered Committee. The capi tal goods mentioned in the negative list would not be eligible for input tax cre dit. However, it appears that the States have taken their own decisions to provi de negative lists or reduction in set off in respect of capital goods. 8.9.3 Pro cedural requirements for claim of set off Barring the items covered by the negative list and subject to retention rules, t he dealers are entitled to set off on capital goods like any other purchases. Th us, the dealer will have to bifurcate their purchase into capital goods eligible for set off and capital goods not so eligible. In respect of eligible capital g oods the dealer will be required to follow the procedural requirements for claim ing set off successfully. For example, dealers will be required to support purch ase of capital goods with tax invoice. In the absence of such tax invoice set of f will be disallowed. Once a dealer is entitled to set off he has to further com ply with the relevant provisions in respect of allowability. If it is subject to certain installments, the dealer will be required to claim set off accordingly in his returns. If the set off is subject to prior permission, the same should b e duly obtained. The allowable set off on capital goods will be, of course, part of normal set off. The dealer will

Input Tax Credit 8.7 be able to adjust this set off against his other VAT liability. For example, dea ler can adjust his set off as per the following illustration: Particulars (i) VA T paid on procurement of inputs/supplies worth Rs.1 lakh @ 12.50% (ii) VAT paid on procurement of capital goods of Rs.10 lakhs @ 12.50% (iii) VAT credit availab le in the month (iv) VAT on sales of Rs.10,00,000 during the month @ 12.50% (v) VAT payable during the month (vi) Carry over of tax credit for set off during th e next month (Rs.) 12,500 1,25,000 1,37,500 1,25,000 Nil 12,500 It may be mentioned here that the set off under VAT Acts are subject to one very important condition. It is generally provided in VAT Acts that the set off on a ny goods should not exceed the tax received on the same goods in Government Trea sury. For example, section 48(5) of the Maharashtra VAT Act provides that a deal er will not be entitled to set off more than the amount received in the Governme nt Treasury. Therefore, if the vendor fails to make the payment of tax to the Go vernment, the purchasers claim of set off will be denied inspite of the fact that he has paid the tax to his vendor. If at any earlier stage some tax was paid, t o that extent, the set off can be claimed. Therefore, the purchasing dealer, des irous of claiming set off, should also look into the credentials of the vendor s o as to be sure that he will get the set off of tax paid to him. 8.10 VAT INVOIC E Invoice is a document listing goods sold with price, tax charged and other det ails as may be prescribed and issued by a dealer authorized under the Act. The w hole structure of the VAT with input tax credit is founded on the documentation of a tax invoice, a cash memo or a bill. The White Paper mainly provides for the following provisions, which are mandatory, and failure to comply with these att racts penalty: (i) Every registered dealer whose turnover of sales exceeds the s pecified amount shall issue to the purchaser a serially numbered tax invoice, ca sh memo or bill with the prescribed particulars. The tax invoice shall be dated and signed by the dealer or his regular employee, showing the required particula rs. (ii) (iii) The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. 8.10.1 Importance of VAT invoice (tax invoice) Invoices are crucial documents for administering VAT. In the absence of invoices VAT paid by the dealer earlier cannot be claimed as set off. Invoices should be preserved with full care. In case any original invoice is lost or misplaced, a duplicate authenticated copy must be obtained from the issuing dealer.

8.8 Service tax & VAT A VAT invoice: (i) (ii) helps in determining the input tax credit; prevents casc ading effect of taxes; (iii) facilitates multi-point taxation on the value addition; (iv) promotes assu rance of invoices; (v) assists in performing audit and investigation activities effectively; (vi) checks evasion of tax. 8.10.2 Contents of VAT invoice VAT legislations of all States provide for the contents of the tax invoice. By a nd large there would be no need for a separate tax invoice, a regular invoice ca n also be termed as tax invoice if it has the prescribed contents. Generally, th e various legislations provide that the tax invoice should have the following co ntents: (i) (ii) the words tax invoice in a prominent place; name and address of t he selling dealer; (iii) registration number of the selling dealer; (iv) name and address of the pu rchasing dealer; (v) registration number of the purchasing dealer (may not be re quired under all VAT legislations); (vi) pre-printed or self-generated serial nu mber; (vii) date of issue; (viii) description, quantity and value of goods sold; (ix) rate and amount of tax charged in respect of taxable goods; (x) signature of the selling dealer or his regular employee duly authorized by him for such pu rpose. 8.10.3 Other invoices Normally, a VAT dealer is expected to indicate the rate of tax and the amount of tax charged in the invoice issued. However, in cas e of small dealers or if the sale is to end consumer, other invoices are permitt ed without the details of tax. Such invoices should contain the following partic ulars: (i) (ii) name and address of the selling dealer; registration number of t he selling dealer; (iii) name and address of the purchasing dealer; (iv) registration number of the purchasing dealer;

Input Tax Credit (v) pre-printed or self generated serial number; (vi) date of i ssue; (vii) description, quantity and value of goods sold; (viii) signature of d ealer or his/her representative. 8.9

However, to ensure that the revenue legally due to the States is realized and re mitted, it is advisable that the invoice should contain the details of the rate of tax and the tax charged in an explicit manner. 8.10.4 Format of a tax invoice No prescribed statutory format is given for tax invoice in the White Paper or f or that matter in any State VAT Act. Only the contents of the tax invoice have b een prescribed. However, a standard format of the same may look like the one giv en below: TAX INVOICE ORIGINAL BUYERS COPY Sellers Name Address .. No. Description of Goods Tax Invoice No. . Date: Challan No. and date Buyers Name & A ess . Buyers VAT Registration No., if any . S No. Quantity Price per unit Value (Rs.) VAT Rate Tax Amt. Total (Rs) TOTAL Rupees in figures E & O.E Signature (of selling dealer or his authorized e mployee)

8.10 Service tax & VAT 8.10.5 Composition scheme The provisions relating to tax invoice do not apply to a selling dealer who has opted to avail the composition scheme under the respective State VAT laws. Thus, a composition scheme dealer ca nnot issue a tax invoice. Self-examination questions 1. 2. 3. 4. 5. 6. 7. 8. 9. Di fferentiate between input tax and output tax. Who can avail input tax credit? Ca n input tax credit be carried forward? Discuss. Enumerate the eligible purchases in respect of which input tax credit can be availed. Mention the purchases whic h are not eligible for input tax credit. How will the input tax credit be availe d when common inputs are used for taxable and tax-free good? Explain whether uni ts in SEZ and EOU units are required to pay input tax on purchases made by them? Can input tax credit be availed on capital goods? Explain Discuss the procedura l requirements to be fulfilled in order to claim input tax credit on capital goo ds. 10. Explain the provisions in respect of a tax invoice. 11. Enlist the various c ontents of the tax invoice. 12. Discuss the importance of a tax invoice.

9 SMALL DEALERS AND COMPOSITION SCHEME 9.1 PRINCIPLES LAID DOWN IN THE WHITE PAPER The relevant provisions provided in the White Paper in relation to composition s cheme read as under: "Small dealers with annual gross turnover not exceeding Rs. 50 lakhs who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover . The dealers opting for this composition scheme will not be entitled to input t ax credit." 9.2 THRESHOLD EXEMPTION LIMIT The White Paper, in order to provide relief to the small dealers, specifies that registration for VAT will not be compulsory for dealers below a threshold (Rs.5 lakhs) turnover, and there will be a provision of an optional and simple compos ite scheme of taxation of a small percentage of gross turnover. However, the Emp owered Committee of State Finance Ministers subsequently allowed the States to i ncrease the threshold limit for the small dealers to Rs.10 lakhs with the condit ion that the concerned State would bear the revenue loss on account of increase in the limit beyond Rs.5 lakhs. 9.3 STATE LAWS TO PROVIDE FOR COMPOSITION SCHEME The VAT Act is so designed that high value taxpayers should not be spared and th e small dealers should be free from hassles of compliance procedures. The States have to provide composition scheme for small dealers i.e. the dealer whose tota l turnover exceeds Rs.5 lakhs but does not exceed Rs.50 lakhs. Such a dealer wou ld have an option to pay a composite amount of tax based on its annual gross tur nover at the applicable rate

9.2 Service tax & VAT subject to such conditions as may be prescribed. However, in such cases a dealer shall not be entitled to input tax credit on inputs and shall not be authorized to issue vatable invoices. The Empowered Committee has permitted the States to reduce the rate of composition tax to as low as 0.25 %. The composition tax at t he rate decided by the State Governments can now be levied on the taxable turnov er instead of gross annual turnover. Besides this, the State Governments may als o provide for different types of composition schemes to be notified for differen t classes of retailers. 9.4 FEATURES OF COMPOSITION SCHEME The decision to join composition scheme will be an individual decision. This dec ision will depend on the fact as to how VAT affects the dealers business. The adv antage of this scheme is that it saves a lot of labour and effort in keeping rec ords. It also simplifies calculation of tax liability of a dealer. Such schemes generally have the following features: (i) a very small tax will be payable; (ii) there will be a simple return form to cover longer return period. The major disadvantage of this scheme is the ineligibility of the dealer to avail input t ax credit and issue tax invoices in order to pass on tax credit. Hence, the deal ers desirous of availing input tax credit on their purchases may not prefer to b uy from composition dealers. 9.5 ELIGIBILITY FOR THE COMPOSITION SCHEME Every registered dealer who is liable to pay tax under the respective State VAT Acts and whose turnover does not exceed Rs.50 lakhs in the last financial year i s generally entitled to avail this scheme. However, the following are not eligib le for the composition scheme: (i) a manufacturer or a dealer who sells goods in the course of inter-state trade or commerce; or (ii) a dealer who sells goods in the course of import into or export out of the territory of India. (iii) a dealer transferring goods outside the State otherwis e than by way of sale or for

Small Dealers and Composition Scheme execution of works contract. 9.6 EXERCISING OF OPTION 9.3 It is generally optional for a dealer to opt for this composition scheme. A deal er who intends to avail such composition scheme shall exercise the option in wri ting for a year or a part of the year in which he gets himself registered. For t his the dealer has to intimate to the Commissioner. If a dealer avails this sche me, he need not maintain any statutory records as prescribed under the Act. Only the records for purchase, sales, inventory should be maintained. However, if a dealer does not avail the scheme, he has to maintain the prescribed statutory re cords as per the respective State VAT Acts. The dealer should not have any stock of goods which were brought from outside the State on the day he exercises his option to pay tax by way of composition and shall not use any goods brought from outside the State after such date. The dealer should also not claim input tax c redit on the inventory available on the date on which he opts for composition sc heme. 9.7 9.7.1 VAT CHAIN UNDER COMPOSITION SCHEME Loss to the seller If the composition scheme is availed by a dealer then such dealer cannot avail i nput tax credit in respect of input tax paid. Hence the dealer will be loosing t he input tax credit on purchases made by him. He will not be able to pass on the benefit of input tax credit, which will add to the cost of the goods. 9.7.2 Los s to the purchaser The purchaser shall not get any tax credit for the purchases made by him from th e dealer operating under the composition scheme. Therefore, as soon as a dealer opts for the composition scheme, the VAT chain will be broken, and the benefit o f tax paid earlier will not be passed on to the subsequent buyers. Self-examinat ion questions 1. What do you understand by a composition scheme under VAT laws?

9.4 2. 3. 4. 5. Service tax & VAT What is the eligible turnover to avail the benefit of this sch eme? What are the special features of this scheme? Who is not entitled to the be nefits of the composition scheme? How does the composite scheme affect the VAT c hain?

10 VAT PROCEDURES 10.1 REGISTRATION Registration is the process of obtaining certificate of regist ration (RC) from the authorities under the VAT Acts. A dealer registered under t he VAT Acts is called a registered dealer. Any dealer, who intends to carry on t he business of purchase and sale of goods in the State and is liable to pay tax, cannot carry on the business unless he is registered and holds a valid registra tion certificate under the Act. 10.1.1 Eligibility for registration As per the p rovisions contained in the White Paper, registration of dealers with gross annua l turnover above Rs.5 lakh will be compulsory. There will be provision for volun tary registration. All existing dealers will be automatically registered under t he VAT Act. A new dealer will be allowed 30 days time from the date of liability to get registered. An application for registration should be made to the VAT Co mmissioner. The White Paper specifies that registration under the VAT Act will n ot be compulsory for the small dealers with gross annual turnover not exceeding Rs.5 lakhs. However, the Empowered Committee of State Finance Ministers subseque ntly allowed the States to increase the threshold limit for the small dealers to Rs.10 lakhs with the condition that the concerned State would bear the revenue loss, on account of increase in limit beyond Rs.5 lakhs. Generally, a dealer mea ns any person, who consequent to, or in connection with, or incidental to, or in the course of his business, buys or sells goods for a consideration or otherwis e. All sales or purchases of goods made within the State except the exempted goo ds would be subjected to VAT. 10.1.2 Compulsory registration If an assessee fail s to obtain registration under the VAT Act, he may be registered compulsorily by the Commissioner. The Commissioner may assess the tax due from such

10.2 Service tax & VAT person on the basis of evidence available with him. In th is event the assessee shall have to forthwith pay such amount of tax. Further, f ailure to get registered shall result in attracting default penalty and forfeitu re of eligibility to set off all input tax credit related to the period prior to the compulsory registration. 10.1.3 Voluntary registration A dealer otherwise n ot eligible for registration may also obtain registration if the Commissioner is satisfied that the business of the applicant requires registration. The Commiss ioner may also impose any terms or conditions that he thinks fit. 10.1.4 (i) Can cellation of registration The registration can be cancelled on: discontinuance o f business; or (ii) disposal of business; or (iii) transfer of business to a new location; or (iv) annual turnover of a manufacturer or a trader dealing in desi gnated goods or services falling below the specified amount. 10.2 TAX PAYERS IDEN TIFICATION NUMBER (TIN) TIN (Tax Payer s Identification Number) is a code to ide ntify a tax payer. It is the registration number of the dealer. The taxpayers ide ntification number will consist of 11 digit numerals throughout the country. Fir st two characters will represent the State code as used by the Union Ministry of Home Affairs. The set-up of the next nine characters will be, however, differen t in different States. TIN will facilitate computer applications, such as detect ing stop filers and delinquent accounts. TIN will help cross-check information o n tax payer compliance, for example, the selective cross-checking of sales and p urchases among VAT taxpayers. 10.3 RECORDS The following records should be maint ained under VAT system: (i) Purchase records (ii) sales records (iii) VAT accoun t (iv) separate record of any exempt sale Further, the following records should also be kept and produced to an officer: (i) copies of all invoices issued, in s erial number;

VAT Procedures 10.3 (ii) copies of all credit and debit notes issued, in chronol ogical order; (iii) all purchase invoices, copies of customs entries, receipts f or payment of customs duty or tax, and credit and debit notes received to be fil ed chronologically either by date of receipt or under each suppliers name; (iv) d etails of the amount of tax charged on each sale or purchase; (v) total of the o utput tax and the input tax in each period and a net total of the tax payable or the excess carried forward, as the case may be, at the end of each month; (vi) details of goods manufactured and delivered from the factory of the taxable pers on; (vii) details of each supply of goods from the business premises, unless suc h details are available at the time of supply in invoices issued at, or before, that time; Failure to keep these records may attract penalty. All such records s hould be preserved for the period specified in respective State provisions. 10.3 .1 No declaration forms Most of the declaration forms that existed before the in troduction of VAT have been dispensed with. Use of declaration forms is expected to be stopped completely. Lot of time and energy is wasted by the dealer in get ting declaration forms from the department. There is no provision for concession al sale under the VAT Acts since the provision for set off makes the input zerorated. Hence, there will be no need for declaration form. 10.4 RETURNS Under VAT laws there are simple forms of returns. Returns are to be filed monthly/ quarte rly/annually as per the provisions of the State Acts/Rules. Returns will be acco mpanied with the payment challans. Some States have devised return cum challans. In these cases the returns along with the payment can be filed with the treasur y. A registered dealer may be required to file a monthly/quarterly/annual return along with the requisite details such as output tax liability, value of input t ax credit, payment of VAT etc. Opportunity may be provided to lodge revised retu rns. Every return furnished shall be scrutinized expeditiously within the prescr ibed time limit from the date of filing the return. If any technical mistake is detected on scrutinizing, the dealer shall be required to pay the deficit approp riately. Return filing procedures under VAT laws are designed with the objective of: (i) reducing the compliance costs incurred by the businesses in completing and filing their returns; and

10.4 Service tax & VAT (ii) encouraging businesses to comply with their obligati ons to file returns and pay VAT through the application of penalties in case of late payment of VAT and late filling of returns; and (iii) ensuring the efficien t processing of the data included in the returns. 10.5 ASSESSMENT The basic simp lification of VAT is with reference to assessment. Under VAT system, there is no compulsory assessment at the end of each year. The VAT liability is selfassesse d by the dealer himself in terms of submission of returns upon setting off the t ax credit, return forms etc. The other procedures are also simple in all the Sta tes. Deemed assessment concept is a major feature of the VAT. If no specific not ice is issued proposing departmental audit of the books of account of the dealer within the time limit specified in the Act, the dealer will be deemed to have b een self-assessed on the basis of the returns submitted by him. VAT pre-supposes that all the dealers are honest. Scrutiny may be done in cases where a doubt ar ises of under-reporting of transaction or evasion of tax. Honest dealers will be protected and fictitious or dishonest would be penalized heavily. 10.5.1 System of cross checking In the VAT system more emphasis has been laid on self-assessm ent. Hence, a system of cross-checking is essential. Dealers may be asked to sub mit the list of sales or purchases above a certain monetary value or to give the dealer-wise list from whom or to whom the goods have been purchased/sold for va lues exceeding a prescribed monetary ceiling. A cross-checking computerized syst em is being worked out on the basis of coordination between the tax authorities of the State Governments and the authorities of Central Excise and Income-tax to compare constantly the tax returns and set-off documents of VAT system of the S tates and those of Central Excise and Income-tax. This comprehensive cross-check ing system will help reduce tax evasion and also lead to significant growth of t ax revenue. At the same time, by protecting the interests of taxcomplying dealer s against the unfair practices of tax-evaders, the system will also bring in mor e equal competition in the sphere of trade and industry. 10.6 AUDIT In the VAT s ystem considerable weightage is placed on audit work in place of routine assessm ent work. Correctness of self-assessment will be checked through a system of Dep artmental Audit. A certain percentage of the dealers will be taken up for audit every year on a scientific

VAT Procedures 10.5 basis. If, however, evasion is detected in the course of aud it, the previous records of the concerned dealer may be taken up for audit. Auth orized officers of the department will visit the business place of the dealer to conduct the audit. The auditors will examine the correctness of the returns vis -a-vis the books of account of the dealer or any other information available wit h them. They will be equipped with the information gathered from various agencie s such as suppliers, income tax department, excise and customs department, banks etc. Officers of the higher rank will supervise to ensure that the audit work i s done in a free, fearless and impartial manner. 10.6.1 Accounts to be audited i n certain cases Under the sales-tax laws, tax evasion is considered to be on a l arge scale. The sales-tax departments of various States have not been able to ef fectively check the menace of tax avoidance and tax evasion. Therefore, apart fr om the departmental audit many States have also incorporated the concept of audi t of accounts by chartered accountants. The State of Maharashtra has prescribed an elaborate list of particulars to be furnished by the dealers. These particula rs have to be verified by the VAT auditor. However, auditing for all types of de alers may not be necessary. The selection of cases for auditing has to be made i n accordance with the criteria of the size of dealers. In such a case, the retur ns supported by the audited statement can be accepted summarily. However, it mig ht indeed be useful to cull out a fixed proportion of large and medium sized dea lers for regular assessments on a regular basis. In Maharashtra and Rajasthan, t he dealer whose turnover exceeds Rs.40 lakhs in any year is required to get his accounts audited in respect of such year. 10.7 PENAL PROVISIONS Since VAT is pur ely a State subject, States will have incorporated penal provisions as per their requirements. However, these are in general more stringent than those in the ea rlier sales tax laws. Since, the State taxation laws have allowed certain additi onal benefits in the form of input tax credit, which was not available earlier, they have introduced more stringent penal provisions to discourage evasion of ta xes. 10.8 TAX RATES UNDER VAT Under the VAT system, there are only two basic VAT rates of 4% and 12.5% plus a specific category of tax-exempted goods and a spec ial VAT rate of 1 % for gold and silver ornaments, etc. Thus the multiplicity of rates in the sales-tax system has been done away with under the VAT system. 10. 8.1 Exempted category Under exempted category, there are about 50 commodities comprising of natural an d unprocessed products in unorganised sector, items which are legally barred fro m taxation

10.6 Service tax & VAT and items which have social implications. Included in thi s exempted category is a set of maximum of 10 commodities flexibly chosen by ind ividual States from a list of goods (finalised by the Empowered Committee) which are of local social importance for the individual States without having any int er-State implication. The rest of the commodities in the list will be common for all the States. 10.8.2 4% VAT category Under 4% VAT rate category, there are largest number of goods, common for all th e States, comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. The sc hedule of commodities are attached to the VAT Acts of the States. 10.8.3 12.5% c ategory The remaining commodities, common for all the States, fall under the general VAT rate of 12.5%. 10.8.4 1% Category The special rate of 1% is meant for precious stones, bullion, gold and silver or naments etc. 10.8.5 Non-VAT goods Petrol, diesel, ATF, other motor spirit, liquor and lottery tickets are kept out side VAT. The States may or may not bring these commodities under VAT laws. Howe ver, it is agreed that all these commodities will be subjected to 20% floor rate of tax. 10.9 MISCELLANEOUS 10.9.1 Coverage of goods under VAT In general, all the goods, including declared goods are covered under VAT and ge t the benefit of input tax credit. The few goods which are outside VAT are liquo r, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be t axed under the Sales-tax Act or any other State Act or even by making special pr ovisions in the VAT Act itself at uniform floor rates decided by the Empowered C ommittee. 10.9.2 Stock transfer Inter-State transfers do not involve sale and, t herefore they are not subjected to sales-tax. The same position continues under VAT.

VAT Procedures 10.7 However, the tax paid on: (i) inputs used in the manufacture of finished goods which are stock transferred; or (ii) purchases of goods which are stock transferred will be available as input t ax credit after retention of 4% of such tax by the State Governments. 10.9.3 Com pensation for losses Although the introduction of VAT may, after a few years, le ad to revenue growth, there may be a loss of revenue in some States in the initi al years of transition. Some of the State Governments were resistant to introduc e VAT account of this reason. The Government of India therefore agreed to compen sate for 100 per cent of the loss in the first year, 75 per cent of the loss in the second year and 50 per cent of the loss in the third year of introduction of VAT. The loss would be computed on the basis of an agreed formula. This positio n was not only reaffirmed by the Union Finance Minister in his Budget Speech of 2004-05, but a concrete formula for this compensation has also been worked out a fter interaction between the Union Finance Minister and the Empowered Committee. However, in the first year of introduction, only a few States have claimed such compensation. 10.9.4 Imports into the VAT chain Presently States do not have po wers to levy a tax on imports. It is also essential to bring imports into the VA T chain. This will need a constitutional amendment. Because of the availability of set-off, not only cascading effect would be reduced but tax compliance would also improve. The Empowered Committee is discussing this issue with the Governme nt of India. Self-examination questions 1. 2. 3. 4. 5. 6. 7. 8. What is the elig ible limit of turnover for registration under VAT laws? When can the registratio n be cancelled? Differentiate between voluntary and compulsory registration. Wri te a brief note on tax payers identification number. List the records to be maint ained under VAT system. Does VAT system require declaration forms? Discuss. What are the provisions in respect of returns under VAT Acts? Does VAT system recogn ize self-assessment? Discuss.

10.8 Service tax & VAT 9. What are the various types of audits prescribed under VATprovisions? 10. Briefly explain the system of cross checking under VAT laws.

11 VAT IN SPECIAL TRANSACTIONS 11.1 VAT AND SALES-TAX INCENTIVES Traditionally all the State Governments have b een using sales-tax incentives as an important developmental tool particularly, for industrial development of an area of the State which is undeveloped or under developed and where no one would like to set up an industry because of several d isadvantages such as lack of proper infrastructure, remoteness of the market, un willingness of the workers to work in the remote and isolated areas etc. The bas ic philosophy of the incentive schemes is that even if the State does not get re venue from sales tax, the taxpayer will contribute towards the development of th e undeveloped area of the State and get rewarded out of more realisation. Any fi scal exemption from tax or subsidy is against the principles of VAT as it breaks the VAT chain. VAT system works on the basis of tax credit passed at each stage of production and distribution through issuance of tax invoices. Dealers effect ing exempted sales are not allowed to avail input tax credit and they also canno t pass on the credit. Therefore, if a transaction in the VAT system passes throu gh an exempted dealer, credit earned from the first point of chain till such dea ler gets lost, thereby breaking the VAT chain. 11.1.1 Principles laid down in th e White Paper The White Paper on State-Level Value Added Tax provides that under the VAT system, the existing incentive schemes may be continued in the manner d eemed appropriate by the States after ensuring that VAT chain is not affected. T hus, at the national level, no common policy has been adopted regarding the trea tment of incentive schemes. This was due to the reason that different states hav e offered various kinds of incentives depending on the requirements and the loca l needs of the States and the relevant tax system in the State. The Empowered Co mmittee while allowing the States to decide their own policy for treatment of In centives had prescribed certain preconditions: (i) (ii) the quantum as well as t he time period allowed for availing the incentives should not be increased or ex tended. VAT chain should not be affected.

11.2 11.1.2 Service tax & VAT Different incentive schemes By and large the incentives are given in three modes as described below:(a) Exem ption from tax Under this mode incentives are given by way of exemption from tax . The eligible industry is not required to pay any sales tax on purchases of raw material as well as on sales of finished product. The advantage of this mode is that the unit is not required to pay any tax and thus its realisation improves. This brings it in a position to stand the competition. The amount of entitlemen t is to be availed within a specified period. The exemption so allowed, ceases e ither with the expiry of exemption period or the exemption amount whichever occu rs first. (b) Deferment of tax liability Under this mode eligible industry is at par with any other normal unit. It collects the tax on sale of finished goods a nd also pays the tax to its vendors on the purchase of raw materials etc. Howeve r, such eligible unit/industry is not required to pay the collected tax to the G overnment immediately. The tax liability is assessed by applying the normal prov isions. However, payment of tax to the Government is deferred for particular per iod. After that particular period, the liability is required to be paid in presc ribed instalments. (c) Remission of tax Under this mode an eligible industry is allowed to collect tax at an appropriate rate but is required to pay the same. T he unit is required to file periodical return and show the liability. After fili ng the return the department remits the tax liability in full. Thus, the liabili ty as per return is deemed to have been paid. The input tax paid on purchases by unit is being given as refund immediately after filing the return. not tax tax the The exemption mode will not be suitable for VAT regime as it would break the VAT chain. The dealers would not be able to issue tax invoices and pass on the cred it. However, under deferment and remission mode the VAT invoices showing VAT sep arately can be issued by the dealer, thereby resulting in continuance of VAT cha in. These modes of incentives, therefore appear to be much better option under V AT regime for exempted units as they fulfill the objective of grant of incentive s without breaking the VAT chain. 11.1.3 Consideration for schemes under VAT law s The States implementing VAT have taken a uniform decision to continue the ince ntives under VAT. However, some States have decided to continue exemption/deferm ent as per the earlier position while some have decided to change the exemption mode for availing incentives to the deferment mode. The broad principles, which have been considered by the States while framing various schemes, are: (i) The V AT chain should not be disturbed.

VAT in Special Transactions (ii) (iii) (iv) There should not be any further reve nue loss to the States. 11.3 The Department should be able to track the transactions and should ensure that t here is no evasion/avoidance of tax due to the policy. In addition, wherever exe mption/deferment as per old provision is continued additional issues considered are as under: (a) (b) the units enjoying exemption under the old law should not be put to disadvantageous position under the VAT system. the units who are purch asing inputs without payment of any tax should be allowed to enjoy the benefit u nder the new system also. 11.2 VAT AND WORKS CONTRACT The works contract is a deemed sale, which involves the transfer of property in goods (whether as goods or in some other form) invol ved in the execution of a works contract. Under State VAT laws works contract tr ansactions too shall be subjected to VAT within the purview of Entry 54 of the L ist II of the Seventh Schedule of the Constitution. Earlier the judicial decisio ns took a view that in the case of composite contracts involving sale of goods a nd execution of works, no sales tax could be levied at all. However, in order to make the law clear, the 46th amendment to the Constitution provided for the tax ation of transfer of materials used in the execution of a works contract as deem ed sale. Clause 29A was added to Article 366 of the Constitution of India to cov er transfer of property in goods involved in execution of works contract. 11.2.1 C onstitutional authority The power of the States to levy VAT on sales and purchas es of goods is derived from Entry 54 of List II (State List) of Schedule VII to the Constitution of India which reads as under: Entry 54. Taxes on the sale or pu rchase of goods other than newspapers, subject to the provisions of entry 92-A o f List I". Clause (29A) of the Article 366 of the Constitution defines the term "tax on sale or purchase of goods" as under: (29A) "tax on the sale or purchase of goods" includes(a) a tax on the transfer, otherwise than in pursuance of a co ntract, of property in any goods for cash, deferred payment or other valuable co nsideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

11.4 Service tax & VAT (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable con sideration; (e) a tax on the supply of goods by any unincorporated association o r body of persons to a member thereof for cash, deferred payment or other valuab le consideration; (f) a tax on the supply, by way of or as part of any service o r in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purch ase of those goods by the person to whom such transfer, delivery or supply is ma de. Thus, sub-clause (b) of clause (29A) of Article 366 provides for charging of tax on works contract. 11.2.2 Definition of works contract The Finance Act, 200 5 had inserted clause 2(ja) in the Central Sales-tax Act, 1956 which reads as un der: (ja) "works contract" means a contract for carrying out any work which, in cludes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commiss ioning of any movable or immovable property". Majority of the States have adopte d this definition for works contract in their VAT legislations. 11.2.3 Guideline s to ascertain works contract To ascertain whether a transaction is a works cont ract as contemplated in Article 366 (29A)(b), the following points should be kep t in mind: 1. 2. 3. 4. 5. 6. 7. There must exist an individual works contract; d ivisible contracts are out side the scope. Goods must be involved in the executi on of the works. Transfer of property in goods does qualify as works contract wh en it is incorporated in the works. Transfer of property in goods must pass as g oods or in some other form. Form of goods has no relevance (may have a relevance for determination of rate of tax). Property in goods must pass during the execu tion of works not before or after the execution of works. Some work has to be do ne on the property of the contractee by the contractor. In the works contract, t ransfer of property must be an integral part of its execution. Pure labour contr acts or service contracts are out side the purview of the sales tax/VAT law.

VAT in Special Transactions 8. 9. 11.5 If during the execution of works contract goods are consumed and their identity is lost then no transfer of property occurs in those goods. There must be a domi nant intention to effect the transfer of property in goods in execution of works contract. However, even if the dominant intention of the contract is rendering of a service, and in that process if there is a transfer of property in goods, t he contract will amount to a works contract. Taxable turnover for works contract 11.2.4 The entire contract price cannot be subjected to VAT but only value of the goods in which the property would pass during execution of works contract can be taxe d. Therefore, turnover for imposition of VAT in relation to the transfer of prop erty in goods (whether as goods or in some other form) involved in execution of a works contract, shall mean sale price of goods in which there is transfer of p roperty. The amount representing labour and other service charges incurred for s uch execution should be excluded. Where such labour and other service charges ar e not quantifiable, the sale price shall be the cost of acquisition of the goods and the margin of profit on them prevalent in the trade plus the cost of transf erring the property in the goods and all other expenses in relation thereto till the property in them, whether as such or in any other form, passes to the contr actee and where the property passes in a different form, the sale price shall in clude the cost of conversion. 11.2.5 Tax rates The principle schemes of levy of sales tax on works contracts have been retained in the VAT regime as well. The V AT legislations provide the following two broad schemes for levy of VAT on trans fer of property involved in the execution of the works contract: (a) Schedule Ra te As a basic feature, tax is chargeable on the transfer of property in the good s involved in the execution of a works contract at the rates prescribed for the concerned goods in the schedules of the concerned State VAT legislation. Where t he value of each item of material transferred in the course of execution of a wo rks contract is identifiable, tax is charged on the value of individual items of materials as provided under the schedules to the concerned State VAT legislatio n. On inputs the contractor is entitled to avail input tax credit. (b) Compositi on Rate The VAT Legislations have provided for composition rates to be applied o n the entire contract value of the works contract. In such cases, generally the contractor is not entitled to avail of input tax credit on goods procured from w ithin the State. However, in some States (e.g. Maharashtra) partial input tax cr edit is granted.

11.6 11.2.6 Service tax & VAT Composition scheme Under works contract the scheme of composition is a mechanism provided to collec t the tax in a simple manner. The object of such a mechanism is to minimise the inconvenience caused to the assessees and also to the department in computing th e figures. However, it must be noted that in the composition scheme input tax cr edit is not allowed. Provisions for compounding levy are only enabling provision s where an option is given to the assessee either to opt for composition or to f ile the returns. Therefore, before opting for the composition scheme the contrac tor must analyse the expenditure components like labour charges, hire charges fo r machinery and tools, cost of consumables, cost of establishment, profit elemen t, value of local tax-suffered goods, turnover of sub-contractors, value of exem pted goods etc. because all these are included in the total contract value which is subjected to composition fee. Since the composition amount is worked out on the basis of the total value of the contract, whether composition scheme is to b e preferred or not depends upon the nature and scope of the contract. The compos ition scheme has both merits and demerits, so before opting for this scheme the contractor should see whether it is economical for him or not. 11.2.7 Input tax credit on capital goods Several kinds of works contracts do not involve any manu facturing or processing of goods e.g. contracts for construction of roads, bridg es, etc., and yet we find that capital goods of substantial amount are used in t he execution of such contracts. Majority of the VAT legislations provide for ava iling of input tax credit on capital goods only where such goods are used in man ufacturing or processing of goods. 11.3 VAT AND LEASE TRANSACTIONS A lease is a special type of transaction, under which a party owning the asset (called the l essor ) provides that asset for use over a certain period of time to another par ty (called the lessee ) for consideration (called rentals ). The legal ownersh ip of the asset remains with the lessor, but the lessee retains the possession a nd uses the asset over the period of the lease. Therefore, the characteristics o f a lease are: (a) there must be a lessor and a lessee both competent to contrac t; (b) there must be an asset to be leased; (c) actual possession and control on the asset must be transferred; (d) there must be an acceptance of the lease pro perty; (e) there must be transfer of right of enjoyment by the lessor to the les see; (f) there must be a consideration.

VAT in Special Transactions 11.3.1 Lease as per AS 19 11.7 Accounting Standard (AS 19) issued by the Institute of Chartered Accountants of India defines lease as an agreement whereby the lessor conveys to the lessee in r eturn for a payment or series of payments the right to use an asset for an agree d period of time. Generally, there are two different types of leases: Finance lea se : Here the lessor provides finance to the lessee for the purchase of necessar y equipments. Machinery and tools, intended to be purchased are purchased in the name of the lessor, but the right to select the assets rests with the lessee. L essors interest in the equipment is that of ownership and the rent received or re ceivable against such lease. After the end of lease period the lessee has an opt ion to purchase the leased asset. As per the Accounting Standard (AS 19) on leas es issued by the ICAI, a finance lease is a lease that transfers substantially a ll the risks and rewards incident to the ownership of an asset. Operating lease : Here the lessor selects the machinery and equipment required to be purchased a nd then leases out the same to the customer. The ownership is retained by the le ssor but the use of the assets by the lessee is made for a limited period of tim e. The AS 19 on Leases defines an operating lease as a lease other than a financ e lease. 11.3.2 Constitutional authority Lease is chargeable to tax by virtue of sub-clause (d) of clause (29A) of Article 366 of the Constitution of India (ref er clause (29A) in para 11.2.1). Sub-clause (d) provides that tax on sale or pur chase includes a tax on the transfer of the right to use any goods for any purpos e (whether or not for a specified period) for cash, deferred payment or other va luable consideration. In common parlance, these transactions are known as lease o f goods and are also referred to as "deemed sales". The tax on these sales is re ferred to as "lease tax". Such transfer of right to use the goods could be for a ny purpose and the period may or may not be fixed. 11.3.3 Taxable event Taxable event is the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable conside ration. Thus, a transfer which is gratuitous is not taxable. Also, transfer of t he right to use immovable property, like renting a house or factory is not taxab le. 11.3.4 Taxable turnover Normally, the sale price means the amount of valuabl e consideration paid or payable for any sale made during the given period. It al so includes some other charges before delivery thereof. However, certain States have provided for the deduction of interest or finance charges for the purpose o f determination of sale price/taxable turnover.

11.8 11.3.5 Service tax & VAT Inter-state leasing Lease of an asset that is in the course of inter-State or import trade cannot be taxed under a State VAT law. It can be taxed under the Central Sales-tax Act, 1 956. As the definition of "sale" in the Central Sales-tax Act, 1956 has been ame nded to cover deemed sale, therefore deemed sales in the course of inter-State tra de will attract tax under the Central Sales Tax Act. 11.3.6 Sub-lease Transfer o f the right to use goods does not require that the goods should be owned by the person effecting such transfer. Accordingly, sub-lease of an asset too can be ta xed, unless the State Value Added Tax law has provided for the levy of tax only at one stage. 11.3.7 Sale of leased asset after lease period Sale of a leased as set after the lease period is over is taxable in the same manner in which normal sale of such asset would have been taxed. Normally, such sale is effected to th e same lessee and hence such sale would be a local one exigible to tax under the VAT laws of the State in which the asset is located. 11.3.8 Maintenance of leas ed asset The maintenance of the leased asset involving supply of materials for m aintenance/repair by the lessor would not amount to works contract, as there wou ld be no transfer of property in such materials to the lessee. Thus, there would be no VAT on the value of the materials supplied during maintenance/repair of t he asset. In case of computers, generally the lessor undertakes the maintenance and repair of the leased computers. However, the materials required during such maintenance /repair would be input for sale and input tax credit will be availab le. 11.3.9 Input tax credit (a) Input tax credit allowed on purchase of the leas ed asset Under the VAT legislations tax is to be charged on each stage of sale w ith the availing of input tax credit of the tax charged on the earlier stages. T he tenure of the lease agreements is generally spread over a long period of time and lease rentals are collected over such lease periods. The lessor would pay V AT at the time of procurement of goods. However, liability to pay VAT on lease r entals will be spread over the tenure of the lease. Therefore, some States have provided for utilization of input credit for paying output tax only over the ent ire period of lease. This would result in accumulation of input tax credit in th e hands of the lessor for a long period of time. Since the tax would eventually be payable by the lessor, he may opt to carry forward the excess input tax credi t instead of claiming a refund from the tax authorities. Consequently, the lesso r would have to manage his working capital in order to ensure that

VAT in Special Transactions 11.9 carrying of excess input tax credit does not affect his business adversely. Howe ver, States like Maharashtra have provided for immediate utilization of such inp ut tax credit against payment of any tax. (b) Input tax credit as capital goods The assets given on lease will be generally capitalized by the lessor in his boo ks and will be treated as capital assets. Thus, provision relating to input tax credit on capital goods will apply, e.g. if VAT law provides to give input tax c redit on capital goods in 36 months then irrespective of period of lease, input tax credit will be available only for 36 months. 11.3.10 On going leases In case of the lease agreements entered prior to the introduction of VAT, the lessor wo uld have paid sales tax at the time of procuring the goods. Further, if the leas e agreement related to first point goods, the lessor would not have been require d to pay any tax on the lease rentals received by him in the sales tax regime. H owever, in the VAT regime, the lessor would be required to pay tax on the lease rentals received post introduction of VAT with availability of input tax credit of sales tax paid at the time of procurement of such goods. The availing of inpu t tax credit would be subject to the provisions of the concerned VAT legislation s. 11.4 VAT AND HIRE-PURCHASE TRANSACTIONS Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goo ds on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hir er acquires the property (goods) immediately on signing the hire purchase agreem ent but the ownership or title of the same is transferred only when the last ins talment is paid. The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance w ith the terms of the agreement and includes an agreement under which: (i) (ii) T he owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic instalments. The property in the good s is to pass to such person on the payment of the last of such instalments, and (iii) Such person has a right to terminate the agreement at any time before the property so passes. Hire purchase should be distinguished from instalment sale wh erein property passes to the purchaser with the payment of the first instalment. However, in case of hire purchase

11.10 Service tax & VAT (ownership remains with the seller until the last instal ment is paid) buyer gets ownership after paying the last instalment. 11.4.1 Cons titutional authority Sub-clause (c) of clause (29A) of Article 366 of the Consti tution of India provides for "a tax on the delivery of goods on hire-purchase or any system of payment by installments." By virtue of this sub-clause, State leg islations have been able to deem that a sale takes place on the date of delivery of the goods on hire purchase notwithstanding the fact that the option to purch ase is exercised only at the end when the title of the goods as per the terms st ands transferred from the dealer to the hirer. Pure financial transactions The t ransactions which are purely of a financial nature between the financier and the hirer are not covered by sub-clause (c) of clause (29A) of Article 366. The Sup reme Court in the case of Sundaram Finance Ltd. vs State of Kerala (17 STC 489) held that in the given case the transaction though termed as hire purchase was m erely a financial transaction involving no sale. In this case, Sundaram Finance Limited was carrying on the business of financing. The customer who purchased mo tor vehicles from the dealer directly, applied to the company for a loan, which was paid by the company directly to the dealer The company as a security for rep ayment got executed a promissory note, a sale letter, receipt for the amount pai d, an undertaking to keep the vehicle insured and a agreement called hire purch ase agreement in which the company was shown as "owner" to let the vehicle to t he customer as "hirer." On interpretation of the total documents, the Supreme Co urt held that intention of the company in obtaining hire purchase and other agre ement was to secure return of loan advanced to the customer and there was no rea l sale of vehicle intended to the customer by the company. The Court therefore h eld that there was no sale of the vehicle by Sundaram Finance Ltd. to the hirer and so it was outside the purview of sales-tax law. 11.4.2 Physical delivery Del ivery of goods under hire-purchase or installment sale has to be a physical or a ctual delivery of goods in contradistinction to constructive or symbolic deliver y of goods as the goods are intended to be delivered for use by the hirer/custom er. Consequently, the taxable event takes place in the State in which the goods are actually delivered and hence subject to tax under the VAT law of such State. However, if there is movement of goods from one State to another in pursuance o f a contract the position may change. In such a case, it would be an inter-State sale and tax should be imposed under the Central Sale-tax Act 1956. Under VAT l aws of different States hire-purchase and installment sales are at par with norm al sales and hence the provisions of the State VAT laws as applicable to normal sales are equally applicable to hire-purchase and installment sales.

VAT in Special Transactions 11.11 It may be noted here that in such transactions the word purchase is of primary significance while hire is an adjunct. In a contract of hire-purchase the contract is for purchase with the attributes o f hire and not hire with the attributes of a purchase. As a corollary of it, the hirer or the customer under the installment sale effects deemed purchase of the goods delivered to him in respect of which he can claim the same concessions as the dealer effecting normal purchase of the goods. 11.4.3 Taxable event The def inition of sale under value added tax laws of various States provides that the t axable event will be the delivery of goods on hire purchase or any system of pay ment by installments. It is implicit that such transaction should be for monetar y consideration. In the case of hire-purchase, property passes in the goods when the hirer exercises his option to purchase the goods subject to the fulfillment of the terms of the agreement and then the transaction fructifies into a conclu ded (normal) sale. In the case of delivery of goods on a system of payment by in stallments, property in the goods passes only where all the installments are pai d, which the customer is under an obligation to pay. Such a sale is called an i nstallment sale . Such a transaction is distinct from a credit sale of goods as in the credit sale, the property in the goods immediately passes on delivery of the goods and the buyer is allowed to pay the price by installment or otherwise. The basic difference in taxation of hire-purchase transaction is that the taxab le event has been made the delivery of the goods and not the completed sale on p ayment of the last installment. 11.4.4 Point of tax A debatable question which a rises is whether in case of hire-purchase or installment sale VAT will have to b e paid again at the time when transaction fructifies into a concluded sale, insp ite of tax having been deposited on installment (payable as and when due, whethe r or not recovered). Answer to this problem depends mostly upon the provisions o f the VAT laws of the States in which the goods are located when the transaction fructifies into a concluded sale. One view is that when the transaction fructif ies into a concluded sale, tax will not be payable as tax has already been paid on installment. However the other view is that, earlier tax was a tax on deliver y of the goods on hire-purchase or installment. Therefore, at that time only the consideration received for hire-purchase or installment was taxed and the consi deration receivable at the time of concluded sale does not get taxed. Hence, tax is payable again on the fructified sale on the depreciated value of the asset o r its market value. The second view appears to be logical. However, if no consid eration is payable on fructified sale then tax is not attracted.

11.12 Service tax & VAT 11.4.5 Input tax credit The hire purchase transaction is at par with normal sale transaction. Therefore normal provisions relating to input tax credit will apply. However, some States have provided for prorata credit. 11.4.6 Finance charges/interest It is common k nowledge that the installment fixed for payment in the case of a hire-purchase a rrangement involves an element of interest or finance charges in addition to the price of the goods sold. While some of the State VAT legislations have provided for deduction of such interest or finance charges in arriving at the sale price to be treated as turnover in a hire purchase transaction, some States have not done so. 11.4.7 Goods returned The VAT is payable on the date of delivery of the goods. If for any reason the goods are returned, then refund of tax will have t o be claimed as per the provisions of respective State VAT laws. Many States pro vide the time limit for granting the claim of goods returned. Therefore, if the goods are not returned during that specified period, no benefit will be availabl e. 11.4.8 Unpaid installments/ forfeited installments If for any reason, the tra nsaction of hire purchase fails, then the vendor takes possession of the goods. In substance, this is a sales return. Thus, the provisions of local VAT Act rela ting to sales return will apply. Normally in such cases the installment received for the intervening period are forfeited. Self-examination questions 1. 2. 3. E xplain how sales tax incentives cause problems for VAT system? What are the diff erent incentive schemes? Explain. Does the White Paper provide any guideline in respect of sales-tax incentives? If yes, then explain the guideline. 4. Describe the broad principles considered by the States while framing various sales-tax i ncentive schemes in VAT regime. 5. What is a works contract? Is it a sale? Expla in with reference to the constitutional authority providing for the same. 6. Enl ist the guidelines to ascertain whether a transaction is a works contract. 7. Wh at is the taxable turnover for works contract? Also mention the types of tax rat es specified under various VAT laws. 8. What is a lease? Is it liable to tax und er VAT laws? Explain. 9. How can the input tax credit be claimed in case of leas e transactions? 10. Explain the concept of hire-purchase transactions. Comment u pon their exigibility to VAT.

12 VAT AND CENTRAL SALES-TAX 12.1 CENTRAL SALES TAX India has a federal structure and the present State-Level value added tax is designed on individual State basis i.e. each State will impo se value added tax on the sale/purchase transactions taking place within the Sta te. So far as the trade between various States of India is concerned, the same h as been governed by the Central Sales-tax (CST) Act, 1956 which is administered by the State sales-tax departments and the revenue is retained by the State Gove rnments. The Central Sales Tax Act, 1956 is an Act of the Parliament to formulat e the principles for determining when sale or purchase of goods takes place in t he course of inter-State trade or commerce. It provides for levy and collection of tax on such inter-State sales of goods. It also formulates principles for det ermining when a sales or purchase of goods takes place outside a State or in the course of import into or export from India. It also specifies and declares cert ain goods to be of special importance in inter-State trade and commerce and spec ifies in relation to them the restrictions and conditions to which the State sal es tax laws shall be subject. A dealer, registered under CST Act, effecting an i nter-State-purchase of goods, either for resale, or for use in manufacture or pr ocessing of goods, or for mining, or for use in generation and distribution of p ower or for use in packing for sale/resale can issue form C for availing of the benefit of purchasing at a concession rate (4%) of tax. This form is obtained by the purchasing registered dealer from the concerned sales tax officer. 12.2 CST LEADS TO CASCADING OF TAXES India has a purely unbalanced State wise economy as only some of the States are manufacturing States while majority of them are con sumer states. Manufacturing States generate considerable revenues from CST. A lo t of goods come into the consuming States with CST imposed on them. When these g oods are resold in these States, the tax liability of non-manufacturing States b ecomes

12.2 Service tax & VAT very high on account of VAT and CST. For example, States that do not produce plastic granules (raw material) have to pay 4% CST (against C Form) on import of plastic granules and on value-addition (finished products) it attracts 12.5% tax, the set-off of tax being nil as CST is not vatable (the con cept of CST being non-vatable is explained in para 12.3). Thus, the total tax li ability is 16.5% but the States where the raw material (plastic granules) is ava ilable the total tax liability would be only 12.5%. This shows that VAT with CST leads to cascading effect. Trade will be uncompetitive for the States that are net importers, because in those States consumer prices will be high, while the v ery objective of the VAT system is the lowering of prices for the consumers. Sin ce, CST is an origin-based tax collected by the exporting State whereas VAT is a destination based consumption tax, both cannot go together. 12.3 CST IS NOT VAT ABLE The inter-state purchases liable to CST are not eligible for input tax credit. H owever, the liability for CST can be set off against the input tax credit earned on other eligible purchases. Let us try to understand this with the help of an example and see why CST is not vatable. A dealer of Karnataka purchases goods fr om another dealer of Maharashtra. The Maharashtra dealer charges CST @ 4% on thi s sale against the C-form produced by the dealer of Karnataka. The tax is deposi ted in the treasury of Maharashtra and thus forms part of Maharashtras revenue. T hough its name is central sales tax but the Central Government does not get any part of this revenue and it is totally a revenue receipt of the selling state. T he Karnataka dealer later sells these goods in the State of Karnataka to any oth er dealer or consumer and collects VAT on the same. Now the question arises whet her the Karnataka dealer can claim input tax credit of the CST paid by him again st his VAT liability. The answer is no as Karnataka (purchasing State) would not allow set off of a tax paid in Maharashtra (another State) against the tax levi ed by it as it would result in revenue loss for the Karnataka (purchasing State) . This is the main reason why CST is not vatable or why it cannot be made vatabl e. However, when liability of CST arises on a inter-state sale, the input tax cr edit can be used for set off as the revenue in this case the revenue does not go to any other State. 12.4 CST AFTER INTRODUCTION OF VAT As per the national cons ensus, the inter-State transactions of purchase and sale will continue to be gov erned by the CST Act at least for some time till the State-Level Value Added Tax is settled and an alternative system as envisaged in the White Paper is impleme nted.

VAT and Central-Sales Tax 12.3 A decision has been taken by the Empowered Commit tee for duly phasing out of interState sales-tax or CST. The White Paper in this regard states that: "There is also a need, after introduction of VAT, for phasi ng out of CST. However, the States are now collecting nearly Rs.15,000 crores ev ery year from CST. There is accordingly a need for compensation from the Governm ent of India for this loss of revenue as CST is phased out. Moreover, while CST is phased out, there is also a critical need for putting in place a regulatory f rame-work in terms of Taxation Information Exchange System to give a comprehensi ve picture of inter-State trade of all commodities. As already mentioned, this p rocess of setting up of Taxation Information Exchange System has already been st arted by the Empowered Committee, and is expected to be completed within one yea r. The position regarding CST will be reviewed by the Empowered Committee during 2005-06, and suitable decision on the phasing out of CST will be taken." The VA T Panel has taken a view that the phase-out would begin from April 1, 2007, with a reduction in CST ceiling rate from 4% to 2% per cent. The VAT Panel had earli er announced that the CST phase out would begin from October 1, 2006 with a redu ction in ceiling rate from 4% to 3%, followed by 3% to 2% on April 1, 2007, then a review by December 2007, reduction from 2% to 1% in April 2008 and then from 1% to 0 in the subsequent year. The move to defer the phase out came in the wake of lack of "convergence" between the States and the Centre over the elements of the compensation package for CST phase out. The CST phase-out would exactly be the same as the previously planned schedule except that the six-month reduction from 4% to 3% (from October 1, 2006 to March 31, 2007) would not take place. Aft er reducing the rate from 4% to 2%, the review would happen as planned by Decemb er 2007. 12.5 AMENDMENTS IN CST ACT TO FACILITATE INTRODUCTION OF VAT 12.5.1 Ame ndment in section 15 Finance Act, 2002 had amended section 15(a) of the CST so a s to empower States to impose tax at more than one stage in respect of declared goods defined under section 14 of the CST Act. This amendment is basically in re sponse to the suggestions of the Empowered Committee on VAT asking for amendment in the CST Act so as to facilitate smooth introduction of VAT. It is hoped that CST rate for sale against C form would be gradually reduced from 4% to 0%. On ce it becomes so, sales-tax will be levied only by the destination State. 12.5.2 Amendment in section 8 Finance Act, 2003 has amended section 8(1) of the CST Ac t, to provide that with effect from the date to be notified by the Central Gover nment in the Official Gazette, the rate of

12.4 Service tax & VAT tax payable by a dealer shall be 2% of his turnover or th e State sales tax rate, or as the case may be, the rate applicable under any ena ctment of that State imposing value added tax, whichever is lower. However no no tification has yet been issued to make the 2% rate effective. Self-examination q uestions 1. 2. 3. 4. 5. What is central sales tax? On which kind of sale is it l evied? Explain with the help of an example why CST is not vatable. Discuss the a mendments made in the CST Act in order to ensure smooth introduction of VAT. Exp lain how the CST in the VAT regime leads to cascading effect of taxes. Briefly e xplain the policy laid down in the White Paper regarding the phasing out of the CST.

SECTION C CUSTOMS

1 BASIC CONCEPTS 1.1 INTRODUCTION In a general sense, tax is any contribution imposed by the Government upon indiv iduals, for the use and service of the State, whether under the name of toll, to llgate, tribute, gabel, impost, duty, customs, excise, subsidy, aid, supply or o ther name. The power of taxation is used not only for raising revenue but also t o regulate economy, to encourage or discourage a situation which calls for impor t or/and export of goods. Taxation is also resorted to achieve the social object ives of the state. Basically taxes can be classified as direct taxes and indirec t taxes. The basic distinction between Direct taxes and Indirect taxes is that w hereas the former is meant to be borne by the persons on whom it is levied, the latter is expected to be passed on to the buyer and thus an indirect levy on the person paying the tax. One of the forms of tax is referred to as duty. Though the re appears to be no difference between a tax and a duty, a subtle distinction ca n be made in the fact that the latter as opposed to the former is paid before th e act permitted under the law is carried out or performed. For instance, Customs duty is paid before the goods are cleared whereas income-tax is paid subsequent to the taxable event, which is earning of income. Customs is a form of indirect tax. Standard English dictionary defines the term Customs as duties imposed on im ported or less commonly exported goods. This term is usually applied to those ta xes which are payable upon goods or merchandise imported or exported. The term Cu stoms derives its colour and essence from the term Custom, which means a habitual p ractice or course of action that characteristically is repeated in like circumst ances. Duties on import and export of goods have been levied from time immemoria l by all the countries. In the times, when the predominant system of governance was monarchy, it was customary for a trader bringing the goods to a particular k ingdom to offer certain offerings as gifts to the King for allowing him to sell his goods in that kingdom. Over a period of time, the system of governance took a paradigm shift from monarchy in favour of democracy. The Constitution forms th e base upon which the system of democracy works on. The taxes are levied, impose d and collected under express powers derived from statutes. These statutes have the legal backing, which is necessary for their enforcement and these statutes a nd Acts are passed by the legislature under the powers conferred upon it by the Constitution.

1.2 Customs In India, the Customs Act was passed and promulgated by the Parliament in the ye ar 1962 which replaced the erstwhile Sea Customs Act, 1878. Further, The Customs Tariff Act was passed in the year 1975 to replace the Indian Tariff Act, 1934. The Customs Tariff Act was amended in the year 1985 to move in times with and to deal with the complexities resulting from the rapid development in science and technology and consequent industrial development and expansion of manufacturing and trading activities. The Customs Act as it stands now, consolidates the entir e law on the subject of import and export duties, which were earlier contained i n various enactments like the Sea Customs Act, 1878, In-land Bounded Warehousing Act, 1896 and Land Customs Act, 1924. Thus now the Act stands as a complete cod e in itself as to the levy and collection of duties on import and export of good s. 1.2 CONSTITUTIONAL PROVISIONS All the enactments enacted by the Parliament should have its source in the Const itution of India. The power for enacting the laws is conferred on the Parliament and on the legislature of a State by Article 245 of the Constitution. The said Article states: Subject to the provisions of this Constitution, Parliament may m ake laws for the whole or any part of the territory of India, and the legislatur e of a State may make laws for the whole or any part of the state. No law made b y the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. Article 246 governs the subject matter of the laws made by the Parliament and by the legislature of states. The matters are listed in the seventh schedule to the Constitution. The seventh schedule is classified into three lists as follows: List I [referred as Union List]: This list enumerat es the matters in respect of which the Parliament has an exclusive right to make laws. List II [referred as State List]: This list enumerates the matters in res pect of which the legislature of any state has an exclusive right to make laws. List III [referred as the concurrent list]: This list enumerates the matters in respect of which both the Parliament and, subject to List I, legislature of any state, have powers to make laws. Parliament has a further power to make any law for any part of India not comprised in a state, notwithstanding that such matter is included in the state list. Some of the relevant entries in the lists referr ed to above are; Union List Entry No. Subject matter 82 83 84 Taxes on income ot her than agricultural income Duties of Customs including Export duties Duties of excise on tobacco and other goods manufactured or produced in India, except: (a ) alcoholic liquors for human consumption

Basic Concepts 1.3 (b) opium, Indian hemp and other narcotic drugs and narcotics; but including, me dicinal and toilet preparations containing alchohol, or any substance stated bef ore. 92A Taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter State Trade or Commerce. Co ncurrent List Entry No. Subject matter 35 44 Mechanically propelled vehicles inc luding the principles on which taxes on such vehicles are to be levied. Stamp du ties other than duties or fees collected by means of judicial stamps, but not in cluding rates of stamp duty. The Parliament is authorised by virtue of Article 271 to increase any of the tax es or duties by imposing a surcharge and the amount collected as such shall form part of the Consolidated Fund of India. 1.3 AN OVERVIEW OF THE CUSTOMS ACT, 196 2 The entire gamut of the Act is grouped into seventeen chapters. The following ta ble presents an overview of the said chapters and aims at securing the readers un derstanding of the provisions of the Act in a proper perspective. Ch. No. I II I II IV IVA Ch. Heading Preliminary Officers of Customs Customs Airports Prohibiti on Detection and prevention of illegally imported goods Detection and prevention of illegal export of goods Exemption from Ch. IVA and Ch. IVB Levy and exemptio n of Customs duty ports and Sections 1&2 3 to 6 7 to 10 11 11A to 11G Content Sh ort title and definitions Classes, appointment and powers of the customs officer s. Appointment of ports, Airports, landing stations and customs area Power and c overage of prohibition. Notified goods, storage, sale, transportation etc. Notif ied goods, transportation etc. control over accounting, storage, IVB IVC V 11H to 11K 11N 12 to 28B Central Governments power to grant exemption. Dutiable goods, valuation, rate of duty, assessment, remission,

1.4 Customs exemption, interest on delayed payments. VA VB VI Amount of duty in the price of goods Advance rulings Control over conveyances ca rrying import or export goods 28C & 28D 28E to 28M 29 to 43 Price of goods and passing of incidence of duty Authority, application, procedur e, applicability and powers. Arrival/departure reports, Import/Export general ma nifest, entry inwards, place time and restrictions on loading/unloading, water b orne goods etc. Bill of entry, shipping bill, clearance for home consumption/war ehousing, storage of goods, Transit and procedures transhipment VII Clearance of goods 44 to 51 VIII IX Goods in transit Warehousing 52 to 56 57 to 73 Appointment & licensing of warehouse, bonding of goods, period of warehousing, p ayment of rent and charges, clearance of warehoused goods, allowance for volatil e goods Drawback allowable, regulation allowable, Interest prohibition and X Drawback 74 to 76 XA Special Provisions relating to Special Economic Zone Special provisions relating to baggage, posts and stores Coastal goods and coastal vessels Search, Seizure and Arrest 76A to 76N Notification of SEZ, admission of goods, exemptions, levy of duty and removal of goods etc. Declaration, valuation, procedures rate of duty exemption and and XI 77 to 90 XII 91 to 99 Entry, restrictions, clearance, loading and unloading and application. Powers an d procedures of search, seizure and arrest.

XIII 100 to 110

Basic Concepts XIV Confiscation and penalties 111 to 127 1.5 Powers and procedures for confiscation and for levy and collection of penalties. Application for settlement, procedure, powers of settlement commission, inspect ion etc. Procedure and time limits for appeals and revisions Cognizable offences procedures for prosecution. and XIVA Settlement of cases 127A to 127N XV XVI XVII Appeals and revision Offences and prosecution Miscellaneous 128 to 131C 132 to 140A 141 to 161 Recovery of sums due, power to take samples, licensing of custom house agents, l iability of principal and agent, delegation of powers, General power to make rul es etc. 1.4 SOME IMPORTANT DEFINITIONS 1.4.1 Assessment: [Sec 2(2)]: The term is defined to include provisional assessm ent, reassessment and any order of assessment in which the duty assessed is nil. Assessment is the name given to the process of determining the tax liability in accordance with the provisions of the Act. 1.4.2 Conveyance: [Sec 2(9)]: The te rm is defined to include a vessel, an aircraft and a vehicle. As the Customs Act seeks to consolidate the laws relating to levy of duties on import and export o f goods, it is necessary to cover all the modes of transport. Therefore, the Act uses the term conveyance with an inclusive definition covering all the 3 modes of transport i.e., water, air and land. The specific terms are: vessel (by sea), aircraft (by air) and vehicle (by land). 1.4.3 Dutiable goods: [Sec 2(14)]: The term is defined to mean any goods which are chargeable to duty and on which dut y has not been paid. In order to be dutiable, any article should be within the a mbit of the word goods as defined under sec 2(22) and should find a mention in t he Customs Tariff. 1.4.4 Export: [Sec 2(18)]: The term with its grammatical vari ations and cognate expressions is defined to mean taking out of India to a place outside India. 1.4.5 Export goods: [Sec 2(19)]: The term is defined to mean any goods, which are to be taken out of India to a place outside India. 1.4.6 Forei gn going vessel or aircraft: [Sec 2(21)]: The term is defined to mean any vessel or aircraft for the time being engaged in the carriage of goods or passengers b etween any port or airport in India and any port or airport outside India, wheth er touching any intermediate port

1.6 Customs or airport in India or not, and includesany naval vessel of any foreign Governme nt taking part in any naval exercise; any vessel engaged in fishing or any other operations outside the territorial waters of India; any vessel or aircraft proc eeding to a place outside India for any purpose whatsoever; 1.4.7 Goods: [Sec 2(22)]: As per the said section goods includes(a) vessels, aircr afts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instrume nts; (e) any other kind of movable property; There are two fundamental aspects f or any thing to be called as goods and they are moveability and marketability. C oncept of moveable: The first aspect of goods is that they should be movables. T he Supreme Court has enunciated this principle in the case of UOI Vs. Delhi Clot h Mills (1977) ELT J 199 and in South Bihar Sugar Mills Vs. UOI (1978) ELTJ 336 by holding that to be called goods, the articles are such as are capable of bein g bought and sold in the market. Though these judgments are rendered in the cont ext of Excise duty, the subject matter being pari materia, they can also be appl ied in the context of Customs duty. Concept of marketable: The second fundamenta l aspect of goods is that they should be capable of being marketed. Marketabilit y is the capability of an article to be put into market for sale. Whether a part icular article is marketable or not is decided on the circumstances of each case . Detailed discussions on these subjects can be found in Chapter 1 of the Excise module. 1.4.8 Import: [Sec 2(23)]: The term with its grammatical variations and cognate expressions is defined to mean bringing into India from a place outside India. For a detailed discussion refer to the chapter on Importation etc. 1.4.9 Imported goods: [Sec 2(25)]: The term is defined to mean any goods brought into India from a place outside India but does not include goods which have been cle ared for home consumption. For a detailed discussion refer to the chapter on Imp ortation, etc. 1.4.10 Importer: [Sec 2(26)]: Importer in relation to any goods a t any time between their importation and the time when they are cleared for home consumption, includes any owner or any person holding himself out to be the imp orter. For a detailed discussion refer to the chapter on Importation, etc. 1.4.1 1 India: [Sec 2(27)]: India includes the territorial waters of India. Territorial waters of India extend to 12 nautical miles into the sea from the appropriate ba se line.

Basic Concepts 1.7 Goods are deemed to have been imported if the vessel enters the imaginary line o n the sea at the 12 th nautical mile i.e. if the vessel enters the territorial w aters of India. Therefore, a vessel not bound to India should not enter these wa ters. India includes not only the surface of sea in the territorial waters but a lso the air space above and the ground at the bottom of the sea. 1.4.12 Indian c ustoms waters: [Sec 2(28)]: Indian customs waters means the waters extending into the sea up to the limit of contiguous zone of India under section 5 of the Terri torial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zon es Act, 1976 and includes any bay, gulf, harbour, creek or tidal river. Indian c ustoms waters cover both the Indian territorial waters and contiguous zone as we ll. Indian territorial waters extend up to 12 nm from the base line whereas cont iguous zone extend to a further 12 nm from the outer limit of territorial waters . Therefore, Indian customs waters extend to a total of 24 nm from base line. 1. 4.13 Person-in-charge: [Sec 2(31)]: Person-in-charge means(a) in relation to a ves sel, the master of the vessel; (b) in relation to an aircraft, the commander or the pilot-in-charge of the aircraft; (c) in relation to a railway train, the con ductor, guard or other person having the chief direction of the train; (d) in re lation to any other conveyance, the driver or other person-in-charge of the conv eyance. 1.4.14 Stores: [Sec 2(38)]: Stores means goods for use in a vessel or airc raft and includes fuel and spare parts and other articles of equipment, whether or not for immediate fitting. Stores are also goods but are covered by special p rovisions in sections 85 to 90. The definition does not cover goods for use in a vehicle. For a detailed discussion refer to the chapter on Importation, Exporta tion and Transportation of Goods. 1.4.15 Tariff value: [Sec 2(40)]: Tariff value, in relation to any goods, means the tariff value fixed in respect thereof under sub-section (2) of section 14. 1.4.16 Value: [Sec 2(41)]: "Value, in relation to any goods, means the value thereof determined in accordance with the provisions of sub-section (1) of section 14. For a detailed discussion refer to the chapter on Valuation. Self-examination questions 1. Define the following terms as used in the Customs Act, 1962: (i) Conveyance (ii) Goods

1.8 Customs (iii) Person-in-charge (iv) Stores (v) Foreign going vessel or aircraft 2. 3. Distinguish between Indian territorial waters and Indian custom waters. With ref erence to the provisions of the Customs Act, 1962, explain the following briefly : (i) Stores (ii) Dutiable goods and Imported goods 4. 5. Write a brief note on the constitutional provisions governing the levy of custom s duties. ONGC vessel and foreign vessel are drilling oil beyond 12 nautical mil es in the sea. Which of the two is a foreign going vessel? Explain. Foreign goin g vessel or aircraft is one that carries passengers and (or) goods between ports /airports in India and out of India. It does not matter if it touches any interm ediate port/airport in India. The following are also included in the definition: (a) A foreign naval vessel doing naval exercises in Indian waters. (b) A vessel engaged in fishing or any other operation (like oil drilling by O.N.G.C.) outsi de territorial waters. (c) A vessel or aircraft going to a place outside India f or any purpose whatsoever [section 2(21)]. In the given case both the vessels ar e beyond territorial waters hence both of them are foreign going vessels. Answer 5.

2 LEVY OF AND EXEMPTIONS FROM CUSTOMS DUTY All taxes and duties are imposed in three stages, which are levy, assessment and collection. Levy is the stage where the declaration of liability is made and th e persons or the properties in respect of which the tax or duty is to be levied is identified and charged. Assessment is the procedure of quantifying the amount of liability. The liability to tax or duty does not depend upon assessment. The final stage is where the tax or duty is actually collected. The collection of t ax or duty may for administrative or other reasons be postponed to a later time as done in the case of excise duty, wherein the liability towards duty arises up on manufacture of excisable goods, the duty is collected only upon removal of go ods from the factory. The Judicial Committee in the United Kingdom in the case o f Whilney Vs. Commissioners of Inland Revenue (1926) appeal cases (reproduced in Jain Shudh Vanaspathi Ltd. Vs. Union of India) has observed as follows; Now ther e are three stages in the imposition of a tax; there is the declaration of the l iability that is part of statute that determines what persons in respect of what properties are liable. Next there is assessment. Liability does not depend upon the assessment. That ex-hypothesis, has already been fixed. But assessment part icularizes the exact sum which a person liable has to pay. Lastly comes the meth ods of recovery if the person taxed does not voluntarily pay. 2.1 DETERMINING FAC TORS The liability towards customs duty is broadly based upon the following 3 factors : 1. the goods, the point and the circumstances under which the customs duty bec omes leviable; 2. the procedure, the mechanism and the organization for determin ing the amount of customs duty and collection thereof; 3. the exemption to the l evy either on grounds of morality or equity or as a result of the discretionary powers vested in the Government as a tool for planning tax structure and

2.2 Customs control of economic growth of the country. The customs duty is considered to be levied on the goods and not on the person importing the goods or paying the duty . Equitability requires charging of duty at the same level if the circumstances of importation are similar. This has given rise to a deemed provision under sect ion 12 of the Customs Act. 2.2 POINT AND CIRCUMSTANCES OF LEVY 2.2.1 Dutiable Goods [Section 12]: This section is the charging section of the A ct. 1. Except as provided in this Act, or any other law for the time being in fo rce, duties of customs shall be levied at such rates as may be specified under t he Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force, on goods imported into and exported from India. 2. The provisions of sub -section (1) shall apply in respect of all goods belonging to Government as they apply in respect of goods not belonging to Government. The following propositio ns arise from the above provisions; 1. Duties of customs shall be levied on good s. However, it may be noted that this levy is subject to other sections in the A ct. For instance: Section 13 no duty on pilfered goods Section 22 reduced duty o n damaged goods Section 23 remission of duty on destroyed goods. 2. 3. 4. The go ods shall be such as are imported or exported to or from India; The duty shall b e at such rates as may be specified under the Customs Tariff Act, 1975. Governme nt goods shall be treated on par with non-governmental goods for the purposes of levy of customs duty. Charge on goods: The charge of customs duty is considered to be on the goods and not on the person importing them or paying the duty. Being such, it is expected to be passed on to the buyer. Goods that are imported or exported: Section 12 m akes it abundantly clear that importation or exportation of goods into or out of India is the taxable event for payment of the duty of customs. Before the judgm ents of the Apex court in the landmark cases of Union of India Vs. Apar Industri es Ltd. (1999) 122 ELT 3 (SC) and further in the case of Garden Silk Mills Ltd. Vs. Union of India 1999 (113) ELT 358 (SC) a lot of problems were faced in deter mining the point at which the importation or exportation takes place. The root c ause of the problem was the definition of India as given by sec 2(27) to include

Levy of and Exemptions from Custom Duty 2.3 territorial waters of India because even an innocent entry of a vessel into the territorial waters of India would result in import of goods and further it was a lmost impossible to determine when exactly the vessel crossed the territorial wa ters limit. But this matter is no longer res integra. The Supreme Court observed in the Garden Silk Mills case that import of goods will commence when they cros s the territorial waters but continues and is completed when they become part of the mass of goods within the country; the taxable event being reached at the ti me when the goods reach the customs barriers and bill of entry for home consumpt ion is filed. The main test for determining the taxable event is the happening o f the event on which the charge is affixed. Therefore, to conclude that importat ion is completed as soon as the goods enter the territorial waters of India woul d be a wrong interpretation of the law in the spirit in which is enacted and con sequently the goods should become part of the mass of the goods within the count ry for the charge of customs duty to be attracted. 2.2.2 Distinction between cle arance for home consumption and clearance for warehousing: Clearance for home co nsumption implies that, the customs duty on import of the goods has been dischar ged and the goods are therefore cleared for utilization or consumption. The good s may instead of being cleared for home consumption be deposited in warehouse an d cleared at a later time. When the goods are deposited in the warehouse the col lection of customs duty will be deferred till such goods are cleared for home co nsumption. The revenue for the Government is safeguarded by the importer executi ng a bond binding himself in a sum equal to twice the amount of duty assessed on the goods at the time of import. The importer is also liable to pay interest, r ent and charges for storage of goods in warehouse. 2.2.3 Duty liability in certa in special circumstances a. Re-importation of goods produced or manufactured in India [Section 20]: Section 20 provides that if goods are imported into India af ter exportation therefrom, such goods shall be liable to duty and be subject to all the conditions and restrictions, if any, to which goods of the like kind and value are liable or subject, on the importation thereof. This implies that good s manufactured or produced in India, which are exported and thereafter re-import ed are treated on par with other goods, which are imported. However, the followi ng notifications have provided certain concessions in this regard: (i) where an exporter has availed export incentives in the nature of duty drawback, rebate un der Central Excise Rules, etc., the import duty shall be restricted to the amoun t of incentive availed of at the time of export. [Notification no. 94/96 Cus. da ted 16.12.1996] (ii) where the imported goods have been originally exported to t he overseas supplier for

2.4 Customs repairs, the duty on re-importation is restricted to the cost of repairs done abroad. This is subject to the following conditions: (a) the time limit fo r re-importation is 3 years. This is extendable to 5 years. (b) the exported goo ds and the re-imported goods must be the same. ownership of the goods should als o not have changed. The However, the notification is not applicable to exports from EPZ or EOUs, etc. Fu rther, it is not applicable if the repairs amount to re-manufacture. [Notificati on no. 94/96 Cus. dated 16.12.1996] (iii) Sometimes, the situation might be reve rse exported goods may come back for repairs and re-export. In such a situation, the re-imported goods can avail exemption from paying of import duty subject to the following conditions: b. the re-importation is for repairs only the time li mit is 3 years the goods must be re-exported after repairs the time limit for ex port is 6 months (extendable to one year). [Notification no.158/95 Cus. dated 14.11.1995] Goods derelict, wreck etc [Sectio n 21] : Section 21 provides that all goods, derelict, jetsam, flotsam and wreck brought or coming into India, shall be dealt with as if they were imported into India, unless it be shown to the satisfaction of the proper officer that they ar e entitled to be admitted duty-free under this Act. The concept of goods brought into India is not confined to goods, which are intentionally brought into India, but also extends to derelict, jetsam, flotsam and wreck brought or coming into I ndia. This implies that apart from goods which are normally imported in the cour se of international trade, flotsam, and jetsam, which are washed ashore and dere lict and wreck brought into India out of compulsion are also treated on par with trade goods. The meanings of the various terms are as follows: Derelict This re fers to any cargo, vessel, etc. abandoned in the sea with no hope of recovery. J etsam This refers to goods jettisoned from the vessel to save her from sinking. Flotsam Jettisoned goods which are floating in the sea are called flotsam. Wreck This refers to cargo or vessel or any property which are cast ashore by tides a fter ship wreck.

Levy of and Exemptions from Custom Duty 2.3 PROCEDURE, MECHANISM AND ORGANISATIO N FOR ASSESSMENT OF DUTY 2.5 2.3.1 Meaning of Assessment: In the context of the customs duty, the term assess ment means quantification of the amount of duty payable. The process of assessme nt involves the following stages. a. b. c. d. Determination of the quantity and total value of the consignment; Determination of the proper tariff classificatio n of the goods; Determination of the appropriate rate of duty after considering the various exemptions, abatements, remissions. Determining whether the goods ar e to be cleared for home consumption or to be deposited in the warehouse. The me thod of valuation has been 2.3.2 Valuation of goods [Section 14] : explained in detail in chapter 5. 2.3.3 Date for determining the rate of duty and tariff valuation of imported goo ds [Section 15] : Section 15 provides that (1) The rate of duty and tariff valua tion, if any, applicable to any imported goods, shall be the rate and valuation in force, (a) in the case of goods entered for home consumption under section 46 , on the date on which a bill of entry in respect of such goods is presented und er that section; (b) in the case of goods cleared from a warehouse under section 68, on the date on which a bill of entry for home consumption in respect of suc h goods is presented. (c) in the case of any other goods, on the date of payment of duty: Provided that if a bill of entry has been presented before the date of entry inwards of the vessel or the arrival of the aircraft by which the goods a re imported, the bill of entry shall be deemed to have been presented on the dat e of such entry inwards or the arrival, as the case may be. (2) The provisions o f this section shall not apply to baggage and goods imported by post. From the r eading of the above provisions of section 15 the following propositions arise. a . If the goods are cleared for home consumption, the rate of duty and tariff val uation prevailing on the date on which the Bill of Entry in respect of such clea rance is presented will be applicable. However, if the Bill of Entry is presente d before the entry inwards of the vessel or arrival of aircraft, then the rate o f duty and tariff valuation prevailing on the date on which entry inwards is gra nted or as the case may be arrival of aircraft takes place will be applicable.

2.6 b. Customs If the goods are deposited into warehouse and cleared therefrom, then th e rate of duty and tariff valuation prevailing on the date on which the bill of entry for home consumption is presented will be applicable. In any other case, t he rate of duty and tariff valuation prevailing on the date of payment of duty w ill be applicable. In respect of baggage and goods imported by post the provisio ns of section 15 will not be applicable as they are independently covered by oth er sections. c. d. Section 15 has generated a lot of interest in terms of case law development. In Bharat Surfacants Pvt.Ltd vs UOI 1989 (43) ELT 189 the Supreme Court held that t he rate of duty and tariff valuation would be done on the date of final entry of the ship. In this case, a ship entered Bombay and made prior entry on 4.7.81 at which time the duty was 12.5%. Since there was no space, the ship proceeded to Karachi and after that came back to Bombay on 23.7.81 and was granted final entr y on 4.8.91 when the duty rate had been revised to 150%. The Supreme Court held that the rate applicable would be 150% only since the formality of entry inward could be done only on 4.8.91. Clause (b) of Section 15(1) makes it abundantly cl ear that in respect of warehoused goods, duty becomes payable at the rate in for ce on the actual removal from the warehouse. See Prakash Cotton Mills P.Ltd vs B .Sen 1979 (3) ELT J241 SC. In Priyanka Overseas Pvt.Ltd vs UOI 1990(31) ECR 569, the Supreme Court held that if the goods could not be removed because of the fa ult of customs authorities and subsequently the liability arises, then no such d uty would become payable by the importer. With effect from 14.05.2003, these dec isions have been rendered redundant owing to the amendment made in section 15(b) by the Finance Act, 2003. It would also be important to note that date of contr act is not relevant and only the date of importation is relevant as per the deci sion of the Supreme Court in Rajkumar Knitting Mills P.Ltd vs CC 1998 (98) ELT 2 92. 2.3.4 Flow of assessment and clearance procedure : a. The master of the vess el carrying the goods calls on the port, files the arrival report and the import general manifest [IGM] with customs authorities. b. Customs authorities check t he documents, grant entry inwards to the vessel, assign an IGM number to the man ifest and permit the master of the vessel to land and unload the cargo. The vess el discharges the cargo into the custody of the port trust authorities. The impo rter of the goods delivers the negotiable bill of lading received from the suppl ier of the goods to the master of the vessel and obtains the delivery order. c. d.

Levy of and Exemptions from Custom Duty e. f. g. h. i. j. 2.7 It is the right and responsibility of the importer to file an application for cl earance of goods and this application is called the bill of entry. The customs a uthorities check the bill of entry with the IGM and note the bill of entry in th e IGM. The bill of entry is then processed by the appraising department to decid e upon the tariff classification and valuation. The customs authorities may phys ically examine the goods for the above purpose of classification and valuation. If the bill of entry for home consumption is presented, then the customs duty is collected and pass out of customs charge is issued. If the bill of entry for ware housing is presented, then the importer executes a warehousing bond equal to twi ce the amount of duty assessed and then the goods are deposited into the warehou se. The importer on showing the pass out of customs charge to the port trust autho rities takes delivery of the goods. In case the goods are warehoused, the import er files a bill of entry for ex-bond clearance for home consumption at the time of clearance of goods from such warehouse. The customs duty is then collected an d the goods are allowed to be taken from the port. REMISSION, ABATEMENT AND EXEM PTIONS k. l. m. 2.4 The Customs Act provides for remission, abatement and exemptions from customs du ty in certain circumstances. These provisions are discussed in the subsequent pa ragraphs. 2.4.1 No duty on pilfered goods [Section 13] : Section 13 provides tha t If any imported goods are pilfered after the unloading thereof and before the proper officer has made an order for clearance for home consumption or deposit i n a warehouse, the importer shall not be liable to pay the duty leviable on such goods. However, where such goods are restored to the importer after pilferage, the importer become liable to duty. The conditions to be satisfied for exemption from duty are as follows: a. b. c. The imported goods should have been pilfered . The pilferage should have occurred after the goods are unloaded but before the proper officer makes the order for home consumption or for deposit into warehou se. The pilfered goods should not have been restored back to the importer.

2.8 Customs The term pilfer is defined to mean, to steal, especially in small quantities; petty theft. Therefore, the term does not include loss of total package. In order to c laim pilferage the following circumstances should exist : a. b. c. there should be evidence of tampering with the packages; there should be blank space for the missing articles in the package; and the missing articles should be unit article s [and not part articles] The pilferage of goods would normally be noticed at the time of physical verific ation of goods by the customs authorities. However, in some circumstances, it ma y so happen that the pilferage may be observed only at the time of removal of go ods by the importer. In such case, the order for clearance or as the case may be for bonding would already have been passed. Therefore, the importer has to ask for survey either by the steamer agents or by the insurance surveyors and the re port issued by them would form the basis for claiming remission. As in such the circumstances, the duty would already have been paid, the remission is allowed i n the form of a refund. It is important to note that the Port Trust is the custo dian of imported goods. Section 13 disables the Government from collecting the d uty on pilfered goods from the importer. On the other hand, section 45 enables t he Government to demand the duty so lost from the custodian. However, these are independent provisions. In other words, whether duty is paid by the custodian or not, refund cannot be denied to the importer by the department. 2.4.2 Abatement of duty on damaged or deteriorated goods Section 22 provides that [Section 22] : (1) Where it is shown to the satisfaction of the Assistant Commissioner of Custo ms or Deputy Commissioner of Customs (a) that any imported goods had been damage d or had deteriorated at any time before or during the unloading of the goods in India; or (b) that any imported goods, other than warehoused goods, had been da maged at any time after the unloading thereof in India but before their examinat ion under section 17, on account of any accident not due to any wilful act, negl igence or default of the importer, his employee or agent; or (c) that any wareho used goods had been damaged at any time before clearance for home consumption on account of any accident not due to any wilful act, negligence or default of the owner, his employee or agent, such goods shall be chargeable to duty in accorda nce with the provisions of sub-section (2). (2) The duty to be charged on the go ods referred to in sub-section (1) shall bear the same proportion to the duty ch argeable on the goods before the damage or deterioration which the value of the damaged or deteriorated goods bears to the value of the goods before the

Levy of and Exemptions from Custom Duty damage or deterioration. 2.9 (3) For the purposes of this section, the value of damaged or deteriorated goods may be ascertained by either of the following methods at the option of the owne r:(a) the value of such goods may be ascertained by the proper officer, or (b) s uch goods may be sold by the proper officer by public auction or by tender, or w ith the consent of the owner in any other manner, and the gross sale proceeds sh all be deemed to be the value of such goods. Thus the abatement is available und er the following circumstances: (a) When the goods are damaged or deteriorated b efore or during the course of their unloading. At this stage, no distinction is made between warehoused goods and goods meant for home consumption. (b) In the c ase of goods cleared for home consumption, when the goods are damaged after unlo ading but before examination by the customs authorities; (c) In the case of ware housed goods, when the goods are damaged before their actual clearance from such warehouse. The term damage denotes physical damage to the goods. This implies tha t the goods are not fit to be used for the purpose for which they are meant. Det erioration is reduction in quality of goods due to natural causes. In order to a vail the benefit of abatement, the damage should not have been caused by any wil lful act, negligence or default of the owner, his employee or agent. Sub-section (3) provides for valuation of the damaged or deteriorated goods. It provides th at the value shall be as ascertained by the proper officer or the proper officer may be sell such goods by public auction or by tender or in any other manner wi th the consent of the importer and the gross sale proceeds shall be deemed to be the value of such goods. Sub-section (2) provides that the duty chargeable on d amaged or deteriorated goods shall be on a proportionate to the duty chargeable on such goods before such damage or deterioration. 2.4.3 Remission of duty on go ods lost, destroyed or abandoned [Section 23] : Section 23 provides that (1) Wit hout prejudice to the provisions of section 13, where it is shown to the satisfa ction of the Assistant Commissioner of Customs or Deputy Commissioner of Customs that any imported goods have been lost (otherwise than as a result of pilferage ) or destroyed, at any time before clearance for home consumption, the Assistant Commissioner of Customs or Deputy Commissioner of Customs shall remit the duty on such goods.

2.10 Customs (2) The owner of any imported goods may, at any time before an orde r for clearance of goods for home consumption under section 47 or an order for p ermitting the deposit of goods in a warehouse under section 60 has been made, re linquish his title to the goods and thereupon he shall not be liable to pay the duty thereon. However, the owner of any such imported goods shall not be allowed to relinquish his title to such goods regarding which an offence appears to hav e been committed under this Act or any other law for the time being in force. Th e following propositions arise from the reading of the above provisions. a. Good s lost or destroyed: The remission of duty is permissible only in the case of to tal loss of goods. This implies that the loss is forever and beyond recovery. Th e loss referred to in this section is generally due to natural causes like fire, flood, etc. Further, such loss may take place at any time before the clearance of goods for home consumption. The loss may be at the warehouse also. The loss s hould not be in the nature of pilferage. If it is in the nature of pilferage, th en the provisions of section 13 gets attracted and remission is consequently all owable under that section. It may be said that section 13 and section 23 are mut ually exclusive. In the above situation, the loss/ destruction has to be proved to the satisfaction of teh Assistant Commissioner or Deputy Commissioner. Thereu pon, he may pass remission orders cancelling the payment of duty. In case duty h as already been paid, refund can be obtained after getting the remission orders. b. Goods abandoned by importers: Some times it may so happen that the importer is unwilling or unable to take delivery of the imported goods. Some of the likel y causes may be: (i) the goods may not be according to the specifications; (ii) the goods may have been damaged or deteriorated during voyage and as such may no t be useful to the importer; (iii) there might have been breach of contract and therefore the importer may be unwilling to take delivery of the goods. In all th e above cases, the goods having been imported, the liability to customs duty is imposed and therefore the importer has to relinquish his title to the goods unco nditionally and abandon them. Relinquishment is done by endorsing the document o f title, viz. Bill of Lading, Airway Bill, etc. in favour of the Commissioner of Customs along with the invoice. If the importer does so, he will not be require d to pay the duty amount. However, the owner of any such imported goods shall no t be allowed to relinquish his title to such goods regarding which an offence ap pears to have been committed under this Act or any other law for the time being in force.

Levy of and Exemptions from Custom Duty 2.11 2.4.4 Denaturing or mutilation of g oods [Section 24]: Section 24 of Customs Act, 1962 provides that an importer can request Central Government to denature or mutilate the imported goods, which ar e ordinarily used for more than one purpose, so as to render them unfit for one or more of such purpose. If the goods are denatured or mutilated, they are asses sed as if the goods were imported in denatured or mutilated form. This provision helps the importer when he requires the goods for any one specific purpose but he is not able to import the same in such denatured or mutilated form. Denaturin g of Spirit rules, 1972 specify procedure for denaturing spirit. 2.4.5 Exemption from customs duty [Section 25]: Central Governments power to grant exemption: Ar ticle 265 of the Constitution provides that No tax shall be levied or collected e xcept by authority of law. The power of the Central Government to alter the duty rate structure is known as delegated legislation and this power is always subjec t to superintendence and check by Parliament. a. General exemption: If the Centr al Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolu tely or subject to such conditions (to be fulfilled before or after clearance) a s may be specified in the notification, goods of any specified description from the whole or any part of duty of customs leviable thereon. b. Special exemption: If the Central Government is satisfied that it is necessary in the public inter est so to do, it may, by special order in each case, exempt from payment of duty , any goods on which duty is leviable only under circumstances of an exceptional nature to be stated in such order. Further, no duty shall be collected if the a mount of duty leviable is equal to, or less than, one hundred rupees. Both the a bove mentioned exemptions may be granted by providing for the levy of duty on su ch goods at a rate expressed in a form or method different from the form or meth od in which the statutory duty is leviable. Further the duty leviable under such altered form or method shall in no case exceed the duty leviable under the norm al form or method. 2.4.5 Rationale for grant of exemption: The power for grant o f exemption vests with the Central Government subject to the overall control of the Parliament. The Government on a rational basis may discretely use this power and the exemptions may be based on any of the following bases: a. Moral grounds , where the duty should not be levied at all. Some of the instances, which may b e given are; (i) Where the goods do not reach the Indian soil at all. (ii) Where the goods have reached the Indian soil but are not available for consumption. ( iii) Where the goods get damaged or deteriorated in transit.

2.12 Customs b. Discretionary provision, where the exemption is used for control ling the economy and industrial growth of the country. Interpretation of Exemption Notifications: In Kasinka Trading v. U.O.I. 1994 (74 ) E.L.T. 782, the Supreme Court held that the power to exempt includes the power to modify or withdraw in terms of Section 21 of the General Clauses Act, 1897. It was held that even a time bound exemption notification issued under section 5 A of the Central Excise Act, 1944, or section 25 of the Customs Act, 1962 can be modified and revoked if it is in public interest and the doctrine of Promissory Estoppel cannot be invoked since a notification cannot be said to be making a r epresentation or a promise to a party getting benefit thereof. The Supreme Court has held in Pankaj Jain Agencies v. U.O.I. 1994 (72) E.L.T. 805 that a Notifica tion is to take effect from the date of the publication in the Official Gazette. In ITC Ltd. v. CCE 1996 (86) E.L.T. 477 the Supreme Court reiterated this view and said that non-availability of the Gazette on the date of issue of the notifi cation will not affect the operativeness and enforceability of the notification particularly when there are radio announcements and press releases explaining th e changes on the very day. Effective date: Section 25 of the Act provides that t he date of effect of the notification will be the date of its issue. It also pro vides for statutory obligation on the part of the Department to publish and sell the notifications to the public through Directorate of Publicity and Public Rel ations on or before the date on which the notification will be effective. The fo llowing issues need to be kept in mind in case of general exemption. (i) Where t he exemption notification does not mention the date of its effect, the notificat ion comes into effect from the date of its issue by the Central Government for p ublication in the Official Gazette. It shall be published and also offered for s ale on the date of its issue. (ii) At times, the exemption notification may also come into force from a date later tahn the date of issue. In such a case the no tification shall be published and offered for sale on or before the date from wh ich it comes into force. (iii) Where the exemption is through a special order, t he above rules do not apply. Special orders are issued separately for each case and communicated to the beneficiary directly by the Government. The beneficiary can claim refund for the period reckoned from the date of its issue. Sub-section 2A empowers the Government to issue clarifications to the notifications within one year from the issue of the notification and such clarifications will have re trospective effect.

Levy of and Exemptions from Custom Duty 2.13 2.4.6 List of Important Judicial De cisions on Scope of Exemption Notifications A. General Principles Particulars 1. Exemption notifications represent the policy of the Government evolved to sub-s erve public interest and public revenue. It is a part and parcel of the enactmen t subject to it not being against Article 14 of Constitution. 2. Supervening pub lic equity overrides principle of promissory estoppel. Time bound notification c an be withdrawn. Citation U.O.I. v. Paliwal Electricals P. Ltd 1996 (83) E.L.T. 241 (S.C.) Shrijee Sales Corporation v. U.O.I. 1997 (89) E.L.T. 452 (S.C.) (See commentary for decision in Kasinka Trading) U.O.I. v. Jalyan Udyog 1993 (68) E.L.T. 9 (S.C. ) 3. Exemption notification is a class of delegated or conditional legislation. Po wer can be used not only for raising revenue but also to regulate the economy an d for serving social objectives. 4. Classification between small and big manufac turers not discriminatory. 5. Choice of date in exemption notifications cannot b e questioned being a question of policy. 6. Exemption notification not valid if it does not recite public interest. 7. Public interest means an act beneficial t o general public. B. How to Interpret ? Particulars 1. Notification to be treate d as a part of the enactment itself. 2. Interpretation given at the time of enac tment or issue to be given weight. Murthy Match Works v. AC 1978 (2) E.L.T. J429 (S.C.) ITC Bhadrachalam Paper Boar ds Ltd. v. CCE 1994 (71) E.L.T. 334 (S.C.) Ramdhan Pandey v. State of UP 1993 (6 6) E.L.T. 547 (S.C.) MJ Exports v. CCE 1992 (59) E.L.T. 112 (T) Citation CCE v. Parle Exports P. Ltd. 1998 (38) ELT 741 (SC) CCE v. Parle Export s P. Ltd. 1988 (38) E.L.T. 741 (S.C.)

2.14 Customs 3.(a) Exemption notification should be construed strictly and reaso nably having regard to the language employed. (b) Strictness of construction doe s not mean that circuitous process should be followed. Strictness should also re sult in giving full effect. (c) Express language to be given effect. Supposed in tention to be gathered from language used. (d) Exemption notification not to be rendered nugatory or purposeless. The word singular includes plural. 4.(a) Exemp tion notification construable strictly. No room to be given for intendment in th e light of clear words contained in the notification. (b) Exemption notification need not be construed strictly when there is no doubt or ambiguity in it. 5. Li beral construction which enlarges the term and scope of notification not permiss ible. 6. Exemption notification to be read as an ordinary man would read it. The word and to be read conjunctively as any one would do so. 7. Ambiguity in notific ation to be resolved in favour of Revenue. HMM Ltd. v. CCE 1996 (87) E.L.T. 593 (SC) Swadeshi Polytex Ltd. v. CCE 1989 (44) E.L.T. 794 (SC) GSFC Ltd. v. CCE 1997 (91 ) E.L.T. 3 (SC) CC v. United Electrical Industries Ltd. 1999 (108) E.L.T. 609 (S C). Hemraj Gordhandas v. HH Dave 1978 (2) E.L.T. J 350 (SC) SG Glass Works P. Ltd. v. CCE 1994 (74) E.L.T. 775 (S.C.) Rajasthan Spg. & Wvg. Mills Ltd. v. CCE 1995 (77) E.L.T. 474 (S.C.) CCE v. Shibani Engi- neering Syste ms 1996 (86) E.L.T. 453 (S.C.) Novopan India Ltd. v. CCE 1994 (73) E.L.T. 769 (SC); Contrary view in STP Limite d v. CCE 1998 (97) E.L.T. 16 (S.C.) Prestige Engg. India Ltd. v. CCE 1994 (73) E .L.T. 497 (S.C.) 8. Expressions used in the Act should be understood in the same sense if used in Rules and notifications.

Levy of and Exemptions from Custom Duty 2.15 9.(a) Exemption cannot be claimed o n the strength of Finance Ministers Budget speech. (b) Notings on Government fil es cannot be used as an aid in construction. BK Industries v. U.O.I. 1993 (65) E .L.T. 465 (S.C.) Doypack Systems P. Ltd. v. U.O.I. 1988 (36) E.L.T. 201 (S.C.) 10. Exemption notification to be interpreted differently from statute. Strict in terpretation applicable to find out whether a subject falls under the exemption. Once this is solved, liberal interpretation to be given by reading the notifica tion as a whole. 11.(a) Substantive conditions in notification to be satisfied m andatorily since it may facilitate fraud or introduce administrative inconvenien ces. Nonobservance of procedural conditions condonable. Bombay Chemicals P. Ltd. v. CCE 1995 (77) E.L.T. 3 (SC), Novapan India Ltd. v. C CE 1994 (73) E.L.T. 769 (S.C.) MCF Ltd v. Dy. Commissioner 1991 (55) E.L.T. 437 (S.C.); Thermax P. Ltd. v. CCE 1992 (61) E.L.T. 352 (SC); Formica India Division v. CCE 1995 (77) E.L.T. 511 (S C) (b) If non-observance of procedural condition may facilitate fraud or administra tive convenience, exemption can be denied. 12. Burden to prove eligibility to ex emption notification on the claimant. Indian Aluminium com-pany Ltd. v. Thane Municipal Corporation 1991 (55) E.L.T. 4 54 (S.C.). Mysore Metal Industries v. CCE 1988 (36) E.L.T. 369 (S.C.); Motiram t olaram v. U.O.I. 1999 (112) E.L.T. 749 (SC) Prince Khadi Woollen Handloom Prod. Coop. Indl. Society v. CCE 1996 (88) E.L.T. 637 (SC) CCE v. Indian Petro Chemica ls 1997 (92) E.L.T. 13 (SC); Abrol Watches Pvt. Ltd v. CC 1997 (92) E.L.T. 311 ( S.C.) CC v. Perfect Machine Tools Co. P. Ltd 1997 (96) E.L.T. 214 (S.C.) 13. Exemption cannot be denied on a ground not originally contended. 14. Assesse e can opt for that notification which is more beneficial. 15. A particular item not expressly excluded does not mean that it is included.

2.16 Customs 16. Benefit not to be extended on the ground that such benefit is w rongly extended to others. 17. The term appropriate amount of duty already has be en paid includes nil rate of duty. 18. In interpreting an earlier notification, n arrow or broader view to be taken can be decided based on subsequent notificatio n. 19. Assessee cannot suffer on account of illegal act of Department. Exemption notification applicable. 20. Words in Tariff Schedule to be interpreted keeping in mind the rapid march of technology as industry is not static. Self-examinati on questions 1. Distinguish between- : (a) Jetsam and Flotsam (b) Pilfered goods and Lost/destroyed goods (c) General exemptions and Ad hoc exemptions 2. What w ill be the impact on the customs duty if the goods are: (i) damaged inside the wa rehouse before clearance for home consumption (ii) deteriorated inside the wareh ouse before clearance for home consumption (iii) destroyed in the warehouse befo re clearance for home consumption (iv) destroyed on the wharf, before clearance for home consumption (v) destroyed after clearance from warehouse 3. An importer , imported consignment of goods, chargeable to duty @ 40% ad valorem. The vessel arrived on 31st May, 2006. A bill of entry for warehousing the goods was comple ted on 2nd June, 2006 and the goods were duly warehoused. In the meantime an exe mption notification was issued on 15th October, 2006 reducing the effective cust oms duty to 25% ad valorem. Faridabad CT Scan Centre v. DG Health Services 1997 (95) E.L.T. 161 (S.C.) CCE v. Usha Martin Industries 1997 (94) E.L.T. 460 (SC LB ) Johnson & Johnson Ltd. v. CCE 1997 (92) E.L.T. 23 (S.C.) Kuil Fireworks Indust ries v. CCE 1997 (95) E.L.T. 3 (S.C.) CC v. Lekhraj Jessumal & Sons 1996 (82) E. L.T. 162 (S.C.)

Levy of and Exemptions from Custom Duty 2.17 Thereafter, the importer filed a bi ll of entry for home consumption on 20 th October claiming 25% duty. The customs department charged higher rate of duty @ 40% ad valorem. Give your view about t he same, discussing the relevant provisions of the Customs Act, 1962. 4. Peerles s Scraps, imported during August 2006, by sea, a consignment of metal scrap weig hing 6,000 M.T. (metric tonnes) from U.S.A. They filed a bill of entry for home consumption. The Assistant Commissioner passed an order for clearance of goods a nd applicable duty was paid by them. Peerless Scraps thereafter found, on taking delivery from the Port Trust Authorities, that only 5,500 M.T. of scrap were av ailable at the docks although they had paid duty for the entire 6,000 M.T., sinc e there was no short-landing of cargo. The short-delivery of 500 M.T. was also s ubstantiated by the Port-Trust Authorities, who gave a weighment certificate to Pe erless Scraps. On filing a representation to the Customs Department, Peerless Sc raps has been directed in writing to justify as to which provision of the Custom s Act, 1962 governs their claim for remission of duty on the 500 M.T. not delive red by the Port-Trust. You are approached by Peerless Scraps as Counsel for an opi nion/advice. Examine the issues and tender your opinion as per law, giving reaso ns. 5. ASC Ltd. entered in to technical collaboration with MSC Ltd. of Netherlan ds and imported drawings and designs in paper form through professional courier and post parcels. ASC Ltd. declared the value of these drawings and designs at a very nominal value. However, the Assistant Commissioner of Customs valued these drawings and designs at a high value and levied duty on them. ASC Ltd. contende d that customs duty cannot be levied on drawings and designs as they do not fall in the definition of goods under the Customs Act, 1962. Do you feel the stand t aken by the ASC Ltd. is tenable in law? Support your answer with a decided case law, if any. Answers 1. (a) Jetsam and Flotsam are both jettisoned (i.e. thrown with speed) from the vessel to prevent it from sinking. They are not abandoned g oods. Jetsam gets sunk and drifts to the shore whereas Flotsam does not sink but it floats and drifts to the shore. Duty is payable for both unless they are ent itled to be admitted free of duty.

2.18 Customs (b) 1. 2. 3. 4. 5. 6. Pilfered goods Covered by section 13 Departme nt gets compensation from the custodian [Section 45(3)] Mandatory benefit Petty theft by human being Restoration possible Occurrence is after unloading and befo re Customs clearance order for home consumption or warehousing Occurrence in war ehouse not recognised Duty need not be calculated No need to prove pilferage. It is quite obvious Refund arises if pilferage takes place after paying duty Lost/ Destroyed goods Covered by section 23(1) No such compensation Remission is discr etionary Loss/Destruction by fire, flood etc (Act of God) Restoration is not pos sible Occurrence may be at any time before clearance for home consumption Occurr ence recognised in warehouse is 7. 8. 9. 1 0. 2. (i) Duty should be calculated for determining the remission amount Should be proved and remission sought for. Question of refund does not arise at all. When the goods are damaged inside the warehouse abatement in customs duty, on re sultant loss in value, has been provided through section 22. Section 22 contempl ates that for claiming abatement of duty, the damage (not deterioration) should occur at any time before clearance of the imported goods for home consumption fr om the warehouse. However, the damage should not be attributable to the importer . It should be proved to the satisfaction of Assistant Commissioner or Deputy Co mmissioner of Customs that the imported goods have actually suffered damages. Th e claim for abatement is not tenable unless the importer factually proves the da mage. The following equation provides the way to calculate the abatement of duty . Duty after damage Duty before damage = Value after damage Value before damage

Levy of and Exemptions from Custom Duty 2.19 (ii) As discussed above, in case of warehoused goods, only damages are covered and not deterioration, hence abateme nt will not be available in this case and full duty will have to be paid. (iii) When the goods are destroyed in the warehouse before clearance for home consumpt ion, customs duty will be remitted as per the provisions of section 23. Section 23(1) applies when the goods have been lost (otherwise than as a result of pilfe rage) or destroyed in entirety i.e. whole or part of goods is lost once for all. The goods cease to exist and cannot be retrieved. The loss is generally on acco unt of natural causes such as fire, flood etc., and no human element is present as in section 13. The loss or destruction may occur at any time before clearance for home consumption. The loss/destruction has to be proved to the satisfaction of Assistant Commissioner or Deputy Commissioner. (iv) As all the conditions of section 23 are fulfilled, duty will be remitted in this case also. (v) As per t he discussion made in (iii) above it is clear that remission of duty is possible only when destruction occurs before clearance for home consumption. In case of destruction after clearance from a warehouse, no remission of duty is possible. 3. According to section 15(1)(b) of the Customs Act, the relevant date for deter mination of rate of duty and tariff value in case of goods cleared from a wareho use is the date on which a bill of entry for home consumption in respect of such goods is presented. Therefore, the relevant date for determining the duty in th e given case will be 20.10.2006 (the date on which the bill of entry for home co nsumption is presented). Therefore, the relevant rate will be 25%. As per provis ions of Section 23, where it is shown to the satisfaction of Assistant or Deputy Commissioner that any imported goods have been lost or destroyed, otherwise tha n as a result of pilferage at any time before clearance for home consumption, th e Assistant or Deputy Commissioner shall remit the duty on such goods. Therefore , duty shall be remitted only if loss has occurred before clearance for home con sumption. In the given case, it is apparent from the facts that quantity of scra p received in India was 6000 metric tonnes and 500 metric tonnes thereof was los t when it was in custody of Port Authorities i.e. before clearance for home cons umption was made. Also, the loss of 500 MT of scrap cannot be construed to be pi lferage, as loss of such huge quantity cannot be treated as Petty Theft. Hence, Pe erless Scraps may take shelter under section 23 justifying his claim for remissi on of duty. 4.

2.20 Customs 5. This issue has been settled by the Supreme Court in the case of Associated Cement Companies Ltd. v. CC 2001 (128) ELT 21 (SC). The Apex Court ob served that though technical advice or information technology are intangible ass ets, but the moment they are put on a media, whether paper or cassettes or diske ttes or any other thing, they become movable and are thus, goods. Therefore, the Supreme Court held that drawings, designs, manuals and technical material are g oods liable to customs duty. Therefore, the stand taken by the ASC Ltd. is not c orrect in law.

3 TYPES OF DUTY 3.1 BASIC CUSTOMS DUTY [SECTION 2 OF THE CUSTOMS TARIFF ACT] This duty is levied under the provisions of section 12 of the Customs Act and se ction 2 of the Customs Tariff Act. Section 2 of the Customs Tariff Act provides that; The rates at which duties of customs shall be levied under the Customs Act 1962 are specified in the First and Second Schedules. The first schedule enlists the goods liable to import duty and the second schedule enlists the goods liable to export duties. The following entry in the first schedule is reproduced for e asy understanding of the structure of the Tariff Schedule. (1) (2) (3) Coconuts, Brazil nuts And Cashew nuts, fresh Or dried, whether or not Shelled or peeled Coconuts: 0801.11 0801.19 0801.21 0801.22 0801.31 0801.32 --Desiccated --Other Brazil nuts: --In shell --Shelled -Cashew nuts: --In shell --Shelled 30% 30% Fre e 20% 30% 30% 20% 20% 70% 70% 60% 60% (4) (5)

3.2 Customs Generally the rate of duty specified in column (4) is applicable but if the good s are imported from the areas notified by the Central Government to be preferent ial areas, then the rate of duty under column (5) will be applicable. The Govern ment may by notification under section 25 of the Customs Act prescribe preferent ial rate of duty in respect of imports from certain preferential areas. The impo rter will have to fulfill the following conditions to make the imported goods el igible for preferential rate of duty. a) At the time of importation, he should m ake a specific claim for the preferential rate. b) He should also claim that the goods are produced or manufactured in such preferential area. c) The area shoul d be notified under section 4(3) of the Customs Tariff Act to be a preferential area. d) The origin of the goods shall be determined in accordance with the rules made under section 4(2) of the Customs Tariff Act. If the importer fails to discharg e the above duties, the goods shall be liable to standard rate of duty. 3.2 ADDI TIONAL DUTY OF CUSTOMS [SECTION 3 OF THE CUSTOMS TARIFF ACT] This duty is popularly but wrongly referred to as Countervailing duty. In Hydera bad Industries Ltd .vs UOI 1999 (108) ELT 321, the Supreme Court held that Secti on 3 of the Customs Tariff Act would be an independent charging section. The Sup reme Court also held that additional duty could be levied only if the article is such that could be manufactured or produced in India. If the article cannot be subjected to excise levy because it is not produced or manufactured, then on the import of like articles, additional duty cannot be levied. To this extent, the earlier decision of the Supreme Court in Khandelwal Metal & Engineering Works vs UOI 1985 (20) ELT 222 was overruled. The levy of this duty is governed by secti on 3 of the Customs Tariff Act which provides that (1) Any article which is impo rted into India shall, in addition, be liable to a duty equal to the excise duty for the time being leviable on a like article if produced or manufactured in In dia. This duty shall be called as additional duty. If such excise duty on a like article is leviable at any percentage of its value, the additional duty to whic h the imported article shall be so liable shall be calculated at that percentage of the value of the imported article. However, in case of any alcoholic liquor for human consumption imported into India, the Central Government may, by notifi cation in the Official Gazette, specify the rate of additional duty having regar d to the excise duty for the time being leviable on a like alcoholic liquor prod uced or manufactured in different States. In case if the like alcoholic liquor i s not

Types of Duty 3.3 produced or manufactured in any State, then, the excise duty which would be levi able for the time being in different States on the class or description of alcoh olic liquor to which such imported alcoholic liquor belongs shall be the applica ble rate. It has been clarified vide an explanation that the expression excise du ty for the time being leviable on a like article if produced or manufactured in India" means the excise duty for the time being in force which would be leviable on a like article if produced or manufactured in India or, if a like article is not so produced or manufactured, which would be leviable on the class or descri ption of articles to which the imported article belongs, and where such duty is leviable at different rates, the highest duty. (2) For the purpose of calculatin g under sub-sections (1) and (3), the additional duty on any imported article, w here such duty is leviable at any percentage of its value, the value of the impo rted article shall be the aggregate of (i) the value of the imported article dete rmined under sub-section (1) of section 14 of the Customs Act, 1962 or the tarif f value of such article fixed under sub-section (2) of that section, as the case may be; and (ii) any duty of customs chargeable on that article under section 12 of the Cust oms Act, 1962, and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include (a) the duty referred to in sub-sections (1), (3) and (5); (b) the safeguard duty referred to in sections 8B and 8C; (c) the countervailing duty referred to in section 9; and (d) the anti-dumping duty referred to in sec tion 9A: In case of an article imported into India (a) in relation to which it i s required to declare the retail sale price of such article on the package there of under the provisions of the Standards of Weights and Measures Act, 1976 or th e rules made thereunder or under any other law for the time being in force, and (b) where the like article produced or manufactured in India, or in case where s uch like article is not so produced or manufactured, then, the class or descript ion of articles to which the imported article belongs, is the goods specified by notification in the Official Gazette under sub-section (1) of section 4A of the Central Excise Act, 1944, the value of the imported article shall be deemed to be the retail sale price declared on the imported article less such amount of ab atement, if any, from such retail sale price as the Central Government may, by n otification in the Official Gazette, allow in

3.4 Customs respect of such like article under sub-section (2) of section 4A of the Central Excise Act, 1944. Where on any imported article more than one retail sal e price is declared, the maximum of such retail sale price shall be deemed to be the retail sale price for the purposes of this section. (3) If the Central Government is satisfied that it is necessary in the public in terest to levy on any imported article [whether on such article duty is leviable under sub-section (1) or not] such additional duty as would counter-balance the excise duty leviable on any raw materials, components and ingredients of the sa me nature as, or similar to those, used in the production or manufacture of such article, it may, by notification in the Official Gazette, direct that such impo rted article shall, in addition, be liable to an additional duty representing su ch portion of the excise duty leviable on such raw materials, components and ing redients as, in either case, may be determined by rules made by the Central Gove rnment in this behalf. (4) In making any rules for the purposes of sub-section ( 3), the Central Government shall have regard to the average quantum of the excis e duty payable on the raw materials, components or ingredients used in the produ ction or manufacture of such like article. (5) If the Central Government is sati sfied that it is necessary in the public interest to levy on any imported articl e [whether on such article duty is leviable under sub-section (1) or, as the cas e may be, sub-section (3) or not] such additional duty as would counter-balance the sales tax, value added tax, local tax or any other charges for the time bein g leviable on a like article on its sale, purchase or transportation in India, i t may, by notification in the Official Gazette, direct that such imported articl e shall, in addition, be liable to an additional duty at a rate not exceeding fo ur per cent. of the value of the imported article as specified in that notificat ion. In this sub-section, the expression "sales tax, value added tax, local tax or any other charges for the time being leviable on a like article on its sale, purchase or transportation in India" means the sales tax, value added tax, local tax or other charges for the time being in force, which would be leviable on a like article if sold, purchased or transported in India or, if a like article is not so sold, purchased or transported, which would be leviable on the class or description of articles to which the imported article belongs, and where such ta xes, or, as the case may be, such charges are leviable at different rates, the h ighest such tax or, as the case may be, such charge. (6) For the purpose of calc ulating under sub-section (5), the additional duty on any imported article, the value of the imported article shall, notwithstanding anything contained in sub-s ection (2), or section 14 of the Customs Act, 1962, be the aggregate of (i) the v alue of the imported article determined under sub-section (1) of section 14 of t he Customs Act, 1962 or the tariff value of such article fixed under sub-section ( 2) of that section, as the case may be; and

Types of Duty 3.5 (ii) any duty of customs chargeable on that article under section 12 of the Cust oms Act, 1962, and any sum chargeable on that article under any law for the time being in force as an addition to, and in the same manner as, a duty of customs, but does not include (a) the duty referred to in sub-section (5); (b) the safegu ard duty referred to in sections 8B and 8C; (c) the countervailing duty referred to in section 9; and (d) the anti-dumping duty referred to in section 9A. (7) T he duty chargeable under this section shall be in addition to any other duty imp osed under this Act or under any other law for the time being in force. (8) The provisions of the Customs Act, 1962 and the rules and regulations made thereunde r, including those relating to drawbacks, refunds and exemption from duties shal l, so far as may be, apply to the duty chargeable under this section as they app ly in relation to the duties leviable under that Act. 3.2.1 Computation of addit ional duty of customs: If the additional duty is leviable as a percentage of the value of goods, then the following paragraph illustrates the method of computin g the additional duty of customs. Assessable value under section 14 Rate of basi c customs duty Rate of additional custom duty Assessable value Basic custom duty @ 25% of Rs. 1,000.00 Additional custom duty(16% on Rs.1250) Total duty payable [250+200] 3.3 : Rs. 1,000.00 : 25% : 16% : Rs. 1,000.00 : Rs. : Rs. : Rs. 250.0 0 200.00 450.00 Total value for computing additional customs duty : Rs. 1,250.00 PROTECTIVE DUTIES [SECTION 7 OF THE CUSTOMS TARIFF ACT] The two types of custom duties are revenue duties and protective duties. Revenue duties are those which are levied for the purpose of raising customs revenue, w hereas protective duties are intended to give protection to indigenous industrie s. If resort to protective duties is not made there could be a glut of cheap imp orted articles in the market making the indigenous goods unattractive. The prote ction through protective duties is given considering the following factors. (a) The protective duties should not be very stiff so as to discourage imports.

3.6 Customs (b) It should be sufficiently attractive to encourage imports to bridge the gap between demand and supply of those articles in the market. The protective duties are levied by the Central Government upon the recommendation made to it by the Tariff Commission and upon it being satisfied that circumstances exist which ren der it necessary to take immediate action to provide protection to any industry established in India. Section 7 of the Customs Tariff Act provides as follows; ( a) The protective duty shall be effective only upto and inclusive of the date if any, specified in the First Schedule. (b) The Central Government may reduce or increase the duty by notification in the Official Gazette. (c) If there is any i ncrease in the duty as specified above, then the Central Government is required to place such notification in the Parliament for its approval. If the Parliament recommends any change in the notification, then the notification shall have eff ect subject to such changes. However, any thing done pursuant to the notificatio n before the recommendation by the Parliament shall be valid. 3.4 EMERGENCY POWE R TO IMPOSE OR ENHANCE EXPORT DUTIES [SECTION 8 OF CUSTOMS TARIFF ACT] The Centr al Government may impose or enhance export duties under the following circumstan ces. a. b. The goods may or may not be specified in the Second Schedule. The Cen tral Government is satisfied that circumstances exist, which render it necessary for the imposition or enhancement of export duties. If the above conditions are satisfied, the Central Government may by notificatio n in the Official Gazette make amendment to the Second Schedule so as to provide for increase or levy of the export duty. 3.5 EMERGENCY POWER TO IMPOSE OR ENHAN CE IMPORT DUTIES [SECTION 8A OF CUSTOMS TARIFF ACT] If the following conditions are satisfied, the Central Government may by notification in the Official Gazett e carry out amendments to the First Schedule providing for the imposition or enh ancement of the import duty. a. b. The goods should be specified in the First Sc hedule. The Central Government is satisfied that circumstances exist, which rend er it necessary for the imposition or enhancement of import duties.

Types of Duty 3.7 Proviso to sub-section (1) provides that the Central Government shall not issue any notification under this section unless the earlier notification amending the rate of duty has been placed before the parliament and the same has been passed with or without modifications. 3.6 SAFEGUARD DUTY [SECTION 8B OF CUSTOMS TARIFF ACT] The safeguard duty is imposed for the purpose of protecting the interests of any domestic industry in India. It is product specific i.e. the safeguard duty is a pplicable only for certain articles in respect of which it is imposed. The duty imposed under this section is in addition to any other duty in respect of such g oods levied under this Act or any other law for the time being in force. The dut y imposed under this section shall be in force for a period of 4 years from the date of its imposition. But if the Central Government is of the opinion that the domestic industry has taken measures to adjust to such injury or as the case ma y be to such threat and it is necessary that the safeguard duty should continue to be imposed, it may extend the period of such imposition subject to a maximum of 10 years from the date of first imposition. For the imposition of safeguard d uty the Central Government should be satisfied that, (a) Any article is imported into India in increased quantities; (b) Such increased importation is causing o r threatening to cause serious injury to domestic industry. The duty is imposed by issuing a notification in the Official Gazette. 3.6.1 Exemptions from safegua rd duty.: (a) Articles originating from developing country so long as the share of imports of that article from that country does not exceed 3% of the total imp orts of that article into India. (b) Articles originating from more than one dev eloping country so long as the aggregate of imports from all such developing cou ntries taken together does not exceed 9% of the total imports of that article in to India. (c) Unless specifically made applicable in the notification the articl es imported by a 100% EOU or units in a Free Trade Zone or Special Economic Zone shall not be liable to safeguard duty. 3.6.2 Provisional Assessment : The Centr al Government is also empowered to impose provisional safeguard duty pending det ermination of the final duty. This provisional duty may be imposed on the basis of preliminary determination that increased imports have caused or threatened to cause serious injury to a domestic industry. The provisional duty shall be in f orce for a maximum period of 200 days from the date of its imposition. If upon f inal determination, the Central Government is of the opinion that the increased imports have not caused or threatened to cause serious injury to a domestic indu stry, the duty collected shall be refunded.

3.8 Customs 3.7 POWER OF CENTRAL GOVERNMENT TO IMPOSE TRANSITIONAL PRODUCT SPECIFIC SAFEGUAR D DUTY ON IMPORTS FROM CHINA [SECTION 8C OF THE CUSTOMS TARIFF ACT] The transiti onal product specific safeguard duty under section 8C is imposable only if the C entral Government is satisfied that any article is imported into India, from the Peoples Republic of China, in such increased quantities and under such condition s so as to cause or threatening to cause market disruption to domestic industry. It is product specific i.e. the safeguard duty is applicable only for certain a rticles in respect of which it is imposed. The duty imposed under this section i s in addition to any other duty in respect of such goods levied under this Act o r any other law for the time being in force. The duty imposed under this section shall be in force for a period of 4 years from the date of its imposition. But if the Central Government is of the opinion that the domestic industry has taken measures to adjust to such injury or as the case may be to such threat and it i s necessary that the safeguard duty should continue to be imposed, it may extend the period of such imposition subject to a maximum of 10 years from the date of first imposition. For the imposition of safeguard duty the Central Government s hould be satisfied that, a. b. Any article is imported into India in increased q uantities; Such increased importation is causing or threatening to cause market disruption to domestic industry. The duty is imposed by issuing a notification in the Official Gazette. Under sub -rule (7) (b) the term market disruption shall be caused whenever imports of a lik e article or a directly competitive article produced by the domestic industry, i ncrease rapidly, either absolutely or relatively, so as to be a significant caus e of material injury, or threat of material injury, to the domestic industry. Pr ovisional Assessment under section 8C : Similar to Section 8B the Central Govern ment is also empowered to impose provisional transitional product specific safeg uard duty pending determination of the final duty under sub-section (2). This pr ovisional duty may be imposed on the basis of preliminary determination that inc reased imports have caused or threatened to cause market disruption to a domesti c industry. The provisional duty shall be in force for a maximum period of 200 d ays from the date of its imposition. If upon final determination, the Central Go vernment is of the opinion that the increased imports have not caused or threate ned to cause serious injury to a domestic industry, the duty collected shall be refunded. The Central Government has issued Customs Tariff (Transitional Product specific Safeguard Duty) Rules, 2002. vide Notification No.34/2002-cus (N.T) da ted 11.6.20002 under Section 8C of the Act for the purpose of regulation of the product specific safeguard duty.

Types of Duty 3.9 3.8 COUNTERVAILING DUTY ON SUBSIDIZED ARTICLES [SECTION 9 OF THE CUSTOMS TARIFF ACT] The countervailing duty is imposed if the following conditions are satisfie d. (a) Any country or territory, directly or indirectly, pays or bestows subsidy upon the manufacture or production or exportation of any article. Such subsidy includes subsidy on transportation of such article. (b) Such articles are import ed into India. (c) The importation may or may not directly be from the country o f manufacture or production. (d) The article, if not imported from the country o f manufacture or production, may be in the same condition as when exported from the country of manufacture or production or may be changed in condition by manuf acture, production or otherwise. The amount of countervailing duty shall not exc eed the amount of subsidy paid or bestowed as aforesaid. This duty is in additio n to any other duty chargeable under this Act or any other law for the time bein g in force. Unless revoked earlier, the duty imposed under this section shall ce ase to have effect on the expiry of 5 years form the date of such imposition. Bu t if the Central Government, in a review is of the opinion such cessation is lik ely to lead to continuation or recurrence of such subsidization and injury, it m ay, from time to time, extend the period of such imposition for a further period of 5 years and such further period shall commence from the date of such extensi on. If the review is not completed before the expiry of the period of imposition then the duty may continue to remain in force pending the outcome of such revie w for a further period not exceeding 1 year. Explanation to sub-section (1) prov ides that subsidy shall be deemed to exist if(a) There is financial contribution by the Government or any public body in the exporting or producing country or t erritory. Such contribution may include direct transfer of funds like grants, lo ans etc., waiver of revenue due to the Government etc. (b) There is any form of income or price support granted or maintained by the Government, which results i n increased export of such article or reduced import of any article into that co untry. Countervailing duty shall not be levied unless it is determined that (a) The subsidy relates to export performance; (b) The subsidy relates to the use of domestic goods over imported goods in the export article; or (c) The subsidy ha s been conferred on a limited number of persons engaged in manufacturing produci ng or exporting the article unless such a subsidy is for-

3.10 Customs (1) Research activities conducted by or on behalf of such persons ( 2) Assistance to disadvantaged regions within the territory of the exporting cou ntry; or (3) Assistance to promote adaptation of existing facilities to new envi ronmental requirements. 3.8.1 Provisional Countervailing Duty: When the determin ation of the amount of subsidy is pending, the Central Government may impose a p rovisional countervailing duty not exceeding the amount of such subsidy as provi sionally estimated by it. If the final subsidy determined is less than the subsi dy provisionally determined, then the Central Government shall reduce such duty and also refund the excess duty collected. 3.8.2 Prior imposition of duty : The following conditions should be satisfied for imposition of countervailing duty w ith retrospective effect. (a) The injury to domestic industry, which is difficul t to repair, is caused by massive imports in a relatively short period, of the a rticles benefiting from subsidies. (b) In order to preclude recurrence of such i njury, it is necessary to levy countervailing duty retrospectively. The retrospe ctive date from which the duty is payable shall not be beyond 90 days from the d ate of notification. The provisions of the Customs Act, 1962 and the rules and r egulations made thereunder in respect of date of determination of the rate of du ty, non levy, short levy, refunds, interest, appeals, offences and penalties sha ll apply to the countervailing duty chargeable under section 9. 3.9 ANTI-DUMPING DUTY [SECTION 9A OF THE CUSTOMS TARIFF ACT] The term dumping is defined as an act of selling in quantity at a very low price o r practically regardless of the price. Further it also includes selling goods ab road at less than the market price at home. The anti-dumping duty is country spe cific i.e. it is imposed on imports from a particular country. Section 9A provid es that where any article is exported from any country or territory to India at less than its normal value, then, upon the importation of such article into Indi a, the Central Government may by notification in the Official Gazette, impose an anti-dumping duty not exceeding the margin of dumping in relation to such artic le. The anti-dumping duty shall not be leviable on articles imported by a 100% E OU or a unit in a Free Trade Zone or Special Economic zone, unless the notificat ion specifically makes it applicable for such units. This duty is in addition to any other duty chargeable under this Act or any other law for the time being in force.

Types of Duty 3.11 The provisions of Customs Act, 1962 so far as they relate to the date of determination of rate of duty, levy of interest, offences and penalt ies are incorporated in section 9A. Thus, the provisions of interest, offences a nd penalties in the Customs Act, 1962 could be invoked in relation to any case o f evasion of anti-dumping duty. Unless revoked earlier, the duty imposed under t his section shall cease to have effect on the expiry of 5 years form the date of such imposition. But if the Central Government, in a review is of the opinion t hat such cessation is likely to lead to continuation or recurrence of such dumpi ng and injury, it may, from time to time, extend the period of such imposition f or a further period of 5 years and such further period shall commence from the d ate of such extension. If the review is not completed before the expiry of the p eriod of imposition then the duty may continue to remain in force pending the ou tcome of such review for a further period not exceeding 1 year. 3.9.1 Meaning of certain terms. (a) Margin of dumping: in relation to an article means the diffe rence between its export price and normal value. (b) Export price: in relation t o an article means the price of the article exported from the exporting country or territory. In cases where there is no export price or the export price is unr eliable because of association or a compensatory arrangement between the exporte r and the importer or a third party, the export price may be construed at the pr ice at which the imported articles are first resold to an independent buyer. In case where the article is not resold to an independent buyer or not resold in th e condition as imported, the export price shall be construed on such reasonable basis as may be determined in accordance with the rules made. (c) Normal value: in relation to an article meansThe comparable price, in the ordinary course of t rade, for the like article when destined for consumption in the exporting countr y or territory as determined in accordance with the rules. When there are no sal es of the like article in the ordinary course of trade in the domestic market of the exporting country or territory, or when because of the particular market si tuation or low volume of sales in the domestic market of the exporting country o r territory, such sales do not permit a proper comparison, the normal value shal l be eithera. Comparable representative price of the like article when exported from the exporting country or territory or an appropriate third country as deter mined in accordance with the rules made; or

3.12 Customs b. The cost of production of the said article in the country of ori gin along with reasonable addition for administrative, selling and general costs , and for profits, as determined in accordance with the rules made: c. In case t he article is imported from a country other than the country of origin or where the article has merely been transshipped through the country of export or such a rticle is not produced in the country of export or there is no comparable price in the country of export, the normal value shall be determined with reference to its price in the country of origin. 3.9.2 Provisional anti-dumping duty: When t he normal value and margin of dumping in relation to any article is still in the process of determination in accordance with this section and rules made there u nder, the Central Government may impose anti-dumping duty on the basis of provis ional estimate of such value and margin. If the provisional duty is higher than the margin finally determined, then the Central Government shall reduce the anti -dumping duty and shall also refund the excess duty collected. 3.9.3 Imposition of duty with retrospective effect : If the following conditions are satisfied, t hen the Central Government may by notification in the Official Gazette levy anti dumping duty retrospectively from a date prior to the date of imposition of anti dumping duty. The retrospective date from which the duty is payable shall not b e beyond 90 days from the date of notification. (a) There is a history of dumpin g which caused injury or that the importer was, or should have been, aware that the exporter practises dumping and that such dumping would cause injury; and (b) The injury is caused by massive dumping of an article imported in a relatively short time which in the light of the timing and the volume of the imported artic le dumped and other circumstances is likely to seriously undermine the remedial effect of the antidumping duty liable to be levied. Section 9AA provides that wh ere an importer proves to the satisfaction of the Central Government that he has paid any anti-dumping duty imposed under sub-section (1) of section 9A on any a rticle, in excess of the actual margin of dumping in relation to such article, h e shall be entitled to refund of such excess duty. In Designated Authority vs Ha ldor Topsoe 2000 (120) ELT 11, the Supreme Court held that anti-dumping duty cou ld be fixed with reference to prices in a territory and that European Union coul d also be a territory. 3.10 NO LEVY UNDER SECTION 9 OR SECTION 9A IN CERTAIN CAS ES [SECTION 9B OF THE CUSTOMS TARIFF ACT] This section provides that, notwithsta nding anything contained in section 9 or section 9A,(a) No article shall be subj ected to both countervailing and anti-dumping duties to

Types of Duty 3.13 compensate for the same situation of dumping or export subsid ization. (b) Countervailing and anti-dumping duties shall not be levied just bec ause such articles are exempt from duties or taxes borne by like articles when m eant for consumption in the country of origin or exportation or by reasons of re fund of such duties or taxes. (c) These duties shall not be levied on imports fr om member country of WTO or from a country with whom the GOI has a most favoured nation agreement unless a determination has been made that import of such artic le into India causes or threatens material injury to any established industry in India or materially retards the establishment of any industry in India. (d) The provisional countervailing and anti-dumping duties shall not be levied on any a rticle imported from specified countries unless preliminary findings have been m ade of subsidy or dumping and consequent injury to domestic industry and a furth er determination has also been made that a duty is necessary to prevent injury b eing caused during the investigation The points (b), (c) and (d) mentioned above shall not be applicable in a case where countervailing or anti-dumping duty has been imposed on any article to prevent injury or threat of an injury to the dom estic industry of a third country exporting the like articles to India. The prov isions of section 9C of the Customs Tariff Act enumerate the orders against whic h an appeal can be preferred to CESTAT. The procedure, time limit and other rela ted matters of filing an appeal are addressed to in this section. An appeal file d under this section shall be accompanied by a fee of fifteen thousand rupees. E very application made before the Appellate Tribunal, (a) in an appeal for grant o f stay or for rectification of mistake or for any other purpose; or (b) for rest oration of an appeal or an application, shall be accompanied by a fee of five hu ndred rupees. 3.11 EDUCATION CESS @ 2% With effect from 10.09.2004 an Education Cess has been levied on items imported into India. It is leviable @ 2% on the ag gregate of duties of customs (except safeguard duty under section 8B and 8C, cou ntervailing duty under section 9 and anti dumping duty under section 9A of the C ustoms Tariff Act) leviable on such goods. Items attracting customs duty at boun d rates under International Commitments are exempt from this cess. The cess attr ibutable to the additional duty of customs leviable under section 3 of the Custo ms Tariff Act, paid on inputs and capital goods is available as credit for payme nt of cess on the final products manufactured in India. The Education Cess so co llected is utilized for providing and financing universalised quality basic educ ation.

3.14 Customs The Education Cess on imported goods is in addition to any other du ties of customs chargeable on such goods, under the Customs Act, 1962 or any oth er law for the time being in force. The provisions of the Customs Act, 1962 and the rules and regulations made thereunder, including those relating to refunds a nd exemptions from duties and imposition of penalty, as far as may be, apply in relation to the levy and collection of the Education Cess on imported goods as t hey apply in relation to the levy and collection of the duties of customs on suc h goods under the Customs Act, 1962 or the rules or the regulations, as the case may be. Self-examination questions 1. 2. 3. 4. 5. Differentiate between protect ive duty and safeguard duty. Briefly examine the nature and significance of the levy of anti dumping duty under the Customs Tariff Act, 1975. Write a brief note on education cess on customs duty. Discuss the provisions governing the levy of additional duty of customs chargeable under section 3(5) of the Customs Act, 19 62. What will be the dates of commencement of anti-dumping duty in the following cases under section 9A of the Customs Tariff Act, 1975 and the rules made there under: (i) where no provisional duty is imposed; (ii) where provisional duty is imposed; (iii) where anti-dumping duty is imposed retrospectively from a date pr ior to the date of imposition of provisional duty. Answer 5. The Central Governm ent has power to levy anti-dumping duty on dumped articles in accordance with th e provisions of section 9A of the Customs Tariff Act, 1975 and the rules framed thereunder. The dates of commencement of anti-dumping duty are: (i) When no prov isional duty is imposed under section 9A(2), the date of publication of notifica tion in the Official Gazette imposing anti-dumping duty under section 9A(1). (ii) Where provisional duty is imposed, the date of imposition of provisional du ty, i.e. the date of notification issued in the Official Gazette imposing it und er section 9A(2). (iii) Where anti-dumping duty is imposed retrospectively under section 9A(3) from a date prior to the date of imposition of provisional duty, such prior date as may be notified in the notification imposing anti-dumping dut y retrospectively, but not beyond 90 days from the date of such notification of provisional duty.

4 CLASSIFICATION OF GOODS 4.1 CUSTOMS TARIFF One of the important steps in assessing the amount of duty payable is classifica tion of the goods within the ambit of the Schedule to the Customs Tariff Act. Th e Indian Customs Tariff is based upon the Harmonized System of Nomenclature Alon g the lines of HSN, the customs tariff has a set of Rules of Interpretation of t he tariff schedule and General Explanatory notes. The six rules of interpretatio n and the two general explanatory notes are an integral part of the Schedule. Th e purpose of inclusion of the rules of interpretation and the general explanator y notes as an integral part of the first schedule is to give clear direction as to how the nomenclature in the schedule is to be interpreted and to give statuto ry force to the interpretative rules and the general explanatory notes. The Firs t Schedule comprises of 98 chapters grouped under 21 sections. Most of the secti ons and chapters are preceded by detailed and exhaustive section and, as the cas e may be chapter notes. These notes are part of the statute and hence have the l egal authority in determining the classification of goods. 4.2 GENERAL EXPLANATO RY NOTES There are two general explanatory notes included in the First Schedule. They are (a) The first note explains the relevance of one dash [-] and two dash [--]. - denotes that the said article or group of articles shall be taken to be sub-classificat ion of the article or group of article covered by the said heading. -- denotes tha t that the said article or group of articles shall be taken to be sub-classifica tion of the immediately preceding article or group of articles which has -. (b) Th e abbreviation % in any column of the Schedule in relation to the rate of duty mea ns that the duty shall be computed at the percentage specified on the value of t he goods as defined in section 14 of the Customs Act.

4.2 Customs Example Heading No. (1) 08.01 Sub-heading No. (2) Description of the Article (3) Coconuts, Brazil nuts And Cashew nuts, fresh Or dried, whether or not Shelled o r peeled -Coconuts: 0801.11 0801.19 0801.21 0801.22 0801.31 0801.32 --Desiccated --Other -Brazil nuts: --In shell --Shelled -Cashew nuts: --In shell --Shelled 3 5% 35% Free 25% 35% 35% 25% 25% 35% 35% 25% 25% (4) Rate of duty Standard Prefer ential (5) In the above entry, coconut, which is preceded by - is classification of the headi ng Coconuts, Brazil nuts and Cashew nuts, fresh or dried, whether or not Shelled or peeled and Desiccated. -- is sub-classification of coconut which is preceded b y -. The second explanatory note states that the abbreviation % stands for specifyin g that the rate of duty is ad valorem. It means the duty shall be computed at th e rates specified in the First Schedule on the value of the goods determined in accordance with section 14 of the Customs Act. In the above entry, the standard rates are 35% or as the case may be 25%. 4.3. RULES OF INTERPRETATION OF CUSTOMS TARIFF ACT 4.3.1 Rule 1: The titles of sections, chapters and sub-chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative section or chapter notes and provided such headings or notes do not otherwise require, according to the following provisions: The above rule lays down the following propositions.

Classification of Goods (a) The titles of sections, chapters and sub-chapters do not have any legal force. 4.3 (b) Terms of headings read with relative section and chapter notes are legally r elevant for the purpose of classification. (c) The rules of interpretation need not be resorted to when classification is possible on the basis of description i n heading, sub-heading, chapter notes and section notes. (d) Notes of one chapte r or section cannot be applied for interpreting entries in other chapters or sec tions. Example: Sub-heading 8422.30 Machinery for filling, closing, sealing or l abeling bottles, cans, boxes, bags or other containers; machinery for capsuling bottles, jars, tubes and similar containers; machinery for aerating beverages. S ub-heading 8472.30 inter alia covers machines for closing or sealing opening, cl osing or sealing mails. The product in question is a letter closing and sealing machine. Both the headings appear to be relevant for the product in question. Ho wever, chapter note 2 to chapter 84 inter alia provides that Heading No. 84.22 d oes not cover inter alia office machinery of Heading No. 84.72. Therefore, the p roduct in question will be classified under 8472.30. 4.3.2 Rule 2: (a) Any refer ence in a heading to an article shall be taken to include a reference to that ar ticle incomplete or unfinished, provided that, as presented, the incomplete or u nfinished article has the essential character of the complete or finished articl e. It shall also be taken to include a reference to that article complete or fin ished ( or falling to be classified as complete or finished by virtue of this ru le ), presented unassembled or dis-assembled. This rule lays emphasis on the ess ential character of the goods. Thus goods which have the essential characteristi cs of finished goods will be classified under the same heading in which the fina l product has to be classified. In TELCO Vs. CC, 1990 (50) ELT 571 (T-B2), it wa s held that synchrocones are components of automobiles. Forgings for synchrocone s cannot be treated as parts of automobiles in view of extensive operations to b e carried on, on the forgings. It cannot be said that they have the essential ch aracteristics of the finished product. Therefore such forgings are classifiable as such under heading no. 74.03. (b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classificat ion of goods consisting of more than one material or substance shall be accordin g to the principles of rule 3.

4.4 Customs The following propositions are laid out by the above rule. (a) Any reference to a material or substance would refer to mixture or combination of that material o r substance. (b) Any reference to goods containing a particular material or subs tance would include a reference to goods consisting wholly or partly of such spe cified material or substance. Example: The term coffee will include coffee mixed with chicory. Likewise natural rubber will cover a mixture of natural and synth etic rubber. 4.3.3 Rule 3: When by application of Rule 2(b) or for any other rea son, goods are, prima facie, classifiable under two or more headings, classifica tion shall be effected as follows: (a) The heading which provides the most speci fic description shall be preferred to headings providing a more general descript ion. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the item s in a set up for retail sale, those headings are to be regarded as equally spec ific in relation to hose goods, even if one of them gives a more complete or pre cise description of the goods. (b) Mixtures, composite goods consisting of diffe rent materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified with reference to (a), shall be classifi ed as if they consisted of material which gives them their essential character, in so far as this criterion is applicable. (c) When goods cannot be classified b y reference to (a) or (b), they shall be classified under the heading which occu rs last in numerical order among those which equally merit consideration. The ap plication of this rule arises when the goods consists of more than one material or substance. Sub-rule (a) provides that the heading that provides a more specif ic description should be preferred over the heading that provides a general desc ription. Example: Product: Steel forks Competing headings: Heading 82.15 covers spoons, forks, ladles, skimmers, cakeservers, fish knives etc. Heading 73.23 cov ers table, kitchen or other house hold articles and parts thereof of iron or ste el Classification: Heading 82.15 provides a more specific description of the pro duct in question viz steel forks. Therefore, steel forks should be classified un der that heading

Classification of Goods 4.5 Sub-rule (b) would apply only if the goods cannot be classified under sub-rule ( a). This sub-rule provides that composite goods should be classified on the basi s of that material or substance that gives it its essential character. Example: Product: Lead pencil with an eraser at the back. Classification: Though the abov e is a composite goods the essential character is that it is a pencil and the at tachment of eraser at the stub is only for the purpose of adding convenience to the user. Therefore, it shall be classified as a pencil and not as an eraser. If both sub-rules (a) and (b) fails to classify the goods in question, then resort may be had to sub-rule (c), which provides that composite goods shall be classi fied on the basis of the heading that occurs last in numerical order. Example: P roduct: Conveyor belt used in colliery made up of vulcanized rubber in the top l ayer, textile as the central layer and plastic as the bottom layer. Competing he adings: Heading 40.10 covers conveyor or transmission belting. Heading 59.10 cov ers transmission or conveyor belts or belting of textile material, whether or no t reinforced with metal or other material. Classification: Even though both the headings are equally specific, heading 59.10 will prevail over heading 40.10 by virtue of sub-rule (3) of Rule 3. 4.3.4 Rule 4: Goods which cannot be classified in accordance with the above rules shall be classified under the heading approp riate to the goods to which they are most akin. This rule is popularly referred to as the akin rule. This rule specifies that if the goods cannot be classified in accordance with the earlier rules, they shall be classified under the heading in which the most akin goods are classified. Example: Product: Plastic films us ed to filter or remove the glare of the sun light, pasted on car glass windows, window panes etc. Classification: These goods do not find a specific entry in th e tariff schedule. However, heading 3925.30 covers Builders wares of plastic not elsewhere specified shutters, blinds (including Venetian blinds). Even though th e product in question is not a builders ware, they are most akin to plastic blin ds and hence it can be classified under 3925.30 heading. 4.3.5 Rule 5: In additi on to the foregoing provisions, the following rules shall apply in respect of go ods referred to therein: (a) Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shape d or fitted to contain a specific article or a set of articles; suitable for lon g term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind

4.6 Customs normally sold therewith. This rule does not, however, apply to container s which give the whole its essential character; (b) Subject to the provisions of (a) above, packing materials and packing contai ners presented with the goods therein shall be classified with the goods, if the y are of a kind normally used for packing such goods, however this provision doe s not apply when such packing material or packing containers are clearly suitabl e of repetitive use. This rule while recognizing the practice in international t rade in the matter of packaging of goods lays down the following propositions; ( a) Leather or other cases, which are normally supplied along with the goods, how ever costly they may be, need not be treated separately for the purpose of class ification. (b) Durable containers capable of repetitive use should be classified separately. (c) Containers, which themselves give the essential character to th e contents should be classified on their on merits. 4.3.6 Rule 6: For legal purp oses, the classification of goods in the sub-headings of a heading shall be dete rmined according to the terms of those sub-headings and any related sub-heading notes and, mutatis mutandis, to the above rules, on the understanding that only sub-headings at the same level are comparable. For the purposes of this rule the relative section and chapter notes also apply, unless the context otherwise req uires. The main proposition laid down by this rule is that sub-heading at the sa me level are comparable. This implies that a sub-heading can be compared only wi th another subheading within the same heading. 4.4 SPECIAL PROVISIONS FOR CLASSI FICATION OF SETS OF ARTICLES AND ACCESSORIES Section 19 of the Customs Act provi des that: Except as otherwise provided in any law for the time being in force, w here goods consist of a set of articles, duty shall be calculated as follows: (a ) Articles liable to duty with reference to quantity shall be chargeable to that duty; (b) Articles liable to duty with reference to value shall, if they are li able to duty at the same rate, be chargeable to duty at that rate, and if they a re liable to duty at different rates, be chargeable to duty at the highest of su ch rates; (c) Articles not liable to duty shall be chargeable to duty at the rat e at which articles liable to duty with reference to value are liable under clau se (b):

Classification of Goods Provided that, 4.7 (a) Accessories of, and spare parts or maintenance and repairing implements for, any article which satisfy the conditions specified in the rules made in this be half shall be chargeable at the same rate of duty as that article; (b) If the im porter produces evidence to the satisfaction of the proper officer regarding the value of any of the articles liable to different rates of duty, such article sh all be chargeable to duty separately at the rate applicable to it. As per the Ac cessories (Conditions) Rules, 1963, accessories of and spare parts and maintenan ce or repairing implements for, any article when imported along with that articl e shall be chargeable at the same rate of duty as that article, if the proper of ficer is satisfied that in the ordinary course of trade such accessories, parts and implements are compulsorily supplied along with that article and no separate charge is made for such supply and their price being included in the price of t he relevant article. 4.5 1. SOME CASES ON CLASSIFICATION M/s Sprint RPG India Lt d. Vs. CCE [(2000) 88 ECR 737 (SC)] Product imported: In this case, the assessee imported hard disk loaded with comp uter software. The price paid for 6 such disks was approx. Rs. 68 lacs while the value of the hard disk simpliciter would be roughly be around Rs. 60,000.00. Ri val contentions: Hard disk drive is chargeable to duty under heading 84.71 at a rate of 25% and computer software is chargeable to duty @ 10% [Chapter heading 8 5.24 read with Notification No. 59/95 dated 16-03-95]. The departments view was t hat the goods is classifiable as computer hard drive loaded with software. The a ssesses contention was that what was imported was software loaded on a hard drive disk and hence the rate of duty should be 10%. Decision : The SC observed that computer software can be brought either on a floppy or magnetic tape or on a har d disk or in a printed form and hence what is imported is software on a containe r, which is a hard disk. On the facts of the case the court held that the comput er software imported by the appellant on a hard disk is assessable at a rate of 10% as per heading 85.24 because what was imported by the appellant was software on a hard disk and it was not hard disk in the grab of software. 2. Engee Indus trial Services Pvt. Ltd. Vs. UOI [2000 (115) ELT 58, 63 (Kar)] Product imported: The assessee had imported a ship for the purpose of breaking. Rival contentions : In respect of additional duty of customs, the assesses contention was that the ship is imported for the purpose of breaking and therefore the same is covered under notification no. 167/86-CE dated 01-03-86, which provides for exemption of

4.8 Customs ferrous scrap arising out of ship breaking. The departments contention was that t he imported article was a ship and therefore, the same has to be classified as a ship and not as scrap arising out of ship breaking. Decision: The court observe d that the duty liability arises on the goods imported and not on the products a rising from the breaking up of the imported item. Therefore, it was held that th e ship should be classified as such and not as scrap arising from the breaking o f a ship. 3. Saurashtra Chemicals Vs. CC [1986 (23) ELT 283] This case brings ou t the importance of section notes and chapter notes in the classification of goo ds. The tribunal observed that Section Notes and Chapter Notes in the Customs Ta riff are a part of the statute nd thus are relevant in the matter of classificat ion of goods. These notes sometimes restrict and some times expand the scope of headings. The scheme of the Customs Tariff is to determine the coverage of headi ngs in the light of section notes and chapter notes. These notes, in this sense have an overriding effect on the headings. Kindly refer the chapter on classific ation in Section A Excise for other principles on classification. Self-examinati on questions 1. 2. 3. 4. 5. How will you determine the customs duty where import ed goods consist of articles liable to different rates of duty? What is the purp ose of interpretation rules regarding Customs Tariff? Do they form part of the t ariff schedule? Explain the Akin Rule of interpretation. Explain rule 3 of the Rul es for Interpretation of the Customs Tariff. India Car Co. is manufacturing pass enger cars and has entered into a joint venture agreement and collaboration with Videshi Car Co. India Car Co. imported from Videshi Car Co. a shipment of 24 CK D packs (completely knocked down condition) of passenger car components. They fi led bill of entry for clearing the goods, which were claimed to be components of motor cars. They also claimed benefit of a notification exempting components, i ncluding components of motor cars in semiknocked down packs and completely knock ed down packs. The adjudicating authority held that the imported components bein g complete cars in CKD packs had the essential character of the finished product and as such the consignment were to be treated as motor cars and not components . It was also held that India Car Co. was not entitled to the benefit of the not ification as the notification was only for components.

Classification of Goods Examine brifefly: (i) 4.9 Whether the CKD packs imported into the country could be considered to be motor cars for the purpose of classification and clearance? (ii) Whether India Car Co. is entitled to the benefit of exemption notification? Answer 5. The facts of the given case are similar to the facts of the case of C C, Bangalore v. Maestro Motors Ltd. 2004 (174) ELT 289 (SC) decided by the Apex Court. (i) As per interpretative Rule 2(a) of the General Rules of Interpretatio n of Customs Tariff, any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of t he complete or finished article. It shall also be taken to include a reference t o that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or dis-assembled. This r ule lays emphasis on the essential character of the goods. Thus goods which have the essential characteristics of finished goods will be classified under the sa me heading in which the final product has to be classified. In the Maestro Motor s case, the passenger car components were imported in CKD packs. Thus, what was imported was completely knocked down cars. The components imported had the essen tial character of a complete car even though presented in unassembled form. Thus , in view of Rule 2(a) of the General Rules of Interpretation of Customs Tariff, the Supreme Court held that the components in CKD packs would be classified as motor car. Therefore, in case of India Car Co. also, the CKD packs should be cla ssified as cars for the purpose of classification and clearance. (ii) In the Mae stro Motors case, it was observed by the Supreme Court that a notification has t o be interpreted in terms of its language. If in the notification, exemption is granted with reference to tariff items in the First Schedule to the Customs Tari ff Act, 1975, then the Rules of Interpretation must apply. In that case even for the purposes of the notification, the goods will be classified in the same mann er as they are classified for purposes of payment of customs duty. However, wher e the language of the notification is plain and clear, effect must be given to i t. In this case the notification exempted components, including components of fu el efficient motor cars in semi-knocked down packs and completely knocked down p acks. The Apex Court held that for purposes of levy of customs duty, by virtue o f interpretative Rule 2(a) of the General Rules of Interpretation of Customs

4.10 Customs Tariff, the components in a completely knocked down pack would be c onsidered to be cars. However, in view of the clear language of the Notification , the components including components in completely knocked down packs would be exempted. Thus, in view of the abovementioned judgment, the components in CKD pa cks by India Car Co. would get the exemption under the Notification, even though for purposes of classification and clearance they may be considered to be motor cars.

5 VALUATION UNDER THE CUSTOMS ACT, 1962 5.1 INTRODUCTION The manner in which duties of customs are charged on goods imported into India ( import duty) or goods exported from India (export duty) is basically either by w ay of (a) A specific duty based on the quantity of the goods like Rs. 1000 per m etric tone of steel or (b) Ad valorem, namely expressed as percentage of the val ue of the goods i.e 40% ad valorem. etc. The disadvantage with a specific rated levy is that the revenue to the Government remains fixed, unless there is variat ion in the quantum of total imports and exports. The continuous upward trend in the price of goods has suggested that the Government is losing increase in its r evenue by not following ad valorem basis of duties. 5.2 CONCEPT OF VALUE Section 2(41) of the Customs Act, 1962, defines value in relation to any goods a s the value thereof determined in accordance with the provisions of section 14(1 ). Some of the values commonly known to the public are : (i) Cost price to the m anufacturer: It is the total cost incurred by the manufacturer of an article or product in producing or manufacturing the product. (ii) Sale price of the manufacture: It is the price at which the manufacturer is selling the goods to the buyer. (iii) There are two sale prices namely (a) a do mestic sale price (b) an export price in the course of international trade. (iv) In the course of sale, there are two situations namely, wholesale transactions and retail trade. Thus we have (a) Whole sale price and (b) retail price

5.2 Customs (v) The sale may be on down right cash basis, or payment on delivery of the good s or the title documents or deferred payment say either on installments or after 30 or 90 days. These situations give rise to (a) cash price; (b) payment by sig ht draft; (60 or 90 days draft). (vi) There are situations where the manufacture r himself may not be exporting the goods in the course of international trade. T his gives rise to the concept of suppliers. As a result we have suppliers price. (vii) In the course of international trade, where the buyer is in another countr y, the seller has often to resort price list or catalogues. This is in turn give s rise to list price. (viii) There is always a negotiation between the buyer and the seller. The contracted price is arrived at by giving discounts to the list price. Such discounts are given for various considerations. We have therefore te rms like (i) Trade discount (ii) Quantity discount (iii) Prompt payment cash dis count (iv) L/c discount (v) Special discount (ix) There are situations where the goods are defective, sub standard or there is a glut of stock and the goods hav e to be sold at the best price available. This yields disposal price. (x) The pr ice may vary from consignment from consignment even though there may not be any underhand dealing in the transaction. Such a price is called transaction value. (xi) There may be a clear understanding between the overseas seller and the Indi an buyer of the goods. They may have a special relationship, such as, the Indian buyer may be the sole selling agent for the goods of the overseas seller. He ma y be the sole distributor. He may even be a branch or subsidiary of the seller a nd the sale may be a stock transfer. In such a situation, the price is known as dealers price. (xii) Lastly, if we have no information of any of the matters rela ting to the transaction and we have only the commercial invoice used in the tran saction, the price is invoice price. 5.3 TERMS USED IN COMMERCIAL PARLANCE It would be useful to know and understand the terms and contents of documents us ed in the International Trade transactions.

Valuation Under the Customs Act, 1962 (1) Invoice 5.3 This is the basic commercial document showing particulars regarding description of goods - quantity and unit price - discounts and net price - names of consigno r and consignee - payment particulars. - Contract or acceptance of order on the basis of which the goods are supplied. (2) Packing specification (3) Certificate of Origin Giving particulars of the contents of each of each of the package in the consign ment. A certificate issued by the competent authority in the country of manufact ure giving the extent of the manufacture in that country. A negotiable document given by the carriers of the cargo giving particulars of (a) Port of shipment (b ) No. of packages covered by the consignment (c) Marks and numbers on the page ( d) Name of the vessel in which the goods have been dispatched (e) Name of the co nsignee of the goods, (f) whether the freight has been pre-paid or is to be coll ected at the destination. It is a negotiable document which has to be surrendere d to the carrier for getting delivery of the goods. (4) Bill of Lading (5) Air Consignment Note It is a document corresponding to Bill of Lading, in the case of cargo imported or exported by air. It is a document showing the particulars of the consignment for which the buyer has placed an order with the supplier. It normally gives par ticulars about (i) full description of the goods (ii) unit price (iii) mode of p ayment (iv) quantity required (v) delivery instructions. (6) Indent

5.4 Customs It is a document, which indicates the price, the terms and other conditi ons on which the seller is willing to supply goods to the buyer. It refers to th e formalisation of the contract of sale between the buyer and the seller. Once t he seller of the goods sends his acceptance of the order of the buyer (the inden t) the contract is complete. The acceptance will inter alia contain particulars of description of the goods to be supplied, unit price, including discounts and other charges, time and terms of delivery, penal clause for breach of contract, agreed terms of payment. This is an instrument delivered by the bank intimating the seller that the buyer has instructed the bank and the bank will according to these instructions pay the seller of the goods, the bill amount for the supply of the goods on presentation of certain documents evidencing shipment of the goo ds. A document evidencing the amount of money paid for the importation. An autho risation given by the local agent of the carriers, on surrender of the original negotiable copy of the bill of lading or air consignment note, directing the cus todian of the cargo to deliver the consignment to the importer or his agent. A r eceipt given by the First mate or First officer or cargo supervisor of the conve yance certifying the total quantity of the consignment received on board the ves sel or the aircraft. A bill of lading or air consignment note is issued by the a gent of the Carrier Company on surrender of the mates receipt. (7) Quotation (8) Acceptance (9) Letter of Credit (10) Sight draft (11) Delivery Order (12) Mates Receipt

Valuation Under the Customs Act, 1962 (13) Retirement of documents 5.5 The original negotiable copies of the shipment documents like invoice packing sp ecification, certificate of origin. Since retirement of the original document ta kes time, non negotiable documents are given to the importer to facilitate clear ance. The port authorities have to pay for (i) Unloading the cargo from the conv eyance; (ii) Light house charges (iii) Forklift, warehouse crane charges if they are used for landing. (14) Non-negotiable documents (15) Landing charges (16) Boat/Lighterage Charge Some times the vessel is unable to get a berth alongside the quay in the harbour . The goods are then transported from the ship to the shore by boats / lighters. The charges paid therefore are called Boat / Lighterage charges. Since the impo rters / exporters may not be able to devote time and energy to clear imported go ods or export goods, and since it involves running about several organisations a part from customs, like Port, Trust, steamer agents, insurance companies, the as sistance of agency organisation having adquate technical knowledge andexpertise has been provided in the form of custom house agents. It is customary to insure all goods in the course of international trade. The general cover relates to ris k on account of loss, pilferage, fire, storm etc. However loss of goods on accou nt of seizure of goods due to war, is a separate cover. It is therefore customar y to refer to the insurance as marine risk insurance and war risk nsurance. The policy and cover of such insurance is a relevant document for valuation. (17) Custom House Agent (18) Insurance cover

5.6 Customs 5.4 TECHNICAL TERMS RELATING TO VALUE IN THE COURSE OF IMPORT OR EXPORT (1) Ex-F actory Price It is the price of the goods as comes out of the factory. It includ es cost of production and manufacturers margin of profit. It is the cost at which the export goods are delivered alongside the ship, ready for shipment. It inclu des exfactory +local freight + local taxes. Technically there is not much of a d ifference between FAS and FOB cost. FOB means the stage at which the goods are p laced on board the conveyance carrying the vessel. It can be said to include FAS + loading charges + export duty cess. It is the cost at which the goods are del ivered at the Indian port. It covers cost of goods. Some times there is referred as CFC also. (2) F.A.S ( Free Alongside) (3) F.O.B. (Free on Board) (4) C.I.F. (Cost Insurance Freight) 5.5 CONCEPT OF INDIRECT TAX AND VALUATION FOR THE SAME Customs duty is considere d to be an indirect tax. It is a tax on the goods and it is not a tax on the per son having or owning the goods. The charge of tax attaches to the goods. Unless the tax liability is discharged, the goods are not allowed to proceed further. I t becomes therefore necessary for the importer, who desires to take clearance of the goods into town for home consumption, to discharge the duty liability. Simi larly in case of baggage the passenger cannot take his goods, unless the duty li ability is discharged. The essence is simple. Like articles in similar situation s should attract the same burden. As a corollary it follows that (i) There shoul d be uniformity in tax burden. (ii) Since the rate of duty is already fixed for like goods, the value of goods should be uniform for all imports / exports for l ike good at the same time and place. (iii) The value of the goods should be prox imate to the point of taxation i.e. in the case of import the value at the point of import is relevant. (iv) Variations in the price/agreed in each transaction on account of factors other than in the course of normal international wholesale trade should be adjusted.

Valuation Under the Customs Act, 1962 5.7 5.6 COMPUTATION OF ASSESSABLE VALUE 5.6.1 Two approaches to the assessable value : In the course of import, the goods take the following route. 1 Manufac turer 2 Supplier 3 Port of shipment 4 Port of import 5 Cost to Importer 6 Cost to Whol esale Dealer 7 Cost to Retailer/ consumer Theoretically the value of the goods at stages (1) (2) (3) (5) (6) (7) is tangib le and ascertainable. Furthermore, these values are documented and capable of ve rification by comparison with corresponding values for such or similar goods. Th e documents involved in such stages are (i) Manufacturers price list / quotation / sale invoices. (ii) Suppliers sale invoices/ market prices (iii) Customs approv ed attested documents showing value adopted for levy of export duty and allied c ontrols. (iv) Importers account books (v) Sale invoices issued by importer to the wholesale dealer or the next purchaser. Market trend of the prices of the goods . (vi) Sale invoices of wholesale dealers; and trend of prices in the market. Th e invoice values normally give GIF or FOB values of the goods. The market value is the wholesale market price at which the importers are regularly selling impor ted goods. These two are the tangible and readily available data, at the hands o f the customs officers to arrive at the assessable value a notional deducted value of the goods. Thus two well accepted approaches have evolved : (i) one starting from the actual whole sale market price of the goods in question and giving nec essary abatements to adjust the post importation costs; (ii) the second, to take as base, the value given in the invoice and make necess ary adjustments for factors influencing the price in individual transactions. 5. 6.2 Valuation of goods [section 14] : Section 14 provides that (1) For the purpo ses of the Customs Tariff Act, 1975 (51 of 1975), or any other law for the time being in force where under a duty of customs is chargeable on any goods by refer ence to their value, the value of such goods shall be deemed to be the price at which such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of importation or exportation, as the case may be, in the course of international trade,

5.8 Customs where (i) the seller and the buyer have no interest in the business of each othe r: or the price is the sole consideration for the sale or offer for sale : Provi ded that such price shall be calculated with reference to the rate of exchange a s in force on the date on which a bill of entry is presented under section 46, o r a shipping bill or bill of export, as the case may be, is presented under sect ion 50; (1A) Subject to the provisions of sub-section (1), the price referred to in that sub-section in respect of imported goods shall be determined in accorda nce with the rules made in this behalf. (2) Notwithstanding anything contained i n sub-section (1) or sub-section (1A), if the Board is satisfied that it is nece ssary or expedient so to do it may, by notification in the Official Gazette, fix tariff values for any class of imported goods or export goods, having regard to the trend of value of such or like goods, and where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value. (3) For the purposes of this section (a) "rate of exchange" means the rate of exchange (i) determined by the Board, or (ii) ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency or foreign currency into Indian currency; (b) "foreign currency" and "Indian currency" have the meanings respectively assigned to them in section 2(m)(q) of the Foreign Ex change Management Act, 1999. 5.6.3 are (i) Analysis of section 14 - Deemed value [section 14(1)] : The main ingredients (ii) one of them has no interest in the business of the other; and this provision is applicable only in cases where a duty of customs is chargeable on any goods with reference to their value (ad valorem duty) either under the C ustoms tariff Act, 1975; or under any other law for the time being in force; (ii) the assessable value is a deemed value; (iii) It shall be the price at whic h such or like goods are ordinarily sold. (iv) If there is no sale, it shall be the price at which such or like goods are ordinarily offered for sale (i.e. cata logue price). (v) Further the terms of the price (whether sale price or offer fo r sale) should be such that it is for delivery at the time and place of importat ion or exportation as the case may be

Valuation Under the Customs Act, 1962 (vi) The sale or offer for sale should be in the course of international trade. 5.9 (vii) The seller and the buyer should not have interest in the business of each other or even one of them should not have interest in the business of the other. Earlier the law prohibited mutual interest. Now, even one way interest is not p ermitted. (viii) Finally, the price should be the sole consideration for the sal e or offer for the sale. To remember these eight ingredients the provision of se ction 14(1) can be written as under: For the purpose of the Customs Tariff Act, 1975, or any other law for the time b eing in force, whereunder a duty of customs is chargeable on any goods by reference to t heir value The value of such goods Shall be deemed to be The price At which such or like go ods are ordinarily sold Or offered for sale For delivery at the time and place o f importation or exportation, as the case may be, in the course of international trade, Where the seller and the buyer have no interest in the business of each other or one of them has no interest in the business of the other and the price is the s ole consideration for the sale or offer for the sale . The parameters laid down by s ection 14 are applicable to imports as well as exports. Export goods are to be v alued as per section 14(1) only. However, in case of imported goods, assessable value is to be determined in accordance with the Customs (Determination of Price of Imported Goods) Rules, 1988. However, these rules will apply within the limi ts of section 14(1). These rules are given in para 5.7.1. Tariff value [Section 14(2)]: In case of imported goods in respect of which the Central Government has fixed tariff values, these goods shall be chargeable to duty with reference to such tariff value. Currency conversion rate : The rate of exchange is notified b y three agencies the Central Board of Excise and Customs, the RBI and the Foreig n Exchange Dealers Association of India (FEDAI). For the purpose of customs valua tion, the rates notified by the Central Board of Excise and Customs only are to be considered. These are notified on a monthly basis, applicable from the first day of the month. There are separate rates for imported goods (selling rate) and for export goods (buying rate).

5.10 Customs Conversion date: The conversion in value is to be done with referen ce to the rate of exchange prevalent on the date of filing B/E under section 46 (for imported goods) and the date of filing shipping bill (vessel or aircraft) o r bill of export (vehicle) under section 80 (in case of export goods). 5.7 CUSTO MS VALUATION (DETERMINATION OF PRICE OF IMPORTED GOODS) RULES, 1988 These rules came into force w.e.f 16 th August, 1988. They apply to imported goods where a d uty of customs is chargeable by reference to their value. 5.7.1 Definitions. (1) In these rules, unless the context otherwise requires, (a) "computed value" mea ns the value of imported goods determined in accordance with rule 7A of these ru les; (aa) "deductive value" means the value determined in accordance with rule 7 of these rules; (b) "goods of the same class or kind", means imported goods tha t are within a group or range of imported goods produced by a particular industr y or industrial sector and includes identical goods or similar goods; (c) "ident ical goods" means imported goods (i) which are same in all respects, including p hysical characteristics, quality and reputation as the goods being valued except for minor differences in appearance that do not affect the value of the goods; (ii) produced in the country in which the goods being valued were produced; and (iii) produced by the same person who produced the goods, or where no such goods are available, goods produced by a different person, but shall not include impo rted goods where engineering, development work, art work, design work, plan or s ketch undertaken in India were completed directly or indirectly by the buyer on these imported goods free of charge or at a reduced cost for use in connection w ith the production and sale for export of these imported goods; (d) "produced" i ncludes grown, manufactured and mined; (e) "similar goods" means imported goods (i) which although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be c ommercially interchangeable with the goods being valued having regard to the qua lity, reputation and the existence of trade mark; (ii) produced in the country in which the goods being valued were produced; and

Valuation Under the Customs Act, 1962 5.11 (iii) produced by the same person who produced the goods being valued, or where no such goods are available, goods pr oduced by a different person, but shall not include imported goods where enginee ring, development work, art work, design work, plan or sketch undertaken in Indi a were completed directly or indirectly by the buyer on these imported goods fre e of charge or at a reduced cost for use in connection with the production and s ale for export of these imported goods; (f) "transaction value" means the value determined in accordance with Rule 4 of these rules. (2) For the purpose of thes e rules, persons shall be deemed to be "related" only if (i) they are officers o r directors of one another s businesses; (ii) they are legally recognised partne rs in business; (iii) they are employer and employee; (iv) any person directly o r indirectly owns, controls or holds 5 per cent or more of the outstanding votin g stock or shares of both of them; (v) one of them directly or indirectly contro ls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or ( viii) they are members of the same family. Explanation I. The term "person" al so includes legal persons. Explanation II. Persons who are associated in the b usiness of one another in that one is the sole agent or sole distributor or sole concessionaire, however described, of the other shall be deemed to be related f or the purpose of these rules, if they fall within the criteria of this sub rule . 5.7.2 Determination of the method of valuation (Rule 3) For the purpose of the se rules, (i) subject to Rules 9 and 10A, the value of imported goods shall be t he transaction value; (ii) if the value cannot be determined under the provision s of clause (i) above, the value shall be determined by proceeding sequentially through Rules 5 to 8 of these rules. 5.7.3 Transaction value (Rule 4) (1) The tr ansaction value of imported goods shall be the price actually paid or payable fo r the goods when sold for export to India, adjusted in accordance with the provi sions of Rule 9 of these rules. (2) The transaction value of imported goods unde r sub rule (1) above shall be accepted: Provided that (a) the sale is in the ord inary course of trade under fully competitive conditions;

5.12 Customs (b) the sale does not involve any abnormal discount or reduction fr om the ordinary competitive price; (c) the sale does not involve special discoun ts limited to exclusive agents; (d) objective and quantifiable data exist with r egard to the adjustments required to be made under the provisions of rule 9 to t he transaction value; (e) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which (i) are imposed or requ ired by law or by the public authorities in India; or (ii) limit the geographica l area in which the goods may be resold; or (iii) do not substantially affect th e value of the goods; (f) the sale or price is not subject to same condition or consideration for which a value cannot be determined in respect of the goods bei ng valued; (g) no part of the proceeds of any subsequent resale,disposal or use of the good s by the buyer will accrue directly or indirectly to the seller, unless an appro priate adjustment can be made in accordance with the provisions of Rule 9 of the se rules; and (h) the buyer and seller are not related, or where the buyer and s eller are related, that transaction value is acceptable for customs purposes und er the provisions of subrule (3) below. (3) (a) Where the buyer and seller are r elated, the transaction value shall be accepted provided that the examination of the circumstances of the sale of the imported goods indicate that the relations hip did not influence the price. (b) In a sale between related persons, the tran saction value shall be accepted, whenever the importer demonstrates that the dec lared value of the goods being valued, closely approximates to one of the follow ing values ascertained at or about the same time. (i) the transaction value of i dentical goods, or of similar goods, in sales to unrelated buyers in India; (ii) the deductive value for identical goods or similar goods; (iii) the compute d value for identical goods or similar goods. Provided that in applying the valu es used for comparison, due account shall be taken of demonstrated difference in commercial levels, quantity levels, adjustments in accordance with the provisio ns of Rule 9 of these rules and cost incurred by the seller in sales in which he and the buyer are not related; (c) substitute values shall not be established u nder the provisions of clause (b) of this sub rule.

Valuation Under the Customs Act, 1962 5.13 5.7.4 Transaction value of identical goods (Rule 5) (1)(a) Subject to the provisions of Rule 3 of these rules, the va lue of imported goods shall be the transaction value of identical goods sold for export to India and imported at or about the same time as the goods being value d. (b) In applying this rule, the transaction value of identical goods in a sale at the same commercial level and in substantially the same quantity as the good s being valued shall be used to determine the value of imported goods. (c) Where no sale referred to in clause (b) of sub rule (1) of this rule, is found, the t ransaction value of identical goods sold at a different commercial level or in d ifferent quantities or both, adjusted to take account of the difference attribut able to commercial level or to the quantity or both, shall be used, provided tha t such adjustments shall be made on the basis of demonstrated evidence which cle arly establishes the reasonableness and accuracy of the adjustments, whether suc h adjustment leads to an increase or decrease in the value. (2) Where the costs and charges referred to in sub rule (2) of Rule 9 of these rules are included in the transaction value of identical goods, an adjustment shall be made, if there are significant differences in such costs and charges between the goods being v alued and the identical goods in question arising from differences in distances and means of transport. (3) In applying this rule, if more than one transaction value of identical goods is found; the lowest such value shall be used to determ ine the value of imported goods. 5.7.5 Transaction value of similar goods (Rule 6) (1) Subject to the provisions of Rule 3 of these rules, the value of imported goods shall be the transaction value of similar goods sold for export to India and imported at or about the same time as the goods being valued. (2) The provis ions of clauses (b) and (c) of sub rule (1), sub rule (2) and sub rule (3), of R ule 5 of these rules shall, mutatis mutandis, also apply in respect of similar g oods. 5.7.6 Determination of value when transaction value is not available (Rule 6A) If the value of imported goods cannot be determined under the provisions of rules 4, 5 and 6, the value shall be determined under the provisions of Rule 7 or, when the value cannot be determined under that rule, under Rule 7A, provided that at the request of the importer, and with the approval of the proper office r, the order of application of rules 7 and 7A shall be reversed. 5.7.7 Deductive value (Rule 7) (1) Subject to the provisions of Rule 3 of these rules, if the g oods being valued or identical or similar imported goods are sold in India, in t he condition as imported at or about the time at which the declaration for deter mination of value is presented, the value of imported goods shall be based on th e unit price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to th e sellers in India, subject to the

5.14 Customs following deductions : (i) either the commission usually paid or ag reed to be paid or the additions usually made for profits and general expenses i n connection with sales in India of imported goods of the same class or kind; (i i) the usual costs of transport and insurance and associated costs incurred with in India; (iii) the customs duties and other taxes payable in India by reason of importation or sale of the goods. (2) If neither the imported goods nor identic al nor similar imported goods are sold at or about the same time of importation of the goods being valued, the value of imported goods shall, subject otherwise to the provisions of sub rule (1) of this rule, be based on the unit price at wh ich the imported goods or identical or similar imported goods are sold in India, at the earliest date after importation but before the expiry of ninety days aft er such importation. (3) (a) If neither the imported goods nor identical nor sim ilar imported goods are sold in India in the condition as imported, then, the va lue shall be based on theunit price at which the imported goods, after further p rocessing, are sold in the greatest aggregate quantity to persons who are not re lated to the seller in India. (b) In such determination, due allowance shall be made for the value added by processing and the deductions provided for in items (i) to (iii) of sub rule (1) of this rule. 5.7.8 Computed value (Rule 7A) Subjec t to the provisions of Rule 3, the value of imported goods shall be based on a c omputed value, which shall consist of the sum of:(a) the cost or value of materi als and fabrication or other processing employed in producing the imported goods ; (b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India; (c) the cos t or value of all other expenses under sub rule (2) of rule 9 of these rules. 5. 7.9 Residual method (Rule 8) (1) Subject to the provisions of Rule 3 of these ru les, where the value of imported goods cannot be determined under the provisions of any of the preceding rules, the value shall be determined using reasonable m eans consistent with the principles and general provisions of these rules and su b section (1) of Section 14 of the Customs Act, 1962 (52 of 1962) and on the bas is of data available in India. (2) No value shall be determined under the provis ions of this rule on the basis of (i) (ii) the selling price in India of the go ods produced in India; a system which provides for the acceptance for customs pu rposes of the highest of the two alternative values;

Valuation Under the Customs Act, 1962 5.15 (iii) the price of the goods on the d omestic market of the country of exportation; (iiia) the cost of production other than computed values which have been determi ned for identical or similar goods in accordance with the provisions of rule 7A; (iv) the price of the goods for export to a country other than India; (v) minim um customs values; or (vi) arbitrary or fictitious values. 5.7.10 Cost and servi ces (Rule 9) (1) In determining the transaction value, there shall be added to t he price actually paid or payable for the imported goods, (a) the following cost and services, to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:(i) commis sions and brokerage, except buying commissions; (ii) the cost of containers whic h are treated as being one for customs purposes with the goods in question; (iii ) the cost of packing whether for labour or materials; (b) the value, apportione d as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that s uch value has not been included in the price actually paid or payable, namely:(i ) materials, components, parts and similar items incorporated in the imported go ods; (ii) tools, dies, moulds and similar items used in the production of the importe d goods; (iii) materials consumed in the production of the imported goods; (iv) engineering, development, art work, design work, and plans and sketches undertak en elsewhere than in India and necessary for the production of the imported good s; (c) royalties and licence fees related to the imported goods that the buyer i s required to pay, directly or indirectly, as a condition of the sale of the goo ds being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; (d) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, dire ctly or indirectly, to the seller; (e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller, or by the buyer to a third party to satisfy an obligation of the seller to the e xtent that such payments are not included in the price

5.16 Customs actually paid or payable. (2) For the purposes of sub section (1) a nd sub section (1A) of Section 14 of the Customs Act, 1962 (52 of 1962) and thes e rules, the value of the imported goods shall be the value of such goods, for d elivery at the time and place of importation and shall include (a) the cost of t ransport of the imported goods to the place of importation; Due to non availabil ity of deep draught all ports are not navigable up to the Jetty and therefore th e goods have to be discharged/transhipped at the outer anchorage. Further, in ma ny busy ports, goods are off loaded at the anchorage on barges in order to ease the congestion in the docks. Such charges associated with delivery of cargo at o uter anchorage are known as barging/lighterage charges. These barging/lighterage charges borne by the importer in bringing the goods from the outer anchorage to the landmass have to be included in the assessable value as extended cost of tra nsportation under Rule 9(2)(a) of Customs Valuation (Determination of Price of Im ported Goods) Rules, 1988. The value of the goods is deemed to be the price at w hich such goods are ordinarily sold or offered for sale, for delivery at the tim e and place of importation in the course of international trade. The importation is complete when the goods reach the landmass of the country and not at the out er anchorage point. Therefore, all the expenses incurred by the by the importer in bringing the goods to the landmass of the country will be includable in the a ssessable value [M.F. (D.R.) Circular No. 29/2004 Cus., dated 13.04.2004] (b) loa ding, unloading and handling charges associated with the delivery of the importe d goods at the place of importation; and (c) the cost of insurance : Provided th at (i) where the cost of transport referred to in clause (a) is not ascertainabl e, such cost shall be 20% of the free on board value of the goods; (ii) the charges referred to in clause (b) shall be 1% of the free on board valu e of the goods plus the cost of transport referred to in clause (a) plus the cos t of insurance referred to in clause (c); (iii) where the cost referred to in cl ause (c) is not ascertainable, such cost shall be 1.125% of free on board value of the goods; Provided further that in the case of goods imported by air, where the cost referred to in clause (a) is ascertainable, such cost shall not exceed 20% of free on board value of the goods : Provided also that where the free on b oard value of the goods is not ascertainable, the costs referred to in clause (a ) shall be twenty per cent of the free on board value of the goods plus cost of insurance for clause (i) above and the cost referred to in clause (c) shall be 1 .125% of the free on board value of the goods plus cost of transport for clause (iii) above.

Valuation Under the Customs Act, 1962 5.17 Provided also that in case of goods i mported by sea stuffed in a container for clearance at an Inland Container Depot or Container Freight Station, the cost of freight incurred in the movement of c ontainer from the port of entry to the Inland Container Depot or Container Freig ht Station shall not be included in the cost of transport referred to in clause( a). In other words, the cost of transportation from the port to ICD/CFS is not i ncludable in the assessable value. (3) Additions to the price actually paid or p ayable shall be made under this rule on the basis of objective and quantifiable data. (4) No addition shall be made to the price actually paid or payable in det ermining the value of the imported goods except as provided for in this rule. 5. 7.11 Declaration by the importer (Rule 10) (1) The importer or his agent shall f urnish (a) a declaration disclosing full and accurate details relating to the va lue of imported goods; and (b) any other statement, information or document incl uding an invoice of the manufacturer or producer of the imported goods where the goods are imported from or through a person other than the manufacturer or prod ucer, as considered necessary by the proper officer for determination of the val ue of imported goods under these rules. (2) Nothing contained in these rules sha ll be construed as restricting or calling into question the right of the proper officer of customs to satisfy himself as to the truth or accuracy of any stateme nt, information, document or declaration presented for valuation purposes. (3) T he provisions of the Customs Act, 1962 (52 of 1962) relating to confiscation, pe nalty and prosecution shall apply to cases where wrong declaration, information, statement or documents are furnished under these rules. 5.7.12 Rejection of dec lared value (Rule 10A) (1) When the proper officer has reason to doubt the truth or accuracy of the value declared in relation to any imported goods, he may ask the importer of such goods to furnish further information including documents o r other evidence and if, after receiving such further information, or in the abs ence of a response of such importer, the proper officer still has reasonable dou bt about the truth or accuracy of the value so declared, it shall be deemed that the value of such imported goods cannot be determined under the provisions of s ub rule (1) of Rule 4. (2) At the request of an importer, the proper officer, sh all intimate the importer in writing the grounds for doubting the truth or accur acy of the value declared in relation to goods imported by such importer and pro vide a reasonable opportunity of being heard, before taking a final decision und er sub rule (1).

5.18 Customs 5.7.13 Settlement of dispute (Rule 11) In case of dispute between th e importer and the proper officer of customs valuing the goods, the same shall b e resolved consistent with the provisions contained in sub section (1) of Sectio n 14 of the Customs Act, 1962 (52 of 1962). 5.7.14 Interpretative Notes (Rule 12 ) The interpretative notes specified in the Schedule to these rules shall apply for the interpretation of these rules. 5.7.15 General Note : Use of generally ac cepted accounting principles "Generally accepted accounting principles" refers t o the recognized consensus or substantial authoritative support within a country at a particular time as to which economic resources and obligations shall be re corded as assets and liabilities, which changes in assets and liabilities should be recorded, how the assets and liabilities and changes in them should be measu red, what information should be disclosed and how it should be disclosed and whi ch financial statements should be prepared. These standards may be broad guideli nes of general application as well as detailed practices and procedures. 5.8 NOT ES TO RULES 5.8.1 Note to Rule 2: In Rule 2(2)(v), for the purposes of these rules, one pers on shall be deemed to control another when the former is legally or operationall y in a position to exercise restraint or direction over the latter. 5.8.2 Note t o Rule 4 Price actually paid or payable: The price actually paid or payable is the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. The payment need not necessarily take the form of a transfer of money. Payment may be made by way of letters of credit or negotia ble instruments. Payment may be made directly or indirectly. An example of an in direct payment would be the settlement by the buyer, whether in whole or in part , of a debt owed by the seller. Activities undertaken by the buyer on his own ac count, other than those for which an adjustment is provided in Rule 9, are not c onsidered to be an indirect payment to the seller, even though they might be reg arded as of benefit to the seller. The costs of such activities shall not, there fore, be added to the price actually paid or payable in determining the value of imported goods. The value of imported goods shall not include the following cha rges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods: (a) Charges for construction, erection, asse mbly, maintenance or technical assistance, undertaken after importation on impor ted goods such as industrial plant, machinery or equipment; (b) The cost of tran sport after importation; (c) Duties and taxes in India.

Valuation Under the Customs Act, 1962 5.19 The price actually paid or payable re fers to the price for the imported goods. Thus the flow of dividends or other pa yments from the buyer to the seller that do not relate to the imported goods are not part of the customs value. Rule 4(2)(e) (iii) : Among restrictions which wo uld not render a price actually paid or payable unacceptable are restrictions wh ich do not substantially affect the value of the goods. An example of such restr ictions would be the case where a seller requires a buyer of automobiles not to sell or exhibit them prior to a fixed date which represents the beginning of a m odel year. Rule 4(2)(f) : If the sale or price is subject to some condition or c onsideration for which a value cannot be determined with respect to the goods be ing valued, the transaction value shall not be acceptable for customs purposes. Some examples of this include: (a) The seller establishes the price of the impor ted goods on condition that the buyer will also buy other goods in specified qua ntities; (b) the price of the imported goods is dependent upon the price or pric es at which the buyer of the imported goods sells other goods to the seller of t he imported goods; (c) the price is established on the basis of a form of paymen t extraneous to the imported goods, such as where the imported goods are semifin ished goods which have been provided by the seller on condition that he will rec eive a specified quantity of the finished goods. However, conditions or consider ations relating to the production or marketing of the imported goods shall not r esult in rejection of the transaction value. For example, the fact that the buye r furnishes the seller with engineering and plans undertaken in India shall not result in rejection of the transaction value for the purposes of Rule 4. Likewis e, if the buyer undertakes on his own account, even though by agreement with the seller, activities relating to the marketing of the imported goods, the value o f these activities is not part of the value of imported goods nor shall such act ivities result in rejection of the transaction value. Rule 4(3) : 1. Rule 4(3)(a ) and Rule 4(3)(b) provide different means of establishing the acceptability of a transaction value. 2. Rule 4(3)(a) provides that where the buyer and the selle r are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the value of imported goods provided that the relationship did not influence the price. It is not intended that there sho uld be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubt s about the acceptability of the price. Where the proper officer of customs has no doubts about the acceptability of the price, it should be accepted without re questing further information from the

5.20 Customs importer. For example, the proper officer of customs may have previ ously examined the relationship, or he may already have detailed information con cerning the buyer and the seller, and may already be satisfied from such examina tion or information that the relationship did not influence the price. 3. Where the proper officer of customs is unable to accept the transaction value without further inquiry, he should give the importer an opportunity to supply such furth er detailed information as may be necessary to enable him to examine the circums tances surrounding the sale. In this context, the proper officer of customs shou ld be prepared to examine relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way i n which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and sell er, although related under the provisions of Rule 2(2), buy from and sell to eac h other as if they were not related, this would demonstrate that the price had n ot been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the ind ustry in question or with the way the seller settles prices for sales to buyers who are not related to him, this would demonstrate that the price had not been i nfluenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is represe ntative of the firm s overall profit realized over a representative period of ti me (e.g. on an annual basis) in sales of goods of the same class or kind, this w ould demonstrate that the price had not been influenced. 4. Rule 4(3)(b) provide s an opportunity for the importer to demonstrate that the transaction value clos ely approximates to a "test" value previously accepted by the proper officer of customs and is therefore acceptable under the provisions of Rule 4. Where a test under rule 4(3)(b) is met, it is not necessary to examine the question of influ ence under Rule 4(3)(a). If the proper officer of customs has already sufficient information to be satisfied, without further detailed inquiries, that one of th e tests provided in Rule 4(3)(b) has been met, there is no reason for him to req uire the importer to demonstrate that the test can be met. In Rule 4(3)(b) the t erm "unrelated buyers" means buyers who are not related to the seller in any par ticular case. Rule 4(3)(b) : A number of factors must be taken into consideratio n in determining whether one value "closely approximates" to another value. Thes e factors include the nature of the imported goods, the nature of the industry i tself, the season in which the goods are imported, and whether the difference in values is commercially significant. Since these factors may vary from case to c ase, it would be impossible to apply a uniform standard such as a fixed percenta ge, in each case. For example, a small difference in value in a case involving o ne type of goods could be unacceptable while a large difference in a case involv ing another type of goods might be acceptable in determining whether the transac tion value closely approximates to the "test" values set forth in Rule 4(3)(b).

Valuation Under the Customs Act, 1962 5.21 5.8.3 Note to Rule 5 : 1. In applying rule 5, the proper officer of customs shall, wherever possible, use a sale of i dentical goods at the same commercial level and in substantially the same quanti ties as the goods being valued. Where no such sale is found, a sale of identical goods that takes place under any one of the following three conditions may be u sed: (a) a sale at the same commercial level but in different quantities; (b) a sale at a different commercial level but in substantially the same quantities; o r (c) a sale at a different commercial level and in different quantities. 2. Hav ing found a sale under any one of these three conditions adjustments will then b e made, as the case may be, for : (a) quantity factors only; (b) commercial leve l factors only; or (c) both commercial level and quantity factors. 3. For the pu rposes of Rule 5, the transaction value of identical imported goods means a valu e, adjusted as provided for in rule 5(l)(b) and (c) and rule 5(2) which has alre ady been accepted under Rule 4. 4. A condition for adjustment because of differe nt commercial levels or different quantities is that such adjustment, whether it leads to an increase or a decrease in the value, be made only on the basis of d emonstrated evidence that clearly establishes the reasonableness and accuracy of the adjustment, e.g. valid price lists containing prices referring to different levels or different quantities. As an example of this, if the imported goods be ing valued consist of a shipment of 10 units and the only identical imported goo ds for which a transaction value exists involved a sale of 500 units, and it is recognised that the seller grants quantity discounts, the required adjustment ma y be accomplished by resorting to the seller s price list and using that price a pplicable to a sale of 10 units. This does not require that a sale had to have b een made in quantities of 10 as long as the price list has been established as b eing bona fide through sales at other quantities. In the absence of such an obje ctive measure, however, the determination of a value under the provisions of rul e 5 is not appropriate. 5.8.4 Note to Rule 6 : 1. In applying Rule 6, the proper officer of customs shall, wherever possible, use a sale of similar goods at the same commercial level and in substantially the same quantities as the goods bei ng valued. For the purpose of Rule 6, the transaction value of similar imported goods means the value of imported goods, adjusted as provided for in rule 6(2) w hich has already been accepted under Rule 4. 2. All other provisions contained i n note to Rule 5 shall mutatis mutandis also apply in respect of similar goods. 5.8.5 Note to Rule 7 : 1. The term "unit/price at which ... goods are sold in th e greatest aggregate quantity"

5.22 Customs means the price at which the greatest number of units is sold in sa les to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place. 2. As an example of this, goods are sold from a price list which grants favourab le unit prices for purchases made in larger quantities. Sale quantity 1 10 units 11 25 units Over 25 units Unit price 100 95 90 Number of sales 10 sales of 5 un its, 5 sales of 3 units 5 sales of 11 units 1 sale of 30 units, 1 sale of 50 uni ts Total quantity sold at each price 65 55 80 The greatest number of units sold at a price is 80, therefore, the unit price in the greatest aggregate quantity is 90. 3. As another example of this, two sales occur. In the first sale 500 units are sold at a price of 95 currency units eac h. In the second sale 400 units are sold at a price of 90 currency units each. i n this example, the greatest number of units sold at a particular price is 500, therefore, the unit price in the greatest aggregate quantity is 95. 4. A third e xample would be the following situation where various quantities are sold at var ious prices. (a) Sales Sale quantity 40 units 30 units 15 units 50 units 25 unit s 35 units 5 units (b) Totals Total quantity sold 65 50 60 25 Unit price 100 90 100 95 105 90 100 Unit price 90 95 100 105

Valuation Under the Customs Act, 1962 5.23 In this example, the greatest number of units sold at a particular price is 65, therefore, the unit price in the grea test aggregate quantity is 90. 5. Any sale in India, as described in paragraph 1 above to a person who supplies directly or indirectly free of charge or at redu ced cost for use in connection with the production and sale for export of the im ported goods any of the elements specified in Rule 9(l)(b), should not be taken into account in establishing the unit price for the purposes of Rule 7. 6. It sh ould be noted that "profit and general expenses" referred to in rule 7(1) should be taken as a whole. The figure for the purposes of this deduction should be de termined on the basis of information supplied by or on behalf of the importer un less his figures are inconsistent with those obtaining in sales in India, of imp orted goods of the same class or kind. Where the importer s figures are inconsis tent with such figures, the amount for profit and general expenses may be based upon relevant information other than that supplied by or on behalf of the import er. 7. The "general expenses" include the direct and indirect costs of marketing the goods in question. 8. Local taxes payable by reason of the sale of the good s for which a deduction is not made under the provisions of rule 7(1)(iii) shall be deducted under the provisions of rule 7(1)(i). 9. In determining either the commissions or the usual profits and general expenses under the provisions of ru le 7(1), the question whether certain goods are "of the same class or kind" as o ther goods must be determined on a case by case basis by reference to the circum stances involved. Sales in India, of the narrowest group or range of imported go ods of the same class or kind, which includes the goods being valued, for which the necessary information can be provided, should be examined. For the purposes of Rule 7 goods of the same class or kind" includes goods imported from the same country as the goods being valued as well as goods imported from other countrie s. 10. For the purposes of rule 7(2) the "earliest date" shall be the date by wh ich sales of the imported goods or of identical or similar imported, goods are m ade in sufficient quantity to establish the unit price. 11. Where the method in rule 7(3) is used, deductions made for the value added by further processing sha ll be based on objective and quantifiable data relating to the cost of such work . Accepted industry formulas, recipes, methods of construction, and other indust ry practices would form the basis of the calculations. 12. It is recognized that the method of valuation provided for in rule 7(3) would normally not be applica ble when, as a result of the further processing, the imported goods lose their i dentity. However there can be instances where, although the identity of the impo rted goods is lost, the value added by the processing can be determined accurate ly without unreasonable difficulty. On the other hand, there can also be instanc es where the imported goods maintain their identity but form such a minor elemen t in the goods sold in the country of importation that the use of this valuation method would be unjustified. In

5.24 Customs view of the above, each situation of this valuation method would be unjustified. In view of the above, each situation of this type must be consider ed on a case by case basis. 5.8.6 Note to Rule 7A : 1. As a general rule, value of imported goods is determined under these rules on the basis of information re adily available in India. In order to determine a computed value, however, it ma y be necessary to examine the costs of producing the goods being valued and othe r information which has to be obtained from outside India. Furthermore, in most cases, the producer of the goods will be outside the jurisdiction of the proper officer. The use of the computed value method will generally be limited to those cases where the buyer and seller are related, and the producer is prepared to s upply to the proper officer the necessary costings and to provide facilities for any subsequent verification which may be necessary. 2. The "cost or value" refe rred to in clause (a) of rule 7A is to be determined on the basis of information relating to the production of the goods being valued supplied by or on behalf o f the producer. It is to be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accountin g principles applied in the country where goods are produced. 3. The "cost or va lue" shall include the cost of elements specified in clauses (1)(a)(ii) and (1)( a)(iii) of rule 9. It shall also include the value, apportioned as appropriate u nder the provisions of the relevant note to rule 9, of any element specified in rule 9(l)(b) which has been supplied directly or indirectly by the buyer for use in connection with the production of the imported goods. The value of the eleme nts specified in rule 9(l)(b)(iv) which are undertaken in India shall be include d only to the extent that such elements are charged to the producer. It is to be understood that no cost or value of the elements referred to in this paragraph shall be counted twice in determining the computed value. 4. The "amount for pro fit and general expenses" referred to in clause(b) of rule 7A is to be determine d on the basis of information supplied by or on behalf the producer unless the p roducer s figures are inconsistent with those usually reflected in sales of good s of the same class or kind as the goods being valued which are made by producer s in the country of exportation for export to India. 5. It should be noted in th is context that the "amount for profit and general expenses" has to be taken as a whole. It follows that if, in any particular case, producer s profit figure is low and his general expenses are high, the producers profit and general expenses taken together may nevertheless be consistent with that usually reflected in sa les of goods of the same class or kind. Such a situation might occur, for exampl e, if a product were being launched in India and the producer accepted a nil or low profit to offset high general expenses associated with the launch. Where the producer can demonstrate a low profit on his sales of the imported goods becaus e of particular commercial circumstances, his actual profit figures should be ta ken into account provided that he has valid commercial reasons to justify them a nd his pricing policy reflects usual pricing policies in the branch of industry concerned. Such a situation might occur for example, where producers have been f orced to lower prices temporarily because of an unforeseeable drop in demand, or where they sell goods to complement a range of goods being produced in India an d

Valuation Under the Customs Act, 1962 5.25 accept a low profit to maintain compe titivity. Where the producer s own figures for profit and general expenses are n ot consistent with those usually reflected in sales of goods of the same class o r kind as the goods being valued which are made by producers in the country of e xportation for export to India, the amount for profit and general expenses may b e based upon relevant information other than that supplied by or on behalf of th e producer of the goods. 6. The "general expenses" referred to in clause (b) of rule 7A covers the direct and indirect costs of producing and selling the goods for export which are not included under clause (a) of rule 7A. 7. Whether certai n goods are "of the same class or kind" as other goods must be determined on a c ase by case basis with reference to the circumstances involved. In determining t he usual profits and general expenses under the provisions of rule 7A, sales for export to India of the narrowest group or range of goods, which includes the go ods being valued, for which the necessary information can be provided, should be examined. For the purposes of rule 7A "goods of the same class or kind" must be from the same country as the goods being valued. 5.8.7 Note to Rule 8 : 1. Valu e of imported goods determined under the provisions of Rule 8 should to the grea test extent possible, be based on previously determined customs values. 2. The m ethods of valuation to be employed under rule 8 may be those laid down in rules 4 to 7A, inclusive, but a reasonable flexibility in the application of such meth ods would be in conformity with the aims and provisions of Rule 8. 3. Some examp les of reasonable flexibility are as follows : (a) Identical goods. The requir ement that the identical goods should be imported at or about the same time as t he goods being valued could be flexibly interpreted; identical imported goods pr oduced in a country other than the country of exportation of the goods being val ued could be the basis for customs valuation; customs values of identical import ed goods already determined under the provisions of Rules 7 and 7A could be used . (b) Similar goods. The requirement that the similar goods should be imported at or about the same time as the goods being valued could be flexibly interpret ed; similar imported goods produced in a country other than the country of expor tation of the goods being valued could be the basis for customs valuation; custo ms values of similar imported goods already determined under the provisions of r ules 7 and 7A could be used. (c) Deductive method. The requirement that the go ods shall have been sold in the "condition as imported" in rule 7(1) could be fl exibly interpreted; the ninety days requirement could be administered flexibly. 5.8.8 Note to Rule 9 : In rule 9(1)(a)(i), the term "buying commissions" means f ees paid by an importer to his agent for the service of representing him abroad in the purchase of the goods being valued.

5.26 Customs Rule 9(l)(b)(ii) : 1. There are two factors involved in the apporti onment of the elements specified in rule 9(1)(b)(ii) to the imported goods, the value of the element itself and the way in which that value is to be apportioned to the imported goods. The apportionment of these elements should be made in a reasonable manner appropriate to the circumstances and in accordance with genera lly accepted accounting principles. 2. Concerning the value of the element, if t he importer acquires the element from a seller not related to him at a given cos t, the value of the element is that cost. If the element was produced by the imp orter or by a person related to him, its value would be the cost of producing it . If the element had been previously used by the importer, regardless of whether it had been acquired or produced by such importer, the original cost of acquisi tion or production would have to be adjusted downward to reflect its use in orde r to arrive at the value of the element. 3. Once a value has been determined for the element, it is necessary to apportion that value to the imported goods. The re can be various possibilities for such a situation. For example, the value mig ht be apportioned to the first shipment if the importer wishes to pay duty on th e entire value at one time. As another example, the importer may request that th e value be apportioned over the number of units produced up to the time of the f irst shipment. As a further example, he may request that the value be apportione d over the entire anticipated production where contracts or firm commitments exi st for that production. The method of apportionment used will depend upon the do cumentation provided by the importer. 4. As an illustration of the above, an imp orter provides the producer with a mould to be used in the production of the imp orted goods and contracts with him to buy 10000 units. By the time of arrival of the first shipment of 1000 units, the producer has already produced 4,000 units . The importer may request the proper officer of customs to apportion the value Rule 9(1)(b)(iv) : 1 of the mould over 1,000 units, 4,000 units or 10,000 units. . Additions for the elements specified in rule 9(1)(b)(iv) should be based on ob jective and quantifiable data. In order to minimise the burden for both the impo rter and proper officer of customs in determining the values to be added, data r eadily available in the buyer s commercial record system should be used in so fa r as possible. 2. For those elements supplied by the buyer which were purchased or leased by the buyer, the addition would be the cost of the purchase or the le ase. No addition shall be made for those elements available in the public domain , other than the cost of obtaining copies of them. 3. The case with which it may be possible to calculate the values to be added will depend on a particular fir m s structure and management practice, as well as its accounting methods.

Valuation Under the Customs Act, 1962 5.27 4. For example, it is possible that a firm which imports a variety of products from several countries maintains the r ecords of its design centre outside the country of importation in such a way as to show accurately the costs attributable to a given product. In such cases, a d irect adjustment may appropriately be made under the provisions of rule 9. 5. In another case, a firm may carry the cost of the design centre outside the countr y of importation as a general overhead expense without allocation to specific pr oducts. In this instance, an appropriate adjustment could be made under the prov isions of rule 9 with respect to the imported goods by apportioning total design centre costs over total production benefiting from the design centre and adding such apportioned cost on a unit basis to imports. 6. Variations in the above ci rcumstances will, of course, require different factors to be considered in deter mining the proper method of allocation. 7. In cases where the production of the element in question involves a number of countries and over a period of time, th e adjustment should be limited to the value actually added to that element outsi de the country of importation. Rule 9(1)(c) : 1. The royalties and licence fees referred to in rule 9(1)(c) may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to rep roduce the imported goods in the country of importation shall not be added to th e price actually paid or payable for the imported goods in determining the custo ms value. 2. Payments made by the buyer for the right to distribute or resell th e imported goods shall not be added to the price actually paid or payable for th e imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods. Rule 9(3) : Where objective an d quantifiable data do not exist with regard to the additions required to be mad e under the provisions of rule 9, the transaction value cannot be determined und er the provisions of rule 4. As an illustration of this, a royalty is paid on th e basis of the price in a sale in the importing country of a litre of a particul ar product that was imported by the kilogram and made up into a solution after i mportation. If the royalty is based partially on the imported goods and partiall y on other factors, which have nothing to do with the imported goods (such as wh en the imported goods are mixed with domestic ingredients and are no longer sepa rately identifiable, or when the royalty cannot be distinguished from special fi nancial arrangements between the buyer and the seller), it would be inappropriat e to attempt to make an addition for the royalty. However, if the amount of this royalty is based only on the imported goods and can be readily quantified, an a ddition to the price actually paid or payable can be made.

5.28 Customs 5.8.9 Case Laws: Some judicial decisions relevant to the above fact ors are given below: (a) Deemed Value and price : In the case of Union of India Vs. Glaxo Laboratories, (1984 (17) ELT. 284) the Bombay High Court held that the value under section 14(1) (a) is not necessarily the invoice price or the price agreed upon between the parties; but it is a deemed value.In Garden Silk Mills Ltd vs UOI, 1999 (113) ELT 358, the Supreme Court held that such value should be determined when they reach the customs barrier and they could be less than or m ore than the value indicated in documents. Normally the invoice value would be a cceptable as that would show the value at which the transaction has taken place. See UOI vs Mahindra & Mahindra Ltd 1995 (76) ELT 481. Normally, a declared pric e list can be used for the purpose of arriving at the value but there is no hard and fast rule and the invoice may supercede the price list as held by the Supre me Court in Mirah Exports Pvt.Ltd vs CC 1998 (98) ELT 3. Therefore, the Supreme Court has recognized that negotiated prices may be accepted as a basis of valuat ion. In fact, in Eicher Tractors Ltd vs CC 2000 (122) ELT 321, the Supreme Court upheld the grant of large discounts amounting to 77% as stock clearance after n egotiation stating that this would be the transaction value in respect of such c onsignments and that large discount was a common practice for bulk buyers. It mu st be noted that Rule 4 has been amended on 7.9.2001 to negative this decision w herein clause (b) to proviso to Rule 4(2) states that abnormal discounts or redu ctions from ordinary competitive prices shall not be taken into account. Even sp ecial discounts limited to exclusive agents would mean that transaction value of such items cannot be determined. (b) At which such or like goods are ordinarily sold : In the case of Chander Prakash & Co., Vs. Collector of Customs 1990 (50) ELT 309 the CEGAT held that when comparable price for comparable goods was avai lable, adoption of invoice value which was low was held to be incorrect. It was held that statutory provision of section 14(1)(a) clearly permitted adoption of prices of comparable goods. In this case a bill of entry was filed on 26.09.80 f or import of 100 packages of dry figs at an invoice price of 1 US $ per kg. Howe ver on the previous day i.e 25.09.80, a consignment of dry figs was cleared at t he rate of US $ 1.50 per kg. The representative samples on comparison were found to be identical, the customs adopted the rate of US $ 1.50 per kg. as the basis of assessable value. It has been held by the Supreme Court in Rajkumar Knitting Mills P.Ltd vs CC 1998 (77) ECR 236 that what is relevant is the date of import Ordinarily Sold : In the case of Maruti, who had ation and not the contract date. a collaboration with Suzuki Motor Co. Ltd. it was contended by the Department th at since Maruti was the only buyer of Suzuki SKD/CKD packs and complete vehicles , the price charged could not be said to be the one at the which the goods were o rdinarily sold or offered for sale. Relying upon the decision of the Supreme Cour t in Atic Industries case [1984(17) ELT 323]

Valuation Under the Customs Act, 1962 5.29 where in the scope of parallel provis ion in the Central Excise & Salt Act (Sec 4) was interpreted, the CEGAT held tha tthere is no reason why the interpretation by the honourable Supreme Court on Sec tion 4 of CES Act 1944 should not apply to the materially identical provision of Section 14 of the Customs Act. For the price to be called the one at which the goods are ordinarily sold it is not necessary that there should be more than one buyer, what is of essence is whether the dealings between the buyer and the sel ler are at arms length and the price is a fully commercial price or not. Holding that there was nothing on record to show that the dealing between Maruti and Suz uki are not at arms length or that the price charged by Suzuki from Maruti was no t a fully commercial price and observing that the purchase agreement clearly sho wed that the price were export prices, the CEGAT held that the price charged was the price at which the goods were ordinarily sold. [Collector of Customs. Bomba y Vs. Maruti Udyog Ltd. 1987 (28) ELT 390] (c) In the course of international Tr ade : In a case of procurement of cocoa beans for an Indian company, the UK base d principal company entered into a contract with another company also based in U K for delivery of goods on behalf of the Indian company. It was urged by the Rev enue that the transaction was not in the course of international trade which was rejected by the Bombay High Court on the grounds that the transaction was done on behalf of the Indian company and therefore it was in the course of internatio nal trade. See Cadbury Fry India Pvt.Ltd vs UOI 1990 (46) ELT 7. In the case of sale on high sea basis, it was held by the Supreme Court in Hyderabad Industries Ltd vs UOI 2000 (115) ELT 593 that the service charges payable to canalizing ag ency is includible in the assessable value of the imported goods. (d) At the tim e and place of importation: In the case of Punjab Niryat Ayat Private Ltd., Vs. Collector of Customs, Bombay [1991] (26) ECR S32 CEGAT] it was held that the inv oice dated 23.03.90 relating to one machine with accessories imported by M/s Mas h Leather cannot be held to be goods of like kind and quality imported during th e relevant period. CEGAT held (i) That there is a gap of seven months and six da ys between the imports of M/s Mash Leather and the impugned imports and therefor e the invoice dated 23.3.90 cannot be treated as an import at or about the same time. (ii) The impugned imports are five in quantity without accessories, whereas the invoice dated 23.3.90, related to one machine with accessories and therefore the goods cannot be treated as of like kind. (iii) The appellants are regular impor ters. M/s Mash Leather is a consumer and both the importers cannot be treated at the same commercial level.

5.30 Customs (e) Price is the sole consideration of the sale : This clause goes to ensure that the imported transaction was not influenced by any other factor w hich makes the price charged as unacceptable for the purpose of valuation. It mu st be noted that under section 14 or under the Valuation Rules, the transaction value cannot be rejected unless it is proved that price of identical or similar goods at the same commercial levels were imported at a different value. See Nara yan International vs CC 1992 (58) ELT 126 (T). 5.9 DATE FOR DETERMINATION OF RAT E OF DUTY AND TARIFF VALUE For imported goods [section 15]: Section 15 of the Customs Act, 1962 specifies t hat the relevant date for determining the rate of duty and tariff valuation of i mported goods. They are different for different situations as given below: (a) G oods are entered for home consumption under section 46 The relevant date for the three modes of transport as laid down by section 15(1)(a) read with proviso wou ld be as follows: (i) For goods imported by vehicle at land customs station the relevant date is the date of filing the B/E under section 46. (ii) For goods imported by a vessel at a customs port the relevant date is the d ate of filing the B/E under section 46 or date of entry inwards to vessel under section 31, whichever is later. (iii) For goods imported by aircraft at a custom s airport the relevant date is the date of filing the B/E under section 46 or da te of arrival of aircraft, whichever is later. (b) Goods cleared from a warehous e under section 68 the relevant date is the date on which a bill of entry for ho me consumption in respect of such goods is presented. (c) In the case of any oth er goods the relevant date is the date of payment of duty. These provisions rela ting to determination of relevant date do not apply to baggage and imports by po st, in which sections 78 and 83 apply respectively. For export goods [section 16 ]: The relevant date for export goods is determined as per section 16. However, the provisions do not apply to baggage and imports by post. The provisions are a s follows: (a) In case of goods entered for export (irrespective of the mode of transport) the relevant date is the date of the let export order of the proper off icer permitting export and loading of cargo on board under section 51. (b) In ca se of any other goods the relevant date is the date of payment of duty.

Valuation Under the Customs Act, 1962 5.31 5.10 JUDICIAL DECISIONS ON VALUATION OF IMPORTED GOODS General Particulars 1. Section 14(1A) and Valuation Rules rela ting to valuation of imported goods are subject to the provisions of Section 14. 2. Before resorting to valuation under residuary Rule 8, applicability of other rules will have to be exhausted. Citation Plast Fab vs CC 1993 (66) ELT 441 (T) . Polyvinyl Industrial Corporation vs CC 1994 (74) ELT 426. Transaction Value (Rule 3 & 4).: Rule 3 states that, subject to Rules 9 and 10A, value of imported goods shall be the transaction value. Rule 4 (set out above) of the Valuation Rules states that the transaction value of imported goods shall be the price actually paid or payable for the goods adjusted in accordance with Rule 9 of the said rules. If the said price is determinable that shall be the v alue of the imported goods. Particulars 1. Rule 4 of the Valuation Rules talk of the transaction value and therefore unless that is unacceptable for the reasons s et out in Section 14, it has to be accepted. 2. The best evidence of price of im ported goods is the manufacturers invoice. Citation Eicher Tractors Ltd vs CC 20 00 (122) ELT 21 (SC). CC vs Nippon Bearings P.Ltd 1996 (82) ELT 3 (SC). Sai Impex vs CC 1992 (62) ELT 616. 3. Holding subsidiary relationship may not be relevant if transaction value for contemporaneous import of identical goods is the same. 4. Transaction value cann ot be rejected based on price list only. Siemens Ltd vs CC 2000 (126) ELT 1134 (T). Eicher Tractors Ltd vs CC 2000 (122) ELT 321 (SC). Transaction value of identical goods (Rule 5) : Rule 3 specifically states that value of imported goods shall be the transaction value under rule 4. If that can not be determined, then Rules 5 to 8 shall be applied serially. Rule 5 determine s the value of the imported goods by reference to the value of identical goods.

5.32 Customs Particulars 1. Comparison of goods must be of identical goods at sa me commercial levels. 2. Branded and unbranded goods could be compared. Comparis on of goods from different countries of origin possible only if there is proxima te linkage. 3. Where the importer has adduced evidence, department should produc e contemporaneous import values at higher prices to discard transaction value. 4 . Price list is not conclusive as evidence of contemporaneous imports. Discounts beyond the price list can be given. 5. For ascertaining contemporaneous imports , date of import is relevant and not the date of contract. Citation Sandip Agarw al vs CC 1992 (62) ELT 528 (Cal). CC vs Shibani Engineering Systems 1996 (86) EL T 453 (SC) CC vs Nippon Bearings Ltd. 1996 (82) ELT 3 (SC). Eicher Tractors Ltd vs CC 2000 (122) ELT 321 (SC). Rajkumar Knitting Mills P.Ltd . vs CC 1998 (98) ELT 292 (SC). Transaction value of similar goods (Rule 6) : If Rule 4 or Rule 5 cannot be appl ied then this rule states that transaction value of similar goods can be taken p rovided they are at the same commercial levels and in substantially the same qua ntities. The case laws provided under Rule 5 will be equally applicable here as relating to the principles stated herein. Particulars 1. The word similar is more expansive than the word same. Plywood or veneer panels is similar to laminated woo d. 2. Enhancing the value of goods imported from Japan on the basis of supplies from France not acceptable. Comparing a quantity of 4986 kgs imported with anoth er import of 360 kgs is not correct. Citation CCE vs Wood Craft Products Ltd 199 5 (77) ELT 23 (SC). Nitisoya Diamond Tools vs CC 1994 (74) ELT 49 (T).

Valuation Under the Customs Act, 1962 5.33 Determination when Transaction Value not available (Rule 6A) : Rule 6A states that when the transaction value cannot be determined under Rule 4,5 or 6, value shall be determined in accordance with provisions of Rule 7 and if that cannot be applied, under Rule 7A. The importer is given an option to chose which of the Rule he would opt for though the office r will have to proceed to apply Rule 7 before Rule 7A. Deductive Value (Rule 7) : Rule 7 states that where goods being valued are identical or similar to other imported goods which are sold in India as such without processing and transactio n value cannot be determined, value of the imported goods shall be based on the unit price of the greatest aggregate quantity sold to persons as who are not rel ated to sellers in India after allowing for deduction of commission, profits and general expenses incurred in India, the costs of transports and customs duties and other taxes payable in India. This value of similar or identical goods shoul d be determined at or about the same time of import of the goods whose value is sought to be determined. If this is not possible, the value of goods sold within 90 days after importation can be adopted. If however, the identical or similar goods are not sold as such then the costs of reprocessing including expenses and profits, taxes and transports charges as mentioned in the prior paragraph shall be deducted. In SK Electronics vs CC 1998 (98) ELT 668, the Tribunal held that duty cannot be demanded on the sale price in India but allowance should be given for items such as duty, transport cost, cost of manufacturing and cost of other parts required to manufacture the car lighters. Computed Value (Rule 7A) : In t his alternative to rule 7, value is computed with reference to the cost of manuf acture alongwith profit and general expenses and other costs listed under Rule 9 (2). This cost is arrived at by gathering data from the exporter company. This r ule has very limited applicability since foreign companies are loath to disclose their costing details. Residual Method (Rule 8): Under this method, where the o ther methods cannot be used, value will be fixed consistent with the Act and Rul es and with data available in India. However, value cannot be fixed under this R ule on the basis of

selling price in India; highest of two alternatives; price in the market of expo rtation; cost of production other than under Rule 7A;] price to any other countr y;

5.34 Customs minimum customs values; arbitrary or fictitious values. Costs and Services (Rule 9) : Rule 9 adds certain costs to the transaction value of the imported goods. The following are the broad heads of additions if they a re not included in the transaction value already: Costs such as commission and brokerage (excluding buying commission); Cost of co ntainers; Costs of packing; Costs or value of items supplied free of charge such as materials, components, tools, dies, moulds used in the production, engineering, development, art work a nd designs. Royalties and licence fees which is payable as a condition of sale of goods bein g valued. Value of any part of proceeds of any subsequent resale; All other payments which is a condition of sale of the imported goods. Under Rule 9(2), cost to the place of importation, loading, unloading, handling charges and cost of insurance have to be added to the transaction value. If they cannot be ascertained then the following percentages are added: (i) transportat ion 20% of FOB value; (ii) loading, unloading and handling 1% of FOB value plus cost of transport plus cost of insurance (iii) insurance 1.125% of FOB value of goods. Some important case laws that have arisen out of this rule can be summari zed as under: Particulars 1. Customs department can add landing charges at actuals or as perce ntage. But once percentage is used, no further sum can be added in that componen t. 2. Addition of royalty on final products (vehicles) mentioned in the collabor ation agreement in the value of imported engines Citation Coromandal Fertilisers Ltd vs CC 2000 (115) ELT 7 (SC). UOI vs Mahindra & Mahindra Ltd. 1995 (76) ELT 481 (SC).

Valuation Under the Customs Act, 1962 5.35 not tenable since the two were not su bject to each other. 3. Separate agreements does not make for separate transacti ons. Charges paid for design of equipment through separate agreement to be added to value of equipment. 4. Cost of dismantling, process licences, consultancy an d technical services rendered abroad to make it ready for import into India incl udible. 5. Cost of product when shown as licence fee value not deductible. In th is case, SBI imported a software worth USD 4084475 and contended that the actual value was USD 401,047 while the balance USD 3683438 represented licence for usi ng the software at multiple locations. The Tribunal held that since SBI paid not hing to the supplier as licence fee for reproduction of software, the entire val ue was the product value. This decision was affirmed by the Supreme Court. Andhr a Petrochemicals vs CC 1997 (90) ELT 275 (SC). CC vs Essar Gujarat Ltd 1996(88) ELT 609 (SC). Bombay Dyeing Co.Ltd vs CC 1997 ( 90) ELT 276. SBI vs CC 2000 (115) ELT 597 (SC). Declaration by the Importer (Rule 10) : The importer has to furnish full and acc urate details of the value of imported goods and shall produce the manufacturers invoice or the invoice from where the goods were imported. Rejection of declare d value (Rule 10A) : This rule was inserted from 19.2.98 empowering the officer to reject the declared value if he has reason to doubt the accuracy or truth of the value declared. However, the grounds of such doubts must be communicated to the importer and he must be given sufficient opportunity to represent. Self exam ination questions 1. 2. Differentiate between deductive value (Rule 7) and compu ted value (Rule 7A). Can the transaction value be accepted under the Customs Act, 1962 and the Customs Valuation (Determination of Price of Imported goods) Rules, 1988 when the buyer and seller are related persons? Write a brief note.

5.36 Customs 3. 4. What is residual method of valuation? Discuss with reference to the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. Enumerate the various costs and services that are to be added to the Transaction Value under rule 9 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. A had imported a lift from Finland. Due to safety reasons the lift was not taken to the jetty in the port but was unloaded at the outer anchor age. The charges incurred for such unloading amounted to Rs.18000 and the cost i ncurred on transport of the lift from outer anchorage to the jetty was Rs.3500.0 0. A claims that such charges form part of the loading and unloading charges and s hould be deemed to be included in the addition of 1% of the CIF value of the lif t, made under Rule 9(2)(b) of Customs Valuation (Determination of Price of Impor ted Gods) Rules, 1988. Discuss the tenability of As claim with reference to recent Circulars, if any. Explain whether the costs and services as given in Rule 9 of the Customs Valuation Rules, 1988 are to be added to the value of the identical goods or similar imported goods under Rule 5 & 6 respectively. RI is an indentin g agent of an Italian company. The agreement provides for payment of 20% commiss ion on the imported equipments supplied by RI to users in India. However in resp ect of RIs own requirements of the equipment supplied by the Italian company no c ommission was payable as there was to be no value addition by the indenting agen t. The department wants to enhance the value of the imports by 20% as according to them the Indenting Agent is a Related person. Examine briefly whether the stand taken by the department is correct with reference to Section 14 of the Customs Act, 1962 and Rule 9 of the Customs Valuation Rules, 1988 regarding cost and serv ices and Rule 2(2) regarding Related persons. C & Co. imported second hand machiner y and declared the transaction value in the Bill of Entry filed for purposes of assessment of import duty. The Assistant Commissioner of Customs ignored the tra nsaction value and based on Chartered Engineer s certificate showing that the ma chinery was in working condition and had a residual life of 10 years he complete d the assessment under Rule 8 of the Customs Valuation (Determination of Price o f Imported Goods) Rules, 1988 after allowing maximum depreciation of 70%. Discus s briefly giving reasons whether the action of the Assistant Commissioner is val id in law. 9. ABC Ltd., manufacturer of fertilizers, imported large quantity of rock phosphate and sulphur. Goods were purchased by ABC Limited on the high seas and responsibility 5. 6. 7. 8.

Valuation Under the Customs Act, 1962 5.37 of unloading in India was theirs and they maintained their own wharf at port, unloading equipment and staff for the s ame. Customs Authorities assessed the landing charges at 1.4% on C.I.F. value th ereof and the importer had paid the same as demanded. Later on, Customs Authorit y claimed that the said 1.4% did not include stevedoring charges and unloading c harges. Therefore, they added them separately calculating them upon the basis of inter alia unloading labour charges, customs staff overtime, post time charges for dining hall, fuel, depreciation, maintenance cost, administrative overheads and notional interest on capital. State what your advice to the company would be , bearing in mind the provisions on Customs Act and decided cases. 10. Mysore Te xtiles Ltd. imported nylon/polyester cloth from Taiwan. Mysore Textiles Ltd. dec lared US $ 27800 as the value of the goods. The same value was reflected in the invoice and the bill of entry. However, the Customs Department assessed the impo rt duty on the basis of the Insurance value of US $ 45600. The Customs Officials claimed that Mysore Textiles Ltd. had undervalued the goods and therefore the i nsurance value should be adopted for the purpose of valuation. Can insurance val ue be regarded as the assessable value without making any deductions therefrom? Discuss. 11. Mother Mary Hospital and Research Centre imported a machine from De lta Scientific Equipments, Chicago for in house research. The price of the machi ne was settled at US $ 5000. The machine was shipped on 10.01.2004. Meanwhile, t he Hospital Authorities negotiated for a reduction in the price. As a result, De lta Scientific Equipments agreed to reduce the price by $ 850 and sent the revis ed price of $ 4150 under a telex dated 15.01.2004. The machine arrived in India on 18.01.2004. The Commissioner of Customs has decided to take the original pric e as the transaction value of the goods on the ground that the price is reduced only after the goods have been shipped. Do you agree to the stand taken by the C ommissioner? Give reasons in support of your answer. Answers 5. Due to non avail ability of deep draught all ports are not navigable up to the jetty and therefor e the goods have to be discharged/transhipped at the outer anchorage. Further, i n many busy ports, goods are off loaded at the anchorage on barges in order to e ase the congestion in the docks. Odd dimensional cargo/heavy lifts/hazardous car go often has to be off loaded at anchorage for technical/safety reasons. Such ch arges associated with the delivery of cargo at outer anchorage are known as barg ing/lighterage charges.

5.38 Customs The Supreme Court has held in the case of M/s. Garden Silk Mills Li mited v. Union of India reported in 1999 (113) E.L.T. 358 (S.C.) that the value of goods is deemed to be the price at which such goods are ordinarily sold or of fered for sale, for delivery at the time and place of importation in the course of international trade. The importation is complete when the goods reach the lan dmass of the Country and not at the outer anchorage point. Recently, CBE&C in it s M.F. (D.R.) Circular No. 29/2004 Cus., dated 13.04.2004 has clarified that all the expenses incurred by the importer in bringing the goods to the landmass of the country will be includible in the assessable value. The freight charges to b e added to the assessable value should include all elements of cost incurred in the transportation of the goods from the point of exportation to the place of im portation, i.e., the final jetty at which the goods are unloaded. The charges bo rne by the importer in bringing the goods from the outer anchorage to the landma ss has to be included in the assessable value as extended cost of transportation u nder Rule 9(2)(a) of Customs Valuation Rules, 1988. It is to be noted that the 1 % landing charges collected by the department under Rule 9(2)(b) of Customs Valu ation Rules, 1988, are towards the loading, unloading and handling charges at th e place of importation, which is the landmass of the Country. Therefore, As claim i s not tenable in law. 6. As per Rule 5(1)(c) of the Customs Valuation Rules, 198 8 where imported goods are being valued as per Rule 5 the value of the identical goods is adjusted to take into account the difference attributable to the comme rcial level or to the quantity or both. According to Rule 5(2) where costs and c harges referred to in Rule 9 are included in the value of identical goods, adjus tment has to be made of the difference in such costs and charges between the imp orted goods and the identical goods. Therefore, if the value of the identical go ods does not include certain specific costs and charges relating to the imported goods these are to be included as per Rule 9. 7. Imported goods are valued to l evy customs duty as per Customs Valuation (Determination of Prices of Imported G oods) Rules, 1988 and Section 14 of the Customs Act, 1962. According to Rule 9, the costs of services incurred by the buyer and not included in the price, shall be added to the price paid. Rule 2(2) defines the term related person. Accordin g to Rule 4 if the sale is to a related person, then transaction value shall be accepted only if the relationship does not affect the price. Applying the test l aid down in Rule 2(2), it can not be said that indenting agent is a related pers on. Also, the terms of the agreement provide for the payment of commission only when the agent sells the goods to others and not for the goods

Valuation Under the Customs Act, 1962 5.39 which he keeps for himself. Coming to Rule 9, the commission of 20% can not be added to the value of the imported goo ds as the rule specifically states that only the costs and services which are pa id by the buyer, and not included in the price, are to be added to the price pai d for the goods. Accordingly, the action of the department is not correct as it is not consistent with section 14 and Rule 9 of the Rules. 8. The facts in this case are similar to the facts in Tolin Rubber Pvt. Ltd. v. COC, Cochin (2004) 16 3 ELT 289 (SC). In this case the Supreme Court stated that the value of the good s has to be determined as per Rule 4(1) of the Customs Valuation Rules, 1988 and only when conditions specified under Rule 4(2) are not fulfilled, the transacti on value as per Rule 4(1) has to be rejected and further determination has to be made as per Rule 8. The assessing authority had not provided any reasons for re jecting the transaction value. It was held by the Supreme Court that the Bill of Entry as made by the company and the transaction value as declared by it had to be accepted by the Department. Applying the same ratio to the given situation, it could be said that the action of the Assistant Commissioner in the instant ca se is not valid in law. 9. The facts of this case relates to the decision given by the Supreme Court in Coromandal Fertilizers Ltd. vs. Collector of Customs (20 00). Landing charges are assessed at a percentage of the value of the goods. How ever, stevedoring or unloading charges are not to be added, when landing charges are assessed on a percentage basis. Therefore, the assessee is not required to pay additional landing charges as claimed by the department. 10. It has been decided by the Tribunal in case of Nina Chaka Pvt. Ltd. v Commis sioner of Customs, New Delhi 2004 (163) E.L.T. 464 (Tri. Del.) that the insuranc e value takes into account not only the Cost Insurance Freight value but also du ties and taxes payable on the goods involving transfer from sellers premises to b uyers premises. The insurance price as such, therefore, could not form the basis of valuation without making deductions therefrom of taxes and other permissible components. 11. No, the Commissioners approach is not correct in law. As per Sect ion 14 of the Customs Act, the transaction value of the goods is the value at th e time and place of importation. It was decided in Garden Silk Mills v. UOI that importation is completed only when the goods become part of mass of goods withi n the country. Since the price of the goods is reduced while they are in transit , it could not be contended that the price was revised after importation took pl ace. Therefore,

5.40 Customs the goods should be valued as per the reduced price, which was the price at the time of importation. Similar view was adopted in Gujarat Heavy Chem icals Ltd. v Commissioner of Customs, Ahmedabad 2004 (163) E.L.T. 448 (Tri. Mumb ai)

6 ADMINISTRATIVE ASPECTS OF CUSTOMS ACT, 1962 6.1 APPOINTMENT OF CUSTOMS PORTS, AIRPORTS, WAREHOUSING STATIONS, ETC., The entr y/exit of carriers/passengers etc., is regulated in India by the Customs Act, 19 62 which governs/regulates this entry/exit of different categories of vessels/cr afts/goods/ passengers etc., into or outside the country. Under the Customs Act, Government is given the powers to appoint Customs ports and airports where alon e the imported goods can be brought in for unloading or export goods loaded on s hips or air crafts. Similar powers have been given to the Government to notify t he places which alone shall be the Land Customs Stations for clearance of import ed goods or goods to be exported by land or by inland water. Even the routes of passage by land and inland water into or out of the country can be regulated and these provisions have been made use of specially for regulating traffic for our neighboring countries like Nepal. 6.1.1 Customs port, airport, etc. : Section 2 (10) defines a customs airport as any airport appointed under clause (a) of Sect ion 7 to be a customs airport. Section 2(11) defines a customs area to mean the area of a customs station and includes any area in which imported goods or expor t goods are ordinarily kept before clearance by customs authorities. In turn Sec tion 2(13) defines a customs station to mean any customs port, customs airport o r land customs station. Section 7 of the Customs Act, 1962 empowers the Board to appoint by notification in the Official Gazette: (a) customs ports and customs airports, (b) inland container depots, for the unloading of imported goods and t he loading of export goods or any class of such goods, (c) land customs stations for the clearance of goods imported or to be exported by land or inland water o r any class of such goods,

6.2 Customs (d) the routes specified in the notification by which alone goods or any class o f goods may pass by land or inland water into or out of India, (e) the coastal p orts for the carrying on of trade in coastal goods or any class of such goods wi th all or any specified ports in India. 6.1.2 Notified Customs Ports: Sl No. 1 2 3 4 5 6 7 8 9 10 11 12 6.1.3 Notified Customs Airports: Sl No. 1 2 3 4 5 6 7 8 9 10 Notified Customs Air Ports Port Blair Hyderabad Borjhar (Guwahati) Patna De lhi Ahmedabad Srinagar Bangalore Cochin Trivendrum Notified Customs Ports Port B lair Vishakapatnam Daman and Diu Panaji Port Kandla Porbandar New Mangalore Coch in Ratnagiri Paradeep Madras Sea Port Pondicherry

Administrative Aspects of Customs Act, 1962 11 12 13 14 15 16 17 18 19 20 6.1.4 Inland Container Depots: Sl No. 1 2 3 4 5 6 7 8 9 10 11 12 Notified Inland Conta iner Depots Hyderbad Tuglakbad (Delhi) Ahmedbad Baroda Faridabad Bangalore Balas ore Amritsar Nagpur Jaipur Coimbatore Kanpur Indore Sahar (Bombay) Pune Nagpur I mphal Jaipur Madras Lucknow Calcutta Agra 6.3

6.4 Customs 6.1.5 Notified Land Custom Stations: Sl No. 1 2 3 4 5 6 7 8 Notified Land Custom s Stations Amritsar Railway Station Delhi Railway Station Calcutta Jetties No 4 and 6 Howrah Railway Station Phulbari Foreign Post Office of Exchange, New Delhi Sub foreign Post Office in Special Economic Zone Complex, Cochin Sub foreign Po st Office Processing Zone, Noida in Noida Export 6.2 ADMINISTRATIVE SET UP 6.2.1 Classes of Officers: The administration of the Act has to be done by certa in officers of customs. The Customs Act also specifies the class of officers who are responsible for the functioning of the law. Section 3 of the Customs Act, s pecifies the classes of officers of customs namely: (a) Chief Commissioners of C ustoms; (b) Commissioners of Customs; (c) Commissioners of Customs (Appeals); (d ) Joint Commissioners of Customs; (e) Deputy Commissioners of Customs; (f) Assis tant Commissioners of Customs or Deputy Commissioners of Customs; and (g) Such o ther class of officers of customs as may be appointed for the purposes of this A ct. Among the other classes of officers of customs, the more important ones are: (a) Appraisers of customs, who do the assessment work of import and export good s, including classification, valuation and examination of the goods; and (b) Pre ventive Officers of Customs, who do the executive duties like

Administrative Aspects of Customs Act, 1962 (i) Boarding and checking ships and aircrafts; 6.5 (ii) Clearing passengers and crew and their baggage; (iii) Surpervision and cont rol over loading and unloading of cargo; (iv) Preventing smuggling by checking s uspects, patrolling the customs area, searching suspected premises, persons and vehicles. (v) Interrogating suspects/witnesses and investigation. (c) Ministeria l officers who maintain records, keep accounts, etc. (d) Chemical examiner, who tests samples of imported/export cargo for determination of true character of th e goods for proper classification and value, necessary for determination of cust oms duty. The above is the normal setup in the organization at the major ports o f Bombay, Calcutta, Madras, Cochin, Visakapatnam, Kandla, Goa, known as major cu stom houses. In other customs ports/customs airports/land customs station, the j ob is carried out by the Central Excise Officers, who are having territorial jur isdiction, with similar designations. 6.2.2 Officers of CE Department : The othe r class of officers of the Central Excise Department are known as Superintendent s and Inspectors of Central Excise. Since these officers are not officers of cus toms, it becomes necessary to empower them to be officers of customs for the pur poses of doing customs work. Section 4(1) enables the Central Board of Excise an d Customs (CBEC) to appoint such persons as it thinks fit to be the officers of Customs. This power was earlier vested with the Central Government. All Central Excise officers managing customs formations have been duly appointed by the Cent ral Government in this behalf. All Superintendents of Central Excise Class I hav e been duly appointed to discharge the duties of Assisstant Commissioner or Depu ty Commissioner of Customs in their respective jurisdiction. [Refer M.F.(D.R. & I.) Notification No.144 Cus., dt 1 11 1969] 6.2.3 Officers of other departments: Apart from the regular customs and central excise formation, it becomes necessa ry to administer customs laws and regulations in all border areas where there ar e no customs formations. These places are manned or controlled by other Governme nt officials like: (1) Border Security Police (2) Indo Tibetan Border Police (3) Coast Guard etc. Similarly there are areas, where there is not much customs or central excise activity like Andaman and Nicobar Island, Lakshadweep, Mizoram, M anipur, Nagaland, Tripura and other North Eastern States. It has been found conv enient to empower local revenue

6.6 Customs authorities and central and state police officials in this regard. The power to empower these officers with the powers and responsibilities of customs officers, is given to the Central Government under section 6 of the Act. 6.2.4 Powers of officers of customs (Section 5): The Board (CBEC) may appoint such persons as it thinks fit to be officers of customs. As per section 5 of the Customs Act, 1962 , the powers of officers of customs are as under: (1) Subject to such conditions and limitations as the Board may impose, an officer of customs may exercise the powers and discharge the duties conferred or imposed on him under this Act. (2) An officer of customs may exercise the powers and discharge the duties conferre d or imposed under this Act on any other officer of customs who is subordinate t o him. (3) However, the Commissioner (Appeals) shall not exercise the powers and discharge the duties conferred or imposed on an officer of customs other than t hose specified in Chapter XV (Appeals and Revision) and section 108 (Power to su mmon persons for giving evidence). 6.2.5 Entrustment of functions of customs off icers on certain other officers (Section 6 ): The Central Government may, by not ification in the Official Gazette, entrust either conditionally or unconditional ly to any officer of the Central or the State Government or local authority any functions of the Board or any officer of customs under this Act.. 6.3 WAREHOUSIN G STATIONS It might so happen that the importer is not in a position to clear the imported goods into the country immediately owing to the financial requirement reasons. A facility had therefore been given under the law enabling such importers to stor e imported goods. The goods can be cleared for home consumption at a later date after payment of duty. The importer is charged with warehousing charges for this facility. This warehousing facility is a special feature of the Customs Act. Th e Central Board of Excise and Customs (the Board) may, by notification in the Of ficial Gazette, declare places to be warehousing stations at which alone public warehouses may be appointed and private warehouses may be licensed. Warehouse is defined as a public warehouse appointed under section 57 or a private warehouse licensed under sec. 58 [Sec.2(43)]. 6.3.1 Warehousing Stations notified under S ection 9 : Some of the major notified warehousing stations in different states a re listed below:

Administrative Aspects of Customs Act, 1962 Sl No. 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 State Gujarat Uttar Pradesh Maharastra Rajasthan Karnataka Or issa West Bengal Kerala Tamil Nadu Delhi Sikkim Bihar Assam Madhya Pradesh Andhr a Pradesh Pondicherry Notified Warehousing stations 6.7 Ahmadabad City, Baroda, Gandhinagar, Indore, Mandvi (Kutch), Nadiad Agra, Gorakh pur, Kanpur, Lucknow, Varanasi Ahmednagar, Bombay, Nagpur City, Pune City, Thane Alwar, Jaipur, Jodhpur city Bangalore, Mangalore Bhubaneshwar Calcutta, Falta E xport Processing Zone(FTZ) Cochin, Trivandrum, Kozhikode, Port Blair in Andamans Coimbatore, Cuddalore, Madras, Manali Delhi, Noida Export Processing Zone (FTZ) Gangtok City Garhara, Patna Gauhati Gwalior City Hyderabad, Kakinada, Vishakapa tnam Pondicherry 6.3.2 Appointment of Public Warehouses: At any warehousing station, the Assistan t Commissioner of Customs or Deputy Commissioner of Customs may appoint public w arehouses wherein dutiable goods may be deposited. [Section 57] It is incorrect to hold that reference to public bonded warehouses in this section is limited to o nly public bodies running a warehouse. There is nothing in this section which re quires that only public bodies be appointed to run public warehouse. It only emp owers the Assistant/Deputy Commissioner of Customs to appoint the public warehou se. This only means the warehouses where public may deposit goods without paymen t of duty. These public warehouses are situated within the city declared as ware housing station and is under the control of mainly Central Warehousing Corporati on or the Municipal authorities of that City. The Act does not require that only warehouse owned by the Government or Government undertaking will be treated as public warehouses.

6.8 Customs 6.3.3 Licensing of private warehouses: At any warehousing station, the Assistant /Deputy Commissioner of Customs may licence private warehouses wherein dutiable goods imported by or on behalf of the licensee, or any other imported goods in r espect of which facilities for deposit in a public warehouse are not available, may be deposited. [Section 58(1)] Under this section, grant of licence for priva te bonded warehouse is given where public bonded warehouses are not available. T herefore, in Ludhiana, upon availability of public warehouse facility, the Assis tant Collector refused to renew licence for private bonded warehouse [Vardman Sp inning & General Amills Ltd vs. UOI, 1981 ELT 911 (P&H)] The High Court of Rajas than has held that licence for private bonded warehouse cannot be cancelled mere ly on coming into existence of a public warehouse. [Baroda Rayons Corporation vs . Supdt of Customs, Spl Appeal No.714/81] The power to renew warehousing licence is a discretionary act. Merely because an application for renewal is made befor e expiry of existing licence, the authority is not bound to grant extension, par ticularly when the original licence is granted for a limited duration. Self exam ination questions 1. 2. 3. Discuss the provisions in respect of appointment of c ustoms ports, airports etc. What is a warehousing station? Discuss. With referen ce to section 6 of the Customs Act, 1962, examine briefly whether the Government could entrust any functions of the Central Board of Excise and Customs or any o fficer of customs to any officer of any other department. Briefly explain the po wers of officers of Customs under section 5 of the Customs Act, 1962. Write a br ief note on licensing of private warehouses. 4. 5.

7 IMPORTATION, EXPORTATION AND TRANSPORTATION OF GOODS 7.1 INTRODUCTION The principles governing levy and exemption from customs duties have already bee n discussed in the previous chapters. There are various procedures under the Cus toms Act which govern assessment, collection, transportation and other important aspects. The procedures relating to assessment and collection of customs duty a re discussed in this chapter. The provisions relating to transportation are well understood when studied with the importation and exportation procedures since b oth chapters are governed by the same legal provisions. Hence the procedures rel ating to transportation have been covered in the current chapter under the relev ant headings. 7.2 IMPORTATION In this chapter, we will consider the procedure for assessment and collection of customs duty in respect of the following six situations of imports: 1. 2. 3. 4. 5. 6. Goods imported by Sea Goods imported by Air Goods imported by Land Goods imported by Post Goods imported by passengers as their baggage Ship stores consi dered to be imported and charged to customs duty While the first three types of imports are governed by the normal provisions of the Customs Act, special provisions have been made in respect of the later three imports.

7.2 7.3 Customs DEFINITIONS OF IMPORTANT TERMS 7.3.1 Import [Section 2(23)] with its grammatical variations and cognate express ions, means bringing into India from a place outside India. The definition of im ports is not restricted only to commercial imports. It only means bringing of go ods from any place outside India into India. The meaning of import has been one of the most contentious issues in Customs. There are two school of thoughts. One school of thought is that import gets completed when the vessel carrying goods crosses the territorial waters of India. The other school of thought is that the import is complete only when the goods mingle with the landmass of India. Now t he settled law is in favour of second school of thought. It has been held in Gar den Silk Mills .v. UOI [1999 (113) ELT 358 (SC)] that import of goods into India commences when the goods enter the territorial waters of India, but continue an d complete only when the goods become part of mass of goods within the country. The taxable event occurs only when the goods reaches the customs barrior and the bill of entry for home consumption is filed. This view is also supported in UOI .v. Apar Pvt. Ltd. [1999 (112) ELT 3 (SC)]. 7.3.2 Imported Goods [Section 2(25) ] means any goods brought into India from a place outside India but does not inc lude goods, which have been cleared for home consumption. 7.3.3 Importer [Sectio n 2(26)] in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner or any perso n holding himself out to be the importer. The definition of importer includes no t only the owner but also any other person holding out to be an importer. Owner is a person who is holding the documents of title to the goods. On the other han d importer also includes any person holding himself to be the importer for purpo se of clearance of goods. It has been held that a State Financial Corporation, w hich financed the import and has also cleared the goods on payment of duty, is l iable to pay the differential duty and cannot plead that it is not the actual im porter. [Karnataka State Financial corporation v. Commissioner of Customs 1994 ( 72) ELT 904 (T SRB)]. Also in the case of Traditional Craft v. Commissioner of C ustoms, [2000 (125) ELT 513 (T WZB)] the tribunal has held that the person who h as not caused the actual import but clears the goods from warehouse would be an importer within the meaning of this section. 7.3.4 India [Section 2(27)] include s the territorial waters of India. The definition of India is an inclusive defin ition and includes not only the land mass of India but also the territorial wate rs of India. The territorial waters extend to 12 nautical miles into the sea fro m the appropriate base line.

Importation, Exportation and Transportation of Goods 7.3.5 Goods [Section 2(22)] includes (a) vessels, aircrafts and vehicles (b) stores (c) baggage (d) currenc y and negotiable instruments and (e) any other kind of movable property. 7.3 7.3.6 Coastal goods [Section 2(7)] means goods, other than imported goods, trans ported in a vessel from one port in India to another. 7.3.7 Stores [Section 2(38 )] means goods for use in a vessel or aircraft and includes fuel and spare parts and other articles of equipment, whether or not for immediate fitting. 7.3.8 Ba ggage [Section 2(3)] includes unaccompanied baggage but does not include motor v ehicles. 7.3.9 Vehicle [Section 2(42)] means conveyance of any kind used on land and includes a railway vehicle. 7.3.10 Conveyance [Section 2(9)] includes a ves sel, an aircraft and a vehicle. 7.4 STATUTORY PROVISIONS From the above it is seen that import is an act of bringing anything into India from a place outside India and it gets completed once the goods culminate with t he land mass of India. Also goods include Vessels, Aircrafts, Vehicles, Stores, Baggage, Currency, and other movable property and are subject to duty of Customs . The provisions for procedure for importation of goods are given in section 29 to 38 and 46 to 49 of Customs Act, 1962. The same has been discussed in detail i n the subsequent paragraphs. 7.4.1 Arrival of vessels and aircrafts in India [Se ction 29] : This section casts the obligation on the person in charge of the ves sel to land only at the approved customs port or airport. This section provides that the person in charge of a vessel or an aircraft entering India from any pla ce outside India shall not cause or permit the vessel or aircraft to call or lan d (a) for the first time after arrival in India; or (b) at any time while it is carrying passengers or cargo brought in that vessel or aircraft; at any place ot her than a customs port or a customs airport, as the case may be. In other words the above provision prohibits the arrival of the Vessel or Aircraft at any plac e other than the approved ports and airports.

7.4 Customs Exception: The above provisions are not applicable in relation to any vessel or aircraft, which is compelled by accident, stress of weather or other unavoidable cause to call or land at a place other than a customs port or customs airport. However the person in charge of the vessel has the following obligation cast on him: 1. 2. He will have to report the arrival of the vessel to the nearest custo ms officer or officer in charge of police station, and produce the log book if d emanded. He should not allow any unloading of goods without permission, and shou ld not allow any passengers or crews to leave the vicinity of the vessel. Howeve r the goods can be removed or the passengers and crews can be allowed to depart if the same is necessary for reason of health, safety or preservation of life or property. He should comply with all the directions given by such officers. 3. Any failure on the part of the person in charge of the vessel to comply with the above provisions will not only render him to be liable to penalty under section 112 of the Customs Act but also render the imported goods liable to confiscatio n under section 111 (b) and 111 (c) of the Customs Act and the conveyance liable to confiscation under section 115 (1) of the Customs Act under certain circumst ances. 7.4.2 Delivery of import manifest or import report [Section 30] : After e nsuring that the vessels are landed only in approved customs port or airports, f urther duty is cast upon the person in charge of the vessel to deliver the impor t manifest. Import manifest or import report is a detailed information to custom s about goods in the vessels/air crafts which have been brought in at any port/a irport for unloading at that particular port/international airport as also that which would be carried further for other ports/airports. Declarations of such ca rgo has to be made in a prescribed form (which is termed Import General Manifest o r IGM) Time limit for delivery of IGM/IR: The person in charge of a vessel, or a n aircraft, or a vehicle, carrying imported goods or any other person as may be specified by the Central Government, by notification in the Official Gazette, in this behalf shall, in the case of a vessel or an aircraft, deliver to the prope r officer an import manifest prior to the arrival of the vessel or the aircraft, as the case may be, and in the case of a vehicle, an import report within twelv e hours after its arrival in the customs station, in the prescribed form and if the import manifest or the import report or any part thereof, is not delivered t o the proper officer within the specified time and if the proper officer is sati sfied that there was no sufficient cause for such delay, the person in charge or any other person referred to in this section, who causes such delay, shall be l iable to a penalty not exceeding fifty thousand rupees. Belated filing of IGM: I mport manifest/Report filed belatedly may also be accepted by the proper officer on valid justified grounds.

Importation, Exportation and Transportation of Goods 7.5 Amendment to IGM: If the proper officer is satisfied that the import manifest or import report is in any way incorrect or incomplete and there is no fraudulent intention, he may permit it to be amended or supplemented. [Section 30(3)]. Subs equent amendment of IGM relates back to the date of filing of IGM and is not a s eparate event. By the time supplementary IGM is filed, if entry inward has alrea dy been granted, the rate of duty applicable will be as on the date of presentat ion of bill of entry. [Associated Forest Products (P) Ltd. V. Assistant Commissi oner of Customs, 1992 (59) ELT 264, 277 78 (Cal), affirmed by the Supreme Court in 2000 (115) ELT 37 (SC).] Contents and Form of IGM/IR (Import General Manifest /Import Report): Different forms of IGM/IR have been prescribed for the aircraft s, vessels and the vehicles. The form of IGM/IR is prescribed by (a) The Import Manifest (Vessels) Regulations 1971 in the case of vessels; (b) The Import Manif est (Aircraft) Regulations 1976 in the case of aircrafts; (c) The Import Report (Form) Regulations1976 in the case of vehicles. All the three regulations are su bstantially similar and provide for the following:(i) The manifest/report should be delivered in duplicate and should cover all the goods carried in the aircraf t/vessel/vehicle. 1. 2. 3. 4. 5. General declaration. Cargo declaration. Vessels stores list. a list of private property in the possession of the master, office rs and crew. Passenger manifest in case of aircrafts.

(iii) The cargo list is categorized in the manifest/report into the following ca tegories and shall be delivered in separate sheets. (1) cargo to be landed; (3) goods to be transshipped; (i) (iv) arms narcotics (2) unaccompanied baggage; (4) same bottom or retention cargo. (iii) explosives (vi) gold and (iv) In the cargo declaration, there should be separate mention about (ii) ammun ition (v) dangerous drugs (vii) silver.

(ii) The manifest/import report has to be in four parts as under

7.6 Customs This declaration should be given irrespective of whether these are for l anding, or for transshipment, or for being carried as same bottom cargo. The det ails about the above should be given in separate sheets and should be set out in the order of ports of loading. If the vessel/vehicle does not carry any of thes e cargo a nil declaration should be made. (v) The person delivering the import manifest or report should subscribe in the declaration as to the truth of its contents. The general declaration will give p articulars about name of the vessel, nationality, tonnage, name of the shipping line, last port of call, port arrival and date and time of arrival, name of the master, nationality of the master, name and address of the local steamer/shippin g agent, ports called during the present voyage, number of crew, number of passe ngers and the following documents are to be enclosed with the general declaratio n: (a) cargo declaration; (d) crew list (b) store list (e) passenger list (c) pr ivate property list; (f) maritime declaration of health. 7.4.3 Imported goods not to be unloaded from vessel until entry inwards granted [Section 31] : This section provides that the master of a vessel shall not permi t the unloading of any goods until an order has been given by the proper officer granting ENTRY INWARDS to such vessels. This is specified only for vessels and not for aircrafts or vehicles. Entry inwards is a term used to denote colloquial ly that the ships entry papers like arrival report, manifest etc have been receiv ed and they have been found to be in order, the person in charge of the conveyan ce can commence further import operations namely unloading of the cargo and dise mbarking of the passengers. The overt action for this permission, is assigning a rotation number (a serial No) for the conveyance. All the documents and papers relating to imports by this conveyance will be docketed and processed under this rotation number. Date of entry inward is the date on which the vessel found a b erthing place for discharge of cargo. There is no provision requiring grant of e ntry inward forthwith, nor a duty cast on the Customs Officer to forthwith grant entry inward when IGM is presented. [Devpal Dhir v. B. V. Kumar, Commissioner o f Customs (Appeals) 1987 (32) ELT 459 (Bom)] Section 31(2) provides that Entry I nwards shall not be given until the import manifest has been delivered or a vali d reason is given for not delivering it. Grant of Entry Inwards is an acknowledg ement of the fact that Customs Department is ready to supervise the unloading of the cargo, and is prepared to assess the goods to duty, as and when the concern ed importer comes forward to clear the imported goods.

Importation, Exportation and Transportation of Goods 7.7 The provision is in two parts: one where there is a full satisfaction that the ships papers are in order and the import operations can be allowed. The second pa rt relates to a situation where the IGM or import report is not complete or is d efective. This can be cured within a given time, i.e. the required documents and /or information can be obtained and given within a short time. An indemnity bond /undertaking is taken from the master of the vehicles/local agent to provide the requisite documents and/or material within a prescribed period, the entry inwar ds is then granted. Though the master of the vessel cannot allow the goods to be unloaded until the grant of Entry Inwards, subsection (3) of section 31 provide s that this provision is not applicable to unloading of baggage accompanying a p assenger or a member of the crew, mail bags, animals, perishable goods and hazar dous goods. 7.4.4 Imported Goods not to be unloaded unless mentioned in Import m anifest or import report [Section 32] : Without the permission of the proper off icer, the imported goods cannot be unloaded, unless they are mentioned in the Im port General Manifest for being unloaded in that customs station. The mention of any consignment in the ships/aircrafts manifest or conveyances cargo list is a pr oof of the genuine nature of the import goods. If the goods are not mentioned in the manifest or import report delivered to the proper officer at a customs port /airport/station, there is every reason to believe that the goods were intended to be smuggled into India, either without payment of duty or in contravention of any prohibition in force. On the other hand if the full particulars of the impo rt consignment are timely given in the manifest/import report prima facie, there is every reason to believe that it is a straight forward transaction. It is in this perspective that section 32 of the Customs Act has stipulated the above res triction. 7.4.5 Loading and Unloading of goods at approved places only [Section 33] : Section 33 provides that loading and unloading of goods are to be undertak en only at places approved under section 8(a) of the Customs Act, 1962. 7.4.6 Go ods not to be Loaded or Unloaded except under the supervision of Customs officer . [Section34] : Section 34 provides that loading and unloading of goods should b e done under the supervision of the proper officer. However, the Board may, by n otification in the Official Gazette, give general permission and the proper offi cer may in any particular case, give special permission for any goods or class o f goods to be unloaded or loaded without the supervision of the proper officer. In almost all major ports, customs officers are deployed at the wharfs and berth s where the goods are imported or exported. These officers supervise all loading and unloading, and shipping operations.

7.8 Customs 7.4.7 Restrictions on goods being water borne [Section 35] : There are certain c ustoms ports like Pondicherry, Tuticorin, Mangalore, Saurashtra, where the ships cannot come to the shore for unloading or loading. In these places the cargo is ferried from the ships anchored at mid sea to the port in boats, otherwise know n as lighters. Even in other ports like Calcutta, Bombay, Madras, Cochin etc. no t all ships arriving in the port get a berth. They have to wait for some time be fore they get allotment of berth. At times the ships have tight itinerary. In su ch cases the import cargo is taken from the ship to the shore and the export car go is taken from the shore to the ship in boats. Section 35 of the Customs Act s tipulates that no imported goods shall be water borne for being loaded in any ve ssel, and no export goods which are not accompanied by a shipping bill, shall be water borne for being shipped unless the goods are accompanied by a boat note i n the prescribed form. However, the board may, by notification give general perm ission and the proper officer may in any particular case, give special permissio n, for any goods or any class of goods to be water borne without being accompani ed by a boat note. At present this exemption is in operation in (1) Chennai Port for both imports and exports (2) Kolkata Port for exports only. Boat Note Regul ations : The form and content of the boat note is prescribed under the Boat Note Regulations, 1976. These regulations specify that (1) normally the boat note sh ould be issued by the proper officer; (2) however, in a special case, the Commis sioner of Customs, may authorize an exporter or his authorized agent to issue a boat note; (3) Every person who is authorised by the Commissioner as above, shal l maintain proper account of boat notes issued by him and furnish to the proper officer such information as may be specified by the Commissioner. (4) the boat n otes should be of such dimension and colour as in prescribed forms; (5) the boat notes should be in duplicate and machine numbered. Separate forms are prescribe d for export cargo, import cargo, and transshipment cargo. 7.4.8 Other Controls : The following are further controls exercised on the conveyances and the loadin g/unloading of goods. 1. The goods cannot be loaded and unloaded on Sundays or o ther holidays observed by the Customs Department, or on any other day after the working hours unless the

Importation, Exportation and Transportation of Goods prescribed notice and the p rescribed fee are paid. [Section 36] 2. 7.9 The proper officer may, at any time, board any conveyance carrying imported good s ore export goods and may remain on such conveyance for such period, as he cons iders necessary. [Section 37] The proper officer may require the person in charg e of any conveyance to produce any document or answer any questions and such per son shall be bound to comply with the same. [Section 38] 3. 7.4.9 Flow Pattern for Import: The following steps would illustrate the complete operation in this regard. 1. 2. 3. The vessel is escorted into the harbor by th e pilot vessel of the port. After entering the harbour, the vessel is brought to the particular quay or berth, where it is berthed and anchored. The health depa rtment officials and police officials go on board the vessel. The health officia ls check (a) Whether the vessel has called during its voyage at any port which i s susceptible to epidemic diseases; and if so, whether the ship has been cleared by the Quarantine authorities. (b) Whether any crew or passenger in the vessel has any contagious or epidemic for contagious disease; (c) Whether the vessel or any crew/passenger requires to be quarantined; (d) Whether the vessel carries a ny cargo contaminated by such epidemic diseases, affecting the health of people or crop, etc. The immigration authorities check whether the ship has proper docu ments to call at an Indian airport. 4. The Customs Officer, who boards the vesse l on its arrival alongside the health and police officials (a) Collects the arri val report with its supporting papers from the master of the vessel. (b) Scrutin izes the arrival report for details on (i) import cargo/same bottom cargo; (ii) Special goods like arms, ammunition, explosives, and dangerous drugs. (iii) Prop er clearance from the last port of call, health certificate, payment of light du es etc.

7.10 Customs (b) Calls for necessary information/documents from the Master/mate/ Chief officer/Ships doctor to carry out the above checks; (c) If satisfied, colle cts the arrival report and the Import Manifest if it has not been already filed and sends these papers to the Custom House. (d) If entry had been given by the p roper officer, allows the unloading to commence. 5. Once the unloading of the ca rgo starts, supervises and checks whether the landing is done by proper tally ma intained by Steamer Agents tally clerks and Port Trusts tally clerks. Keeps a gen eral surveillance to ensure that the goods are not illicitly removed from the sh ip or the storage godowns. PROCEDURE FOR CLEARANCE OF IMPORTED GOODS 6. 7.5 The procedures for clearance of imported goods are contained in Section 45 to Se ction 49 of the Customs Act. These procedures are not applicable to Baggage and Goods imported or to be exported by post. 7.5.1 Restrictions on custody and remo val of imported goods [Section 45] : Once the imported goods have entered the Cu stoms area, there arises the question of who is responsible for the safe custody of goods. This section requires that until the imported goods are cleared for h ome consumption or are warehoused or are exported for transhipment, they shall r emain in the custody of such person as may be approved by the Commissioner of Cu stoms [Section 45(1)]. This person is called the custodian. The responsibility o f the custodian commences in respect of imported goods the moment the ship is be rthed in the harbour or the goods are ready for unloading from the aircraft. In major ports, the custodian is the Port Trust. In other places, the custodian are the ware house keepers. In Inland Container Depots, the Container Corporation o f India is the custodian of the imported cargo. In case of air cargo, the custod ian is the National Airport Authority. For goods brought by rail, the custodian is the Station Master. Responsibility of Custodian of goods : During the time th e goods are in the custody of the custodians, they have the following responsibi lities [Section 45(2)]. 1. 2. Maintain a proper record of goods received from th e carriers and send a copy of the record to the customs authorities. Not to perm it such goods to be removed from the customs area or allow them to be dealt with otherwise except under the specific permission of the Customs Authorities. In pursuance to this responsibility, the custodian is required to tally the part iculars of the goods landed by a vessel, and send a report known as out turn sta tement to the customs

Importation, Exportation and Transportation of Goods 7.11 authorities. This enab les the customs authorities to check whether all goods manifested in the import general mainfest for landing in a particular palace have actually been landed. I n case of the goods are not so landed, action is taken against the carriers. Lia bility of the Custodians [Section 45(3)]: This provision provides that notwithst anding anything contained in any law for the time being in force, if any importe d goods are pilfered after unloading in any customs area, while in the custody t he custodian, such custodian shall be liable to pay duty on such goods. Therefor e, in respect of pilfered goods covered by section 13, the loss of revenue is co mpensated by the custodian. The duty shall be paid at the rate prevailing on the day of delivery of the import mainfest or as the case may be, an import report to the proper officer under section 30 for the arrival of the conveyance in whic h such goods were carried. This provision is intended to make the custodian of t he imported goods lying in customs area liable for duty even if they are pilfere d when they were in their custody. Earlier, in the matter of pilfered goods, the government has been losing the revenue, while the importers interest was protect ed. Section 45 holds the custodian responsible only in respect of the Customs du ty in respect of pilfered goods. It does not extend to the value of goods lost. However in the case of IAAI v. Ashok Dhawan, 1999 (106) E.L.T. 16 (SC), the Supr eme Court has held that if the custodian has no explanation at all to show how t he loss occurred in respect of goods in its custody, applying the principle res ipso locquitor, the custodian is liable for loss of goods. 7.5.2 Filing of Impor t Bill of Entry [Section 46(1)]: It is the duty of the importer of any goods to make an application to the proper officer for clearance of the goods. As has bee n mentioned earlier, the goods may be cleared for home consumption or for home c onsumption or for deposit in a warehouse or for transit or transhipment. Therefo re, there are three types of Bills of Entries prescribed for these three differe nt purposes. Form I (white) for home consumption. Form II (yellow) for warehousi ng (into bond). Form III (green) for ex bond clearance for home consumption (ex bond). Bill of Entry can be filed electronically too in Customs Houses providing this facility. The form of the bill of entry is governed by Bill of Entry (Form s Regulations, 1976). Normally the Bill of Entry is in four copies: (a) Original , meant for the customs authorities for assessment and collection of duty; (b) D uplicate, intended as an authority to the custodian of the cargo to release carg o to the importer from his custody; (c) Triplicate, as a copy for record for the importer; and

7.12 Customs (d) Quadruplicate, as a copy to be presented to the bank or Reserve Bank of India for the purposes of making remittance for the imported goods. A f acility has now been provided for clearance of the goods by making an electronic declaration to the Customs Computer Systems through network facility. The Bill of Entry (Electronic Declaration) Regulations, 1995, provides the details. The i mporter is required to declare in the Bill of Entry amongst other things the par ticulars of packages, the descriptions of the goods, in terms of the description given in the Customs Tariff to enable proper classification of the goods and th e correct value of the goods for the determining the amount of duty. Since the a ssessment is based on the declaration made by the importer, the onus is cast upo n him to make a declaration and solemn affirmation about the truth of the conten ts in the Bill of Entry. Importer unable to furnish details: If for any reason t he importer is unable to furnish these details, he may request the customs offic ials to examine the goods in his presence to enable him to ascertain the necessa ry details for making a proper declaration in the bill of entry. Alternatively, he can seek permission to deposit the goods in a public bonded warehouse appoint ed under section 57 pending receipt of the necessary information and the support ing documents under section 49. This is also called warehousing without warehous ing. Such goods shall not be deemed to be warehoused goods for the purpose of th e Act and accordingly warehousing provisions shall not apply to such goods. A ca se law on the subject is given below: Sewing Systems (P) LTD 1989 (44) ELT 456 ( Kar) A demand was issued for duty on goods deposited under section 49 via wareho use with reference to date of removal from warehouse. It was held that there is no similarity between the warehousing facility referred to in section 49 and war ehousing under section 59 because under section 49 it is explicitly made clear t hat such goods shall not be deemed to be warehoused goods for the purpose of the Act and, accordingly, warehousing provisions will not apply to such goods. Norm ally, a bill of entry is required to be filed per consignment. However, the Comm issioner may, at his discretion, permit the importer to present separate bill of entries for clearance of part of consignment. Conversion from home consumption to warehousing and vice versa: It may so happen that an importer has filed the b ill of entry for home consumption. He may subsequently find that he is not in a position to pay duty and remove the goods to town. He may seek permission to sub stitute the bill of entry for home consumption with a bill of entry for warehous ing. The reverse proposition is also permissible. In either case, the proper off icer of customs has to be satisfied that this request is made on genuine grounds

Importation, Exportation and Transportation of Goods 7.13 and not a device to av oid duty. In other words, if the rate of duty is high and the importer expects t he government to reduce the duty, he cannot seek permission to substitute the bi ll of entry for home consumption by a bill of entry of warehousing so that he wo uld decide to remove the goods as and when the rate of duty is reduced. Bill of Lading: The Bill of Lading given by the carrier of the goods is the importers doc ument of title to the goods. The Bill of Lading covers all the goods imported wi th full description. Time limit for filing: According to Section 46(3) a bill of entry is to be normally filed after the delivery of the import manifest (vessel /aircraft)/import report (vehicle). However, it may be kept in mind that as per section 48, the cargo has to be cleared from the wharf within 30 days of unloadi ng. Prior entry Bill of Entry: The second proviso thereunder provided for the pr esentation of bill of entry even before the delivery of the import manifest if t he vessel (not aircraft) by which the goods have been shipped for importation in to India is expected to arrive within thirty days from the date of such presenta tion. The permission under this prior entry system is applicable to goods brough t by vessels as well as aircraft. The prior entry Bill of Entry may be presented 30 days before the expected date of arrival of the vessel or aircraft. In the c ase of Land Customs Stations, however, the Commissioners permission is necessary for filing prior entry Bill of Entry in respect of goods imported by vehicles. 7 .5.3 Assessment of Goods: The provisions regarding the assessment of goods are c ontained in section 17 of the Customs Act. After the bill of entry is filed, the bill of entry is assessed by the appraisers of the customs department. In this process, these officers may check the supporting documents like invoices, packin g specification, payment particulars, catalogues, brokers note, insurance policy etc, which would enable them to arrive at a correct decision about the proper c lassification and valuation of the goods. A physical examination of the cargo is also provided for as a check over the cargo of the declaration made in the bill of entry. However, there are two options open to the department. If the customs department is prima facie satisfied that the declarations are true, the physica l check can be postponed to a stage after payment of duty but before removal of goods. If on the contrary, the customs officers require to check physically the correctness of description, the physical examination is carried out first, befor e assessment. The customs authority have also powers to take samples for chemica l test and make such other enquiry as may be necessary for determination of corr ect classification and valuation. 7.5.4 Provisional assessment of duty [Section 18]: Provisional assessment can be resorted to in the following cases (i) when t he proper officer is satisfied that an importer or exporter is unable to produce

7.14 Customs documents or furnish information necessary for the assessment of du ty (ii) where the proper officer deems it necessary to subject any imported good s or export goods to any chemical or other test for the purpose of assessment of duty. (iii) where the importer or the exporter has produced all the necessary d ocuments and furnished full information but the proper officer deems it necessar y to make further enquiry for assessing the duty, In such cases the proper offic er may direct that the duty leviable on such goods may, pending the production o f such documents or furnishing of such information or completion of such test or enquiry, be assessed provisionally if the importer or the exporter, as the case may be, furnishes such security as the proper officer deems fit for the payment of the deficiency, if any, between the duty finally assessed and the duty provi sionally assessed. When the duty leviable on such goods is assessed finally in a ccordance with the provisions of this Act, then, (i) in the case of goods cleare d for home consumption or exportation, the amount paid shall be adjusted against the duty finally assessed and if the amount so paid falls short of, or is in ex cess of the duty finally assessed, the importer or the exporter of the goods sha ll pay the deficiency or be entitled to a refund, as the case may be; (ii) in the case of warehoused goods, the proper officer may, where the duty fin ally assessed is in excess of the duty provisionally assessed, require the impor ter to execute a bond, binding himself in a sum equal to twice the amount of the excess duty. 7.5.5 Clearance of goods [Section 47] : Once the customs check and payment of duty is completed, the customs officers allow clearance of the goods . Section 47 provides that where the proper officer is satisfied that the goods entered for home consumption are not prohibited and the appropriate import duty has been paid, he can make an order permitting clearance of the goods for home c onsumption. On making this order, which is popularly known as pass out of customs charge order the bill of entry (duplicate) copy is produced to the custodian who delivers the goods to the importer. Some major importers have been given the gr een channel clearance facility. It means clearance of goods is done without rout ine examination of the goods. They have to make a declaration in the declaration form at the time of filing of bill of entry. The appraisement is done as per no rmal procedure except that there would be no physical examination of the goods. Only marks and number are to be checked in such cases. However, in rare cases, i f there are specific doubts regarding description or quantity of the goods, phys ical examination may be ordered by the senior officers/investigation wing like S IIB.

Importation, Exportation and Transportation of Goods 7.15 Interest: Further if t he importer fails to pay import duty within five days (excluding holidays) of th e determination of the duty amount, he is required to pay interest on the duty t ill the time he actually pays the duty and clears the goods. The rate of interes t shall be not below 10 percent and not exceeding 36 percent per annum and shall be fixed by the central government. However, the interest may be waived by the CBEC in public interest. Relevant Cases Madanlal Steel Industries (P) Ltd V. UOI [1991 56 ELT 705 (Mad)] Can the goods be confiscated after the order under sect ion 47 It has been held in the above case that the order of clearance undr secti on 47 is not required to be set aside to effect seizue & commence confiscation p roceedings. The above decision has been followed in the case of Titanide coating Pvt. Ltd v. Assistant Collector of Customs. [1993 (56) ELT 705 (Kar)] which hel d that the proceedings under section 28, 110, & 124 are not subject to the order under section 47 of the act. Tirupathi Plastics Vs. A.C. 1990 (49) ELT 49 (Kar) Detention of goods by the department and who is to pay the demurrage charges? I n case there is detention of goods by Customs authorities for whatever reason, a nd goods so detained are given to the custody of approved custodian during the p endency of adjudication of rival claims between the department and the importer, the importer is entitled to be furnished with a detention certificate or an ord er detaining the goods indicating reasons which is to serve as the evidence of d etention and as a receipt of the goods by the department. Upon the settlement of dispute, if the department succeeds in establishing that detention is justified , the importer has to bear the burden of demurrage, and if the department fails the department has to bear the same. 7.5.6 Procedure for disposal of goods not c leared [Section 48]: If there are any goods imported from a place outside India, which are not cleared within 30 days from the date of unloading, the custodian of the cargo is unnecessarily burdened with the custody of the goods. It also de prives the customs department of its legitimate revenue in the form of customs d uty. The 30 days have been considered to be sufficient time for any importer to make up his mind whether the goods should be cleared into town on payment of dut y or whether they should be transhipped or whether they should be deposited in a warehouse. If such imported goods are not cleared either for home consumption o r for warehouse within 30 days or within such further time as the proper officer may allow or if the title to any imported goods is relinquished, the custodian of the goods is permitted, with the approval of the customs department and after giving notice to the importer, to sell the goods by auction.

7.16 Customs In the case of sensitive goods like animals, foodstuffs and hazardo us goods etc. the custodian with the approval of the proper officer can sell the goods even before the expiry of the 30 days limit. Similarly in the case of arm s or ammunition, which cannot be sold in public auction, the disposal is regulat ed by the rules made in this regard. 7.5.7 Storage of imported goods is warehous e depending clearance [section 49] : Where due to some genuine difficulty, the i mporter is unable to clear the goods for home consumption within the stipulated time, the goods may be deposited in a warehouse without double duty bond. This f acility is available irrespective of whether the goods are dutiable or not. This is another instance of warehousing without warehousing. However, in this case t he warehouse may be public or private. Such warehousing will not be covered unde r Chapter IX of the Act. 7.6 EXPORTATION 7.6.1 Important Definitions Export [Section 2(18)] with its grammatical variatio ns and cognate expressions, means taking out of India to a place outside India. Export goods [Section 2(19)] means any goods, which are to be taken out of India to a place outside India. Exporter [Section 2(20)] in relation to any goods at any time between their entry for export and the time when they are exported, inc ludes any owner or any person holding himself out to be the exporter. 7.6.2 Cont rol Over Export Goods: It would be convenient at this juncture to discuss the pr ovision relating to the export of the goods in so far as it applies to the maste r of the vessel or his agent. The steamer agent comes into the picuture only aft er the customs have permitted the export goods to be shipped. Loading of Export Goods [Section 40]: The first and foremost duty cast on the master of the vessel under section 40 is that export goods are not to be loaded unless duly passed b y Proper Officer. The person in charge of a conveyance shall not permit the load ing at a customs station (a) of export goods, other than baggage and mail bags, unless a shipping bill or bill of export or a bill of transshipment, as the case may be, duly passed by the proper officer, has been handed over to him by the e xporter; (b) of baggage and mail bags, unless their export has been duly permitt ed by the proper officer.

Importation, Exportation and Transportation of Goods 7.17 7.6.3 Entry outwards [ Section 39]: One of the important requirements in this regard is that the vessel in question should be scheduled to go to the port of consignment. It is therefo re, necessary that the vessel or conveyance in question should be cleared to go to on a foreign voyage and the port of destination should be in the vessels itine rary. This permission to be granted by the Customs authorities is known as Entry Outwards. Section 39 stipulates that export goods are not to be loaded on vessel until entry outwards is granted. The master of the vessel shall not permit the l oading of any export goods, other than baggage and mail bags, until an order has been given by the proper officer granting entry outwards to such vessel. This r estriction is for vessels and not for aircraft and vehicles. Therefore, for load ing of goods for export, the following requirements are to be fulfilled : (i) En try outwards to be granted under section 39. (ii) Shipping bill under section 50 (iii) Let export order under section 51 (iv) Boat note under section 35 in case t he vessel is anchored away from the wharf and the goods are carried in a boat to the vessel. 7.6.4 Export goods not to be loaded until duly passed [Section 40]: This section applies to all types of conveyances. The goods can be taken on boa rd only if they are accompanied by the following documents: (i) In case of expor t goods other than baggage and mail bags the goods shall be accompanied by Shipp ing Bill (at seaports/airports) Bill of Export (at Land Customs Station) Bill of Transhipment (for transhipment goods) all duly passed by the proper officer. (ii) In case of baggage and mail bags the y should be permitted by Customs for export. 7.6.5 Export General Manifest [Sect ion 41] : This is the most important responsibility cast on the person in charge of the conveyance. He (including the Master of the vessel) has to give to the C ustoms Authorities a complete list of the cargo exported from India and taken by the conveyance under his charge. Section 41(1) of the Customs Act, 1962 provide s that the person in charge of a conveyance carrying export goods shall, before the departure of the conveyance from a Customs station, deliver to the proper of ficer, in the case of a vessel or aircraft an export manifest, and in the case o f a vehicle, an export report in the prescribed form.

7.18 Customs Amendment to EGM: If the proper officer is satisfied that the expor t manifest or the export report is in any way incorrect and there was no fraudul ent intention, he may permit such manifest or report to be amended or supplement ed. [Section 41(3)] Preparation of EGM/ER : The procedure for preparation of EGM /ER is as follows: (i) In the case of shipment by sea, the ships officer gives a receipt after he has received the consignment on board the ship. This receipt is called mate receipt. It is surrendered to the steamer agent or the agent who is sues the bill of lading. (ii) In the case of shipment by air, after the cargo is delivered to the airways for loading, the airways issues an air consignment note. (iii) In the case of t rain and lorry a railway receipt or a lorry receipt as the case may be is issued as soon as the consignment is received by the carrier. The export general manif est or report is the consolidated report of all such Bills of Lading/air consign ment notes/railway receipts/lorry receipts issued. Form & Content of Export Gene ral Manifest or Export Report: The form of the export general manifest/export re port is prescribed under the following: (a) The Export Manifest (Vessel) Regulat ions, 1976 (b) The Export Manifest (Aircraft) Regulations, 1976 (c) The Export M anifest (Form) Regulations, 1975 In all the three regulations the common feature s are as follows: (1) The manifest/report shall be delivered in duplicate. (2) I t shall consist of (a) Cargo report (b) Vessels store list, (c) Private property list of master, officers and crew (d) In case the vessel/aircraft/conveyance car ries passengers, a passenger manifest. (3) The cargo list shall give the followi ng details in separate sheets. (a) Cargo shipped (b) Cargo transshipped, (c) Car go lying in the vessel/aircraft, but not landed or transshipped (same bottom car go) (d) Cargo in respect of which drawback is claimed.

Importation, Exportation and Transportation of Goods 7.19 (e) In case of the ves sel, the dutiable goods, including arms and ammunition forming part of the ordin ary equipment of a vessel. (4) Specific declaration should be made in respect of the following cargo, irrespective of whether it comprises same bottom cargo, sh ipment or transshipment (i) arms (ii) ammunition (iii) explosives (iv) narcotics (v) dangerous drugs or (vi) gold If the vessel/aircraft does not carry any such cargo, a nil report should be furnished. 7.6.6 No conveyance to leave without w ritten order [Section 42] : The person incharge of the conveyance which has brou ght any imported goods or has loaded any export goods at a customs station shall not cause or permit the conveyance to depart from that customs station until a written order to that effect has been given by the proper officer. Subsection (2 ) of section 42 stipulates that no such order shall be given until (a) The perso n in charge of a conveyance has answered the questions put to him under Section 38; (b) The provisions of section 41 have been complied with; (c) The shipping b ills or bills of export, the bills of transshipment, if any and such other docum ents, as the proper officer may require, have been delivered to him; (d) All dut ies leviable on any stores consumed in such conveyance and all charges and penal ties due in respect of such conveyance or from the person in charge thereof have been paid or the payment secured by such guarantee or deposit of such amount as the proper officer may direct; (e) The person in charge of the conveyance has s atisfied the proper officer that no penalty is leviable on him under section 116 or the payment of any penalty that may be levied upon him under that section ha s been secured by such guarantee or deposit of such amount as the proper officer may direct; (f) In any case where any export goods have been loaded without pay ment of export duty or in contravention of any provision of this Act or any othe r law for the time being in force in relation to export of goods(i) Such goods h ave been unloaded, or (ii) Where the Assistant Commissioner is satisfied that it is not practicable to unload such goods, the person in charge of the conveyance has given an undertaking, secured by such guarantee or deposit of such amount a s the proper officer may direct, for bringing back the goods to India. The oblig ations on the part of the conveyance and/or the person in charge have been numer ated in sub section (2). They are explained one by one below:

7.20 Customs (a) Apart from filing the IGM/Import report the person in charge of the vessel has to answer the questions put to him under section 38. Section 38 is invoked normally, when the particulars furnished, are inadequate and when the customs department feel that the person in charge is deliberately suppressing s ome vital facts. If the same are not furnished in spite of use of section 38, ob viously there is something wrong and the vessel cannot be permitted to depart wi thout furnishing such information. (b) Obvious fulfillment of provisions of sect ion 41 is a pre requisite for any conveyance leaving an Indian port. Either the Export General Manifest or Export Report should have been filed or the necessary undertaking given by the ships agent and with necessary security deposit. (c) Th e shipping bills and other shipping documents in respect of the exported goods h ave to be furnished to the customs department. The original shipping bill/bill o f export forms the voucher record of the duty and other amounts paid and duplica te the proof of quantity actually shipped. These are basic records relating to s hipment. (d) Technically speaking, all stores consumed during the stay of the co nveyance at a particular customs station amount to import and home consumption. Thus customs duty is leviable on such stores. It is customary to have an invento ry of ship stores at the time of arrival and again at the time of departure of t he conveyance. Customs duty is leviable on the difference. (e) Similarly, a liab ility is cast on the person in charge of the conveyance, to account for all good s manifested for discharge at a particular station. If the goods manifested for discharge are not unloaded, the person in charge has to explain under section116 of the Customs Act, as to what happened to such goods. He can show that (i) The goods were really unloaded at the particular customs station; (ii) The goods we re not unloaded but were over carried and brought back to that particular statio n later; (iii) The goods were not unloaded, but were over carried and delivered in some other place. If he does not give a satisfactory explanation with support ing documents, a presumption arises that such goods are surreptitiously landed i n India and smuggled into the country, in which case he is liable to penalty equ al to twice the amount that would be leviable on such goods as duty and other ch arges had such goods been properly landed in India. As seen from above, the liab ility to penalty for short landing of goods is on the person incharge of the con veyance. The proceedings usually take a long time and if the notice is served on the pilot, the aircraft will have to be detained for a long time. Hence it is h eld that it is sufficient if the notice is served on the owner of the conveyance i.e. the airlines.

Importation, Exportation and Transportation of Goods 7.21 [Singapore Airlines v. UOI, 2000 (121) ELT 289 (Del)] 7.7 PROCEDURE FOR THE CLEARANCE OF EXPORT GOODS 7.7.1 Entry of goods for exportation [Section 50] : The exporter is, under secti on 50 of the Customs Act, required to present to a proper officer of customs a s hipping bill in case of export by a vessel or by air and a bill of export, in ca se of export by a vehicle. The form of the shipping bill is regulated by the Shi pping Bill (Forms & Regulations) Act, 1991. The forms are as follows : Dutiable goods Duty free goods With drawback claim Duty free ex bond Export under DE PB S cheme Yellow While Green Pink Blue Normally a shipping bill is permitted to be filed only after an entry outward ha s been granted for the particular vessel or aircraft by which the goods are to b e exported. However, under special circumstances the Commissioner of Customs may permit advance shipping bill to be filed. 7.7.2 Clearance of goods for exportat ion [Section 51] : After the shipping bill is filed, they are presented for the customs appraisal. Here also there are two parts namely, scrutinising assessment and physical check of assessment. Since the export regulations are not strict a nd rigid, these procedures are very simple. After the customs officer is satisfi ed that the goods are not prohibited and the exporter has paid the duty, he make s the order for shipment on the duplicate copy of the shipping bill. This is kno wn as Let Export orders. 7.7.3 Notice of Short Export of Goods: According to the N otice of Short Export Rules, 1963, if any goods mentioned in a shipping bill or bill of export and cleared for exportation are not exported, the exporter shall, within seven days, from the date of departure of the conveyance by which such g oods were exported, furnish the prescribed information to the proper officer in respect of such goods. 7.7.4 Flow pattern for Export: Let us now consider the va rious steps and controls exercised by the Customs department on the export goods . (i) The exporter files an application for export of goods known as Shipping Bi ll. (ii) After the appraising department, the export duty assesses the shipping bill, export cess etc. are collected.

7.22 Customs (iii) Thereafter the Shipping Bill along with the export cargo is p resented to the Customs officers in charge of supervision of the loading of the Cargo. (These officers are generally called Preventive Officers in the major Cus tom Houses.) The Preventive Officer after satisfying himself that all the custom s checks including Export Trade Control license and export duty payment have bee n completed, will endorse the shipping bill with a Let Ship order. (iv) On receipt of the cargo on board the ship, the master/mate/agent of the ship issues a rece ipt of the quantity and particulars of the cargo loaded on the ship. (v) If the ship is not berthed alongside the quay and the goods have to be taken to the shi p by boats/lighters the boat note procedure would be followed. (vI) When the Shi pping Bill is presented to the master/agent/mate of the vessel, the export cargo will be permitted to be loaded. (vii) The Customs Officer endorses on the Shipp ing Bill the quantity of the goods loaded into the ship under the Ship Bill. 7.8 PROCEDURE FOR POSTAL ARTICLES 7.8.1 Import and export of goods by post: In the case of goods imported by post the agency for the carriage of goods is the Government of India be it through se a, air or land. The control of the Customs Department is only on goods, whether imported or exported (i) on which there is a duty; and (ii) which are subject to prohibition or restriction under the Customs Act or any other law for the time being in force. The customs have no concern over other goods or other mail. 7.8. 2 Provisions under Indian Post Office Act : The Indian Post Office Act, 1898, co ntains certain provisions to facilitate this control. The first of these is sect ion 24 of the Indian Post Office Act, which reads as under: Power to deal with p ostal articles containing goods contraband or liable to duty [Section 24] : Exce pt as otherwise provided in this Act, where a postal article suspected to contai n any goods of which the import by post or the transmission by post is prohibite d by or under any enactment for the time being in force, or anything is liable t o duty, writing to the addressee, initiating him to attend, either in person, or by an agent, within a specified time at a post office, and shall in the presenc e of the addressee, or his agent, or if the addressee or his agent fails to atte nd as aforesaid, then in his absence open and examine the postal article.

Importation, Exportation and Transportation of Goods 7.23 It therefore, follows that (1) The post office authority has a right and duty to open and examine a po stal article. (2) The right can be exercised only if he has a reasonable suspici on that the goods contained in the postal article are (a) liable to duty of cust oms, or (b) subject to a prohibition under any law in force. (3) Before opening and examining the postal article he should issue a notice in writing to the addr essee asking him to be present at an appointed time and place for the opening of the postal article. (4) The addressee can be present either in person or by an agent; and if the addressee or his agent does not turn up at the appointed time and place, the postal authorities are entitled to open and examine the postal ar ticle in his absence. Delivery to customs authority: The power enabling the post al authorities to deliver such articles to the Customs authorities is enshrined in section 24A of the Indian Post Office Act. The relevant provisions read as fo llows: The Central Government may, by a general or special order, empower any of ficer of the post office, specified in such order, to deliver any postal article , received from beyond the limits of India and suspected to contain anything lia ble to duty, to such customs authority as may be specified in the said order and such customs authority shall deal with such article in accordance with the prov isions of the Sea Customs Act [now Customs Act, 1962] or any other law for the t ime being in force. Thus once the postal authorities have found some postal arti cle to contain dutiable or prohibited goods, that authority should deliver the p ostal article in question to the customs authority for necessary action. 7.8.3 P rovisions under Customs Act: After considering the provisions of the Indian Post Office Act, let us now consider the provisions under the Customs Act relating t o goods imported or exported by post. Sections 82 to 84 of the Customs Act are s ubstantive provisions containing the various provisions. Label or declaration ac companying goods to be treated as entry [Section 82] : In the case of goods impo rted or exported by post, any label or declaration accompanying the goods, which contains description, quantity and value thereof, shall be deemed to be an entr y for import or export, as the case may be, for the purposes of this Act. Releva nt date for Rate of duty and tariff valuation in respect of goods imported or ex ported by post [Section 83] : (1) The rate of duty and tariff value, if any, app licable to any goods imported by post shall be the rate and valuation in force o n the date on which postal authorities present to the proper officer a list cont aining the

7.24 Customs particulars of such goods for the purposes of assessing the duty th ereon. However, where the postal goods arrive on a vessel, and the list containi ng the particulars is available and is filed by the Post Master, before the arri val of the vessel, the list shall be deemed to have been filed on the date of ar rival of the vessel. The effect of this proviso is that the relevant date for im ports by post is the date of submission of the list by the Post Master or the da te of arrival of the vessel, whichever is later. (2) The rate of duty and tariff value applicable to any goods exported by post shall be the rate and valuation in force on the date on which the exporter delivers such goods to the postal aut horities for exportation. Power of the Central Board of Excise and Customs to ma ke regulations [section 84]: This section empowers the Board to make regulations providing (a) the form and manner in which an entry may be made in respect of a ny specified class of goods imported or to be exported by post, other than goods which are accompanied by a label or declaration containing the description, qua ntity and value thereof; (b) the examination, assessment to duty, and clearance of goods imported or to be exported by post (c) the transhipment of transit or g oods imported by post from one Customs station to another or to a place outside India. 7.8.4 Rules Regarding Postal Parcels & Letter Packets from Foreign Ports in/out of India Landing : The rules and regulations under the old Sea Customs Ac t (which are valid under the Customs Act) provide that the boxes or bags contain ing the parcels would be labelled, like Postal Parcels Parcel Mail Letter Mail . They would be allowed to land at (i) Foreign Post Dept. at G.P.O. Calcutta (ii) Forei gn Post Dept. at Bombay. (iii) Foreign Post Office at G.P.O. Madras (iv) Sorting air mail office at Delhi. (v) Foreign Post Dept. at New Delhi. (vi) Foreign Par cel department of Golakganj.

Importation, Exportation and Transportation of Goods 7.25 Clearing : The procedu re to be followed is as under: 1. The Postmaster at Foreign Post Department will prepare in relation to all post parcels subject to customs scrutiny a list or s heeet containing (i) Parcel Nos. (ii) Parcel Bills/senders declarations/labels/de spatch notes (iii) Any other information relevant to the assessment of the parce ls. 2. The mail bags other than those containing registered mail are checked in the sorting office as soon as they are received in India, to eliminate and detai l mail containing dutiable or prohibited goods. On receipt of the parcels, the c ustoms appraiser would segregate them into the following: (a) those that can be assessed to customs duty on the basis of the label or customs declaration; (b) t hose that can be assessed to customs duty after opening the parcel and physical examination of the goods; (c) those for which further information or further doc uments are necessary for determining the customs duty, restrictions on importati on etc. These documents will be called from the addressee of the letter mail art icle. 1. The parcels to be opened will be opened by the postal authorities in th e presence of the customs authorities and after the customs authorities have asc ertained the necessary details for determination of the duty and prohibition asp ects they shall close the letter mail articles or the parcels as the case may be . In the case of parcels, letter mail articles, detained for further details or information a letter of call will be issued by the customs authorities. The post al articles will be presented to the customs authorities once again as soon as t he requisite information is received. As soon as the parcels are assessed to dut y, the customs will indicate on the parcel assessment sheet, the value of the go ods, description of the goods and the duty recoverable on the goods. The postal authorities shall inscribe the duty amount on the label of the parcel. The posta l authorities will collect the duty when the parcel s are delivered to the addre ssee. The duty amount is credited to the customs authorities periodically. The d uty amount is collected at the time of delivery of the postal article to the add ressee. 3. 2. 3. 4. 5.

7.26 Customs Section 13 of the Post Office Act provides that customs duty paid a s postage is recoverable as postage. This provision states that when a postal ar ticle, on which any duty of customs is payable, has been received by post from a ny place beyond the limits of India, and the duty has been paid by the postal au thorities, at any customs port or elsewhere, the amount of duty shall be recover able as if it were postage due under the (Post Office) Act. Imports through cour ier service: The provisions applicable for postal goods do not apply to imports/ exports made through courier agencies. They are governed by Courier Import and E xports (Clearance) Regulations, 1998. 7.9 SPECIAL PROVISIONS RELATING TO STORES The term stores has got a special significance in the course of import and export under the Customs Act. The term stores has been defined under section2(38) of the Customs Act to mean goods for use in a vessel or aircraft, and includes fuel and spare parts and other articles of equipment, whether or not for immediate fittin g. The ambit of the term stores can be understood if the following needs of the ves sel or conveyance are taken into account: (i) The food, drink and other needs of the passengers and crew and other human beings on board the vessel, aircraft or conveyance. (ii) Stock of the fuel necessary for running the vessel, aircraft, conveyance, f or example diesel oil and furnace oil for ships, aviation, turbine fuel for the aircrafts, petrol or diesel or automobiles run on road, coal, diesel of locomoti ve etc. (iii) The conveyance has to carry with it certain essential spare parts for the maintenance and repair of the conveyance during the journey. (iv) Certai n essential medical items like first aid boxes, medicine chest, oxygen etc are a lso necessary during the voyage. (v) Life saving things, life boats, life belts, etc. are also statutorily required to be kept on board the vessel/conveyance. ( vi) If the voyage is long and tedious, certain entertainment to keep the passeng ers engaged is a commercial requirement. They include alcoholic liquors, musical instruments/videos/radio systems, small games, toys and other entertainment ite ms for the children, long chain, etc. on ocean liners etc. The emphasis is that all these items are not imported into or exported out of India in the course of international trade, but by the very fact of their being brought into India from a place outside India, and vice versa, they attract the rigours of the controls on import and export of goods. This has necessitated special provisions to deal with such stores.

Importation, Exportation and Transportation of Goods 7.27 Sections 85 to 90 of t he Customs Act contain detailed provisions relating to treatment of Stores under the Act. 7.9.1 Provisions of IGM/EGM: A specific provision has been made in the Import General Manifest to be filed with customs authorities on arrival at a cu stoms port/airport/station, that the Store list in the prescribed form should be m ade out separately in the Manifest. A similar provision has been made in the Exp ort General Manifest required to be filed at the time of departure from a custom s port/airport/land customs station. Before we go through the statutory provisio ns as aforesaid we shall analyse the movement of the vessels/aircrafts and the v arious possible circumstances that may arise. Since the stores are not landed an d cleared for home consumption, the collection of duty on an assessment document does occur. There are three different situations: (i) The vessel/aircraft/conve yance terminates its journey at this port, or (ii) They proceed towards Indian c oastal ports only and as such the stores continue to remain in Indian customs/te rritorial waters or Indian territory alone, or (iii) It proceeds towards a desti nation outside India. The journey inside India is called coastal run in the case of vessels, domestic flight in the case of aircraft and internal movement in th e case of other transportation by land. 7.9.2 Transit & Transhipment [Section 86 and 87] : provides that 1. 2. Section 86 of the Customs Act Any stores imported in a vessel or aircraft, may remain on board such vessel or aircraft, without payment of duty, while it is in India. (Transit) Any stores im ported in a vessel or aircraft may, with the permission of the proper officer be transferred to any vessel or aircraft as stores for consumption therein. (Trans hipment) No duty on consumption of stores on board a foreign going vessel/aircra ft [Section 87]: Therefore, when a foreign going vessel or aircraft enters territorial water, sub section (i) of section 86 permits the stores on board such vessel or aircraft t o remain on board without payment of duty during its stay in Indian waters. Agai n, in transhipment cases, when such stores are transferred to any foreign going vessel or aircraft or to an Indian naval vessel for consumption, they are permit ted to do so without payment of any duty vide sub section (2) of this section. S ection 87 of the Customs Act provides that any imported stores on board a vessel or aircraft (other than stores to which section 90 applies) may, without paymen t of duty, be consumed during the period such vessel or aircraft is a foreign go ing vessel or aircraft.

7.28 Customs This covers the situation between the first Indian port/airport of arrival to the final Indian port/airport of departure to a destination outside I ndia. In other words, no duty is leviable as long as the vessel/aircraft is a fo reign going vessel/ aircraft. However, if the vessel/aircraft ceases to be so an d converts to a total run/local flight, duty will be chargeable on the stores on board. As a result of these two specific provisions of law, it follows that in other cases normal law of levy and assessment to import duty would apply. Thus, in the case of : (i) vessels/aircraft arriving in India and terminating their vo yage at the port of arrival: (ii) vessel/aircraft arriving in India and subseque ntly converting into coastal voyage/run or domestic flight import duty would be chargeable on the unconsumed stores brought by the vessel/aircraft/conveyance at the point of its entry into India. The stores list in the import manifest forms the basic document for determination of duty liability. 7.9.3 Warehousing of Sh ipstores [Section 85] : It has been found convenient to allow imported shipstore s to be kept in a bonded warehouse and thereafter supply it to vessels/aircraft as and when required. Normally when imported goods are allowed to be kept in a w arehouse the importer is required to bind him to pay the duty on the imported go ods. It is customary to assess the imported goods to determine the amount of dut y payable thereon before permitting such imported goods to be warehoused. In the case of shipstores such a detailed procedure is considered to be unnecessary. H ence section 85 provides for warehousing ship stores without assessment to duty. It provides that where any imported goods are entered for warehousing and the im porter makes and subscribes to a declaration that the goods are to be supplied a s stores to vessels or aircraft, without payment of import duty under this chapt er the proper officer may permit the goods to be warehoused without the goods as sessed to duty. Bonded Aircraft Stores (Procedure) Regulation, 1965 : A regulatio n has been made to regulate such warehousing of shipstores and is called the Bon ded Aircraft Stores (Procedure) Regulations, 1965. The regulation provides that, (1) Whenever any imported goods intended for supply for use in a foreign going aircraft are to be entered for warehousing, an application under the prescribed form should be made to the Assistant Commissioner of Customs or Deputy Commissio ner of Customs. (2) This application will be treated as a Bill of Entry. (3) On receipt of the said application, the Assistant Commissioner or Deputy Commission er of Customs may permit the goods specified in the application to be warehoused without the goods being assessed to duty.

Importation, Exportation and Transportation of Goods 7.29 (4) When the said ware housed goods are to be cleared for use as stores in a foreign going aircraft, an application has to be made to the Assistant Commissioner or Deputy Commissioner in the prescribed form. (5) This application will be treated as a Shipping Bill . (6) On receipt of the said application, the Assistant Commissioner or Deputy C ommissioner may permit clearance of the warehoused goods specified in the applic ation for being taken on board the foreign going aircraft as stores. 7.9.4 Appli cation of Section 69 and Chapter X to Shipstores [Section 88] : This section pro vides that the provisions of Section 69 and chapter X shall apply to stores othe r than those covered by section 90. Thus it follows that, 1. Section 69 allows w arehoused goods to be exported without payment of import duty. By virtue of sect ion 88, this benefit as available to warehoused goods if they are taken on board any foreign going vessel or aircraft as stores. Further, as per section 74, whe re duty paid imported goods are exported within two years then subject to certai n conditions, such duty shall be repaid as drawback. By virtue of section 88, th is benefit has been made available to imported shipstores. In case of imported s hipstores, which have been re exported after the import duties for the same have been paid, the original import duty paid is eligible as drawback. However a spe cial provision has been made in this regard for stores like fuel and lubricants oil taken on board any foreign going aircraft whereby the whole of the import du ty paid is eligible as drawback as against 98% eligible for other imported goods . 7.9.5 Supply of Ship Stores [Section 89] : Section 89 of the Customs Act cover s the case of indigenous goods, which are supplied to a vessel as ship stores. I t states that goods produced or manufactured in India and required as stores on any foreign going vessel or aircraft may be exported free of duty in such quanti ties as the proper officer may determine having regard to the size of the vessel or aircraft, the number of passengers and the crew and the length of the voyage or journey on which the vessel or aircraft is about to depart. In a nutshell, t he duty free supply of shipstores, should be reasonable and not in commercial qu antities. 7.9.6 Special provisions regarding shipstores supplied to Indian Naval vessels [Section 90]: There are special provisions in relation to supply of sto res to Naval vessels. They are: (i) Stores for the use in a ship of the Indian N avy and stores supplied free by the Government for the use of the crew of a ship of the Indian Navy, in accordance with their conditions of service, may be supp lied without payment of duty to be consumed on board the ship of Indian Navy. 2.

7.30 Customs (ii) The provisions of section 69 and Chapter X shall apply as they apply to other goods. However they will be entitled to drawback of the whole of the duty of customs if any paid therein, instead of 98% alone otherwise applica ble. 7.10 SPECIAL PROCEDURES RELATING TO CLEARANCE OF BAGGAGE 7.10.1 Baggage: Th e term baggage has been defined under section 2 (3) of the Customs Act, to include unaccompanied baggage as well but does not include motor vehicles. The term bag gage is a comprehensive term which means the luggage of a passenger accompanied or unaccompanied, and comprises of trunks or bags and the personal belongings of the passenger. It is not limited to the meaning of bonafide baggage as defined in clause 3 of Tourist Baggage Rules, 1958. The term goods has been defined under section 2 (22) of the Customs Act, to include inter alia, baggage also. Therefor e, the restrictions and regulations governing the import and export of goods wil l apply mutatis mutandis to baggage also. 7.10.2 Issues relevant to baggage: The re is a popular belief that baggage consists of personal belongings of an indivi dual or family and is essential for the day to day life of such persons. There i s another popular belief that customs duty is on trade and merchandise only and the goods brought into India or taken out of India in the course of internationa l trade alone are liable to customs duty and customs regulations. The customs du ty is an indirect tax. It is on the goods. It is no way influenced by the partie s to the transaction or the nature of the transaction. The only relevant factors are: (i) whether the goods are imported into India; (ii) whether they are subje ct to the levy of customs duty under the provisions of the Customs Act and (iii) whether there is any relief of payment of duty. It is in this context that the provisions of the Customs Act have to be examined in their applicability to bagg age. The duty cast on the person in charge of the conveyance is to file an Impor t General Manifest in the case of imported goods and an Export General Manifest in the case of export goods. In both the cases, baggage goods are required to be d eclared in separate sheets. 7.10.3 Statutory Provisions : The statutory provisio ns relating to Baggage are covered by sections 77 to 81 of the Customs Act. Entr y of baggage by owner [Section 77] : Under this section the owner of the baggage has to make a declaration of its contents to the proper officer of customs, for the purpose

Importation, Exportation and Transportation of Goods 7.31 of clearing it. This i s known as Baggage Declaration Form. Rate of duty and tariff valuation applicabl e to baggage [Section 78]: Section 78 of the Customs Act stipulates that the rat e of the duty and tariff valuation, if any applicable to baggage shall be the ra te of and valuation in force on the date on which a declaration is made in respe ct of such baggage under section 77. Therefore the relevant date is the date of filing baggage declaration under section 77. Duty exemption to baggage [Section 79] : Section 79(1) of the Customs Act refers to the duty relief available in re spect of baggage. It stipulates that the proper officer, may subject to any rule s made under sub section (2) pass free of duty (a) any article in the baggage, o f a passenger or a member of the crew, in respect of which the said officer is s atisfied that it has been in his use for such minimum period as may be specified in the rules; (b) any article in the baggage of a passenger in respect of which the officer is satisfied that it is for the use of the passenger or his family or is a bonafide gift or souvenir, provided that the value of each such article and the total value of all such articles does not exceed such limits as may be s pecified in the rule. The law thus envisages two categories of baggage, namely t hose belonging to (a) passengers; and (b) members of the crew. Similarly it envi sages three classes of goods, namely (a) personal effects, which have been in th e use of the person for a minimum period; (b) household effects, which is used b y the family including the person; and (c) gifts and souvenirs. Sub section (2) of section 79 enables the Central Government to make rules for the purposes of c arrying out the provisions of section 79(1). It also stipulates that such rules may specify (a) the minimum period for which any article has been used by a pass enger or a member of the crew for the purposes of [clause (a) of sub section(1)] determining personal effects; (b) The maximum value of any individual article a nd the maximum total value of all the articles which may be passed free of duty [under clause (b) of sub section (1) ] i.e., household effects, gifts, souvenirs etc; (c) the conditions to be fulfilled before or after clearance subject to wh ich the baggage may be passed free of duty. Sub section(3) of section 79 provide s that different rules may be made for different classes of persons.

7.32 Customs Relevant Cases 1. Gifts: Articles brought in as baggage for persona l use of another person cannot be treated as bona fide baggage for allowing free ly. The tribunal has held this view in the case of Saroj Goenka v. Commissioner of Customs 1987 [(31) ELT 839 (T SRB)] Software: If software is imported by bagg age mode, exemption under notification No 11/97 Cus would not be available becau se all baggage are liable to be classified and assessed to duty under heading No . 98.03. 2. 7.10.4 Passenger Baggage Rules: In pursuance of the powers conferred under secti on 79 of the Customs Act, the Government has passed the Baggage Rules 1998. The content of the Baggage Rules, 1998 can be explained briefly as under: Tourist: T his means a person not normally resident in India who enters India for a stay of not more than six months for legitimate non immigrant purposes such as touring, recreation, sports, health, family reasons, study, religious pilgrimage or busi ness. On arrival in India such a person shall be entitled to duty free clearance of his bonafide baggage to the following extent: [Appendix E read with rule7] Cla ss of Tourist Tourist of Indian Origin other than those coming from Pakistan by land route Articles allowed free of duty (i) Used personal effects and travel so uvenirs, if a. b. these goods are for personal use of the and tourist, these goods, other than those consumed during the stay in India, are re exported when the tourist leaves India for a foreign destination (ii) Articles as allowed to be cleared duty free under the basic allowance for p assenger depending upon the country from which he is coming. Tourist of foreign origin other than those of Nepalese origin coming from Nepal, or Bhutanese origi n coming from Bhutan. Tourists of Nepalese origin coming from Nepal or of Bhutan ese origin coming from Bhutan (i) Used personal effects and travel souvenirs sub ject to the same conditions as that of a person of Indian Origin. (ii) Articles other than those mentioned in Annexure I upto a value of Rs. 8,000 / for making gifts. No Free Allowance.

Importation, Exportation and Transportation of Goods 7.33 Tourist of Pakistani o rigin or foreign tourists coming from Pakistan or tourists of Indian origin comi ng from Pakistan by land route (i) Used personal effects and travel souvenirs, i f(a) These goods are for personal use of the tourist, and (b) These goods, other than those consumed during the stay in India, are re exported when the tourist leaves India for a foreign destination. (ii) Articles up to a value of Rs. 6000 for making gifts. Passengers other than tourists: The basic allowance to such pa ssengers consists of (a) Used personal effects, excluding jewellery required for satisfying daily necessities of life. (b) Other articles which are carried on t he person or in his accompanying baggage. There is no value limit for used perso nal daily necessities of life. However there is a value limit in respect of othe r articles of baggage (apart from the goods mentioned in Annexure 1) as categori zed according to age of the passenger, country from which they returning and the number of days of stay abroad. The different allowances are tabulated below: Sl . No. I Country coming from Nepal, Bhutan, Myanmar or China doCountries other t han Nepal, Bhutan, Myanmar or China doAge of the Passenger 10 Yrs. or more Dura tion of Stay More than 3 days Value Limit Rs. 6,000/ II upto 10 yrs. 10 Yrs. or more doMore than 3 days

More than 3 days 3 days or less

It may be noted that these free allowances are per individual passenger only and shall not be allowed to be pooled with other passengers.

Rs. 6,000/Rs. 3,000/

do

Upto 10 yrs.

do

do

3 days or less Rs. 12,000/

Rs. 1500/Rs. 25,000/

7.34 Customs Additional allowances to professionals of Indian origin: If the non tourist passenger, is of Indian origin who was engaged in his profession abroad , on his return to India he shall be entitled to duty free allowances in additio n to those mentioned above at varying scales depending upon the duration of stay abroad. The additional allowances consists of (i) used household articles and ( ii) professional equipment in use and belonging to the passenger. Professional e quipment has been defined to mean portable equipment, instruments, apparatus and appliance as are required in his profession like a carpenter, a plumber, a weld er, a mason and the like and shall not include items of common use, such as came ras, cassette recorders, dictaphones, personal computers, typewriters and other similar articles This additional allowance may be tabulated as follows: Sl. No. 1. 2. 3. Duration of Stay At least 3 months At least 6 months Minimum 365 days d uring the preceding 2 years and returning to India after termination of his work . Used house hold articles Rs.12,000/Rs.12,000/Professional equipment Rs. 20,000 /Rs. 40,000/ All used household articles and personal effects (which have been in possession and use abroad of the passenger or his family for at least six months) upto an a ggregate value of Rs. 75,000/ . These exclude articles listed in Annex I, II or III of the Baggage Rules.

Jewellery brought by non tourist Indian passenger: The additional duty free allo wance is applicable to non tourist passenger of Indian origin who had stayed abr oad for period exceeding one year. Indian non tourist passengers who had stayed abroad for a period less than a year are not eligible for this additional jewell ery allowance. The jewellery brought by them is specifically excluded from the d uty free allowance for used personal effects. It has to be covered under the nor mal baggage allowance only. The additional jewellery allowance is as follows:Gen tleman Passenger Lady Passenger Rs. 10,000/ Rs. 20,000/ Transfer of residence: A passenger, who has been staying abroad and transferring his residence to India, has naturally been given greater baggage allowance. He is given in

Importation, Exportation and Transportation of Goods 7.35 addition to the allowa nce he would be otherwise eligible as a non tourist, duty free clearance of all used personal and house hold articles, other than those listed in Annex I or Ann ex II, but including the articles listed in Annexure III and jewellery upto an a ggregate value of Rs. 10,000/ in the case of a gentleman Rs. 20,000/ in the ca se of lady This is subject to condition that (i) the passenger has stayed abroad for a minimum period of two years, immediately preceding the date of his arriva l on transfer of residence; (ii) if the passenger had visited India, during the preceding two years, the sum total of such visits should not exceed six months; and (iii) the passenger had not availed baggage concession available to passengers coming on transfer of res idence during the preceding three years. However, if the passengers had taken je wellery out of India at the time of their departure from India, they would be gi ven duty free clearance thereof, if it is proved to the satisfaction of the Assi stant Commissioner of Customs, that they were taken out of India. All passengers are advised to obtain jewellery Export Certificate from the Customs authority a t the port of export/departure in respect of such jewellery. 7.10.5 Provisions r elating to unaccompanied baggage: The various provisions in the above rules are also applicable to the unaccompanied baggage unless specifically excluded. The u naccompanied baggage must be dispatched within one month of his arrival in India or such further period as the Assistant Commissioner may allow. The unaccompani ed baggage can land in India even before the arrival of the passenger. The unacc ompanied baggage may arrive within two months before the arrival of the passenge r. However if the passenger is not able to arrive in India due to circumstances beyond his control like sudden illness to himself or any member of family, natur al calamities, disturbed conditions etc. the Assistant Commissioner may extend t he period of two months upto a maximum of one year for reasons to be recorded. G oods listed in Annexure I & II. Annexure I : 1. 2. 3. 4. Fire arms Cartridges of fire arms exceeding 50. Cigarettes exceeding 200 or cigars exceeding 50 or toba cco exceeding 250 gms. Alcoholic liquor or wine in excess of two litres

7.36 Customs 5. Gold or silver other than ornaments Annexure II: 1. 2. 3. 4. 5. 6. 7. 8. 9. Colour Television/Monochrome television Digital Video Disc Player Video Home Theatre System Dish Washer Music System Air conditioner Domestic Refrigerators of capacity above 300 litres or its equivale nt Deep Freezer Microwave Oven 10. Video camera or the combination of such video camera with one or more of the following goods viz. (a) Television receiver. (b) Sound recording or reproducin g apparatus. (c) Video reproducing apparatus. 11. Word Processing Machine 12. Fa x Machine 13. Portable Photocopying Machine 14. Vessel 15. Aircraft 16. Cinemato graphic films of 35 mm and above 17. Gold or silver in any form other than ornam ents Annexure III 1. 2. 3. 4. Video Cassette Recorder or Video Cassette Player o r Video Television Receiver or Video Cassette Disk Player Washing Machine Electr ical or Liquefied Petroleum Gas Cooking Range Personal computer (Desktop Compute r)

Importation, Exportation and Transportation of Goods 7.37 5. 6. Laptop Computer (Notebook Computer) Domestic Refrigerators of capacity up to 300 litres or its e quivalent. Crew Baggage: These baggage rules are applicable to the members of the crew enga ged in foreign going vessels, when they are finally paid off on termination of t heir engagement. However, a crew member of a vessel and aircraft shall be allowe d to bring items like chocolates cheese, cosmetics and other petty gift items fo r their personal or family use which shall not exceed the value of Rs.600. Tempo rary detention of baggage [Section 80] : It may so happen that a passenger has b rought with him an article, which is prohibited. The passenger may not insist on taking it into the Indian Territory. On the contrary, he may opt to re export i t or take it with him when he leaves the country. Similarly a passenger may not unnecessarily pay duty on an article, which he can conveniently avoid taking int o the town, if the duty is heavy. In such case also, he may opt to take the arti cle with him when he leaves the country. In both the cases, he will have to depo sit the article with the customs authorities and take it back at the port of his departure. Where the baggage of a passenger contains any article which is dutiab le or the import of which is prohibited and in respect of which a true declarati on has been made under section 77, the proper officer may, at the request of the passenger, detain such article for the purpose of being returned to him on his leaving India and if for any reason, the passenger is not able to collect the ar ticle at the time of his leaving India the article may be returned to him throug h any other passenger authorised by him and leaving India or as cargo consigned in his name. Declaration the essence: The declaration of the goods brought in is a absolute necessity. If the goods are not declared under section 77, the passen ger cannot subsequently claim the benefit under section 80 and the goods are lia ble for confiscation. [Md. Ibrahim v. Secretary, Ministry of Finance, 2000 (123) ELT 239 (Mad).] 7.10.6 Regulations in respect of baggage [Section 81] : Since t he provisions in respect of baggage are a complete code by themselves, it is des irable to supplement detailed procedures wherever necessary with the rule making powers. Section 81 therefore provides that the Board may make regulations in th e following matters: (a) providing for the manner of declaring the contents of a ny baggage; (b) providing for the custody, examination, assessment to duty and c learance of baggage; (c) providing for transit or transhipment of baggage from o ne customs station to another or to a place outside India.

7.38 Customs Baggage declaration form : In exercise of these powers, the form of the baggage declaration has been prescribed and standardized. Transit or transh ipment of baggage from one customs station to another becomes a necessity for co nvenient clearance of unaccompanied baggage. Baggage (Transit to Customs Station s) Regulations: The Central Board of Excise & Customs has made the regulations f or the transit of unaccompanied baggage from the customs station of arrival at B ombay, Delhi, Calcutta, Madras, Bangalore, Trivandrum, Hyderabad or Cochin to an y other of the aforesaid customs stations. Conditions: Where the unaccompanied b aggage of any passenger arrives at the customs station at Bombay, Delhi, Calcutt a, Madras, Bangalore, Trivandrum, Hyderabad or Cochin and the passenger desires that the said baggage may be cleared at any of the aforesaid customs stations, o ther than the customs station at which the baggage has arrived, then on a reques t made in this behalf by the passenger, such baggage may be permitted to be tran sported to the customs station at which the passenger desires the same to be cle ared, by air or by passenger train, if(a) all arrangements are made by the passe nger or his agent for the transport of such baggage from the customs station of arrival to the customs station at which he desires to have the baggage cleared f or its booking to that station , and for its transport to the custom house in th e place at which the station is located, (b) the baggage remains under the super vision of an officer of customs, deputed for the purpose, except when it is unde r the custody of the airline or railway authorities, and the passenger pays for the services of the officer so deputed; and (c) in case of goods to be transport ed by rail such of the goods as can be insured with the railways are so insured. However the Commissioner may at his discretion, allow the unaccompanied baggage to be transported to the customs station at which the passenger wants to have t he same cleared by goods train if the goods are insured and the passenger or his agents satisfy the proper officer that the goods are not permitted to be transp orted in passenger train having regard to the size and weight or that the transp ort by passenger train would cause undue financial strain on him. 7.11 TRANSIT A ND TRANSHIPMENT 7.11.1 Transit and transhipment of import cargo An Introduction: A conveyance may not carry goods intended for a particular customs station only . It may carry goods intended for other Indian ports and other foreign ports. Th ere are two distinct possibilities: (a) The conveyance may not call at all other Indian ports/customs stations and foreign

Importation, Exportation and Transportation of Goods 7.39 ports for which it car ries goods. (b) The conveyance may call at all other Indian ports/customs statio ns and foreign ports for which it carries goods. In the case of the former, the goods will have to be transferred to any other conveyance onward carriage to the destination. This is called transhipment. This will cover both goods intended f or Indian ports and foreign ports. In the latter situation, the goods will conti nue to be carried by the same conveyance. This is called transit of goods. In bo th the situations, import duty is not collected on the goods even though the lia bility has already accrued. It would be necessary to ensure that (a) in the case of goods intended for Indian ports, the goods have actually to be conveyed to t he Indian port of destination and appropriate duty of customs is collected there upon; (b) in the case of goods intended for foreign ports, the goods are actuall y conveyed out of India and are not landed in any Indian customs station. 7.11.2 Difference between Transit and Transhipment: The essential difference between t ransit and transhipment lies in the continuity of records and documentation. (a) In the case of transit of goods by the same conveyance, the record already made in the ships/aircrafts manifest will continue. The goods would have to be shown i n the manifest as same bottom cargo. The destination of the cargo consignment wi se has to be shown in the same bottom cargo manifest. These entries have necessa rily to figure in the export manifest of the conveyance. Thereafter when the con veyance calls at the next Indian customs port or airport the goods have to figur e in the Import General Manifest filed there as landing cargo or same bottom car go as the case may be. Thus there is continuity in the record and there is no ch ance of the control over such transit goods being lost. (b) The position of the transhipment is entirely different. In the first instance such transhipment good s are landed in the particular Indian customs station. There after they have to be shipped by a conveyance to the destination to be transhipped. These are the f ollowing stages where care and caution have to be exercised to ensure that the g oods are not illicitly landed and smuggled into India. (i) during the period whe n the transhipment goods lie in the Indian customs station; (ii) when the goods are transhipped by another conveyance to their final destination; (iii) where th e transhipped goods are destined to another Indian customs station, care has to be taken at that station for actual landing and proper clearance.

7.40 Customs 7.11.3 Statutory Provisions: The statutory provisions relating to T ransit and Transhipment of goods are covered in sections 52 to 56 of the Customs Act. Exceptions to this chapter [Section 52] : The provisions of this chapter s hall not apply to (a) Baggage (b) Goods imported by post and (c) Stores Transit of goods in the same vessel or air [Section 53] : Subject to the provisions of s ection 11 any goods imported in a conveyance and mentioned in the import manifes t or the import report, as the case may be, as for transit in the same conveyanc e to any place outside India or any customs station may be allowed to be so tran sited without payment of duty. Transhipment of goods without payment of duty [Se ction 54] : (1) Where any goods imported into a customs station are intended for transhipment, a bill of transhipment shall be presented to the proper officer i n the prescribed form. Where the goods are being transferred under an internatio nal treaty or bilateral agreement between the Government of India and Government of a foreign country, a declaration for transhipment instead of a bill of trans hipment shall be presented to the proper officer in the prescribed form. (2) Sub ject to the provisions of sections 11, where any goods imported into a customs s tation are mentioned in the import manifest or the import report, as the case ma y be, as for transhipment to anyplace outside India, such goods may be allowed t o be so transhipped without payment of duty. (3) Where any goods imported into a customs station are mentioned in the import manifest or the Import report, as t he case may be, as for transhipment:(a) to any major port as defined in the Indi an Ports Act, 1908 (15 of 1908), or the customs airport at Mumbai, Calcutta, Del hi, or Chennai or any other custom port or customs airport which the board may, by notification in the Official Gazette, specify in this behalf, or (b) to any o ther customs station and the proper officer is satisfied that the goods bonafide intended for transhipment to such customs station, the proper officer may allow the goods to be transhipped without payment of duty, subject to such conditions as may be prescribed for the due arrival of such goods at the customs station t o which tanshipment is allowed. Liability of duty on goods transited under secti on 53 or transhipped under section 54 [Section 55] : Where any goods are allowed to be transhipped under section 53 or

Importation, Exportation and Transportation of Goods 7.41 transhipped under sub section (3) of section 54 to any customs station, they shall, on their arrival a t such station, be liable to duty and shall be entered in like manner as goods a re entered on the first importation thereof and the provisions of this Act and a ny rules and regulations shall, so far as may be, apply in relation to such good s. Transport of certain classes of goods subject to prescribed conditions [Secti on 56] : The provisions of sections 53 and 54 apply only to goods imported at an Indian customs port/airport and transmitted or transshipped to another Indian c ustoms port/airport. They do not cover transport by land from one Indian land cu stom station to another Indian land customs station. In the case of goods destin ed to foreign ports/airports/custom station, the problem had been specifically f aced in the case where imported goods meant for Nepal landed at any Indian custo ms port/airport or land customs station. Such goods had to be transported by roa d or rail to Indian land customs station along the Indo Nepal Border and thereaf ter crossed over to the corresponding Nepalese customs station. Similarly there was rail traffic between West and East Pakistan before the latter was liberated and named Bangladesh. The movement across the Indian territory was found to be f aster and cheaper compared to movement by sea around the Indian subcontinent. Su ch a situation is dealt with by section 56 of the Customs Act. Section 56 specif ically provides that Imported goods may be transported without payment of duty f rom one land customs station to another, and any goods may be transported from o ne part of India to another part through any foreign territory, subject to such conditions as may be prescribed for the due arrival of such goods at the place o f destination. In the first part there is a substantial exemption from customs d uty. The second part technically amounts to export and subsequent re import. 7.1 1.4 Goods Imported (Conditions of Transhipment) Regulations, 1995. The legal pro visions relating to the transhipment of goods are discussed in section 54. Howev er the procedures relating to the transhipment of goods are governed by Goods Im ported (Conditions of Transhipment) Regulations, 1995. Broadly, the transhipment procedure is as follows: 1. Transhipment Permit: A transhipment permit is the permission granted by the Customs, at the port/airport of unloading of imported goods, to shipping agents for carriage of goods to another port/airport/ICD/CFS in India. The shipping agent submits an application alongwith transhipment form s (5 copies), sub manifest and a copy of IGM to the Customs. The Customs scrutin izes the details furnished by the shipping agents in the application for transhi pment. In case, the documents are in order, permission for transhipment is grant ed by the Customs.

7.42 Customs 2. Execution of Bond and Bank Guarantee: To ensure that imported ca rgo, on which duty has not been paid, are not pilfered en route to another port/ airport/ICD/CFS and reach there safely, a bond with bank guarantee (@ 25% of bon d value) is executed by the carrier engaged for the transhipment of the goods. T he carriers in public sector i.e. CONCOR and CWC are exempted from the requireme nt of bank guarantee for transhipment of goods. The terms of the bond is that if the carrier produces a certificate from Customs of the destination port/airport /ICD/CFS for safe arrival of goods there, the bond stands discharged. In case su ch certificate is not produced within 30 days or within such extended period as the proper officer of Customs may allow, an amount equal to the value, or as the case may be, the market price of the imported goods is forfeited. Sealing of go ods: After issuance of transhipment permit and execution of bonds as mentioned a bove, containers are sealed with one time bottle seal by the Customs. In case, containers are already sealed with one time bottle seal by the shipping agent s, containers are not required to be sealed again by the Customs. In such cases, shipping agents are required to inform the serial number of seals to Customs, w hich is just verified by the Customs. What are the circumstances under which ass essment is done provisionally under section 18? State the provisions of tranship ment of goods without payment of duty under section 54 of the Customs Act, 1962. Explain the procedure prescribed in Customs Act, 1962 in case of goods not clea red, warehoused or transhipped within 30 days after unloading. Write short notes on: (a) Export general manifest (b) Boat note (or restriction on goods being wa ter borne) 5. Discuss briefly: (a) Temporary detention of baggage (b) Relevant d ate for rate of duty and tariff valuation in respect of goods imported and expor ted by post 6. What is the permissible time limit with respect to the following : (i) for filing a bill of entry (ii) for paying the assessed duty 3. Self examination questions 1. 2. 3. 4.

Importation, Exportation and Transportation of Goods 7.43 (iii) for delivery of import manifest/report and export manifest/report 7. 8. 9. State in brief the pr ovisions of the Customs Act, 1962 relating to filing of Import Manifest/Report. Wr ite a brief note on the declaration made by the owner of Baggage. State and summ arise the provisions and procedure in the Customs Act, 1962 governing preparatio n and filing of a bill of entry. 10. Queen Marry, the vessel containing the goods imported by XML Ltd. entered the Indian Territorial waters on 26.05.2006. The Import Manifest was submitted on 24 .05.2006. The vessel arrived at the customs port on 29.05.2006 but the entry inw ards was given to the vessel on 04.06.2006. An Into Bond Bill of Entry was present ed by XML Ltd. on 06.06.2006 and thus, the goods were classified, valued and sto red in the bonded warehouse. On 03.07.2006 safeguard duty @ 8% was imposed on su ch goods. XML Ltd. had presented the Bill of Entry for Ex Bond Clearance in respec t of such goods on 01.07.2006 and cleared the goods from the bonded warehouse on 05.07.2006. Discuss whether XML Ltd. is liable to pay safeguard duty on the goo ds imported by it. Will your answer be different if the Bill of Entry for Ex Bond Clearance is presented by XML Ltd. on 04.07.2006? Give reasons in support of you r opinion. Answer 10. The Supreme Court in the case of Kiran Spinning Mills 1999 (113) ELT 753 has held that the taxable event occurs when the customs barrier i s crossed and not on the date when the goods had landed in India or had entered the territorial waters of India. For the goods stored in a warehouse the customs barrier would be crossed when they are sought to be taken out of customs and br ought to the mass of goods in the country. As per section 15(1)(b) of the Custom s Act 1962, the relevant date for determination of rate of duty and tariff valua tion in case of warehoused goods is the date when a bill of entry for home consu mption (bill of entry for ex bond clearance) in respect of such goods has been p resented under section 68 of the Customs Act, 1962. Therefore, in view of sectio n 15(1)(b) the taxable event gets completed when the bill of entry for home cons umption in case of warehoused goods is filed. Thus, in the given problem, the ta xable event gets completed on 01.07.2006, the date on which the bill of entry fo r ex bond clearance is submitted and not on 05.07.2006 when the goods are remove d form the warehouse. The safeguard duty is imposed on 03.07.2006 and the bill o f entry for ex bond clearance is submitted on 01.07.2006, thus, no safeguard dut y can be imposed in such a case, as at the time when taxable event got completed there was no levy of safeguard duty. Further, as per section 15(1)(b) the relev ant date for determining the rate of duty is the date of

7.44 Customs presentation of bill of entry for ex bond clearance, and on that da te there was no safeguard duty. However, if the bill of entry for ex bond cleara nce is filed on 04.07.2006, the date after the levy of safeguard duty, such duty will be levied on the goods.

8 WAREHOUSING 8.1 INTRODUCTION The concept of warehousing is a trade practice involving trade off between (a) t he economics of importation and (b) the requirement of the importer at any given point of time. The requirements of the importer at any given point of time may be say X. Either the supplier may not agree to sell that much quantity or the fr eight may not be economical. The importer in those circumstances would be forced to place an order for 5X or 8X as the case may be. As soon as the goods were im ported they were assessed to duty. The total amount of duty was determined. Ther eafter instead of clearing the whole consignment the importer was allowed to cle ar the consignment in convenient lots after paying appropriate duty on that part icular portion that was cleared. During the intervening period the goods were he ld in custody in a place called warehouse. The consideration the importer was re quired to pay for this facility was that (i) he should bind himself to pay to th e government a sum equal to double the amount of total duty determined, with suc h surety or security as may be required (this was known as double duty bond) and (ii) he should agree to pay duty on the goods cleared from such warehouse at the rate of duty and valuation prevalent on the date on which a bill of entry in re spect of such goods is presented. This facility was also necessary in another si tuation. Ship stores like liquors, cigarettes, preserved food were imported into India and supplied to vessels according to their requirements. The entire consi gnment imported was intended to be so shipped out of the country. The same was t he case of fuel for the ship like furnace oil, diesel oil etc. Obviously there w as no point in collecting import duty on the whole of the consignment and granti ng drawback piecemeal as and when such goods were exported. It was not also safe for the revenue point of view to allow such goods to lie in the port uncleared until they were exported/shipped as shipstores.

8.2 8.2 Customs PARALLEL PROVISIONS FOR HOME CONSUMPTION In these circumstances, in addition to the concept of clearance for home consumpt ion the concepts of clearance for deposits in a warehouse and clearance for home con sumption from the warehouse came into being. As a result of the above, parallel p rovision had also been made corresponding to clearance for home consumption. The examples are: Section 46(1): The importer of any goods, other than goods intend ed for transit or transhipment, shall make entry thereof by presenting to the pr oper officer a bill of entry for home consumption or warehousing in the prescrib ed form. Section 15(1): The rate of duty and tariff valuation, if any, applicabl e to the imported goods shall be the rate and valuation in force(a) in the case of goods entered for home consumption under section 46, on the date on which a b ill of entry in respect of such goods is presented under that section. (b) In th e case of goods cleared from a warehouse under section 68, on the date on which a bill of entry in respect of such goods is presented. 8.3 SPECIAL PROVISIONS FO R WAREHOUSING A separate chapter was therefore incorporated in the Customs Act, 1962, containi ng specific provisions relating to warehousing of imported goods. Chapter IX of the Customs Act, 1962 contains the following provisions: (1) Appointment of publ ic warehouses Section 57 (2) Licensing of private warehouses Section 58 (3) Ware housing bond Section 59 (4) Permission for deposit of goods in a warehouse Secti on 60 (5) Period for which goods may remain warehoused Section 61 (6) Control ov er warehoused goods Section 62 (7) Payment of rent and warehouse charges Section 63 (8) Owners right to deal with warehoused goods Section 64 (9) Removal of good s from one warehouse to another Section 67 (10) Clearance of warehoused goods fo r home consumption Section 68 (11) Clearance of warehoused goods for exportation Section 69 (12) Allowance in the case of volatile goods Section 70

Warehousing 8.3 (13) Goods not to be taken out of warehouse except as provided by this Act Secti on 71 (14) Goods improperly removed from the warehouse Section 72 (15) Cancellat ion and return of warehousing bond Section 73 We shall examine each of the provi sions separately in the subsequent paragraphs. 8.4 IMPORTANT DEFINITIONS 8.4.1 Warehouse [Section 2(43)] means a public warehouse appointed under section 57 or a private warehouse licensed under section 58. 8.4.2 Warehoused goods [Se ction 2(44)] means goods deposited in a warehouse. 8.4.3 Warehousing station [Se ction 2(45)] means a place declared as a warehousing station under section 9. Th e law makes a clear distinction between public warehouses and private warehouses . The public warehouse is owned and managed by a government body. In most of the cases it is Central Warehousing Corporation. A private warehouse is licensed in places where there is no public bonded warehouse. An important point to be reme mbered is the liability of the warehouse keeper. Normally such warehouses are ke pt under double lock one that of the warehouse keeper, and the other of the cust oms department. Further in the case of the private bonded warehouse the licensee has to pay for and acquire the services of a customs officer (on cost recovery basis) to be posted and stationed in the private warehouse. The common features about these warehouses are: (a) the warehouses should be situated in a warehousi ng station; (b) the ground plan of the warehouse should be scrutinized for suita bility and security of the building; (c) there should be sufficient light and ve ntilation for proper storage of goods; (d) the windows should be secured with sh utters and stout iron bars. Superfluous windows should be closed up with brick w ork; (e) the entrances should have strong and secured doors with strong locks. T hey should be capable of periodical check from outside and the doors are locked; (f) there should be proper and prominent name board, showing the full name and full address of the warehouse. 8.5 PROCEDURE FOR DEPOSIT IN THE WAREHOUSE AND SU BSEQUENT REMOVAL The following are briefly the various stages and steps involved in deposit of im ported

8.4 Customs goods in a private bonded warehouse and their subsequent removal. The removal ca n be normally for (a) home consumption (b) export; and (c) transfer to another w arehouse. The stages in the processing of goods for deposit in warehouse are: (a ) Assessment of into bond bill of entry at the port of import; (b) Execution of double duty warehousing bond under section 59; (c) Bonding of the goods in a war ehouse at the port of import; (d) Ascertain availability of space from the inlan d private bonded warehouse in the inland station; (e) Superintendent in charge o f private warehouse issues space availability certificate; (f) On the strength o f the certificate, the officer in charge of the port warehouse would permit tran sfer of the goods under section 67; (g) The necessary bond, for due transport and subsequent accounting of the goods , is executed; (h) Licensee should file, before depositing the transferred goods , the copy of invoice, bill of lading, authenticated copy of bill of entry at th e port of importation and section 59 bond; (i) The jurisdictional Assistant Comm issioner after necessary check of the documents will accept the section 59 bond and permit the transferred goods to be rewarehoused; Before permitting the depos it of the goods in the private warehouse, the packages will be examined external ly to satisfy by marks and numbers that they were the same goods duly covered by the bill of entry filed at the port of import. If any of the packages were dama ged or broken in transit, the contents would be examined. If the packages do not bear distinguishing marks or running serial number, they will be provided on th e packages; (a) Stock account book; and (b) Into bond bill of entry wise account (l) The licensee requiring clearance of the goods from the warehouse would pres ent an ex bond for home consumption at least 48 hours before the desired time fo r clearance; (j) (k) During custody in the private bonded warehouse, the licensee will maintain

Warehousing 8.5 (m) After assessment of the ex bond bill of entry and determination of the duty payable, the B/E will be returned along with challan in quadruplicate (for payme nt of duty); (n) The licensee shall also inform the customs officer about the pr oposed removal well in advance; (o) After payment of duty, the copies of the ex bond bill of entry and one copy of the receipted challan to the superintendent i n charge of the warehouse who will depute necessary officers to effect the relea se of the goods; (p) The officer after examination and test weighment will allow the clearance if the packages are found to tally with the particulars given in the bill of entry; (q) The officer will make necessary entries and endorsement o n the warehouse register, stock card and bill of entry file. 8.6 STATUTORY PROVI SIONS 8.6.1 Appointment of public warehouses [Section 57] : Under section 57 of the Cu stoms Act, at any warehousing station, the Assistant Commissioner of Customs may appoint public warehouses wherein dutiable goods may be deposited. In other wor ds, (i) the place should have already been declared as a warehousing station; (i i) it is the Assistant Commissioner who is competent to declare a warehouse as a public bonded warehouse; (iii) only dutiable goods can be deposited in the ware house. The Assistant Commissioners have appointed the public bonded warehouses a nd the Commissionerates have issued trade notices about such appointment of publ ic bonded warehouses. Some of the Commissionerates have issued public notice giv ing detailed instructions for the working of the public bonded warehouse. From t hese public notices, it is apparent that: (1) The policy of the Government is ma inly to provide warehousing facility at selected places in the inland stations, having regard to the following: (a) the requirement of trade and industry (b) th e proximity to port town (c) availability of customs expertise (2) These public bonded warehouses are generally managed by Central Warehousing Corporations.

8.6 Customs The points covered by these public notices are: (1) obligations of the warehouse keeper; (2) procedure for warehousing imported goods for the first time; (3) pr ocedure for warehousing on transfer from one warehouse to another; (4) issue of space availability certificate before accepting warehouse goods; (5) examination of goods before re warehousing; (6) ex bond clearance; (7) reassessment of ware housed goods; (8) maintenance of stock card and accounts; (9) permissible wareho using period; (10) procedure for extension of warehousing period; (11) failure t o clear the goods from the ware house; (12) penalty for goods improperly removed from the warehouse. 8.6.2 Licensing of Private Warehouses [Section 58] (1) At a ny warehousing station, the Assistant Commissioner of customs or the Deputy Comm issioner of Customs may license private warehouses, wherein dutiable goods impor ted by or on behalf of the licensee, or any other imported goods in respect of w hich facilities for deposit in a public warehouse are not available, may be depo sited. (2) The Assistant Commissioner of Customs may cancel a licence granted un der subsection(1) (a) by giving one months notice, in writing to the licensee; or (b) if the licensee has contravened any provision of this Act or the rules or r egulations or committed breach of any of the conditions of the license; Provided that before any licence is cancelled under clause (b), the licensee shall be gi ven a reasonable opportunity of being heard. (3) Pending an enquiry whether a li cence granted under sub section (1) should be cancelled under clause(b) of sub s ection (2) the Assistant Commissioner may suspend the licence. 8.6.3 Private war ehouses not to be permitted under this section where public warehouses are avail able: Under this section, grant of private bonded warehouse where public bonded warehouses are available are clearly debarred. This view is upheld by the High C ourt in the case of Shree Pipes Ltd. v. UOI, 1995 (79) ELT 405 (Raj).

Warehousing 8.7 8.6.4 Procedure for permission of Private Warehouses : In case of Private Bonded Warehouses, the applications for such licences have been classified into two ca tegories viz., storage of sensitive goods such as liquor, cigarettes, foodstuffs , consumables, etc. and other non sensitive goods. Under Boards Circular No.99/95 dated 20.9.1995, the following guidelines in case of storage of sensitive goods have been provided:(i) Applicants should produce a Solvency Certificate from a Scheduled Bank of repute for a value not less than Rs. 50 lakhs; (ii) Such warehouses may not be located in residential areas; (iii) The premises should be secure, possess fire fighting provisions and be easily accessible to the Customs Officers; (iv) Goods deposited should be fully insured for a value a t least equal to the customs duty; (v) The proprietor/partner/director must not be involved in any Customs or Excise offence . In case of any involvement in suc h offences, the licence may be terminated after following the prescribed procedu re; (vi) In the case of individual consignments to be warehoused, a double duty bond as prescribed under section 59 should be given by the licencee. In case of sensitive goods, a cash deposit/ bank guarantee equal to 25% of the duty liabili ty (effective duty foregone) will be taken for each consignment. At the same tim e, a revolving bond with a single bank guarantee for a higher amount can be acce pted if so requested for a number of consignments. In the case of non sensitive goods, applicants for Private Bonded Warehouses have to abide by all provisions as pertaining to sensitive goods discussed above, except that the requirement of furnishing a Solvency Certificate has been waived. The applicant, however, shou ld be solvent for Rs. 10 lakhs and should possess a good record. A double duty b ond with surety would suffice for storage of non sensitive bonded goods. In case the Customs are not satisfied about the transactions of a particular bonder, th e applicant may be asked to furnish a bank guarantee. 8.6.5 Warehousing Bond [Se ction 59] Section 59 provides as follows: (1) The importer of any goods, specifi ed in sub section (1) of section 61, which have been entered for warehousing and assessed to duty under section 17 or section 18, shall execute a bond binding h imself in a sum equal to twice the amount of duty assessed on such goods, (a) to observe all the provisions of this Act and the rules and regulations in respect of such goods;

8.8 Customs (b) to pay on or before a date specified in a notice of demand (i) all d uties, and interest if any, payable under sub section(2) of section 61; (ii) ren t and charges claimable on account of such goods under this Act, together with i nterest on the same from the date so specified at such rate not below eighteen p ercent and not exceeding thirty six percent per annum as is for the time being f ixed by the central government in the Official Gazette, and (iii) to discharge a ll penalties incurred in violation of the provisions of this Act and the rules a nd regulations in respect of such goods. (2) For the purpose of sub section (1) the Assistant Commissioner of Customs may permit an importer to enter into a general bond in such amount as the Assistant Commissioner of Customs may approve in respect of the warehousing of goods to b e imported by him within a specified period. (3) A bond executed under this sect ion by an importer in respect of any goods shall continue in force notwithstandi ng the transfer of the goods to any other person or the removal of the goods to any other warehouse; Provided that where the whole of the goods or any part ther eof are transferred to another person, the proper officer may accept a fresh bon d from the transferee in a sum equal to twice the amount of duty assessed on the goods transferred and thereupon the bond executed by the transferor shall be en forceable only for a sum mentioned therein less the amount for which a fresh bon d is accepted from the transferee. The double duty indemnity bond plays a very i mportant role in the entire concept of warehousing. The rate of duty and valuati on prevalent on the date of removal are applicable in terms of section 15(1) for piecemeal clearances. Normally the rates of customs duty have been generally in creasing. Therefore there has been no risk of loss of revenue on account of ware housing. Hence allowing for increase in duty rates, it was considered sufficient to cover double the duty amount by an indemnity bond with necessary surety or s ecurity. This is basically the underlying objective of the warehousing bond. Det ermination of the bond amount: : Subsection (2) specifies that instead of an ind ividual double duty bond for each consignment, the importer may be permitted to file a general bond to cover imported goods to be warehoused by him during a par ticular period. The bond amount will be determined by the Assistant Commissioner of Customs, having regard to the (a) Past imports warehoused and the duty invol ved in such consignments; (b) Anticipated imports and expected revenue involved.

Warehousing 8.9 In practice, a running account is maintained with debit when imported goods are warehoused and credits when warehoused goods are cleared ex bond on payment of d uty. There is a concept that as long as the goods are available to customs duty leviable thereon, the duty can be recovered from sale of goods. In fact 72 (2) p rovides for such a coercive method for the realization of duty. Notification fix ing higher rate of interest: Under notification No 35/2000 Cus (NT). dated 12.05 .2000, the Central Board of Excise and Customs has fixed the rate of interest at 24% per annum, for the purposes of sub clause (ii) of clauses (b) of sub sectio n (1) of section 59 of the Customs Act. 8.6.6 Permision for deposit of goods In a Warehouse [Section 60] : When the provisions of section 59 have been complied with in respect of any goods, the proper officer may make an order permitting th e deposit of the goods in a warehouse. 8.6.7 Period for which goods may remain w arehoused [Section 61] : (1) Any warehoused goods may be left in the warehouse i n which they were deposited or in any warehouse to which they may be removed(a) in the case of capital goods intended for use in any hundred percent export orie nted undertaking, till the expiry of five years; and (aa) Goods other than capit al goods, intended for use in any hundred per cent export oriented undertaking, can be warehoused till the expiry of three years. (b) In the case of other goods till the expiry of one year, after the date on wh ich the proper officer has made an order under section 60 permitting the deposit of the goods in a warehouse. Provided that(i) In the case of any goods which ar e not likely to deteriorate, the period specified in clause (a) or clause (aa) o r clause (b) may on sufficient cause being shown, be extended (A) in the case of goods intended for use in any hundred percent export oriented undertaking by th e Commissioner of Customs, for such period as he may deem fit, and (B) in any ot her case, by the Commissioner of Customs, for a period not exceeding six months and by the Chief Commissioner of Customs for such further period as he may deem fit, (ii) In case any goods referred to in clause (b) if they are likely to dete riorate, the Commissioner of Customs may reduce the aforesaid period of one year , as he may deem fit.

8.10 Customs Provided further that when the licence for any private warehouse is cancelled, the owner of any goods warehoused therein shall, within seven days f rom the date on which notice of such cancellation is given or within such extend ed period as the proper officer may allow, remove the goods from such warehouse to another warehouse or clear them for home consumption or exportation. (2) Wher e any warehoused goods (i) specified in sub clause (a) or sub clause (aa) of sub section (1), remain in a warehouse beyond the period specified in sub section ( 1) by reason of extension of the aforesaid period or otherwise, interest at such rate as is specified in section 47 shall be payable at the time of clearance of the goods in accordance with the provisions of section 15 on the warehoused goo ds for the period from the expiry of said warehousing period till the date of pa yment of duty on the warehoused goods;

(ii) Specified in sub clause (b) of sub section (1), remain in a warehouse beyon d a period of ninety days, interest shall be payable at such rate or rates not e xceeding the rate specified in section 47, as may be fixed by the Board, on the amount of duty payable at the time of clearance of goods in accordance with the provisions of section 15 on the warehoused goods, for the period from the expiry of the said ninety days till the date of payment of duty on the warehoused good s. However, the Board may, if it considers it necessary so to do, in the public interest by order and under circumstances of an exceptional nature, to be specif ied in such order waive the whole or part of any interest payable under this sec tion in respect of any warehoused goods; Provided further that the Board may, if it considers it necessary so to do in the public interest, by notification in t he respect of which no interest shall be charged under this section. Explanation : For the purposes of this section hundred percent export oriented undertaking has the same meaning as in Explanation 2 to sub section (1) of section 3 of the Cen tral Excise Act, 1994. CBEC vide Notification No. 18/2003 cus (NT) dated 1.03.20 03 has fixed the rate of interest at 15% for the purpose of clause (ii) of secti on 61. Main features of the provisions of section 61: The main features of secti on 61 can be analysed as follows: (1) the three classes of warehoused goods for the purposes of different periods of warehousing are

Warehousing 8.11 (a) capital goods intended for use in 100% export oriented unde rtaking and (b) goods other than capital goods intended for use in 100% export o riented undertaking, and (b) other goods. (2) The warehousing period for capital goods and other goods used in 100% EOU is 5 years and 3 years respectively. For the rest of the goods it is 1 year. (3) The power to extend the warehousing per iod beyond 5 years/3 years has been delegated to the Commissioner of Customs for such further period as he may deem fit. The period of 1 year can be extended by the Commissioner of Customs for further 6 months. However, for extending it fur ther, authorisation of Chief Commissioner of Customs is required. (4) The Explan ation under section 3 of the Central Excise Act, 1944 defines hundred percent ex port oriented unit to mean an undertaking which has been approved as a hundred p ercent export oriented undertaking by the Board appointed in this behalf by the Central Government, in exercise of the powers conferred by section 14 of the Ind ustries (Development and Regulation) Act, 1951 and the rules made under that Act . (5) The goods that are likely to deteriorate fall under the category others alon e. Their warehousing period can be reduced to a shorter period by the Commission er of Customs. (6) The interest under section 47 is chargeable only after the ex piry of warehousing period; (7) The interest is chargeable on the amount of duty determined at the time of clearance of the warehoused goods under section 15. ( 8) The Board has power to waive the above interest, in individual cases (ad hoc orders) and by Gazette notification in respect of any class of goods. Applicatio n for extension of warehousing period: There is nothing in section 61 to indicat e that application for extension of warehousing period must be made before expir y of the period of warehousing initially permitted. It would appear that unless the authorities have taken coercive measures to recover duty and warehousing or other charges, power to grant extension of time does not come to an end. This wa s held by the Bombay High Court in the case of Banswara Syntex Ltd. V. UOI, 1994 , (74) ELT 522 (Bom). 8.6.8 Control over warehoused goods [Section 62] : Warehou se popularly called bonded warehouse has always been subjected to double lock. One of the locks was that of the owner of the warehouse the custodian of the cargo and the second was that of customs department. This symbolically epitomized the customs control over the

8.12 Customs warehoused goods. This power has been placed on a statutory footing under section 62 of the Customs Act which provides as follows: (1) All warehous ed goods shall be subject to the control of the proper officer; (2) No person sh all enter a warehouse or remove any goods there from without the permission of t he proper officer; (3) The proper officer may cause any warehouse to be locked w ith the lock of the customs department and no person shall remove or break such lock. (4) The proper officer shall have access to every part of a warehouse and power to examine the goods therein. 8.6.9 Payment of rent and warehouse charges [Section 63] (1) The owner of any warehoused goods shall pay to the warehouse ke eper, rent and warehouse charges at the rates fixed under any law for the time b eing in force and where no rates are so fixed, at such rates as may be fixed by the Commissioner of Customs. (2) If any rent or warehouse charges are not paid w ithin ten days from the date when they became due, the warehouse keeper may, aft er notice to the owner of the warehoused goods and with the permission of the pr oper officer cause to be sold (any transfer of the warehoused goods notwithstand ing) such sufficient portion of the goods as the warehouse keeper may select. In the case of the public bonded warehouse, normally the port trust in the major p orts and the central warehousing authorities in other interior places is the own er of the warehouse. Naturally these authorities will charge the owners of the w arehouse for the storage. This cargo will generally consist of the storage rent and other maintenance charges like electricity, cleaning, security etc. The rate s for these charges may be fixed by the Government or quasi Government authoriti es concerned. If they are not so fixed, the Customs Act gives the power to the C ommissioner of Customs concerned. 8.6.10 Owners right to deal with warehoused goo ds [Section 64] : Section 64 provides as follows: With the sanction of the prope r officer, and on payment of the prescribed fees, the owner of any goods either before or after warehousing the same(a) inspect the goods (b) separate damaged o r deteriorated goods from the rest; (c) sort the goods or change their container s for the purpose of preservation, sale, export or disposal of the goods;

Warehousing 8.13 (d) deal with the goods and their containers in such manner as may be necessary to prevent loss or deterioration or damage to the goods (e) sho w the goods for sale; or (f) take samples of goods without entry for home consum ption, and if the proper officer so permits, without payment of duty on such sam ples. When the imported goods are warehoused, the temporary possession and the c ustody of the goods are passed on to the warehouse keeper. However the remaining titular rights of the goods vest with the owner. Thus the owner has every acces s to the goods. In the course of his dealings with the goods, he may be required to (i) see and inspect the goods; (ii) ensure that the goods do not deteriorate or get damaged during storage in the warehouse; (iii) if some goods or some par t of goods is already damaged, he has to segregate them from the good ones, and take appropriate measures to dispose them to the best advantage; (iv) if any con tainer of the goods is damaged and requires repair or replacement, the owner wil l have to attend to these requirements; (v) again if the goods require to be rep acked or the containers changed for the purposes of export of the goods or dispo sal for home consumption he should be permitted to carry out such operations; (v i) show the goods to prospective buyers or local consumers; (vii) draw samples t o check the quality of the goods; (viii) draw such samples to show to prospectiv e buyers or local consumers. The only restriction on all these operations is tha t such operation should not cause any damage or deterioration to the goods. If s uch warehoused goods are so damaged or deteriorated, that the value of the goods depreciates, the duty leviable on the goods will come down and there will be lo ss of Government revenue. 8.7 REMOVAL OF GOODS FROM THE WAREHOUSE The warehoused goods can be removed for (i) transfer from one warehouse to another; or (ii) cl earance for home consumption; or (iii) clearance for exportation.

8.14 Customs Each of the three is a different situation and separate procedures have to be followed. The interests to be safeguarded are different. As such sepa rate provisions have been made for the above three situations under section 67, 68 and 69 respectively. 8.7.1 Removal of goods from one warehouse to another [Se ction 67] : Section 67 provides that the owner of any warehoused goods may, with the permission of the proper officer, remove them from one warehouse to another subject to such conditions as may be prescribed for the due arrival of the ware housed goods at the warehouse to which removal is permitted. The entire emphasis here is on ensuring the proper receipt of the warehoused goods at the destinati on warehouse, so that there is no risk to revenue. The Board in exercise of the powers conferred by section 157 of the Customs Act, 1962 has made Warehoused Goo ds (Removal) Regulations, 1963 to govern the same. 8.7.2 Warehoused Goods (Remov al) Regulations, 1963 1. Conditions for transport of warehoused goods in the sam e town: Where the goods are to be removed from one warehouse to another in the s ame town the proper officer may require the transport of the goods between the t wo warehouses to be under the supervision of an officer of customs, the owner me eting the cost of such supervision. Condition for transport of warehoused goods to another town: Where the goods are to be removed from one warehouse to another in a different town, the proper officer may require the person requesting remov al to execute bond in a sum equal to the amount of import duty leviable on such goods and in such form and manner as the proper officer deems fit. Terms of bond : The terms of the bond shall be that if the person executing the bond produces to the proper officer, within three months or within such extended period as suc h officer may allow a certificate issued by the proper officer at the place of d estination that the goods have arrived at that place, the bond shall stand disch arged but otherwise an amount equal to the import duty leviable on the goods in respect of which the said certificate is not produced shall stand forfeited. Sur ety or Security : The proper officer may require that the bond shall be with suc h surety or security or both as is acceptable to him. 2. 3. 4. 8.7.3 Clearance of warehoused goods for home consumption [Section 68] : The impo rter of any warehoused goods may clear them for home consumption, if(a) a bill o f entry for home consumption in respect of such goods has been presented in the prescribed form; (b) the import duty leviable on such goods and all penalties, r ent, interest and other

Warehousing 8.15 charges payable in respect of such goods have been paid; and (c ) an order for clearance of such goods for home consumption has been made by the proper officer. However, the owner of any warehoused goods may, at any time bef ore an order for clearance of goods for home consumption has been made in respec t of such goods, relinquish his title to the goods upon payment of rent, interes t, other charges and penalties that may be payable in respect of the goods and u pon such relinquishment, he shall not be liable to pay duty thereon. It may be n oted that the owner of any such warehoused goods shall not be allowed to relinqu ish his title to such goods, regarding which an offence appears to have been com mitted under this Act or any other law for the time being in force. Analysis of Section 68 : The essential ingredients are (i) an ex bond bill of entry should b e presented to the proper officer. (ii) After assessment of the ex bond bill of entry the duty determined should be paid. (iii) Along with the import duty the c harges payable under section 63, namely warehouse charges should be paid. (iv) I f any penalty is imposed or levied on the warehoused goods, they should also be paid. (v) Once the proper officer is satisfied that all the amounts payable by t he owner of the goods including duty, warehouse rent, warehouse charges, interes t under section 47, any penalty or fine or any other charges payable on the ware housed goods, have been paid, he may permit removal of the goods from the wareho use and pass a suitable order for clearance. 8.7.4 Brief outline of the procedur e for clearance of warehoused goods for home consumption : In order to have a be tter understanding of the process of clearance of warehoused goods for home cons umption, the following steps are relevant. (1) The document of clearance of such warehoused goods is called ex bond bill of entry. It is green in colour. (2) It is filed in triplicate with the customs authorities at the place where the ware house is situated. (3) The particulars of ex bond bill of entry, like bill of en try no. quantity and description of warehoused goods sought to be cleared, its q uantity and value, tariff classification adopted are noted in the bond register and copy of into bond bill of entry. (4) The bill of entry is then assessed havi ng regard to the provisions of section 15(1)(b) i.e. the rate of duty and tariff valuation in force on the date when bill of entry in

8.16 Customs respect of such goods is presented. (5) In case any abatement is cl aimed under section 22(1)(c), the same is also examined. (6) In the case of impo rt licence regulations and other prohibitions on imports, the common sense law i s that they are relevant to the date of actual importation into India. Subsequen t changes in the import policy would not NORMALLY affect the warehoused goods. H owever the details of such changes if any would be applicable to the subject goo ds as a matter of abundant precaution. (7) After assessment of the bill of entry namely; determination of the amount of duty, the duty and interest if any payab le thereon would be paid to the customs. (8) The goods would then be subjected t o physical examination under section 17 to ensure that the goods proposed to be removed are in conformity with the declaration made in the ex bond bill of entry particularly in respect of description of goods tariff classification, quantity and value. (9) The owner of the goods would be required to get the amount of wa rehouse rent and other charges determined by the warehouse keeper and make neces sary payment. (10) The proper officer of customs would thereupon make the permit ted clearance for home consumption order. The bill of entry copy with this order will be presented to the warehouse keeper. (11) The warehouse keeper would make suitable entries in the stock card, warehouse register, into bond bill of entry wise file. (12) The fact of actual removal of the warehoused goods will be comm unicated to the customs authorities concerned. 8.7.5 Clearance of warehoused goo ds for exportation [Section 69] : The third method of disposal of the warehoused goods is by exportation. This is normally adopted in the case of shipstores, wh ich are meant to be exported only; goods meant for re export and goods supplied to duty free shops and the like. Section 69 provides that: (1) Any warehoused go ods may be exported to a place outside India without payment of import duty, if( i) a shipping bill or bill of export has been presented in respect of such goods in the prescribed form; (ii) the export duties, penalties, rent and other charges payable in respect of such goods have been paid; and (iii) an order or clearance of such goods for exp ortation has been made by the proper officer. (2) Notwithstanding anything conta ined in sub section(1), if the Central Government is of

Warehousing 8.17 the opinion that warehoused goods of any specified description are likely to be smuggled back into India, it may, by notification, in the Offic ial Gazette direct that such goods shall not be exported to any place outside wi thout payment of duty or may be allowed to be so exported subject to such restri ctions and conditions as may be specified in the notification. Notifications iss ued under section 69(2): So far three notifications have been issued in exercise of these powers. They are as follows: 1. By Notification No. 45 Cus, dated 01.0 2.1963, the Central Government has prohibited export of warehoused goods to Bhut an, Nepal, Burma, Sikang, Tibet or Sinkiang, without payment of import duty paya ble on such goods, as such exported goods are likely to be smuggled back into In dia. The exceptions are when export to Nepal are made against irrevocable LCs, s upply is made to Nepal of UN Projects, capital goods are supplied to Nepal again st global tenders of His Majestys Government. By Notification No. 46 Cus, dated 0 1.02.1963, the Central Government has banned export of goods in vessel of less t han 1000 tons gross. Such export is permitted if the exporter executes a bond fo r payment of import duty on the exported warehoused goods and undertakes to prov ide the proof of landing at the destination port within 3 months or within such extended period as such officer may allow. The reason for prescribing these cond itions is that such goods are likely to be smuggled back into India. In practice such vessels of low tonnage as 1000MT gross, call on several Indian ports befor e sailing to a foreign port and they cannot undertake long voyage. By Notificati on No. 4 Cus, dated 01.02.1963, the Government has banned taking of ship stores (i.e. alcoholic liquors, cigarettes, cigars and pipe tobacco) on vessels of less than 200 tons gross without payment of import duty leviable thereon. The reason is that they are by virtue of the nature of the goods and the smallness of the vessel which would necessitate its calling on several Indian ports before its sa iling to a foreign port, there is every likelihood of the goods being smuggled b ack into India. 2. 3. Main ingredients of section 69 (1) Warehoused goods may be exported out of India . (2) No Import duty will be levied on them if the procedure prescribed is follo wed. (3) A shipping bill of export in the prescribed form should be presented in respect of the warehoused goods sought to be cleared for export. (4) The approp riate export duty including cess leviable on such goods on export should be asse ssed and paid. (5) The import dues on the goods, namely penalties, warehouse ren t, interest and other warehousing charges should be paid. Only payment of import duty otherwise leviable

8.18 Customs on such warehoused goods is waived. (6) The proper officer of custo ms should satisfy himself that all regulations, restrictions and prohibitions in force in respect of export of such goods, is compiled with or fulfilled. After satisfying himself about this aspect as well as payment of all duties and other charges payable he will permit removal of the goods from the bonded warehouse fo r export. (7) In case Government of India is of the opinion that goods of any sp ecified description are likely to be smuggled back into India, it may demand pay ment of import duty payable otherwise, on the warehoused goods; prescribe condit ions to be fulfilled including execution of an Indemnity bond undertaking to pro duce proof of export or pay the import duty otherwise leviable The Government of India, by notification prescribes the circumstances under which such conditions can be imposed. 8.7.6 Allowance in respect of volatile goods [Section 70] : Among the goods trad itionally imported and warehoused are the following: (1) Petroleum products (2) Liquor and (3) Ethylene dichloride and liquid helium. Petroleum products like av iation turbine fuel, superior kerosene; high speed diesel oil, light diesel oil, motor spirit, vapourising stored in tanks, subjected to atmospheric pressure ha d a tendency to evaporate during long period of storage. Similarly, liquor like brandy and whisky were imported under over proof conditions, in wooden casks sto red in bonded warehouses, were volatile in nature and there was considerable eva poration loss during storage. Even articles like wine, beer, suffered evaporatio n losses during storage. Among the lower order mineral products raw naptha, furn ace oil and batching oil also were prone to evaporation. As such there was invar iably difference between the bonded quantity and the quantity at the time of rem oval from the warehouse. This loss was due to natural causes and neither the imp orter nor the warehouse keeper can be found fault with. On the same grounds neit her the importer nor the warehouse keeper could be called upon to bear the duty burden of this loss. This position has been recognised and placed on a legal foo ting under section 70 of the Customs Act. Section 70 provides that (i) When any warehoused goods to which this section applies, are at the time of delivery from a warehouse found to be deficient in quantity on account of natural loss, the A ssistant Commissioner of Customs or Deputy Commissioner of Customs may remit the duty on such deficiency. (ii) This section applies to such warehoused goods the Central Government, havin g

Warehousing 8.19 regard to the volatility of the goods and the manner of their s torage, may be notification in the Official Gazette specify. Essential ingredien ts of section 70(1): (i) The goods should be warehoused goods; (ii) The provisio ns of this section should apply to such goods by virtue of a notification under sub section(2); (iii) The goods should be found deficient in quantity at the tim e of removal; (iv) The deficiency should be on account of natural loss; (v) The import duty leviable on such deficiency may be remitted; (vi) The Assistant Comm issioner and the Deputy Commissioner are empowered to grant the remission. The e ssential ingredients of section 70(2) are: (a) The power to specify vests with t he Central Government. (b) Volatility and manner of storage will be the relevant factors; (c) An official notification will have to be issued for this purpose; (d) The remission under section 70(1) applies only to such specified warehoused goods. Notification under section 70(2) : Under MF(DR) Notification No.122/63 Cu s dt.11.5.1963 as amended subsequently the following goods have been specified a s goods to which the provisions of section 70 apply when they are deposited in a warehouse, namely: Aviation fuel acetone vaporising oil batching oil motor spir it menthol kerosene diesel oil mineral turpentine raw Naptha high speed diesel o il furnace oil and Etylene Dichloride kept in tanks and Liquid helium gas kept in containers; ( 2) Wine, spirit and beer, kept in casks. Remission under section 23 and section 70 A Distinction Section 23 is a general provision applicable to cases where goo ds are lost before clearance for home consumption is made. Whereas, section 70 p rovides for remission of duty in respect of loss during warehousing of only the goods notified by the Central Government under that section. Therefore, granting remission for loss during transit between two warehouses does not render sectio n 70 redundant. This view was taken by

8.20 Customs the Tribunal in the case of Indian Oil Corporation v. Commissioner of Customs 1985 (21) ELT 881 (T B) 8.7.7 Prohibition on improper removal and pen alty for such improper removal : Three methods of disposal have been prescribed for warehoused goods under section 67, 68 and 69. In addition, under section 64, the owner of the goods can take samples with or without payment of import duty. These are removals authorised by law and are termed as proper removals. As a co rollary it follows that warehoused goods cannot be removed otherwise. Section 71 and Section 72 provide for such a prohibition and the penal action. 8.7.8 Goods not to be taken out of warehouse except as provided by the Act [Section 71] : S ection 71 provides that No warehoused goods shall be taken out of a warehouse ex cept on clearance for home consumption, or re exportation, or for removal to ano ther warehouse, or as otherwise provided by this Act. 8.7.9 Goods improperly rem oved from warehouse etc. [Section 72]: (1) of the following cases, that is to sa yIn any (a) where any warehoused goods are removed from a warehouse in contravention of section 71; (b) where any warehoused goods have not been removed from a warehous e at the expiration of the period during which such goods are permitted under se ction 61 to remain in the warehouse; (c) where any warehoused goods have been ta ken under section 64 as samples without payment of duty; (f) where any goods in respect of which a bond has been executed under section 59, and which have not b een cleared for home consumption or exportation are not duly accounted for to th e satisfaction of the proper officer. The proper officer may demand and the owne r of such goods shall forthwith pay, the full amount of duty chargeable on accou nt of such goods together with all penalties, rent, interest and other charges p ayable in respect of such goods. (2) If any owner fails to pay any amount demand ed under sub section (1) the proper officer, may, without prejudice to any other remedy, cause to be detained and sold, after notice to the owner (any transfer of the goods notwithstanding) such sufficient portion of his goods, if any, in t he warehouse, as the said officer may select. Section 72(1) provides for penal a ction for violation of section 71. As a natural corollary, provision has been ma de under sub section (2) of section 72, to collect such penal amounts coercively , if the owner of the warehoused goods does not pay up the amounts voluntarily. In such a situation the proper officer cause, such portion of the warehoused

Warehousing 8.21 goods belonging to the defaulter, to be detained and sold to re alise the amounts due. According to principles of nature justice, a notice will have to be given before such a coercive action is taken. Mafatlal Fine Spinning and Manufacturing Company Ltd.(1987) Bombay: What will be the position in case t he owner relinquishes the title to his goods under section 23(2) of the Customs Act, 1962. In the above case, it was decided that if he relinquishes his title b efore the order is passed by the Assistant Commissioner under provisions of sect ion 72, no duty need to be paid. If, however, the relinquishment is made after t he order is passed, he has to pay the duty. Effect of Goods not being removed fr om warehouse : Under clause (b) of section 72, goods which are not removed from the warehouse after the expiry of the period permitted for warehousing or extend ed, are deemed to be improperly removed. The rate of duty applicable will be the rate in force on the date of deemed removal, i.e. the date on which the permitt ed period or its permitted extension comes to an end. When the demand notice is issued is not relevant for determining the rate of duty. Section 15 (1) (b) appl ies only to the cases where a bill of entry is presented for removal from wareho use under section 68, and the payment of duty, interest, penalty, rent, etc. Sec tion 15 (1) (b) has no application where the goods are removed from warehouse be yond the permitted period of warehousing. [ Kesoram Rayon vs CC 1996 (86) ELT 46 4 (SC)] 8.7.10 Cancellation and return of the warehousing bond [Section 73] : Wh en the whole of the goods covered by any bond executed under section 59 have bee n cleared for home consumption or exported or are otherwise duly accounted for, and when all amounts due on account of such goods have been paid, the proper off icer shall cancel the bond as discharged in full and shall on demand deliver it, so cancelled, to the person who has executed or is entitled to receive it. This provision is the final of the warehousing provisions. It implies that: (i) all imported goods which have been warehoused have been duly accounted for in the pr oper manner provided therefor; (ii) all the consequential charges on the goods as well as the owner of the good s like warehouse rent, warehouse charges, interest on the duty amount, penalty e tc leviable from the importer have been paid; (iii) all the conditions and oblig ations undertaken under the warehousing bond have been compiled with or duly ful filled. Then the bond gets discharged and the proper officer shall formally endo rse cancellation thereof. Thereafter if the person who had executed the bond or any other person entitled to receive it demands the return of the cancelled bond , the proper officer shall return to that person. Otherwise the cancelled bond s hall remain with the proper officer.

8.22 Customs 8.8 (i) MANUFACTURE IN BONDED WAREHOUSE temporary storage of import ed goods which were intended to be ultimately exported out of India; As mentioned earlier warehousing was considered in the initial stage as a device for: (ii) piecemeal clearance of imported goods, for home consumption to suit importe rs requirements. As an improvement of the above facilities, certain operations we re permitted to be carried out in the bonded warehouse itself before export of t he goods. Gradually, this concept was extended to deliberate importation of raw materials, manufacture of goods in the bonded warehouse and final export of the finished goods out of India. In this scheme of things there was no: (i) effectiv e import of goods and clearance of goods for home consumption, involving payment of import duty of customs; and (ii) effective export from the town, involving drawback of import duty etc. Ther e was no problem or difficulty in ensuring the identity of the goods. There was also full security over the import duty otherwise payable on the imported goods through the medium of the warehousing double entry bond. It may not be incorrect to say that this concept further evolved into the concept of Free Trade Zones w ithin or adjacent to the customs area in the port, and subsequently extending th is facility to interior places as an adjunct to inland bonded warehouses and fin ally evolving the concept of 100% Export Oriented Undertakings. Statutory Provis ions The statutory provisions relating to the manufacture in the bonded warehous e are contained in sections 65 and 66 of the Customs Act, 1962. Now we can discu ss the statutory provisions in detail. 8.8.1 Manufacture and other operations in relation to goods in a warehouse [Section 65] (1) With the sanction of the Assi stant Commissioner of Customs or Deputy Commissioner of Customs, and subject to such conditions and on payment of such fees as maybe prescribed, the owner of an y warehoused goods may carry on any manufacturing process or other operations in the warehouse in relation to such goods. (2) Where in the course of any operati ons permissible in relation to any warehoused goods under sub section (1), there is any waste or refuse, the following provisions shall apply:

Warehousing 8.23 (a) If the whole or part of the goods resulting from such opera tions are exported, import duty shall be remitted on the quantity of the warehou sed goods contained in so much of the waste or refuse as has arisen from the ope rations carried on in relation to the goods exported: Provided that such waste o r refuse is either destroyed or duty is paid on such waste or refuse as if it ha d been imported into India in that form. (b) If the whole or any part of the goo ds resulting from such operations are cleared from the warehouse for home consum ption, import duty shall be charged on the quantity of the warehoused goods cont ained in so much of the waste of refuse as has arisen from the operations carrie d on in relation to the goods cleared for home consumption. 8.8.2 Power to exemp t imported material used in the manufacture of goods in warehouse [Section 66] : If any imported materials are used in accordance with the provisions of section 65 for the manufacture of any goods and the rate of duty leviable on the import ed materials exceeds the rate of duty leviable on such goods, the Central Govern ment, if satisfied that in the interest of establishment or development of any d omestic industry, it is necessary so to do, may, by notification in the Official Gazette, exempt the imported materials from the whole or part of the excess rat e of duty. Analysis of Section 65 The substantial ingredients of section 65(1) a re (i) The owner of any warehoused goods may carry on any manufacturing process or other operations in relation to warehoused goods; (ii) This may be done with the specific sanction of the Assistant Commissioner o f Customs; (iii) It will be subject to such conditions and on payment of such fe es as may be prescribed. Rules prescribing the conditions aforesaid: A comprehen sive regulations called the Manufacture and Other Operations in Warehouse Regula tions, 1966, was promulgated by the Board under its Notification No. 155/66 Cus dated 30 7 1966. These regulations superseded several rules made earlier coverin g individual situations. Subsection (2) of section 65 deals with any waste of re fuse arising during the manufacturing operations or other processes done in the warehouse. The question that is considered in this provision is whether any impo rt duty should be levied on the waste or refuse. The answer is dependent upon wh ether finished product manufactured out of the manufacturing process or other op erations is exported out of India or cleared for home consumption.

8.24 Customs If the finished products are cleared for home consumption on paymen t of appropriate import duty of customs, then appropriate duty of customs should be levied on the imported goods content in the waste or refuse. Let us consider a few examples to understand the above provisions. Example 1: Let us take the c ase of cutlery manufactured out of imported high speed cutting steel strips. Loc ally procured plastic is used for providing handles to the cutlery i.e. knife, f ork, etc. In a batch process 200 kg imported steel strips and 100 kg plastic is issued for the manufacture of the cutlery items. 400 gross knives are manufactur ed and they are cleared for home consumption. The steel strip content in the abo ve knives is 178 kg. The weight of the plastic handles is 85 kg. The waste is in the form of shaving etc. The total weight of the waste is [(200+100) (178+85)=3 7kg]. The steel content of the waste is 22 kg. So import duty of customs at the rate applicable to steel strips should be collected on the waste. The other alte rnative is where the finished goods are exported out of the country. Take the sa me example. In this case the manufacturer has two options. He can destroy the wa ste. Then he will not be required to pay duty on the steel strip content in the waste. If he does not choose to destroy the waste, then he has to pay duty on th e steel strip content in the waste. Remission of duty on the imported material c ontent in the waste or refuse is allowed only when the final product concerned i s exported out of India and the waste is destroyed. Example 2: Let us now take a n example where the final products are both exported and cleared for home consum ption. The question of appropriating the waste will have to be decided first. Th e imported raw material is rubber. The end product is motor vehicle tyre. The ad ditional materials used are (1) beading wire, (2) tyre cord warp sheet (3) chemi cals and (4) mineral oil. Total quantity of rubber issued Weight of beadwire use d Weight of tyre chord warp sheet used Weight of chemical used Weight of mineral oil used Total weight of raw materials issued Total no. of tyres manufactured W eight per tyre Thus total weight 100 tyres Wastage 1500kg 10kg 180kg 4kg 16kg 17 10kg 100pcs 16.5kg 1650kg 60kg

Warehousing 8.25 Total no. of tyres cleared for home consumption Total no. of ty res exported Wastage relatable to tyres exported 60kg 25pcs. 75pcs. 75 100 = 45 Imported rubber content in the waste relatable to the exported tyres = 45 1500 = 39.5 kg(appx) 1710 Import duty leviable on the import rubber content in the waste can be remitted i f 45 kgs of the waste are destroyed. Weight of waste relatable to tyres cleared for home consumption Imported rubber content in the waste = 15 kg = 13.2 kg Import duty is compulsorily leviable on this quantity of import rubber. The valu e would be the original import value; but the rate of duty would be that prevail ing on the date of payment of duty. Relevant date for determination of rate of d uty leviable on import material content in the waste: The next question is the r elevant date for valuation and tariff valuation of the import material content i n the waste/refuse. Attention is invited to the provisions of section 15(1). In this case the goods are not (i) cleared for home consumption on a bill of entry filed under section 46; or (ii) cleared from the warehouse, where the date of pr esentation of bill of entry for home consumption is relevant. Hence in this case the third alternative, namely the date of duty under section 15(1)(c) applies. He nce in collecting the import duty on the imported material content in the waste or refuse, the rate of duty and tariff valuation prevalent on the date of paymen t of duty will apply. Rate of duty leviable on the finished product: In the case of warehoused goods, the identity of the imported goods is retained at the time of clearance of the goods from the warehouse. When they are bonded in a warehou se and cleared as such the classification would not change. The rate of duty pre vailing on the date of presentation of bill of entry for home consumption will a pply. Normally it would not be less than the rate prevalent at the time of impor tation. Hence, there would normally be no loss of revenue on account of warehous ing. With regard to the position in respect of manufacture in bonded warehouse, if the material undergoes change they have to be classified with regard to their finished condition.

8.26 Customs Analysis of Section 66. The policy of the Government in permitting manufacture in bond had been to encourage growth of Indian industry. Thus instea d of attaching the difference in duty, that is lost in the process of manufactur e in bond, the Government is prepared to forego it totally or partially. Section 66 of the Customs Act deals with this power. Ingredients of section 66: The mai n conditions of section 66 are: (i) imported materials are used in the manufactu re of any goods in accordance with the provisions of section 65 (ii) the import duty leviable on the imported materials exceeds the rate of duty leviable on the finished products (iii) the Central Government is satisfied tha t in the interest of establishment or development of a domestic industry, it is necessary to give protection to the finished products. Then, the Central Governm ent may by an official notification in the Gazette, exempt the imported material , from the whole or part of excess duty. The use of manufacture in bond facility is now being resorted to less and less. The reasons are very simple. They are: (i) there is step by step control and interference by Customs Authorities (ii) t he double duty bond under section 59 and the bond under section 65 cause undue f inancial burden on the manufacturers (iii) the maintenance of detailed accounts and the control of Customs Officers over them is cumbersome (iv) the looking of the imported material storage room by customs and issue of such material for man ufacture at the discretion and control of the customs causes undue operational b ottlenecks (v) finally, the duty liability of imported material in the waste is another source of irritation. 8.9 FREE TRADE ZONES AND EXPORT PROCESSING ZONES The exemption of import customs duty on raw material and other equipment brought into these zones, subject to specific undertaking that the products manufacture d out of these material will be exported out of India, has been found to be a mo re feasible and viable alternative to the manufacture in bonded warehouse proced ure. The shift of supervisory control from the Customs Authorities to the Admini strators of the Zone, had certain inherent advantages, which were in the interes ts of the manufacturers and conducive to the growth of the industries.

Warehousing 8.27 Several ministries and departments were involved in the develop ment and welfare of these zones The Industries department offered facilities in the form of favourable policy. Banking department offered banking facilities inc luding loans etc Railways offered quick transport facilities Civil supplies depa rtment looked after the marketing needs of consumer products. DGTD attended to t he problems of technical expertise. Customs & Excise as well as sales department provided necessary concessions and relief to make the ventures economically viable. Over and above, there was an ad ministrative set up, more interested in solving the problems and practical diffi culties of the entrepreneurs. The administrator did not belong to or identify hi mself with any one of the above ministries or departments. As such he did not ha ve any over riding vested interest. 8.9.1 Qualification of the importer: The imp orter should have: (a) been authorised to set up manufacturing unit or units in the zone; (b) been granted necessary import licence for the import of necessary plant and machinery, equipment and raw materials; and (c) satisfied the Developm ent Commissioner that the goods so imported will be used in connection with the production of goods and packaging them for export out of India or connected with the such export promotion. 8.9.2 Goods covered by the scheme: The goods covered by the exemption scheme are : 1. 2. 3. 4. 5. 6. 7. 8. 9. Machinery; Raw materia ls; Components; Spare parts for machinery; Consumables; Packaging materials; Off ice equipments, spares and consumables thereof; Tools jigs, gauges, fixtures, mo ulds, dies, instruments and accessories; Prototypes, technical and trade samples for development and diversification; 10. Drawing, blue prints and charts;

8.28 Customs 11. Material handling equipment, namely forklifts, overhead cranes, mobile cranes, crawler cranes, hoists and stockers; 12. Goods re imported withi n 1 year from the date of exportation from the Zone due to the failure of the fo reign buyer to take delivery; 13. Goods received for repairs or reconditioning, within three years of the date of exportation, for export after repairs or recon ditioning. The sweep of the coverage is very wide. It covers: (a) Capital goods like plant and machinery, components and spaceports, ancillaries like tools, jig s fixtures etc; (b) Auxiliary equipment, like handling equipment, forklifts cran es etc.; (c) Establishment equipment like office equipment; (d) Drawings, blue p rints, prototypes, samples etc. for development of the product; (e) Raw material s, components, packaging material and consumables; (f) Goods returned without th e buyer taking delivery; goods sent back for repair and return. 8.9.3 Maintenance of accounts: The importer shall maintain proper accounts of im port, consumption and utilization of goods and accounts of exports made by him. He shall submit such account periodically to the Development Commissioner. 8.9.4 Execution of bond: The importer executes a Bond in Form B 17 fixed by the Assis tant Commissioner of Customs, undertaking to fulfil the obligations and conditio ns stipulated (a) in this notification (b) under Import Control Policy and also undertaking to pay on demand an amount equivalent to the duty leviable on the go ods, which are not proved to the satisfaction of the Assistant Commissioner to h ave been used in the manufacture of articles for export. 8.9.5 goods: Temporary removal, transfer or export of imported goods/manufactured Any imported goods or manufactured goods may be permitted to, subject to such co nditions prescribed by the Commissioner/Assistant Commissioner of Customs, (a) b e removed without payment of duty for repairs, processing or display: or (b) be supplied or transferred to another unit in the zone or 100% permission of the De velopment Commissioner of the zone EOU, with the

Warehousing 8.29 (c) be re exported out of the country with the permission of th e Development Commissioner. Note: The above particulars have been given only to enable the students to have a general idea of the duty and other concession that are extended in case of manufacture in bond in a Free Trade Zone, or 100% Expor t Oriented Unit or like export promotion schemes. For practical application they are advised to refer to the actual details in the relevant notification. 8.10 P ROJECT IMPORTS Project Imports are the imports of machinery, instruments, and ap paratus etc., falling under different classifications, required for initial set up of a unit or for substantial expansion of an existing unit. In a project seve ral different items are required, each of which is importable at different rates of customs duties. Hence, it becomes very complicated to make assessment for su ch project imports. Therefore, one consolidated rate of customs duty has been ma de applicable for all items imported under a project irrespective of the nature of the goods and their customs classification. The items eligible for project im port are specified in Heading 98.01 of the Customs Tariff Act, 1975. These inclu de all items of machinery, spare parts within prescribed limits, components or r aw materials etc for initial setting up of a unit or for substantial expansion o f the same. This scheme has been made applicable to Industrial Plants, Irrigatio n Projects, Power Projects, Mining Projects, Projects for Oil or Mineral Explora tion and other projects as may be notified by the Central Government. Self exami nation questions 1. 2. 3. 4. Discuss the procedure for deposit of the imported g oods in a private bonded warehouse and their subsequent removal. How long the im ported goods can remain in a warehouse as per the Customs Act, 1962? What are th e owners right to deal with the warehoused goods under the Customs Act, 1962? Wit h reference to the provisions of the Customs Act, 1962, explain the following br iefly: (i) Power of the Central Government to exempt imported material used in t he manufacture of goods in a warehouse (ii) Project imports 5. X, an importer (other than 100% EOU) imported some goods and deposited them in the warehouse on 12.04.2006. These goods were re exported on 15.08.2006 without

8.30 Customs payment of duty. With reference to the Customs Act, 1962, discuss w hether any interest is payable by X? Answer 5. As per section 61(2)(ii) of the Cus toms Act, 1962, if goods (belonging to importer other than 100% EOU) are kept in the warehouse beyond a period of 90 days, interest shall be payable @15% p.a. o n the amount of duty payable at the time of clearance of the goods. The interest shall be payable after the expiry of the said 90 days till the date of payment of duty. In Pratibha Processors v. UOI 1996 (88) ELT 12 (SC), the Apex Court has held that when goods at the time of removal from warehouse are wholly exempted from payment of duty, the liability to pay interest cannot be saddled on a non e xisting duty. Liability to pay interest under section 61(2) of the Customs Act i s solely dependant upon the exigibility or actual liability to pay duty. In case the liability to pay duty is nil, then, the interest will also be nil. Further, Circular No. 38/2005 Customs dated 28.09.2005 clarifies that if no duty is paya ble on clearances from the warehouses, then no interest is payable thereon. Ther efore, since in this case the goods have been re exported without payment of dut y, no interest is payable by X.

9 DEMAND AND APPEALS 9.1 DEMAND UNDER CUSTOMS ACT, 1962 The provisions relating to demand under Customs Act, 1962 are similar to the pro visions under Central Excise law. The word demand as per Blacks Law Dictionary mean s assertion of a legal right; an imperative request preferred by one person to a nother, under a claim of right, requiring the latter to do or yield something or to abstain from some act. 9.2 ISSUE OF SHOW CAUSE NOTICE [SECTION 28] In accordance with the principles of natural justice the central excise law righ tly provides that before any action is taken against an assessee he must be give n reasonable opportunity of presenting his case. One such situation would be tha t relating to the demand of duty not paid, short paid or erroneously refunded. T he show cause notice is invariable to be issued if the department contemplates a ny action prejudicial to the assessee. Thus, if on account of an infraction of t he provisions of the customs law it is considered appropriate to penalise the de faulter, it is necessary to first issue a show cause notice. The show cause noti ce would detail the provisions of law allegedly violated and ask the noticee to show cause why action should not be initiated against him. Thus, a show cause no tice gives the noticee the opportunity to present his case. (1) These provisions are invoked in the following situations: (i) (ii) when duty has not been levied ; when duty has been short levied; (iii) when duty has been erroneously refunded; (iv) when interest payable has no t been paid; (v) when interest payable has been part paid; or

9.2 Customs (vi) when interest has been erroneously refunded. In any of the above situations, the proper officer is authorised to issue a noti ce under this section asking the assessee to show cause as to why he should not pay the amount specified in the notice. Time limit: The time limit for issuance of the show cause notice is as follows: (a) In the case of any import made by an individual for his personal use or by the Government or by any educational, res earch or charitable institution or hospital within one year from the relevant da te; (b) in any other case within six months from the relevant date. Where any du ty has not been levied or has been short levied or the interest has not been cha rged or has been part paid or the duty or interest has been erroneously refunded by reason of collusion or any wilful mis statement or suppression of facts by t he importer or the exporter or the agent or employee of the importer or exporter , the time period shall be extended to 5 years. Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in c omputing the aforesaid period of one year or six months or five years, as the ca se may be. (2) The proper officer, after considering the representation, if any, made by the person on whom notice is served under sub section (1), shall determ ine the amount of duty or interest due from such person (not being in excess of the amount specified in the notice) and thereupon such person shall pay the amou nt so determined. (2A) Time limit for adjudication: Where any show cause notice has been served on a person under sub section (1), the amount of duty or interes t shall be determined (i) where it is possible to do so, within a period of one year in case where duty or interest has not been levied/paid or has been short l evied/ short paid or the duty or interest has been erroneously refunded by reaso n of collusion or any wilful mis statement or suppression of facts; and (ii) in any other case, where it is possible to do so, within a period of six months fro m the date of service of the notice on the person under sub section (1). (2B) Pa yment of duty, etc. before show cause notice: Where any duty or interest has not been levied/paid or has been short levied/ short paid or erroneously refunded, the person, chargeable with the duty or the interest, may pay the amount of duty or interest before service of show cause notice on him and inform the proper of ficer of such payment in writing. Such officer, on receipt of such information, shall not serve any notice under sub section (1) in respect of the duty or the i nterest so paid.

Demand and Appeals 9.3 The proper officer may determine the amount of short payment of duty or interest , if any, which in his opinion has not been paid by such person and, then, the p roper officer shall proceed to recover such amount in the manner specified in th is section and the period of one year" or "six months" as the case may be, shall be counted from the date of receipt of such information of payment. However, thi s facility shall not apply in a case where the short levy, etc. was by reason of collusion or any wilful mis statement or suppression of facts by the importer o r the agent or employee of the importer or exporter. The interest under section 28AB shall be payable on the amount paid by the person under this sub section an d also on the amount of short payment of duty, if any, as may be determined by t he proper officer, but for this sub section. (2C) The provisions of sub section (2B) shall not apply to any case where the duty or the interest had become payab le or ought to have been paid before the date on which the Finance Bill, 2001 re ceives the assent of the President, i.e. before 11.5.2001. (3) For the purposes of sub section (1), the expression "relevant date" means(a) in a case where duty is not levied, or interest is not charged, the date on which the proper officer makes an order for the clearance of the goods; (b) in a case where duty is prov isionally assessed under section 18, the date of adjustment of duty after the fi nal assessment thereof; (c) in a case where duty or interest has been erroneousl y refunded, the date of refund; (d) in any other case, the date of payment of du ty or interest. 9.3 POWER OF THE CENTRAL GOVERNMENT NOT TO RECOVER DUTIES [SECTI ON 28A] Notwithstanding anything contained in this Act, if the Central Governmen t is satisfied (a) that a practice was, or is, generally prevalent regarding lev y of duty (including non levy thereof) on any goods imported into, or exported f rom, India; and (b) that such goods were, or are, liable (i) to duty, in cases w here according to the said practice the duty was not, or is not being, levied, o r (ii) to a higher amount of duty than what was, or is being, levied, according to the said practice, then, the Central Government may, by notification in the O fficial Gazette, direct that the whole of the duty payable on such goods, or, as the case may be, the duty in excess of that payable on such goods, but for the said practice, shall not be required to be paid in respect of the

9.4 Customs goods on which the duty was not, or is not being, levied, or was, or is being, s hort levied, in accordance with the said practice. (2) Where any notification un der sub section (1) in respect of any goods has been issued, the whole of the du ty paid on such goods, or, as the case may be, the duty paid in excess of that p ayable on such goods, which would not have been paid if the said notification ha d been in force, shall be dealt with in accordance with the provisions of sub se ction (2) of section 27. The person claiming the refund of such duty or, as the case may be, excess duty, should make an application in this behalf to the Assis tant Commissioner of Customs or Deputy Commissioner of Customs, in the form refe rred to in sub section (1) of section 27, before the expiry of six months from t he date of issue of the said notification. 9.4 DUTIES COLLECTED FROM THE BUYER T O BE DEPOSITED WITH THE CENTRAL GOVERNMENT [SECTION 28B] Notwithstanding anythin g to the contrary contained in any order or direction of the Appellate Tribunal, the National Tax Tribunal or any Court or in any other provision of this Act or the regulations made there under, every person who is liable to pay duty under this Act and has collected any amount in excess of the duty assessed or determin ed or paid on any goods under this Act from the buyer of such goods in any manne r as representing duty of customs, shall forthwith pay the amount so collected t o the credit of the Central Government. Where any amount is required to be paid to the credit of the Central Government under subsection (I) and which has not b een so paid, the proper officer may serve on the person liable to pay such amoun t, a notice requiring him to show cause why he should not pay the amount, as spe cified in the notice to the credit of the Central Government. The proper officer shall, after considering the representation, if any, made by the person on whom the notice is served, determine the amount due from such person (not being in e xcess of the amount specified in the notice) and thereupon such person shall pay the amount so determined. The amount paid to the credit of the Central Governme nt under sub section (I) or sub section (3) shall be adjusted against the duty p ayable by the person on finalisation of assessment or any other proceeding for d etermination of the duty relating to the goods referred to in subsection (1). Wh ere any surplus is left after the adjustment made under sub section (4), the amo unt of such surplus shall either be credited to the Fund or, as the case may be refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 27 and such person may make an application under that section in such cases within six months from the date of the public notice to the issued by the Assistant Commissioner of Customs for the refund of such s urplus amount.

Demand and Appeals 9.5 CERTAIN COMMON QUESTIONS ON DEMAND 9.5 The following table summarises certain common questions about the provisions rel ating to demand. 1. When can proceedings be taken under Sec.28? Whenever there i s a short levy/short payment or non levy or non payment, erroneous refund of dut y, the proceedings can be undertaken. 2. What is the difference When excise duty has not at all been charged on the be tween non levy and short product, it becomes non levy. When the levy has been le vy? charged but not correctly, there is short levy. 3. What is the difference Sh ort payment means payment of an amount less than between short payment and what is due. Non payment means the levy itself has not non payment? been paid. 4. Wha t is the difference Short levy arises when the charge itself is done at lower be tween short levy and short rates, for eg., wrong classification of the product. Short payment ? payment can be due to short levy or short payment of a correct l evy (when payment is made less than what is due). 5. Should the Department intim ate the assessee? 6. Within what time should the show cause notice be served? It is mandatory for the Department to issue a show cause notice. Where there is fr aud, collusion, willful mis statement or suppression of facts or contravention o f any provisions with an intent to evade payment of duty, 5 years from relevant date. In other cases, 1 year from relevant date. Where the service of notice is stayed by court order, the period of such stay would be excluded in computing th is time limit. If the matter is before the Settlement Commission, Sec. 32L(3) sp ecifies that the time commencing from date of application to receipt of order se nding back the case shall be excluded. It is very important to note that such no tice must be received by the assessee within the time limit stipulated above. 7. What is this relevant date? Relevant date is defined in Sec. 28(3) to mean a. i n case of short levy/non levy or short payment/nonpayment the date on which the proper officer makes an

9.6 Customs order for clearance of the ; b. In cases of provisional assessment, the date of adjustment of duty after final assessment. c. d. In case of erroneous re fund, the date of such refund any other case, date of payment of duty. 8. Is it obligatory on the part of the Department to take on record the assessees representation ? 9. Is it mandatory for the officer to pass a written order or will a simple letter from the department suffice? 10. Should the assessee pay th e amount after passsing the order? 11. Should the officer adjudicate cases withi n a particular time limit? 12. Can the assessee pay duty before issue of show ca use notice? Sub section 2 makes it mandatory for the officer to consider the representation of the assessee. The officer has to comply with the principles of natural justic e. It is mandatory for the officer to pass a speaking order. Speaking order is o ne which gives the reasons for the decision. A simple letter asking for payment of duty is not an order. The assessee has a right of further appeal which grants him rights of obtaining stay of demanded amounts. (Please see Chapter on Appell ate Procedures.) For cases involving fraud, etc. adjudication should complete wi thin 1 year and other cases within 6 months. No notice would be issued if full d uty is paid and intimated to the Department. However this will not apply to case s of fraud etc. Moreover, if there is still some short payment, the officer can recover within 1 year of such intimation. 9.6 ADJUDICATION Customs law is a self contained provision. Besides containing the provisions for levy of duty, the law also provides for the adjudication of matters relating to the legal provisions. The adjudication is done by the departmental officers, an d in this capacity they act as quasi judicial officers. Extended time limit for issuing the show cause notice : This provision contained in proviso to section 2 8 is very important because the department seeks to always invoke this provision for getting the benefit of extended time limit and also to levy penalty on the defaults. The important terms used in the said proviso are fraud, collusion, wil lful mis statement, suppression of fact and very important with an intent of evad ing the payment of duty.

Demand and Appeals 9.7 Fraud may be defined as Deceit, imposture, criminal deception done with the inten tion of gaining an advantage. Collusion may be defined as to act in concert especi ally in fraud; a secret agreement to deceive. Willful mis statement may be explai ned as stating wrongly or falsely deliberately. Suppression of facts may also be e xplained as to hold back the facts. It is very important to note that unlike secti on 11A of the excise legislation, under section 28 there is no need to prove int ention to evade payment of duty where the extended period is invoked as per the decision of the Supreme Court in ACC Ltd vs CC 2001 (128) ELT 21. There are nume rous decisions regarding this section and its proviso. Some of them are listed b elow : 1. Mere inaction or failure to do something does not constitute suppressi on. There must be something positive to prove suppression CCE v. Chemphar Drug s and Liniments 1989 (40) E.L.T. 276 (SC) and also in Padmini Products v. CCE 1989 (43) E.L.T. 195(SC). Demand against approved classification list only prosp ective CCE v. Cotspun Ltd. 1999 (113) E.L.T. 353 (SC LB). Extended period can not be invoked where classification list is approved. Nat Steel Equipment v. C CE 1988(34) E.L.T. 8; Prabhu Steel Industries v. CCE 1997 (95) E.L.T. 164 (SC). Extended period not invokable when bonafide belief arises out of court judgement s Cosmic Dye Chemicals v. CCE 1995 (75) E.L.T. 72(SC). Extended period not invok able when there are conflicting decisions prevailing and nonrequirement under la w to do something. Pushpam Pharmaceuticals Co.v. CCE 1995 (78) E.L.T. 401 (SC). Proviso to Sec. 11A does not require that notice should be issued within 6 mont hs (now one year) of knowledge of Department. Notice can be issued anytime withi n 5 years of relevant date. Nizam Sugar Factory v. CCE 1999 (114) E.L.T. 429 ( T LB). Wrongful understanding of law does not constitute suppression Vinod Pap er Mills Ltd. v. CCE 1997 (91) E.L.T. 245 (SC). Mere change in opinion regarding classification not sufficient to invoke extended period Prabhu Steel Industries Ltd. v. CCE 1997 (95) E.L.T. 164 (SC). Information not required to be supplied under law when not supplied does not amount to suppression Apex Electricals Pv t.Ltd. v. UOI 1992 (61) E.L.T. 413 (Guj). 2. 3. 4. 5. 6. 7. 8. 9.

9.8 Customs 10. Department cannot sleep over the matter for years and accuse the assessee of suppression Mutual Industries Ltd v. CCE 2000 (117) E.L.T. 578 (T LB) 9.7 INT EREST, PENALTY, CONFISCATION, DUTY PAYMENT UNDER PROTEST 9.7.1 Interest [Section 28AA ] : Section 28AA has been made redundant after pass ing of the Finance Act 2001 and the provisions are contained in section 28AB. 9. 7.2 Interest on delayed payment of duty in special cases [Section 28AB]: With ef fect from 11th May 2001, on all cases of short payment etc. interest is liable t o be paid under Section 28AB and would be charged from the month following the m onth when the duty should have been paid whether it involves fraud, collusion, w illful misstatement or suppression of fact with in intent to evade the payment o f duty or not. Therefore if the demand is raised, the interest under Sec. 28AB w ill follow. Under this section the Central Government by notification is empower ed to specify the rate of interest to be charged under Section 28AB and such int erest rate should not be below 10% and should not exceed 36% per annum. Presentl y, the interest as said above is payable at the rate of 13% per annum starting f rom the date of the next month succeeding the month in which the duty ought to h ave been paid. (Notification 76/2003 Cus (NT) dated 12.09.2003) 9.8 APPEALS AND REVISIONS Chapter XV deals with provisions relating to appeals and revisions. 9. 8.1 Appellate Stages : Under this Chapter, both assessee and department have bee n conferred with a right of three stage remedies against the orders passed under Customs Act and Rules. Briefly, it consists of three stages of appeal two stage s of revision and further appeal to Supreme Court. The three stages of Appellate Authorities are the Commissioner (Appeals), CESTAT, High Court (up to the date when the National tax Tribunal (NTT) is constituted) and NTT [after the NTT is c onstituted refer Note at the end of Chapter]. For orders passed by officers lo wer than the rank of Commissioner of Customs, the first appeal lies to the Commi ssioner (Appeals) and there from to the Appellate Tribunal, and then to High Cou rt and finally to the Supreme Court. Where the order of the Tribunal does not re late to determination of rate of duty or value of goods, an appeal is made to th e High Court under sections 130, instead of appeal to Supreme Court. In cases wh ere the order in original is passed by a Commissioner of Customs, appeal lies di rectly to the Appellate Tribunal. The provisions contained in sections 128 to 13 1C are similar to the provisions contained in sections 35 to 36 of the Central E xcise Act. 9.8.2 Appeals to Commissioner (Appeals) [Section 128] Any person aggr ieved by any decision or order passed under this Act by an officer of Customs lo wer in rank than a Commissioner of Customs may appeal to the Commissioner (Appea ls) within sixty days from

Demand and Appeals the date of the communication to him of such decision or orde r. 9.9 Provided that the Commissioner (Appeals) may, if he is satisfied that the appell ant was prevented by sufficient cause from presenting the appeal within the afor esaid period of sixty days, allow it to be presented within a further period of thirty days. Commissioner (Appeals) may, if sufficient cause is shown, at any st age of proceeding, grant time, from time to time, to the parties and adjourn the hearing for reasons to be recorded in writing. However, such adjournment shall not be granted for more than three times to a party during the proceeding. The a ppeal before the Commissioner (Appeals) is to be filed in Form No.C.A.1. in dupl icate and is to be accompanied by a copy of decision or order appealed against. The grounds of appeal and the form of verification as contained in form No.C.A.1 is to be signed by the appellant. The following are important with respect to t his section: 1. The provisions of section 5 of the Limitation Act 1963 will appl y only to courts. Therefore, quasi judicial authorities such as Collectors and T ribunals are not required to follow the provisions of that Act for computation o f time. Even where the Act provides that the provisions of Limitation Act shall apply, section 5 of that Act will come into play only after computing the time p rescribed under that particular statute. [Sakuru vs. Tanaju, 1985 (22) ELT 327 ( SC)]. A person who is not a party to the original proceeding cannot file an appe al. He is not an aggrieved person as none of his legal rights are affected. Addi tional grounds cannot be raised in appeal as a matter of right, if these grounds had not been raised before the original authority. Although the appellate autho rity is competent to allow such grounds, it should be established that the addit ional grounds are bonafide and could not be raised earlier before the assessing officer. In an appeal, several grounds can be raised including alternative groun ds. It is not open to the authority to pick one of the grounds and reach a concl usion. Raising of a ground in the alternative does not mean that the appellants are claiming so. Such grounds are always without prejudice to other grounds. The refore, it would be improper to pick up one of the grounds to come to the conclu sion that that is all along the claim of the appellant. [Bombay Chemicals Pvt Lt d vs. UOI, 1982 ELT 171 (Bom)]. CHA (Custom House Agent) cannot file an appeal o n behalf of principal: Clause (f) of sub section (2) of section 146 allows right of appeal against an order suspending his own licence. Nowhere this or other pr ovisions allow a CHA to file an appeal in relation to imports or exports of his principal.[V.V. Dabke & Sons vs. CC, 1983 ELT 583 (T D)]. 2. 3. 4. 5.

9.10 Customs 9.8.3 Procedure in appeal [Section 128A]: 1. The Commissioner (Appe als) shall give an opportunity to the appellant to be heard if he so desires. 2. The Commissioner (Appeals) may, at the hearing of an appeal, allow the appellan t to go into any ground of appeal not specified in the grounds of appeal, if the Commissioner (Appeals) is satisfied that the omission of that ground from the g rounds of appeal was not wilful or unreasonable. The Commissioner (Appeals) shal l, after making such further inquiry as may be necessary, pass such order as he thinks just and proper, confirming, modifying or annulling the decision or order appealed against. However, an order enhancing any penalty or fine in lieu of co nfiscation or confiscating goods of greater value or reducing the amount of refu nd shall not be passed unless the appellant has been given a reasonable opportun ity of showing cause against the proposed order: Further, where the Commissioner (Appeals) is of the opinion that any duty has not been levied or has been short levied or erroneously refunded, no order requiring the appellant to pay any dut y not levied, short levied or erroneously refunded shall be passed unless the ap pellant is given notice within the time limit specified in section 28 to show ca use against the proposed order. 4. The order of the Commissioner (Appeals) dispo sing of the appeal shall be in writing and shall state the points for determinat ion, the decision thereon and the reasons for the decision. The Commissioner (Ap peals) shall, where it is possible to do so, hear and decide every appeal within a period of six months from the date on which it is filed. [Sub section 4A] On the disposal of the appeal, the Commissioner (Appeals) shall communicate the ord er passed by him to the appellant, the adjudicating authority, the Chief Commiss ioner of Customs and the Commissioner of Customs. The Central Government shall c onstitute an Appellate Tribunal to be called the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) consisting of as many judicial and technical member s as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by this Act. A judicial member shall be a person who h as for at least ten years held a judicial office in the territory of India or wh o has been a member of the Indian Legal Service and has held a post in Grade I o f that service or any equivalent or higher post for at least three years, or who has been an advocate for at least ten years. 3. 5. 6. 9.8.4 Appellate Tribunal [Section 129] 1. 2.

Demand and Appeals 9.11 For the purposes of this sub section, in computing the p eriod during which a person has held judicial office in the territory of India, there shall be included any period, after he has held any judicial office, durin g which the person has been an advocate or has held the office of a member of a tribunal or any post, under the Union or a State, requiring special knowledge of law; (ii) in computing the period during which a person has been an advocate, t here shall be included any period during which the person has held a judicial of fice, or the office of a member of a tribunal or any post, under the Union or a State, requiring special knowledge of law after he became an advocate. A technic al member shall be a person who has been a member of the Indian Customs and Cent ral Excise Service, Group A, and has held the post of Commissioner of Customs or Central Excise or any equivalent or higher post for at least three years. The C entral Government shall appoint (a) a person who is or has been a Judge of a Hig h Court; or (b) one of the members of the Appellate Tribunal, to be the Presiden t thereof. 5. 6. The Central Government may appoint one or more members of the A ppellate Tribunal to be the Vice President, or, as the case may be, Vice Preside nts, thereof. The Senior Vice President or a Vice President shall exercise such of the powers and perform such of the functions of the President as may be deleg ated to him by the President by a general or special order in writing. Orders ap pellable to Appellate Tribunal: Any person aggrieved by any of the following ord ers may appeal to the Appellate Tribunal against such order (a) a decision or or der passed by the Commissioner of Customs as an adjudicating authority; (b) an o rder passed by the Commissioner (Appeals) under section 128A; (c) an order passe d by the Board or the Appellate Commissioner of Customs under section 128, as it stood immediately before the appointed day; (d) an order passed by the Board or the Commissioner of Customs, either before or after the appointed day, under se ction 130, as it stood immediately before that day : 2. Orders not appealable : No appeal shall lie to the Appellate Tribunal and the Appellate Tribunal shall n ot have jurisdiction to decide any appeal in respect of any order referred to in clause (b) if such order relates to, (a) any goods imported or exported as bagg age; (i) 3. 4. 9.8.5 Appeals to Appellate Tribunal [Section 129A] 1.

9.12 Customs (b) any goods loaded in a conveyance for importation into India, bu t which are not unloaded at their place of destination in India, or so much of t he quantity of such goods as has not been unloaded at any such destination if go ods unloaded at such destination are short of the quantity required to be unload ed at that destination; (c) payment of drawback as provided in Chapter X, and th e rules made thereunder. In the following cases, the Appellate Tribunal may refu se to admit an appeal in respect of an order referred to in clause (b) or clause (c) or clause (d) where (i) (ii) the value of the goods confiscated without opt ion having been given to the owner of the goods to pay a fine in lieu of confisc ation under section 125; or in any disputed case, other than a case where the de termination of any question having a relation to the rate of duty of customs or to the value of goods for purposes of assessment is in issue or is one of the po ints in issue, the difference in duty involved or the duty involved; or (iii) the amount of fine or penalty determined by such order, does not exceed Rs .50,000 [Sub section1]. Appeal by Committee of Commissioners: The Board may, by notification in the Official Gazette, constitute such Committees as may be neces sary for the purposes of this Act. Such Committee shall consist of two Chief Com missioners of Customs or two Commissioners of Customs [Sub section (1B)]. Such C ommittee of Commissioners of Customs may direct the proper officer to appeal on its behalf to the Appellate Tribunal against such order, if it is of the opinion that an order passed by the Commissioner (Appeals) under section 128 or under s ection 128A is not legal or proper.[sub section (2)] Time limit for filing appea l: Every appeal under this section shall be filed within three months from the d ate on which the order appealed against was communicated to he Commissioner or, as the case may be, the other party preferring the appeal. Memorandum of Cross o bjections: On receipt of notice that an appeal has been preferred under this sec tion, the party against whom the appeal has been preferred may, notwithstanding that he may not have appealed against such order or any part thereof, file, with in forty five days of the receipt of the notice, a memorandum of cross objection s verified in such manner as may be specified by rules made in this behalf again st any part of the order appealed against and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time s pecified in sub section (3). The Appellate Tribunal may admit an appeal or permi t the filing of a memorandum of crossobjections after the expiry of the relevant period referred to in sub section (3) or sub section (4), if it is satisfied th at there was sufficient cause for not presenting it within that period.

Demand and Appeals 9.13 Form of Appeal: An appeal to the Appellate Tribunal shal l be in form CA3 and shall be verified in such manner as may be specified by rul es made in this behalf. Sub section (6), of section 129A prescribes the amount o f fee for filing an appeal to the Appellate Tribunal. Amount of duty, interest d emanded and penalty levied Less than or equal to Rs. 5,00,000 More than Rs.5,00, 000 but not exceeding Rs.50,00,000 More than Rs.50,00,000 Fee for filing an appe al Rs. 1,000.00 Rs. 5,000.00 Rs.10,000.00 However, no such fee shall be payable in the case of an appeal preferred by Comm issioner of Customs. Also, no fee shall be payable in case of filing of a memora ndum of cross objections. Sub section (7) prescribes a fee of Rs.500 for every a pplication made before the Appellate Tribunal. The application can be an appeal for grant of stay or for rectification of mistake or for any other purpose; or f or restoration of an appeal or an application. However, no such fee shall be pay able in the case of an application filed by or on behalf of the Commissioner of Customs. 3. 1. Orders of Appellate Tribunal [Section 129B]: The Appellate Tribun al may pass such orders thereon as it thinks fit, confirming, modifying or annul ling the decision or order appealed against or may refer the case back to the au thority which passed such decision or order with such directions as the Appellat e Tribunal may think fit, for a fresh adjudication or decision, as the case may be, after taking additional evidence, if necessary. However, the Appellate Tribunal may pass such orders only after giving the parti es to the appeal, an opportunity of being heard. The Appellate Tribunal (CESTAT) may, if sufficient cause is shown, at any stage of proceeding, grant time, from time to time, to the parties and adjourn the hearing for reasons to be recorded in writing. However, such adjournment shall not be granted for more than three times to a party during the proceeding. 2. The Appellate Tribunal may, at any ti me within six months from the date of the order amend any order passed by it and shall make such amendments if the mistake is brought to its notice by the Commi ssioner of Customs or the other party to the appeal. Such amendments shall be ma de with a view to rectifying any mistake apparent from the record.

9.14 Customs An amendment which has the effect of enhancing the assessment or re ducing a refund or otherwise increasing the liability of the other party shall n ot be made unless the Appellate Tribunal has given notice to him of its intentio n to do so and has allowed him a reasonable opportunity of being heard. Every ap peal shall be decided by the Appellate Tribunal within a period of three years f rom the date on which such appeal is filed, if it is possible to do so. Further where a order of stay is made in the proceedings of a appeal, the Appellate Trib unal is required to dispose of the appeal within 180 days from the date of such order of stay. However, if such appeal is not disposed of within the above speci fied period, the stay order shall stand vacated on the expiry of the period of 1 80 days. 3. 4. 4. The Appellate Tribunal shall send a copy of every order passed to the Commissioner of Customs and the other party to the appeal. Save as other wise provided in section 130 or section 130E, orders passed by the Appellate Tri bunal on appeal shall be final. Procedure of Appellate Tribunal [Section 129C] The powers and functions of the Appellate Tribunal are to be exercised and disch arged by the Benches constituted by the President of the Tribunal and such bench es would be formed from amongst the members of the Appellate Tribunal. [Sub sect ion (1)] Under sub section (2) to Section 129C, it is provided that such bench s hall consist of one judicial member and one technical member. However, under sub section (4) an exception to the above is provided that the President or any oth er member of the Appellate Tribunal authorized in this behalf by the President m ay sit singly and dispose of any case which has been allotted to the bench of wh ich he is a member, subject to the condition that none of following does not exc eed ten lakhs: (i) (ii) the value of the goods confiscated without option having been given to the owner of the goods to pay a fine in lieu of confiscation unde r Section 125; in case of dispute relating to the rate of duty of customs or to the value of goods for the purpose of assessment and the difference in duty invo lved or the duty involved (iii) the amount of fine or penalty involved If the members of the Bench differ in opinion on any point, such point shall be decided according to the opinion of the majority, if there is a majority. If the members are equally divided, they shall state the point on which they differ and make reference to the President, who will either hear himself or refer the case for hearing on such point and sha ll be decided according to the opinion of the majority of these members includin g those heard first. Any proceeding before the Appellate Tribunal shall be deeme d to be a judicial proceeding and the Appellate Tribunal shall be deemed to be a Civil Court.

Demand and Appeals 9.15 9.8.6 Powers of Committee of Chief Commissioners of Cust oms or Commissioner of Customs to pass certain orders [Section 129D] Section 129 D gives powers to Committee of Chief Commissioners or Commissioner of Customs to pass certain orders. The Committee of Chief Commissioners may of its own motion , call for and examine the record of any proceeding in which a Commissioner of C ustoms has passed any order so as to satisfy itself upon the legality or proprie ty of the order. Thereafter, the Committee of Chief Commissioners may direct suc h Commissioner or any other Commissioner to apply to the Appellate Tribunal to d etermine such points as may be specified by it. Similar powers are also given to the Commissioner in respect of decisions taken by the adjudicating officers sub ordinate to him. In this case, the application is to be made to the Commissioner (Appeals). The above orders must be issued within 6 months but not beyond a per iod of one year from the date of the order/decisions of the adjudicating authori ty. The provisions of this section do not apply to any decision or order in whic h the determination of any question having a relation to the rate of duty or to the value of goods for the purposes of assessment of any duty is in issue or is one of the points in issue. 9.8.7 Powers of revision of Board or Commissioner of Customs in certain cases [Section 129DA] The Board on its own motion or on the application of any aggrieved person can call for and examine the record of any p roceedings in which a Commissioner of Customs has passed any decision or order. After satisfying itself as to correctness legality or propriety of such decision or order, the Board may pass such order thereon as it thinks fit. Similar power s have also been given to Commissioner of Customs in respect of proceedings in w hich an adjudicating authority subordinate to him has passed any decision or ord er. Such revisionary powers of Board and Commissioner of Customs are in respect of orders involving rate of duty or valution of goods. However, no such orders s hall be passed so as to prejudicially affect any person unless, such person is g iven a reasonable opportunity of being heard in this regard. No notice of demand of duty under this section can be issued unless such person is given notice und er section 28 to show cause against the proposed order. Further, such revisionar y proceedings cannot be initiated after the expiry of six months from the date o f communication of such decision or order of Commissioner of Customs. One should note that section 129DA has not been brought into force till date since it was initially introduced with the object of establishing a Tribunal called CERAT Cus toms and Excise Revenue Appellate Tribunal with the object of deciding matters r elating to classification and valuation. However, with the CEGAT functioning smo othly, this Tribunal was never set up and this section therefore has never come into effect till date.

9.16 Customs 9.8.8 Revision by Central Government [Section 129DD] The Central Go vernment is vested with the powers to review orders of the Commissioner or Commi ssioner Appeals on an application made by any aggrieved person. The powers can b e exercised only in the following cases: (a) any goods imported or exported as b aggage; (b) any goods loaded in a conveyance for importation into India, but whi ch are not unloaded at their place of destination in India, or so much of the qu antity of such goods as has not been unloaded at any such destination if goods u nloaded at such destination are short of the quantity required to be unloaded at that destination; (c) payment of drawback as provided in Chapter X, and the rul es made thereunder. 9.8.9 Appeal to High Court [Section 130] An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal o n or after the 1st day of July, 2003 (not being an order relating, among other t hings, to the determination of any question having a relation to the rate of dut y of customs or to the value of goods for purposes of assessment), if the High C ourt is satisfied that the case involves a substantial question of law. The Comm issioner of Customs or the other party aggrieved by any order passed by the Appe llate Tribunal may file an appeal to the High Court and such appeal under this s ubsection shall be(a) filed within one hundred and eighty days from the date on which the order appealed against is received by the Commissioner of Customs or t he other party; (b) accompanied by a fee of two hundred rupees where such appeal is filed by the other party; (c) in the form of a memorandum of appeal precisel y stating therein the substantial question of law involved. Where the High Court is satisfied that a substantial question of law is involved in any case, it sha ll formulate that question. The appeal shall be heard only on the question so fo rmulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question However, nothing in this sub section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. The High Court shall decide the question of law so formulated and deliver such j udgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.

Demand and Appeals 9.17 The High Court may determine any issue which (a) has not been determined by the Appellate Tribunal; or (b) has been wrongly determined b y the Appellate Tribunal, by reason of a decision on any question of law. When a n appeal has been filed before the High Court, it shall be heard by a bench of n ot less than two Judges of the High Court, and shall be decided in accordance wi th the opinion of such Judges or of the majority, if any, of such Judges. Where there is no such majority, the Judges shall state the point of law upon which th ey differ and the case shall, then, be heard upon that point only by one or more of the other Judges of the High Court and such point shall be decided according to the opinion of the majority of the Judges who have heard the case including those who first heard it. The provisions of the Code of Civil Procedure, 1908, r elating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section. Note: This section shall be omitted with effect f rom the date when the NTT is constituted. 9.8.10 Appeal to Supreme Court: The Cu stoms Act, 1962, provides a two tier machinery for redressal of grievances again st the decision of the Appellate Tribunal. In cases where the decision of the Ap pellate Tribunal relates to any question having relation with the determination of rate of duty or value of goods amongst other things, the same is directly appella ble to the Supreme Court under Section 130E. However, where the order of the App ellate Tribunal does not relate to rate of duty or value of goods, first an appeal i s made to the High Court and thereafter an appeal against the judgment of the Hi gh Court can be made to the Supreme Court provided the High Court certifies it t o be a fit case for appeal to the Supreme Court. It may be noted that the Suprem e Court in L. Chandra Kumar v. UOI 1997 (92) E.L.T. 318 (S.C.) held in the conte xt of Central Administrative Tribunals it would be incumbent on the parties to a pproach the relevant High Court before coming to the Supreme Court. However, the Delhi High Court has held in Shalimar Rubber Industries v. UOI 1998 (103) E.L.T . 217 (Del.) that the parties right under Sec. 35L has not been taken away by su ch a decision. The Madhya Pradesh High Court has held in Neo Sacks Limited v. CE GAT 1999 (114) E.L.T. 826 that the decision of the Supreme Court in L.Chandra Ku mars case would include not only the CAT but also all Tribunals. The High Court has further added that writ jurisdiction against CEGAT orders are available and alternative remedy by way of statutory appeal to Supreme Court contained in Sec. 35L or Section 130E being restrictive is not a bar to maintaining a writ petiti on.

9.18 Customs 9.8.11 Orders appealable to the Supreme Court: Section 130E specifi es two types of orders which are appealable to the Supreme Court: (a) an appeal shall lie to the Supreme Court from any judgment of the High Court delivered(i) (ii) in an appeal made under section 130,or on a reference made under section 13 0 by the Appellate Tribunal before the 1st day of July, 2003, or (iii) on a reference made under section 130A if the High Court certifies the cas e to be fit for appeal to the Supreme Court. The High Court can certify any case on its own motion or on an oral application made by or on behalf of the aggriev ed party, immediately after passing of the judgement. (b) any order of the Appel late passed before the establishment of NTT having relation to the determination of rate of customs duty or value of goods, among other things. After the establ ishment of the NTT, the appeal from any order of the Appellate Tribunal having r elation to the determination of rate of customs duty or value of goods, among ot her things shall first lie to NTT. Note: National Tax Tribunal means the Nationa l Tax Tribunal established under section 3 of the National Tax Tribunal Act, 200 5. The National Tax Tribunal Act, 2005 has been enacted by the Parliament in pur suance of Article 323B of the Constitution. It came into force with effect from December 28th, 2005. The notified date of establishment of the National Tax Trib unal (NTT) by the Central Government is 6th January, 2006. The objective behind the enactment of the National Tax Tribunal Act is to modify the present system o f appeals under the Customs Act by substituting the National Tax Tribunal for th e High Court, for facilitating quick adjudication of disputes under direct and i ndirect tax laws and achieve uniformity in the interpretation of central legisla tion. This Act provides that on establishment of the National Tax Tribunal, High Court will not have appellate jurisdiction in matters of direct and indirect ta xes. This Act vests jurisdiction in NTT to decide direct and indirect tax disput es on appeal from the decision of the respective Appellate Tribunals. Appeal to NTT can be filed both by the assessee and the revenue, from order passed by the CESTAT, on a substantial question of law. Appeal to NTT will lie only if the NTT is satisfied that the case involves a substantial question of law. The NTT shal l formulate the substantial question of law for the purpose of hearing of appeal by it. A party to an appeal, other than the Government, may either appear in pe rson or authorize one or more chartered accountants or legal practitioners or an y person duly authorized by him or it to present the case before the NTT. The Go vernment may authorize one or more legal practitioners or any of its officers to present its case before the NTT. It may be noted that the Act does not permit c hartered accountants to present the case of the Government before the NTT.

Demand and Appeals 9.19 The Act provides that any person, including any departme nt of the Government, aggrieved by any decision or order of NTT may file an appe al to the Supreme Court within 60 days from the date of communication of the dec ision or order of the NTT to him. The Supreme Court can allow filing of the appe al beyond 60 days, if the appellant was prevented by sufficient cause from filin g the appeal within the said period of 60 days. The Bombay High Court in P.C. Jo shi vs. Union of India (2006) 152 Taxman 285 has passed an ad interim order rest raining the Government from constituting the NTT and transferring the matters pe nding in the High Court to the NTT. Therefore, the constitution of the NTT will take effect only after the stay is vacated. Self examination questions 1. 2. 3. 4. 5. 6. 7. 8. 9. Briefly state the law relating to demand for payment of duty u nder section 28 of the Customs Act, 1962. What are the relevant dates for the purp ose of issuing the show cause notice for demanding customs duty not levied? Writ e a brief note on power not to recover duties not levied or short levied as a re sult of general practice under section 28A of the Customs Act, 1962. Mention bri efly the orders that are not appealable to the Appellate Tribunal. Write a brief note on the orders appealable to the Supreme Court. Discuss the provisions in r espect of making an appeal to the High Court. Explain briefly the powers of revi sion of Board or Commissioner of Customs in certain cases. Discuss the revisiona ry powers of the Central Government. Write a note on the Committee of Commission ers. 10. M imported second hand machinery from Singapore and filed the classification l ist. M claimed that the machinery was fully exempt from payment of customs duty un der a Notification. However, the Assistant Commissioner of Customs, the authorit y in original, passed an order in original holding that the machinery imported b y M was classifiable under a different heading and chargeable to customs duty. Con sequently, M had to furnish the bank guarantee for the duty payable under that hea ding in order to release the machinery. Subsequently, the Assistant Commissioner of Customs ordered to encash the bank guarantee executed by M to realise the cust oms duty. No sooner the aforesaid order inoriginal was issued to M, the Customs De partment invoked the bank guarantee by sending an intimation cum request to the Bank to pay to them the amount of bank guarantee. M contended that the order of th e Assistant Commissioner was an

9.20 Customs appelable order and since the statutory period of filing an appeal was yet to expire, the Departments action was not correct. Do you think the stand taken by the Customs Department is tenable in law? Discuss. Answer 2. Similar s ituation was addressed to by the High Court in the case of the Ocean Driving Cen tre Ltd. v. Union of India 2005 (180) E.L.T. 313 (Bom.). In this case, the petit ioner contended that he had a statutory right of appeal before the Appellate Aut hority and at the same time, he also had a right to move an application to get t he pre deposit waived in terms of section 129E of the Customs Act, 1962. He furt her submitted that he had an arguable case on classification. The debatable ques tion had resulted in the release of goods subject to the furnishing of the bank guarantee at the stage of the provisional assessment. Had it not been a debatabl e issue, he would not have been allowed to claim release of the goods on furnish ing the bank guarantee. The bank guarantee was furnished to secure dues of Depar tment. The same was valid and should have been kept alive till the dispute was f inally resolved. According to him, order of assessment as on date was not final and conclusive. The High Court observed that it was not in dispute that the appe al period was yet to expire and that the order was an appealable order. Further, as per the policy engrafted in the Circular No. 396/29/98 CX., dated 2nd June 1 998 the Department was expected not to resort to coercive action so long as the appeal period was not over. Hence, the action of Department was contrary to thei r own policy. The High Court held that it was not proper on the part of the Depa rtment to encash the bank guarantee before the expiry of the statutory period pr ovided for filing appeal. In the given case also M had a statutory right to file a n appeal and get the pre deposit waived. Thus, extending the ratio of the above decision, it can be inferred that the stand taken by the Department is not tenab le in law.

10 REFUND 10.1 INTRODUCTION On import or export of goods, at times, it is found that duty has been paid in excess of what was actually leviable on the goods. Such excess payment may be due to lack of information on the part of importer/exporter or no n submission of documents required for claim of lower value or rate of duty. Som etimes, such excess payment of duty may be due to shortage/short landing, pilfer age of goods or even incorrect assessment of duty by Customs. In such cases, ref und of excess amount of duty paid can be claimed by the importer or exporter. If any excess interest has been paid by the importer/exporter on the amount of dut y paid in excess, its refund can also be claimed. Section 27 of the Customs Act, 1962 refers to this. 10.2 APPLICATION FOR REFUND 10.2.1 Form of application: Th e refund of any duty and interest, can be claimed either by a person who has pai d the duty in pursuance to an order of assessment or a person who has borne the duty. Any person claiming refund of any duty or interest, has to make an applica tion in duplicate in the form as prescribed in the Customs Refund Application(Fo rm) Regulations, 1995, to the jurisdictional Deputy/Assistant Commissioner of Cu stoms. Such application is to be made before the expiry of six months from the d ate of payment of duty and interest. However, in case of any import made by any individual for his personal use or by Government or by any educational, research or charitable institution or hospital, application for refund can be made befor e the expiry of one year from the date of payment of duty and interest. The appl ication for refund is required to be filed with documentary or other evidence in cluding documents relating to assessment, sales invoice and other like documents to support the claim that the duty and interest was paid in excess, incidence o f duty or interest has not been passed on by him to any other person, and the re fund has not been obtained already. Where on scrutiny, the application is found to be complete in all respects, the Customs issues an acknowledgement in the pre scribed Form as per the Customs Refund Application(Form) Regulations, 1995. Howe ver, in case the application is found to be incomplete, the Customs has to retur n the application to the applicant, pointing out the deficiency. The applicant h as to re submit the application after making good the deficiency, for scrutiny b y Customs again for

10.2 Customs admissibility of the refund claim. If an appealable order passed by an authority is not challenged by filing an appeal, it is not open to the assessee to questi on the correctness of the order subsequently by filing a refund claim. [Flock (I ndia) Private Ltd. 2000 (120) ELT 285 (SC)] Refund claim is not maintainable whe n assessment order is not challenged [M.F. (D.R.) Circular No. 24/2004 Cus., dat ed 18.03.2004]. 10.2.2 Relevant dates for submission of a refund application: As stated above, application for refund is required to be filed within six months from the date of payment of duty and interest and in case of any import made by an individual for his personal use or by Government or by an educational, resear ch or charitable institution or hospital, application for refund is to be filed within one year from the date of payment of duty and interest. However, the limi tation of one year or six months, as the case may be, does not apply where any d uty and interest has been paid under protest. Normally, the time limit of six mo nths or one year is computed from the date of payment of duty, however, in follo wing situations, such time limit is computed differently: (a) In case of goods w hich are exempt from payment of duty by an ad hoc exemption order issued under s ub section (2) of section 25 of the Act, the limitation of one year or six month s, as the case may be, is to be computed from the date of issue of such order; ( b) Where any duty is paid provisionally under section 18 of the Act, the limitat ion of one year or six months, as the case may be, is to be computed from the da te of adjustment of duty after the final assessment thereof; (c) The date of pay ment of any duty and interest in relation to a person, other than the importer s hall be the date of purchase of goods by such person. 10.3 PROCESSING OF REFUN D CLAIM The application of refund found to be complete in all respects by Custom s, is processed to see if the whole or any part of the duty and interest paid by the applicant is refundable. In case the whole or any part of the duty and inte rest is found to be refundable, an order for refund is passed. However, in view of the provisions of unjust enrichment enshrined in the Customs Act, the amount found refundable has to be transferred to the Consumer Welfare Fund. Only in fol lowing situations, the amount of duty and interest found refundable, instead of being credited to the Consumer Welfare Fund, is to be paid to the applicant: (a) if the importer has not passed on the incidence of such duty and interest to an y other person; (b) if imports were made by an individual for his personal use; (c) if the buyer who has borne the duty and interest, has not passed on the inci dence of such duty and interest to any other person; (d) if amount found refunda ble relates to export duty paid on goods which has returned to exporter as speci fied in section 26;

Refund (e) if amount relates to drawback of duty payable under section 74 and 75 ; 10.3 (f) if the duty or interest was borne by a class of applicants which has been no tified for such purpose in the Official Gazette by the Central Government. 10.4 INTEREST ON DELAYED REFUND The Customs has to finalize refund claims immediately after receipt of the refund application in proper form along with all the docum ents. In case, any duty ordered to be refunded to an applicant is not refunded w ithin 3 months from the date of receipt of application for refund, interest is t o be paid to the applicant. Such interest should not be below 5% and should not exceed 30%. Currently, the interest is 6% vide Notification No. 75/2003 Cus (NT) dated 12.09.2003. The interest is to be paid for the period from the date immed iately after the expiry of 3 months from the date of receipt of such application till be date of refund of such duty. For the purpose of payment of interest, th e application is deemed to have been received on the date on which a complete ap plication, as acknowledged by the proper officer of Customs, has been made. Wher e any order of refund is made by the Commissioner (Appeals), Appellate Tribunal, National Tax Tribunal or any Court against an order of the Assistant Commission er/Deputy Commissioner of Customs, the order passed by the Commissioner (Appeals ), Appellate Tribunal, National Tax Tribunal or by the Court, as the case may be is deemed to be an order for the purpose of payment of interest on delayed refu nd. The interest on delayed refund is payable only in respect of delayed refunds of Customs duty and no interest is payable in respect of deposits such as depos its for project imports, security for provisional release of goods etc. [Section 27A] (Reference : The Customs Refund Application (Form) Regulations, 1995 issue d vide notification no. 34/95(NT) Customs, dated 26/5/1995, Notifications no. 32 /95(NT) Customs, dated 26/5/1995. Circular No. 59/95 Cus., dated 5/6/1995) 10.5 REFUND OF EXPORT DUTY IN CERTAIN CASES [SECTION 26] This section provides as fol lows: Where on the exportation of any goods any duty has been paid, such duty sh all be refunded to the person by whom or on whose behalf it was paid, if (a) the goods are returned to such person otherwise than by way of re sale; (b) the goo ds are re imported within one year from the date of exportation; and (c) an appl ication for refund of such duty is made before the expiry of six months from the date on which the proper officer makes an order for the clearance of the goods. This provision is intended to compensate for a situation where the goods, which are exported are rejected and returned by the buyer. The time period set is one year from the date of exportation. The time set for submitting a claim for refu nd is six months from the date on which

10.4 Customs the proper officer makes an order for clearance of returned goods. 10.5.1 Claim for refund of duty [Section 27] : This section provides that any person claiming refund of any duty or interest, if any, on such duty paid by him in pursuant of an order of assessment; or borne by him, may make an application for refund of such duty and interest. The time limit for making such an application isa. in th e case of any import made by any individual for his personal use or by Governmen t or by any educational, research or charitable institution or hospital, before the expiry of one year; in any other case, before the expiry of six months b. from the date of payment of duty and interest, if any, paid on such duty. The li mitation period of 1 year or as the case may be 6 months is not applicable in th e case of duty paid under protest. The application for refund shall be in the fo rmat specified in the Customs Refund Application (Form) Regulations, 1955 and sh ould be accompanied by such documentary or other evidence including the document s referred to in section 28C as the applicant may furnish for establishing that the amount of duty and interest, if any paid on such duty in relation to which s uch refund is claimed has been paid by him. The applicant should make a declarat ion to the effect that he has not passed on the incidence of burden of duty and interest to any person. 10.5.2 Procedure for making the application: The applica tion for refund of duty should contain the following details: a. b. c. d. Import /Export document, Purchase Invoice No. and date. Duty deposit reference and date Description of goods Name and address of 1. 2. 3. e. f. g. h. i. j. Importer Cu stoms House Agent Applicant Refund claim under section Ground of claim Amount of refund claim Amount of modv at credit availed from the additional duty of customs paid and now recovered by the refund claim. List of enclosures Any further details deemed necessary and re levant to the refund claim.

Refund In addition to the above the applicant should subscribe to the following declaration: I/We hereby declare thata. b. c. 10.5 the contents of the refund claim as per the form above are true and correct to t he best of my/our information and belief; the amount and ground for which this r efund claim has been filed has not been previously claimed and paid; and that th e excess duty claimed as refund has not been passed on to any other person by th e importer or the exporter. Letter of authorisation from the importer or buyer if the applicant is an agent. Triplicate copy of the bill of entry/Post parcel wra pper/Shipping bill/Baggage receipt or the purchase invoice. Duty challan or othe r document as evidence of duty paid. Signed working sheet for the amount of refu nd claimed. Customs attested invoice. Customs attested packing list. Document fo r establishing the applicants eligibility to receive the refund amount in terms o f the proviso to sub section (2) of section 27 of the Act, including documents f or the purposes of sections 28C and 28D of the Act. Contract and purchase order. Modvat credit certificate from the Central Excise Authorities. 10.5.3 Documents to be attached with the refund claim 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Short delivery certificate from custodian 11. Short shipment certificate fro m the supplier. 12. Survey report 10.6 DUTY PAID UNDER PROTEST In a case where t he assessment has not been accepted by the importer, the duty may be paid by him under protest. This implies that at the time of payment of duty itself the impo rter has made an application for refund of duty. Hence proviso to sub section (1 ) of section 27 provides that, where duty has been paid under protest, then the limitation period of 1 year or as the case may be 6 months shall not apply. 10.7 DOCTRINE OF UNJUST ENRICHMENT WITH RESPECT TO REFUND OF DUTY When an importer i mports goods, he has to pay the customs duty on such goods. This duty is recover ed from the purchasers when these goods are sold by the importer. In other words , the

10.6 Customs burden of duty is passed on to the purchaser. Subsequently, if the importer make s a claim for refund of duty and on acceptance of such claim if he retains the a mount of refund with himself without passing it to the purchaser, then this woul d be called as unjust enrichment. Therefore, wherever there is an over assessmen t or excess collection of duty, the refund shall be given only to the person who at the material time of grant of refund, bears the burden of duty and interest, if any. When the person who bears the burden of duty refunded is not identifiab le or has not come forward to claim the refund, the refund shall be paid into a fund called Consumer Welfare Fund . The importer or the clearing agent has to p rove that he has not passed the burden of duty, in order to claim refund of duty . Example: The importer has imported an article, which has been valued at Rs. 10 00/ . The customs duty on this article comes to Rs. 250/ . Now the importer adds his profit margin of say Rs. 250/and sells the article for Rs. 1500/ . Now the price charged by the importer consists of the duty element which has been passed on to the buyer. If later on it is found that there was an error in assessment resulting in excess collection of duty, such excess collection is liable to be r efunded. But as may be seen above, the importer has passed on the burden of duty to the purchaser and if any refund is granted to him, it would confer on him, t he benefit to which he does not have a valid right. Therefore in such cases the refund is credited to the Consumer Welfare Fund. The most important decision on re fund is by a Nine Member Bench of the Supreme Court in Mafatlal Industries Ltd. v. U.O.I. 1997 (89) E.L.T. 247. The salient features of this judgment can be su mmarised as under : a. The theory of unjust enrichment is valid and constitution al. However, the theory that the manufacturer would be unjustly impoverished in case of demands has not been agreed to. All pending applications as on 20 9 1991 would be governed by this theory of unjust enrichment. Section 11B and section 27 (Customs Act) are self contained codes for refunds and resort to civil suits or writs is not permissible unless the taxing provision is struck down as uncons titutional. The general theory laid down in certain judgments of both the Suprem e Court and High Courts that refund could be claimed within three years of disco very of mistake has been disapproved. Unless the levy is struck down as unconsti tutional, all Courts must exercise jurisdiction in terms of section 11B and refu se to grant relief if the incidence of tax has been passed on. Whatever amount i s collected as duty will have to paid to the Government. If excess is collected than that payable, it would be credited to the Consumer Welfare Fund or given as refund to the person who has borne the incidence of duty. b. c. d. e. The Supreme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refu nds will not be allowed on captive consumption of inputs.

Refund 10.7 Further, the Supreme Court in the case of CCE v. Allied Photographics 2004 (166) ELT 3 has held that doctrine of unjust enrichment applies even when duty is pai d under protest. It has been held that even if there is no change in price befor e and after assessment (i.e. before and after imposition of duty), it does not l ead to the inevitable conclusion that incidence of duty has been passed on to th e buyer, as such uniformity may be due to various factors. The principle of unju st enrichment applies in case of refund after provisional assessment as what is paid at the time of provisional assessment is customs duty and not only deposit [Bussa Overseas v. UOI 2003 (158) ELT 135(Bom.)]. As per CBEC Circular No. 40/20 02 Cus. dated 17.07.2002, unjust enrichment provisions apply to provisional asse ssment also. Section 28D provides that every person who has paid duty under this Act shall, unless the contrary is proved by him, be deemed to have passed on th e full incidence of such duty to the buyer of such goods. 10.7.1 Exceptions to t he Doctrine of Unjust Enrichment The doctrine of unjust enrichment does not appl y to the refund of duty and interest, if any, paid on such duty if such amount i s relatable to: (i) (ii) drawback of duty payable under sections 74 and 75; expo rt duty as specified in section 26; (iii) the duty and interest, if any, paid on such duty paid by the importer or t he exporter, as the case may be, if he had not passed on the incidence of such d uty and interest to any other person; (iv) the duty and interest on imports made by an individual for his personal use; (v) the duty and interest borne by the b uyer, if he had not passed on the incidence of such duty and interest to any oth er person; (vi) the duty and interest borne by any other such class of applicant s as the Central Government may, by notification in the Official Gazette, specif y. However, no notification under clause (vi) shall be issued unless in the opin ion of the Central Government the incidence of duty and interest has not been pa ssed on by the persons concerned to any other person. Self examination questions 1. 2. 3. 4. With reference to the Customs Act, 1962, explain the circumstances under which refunds will not be credited to the Consumer Welfare Fund. Discuss t he provisions in respect of interest on delayed refunds. List the document to be attached with the refund claim. ABC Ltd. imported certain products and filed a bill of entry. The amount of duty payable was assessed but was not acceptable to ABC Ltd. and hence the same was paid by it under protest. Subsequently, a refun d claim was filed by ABC Ltd. on the ground that the duty had been wrongly levie d. However, the claim was rejected by the Department on

10.8 Customs the ground that since no appeal had been filed against the assessment or der, the refund claim was not maintainable. ABC Ltd. contended that according to section 27 of the Customs Act, 1962 a claim for refund could be made by any per son who had paid duty in pursuance of an order of assessment or a person who had borne the duty. It was submitted that the words in pursuance of assessment necess arily implied that a claim for refund could be made without challenging the asse ssment in an appeal. Further, if the assessment was not correct, a party could f ile a claim for refund and the correctness of the assessment order could be exam ined whilst considering the claim for refund. Give your opinion on the issue wit h the help of decided case laws, if any. 5. Does the principle of unjust enrichment apply to refund of import duty paid on c apital goods? The Supreme Court in the case of Priya Blue Industries Ltd. v. Com missioner of Customs (Preventive) 2004 (172) E.L.T 145 (S.C.) has stated that on ce an order of assessment has been passed, the duty would be payable as per that order. Unless that order of assessment has been reviewed under section 28 and/o r modified in an appeal, that order would be enforceable. So long as the order o f assessment is effective, the duty would be payable as per that order of assess ment. A refund claim is not an appeal proceeding. The officer considering a refu nd claim cannot not sit in appeal over an assessment made by a competent officer . The officer considering the refund claim can also not review an assessment ord er. The Apex Court clarified that as the words in pursuance of assessment order co me after the words Any person claiming refund of any duty and interest, if any, p aid on such duty paid by him, they only indicate the party/person who can make a claim for refund. Thus, these words must be understood in the limited context on ly. They enable a person who has paid duty in pursuance of an order of assessmen t to claim refund. These words does not lead to the conclusion that a claim for refund can be maintained without modifying the order of assessment in an appeal or reviewing the same under section 28. The Supreme Court held that a refund cla im cannot be filed against an assessment order, which has not been modified in a n appeal or reviewed under section 28. The ratio of the abovementioned decision can be applied in the present case also. Therefore, the stand taken by the Depar tment is correct. Answers 4. 5. The Large Bench of the Tribunal in the case of SRF Ltd. v. CCus. Chennai 2006 (1 93) ELT 186 (Tri. LB) has held that the doctrine of unjust enrichment would be applicable in case of imported capital goods used captively for manufacture of excisable goods. It may be noted that in case of Grasim Industries v. CCE 2003 ( 157) ELT 123 (CESTAT) it was held that question of passing of excise duty would not arise in case of capital goods used captively. However, this decision has no w been overruled by the abovementioned judgement of the Large Bench of the Tribu nal.

11 DUTY DRAWBACK 11.1 INTRODUCTION An important principle in the levy of Customs Duty is that the goods should be consumed within the country of importation. If the goods are no t so consumed, but are exported out of the country, the cost of export goods get s unduly escalated an account of incidence of customs duty. The re export of the goods imported into the country is broadly on two occasions: (a) Where the good s are sent back as such to the foreign country; (b) Where the goods are used in the manufacture of other articles for export. The circumstances under the first situation arises due to certain trade practices. Briefly they relate to: (i) (ii ) Goods not conforming to the specification of the order goods not permitted to be imported into the country on account of trade restriction. (iii) the goods after being imported are temporarily retained in the country and later taken out of the country. In other words, the very objective of the impor tation was limited to temporary retention in India. The latest cause for relief of import duty paid is when the goods are ultimately exported. This factor gaine d greater importance with the establishment of 100% Export Oriented Units where goods manufactured are mainly exported to earn foreign exchange. 11.2 DRAWBACK O F CUSTOMS DUTY The principal method of encouraging the export of goods has been the drawback of customs and the central excise duties on goods manufactured out of customs duty paid and/or central excise duty paid on inputs or raw materials. On parallel plane was placed the goods imported by tourists and other passenger s transmitting through India. Under this category was the motor vehicles brought by tourists

11.2 Customs which was used in the country for a short period of 6 12 months alone. The grant of duty relief is contingent upon factual export of the goods. This consequenti ally necessitated grant of the rebate or drawback at the port of export of the g oods. This in turn necessitated formulation of certain rules and the procedure f or regulating the application for grant of drawback and the rates at which such drawback could be granted. In subsequent paragraphs we propose to examine the ma tter in some detail. 11.2.1 Drawback allowable on re export of duty paid goods [ Section 74]: Sub section (1) of section 74 provides that,: When goods capable of being easily identified, which have been imported into India and upon which any duty has been paid on importation(i) (ii) are entered for export and the proper officer makes an order permitting clearance and loading of the goods for export ation under section 51; or are to be exported as baggage and the owner of the ba ggage for the purposes of clearing it, makes a declaration of its contents to th e proper officer under section 77 and such officer makes an order permitting cle arance of the goods for exportation, or (iii) are entered for export by post under section 82 and the proper officer mak es an order permitting clearance of the goods for exportation, 98% of such duty, shall except as otherwise provided hereafter, be paid back. The drawback will b e permissible if (a) the goods are identified to the satisfaction of the Assista nt Commissioner of Customs or Deputy Commissioner of Customs as the goods which were imported and (b) the goods are entered for export within two years from the date of payment of duty on the importation thereof. However, in any particular case, the aforesaid period of two years may, on sufficient cause being shown, be entered by the Board by such further period, as it may deem fit. Analysis of Se ction 74(1): The substance of this provision is that (a) The goods should have b een imported into India (b) The duty of customs should be paid thereon (c) The g oods should be capable of being easily identified as the goods, which were origi nally imported. (h) The goods should have been entered for export either on a sh ipping bill through sea or air; or on a bill of export through land; or as bagga ge; or through post and the proper officer after proper examination of the goods and after ensuring that there is no prohibition or restriction on their export should have permitted clearance of the

Duty Drawback goods for export. (i) (j) 11.3 the goods are identified to the satisfaction of the Assistant or Deputy Commissi oner of Customs as the goods, which were imported, and the goods are entered for export within two years from the date of payment of duty on the importation the reof Once these conditions are satisfied, then the export goods are entitled to payme nt of drawback of an amount equal to 98%. The conditions could be amended or mod ified depending upon other factors. 11.2.2 Time limit for section 74 drawback : Under sub clause (b) of section 74(1), it has been provided that such imported g oods should be entered for export within two years from the date of payment of d uty on the importation. It may be noted that the time period is related to the d ate of payment of duty and not date of importation. In any particular case, if s ufficient reason is shown by the importer as to why he was prevented from export ing the goods within the said period of two years, the Central Board of Excise a nd Customs may, in its discretion, extend the period further depending upon the merits of each case. 11.2.3 Identity of the goods: One of the important conditio ns is that the identity of the goods exported should be established as the one w hich has been imported earlier on payment of duty. The authority who has to be s atisfied in this behalf is the Assistant Commissioner of Customs at the port of export. He can be satisfied (a) primarily by physical examination of the goods ( b) and as alternative through the correspondence exchanged between the overseas seller of the goods and the Indian importer. In the course of physical examinati on emphasis will be laid on (i) (ii) description of the goods quantity and weigh t (iii) identifying markings/distinguishing features (iv) original packing of the goods. Where the goods are at the time of import itself, intended to re export l ater, it is desirable to have the above aspects ascertained during the customs e xamination of the imported goods and recorded on the Bill of Entry. A certified copy of the Bill of Entry with the customs examination report showing the above factors is obtained at the port of import and produced to the customs authoritie s at the port of export. The customs authorities would physically examine the go ods with reference to the above recorded examination report recorded at the time of import. If identity is to be established through documents, the relevant mat erials are:

11.4 (i) Customs import documents including indent, acceptance, contract, invoice, packin g specification, payment documents, triplicate copy of Bill of Entry, insurance and or other survey reports; correspondence covering the circumstances necessita ting return of the goods, the importation/test report thereon, the letter to sup plier posing the problem and the subsequent full correspondence; (ii) (iii) the terms and conditions on which the supplier is prepared to take the goo ds back, the financial settlement for the cost of the goods, import duty paid on the goods and all the expenditure incurred by the importer on the goods. (iv) t he clearance of appropriate authorities for the re export and settlement of the financial aspect, whether refund or credit of cost etc. or free replacement etc. 11.3 RATE OF DRAWBACK Under sub clause (2) of section 74, where the imported go ods are used after importation, the amount of drawback will be at the reduced ra tes prescribed by a Notification. The sub clause reads as under: Notwithstanding anything contained in subsection (1), the rate of drawback in the case of goods which have been used after importation thereof, shall be such as the Central Go vernment, having regard to the duration of use, depreciation in value and other relevant circumstances, may, by notification in the Official Gazette fix. 11.3.1 Notification No.19 Cus dt. 6 2 1965: Pursuant to section 74 (2) the Act, this n otification has been issued. It covers the following (a) list of goods which are not entitled to drawback, under this notification (b) the rates of deduction in rates of drawback for goods which have been out of Customs Control; and (c) sep arate rates for motor cars and goods other than excluded when imported by a pers on, for his personal and private use. Under this notification, draw back of impo rt duty will not be allowed in respect of the following goods, if they have been used after their importation in India: (i) (ii) Wearing Apparel; Tea Chests; (iii) Exposed cinematograph films passed by Board of Film Censors in India. (iv) Unexposed photographic films, paper and plates, and X ray films. It would as a corollary follow, that if these goods are not used after their importation into India and subsequently re exported in the condition they were imported, then the y would be entitled

Duty Drawback to 98% drawback. 11.5 11.3.2 Reduction of rebate having regard to duration of use: Under notification issued by Government, the following percentage has been fixed as the amount of d rawback payable in respect of goods which were used after their importation and which have been out of Customs control. Period between the date of clearance for home consumption and the date when the goods are placed under the customs contr ol for export 1. 2. 3. 4. 5. 6. 7. Not more than 6 months More than 6 months but not more than 12 month More than 12 months but not more than 18 months More tha n 18 months but not more than 24 months More than 24 months but not more than 30 months More than 30 months but not more than 36 months More than 36 months Perc entage of duty paid as drawback 85% 70% 60% 50% 40% 30% Nil There is a condition that in cases where the duration is more than 24 months the Commissioner of Customs should have extended the period for re export. 11.3.3 S pecial rate of drawback in respect of motor vehicles: Having regard to the inter national practice, a different percentage of import duty to be paid as drawback has been prescribed in the case of motor vehicles. And goods imported by the per son for his personal and private use. While 98% of the duty paid is refundable i f the car or goods are re exported immediately, the percentage of reduction of t he drawback is related to use of the motor vehicle per quarter as under: (i) (ii ) Use per quarter during the first year During second year 4% 3% 2 % 2% (iii) During third year (iv) During fourth year It has been specifically provided that where such cars are exported after the ex piry of the period of two years, the drawback would be allowed only if the Centr al Board of Excise and Customs, on sufficient cause being shown, extends the per iod for expiry beyond two years. It is further provided that no drawback shall b e allowed if such motor car or goods have been used for more than four years.

11.6 Customs 11.4 DUTY DRAWBACK RULES 11.4.1 Power to make rules : Sub section (3) of section 74 empowers the Central Government to make rules for the purpose of carrying ou t the provision of section 74 and in particular such rules may provide for the f ollowing: (a) Establishing the manner of identification of goods imported in dif ferent consignments which are ordinarily stored together in bulk; (b) specifying the goods which shall be deemed to be not capable of being easily identified an d (c) the manner and the time within which a claim for payment of drawback is to be filed. 11.4.2 Re export of Imported Goods (Drawback of Customs Duties) Rules , 1995: The Re export of Imported Goods (Drawback of Customs Duties) Rules, 1995 promulgated under Notification No.36/95 Cus (NT) dated 26.05.1995, as amended i n exercise of powers of section 74 (3) inter alia provide that (i) in the case o f exports by post, the outer cover should bear in bold letters an inscription Dra wback Export; a declaration/claim in the prescribed form should be submitted alon g with parcel; and the date of receipt of this claim in the customs department f rom the postal authorities, will be deemed to be the date of filing of the drawb ack claim; in other cases the exporter should state on the shipping bill or Bill of Export: (a) description, quantity and other relevant particulars of the good s; (b) the goods were being exported under claim for drawback under section 74 ( c) import duty of customs were paid on import, and enclose documentary proof the reof (d) indicate whether the goods were taken for use after importation or not (e) enclose copies of import, invoice, packing list, export invoice permission o f the Reserve Bank of India etc. 11.4.3 Manner of filing drawback claim: (i) In the cases of exports other than by post, a formal drawback claim, in the prescri bed form, should be filed with the proper officer of customs, within three month s of the date of let export order ( under section 51) and the claim should be ac companied by (a) triplicate copy of the Shipping Bill or Bill of Export in proof of export; (b) Bill of entry or other document in proof of payment of import du ty (c) Export invoice and packing specification (d) Bill of lading or airway bil l as proof of effective export (e) Permission of RBI etc. (ii)

Duty Drawback (f) (ii) (ii) Import invoice and packing specification 11.7 (g) Any other document necessary. The drawback department shall scrutinise these documents and issue a deficiency memo for further details or documents required and the exporter shall furnish them forthwith. The customs department shall pay to the exporters, or an agent specially authorised by the exporter to receive t he drawback amount, the eligible drawback and interest if any. (iv) If there is any erroneous or excess payment of drawback, it shall be demand ed and if the exporters fails to pay the demand, it can be recovered in the mann er prescribed under section 142 (v) The Central Government can relax the provisi ons of these rules, in appropriate cases, on sufficient cause being shown by the exporter in individual cases. 11.5 DRAWBACK ON IMPORTED MATERIALS USED IN THE M ANUFACTURE OF EXPORT GOODS [SECTION 75] The drawback under section 75 is on a to tally different footing. The following important aspects should be remembered in this regard: (i) (ii) The goods exported are totally different from the inputs. The input could be either imported goods on which duty of customs has been paid or indigenous goods on which central excise duty has been paid (iii) The existence of the imported/indigenous excise duty paid goods in the fin al product is not capable of easy verification at the point of export (iv) The g oods, namely the inputs might have undergone changes in physical shape, property etc. (v) The quantity of inputs per piece of final product may not be uniform a nd may not also be capable of verification at the time of exportation. The under lying principle of the drawback under section 75 is that, the Government fixes a rate per unit of final article to be exported out of the country as the amount of drawback payable on such goods. This amount is dependent upon prior verificat ion of the mode of manufacture, the quantum of raw material required, the averag e content of duty paid articles in the final product and lastly the standardisat ion of the final product conforming to these norms. 11.5.1 Statutory Provisions: Sub section 1 of section 75 provides that where it appears to the Central Gover nment that in respect of good of any class or description manufactured, processe d or on which any operation has been carried out in India, being (1) the goods h ave been entered for export and an order permitting the clearance and holding th ereof for exploration has been made under section 51 by the proper officer, or

11.8 Customs (2) the goods have been entered for export by port under section 82 and an order permitting clearance for exportation has been made by the proper officer, a dra wback should be allowed of the duties of customs chargeable under this Act or an y imported materials class or description used in the manufacture or processing of such goods or carrying out any operation on such goods, the Central Governmen t may by notification in the Official Gazette, direct that drawback shall be all owed. Explanation In this case, the rate of duty is not determined by the officer gran ting the drawback. Nor is it related to the actual import duty or excise duty paid on the raw materials or the components used in the manufacture of the final product ex ported. It is, therefore, an average amount determined by the Government having regard to all the circumstances and the facts of the manufacturing industry. As a corollary to this proposition, it would follow that the rate fixed by the Gove rnment would be applicable for a prescribed period only. If there is (a) any var iation in the rate of duty paid on the input whether customs or excise duty; (b) variation in the composition of the final product and (c) change in the process of manufacture, the rate of duty already fixed by the Government would not be a pplicable. It would require to be revised. The fixation of a rate of drawback is , therefore a continuous process and the industry availing of such facility of d rawback is required to furnish continuously its costing and production data to t he organisation entrusted with the responsibility of fixation of rates of drawba ck. 11.5.2 Drawback not to be allowed in certain cases [proviso to section 75 (1 )] : It will be noticed that in the case of drawback under section 74 the amount of drawback was related to the actual duty paid on the goods. It did not have a ny correlation to either the valuation of the goods at the time of exportation o r the prevailing rates of duty on the goods at the time of export. However, in t he case of section 75 drawback, since the identity of the inputs which have suff ered customs or excise duty as the case may be, is extinguished in the final pro duct, there has been a necessity to correlate the grant of drawback with the val ue of the goods exported. It has therefore been prescribed under proviso to sect ion 75(1) of the Customs Act that no drawback of duty shall be allowed under thi s section if: (a) the export value of the finished goods or the class of goods i s less than the value of the imported material used in the manufacture or proces sing of such goods or carrying out any operation on such goods or class of goods ; or (b) the export value is not more than such percentage of the value of the i mported materials used in the manufacture or processing of such goods or carryin g out any operation on such goods or class of goods as may be notified by the Ce ntral Government; or (c) any drawback has been allowed on any goods and the sale proceeds in respect of such goods are not received by or on behalf of the expor ter in India within the time allowed under the Foreign Exchange Management Act ( FEMA). In such a case, the drawback shall be deemed never to have been allowed a nd the Central Government, may, by rules

Duty Drawback 11.9 made under sub section (2) specify the procedure for the recovery or adjustment of the amount of such drawback. Section 75(1A): Where it appears to the Central Government that the quantity of a particular material imported into India is mor e than the total quantity of like material that has been used in the goods manuf actured, processed or on which any operation has been carried out in India and e xported outside India, then the Central Government, may, by notification in the Official Gazette declare that so much of the material as is contained in the goo ds exported shall for the purpose of sub section (1) be deemed to be imported ma terial. 11.5.3 Power of Central Government to frame Rules [Section 75(2)] : Sub section (2) of section 75, empowers the Central Government to make rules, provid ing for, inter alia (a) the payment of drawback equal to the amount of duty actu ally paid on the imported materials used in the manufacture or processing of the goods or carrying out any operation on the goods or as is specified in the Rule s as the average amount of duty paid on the materials of that class or descripti on used in the manufacture or processing of export goods or carrying out any ope ration on export goods of that class or description either by manufacturers gene rally or by persons processing or carrying out any operation generally or by any particular manufacturer or particular person carrying on any process or other o peration, and interest if any payable thereon. (b) Specifying the goods in respe ct of which no drawback shall be allowed and (c) Specifying the procedure for re covery or adjustment of the drawback in case where there is variation in the bas ic material on which the drawback rate or the interest chargeable has been presc ribed (d) Prescribing the details of certificates, documents and other evidence necessary for determining the drawback amount and (e) Requiring the manufacturer or the person carrying on any processor other operation to give access to every part of his manufacturing factory or the place where any manufacture process or other operations are carried out to any officer of customs to enable such offic er to make necessary examination of and study the process of manufacture, and to verify the data furnished about use of duty paid inputs etc.. (f) The manner an d the time within which the claim for payment of drawback may be filed. Sub sect ion (3) extends the rule making power to include the power to make rules to give drawback with retrospective effect from a date not earlier than the date of cha nges in the rates of duty on inputs used in the export of goods. 11.5.4 Rules ma de under section 75 : In exercise of the powers conferred upon it by section 75 (2), the Central Government has made the Customs and Central Excise Duties Drawb ack Rules, 1995. The important provisions of these rules are as follows:

11.10 Customs (1) In regard to the definition of the term manufacture the term has been defined in the rules. Accordingly manufacture includes processing or any oth er operation carried out of goods and the term manufacturer has to be construed accordingly. (2) In terms of the new rules the amount or rate of drawback determ ined by the Central Government under rule 3 or revised under rule 4 can now be a llowed with retrospective effect from a date to be specified by notification. Ho wever this date should not be earlier than the date of changes in the rates of d uty on inputs used in the export product. Thus whereas normal announcement of ra te or amount of drawback under rule 3 or rule 4 shall continue to be made by pub lic notice as hitherto, any retrospective effect to a rate would have to be nece ssarily by a notification. (3) Specific procedure has been provided for claiming drawback on goods exported by post as well as on goods exported other than by p ost (4) Provision has been made for excluding the time taken for testing of samp le. Accordingly time taken in testing of the sample in excess of one month is re quired to be excluded for computing the period of three months specified for fil ing of a claim by the exporter (5) Provisional payment of drawback has been prov ided both under rule 6 and rule 7 The drawback rules are discussed in greater de tail hereunder. DRAWBACK RULES, 1995 Customs and Central Excise [Notification No .37/95 dt. 26.05.1995] Rule 2: Drawback in relation to any goods manufactured in India and exported, means the rebate of duty chargeable on any imported materia ls or excisable materials used in the manufacture of such excisable goods. These are subject to the Customs Act, 1962, the Central Excise Act, 1944 and these ru les. Export with its grammatical variations and cognate expressions means taking out of India to a place outside India or taking out from a place in Domestic Ta riff Area (DTA) to a special economic zone and includes loading of provisions or store or equipment for use on board a vessel or aircraft proceeding to a foreig n port. Rule 3: Drawback may be paid at such rates determined by Government and reduced by any amount of exemption availed. (reduced rate of duty/Cenvat Credit availed). No drawback is allowed in the case of the following: (i) (ii) Packing materials for export of tea, except teachests. Goods manufactured out of duty fr ee materials. (iii) Jute batching oil used in manufacture jute yarn, twine etc.

Duty Drawback 11.11 (iv) Packing material used for jute yarn, fabrics etc. Rule 4: The rates may be revised by the Central Government Rule 5: Determination of t he date of coming into force and the effective date for application of rate. (i) (ii) The Central Government will specify the period of validity for the drawbac k. Retrospective effect from the date of notification. (iii) The rate must be determined under section 16 or under section 83(2). A dra wback schedule will be published by the Government three months after the budget .(1st June). This is called the All Industry Rate. Rule 6: Where no drawback is de termined the manufacturer has to apply for drawback within 60 days or extended p eriod upto further 60/90 days seeking a brand rate from the Government giving al l date and information about use of inputs, manufacture etc. Rule 7: When the dr awback rate is low a special brand rate will be applicable. Where the rate is lo wer than 4/5 of the duty paid, revised rate may be applied for within 60 days/fu rther 30 days. Proper rate will be fixed by the Government brand rate letter wil l be issued accordingly and provisional payment will be allowed subject to adjus tment. Rule 8: No drawback will be determined (i) if it is less than 1% of FOB v alue or Rs.500/ ; or (ii) if the export value is less than the value of imported materials used in such export goods. Rule 8A: The upper limit of drawback money or rate determined under rule 3 should not exceed one third of the market price of the export product. Rule 9: The Government has power to require submission o f information and documents to determine the rate of drawback. Rule 10: Access t o manufactory has to be provided to Assistant Commissioner Customs of Central Ex cise to verify the facts. Rule 11: Procedure for claiming drawback for goods exp orted by post: (a) Outer packing containing the address of the consignee shall c arry the words Draw back Export. (b) Exporter to furnish Annexure I to the postal authorities containing all details. (c) The date of claim of drawback will be t he date of filing of Annexure I to customs by the postal authorities. Rule 12 : Procedure for export other than by post: (1) Declaration is to be given in shipp ing bill stating that drawback is being claimed and all duties have been paid.

11.12 Customs (2) The exporter shall furnish to the proper officer copy of shipp ing invoices and any other document. (3) In respect of brand rates (rules 6 & 7) additional declaration is to be given that: (a) materials or components; and (b ) The materials continue to be imported and not being obtained from indigenous t here has been no change in manufacturing formula or quantum per unit of imported sources. (4) In respect of duties of customs and central excise paid on the con tainers, packing materials and materials used in the manufacture of the export g oods on which drawback is being claimed, no separate claim for rebate of duty un der the Central Excise Rules, 2002 has been or will be made to the Central Excis e authorities. The Commissioner is empowered to exempt any importer or his agent from the provisions of this clause for reasons for to be recorded in the order (2/6/98). Rule 13 : Manner and time of claiming : Triplicate copy of the shippin g bill is the document for the claim. Documents are to be enclosed to applicatio n Form Annexure II which is to be made within 3 months from the date of order of clearance are the following: (a) Copy of export contract or letter of credit (b ) Copy of packing list (c) Copy of AR4 (d) Insurance certificate (e) Copy of dra wback brand rate letter. After giving acknowledgement, a deficiency meno will be issued calling for wanting details within 10 days. Compliance and re submission by the exporter is to be done within the time frame. Rule 14 : Payment of drawb ack and interest : One or more claims can be combined and adjustments of all due s can be made and cheque issued or amount credited to exporter or his Custom Hou se account. Rule 15 : Supplementary claim : Supplementary claims can be made in Form Annexure III within 3 months from (a) Date of publication of such rate in c ase of revised rate granted (b) Date of communication of the said rate in case o f brand rate (rule 6 & 7) (c) Date of payment of original drawback in other case s. The three months period can be extended by further 3 months by Assistant Comm issioner or by a further period of 9 months by the Commissioner.

Duty Drawback 11.13 Rule 16 : Repayment of erroneous or excess payment of drawba ck and interest : Erroneous payments are to be repaid on demand or otherwise rec overed u/s 142 of Customs Act with interest. Rule 16A : If the exporter fails to produce evidence in respect of realisation of export proceeds within the period allowed under the Foreign Exchange Management Act, 1999, or any extension of th e said period by the Reserve Bank of India, the Deputy/Assistant Commissioner of Customs shall issue a notice to the exporter to produce evidence of realisation of export proceeds within 30 days. Recovery of drawback will be effected in cas e of non receipt of payment from the consignee, based on R.E. I or bank certific ate. Rule 17 : Power to relax : Any relaxation in procedure may be made by the G overnment after recording the reasons in writing. 11.6 INTEREST ON DRAWBACK [SEC TION 75A] Section 75 A provides for payment of interest on delayed payment of dr awback. (a) Accordingly, where any drawback payable to a claimant under section 74 or 75 is not paid within a period of one month from the date of filing a clai m for payment of such drawback, there shall be paid to the claimant, in addition to the amount of drawback, interest at the rate fixed under section 27A from th e date after the expiry of the said period of one month till the date of payment of such drawback. (b) Where any drawback has been paid to the claimant erroneou sly, the claimant shall within a period of two months from the date of demand pa y in addition to the said amount of drawback, interest at the rate fixed under s ection 28AA from the date after the expiry of the said period of three months ti ll the date of recovery of such drawback. 11.7 PROHIBITION AND REGULATION OF DRA WBACK [SECTION 76] (a) Notwithstanding anything herein before contained, no draw back shall be allowed (i) (ii) in respect of any goods, the market price of whic h is less than the amount of drawback due thereon, where the amount of drawback in respect of any goods is less than fifty rupees. (b) Without prejudice to the provision of sub section (I) if the Central Govern ment is of the opinion that goods of any specified description in respect of whi ch drawback is claimed under this chapter are likely to be smuggled back into In dia, it may by notification in the Official Gazette, direct that drawback shall no be allowed in respect of such goods or may be allowed subject to such restric tions and conditions as may be specified in the notification. CASE LAW: In order to appreciate the importance of the basic principles underlying the law relatin g to

11.14 Customs grant of drawback, we have discussed below two important cases: 1. ABC India Vs. Union of India : There is distinction between section 74 and 75 o f the Customs Act section 74 of the Customs Act comes into operation when artic les are imported and therupon exported, such articles being easily identifiable; and section 75 comes into operation when imported materials are used in the man ufacture of goods which are exported. Facts: The Government of Andhra Pradesh fl oated an international tender for the transportation of Monolithic Buddha statue . The statue was required to be transported from Raigir, Nalgonda District, wher e the statue was rough dressed and trasported to the foreshore of Hussain Sagar Lake, Hyderabad, where it was to be installed. The transportation of this Monoli thic statue was a highly technical work and a special equipment for transportati on as well as special lifting and erection equipment called Hydra jack was requi red. This Hydra jack was imported from a firm in Holland on hire. The equipment was imported on a customs clearance permit on an undertaking to export the equip ment within a specified period. However, the job of installation of statue in th e rock at the centre of the lake could not be completed as during transportation of the statue from the shore to the central rock, the statue sank in the lake. The Hydra jack was therefore shipped back to the suppliers from whom it was hire d. A claim for drawback under section 74 of Customs Act was made claiming drawba ck of 98% of the total duty paid in respect of the goods. The Assistant Commissi oner, however allowed drawback only at the rate of 85% of the total import duty paid. Issue: The question that needed to be determined is whether the drawback i s to be granted at 98% or 85% as has been allowed by the department. The Delhi H igh Court held that the reduction in the rate of drawback was applicable in case where the goods had been used after importation and this reduction was sanctifi ed in accordance with a notification issued under section 74 prescribing the rat es of drawback admissible in case of goods used in India before their re export . In deciding the matter, the court took a clear view that whether the jack in q uestion was used or not is a question of fact. Since the statue did not reach th e central rock (Gibraltar) where the statue had to be hoisted for installation, it is clear that the Hydra jack could not be used in India. The Court held that in these circumstances, the drawback was admissible under section 74. 2. Commiss ioner of Customs Vs. India Steel Industries : Rule of interpretation in tariff n eed not be extended to interpretation of classification under the Drawback Rules . Facts: In the schedule II to Customs and Central Excise Drawback Rules, two en tries occurred namely: 3606 All type of bright steel bars and shaftings Rs. 395/ PMT

Duty Drawback 11.15 3803 Articles made of stainless steel including stainless st eel castings, not otherwise specified, made of austenitic variety of stainless s teel Rs . 890/ PMT The issue was whether the words all types occurring in the entry against 3606 refe rred to steel bars alone or qualified the next nomenclature shaftings. In the Custom s Tariff, a clear distinction is made between bars and shaftings. The department argued that in the commercial parlance bars were not known to be made up of sta inless steel and shaftings did not come under the same category as bars. It was therefore, argued by the department that shafting would appropriately fall under the description articles made of stainless steel including stainless steel cast ings. Decision: The Government of India held that the words all types did not refe r to dimensional distinction alone but referred to the nature of the material us ed such as mild steel, carbon austenitic steel etc. It was further held that the rules of the interpretation of a tariff would not apply to rules of interpretat ion of the entries to the Schedule II to drawback, but they would have persuasiv e value. It was further held when two different descriptions or words are used, it would be necessary to give them the natural and separate meaning to make them meaningful. Self examination questions 1. 2. 3. 4. 5. What are the basic requir ements for claiming duty drawback? What is the permissible time limit for paying drawback? With reference to section 75 of the Customs Act, 1962, state the case s where drawback on imported materials used in the manufacture of export goods i s not allowed. Discuss the prohibition and regulation of drawback as provided un der section 76 of the Customs Act, 1962. Spatial Wireless Pvt. Ltd. imported fiv e mainframe computer systems from Flextronics Computers, USA on 31.10.2006 payin g customs duty of Rs.30.45 lakhs. The computers worked for some time but in Marc h 2007 some technical faults developed in the systems resulting in complete clos ure of work. On being informed about the problem, Flextronics Computers sent his technicians from USA, to repair the systems in March 2007 itself. However, no s olution was found, as a result of which, in June 2007, the Management of Spatial Wireless Pvt. Ltd decided to re ship/return the goods to Flextronics Computers, USA. You are the Financial Controller of the Spatial Wireless Pvt. Ltd. Board o f Directors have approached you for advising whether import duty paid can be tak en back from the Central Government when goods are sent back. Advise, in the lig ht of the provisions of Customs Act, 1962.

11.16 Customs Answer 5. Yes, the import duty already paid can be claimed back on five mainframe computer systems imported by Spatial Wireless Pvt. Ltd. in accor dance with the provision of section 74 of Customs Act. Under this section, it is provided that when goods capable of being easily identified, which have been im ported into India and upon which duty has been paid on importation are entered f or export and the proper officer makes an order permitting clearance and loading of the goods for exportation, 98% of such duty shall be paid back as drawback. However, the goods should be identified to the satisfaction of Assistant Commiss ioner of Customs as the goods that were imported and the goods should have enter ed for export within two years from the date of payment of duty on the importati on thereof. Further, it is provided in the section that 98% of drawback shall be allowed only in those cases where the goods have not been used at all after the importation. Various percentages have been fixed by the Government as the amoun t of drawback payable in respect of goods that are used after their importation. In the instant case of Spatial Wireless Pvt. Ltd all the conditions specified i n provisions of section 74 are satisfied. The goods are identifiable, import dut y has been paid and they are scheduled to be exported within the prescribed time limit. However, the goods have been used for some time. Here, the period betwee n the date of clearance for home consumption and the date when the goods are pla ced under the customs control for export is more than 6 months but not more than 12 months. Therefore, Spatial Wireless Pvt. Ltd will be eligible for the drawba ck claim at the rate of 70% of the duty (rate notified by the Government in such case).

12 PROVISIONS RELATING TO ILLEGAL IMPORT, CONFISCATION, PENALTY & ALLIED PROVISIONS 12.1 INTRODUCTION Chapters IV, IV A, IV B and IV C of the Customs Act deals with the provisions relating to prohibition on importation and exportation of goods and detection of illegal imports and exports. The relevant sections are sections 11, 11A to 11N. Before we understand these provisions, we should understand the meaning of prohibited goods. 12.2 PROHIBITION The term prohibited goods has been de fined under section 2(33) meaning any goods the import or export of which is subj ect to any prohibition under this Act or any other law for the time being in for ce but does not include any such goods in respect of which the conditions subjec t to which the goods are permitted to be imported or exported have been complied with. This definition can be split into: any goods which is subject to any prohi bition under this Act or any other law for the time being in force but does not include any such goods which complies with the conditions imposed Hence, this definition is of a wider scope which covers goods not only subject t o prohibition under this Act but also under any other law in force. One exceptio n is those goods which complies or fulfills the condition imposed on it. The pro hibition provided under the Customs Act is in four parts: Provisions General pow er to prohibit Special prohibition relating to detection of illegally imported g oods and prevention/disposal thereof 11 11A to 11G Sections IV IV A Chapter

12.2 Customs 11H to 11 M IV B Special prohibition relating to detection of illegally imported goods and preven tion/disposal thereof Power to exempt from the provisions of Chapters IVA and IV B 12.2.1 General power to prohibit 11N IV C Power to prohibit importation and exportation of goods [Section 11]: (1) If the Central Government is satisfied that it is necessary so to do for any of the pur poses specified in sub section (2), it may, by notification in the Official Gaze tte, prohibit either absolutely or subject to such conditions (to be fulfilled b efore or after clearance) as may be specified in the notification, the import or export of goods of any specified description. (2) The purposes referred to in s ub section (1) are the following :(a) the maintenance of the security of India; (b) the maintenance of public order and standards of decency or morality; (c) th e prevention of smuggling; (d) the prevention of shortage of goods of any descri ption; (e) the conservation of foreign exchange and the safeguarding of balance of payments; (f) the prevention of injury to the economy of the country by the u ncontrolled import or export of gold or silver; (g) the prevention of surplus of any agricultural product or the product of fish eries; (h) the maintenance of standards for the classification, grading or marke ting of goods in international trade; (j) the prevention of serious injury to do mestic production of goods of any description; (k) the protection of human, animal or plant life or health; (l) the protection of national treasures of artistic, historic or archaeological value; (m) the conservation of exhaustible natural resources; (n) the protection of pat ents, trade marks and copyrights; (o) the prevention of deceptive practices; (p) the carrying on of foreign trade in any goods by the State, or by a Corporation owned or controlled by the State to the exclusion, complete or partial, of citi zens of India;

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.3 (q) the fulfilment of obligations under the Charter of the United Nations for th e maintenance of international peace and security; (r) the implementation of any treaty, agreement or convention with any country; (s) the compliance of imported goods with any laws which are applicable to simil ar goods produced or manufactured in India; (t) the prevention of dissemination of documents containing any matter which is likely to prejudicially affect frien dly relations with any foreign State or is derogatory to national prestige;

(u) the prevention of the contravention of any law for the time being in force; and (v) any other purpose conducive to the interests of the general public. The Central Government has issued a large number of notifications under section 11, prohibiting, restricting or conditionally permitting import or export of various goods. 12.3 DETECTION OF ILLEGALLY IMPORTED GOODS AND PREVENTION OF THE DISPOSA L THEREOF [CHAPTER IVA] 12.3.1 This chapter was inserted in the Customs Act, in 1969 consequent to large scale smuggling of silver out of the country and variou s consumer articles smuggled into the country. It was felt necessary to make pro visions to deal effectively with such cases. Therefore, the provisions of chapte r IVA cannot be treated as procedural provisions. Section 11A defines certain te rms such as illegal import and intimated place. The term illegal import is defined as he import of any goods in contravention of provisions of this Act or any other l aw for the time being in force. If the Central Government is satisfied that it is expedient in the public interest to take special measures for the purpose of ch ecking the illegal import, circulation or disposal of such goods, or facilitatin g the detection of such goods, it may, by notification in the Official Gazette, specify goods of such class or description. Such notification shall be issued having regard to the magnitude of the illegal import of goods of any class or description [Section 11B]. The foll owing is an illustrative list of goods notified under this section by the Centra l Government. Sl. No. 01 Description of goods Pieces of Copper or mixed metal no t being coin Notification No. 625 Notification dated 01 02 1898

12.4 02 03 04 Customs Fictitious stamps Sec.263 A(4) Explosives Any copy of book entitled Hindu Heaven by Max Wylie as defined in F.D(C.R) No.42 Cus F.D(C.R) No.64 Cus F.D(C. R) No.25 Cus 09 07 1932 17 09 1932 28 04 1934 Provisions of Chapter IV A do not apply to goods such as terylene, terricot or c otton bush shirts, shirts and pants. Secondly, under this chapter, the burden of proving foreign origin of impugned goods is not cast on the person from whom th e goods are seized as these are not covered or notified under section 123. Under notification no. 204/84 Cus dated 20.7.98, VCRs and players were notified for t he purpose of section 123.By notification no. 205/84 Cus dt 20.7.1984, VCRs and VCPs along with video cassette tapes were notified for the purpose of Chapter IV A. It was held that since video cassette tapes were not notified under section 123, the burden of proving that the said cassettes had been illegally imported w as on the Revenue [Hindustan Electronics (Gem House) vs. CC & CE, 1987 (31) ELT 252 (T NRB)]. 12.3.2 Persons possessing notified goods to intimate the place of storage, etc.[Section 11 C]: 1. Intimation of possessing notified goods: Every p erson who owns, possesses or controls, on the notified date, any notified goods, shall, within seven days from that date, deliver to the proper officer a statem ent in relation to the notified goods owned, possessed or controlled by him and the place where such goods are kept or stored. Every person who acquires any not ified goods, after the notified date, before making such acquisition, shall deli ver to the proper officer an intimation containing the particulars of the place where such goods are proposed to be kept or stored after such acquisition and sh all, immediately on such acquisition, deliver to the proper officer a statement in relation to the notified goods acquired by him. 2. Intimation of shifting of any notified goods: If any person intends to shift any notified goods to any place other than the intimated place, he shall, before taking out such goods from the intimated place, deliver to the proper officer a n intimation containing the particulars of the place to which such goods are pro posed to be shifted. No person shall, after the expiry of seven days from the no tified date, keep or store any notified goods at any place other than the intima ted place. 3. Sale or transfer of notified goods: Where any notified goods have been sold or transferred, such goods shall not be taken from one place to anothe r unless they are accompanied by the voucher referred to in section 11F.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.5 No notified goods (other than those which have been sold or transferred) shall b e taken from one place to another unless they are accompanied by a transport vou cher prepared by the persons owning, possessing or controlling such goods. 12.3. 3 Precautions to be taken by persons acquiring notified goods [Section 11D]: As per section 11D, no person shall acquire (except by gift or succession, from any other individual in India), after the notified date, any notified goods unless such goods are accompanied by the voucher referred to in section 11F or the memo randum referred to in sub section (2) of section 11G. Persons possessing notifie d goods have to maintain, as prescribed by rules made, a true and complete accou nt of such goods. [Section 11E]. Sale or transfer of notified goods should be ev idenced by vouchers as per Section 11 F]. Conclusion: The Notified Goods (Preven tion of Illegal Import) Rules, 1969 provide for the particulars to be given in t he statements, transport voucher, account forms, sale memos, etc. These rules al so provide for reasonable steps to be taken by the person acquiring the notified goods. Rule 9 also sets out the particulars of the notified goods which should be incorporated in the records, such as description, quantity, identifying parti culars like make, brand, serial number, country of origin etc. The intention is that, once the identity of the goods are so pin pointed by these records, its or igin and movement can be traced backwards and if it is not possible to correlate the goods to any duty payment document and thereby satisfy oneself that the goo ds have actually paid import duty, a reasonable presumption can be had that the goods have been smuggled into India without payment of duty and in contravention of existing regulations. 12.4 PREVENTION OR DETECTION OF ILLEGAL EXPORT OF GOOD S [CHAPTER IV B] Under normal circumstances, an illegal export is said to be committed only when the goods have been exported out of India. In such a situation, the goods are no t available to the Government to take action against them. For taking action in the case of illegal export, the goods have to be caught when the act of illegal export is being committed. This has to be done only at the borders or the custom ports. As an alternative, it has been provided that the goods which are attempt ed to be illegally exported are also liable to penal action. The problem in such a case is what constitutes an attempt for illegal export. Admittedly conception of a plan to export illegally or making preparations for execution of such a pl an cannot be legally proceeded against. An attempt has been understood in judici al parlance as a series of events which will eventually result in the commission of a particular offence. It has been difficult to determine precisely in any pa rticular situation when an attempt has commenced and what acts constitute such a n offence. Chapter IV B was introduced in the Customs Act to prevent or detect s uch export of goods illegally. Section 11 I defines certain terms relevant for t he purpose of this chapter. Definition of some of the terms are given below: (a) "Illegal export" means the export of any goods in contravention of the provisio ns of

12.6 Customs this Act or any other law for the time being in force; (b) "intimated place" means a place intimated under sub section (1), sub section (2) or sub section (3), as the case may be, of section 11J; (c) "specified area" includes the Indian customs waters, and such inland area, n ot exceeding one hundred kilometres in width from any coast or other border of I ndia, as the Central Government may, having regard to the vulnerability of that area to smuggling, by notification in the Official Gazette, specify in this beha lf. Section 11I empowers the Central Government to specify goods, having regard to the magnitude of the illegal export of goods of any class or description for the purpose of checking the illegal export or facilitating the detection of good s which are likely to be illegally exported. At present silver and acetic anhydr ide have been so notified. The next measure prescribed in this regard is to comp el persons possessing such specified goods, in a specified area to follow the pr ocedure prescribed under section 11J, 11 K, 11 L and 11 M. The restriction impos ed include the following: 1. Section 11J (1) specifies that, every person who ow ns, possesses or controls any specified goods on the specified date, the market price of which exceeds Rs.15,000 shall, within seven days from that date, delive r to the proper officer an intimation containing the particulars of the place wh ere such goods are kept or stored within the specified area. Every person who ac quires (within the specified area), after the specified date, any specified good s, (i) the market price of which, or 2. (ii) the market price of which together with the market price of any specified g oods of the same class or description, if any, owned, possessed or controlled by him on the date of such acquisition, exceeds Rs.15,000 shall, before making suc h acquisition, deliver to the proper officer an intimation containing the partic ulars of the place where such goods are proposed to be kept or stored after such acquisition. 3. 4. Transport of specified goods has to be covered by vouchers, in such form and containing such particulars as may be specified by rules made i n this behalf. Every possessor of specified goods is required to maintain accoun ts in the prescribed form, inter alia, showing details of receipts and disposal.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.5 EXEMPTIONS FROM THE OPERATION OF CHAPTER IV A & IV B 12.7 Section 11N empowers the Central Government to exempt generally, either absolute ly or subject to such conditions as may be specified in the notification, goods of any class or description from all or any of the provisions of Chapter IVA or Chapter IVB. The following are notified goods: 1. 2. Photographic cameras, flash guns and colour films [M.F. (D.R. & I.) Notification No. 74 Cus, dated 7 th Apr il, 1969] Zip fasteners and parts thereof [M.F. (D.R. & I.) Notification No. 74 Cus, dated 7 th April, 1969] 12.6 CONFISCATION OF GOODS AND CONVEYANCES AND IMPOSITION OF PENALTIES [CHAPTER XIV] Confiscation means seizure of private property by the Government without co mpensation to the owner, often as a consequence of conviction for crime, or beca use possession or use of the property was contrary to law. This chapter deals wi th confiscation of goods and conveyances and imposing penalties. The provisions are contained in sections 111 to 127. 12.6.1 Confiscation of improperly imported goods [Section 111]: The following goods brought from a place outside India sha ll be liable to confiscation: (a) any goods imported by sea or air which are unl oaded or attempted to be unloaded at any place other than a customs port or cust oms airport appointed under clause (a) of section 7 for the unloading of such go ods; (b) any goods imported by land or inland water through any route other than a route specified in a notification issued under clause (c) of section 7 for th e import of such goods; (c) any dutiable or prohibited goods brought into any ba y, gulf, creek or tidal river for the purpose of being landed at a place other t han a customs port; (d) any goods which are imported or attempted to be imported or are brought within the Indian customs waters for the purpose of being import ed, contrary to any prohibition imposed by or under this Act or any other law fo r the time being in force; (e) any dutiable or prohibited goods found concealed in any manner in any conveyance; any dutiable or prohibited goods required to be mentioned under the regulations in an import manifest or import report which ar e not so mentioned; (f) any dutiable or prohibited goods which are unloaded from a conveyance in contravention of the provisions of section 32, other than goods inadvertently

12.8 Customs unloaded but included in the record kept under sub section (2) of sectio n 45; (g) any dutiable or prohibited goods unloaded or attempted to be unloaded in con travention of the provisions of section 33 or section 34; (h) any dutiable or pr ohibited goods found concealed in any manner in any package either before or aft er the unloading thereof; (i) any dutiable or prohibited goods removed or attemp ted to be removed from a customs area or a warehouse without the permission of t he proper officer or contrary to the terms of such permission; any dutiable or p rohibited goods imported by land in respect of which the order permitting cleara nce of the goods required to be produced under section 109 is not produced or wh ich do not correspond in any material particular with the specification containe d therein; (j) (k) any dutiable or prohibited goods which are not included or are in excess of those included in the entry made under this Act, or in the case of baggage in th e declaration made under section 77; (l) any goods which do not correspond in re spect of value or in any other particular with the entry made under this Act or in the case of baggage with the declaration made under section 77 (m) in respect thereof, or in the case of goods under transhipment, with the dec laration for transhipment referred to in the proviso to sub section (1) of secti on 54; (n) any dutiable or prohibited goods transitted with or without transhipm ent or attempted to be so transitted in contravention of the provisions of Chapt er VIII; (0) any goods exempted, subject to any condition, from duty or any proh ibition in respect of the import thereof under this Act or any other law for the time being in force, in respect of which the condition is not observed unless t he non observance of the condition was sanctioned by the proper officer; (p) any notified goods in relation to which any provisions of Chapter IVA or of any rul e made under this Act for carrying out the purposes of that Chapter have been co ntravened. Case laws: 1. The word prohibition used in clause (d) not only takes wi thin its fold total prohibition, but also restrictions or controls of all import s and exports [Sheikh Mohd. Omer vs. CC, 1983 ELT 1439 (SC)]. If the goods are i mported from countries other than those permitted in the license, 2.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.9 such import would be without license, conferring jurisdiction on the customs aut horities to confiscate the goods under section 111 (d) [CC & CE vs. Hindustan Mo tors Ltd, 1979 ELT J313 (Cal)]. 3. Prior to 1973, clause (m) provided for confis cation of goods that did not correspond with the bill of entry in any material p articular. By Act 36 of 1973, this was amended to include value and any other part icular. Therefore, prior to amendment, any difference in value between the bill o f entry and value as found by the department cannot be said to be variation in m aterial particular within the meaning of this clause [Rib Tapes (India) Pvt Ltd & Anr vs. UOI, AIR 1985 SC 2014]. In Jacsons Thevara vs. CC & CE 1992 (61) ELT 3 43 (SC), the importer had cleared goods under project imports regulations and co ncessional assessment under heading no. 84.66 of the Customs Tariff. Subsequentl y, these goods were diverted to a new unit and were not used for substantial exp ansion of capacity at the existing unit. Since the post importation conditions o f exemption had not been complied with, the goods were confiscated after due pro cess of law. This was upheld by the Supreme Court rejecting the contention of th e appellant that the provisions of the clause (o) would apply only to exempt goo ds and not to goods which were liable to duty. Confiscation being a proceeding i n rem, is enforceable even against goods whose ownership is disclaimed [Satyanar ayan vs. CCE, 1987 (29) ELT 247 (T A) etc.]. Section 111 does not use the word im ported goods. It refers to goods brought from a place outside India. The definition of import in Section 2(23) may also refer to bringing of goods into India from a place outside India. This definition does not include goods cleared for home con sumption, Whereas, the expression goods brought from a place outside India makes n o such exclusion. It is not permissible to use definitions in the Act as substit utes for phraseology adopted in the provisions. [N. Devidas & Co vs. CC, 1987 (2 9) ELT 247 (T A)]. Burden of proof that the goods are smuggled goods would be on the department. [B.S. Jewellers vs. Addnl CCE & C, 1986 (26) ELT 451 (T NRB)]. In Sigma Electronics vs. CC, 1997 (91) ELT 401 (T), there is an interesting obse rvation that when no bill of entry is filed, the appellant cannot be charged of having misdeclared the material particulars such as value or description under c lause (m). On the other hand, for confiscating the goods under clause (d), no su ch declaration is necessary. If, upon examination, the goods are found to be pro hibited or restricted, the goods can be confiscated. 4. 5. 6. 7. 8.

12.10 Customs 12.6.2 Confiscation of goods attempted to be improperly exported, etc. [Section 113]: The following export goods shall be liable to confiscation: (a) any goods attempted to be exported by sea or air from any place other than a customs port or a customs airport appointed for the loading of such goods; (b) any goods atte mpted to be exported by land or inland water through any route other than a rout e specified in a notification issued under clause (c) of section 7 for the expor t of such goods; (c) any goods brought near the land frontier or the coast of In dia or near any bay, gulf, creek or tidal river for the purpose of being exporte d from a place other than a land customs station or a customs port appointed for the loading of such goods; (d) any goods attempted to be exported or brought wi thin the limits of any customs area for the purpose of being exported, contrary to any prohibition imposed by or under this Act or any other law for the time be ing in force; (e) any goods found concealed in a package which is brought within the limits of a customs area for the purpose of exportation; (f) any goods whic h are loaded or attempted to be loaded in contravention of the provisions of sec tion 33 or section 34; (g) any goods loaded or attempted to be loaded on any con veyance, or water borne, or attempted to be water borne for being loaded on any vessel, the eventual destination of which is a place outside India, without the permission of the proper officer; (h) any goods which are not included or are in excess of those included in the entry made under this Act, or in the case of ba ggage in the declaration made under section 77; (i) any goods entered for export ation which do not correspond in respect of value or in any material particular with the entry made under this Act or in the case of baggage with the declaratio n made under section 77 in respect thereof; (ii) any goods entered for exportati on under claim for drawback which do not correspond in any material particular w ith any information furnished by the exporter or manufacturer under this Act in relation to the fixation of rate of drawback under section 75; (j) any goods on which import duty has not been paid and which are entered for exportation under a claim for drawback under section 74; (k) any goods cleared for exportation whi ch are not loaded for exportation on account of any wilful act, negligence or de fault of the exporter, his agent or employee, or which after having been loaded for exportation are unloaded without the permission of the proper officer; (l) a ny specified goods in relation to which any provisions of Chapter IVB or of any rule made under this Act for carrying out the purposes of that Chapter have been contravened.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.11 12.6.3 Confiscation of conveyance [Section 115]: (1) The following convey ances shall be liable to confiscation: (a) any vessel which is or has been withi n the Indian customs waters, any aircraft which is or has been in India, or any vehicle which is or has been in a customs area, while constructed, adapted, alte red or fitted in any manner for the purpose of concealing goods; (b) any conveya nce from which the whole or any part of the goods is thrown overboard, staved or destroyed so as to prevent seizure by an officer of customs; (c) any conveyance which having been required to stop or land under section 106 fails to do so, ex cept for good and sufficient cause; (d) any conveyance from which any warehoused goods cleared for exportation, or any other goods cleared for exportation under a claim for drawback, are unloaded, without the permission of the proper office r; (e) any conveyance carrying imported goods which has entered India and is aft erwards found with the whole or substantial portion of such goods missing, unles s the master of the vessel or aircraft is able to account for the loss of, or de ficiency in, the goods. (2) Any conveyance or animal used as a means of transpor t in the smuggling of any goods or in the carriage of any smuggled goods shall b e liable to confiscation, unless the owner of the conveyance or animal proves th at it was so used without the knowledge or connivance of the owner himself, his agent, if any, and the person in charge of the conveyance or animal : Where any such conveyance is used for the carriage of goods or passengers for hire, the ow ner of any conveyance shall be given an option to pay in lieu of the confiscatio n of the conveyance a fine not exceeding the market price of the goods which are sought to be smuggled or the smuggled goods, as the case may be. 12.6.4 Confisc ation of packages and their contents [Section 118]: Where any goods imported in a package are liable to confiscation, the package and any other goods imported i n that package shall also be liable to confiscation. Where any goods are brought in a package within the limits of a customs area for the purpose of exportation and are liable to confiscation, the package and any other goods contained there in shall also be liable to confiscation. 12.6.5 Confiscation of goods used for c oncealing smuggled goods [Section 119]: As per this section, any goods used for concealing smuggled goods shall also be liable to confiscation. 12.6.6 Confiscat ion of smuggled goods and their sale proceeds [Section 120 121]: These two provi sions specifically relate to smuggled goods like gold etc. which after smuggling are changed in physical form or characteristics. For example, gold biscuits are made into primary gold or gold ornaments.

12.12 Customs Where any smuggled goods are sold by a person having knowledge or reason to believe that the goods are smuggled goods, the sale proceeds thereof s hall be liable to confiscation. 12.7 PENALTIES ON PERSONS The personal penalty i s a heavy punishment. The entire Customs Act being in the nature of an indirect tax, no person can be penalised unless he is known to have personally committed the offence with full knowledge of the illegality of his action. However, this e lement of mens rea would defeat the very objective of deterrent action against p ersons involved in smuggling. Therefore, the persons involved in smuggling have been categorised into two, namely, 1. 2. those directly involved in doing any ac t or omission which legally constitutes smuggling and others, who wittingly or u nwittingly get themselves involved in the various stages of smuggling. 12.8 PENAL PROVISIONS UNDER THE CUSTOMS ACT The word penalty means punishment unde r the law, i.e., such punishment as is provided in penal laws. It also means the sum payable as a punishment for a default. 12.8.1 Penalties in respect of impro per importation of goods [Section 112]: The person involved in omission or commi ssion under the Customs Act, in relation to any goods which renders such goods l iable to confiscation under section 111, or abets the ame, or acquires possessio n of or is in any way concerned in carrying, removing, depositing, harbouring, k eeping, concealing, selling or purchasing, or in any other manner dealing with a ny goods which he knows or has reason to believe are liable to confiscation unde r section 111, shall be liable to penalties as follows :a. in the case of goods in respect of which any prohibition is in force under the Customs Act or any oth er law for the time being in force, to a penalty not exceeding the value of the goods or five thousand rupees, whichever is the greater; in the case of dutiable goods, other than prohibited goods, the person shall be liable to a penalty not exceeding the duty sought to be evaded on such goods or five thousand rupees, w hichever is the greater; in the case of goods or baggage in respect of which mis declaration of value has been done, to a penalty not exceeding the difference be tween the declared value and the value thereof or five thousand rupees, whicheve r is the greater; in the case of goods falling both under clauses (i) and (iii), to a penalty not exceeding the value of the goods or the difference between the declared value and the value b. c. d.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.13 thereof or five thousand rupees, whichever is the highest; e. in the case of goods falling both under clauses (ii) and (iii), to a penalty not exceeding the duty sought to be evaded on such goods or the difference between the declare d value and the value thereof or five thousand rupees, whichever is the highest. 12.8.2 Penalty for improper importation of goods, etc [Section 112] The various penalties are tabulated below: Sl No. 01 OFFENCE Any person who, in relation to any goods, does or omits to do any act which act or omission would render such g oods liable to confiscation under section 111, or abets the doing or omission of such an act, or who acquires possession of or is in any way concerned in carryi ng, removing, depositing, harbouring, keeping, concealing, selling or purchasing , or in any other manner dealing with any goods which he knows or has reason to believe are liable to confiscation under section 111, shall be liable to penalty , (a) in the case of goods in respect of which any prohibition is in force under this Act or any other law for the time being in force (b) in the case of dutiab le goods, other than prohibited goods the value of the goods or five thousand ru pees, whichever is the greater; the duty sought to be evaded on such goods or fi ve thousand rupees, whichever is the greater; the difference between the declare d value and the value thereof or five thousand rupees, whichever is the greater the value of the goods or the difference between the declared value and the PENA LTY 02 (c) in the case of goods in respect of which the value stated in the entry made under this Act or in the case of baggage, in the declaration made under section 77 (in either case hereafter in this section referred to as the declared value) is higher than the value thereof (d) in the case of goods falling both under cla uses (a) and (c)

12.14 Customs value thereof or five thousand rupees, whichever is the highest (e ) in the case of goods falling both under clauses (b) and (c) the duty sought to be evaded on such goods or the difference between the declared value and the va lue thereof or five thousand rupees, whichever is the highest. 12.8.3 Penalties in respect of improper exportation of goods [Section 114] The p erson involved in commission or omission, in relation to any goods, which render s such goods liable to confiscation under section 113, or abets the same, shall be liable to penalties in different types of cases as follows:1. in the case of goods in respect of which any prohibition is in force under this Act or any othe r law for the time being in force, to a penalty not exceeding three times the va lue of the goods as declared by the exporter or the value as determined under th is Act, whichever is the greater; in the case of dutiable goods, other than proh ibited goods, to a penalty not exceeding the duty sought to be evaded on such go ods or five thousand rupees, whichever is the greater; in the case of any other goods, to a penalty not exceeding the value of the goods as declared by the expo rter or the value as determined under this Act, whichever is the greater. 2. 3. 12.8.4 Mandatory Penalty for short levy or non levy of duty in certain cases [Se ction 114A] : In cases of non levy or short levy of duty or where the interest h as not been charged or paid or has been part paid or the duty or interest has be en erroneously refunded by reason of collusion or any wilful mis statement or su ppression of facts, the person who is liable to pay the duty or interest, as the case may be, as determined under sub section (2) of section 28 shall also be li able to pay a penalty equal to the duty or interest so determined. However, wher e such duty or interest, as the case may be, and the interest payable thereon, i s paid within thirty days from the date of the communication of the order, the a mount of penalty to be paid shall be reduced to 25% of the duty or interest. If the duty or interest determined to be payable is reduced or increased by the Com missioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, t hen, the duty or interest as reduced or increased, as the case may be, shall be taken into account. Also, in a case where the duty or interest determined to be payable is increased

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.15 by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, then, the benefit of reduced penalty shall be available if the a mount of the duty or the interest so increased, along with the interest payable thereon, and 25% of the consequential increase in penalty have also been paid wi thin thirty days of the communication of the order. Where any penalty has been l evied under this section, no penalty shall be levied under section 112 or sectio n 114. 12.8.5 Penalty for not accounting for goods [Section 116]: If any goods l oaded in a conveyance for importation into India, or any goods transshipped unde r the provisions of this Act or coastal goods carried in a conveyance, are not u nloaded at their place of destination in India, or if the quantity unloaded is s hort of the quantity to be unloaded at that destination, and if the failure to u nload or the deficiency is not accounted for to the satisfaction of the Assistan t Commissioner of Customs or Deputy Commissioner of Customs, the person in charg e of the conveyance shall be liable to: (a) in the case of goods loaded in a con veyance for importation into India or goods transshipped under the provisions of this Act, to a penalty not exceeding twice the amount of duty that would have b een chargeable on the goods not unloaded or the deficient goods, as the case may be, had such goods been imported; (b) in the case of coastal goods, to a penalt y not exceeding twice the amount of export duty that would have been chargeable on the goods not unloaded or the deficient goods, as the case may be, had such g oods been exported. 12.8.6 Penalties for contravention, etc., not expressly ment ioned [Section 117] : Any person who contravenes any provision of this Act or ab ets any such contravention or who fails to comply with any provision of this Act with which it was his duty to comply, where no express penalty is elsewhere pro vided for such contravention or failure, shall be liable to a penalty not exceed ing ten thousand rupees. 12.8.7 Adjudication of confiscations and penalties : Th e Customs Act enjoins quasijudicial proceedings to be followed before any penalt ies are imposed and any confiscation action etc. initiated against any offending goods. Apart from issuing proper show cause notice under section 124, the perso ns concerned are also required to be given opportunity of representation in writ ing and personal hearing in the matter. The proper adjudication authority is the n to pass final order taking due note of all evidences brought on record. As per section 122 of the Customs Act, adjudication powers have been given to differen t class of officers as follows:(i) without limit, by a Commissioner of Customs o r a Joint Commissioner of Customs; (ii) where the value of the goods liable to c onfiscation does not exceed two lakhs rupees, by an Assistant Commissioner of Cu stoms or Deputy Commissioner of Customs; (iii) where the value of the goods liab le to confiscation does not exceed ten thousand rupees, by a Gazetted Officer of Customs lower in rank than an Assistant

12.16 Customs Commissioner of Customs or Deputy Commissioner of Customs. General ly, mens rea is not required to be proof for the imposition of penalty under the p rovisions of the Customs Act. The amount of penalty depends on the gravity of th e offence and is to act as the deterrent for future. Whenever the goods are conf iscated by an adjudicating authority, if these are not prohibited goods, an opti on is to be given to the party as per section 125 of the Customs Act, to pay a f ine known as redemption fine of quantum as the adjudicating authority deems fit, i n lieu of the confiscation. Prohibited goods can be confiscated absolutely. 12.9 ADJUDICATION [SECTION 122] In every case under this Chapter in which anything i s liable to confiscation or any person is liable to a penalty, such confiscation or penalty may be adjudged, (a) without limit by a Commissioner of Customs or a Joint Commissioner of Customs; (b) where the value of the goods liable to confi scation does not exceed two lakhs rupees, by an Assistant Commissioner of Custom s or Deputy Commissioner of Customs; (c) where the value of the goods liable to confiscation does not exceed ten thousand rupees, by a Gazetted Officer of Custo ms lower in rank than an Assistant Commissioner of Customs. 12.9.1 Adjournment r estricted to three times [Section 122A] Section 122A provides that Adjudicating Authorities shall give an opportunity of being heard to a party in a proceeding if the party so desires. The Adjudicating Authority may, if sufficient cause is shown, at any stage of proceeding, grant time, from time to time, to the parties and adjourn the hearing for reasons to be recorded in writing. However, such ad journment shall not be granted for more than three times to a party during the p roceeding. 12.9.2 Issue of show cause notice [Section 124]: No order confiscatin g any goods or imposing any penalty on any person shall be made under this Chapt er unless the owner of the goods or such person (a) is given a notice in writing informing him of the grounds on which it is proposed to confiscate the goods or to impose a penalty; (b) is given an opportunity of making a representation in writing within such reasonable time as may be specified in the notice against th e grounds of confiscation or imposition of penalty mentioned therein; and (c) is given a reasonable opportunity of being heard in the matter :

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.17 The notice referred to in clause (a) and the representation referred to i n clause (b) may, at the request of the person concerned be oral. 12.9.3 Burden of proof in certain cases [Section 123] : Where any goods to which this section applies are seized under this Act in the reasonable belief that they are smuggle d goods, the burden of proving that they are not smuggled goods shall be (i) on the person from whose possession the goods were seized; and (ii) if any person, other than the person from whose possession the goods were seized, claims to be the owner thereof, also on such other person; in any other case, on the person, if any, who claims to be the owner. This section shall apply to gold, and manufa ctures thereof, watches, and any other class of goods which the Central Governme nt may by notification in the Official Gazette specify. 12.9.4 On confiscation, property to vest in Central Government [Section 126] : When any goods are confis cated under this Act, such goods shall thereupon vest in the Central Government. The officer adjudging confiscation shall take and hold possession of the confis cated goods. 12.9.5 Option to pay fine in lieu of confiscation [Section 125] : W henever confiscation of any goods is authorised by this Act, the officer adjudgi ng it may, in the case of any goods, the importation or exportation whereof is p rohibited under this Act or under any other law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods or, where such owner is not known, the person from whose possession or custody such goods have been seized, an option to pay in lieu of confiscation such fine as the sai d officer thinks fit. Without prejudice to the provisions of the proviso to sub section (2) of section 115, such fine shall not exceed the market price of the g oods confiscated, less in the case of imported goods the duty chargeable thereon . Where any fine in lieu of confiscation of goods is imposed, the owner of such goods or the person referred to in sub section (1), shall, in addition, be liabl e to any duty and charges payable in respect of such goods. 12.9.6 Award of conf iscation or penalty by customs officers not to interfere with other punishments [Section 127] : The award of any confiscation or penalty under this Act by an of ficer of customs shall not prevent the infliction of any punishment to which the person affected thereby is liable under the provisions of Chapter XVI of this A ct or under any other law. 12.10 SEIZURE AND ARREST 12.10.1 Seizure: An officer of Customs can seize any goods, if he has reason to believe that the same are li able to confiscation, under the Customs Act. The proper officer may also seize a ny document or things that may be relevant to any proceedings under the Custom A ct. However, the person from whom these documents are seized is entitled to

12.18 Customs make copies of the same. The person from whom the goods are seized is issued a show cause notice, usually within six months. However, the Commissi oner of Customs, on sufficient cause being shown, can extend the time period for issue of Show cause notice, by a further six months. In case the seized goods a re perishable or hazardous in nature or is prone to depreciate in value over tim e or for reasons of constraints in space, the government can notify these goods and these goods can be disposed off before the conclusion of the proceedings eg. All electronic goods, currency, liquors, P&P medicine, Gold, Silver etc. [Secti on 110] 12.10.2 Arrest: To tackle the menace of smuggling and other serious econ omic offences including commercial frauds effectively, apart from penal action i n departmental adjudication, the Customs Act, also provides for criminal prosecu tion action. The persons involved can be arrested and prosecuted in a Court of L aw. Prosecution action can also be taken for providing false documents/declarati ons to Customs and for obstructing Customs officers working intentionally. Any p erson guilty of serious offence under Customs Act, which is punishable under sec tion 135 of the said Act, can be arrested by a customs officer authorised in thi s behalf, as provided under section 104 (1) of the Act. Under the law, the perso n being arrested is entitled to be informed about the grounds for such arrest un der the law. The said section also enjoins that provides that every person arres ted under the Act has to be taken without unnecessary delay to the nearest Magis trate. Since the Customs Act doesnt contain any provision regulating the manner i n which a person arrested is to be dealt with by the Magistrate, therefore, the provisions of the Criminal Procedure Code which regulate this aspect would be ap plicable to the person arrested under the provisions of the Customs Act. The pow er to remand to judicial custody vests in the Magistrate by virtue of section 16 5 of the Criminal Procedure Code. Department has issued several instructions to ensure that powers of arrest by Customs officers are exercised with care at seni or level and arrest should be resorted in sufficient grave nature of officers as per laid down guidelines. 12.10.3 Offences & Prosecution: The offences under th e Customs Act can be broadly categorised in two categories non bailable or cogni sable offences & bailable or noncognisable offences. (i) Non bailable or cognisa ble offences The offences punishable with imprisonment for a term of more than 3 years are co vered in this category. As per section 135 (1) of the Customs Act if any person( a) is in relation to any goods, in any way knowingly concerned in mis declaratio n of value in any fraudulent evasion or attempt at evasion of any duty chargeabl e thereon or of any prohibition for the time being imposed under this Act or any other law for the time being in force with respect to such goods, or (b) acquir es possession of or is in any way concerned in carrying, removing, depositing, h arbouring, keeping, concealing, selling or purchasing or in any other manner

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.19 dealing with any goods which he knows or has reason to believe are liable to confiscation under section 111 or section 113 as the case may be, or (c) att empts to export any goods which he knows or has reason to believe are liable to confiscation under section 113; shall be punishable, in the case of an offence r elating to any of the goods to which section 123 applies and the market price wh ereof exceeds one lakh of rupees, with imprisonment for a term which may extend to seven years and with fine. If any person convicted of an offence under sectio n 135(1) or of section 136 (1) (applicable to customs officers) of the Act is ag ain convicted of an offence under the same sections, then, he shall be punishabl e for the second and for every subsequent offence with imprisonment for a term w hich may extend to seven years and with fine. (ii) Bailable or non cognisable of fences The offences punishable with imprisonment for a term of less than 3 years or only fine are covered in this category .The offences under this category are as follows:(a) If a person makes, signs or uses, or causes to be made, signed o r used, any declaration, statement or document in the transaction of any busines s relating to the customs, knowing or having reason to believe that such declara tion, statement or document is false in any material particular, he shall be pun ishable with imprisonment for a term which may extend to six months, or with fin e, or with both (section 132). (b) If any person intentionally obstructs any off icer of customs in the exercise of any powers conferred under this Act, such per son shall be punishable with imprisonment for a term, which may extend to six mo nths, or with fine, or with both (section 133). (c) If any person resists or ref uses to allow a radiologist to screen or to take X ray picture of his body in ac cordance with an order made by a Magistrate under section 103, or resists or ref uses to allow suitable action being taken on the advice and under the supervisio n of a registered medical practitioner for bringing out goods liable to confisca tion secreted inside his body, as provided in section 103, he shall be punishabl e with imprisonment for a term which may extend to six months, or with fine, or with both (section 134). In all offences under the Customs Act other than those mentioned under non bailable or cognisable offences above, the punishment for impr isonment may extend to a term of three years, or with fine, or with both. Howeve r, in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the court, such imprisonment shall not be for less than one year [section 135 (i)]. If a person makes preparation to export any goods in con travention of the provisions of this Act, and from the circumstances of the case it may be reasonably inferred that if not prevented by circumstances independen t of his will, he is determined to carry out his intention to commit the offence , he shall be punishable with imprisonment for

12.20 Customs a term which may extend to three years, or with fine, or with both (section 135A). The officers of Customs also cannot escape serious action inclu ding prosecution action, if they are found abusing their powers or are shown to be colluding/conniving with tax evaders. In the following cases, prosecution pro ceeding against a customs officer may be initiated under section 136 of the Cust oms Act:In cases of connivance in the act or thing whereby any duty of customs l eviable on any goods, or any prohibition for the time being in force under this Act or any other law for the time being in force with respect to any goods is or may be evaded, a customs officer shall be punishable with imprisonment for a te rm which may extend to three years, or with fine, or with both. In cases of vexa tious search, i.e., where any person is searched for goods liable to confiscatio n or any document relating thereto, without having reason to believe that he has such goods or document secreted about his person, a customs officer may be puni shable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both; or If a customs officer arrests any person without having reason to believe that he has been guilty of a n offence punishable under section 135, he may be punishable with imprisonment f or a term which may extend to six months, or with fine which may extend to one t housand rupees, or with both; or If a customs officer searches or authorises any other officer of customs to search any place without having reason to believe t hat any goods, documents or things of the nature referred to in section 105 are secreted in that place, he may be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both. If any officer of customs, except in the discharge in good faith o f his duty as such officer or in compliance with any requisition made under any law for the time being in force, discloses any particulars learnt by him in his official capacity in respect of any goods, he may be punishable with imprisonmen t for a term which may extend to six months, or with fine which may extend to on e thousand rupees, or with both. 12.10.4 Presumption of culpable mental state : As per section 138A of the Customs Act, in prosecution proceedings under the sai d Act for an offence under the said Act, the culpable (guilty conscience or mens rea) on the part of the accused person shall be presumed and it will be for the accused to proof that he had no deliberation with respect of alleged offence. W hen the presumption of culpable mental state is drawn under this provision, that presumption includes intention, motive, knowledge, belief as well as reason to belief. The presumption could be deemed as rebutted only if the proof is beyond reasonable doubt not merely when its existence is established by a preponderance of probability. 12.10.5 Prosecution: No prosecution proceedings can be launched in a Court of Law against any person under Customs Act, and no cognizance of an y offence under sections 132 to 135 of the Customs Act, 1962 can be taken by any Court, except with the previous

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.21 sanction of concerned Commissioner of Customs. Based upon the results of investigations and evidence brought on record, Commissioners of Customs apply th eir mind before sanctioning prosecution after being satisfied that there are su fficient reasons justifying prosecution. Criminal complaint is thereafter filed in appropriate Court of law and followed up with a view to get expeditious order s / conviction. 12.11 OFFENCES AND PROSECUTION SPECIFIC PROVISIONS Adjudicatio n and appellate remedies are measures, which sometimes may not be adequate to co ntain smuggling and evasion of custom duty. As an exemplary measure it becomes n ecessary in certain situations to initiate criminal proceedings and impose stiff er actions against the offenders. Apart from prosecution in a court of law the G overnment had introduced the COFEPOS ACT in 1974 to preventively detain such smu gglers and foreign exchange racketeers. Sections 132 to 140 contain detailed pro visions regarding the offences which are liable to prosecution in a criminal cou rt of law, the cognisance of the offences, the procedure to try these offences a nd the presumption that can be had in such proceedings. These provisions are bri efly discussed below: 12.11.1 False declaration, false documents, etc [Section 1 32]: Whoever makes, signs declaration, statement or document in the transaction of any business relating to the customs, knowing or having reason to believe tha t such declaration, statement or document is false in any material particular, s hall be punishable with imprisonment for a term which may extend to six months, or with fine, or with both. 12.11.2 Obstruction of officer of Customs [Section 1 33] : If any person intentionally obstructs any officer of customs in the exerci se of any powers conferred under this Act, such person shall be punishable with imprisonment for a term, which may extend to six months, or with fine, or with b oth. 12.11.3 Refusal to be X rayed [Section 134]: Similar punishment is provided if any person refuses to be x rayed. 12.11.4 Evasion of duty or prohibitions [S ection 135]: If any person(a) is in relation to any goods, in any way knowingly concerned in mis declaration of value in any fraudulent evasion or attempt at ev asion of any duty chargeable thereon or of any prohibition for the time being im posed under this Act or any other law for the time being in force with respect t o such goods, or (b) acquires possession of or is in any way concerned in carryi ng, removing, depositing, harbouring, keeping, concealing, selling or purchasing or in any other manner dealing with any goods which he knows or has reason to b elieve are liable to confiscation under section 111 or section 113 as the case m ay be, or (c) attempts to export any goods which he knows or has reason to belie ve are liable to confiscation under section 113

12.22 Customs Particulars 01. in the case of an offence relating to any of the g oods to which section 123 applies and the market price whereof exceeds one lakh of rupees In any other case Punishment Imprisonment for a term which may extend to seven years with fine Imprisonment for a term which may extend to three years , or with fine, or with both 02. If any person is convicted for a second time, he shall be punishable for the sec ond and subsequent offence with imprisonment for a term which may extend to seve n years and with fine. The following shall not be considered as special and adeq uate reasons for awarding sentence of imprisonment for less than one year: 1. 2. 3. 4. the accused is convicted for the first time the accused has been ordered to pay a penalty the accused was not the principal offender and was a secondary party to the commission of the offence the age of the accused. 12.11.5 Preparation [Section 135A]: If a person makes preparation to export any goods in contravention of the provisions of this Act, and if not prevented the o ffence would be committed, he shall be punishable with imprisonment for a term w hich may extend to three years, or with fine, or with both. 12.11.6 Offences by officers of customs [Section 136]: There are hardly any decisions under this pro vision. AIR Manual reports only two cases, out of which, one has resulted in acq uittal before Supreme Court. The section provides that if any officer of customs enters into or acquiesces in any agreement to do, abstains from doing, permits, conceals or connives at any act or thing whereby any fraudulent export is effec ted or any duty of customs is evaded, he shall be punishable with imprisonment f or three years, or with fine, or with both. 12.11.7 Offences by companies [Secti on 140]: Every person who at the time the offence was committed was in charge of , and was responsible to, the company for the

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.23 conduct of business of the company, as well as the company, shall be deem ed to be guilty of the offence and shall be liable to be proceeded against and p unished accordingly. Explanation to sub section (2) defines company as a body corp orate and includes a firm or other association of individuals. 12.11.8 Cognizanc e of offences [Section 137]: No court shall take cognisance of: any offence unde r section 132,133,134,135, except with the previous sanction of the Commissioner of Customs. any offence under section 136, where the offence is alleged to have been committed by an officer not lower in rank than Asst Commissioner of Custom s, except with the previous sanction of the Central Government. 12.11.9 Compounding of Offences Sub section (2) of section 137 provides for comp ounding of offences, either before or after the institution of prosecution, by C hief Commissioner of Customs on payment of compounding amount prescribed by the rules. Such amount shall be paid to the Central Government by the person accused of the offence. Section 156 empowers Central Government to make rules for speci fying the amount to be paid for compounding of offences under section 137. 12.11 .10 Presumption of culpable mental state [Section 138A]: In any prosecution for an offence under this Act, which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state. Culpab le mental state includes intention, knowledge of a fact and belief in, or reason to believe, a fact. 12.11.11 Admissibility of micro films, etc as evidence [Sec tion 138C]: The following are deemed to be also a document for the purposes of t his Act and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof or production of the original: 1. 2. 3. a mic ro film of a document or the reproduction of the image; or a facsimile copy of a document; or computer printout. 12.11.12 Presumption as to documents in certain case [Section 139]: Where any do cument is produced by any person or has been seized from the custody, under this Act or any other law

12.24 Customs has been received from any place outside India in the course of in vestigation of any offence under this Act, the same shall be presumed, unless the contrary is proved, to be admissible. 12. 11.13 Offences to be tried summarily [Section 138]: Notwithstanding anything con tained in the Code of Criminal Procedure, 1898, an offence under this Chapter (i e., Chapter XVI) may be tried summarily by a Magistrate. However, the exceptions are: 1. 2. Offence under clause (i) of sub section (1) of section 135 Offence u nder sub section (2) of section 135. Customs Act is a special enactment. This section provides for summary trial of a ll offences under the Act. Therefore, the provisions of section 262 of Cr.P.C., which allows trial as warrant case of all offences punishable with imprisonment more than 2 years is inapplicable to the offences under this Act. [Ruli Ram and Ors vs. ACCE, 1987 (30) ELT 657 (HP)]. Self examination questions 1. 2. 3. Discu ss briefly the provisions in respect of mandatory penalty for short levy or nonl evy of duty in certain cases. Explain the provisions in respect of confiscation of a conveyance under section 115 of the Customs Act, 1962. M/s. Shree Ram Trade rs had imported certain goods and got them cleared for home consumption. Later, the Department found that the goods had been imported in contravention of Import Control Act and Import Control Order. Consequently, the goods were confiscated under section 111(d) of the Customs Act and a penalty under section 112 of the A ct was levied. You are required to examine the case and offer your views. 4. Pra njal had imported certain goods. Due to some technical problems he had to pay th e redemption fine. Later on, he decides to abandon the goods. So, he claims the refund of redemption fine being paid by him. Is his claim tenable in law? Discus s. Two trucks are intercepted by the Customs Department. The officers of the Cus toms Department conduct search of the vehicle in the presence of witnesses and i t is found that one of the trucks has a secret compartment and 175 Kgs. of heroi ne and 39 Kgs. of opium of foreign origin are concealed in that chamber. During the course 5.

Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.25 of investigation, the statement of P, the registered owner of the vehicle, is taken under section 108 of the Customs Act and 15 witnesses are examined. How ever, P completely denies his culpability in the crime. He contends that though th e vehicle is registered in his name but he has sold the truck much before the co ntraband goods are recovered therefrom. You are required to examine the situatio n with the help of case law, if any. Answers 3. The facts of the case are simila r to the case of Bussa Overseas & Properties P. Ltd. v C.L. Mahar, Asstt. C.C., Bombay 2004 (163) E.L.T. 304 (Bom.) wherein the Bombay High Court observed that once goods are cleared for home consumption they cease to be imported goods as d efined in section 2(25) of the Customs Act and as per section 111(d) only importe d goods could be confiscated. Hence, power to confiscate the goods, after their c learance for home consumption, could be exercised only in cases where the order of clearance is revised and cancelled. Therefore, in the given case the confisca tion of the goods by the Department is illegal. Section 112 (a) provides that an y person who in relation to any goods, does or omits to do any act which act or omission would render such goods liable to confiscation under section 111, or ab ets the doing or omission of such act, is liable to a penalty. The High Court he ld that the power to impose penalty could be exercised not only when the goods a re available for confiscation but when such goods are liable to confiscation. Th e Court held that the expression liable to confiscation clearly indicates that the power to impose penalty can be exercised even if the goods are not available fo r confiscation. The mere fact that the importers secured such clearance and disp osed of the goods and thereafter goods are not available for confiscation cannot divest Customs Authorities of the powers to levy penalty under section 112 of t he Act. Following the judgment of the High Court, penalty levied by the Departme nt in the given case is correct in law. 4. The facts of the case are similar to that of Purfina Chemicals Pvt. Ltd. v. CEGAT Madras 2004 (167) E.L.T. 145 (Mad.) . The High Court, in this case, asserted that provisions of section 125 of the C ustoms Act give an option to the importer to either allow the goods to be confis cated or pay redemption fine in lieu of confiscation. Therefore, the redemption fine becomes leviable only in lieu of confiscation. The High Court observed that in this case the importer had abandoned the goods and

12.26 Customs thus, there remained no scope for confiscation of the same. Theref ore, it was held by the High Court that the fine should be refunded. Applying th e ratio of this decision in the given case, it can be said that Pranjal can clai m the refund of the redemption fine. 5. The facts of the case are similar to the facts of the case of Balwinder Singh v. Asstt. Commissioner, Customs & Central Excise 2005 (181) E.L.T. 203 (S.C.). In this case, the Supreme Court stated that the registered owner of the vehicle was convicted solely for the reason that he was the registered owner of the vehicle. There was no evidence to prove that he knowingly allowed any person to use the vehicle for any illegal purpose. There was also no evidence to prove the conspiracy set up by the prosecution. The Apex Court held that that though the articles were recovered from the truck, there w as no evidence to show that the appellant had any control over the vehicle nor w as he in possession of those drugs. Therefore, the registered owner of the vehic le was acquitted of all charges framed against him. In the given case also, ther e is no evidence against P, the registered owner of the vehicle, and thus he shall not be prosecuted.

13 SETTLEMENT COMMISSION 13.1 INTRODUCTION Chapter XIV A deals with the provisions relating to Settlement of cases. This Chapter was inserted to evolve a mechanism for speedy settlement of cases involving high revenue stakes. This is an alternative channel for reso lution of dispute for assessees without going into the prolonged litigation in a djudication/appeals/revisions etc. The Settlement Commission has been created by constituting Customs & Central Excise Settlement Commission. (Provisions of sec tion 127A to 127N of the Customs Act). Presently, three Benches in the Settlemen t Commission have been constituted and they are functioning at Delhi, Mumbai and Chennai . The fourth bench at Kolkata will be constituted in due course. 13.2 D EFINITIONS [SECTION 127A] In this Chapter, unless the context otherwise requires , (a) "Bench" means a Bench of the Settlement Commission; (b) "case" means any p roceeding under this Act or any other Act for the levy, assessment and collectio n of customs duty, or any proceeding by way of appeal or revision in connection with such levy, assessment or collection, which may be pending before a proper o fficer or the Central Government on the date on which an application under sub s ection (1) of section 127B is made. However, where any appeal or application for revision has been preferred after the expiry of the period specified for the fi ling of such appeal or application for revision under this Act and which has not been admitted, such appeal or revision shall not be deemed to be a proceeding p ending within the meaning of this clause. (c) "Chairman" means the Chairman of t he Settlement Commission. (d) "Commissioner (Investigation)" means an officer of the customs or a Central Excise Officer appointed as such Commissioner to condu ct inquiry or investigation for the purposes of this Chapter.

13.2 Customs (e) "Member" means a Member of the Settlement Commission and includes the Chairm an and the Vice Chairman. (f) "Settlement Commission" means the Customs and Cent ral Excise Settlement Commission constituted under section 32 of the Central Exc ise Act, 1944. 13.3 APPLICATION FOR SETTLEMENT OF CASES [SECTION 127B] 13.3.1 Statutory Provisi ons: This section states that any importer, exporter or any other person may mak e a case for settlement, at any stage of a case relating to him. An importer is de fined in section 2(26) as in relation to any goods at any time between their imp ortation and the time when they are cleared for home consumption includes any ow ner or any person holding himself out to be the importer. An "exporter" is defin ed in section 2(20) as, in relation to any goods at any time between their entry for export and the time when they are exported, includes any owner or any perso n holding himself out to be the exporter. Further, the section states that the a pplication shall be made in such form and in such manner as may be specified. Fo rm SC(C) 1 is prescribed for making such an application along with the fee of on e thousand rupees. [Rule 3 of Customs (Settlement of Cases),1999] The applicatio n shall contain a full and true disclosure of: his duty liability which has not been disclosed before the proper officer, the manner in which such liability has been incurred, the additional amount of customs duty accepted to be payable by him and such other particulars as may be specified by rules including the partic ulars of such dutiable goods in respect of which he admits short levy on account of misclassification or otherwise of goods, to the Settlement Commission to hav e the case settled and such application shall be disposed of in the manner provi ded in the rules. 13.3.2 Conditions : Two conditions are to be fulfilled for filing an application for settlement of a case. The application shall not be made unless (a) the appl icant has filed a bill of entry, or a shipping bill, in respect of import or exp ort of goods, as the case may be, and in relation to such bill of entry or shipp ing bill, a show cause notice has been issued to him by the proper officer; (b) the additional amount of duty accepted by the applicant in his application excee ds two lakh rupees. [Proviso to sub section (1) of Section 127B] 13.3.3 Exceptio ns: 1. No application shall be entertained by the Settlement Commission under su b section (1) of section 127B, in cases which are pending in the Appellate Tribu nal or any Court. 2. No application under this sub section shall be made

13.3 in relation to ch any offence 1 of 1985) has he goods under goods to which section 123 applies or to goods in relation to whi under the Narcotic Drugs and Psychotropic Substances Act, 1985 (6 been committed: for the interpretation of the classification of t the Customs Tariff Act, 1975 (51 of 1975).

13.3.4 Time limit for filing a case in case of seizure u/s 110: Where any dutiable goods, books of account, other documents or any sale proceeds of the goods have been seized under section 110, the applicant shall not be entitled to make an a pplication under sub section (1) before the expiry of one hundred and eighty day s from the date of the seizure. [Sub section (3) of section 127B] 13.3.5 Withdra wal of an application: An application made under sub section (1) shall not be al lowed to be withdrawn by the applicant. [Sub section (4) of section 127B] 13.4 P ROCEDURE ON RECEIPT OF APPLICATION [SECTION 127C] 13.4.1 Report from the Commiss ioner of Customs: On receipt of an application under section 127B, the Settlemen t Commission shall call for a report from the Commissioner of Customs having jur isdiction and on the basis of the materials contained in such report and having regard to the nature and circumstances of the case or the complexity of the inve stigation involved therein, the Settlement Commission may, by order, allow the a pplication to be proceeded with or reject the application [Sub section (1)]. An application shall not be rejected under this sub section, unless an opportunity has been given to the applicant of being heard. 13.4.2 Furnishing of report by t he Commissioner: The Commissioner of Customs shall furnish such report within a period of one month of the receipt of the communication from the Settlement Comm ission, failing which it shall be presumed that the Commissioner of Customs has no objection to such application; but he may raise objections at the time of hea ring fixed by the Settlement Commission for admission of the application and the date of such hearing shall be communicated by the Settlement Commission to the applicant and the Commissioner of Customs within a period not exceeding two mont hs from the date of receipt of such application, unless the presiding officer of the Bench extends the said period of two months, after recording the reasons in writing. 13.4.3 A copy of every order under sub section (1) shall be sent to th e applicant and to the Commissioner of Customs having jurisdiction. [Sub section (2)] 13.4.4 Payment of additional amount of duty : Subject to the provisions of sub section (4), the applicant shall, within thirty days of the receipt of a co py of the order under sub section (1) allowing the application to be proceeded w ith, pay the amount of additional duty admitted by him as payable and shall furn ish proof of such payment to the Settlement Commission. [Subsection (3)] If the Settlement Commission is satisfied, on an application made under sub section (1) that the applicant is unable for good and sufficient reasons to pay the amount referred to in sub

Settlement Commission

13.4 Customs section (3), within the time specified in that sub section, it may extend the ti me for payment of the amount which remains unpaid or allow payment thereof by in stalments, if the applicant furnishes adequate security for the payment thereof. [Sub section (4)] 13.4.5 Interest on unpaid amount of duty: Where the additiona l amount of customs duty referred to in sub section (3) is not paid by the appli cant within the time specified or extended period, as the case may be, the Settl ement Commission may direct that the amount which remains unpaid, together with simple interest at the rate of eighteen per cent p.a. or at the rate notified by the Board from time to time on the amount remaining unpaid, be recovered as the sum due to the Central Government by the proper officer having jurisdiction ove r the applicant in accordance with the provisions of section 142. [Sub section ( 5)] 13.4.6 Further enquiry or investigation: Where an application is allowed to be proceeded with under sub section (1), the Settlement Commission may call for the relevant records from the Commissioner of Customs having jurisdiction and af ter examination of such records, if the Settlement Commission is of the opinion that any further enquiry or investigation in the matter is necessary, it may dir ect the Commissioner (Investigation) to make or cause to be made such further en quiry or investigation and furnish a report on the matters covered by the applic ation and any other matter relating to the case. [Sub section (6)] 13.4.7 Passin g of the Order : After examination of the records and the report of the Commissi oner of Customs received under sub section (1), and the report, if any, of the C ommissioner (Investigation) of the Settlement Commission under sub section (6), and after giving an opportunity to the applicant and to the Commissioner of Cust oms having jurisdiction to be heard, either in person or through a representativ e duly authorised in this behalf, and after examining such further evidence as m ay be placed before it or obtained by it, the Settlement Commission may, in acco rdance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner o f Customs or the Commissioner (Investigation) under sub section (1) or sub secti on (6). 13.4.8 Subject to the provisions of section 32A of the Central Excise Ac t,1944 (1 of 1944), the materials brought on record before the Settlement Commis sion shall be considered by the Members of the concerned Bench before passing an y order under sub section (7) and, in relation to the passing of such order the provisions of section 32D of the Central Excise Act, 1944 (1 of 1944) shall appl y. [Sub section (8)] 13.4.9 Every order to provide for the terms of settlement: Every order passed under sub section (7) shall provide for the terms of settleme nt including any demand by way of duty, penalty or interest, the manner in which any sum due under the settlement shall be paid and all other matters to make th e settlement effective and shall also provide that the settlement shall be void if it is subsequently found by the Settlement Commission that it has been obtain ed by fraud, or misrepresentation of facts. [Sub section (9)] 13.4.10 Interest o n non payment of duty payable in pursuance of an order: Where any duty payable i n pursuance of an order under sub section (7) is not paid by the applicant withi n thirty days of the receipt of a copy of the order by him, then, whether or not the Settlement Commission has extended the time for payment of such duty or has allowed payment thereof

Settlement Commission 13.5 by instalments, the applicant shall be liable to pay simple interest at the rate of eighteen per cent p.a. or at such other rate as notified by the Board on the amount remaining unpaid from the date of expiry of the period of thirty days af oresaid. 13.4.11 Where a settlement becomes void as provided under sub section ( 9) the proceedings with respect to the matters covered by the settlement shall b e deemed to have been revived from the stage at which the application was allowe d to be proceeded with by the Settlement Commission and proper officer may, notw ithstanding anything contained in any other provision of this Act, complete such proceedings at any time before the expiry of two years from the date of the rec eipt of communication that the settlement became void. [Sub section (11)] 13.5 P OWERS OF SETTLEMENT COMMISSION 13.5.1 Power to order provisional attachment to p rotect revenue [Section 127D]: The Settlement Commission may, by order, attach p rovisionally any property belonging to the applicant in such manner as may be sp ecified by rules. Such attachment can be made during the pendency of any proceed ing before it, and for protecting the interests of the revenue. Every provisiona l attachment made by the Settlement Commission under sub section (1) shall cease to have effect from the date the sums due to the Central Government for which s uch attachment is made are discharged by the applicant and evidence to that effe ct is submitted to the Settlement Commission. 13.5.2 Power to reopen completed p roceedings [Section 127E]: If the Settlement Commission is of the opinion (the r easons for such opinion to be recorded by it in writing) that, for the proper di sposal of the case pending before it, it is necessary or expedient to reopen any proceeding connected with the case but which has been completed under this Act before application for settlement under section 127B was made, it may, with the concurrence of the applicant, reopen such proceeding and pass such order thereon as it thinks fit, as if the case in relation to which the application for settl ement had been made by the applicant under that section covered such proceeding also. However, that no proceeding shall be reopened by the Settlement Commission under this section after the expiry of five years from the date of application under sub section (1) of section 127B. 13.5.3 Power to grant immunity form prose cution and penalty [Section 127H]: The Settlement Commission may, if it is satis fied that any person who made the application for settlement under section 127B has co operated with the Settlement Commission in the proceedings before it and has made a full and true disclosure of his duty liability, grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecu tion for any offence under this Act or under the Indian Penal Code (45 of 1860) or under any other Central Act for the time being in force and also either wholl y or in part from the imposition of any penalty, fine and interest under this Ac t, with respect to the case covered by the settlement. No such immunity shall be granted by the Settlement Commission in cases where the proceedings for the pro secution for any such offence have been instituted before the date of

13.6 Customs receipt of the application under section 127B. An immunity granted to a person u nder sub section (1) shall stand withdrawn if such person fails to pay any sum s pecified in the order of the settlement passed under sub section (7) of section 127C within the time specified in such order or within such further time as may be allowed by the Settlement Commission, or fails to comply with any other condi tion subject to which the immunity was granted and thereupon the provisions of t his Act shall apply as if such immunity had not been granted. An immunity grante d to a person under sub section (1) may, at any time, be withdrawn by the Settle ment Commission, if it is satisfied that such person had, in the course of the s ettlement proceedings, concealed any particulars, material to the settlement or had given false evidence, and thereupon such person may be tried for the offence with respect to which the immunity was granted or for any other offence of whic h he appears to have been guilty in connection with the settlement and shall als o become liable to the imposition of any penalty under this Act to which such pe rson would have been liable, had no such immunity been granted. 13.5.4 Power to send a case back to the proper officer [Section 127 I]: The Settlement Commissio n may, if it is of opinion that any person who made an application for settlemen t under section 127B has not cooperated with the Settlement Commission in the pr oceedings before it, send the case back to the proper officer who shall thereupo n dispose of the case in accordance with the provisions of this Act as if no app lication under section 127B had been made [Sub section (1)]. For the purpose of sub section (1), the proper officer shall be entitled to use all the materials a nd other information produced by the assessee before the Settlement Commission o r the results of the inquiry held or evidence recorded by the Settlement Commiss ion in the course of the proceedings before it as if such materials, information , inquiry and evidence had been produced before such proper officer or held or r ecorded by him in the course of the proceedings before him. For the purposes of the time limit under section 28 and for the purposes of interest under section 2 8AA, in a case referred to in sub section (1), the period commencing on and from the date of the application to the Settlement Commission under section 127B and ending with the date of receipt by the officer of customs of the order of the S ettlement Commission sending the case back to the officer of customs shall be ex cluded. 13.5.5 Other powers and procedure of Settlement Commission [Section 127F ]: In addition to the powers conferred on the Settlement Commission under Chapte r V of the Central Excise Act, 1944 (1 of 1944), it shall have all the powers wh ich are vested in an officer of the customs under this Act or the rules made the reunder. Where an application made under section 127B has been allowed to be pro ceeded with under section 127C, the Settlement Commission shall, until an order is passed under sub section (7) of section 127C, have exclusive jurisdiction to exercise the powers and perform the functions of any officer of customs or Centr al Excise Officer as the case may be, under this Act or in the Central Excise Ac t, 1944 (1 of 1944), in relation to the case.

Settlement Commission 13.7 In the absence of any express direction by the Settlement Commission to the cont rary, nothing in this Chapter shall affect the operation of the provisions of th is Act in so far as they relate to any matter other than those before the Settle ment Commission. The Settlement Commission shall have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers, or of the discharge of its functions, including the pla ces at which the Benches shall hold their sittings, subject to the provisions of Chapter V of the Central Excise Act, 1944 (1 of 1944) and this Chapter. 13.6 IN SPECTION, ETC., OF REPORTS [SECTION 127G] No person shall be entitled to inspect , or obtain copies of, any report made by any officer of the Customs to the Sett lement Commission; but the Settlement Commission may, in its discretion, furnish copies thereof to any such person on an application made to it in this behalf a nd on payment of such fee as may be specified by rules. Provided that, for the p urpose of enabling any person whose case is under consideration to rebut any evi dence brought on record against him in any such report, the Settlement Commissio n shall, on an application made in this behalf, and on payment by such person of such fee as may be specified by rules, furnish him with a certified copy of any such report or part thereof relevant for the purpose. 13.7 ORDER OF SETTLEMENT TO BE CONCLUSIVE [SECTION 127J] Every order of settlement passed under sub secti on (7) of section 127C shall be conclusive as to the matters stated therein and no matter covered by such order shall, save as otherwise provided in this Chapte r, be reopened in any proceeding under this Act or under any other law for the t ime being in force. 13.8 RECOVERY OF SUMS DUE UNDER ORDER OF SETTLEMENT [SECTION 127K] Any sum specified in an order of settlement passed under sub section (7) of section 127C may, subject to such conditions, if any, as may be specified the rein, be recovered, and any penalty for default in making payment of such sum ma y be imposed and recovered as sums due to the Central Government in accordance w ith the provisions of section 142, by the proper officer having jurisdiction ove r the applicant. 13.9 BAR ON SUBSEQUENT APPLICATION FOR SETTLEMENT IN CERTAIN CA SES [SECTION 127L] In the following circumstances, a person shall not be entitle d to apply for settlement under section 127B in relation to any other matter: 1. Where an order of settlement passed under sub section (7) of section 127C provi des for the imposition of a penalty on the applicant under section 127B for sett lement, on the ground of concealment of particulars of his duty liability; or

13.8 2. Customs where after the passing of an order of settlement under said sub section (7) in relation to a case, such person is convicted of any offence under this A ct in relation to that case; or where the case of such person is sent back to th e proper officer by the Settlement Commission under section 127 I. COMMISSION TO BE JUDICIAL 3. 13.10 PROCEEDINGS BEFORE SETTLEMENT PROCEEDINGS [SECTION 127M] Any proceedings under this Chapter before the Settlement Commission shall be dee med to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196, of the Indian Penal Code (45 of 1860). 13.11 CE RTAIN PERSONS WHO HAVE FILED APPEALS TO THE APPELLATE TRIBUNAL ENTITLED TO MAKE APPLICATIONS TO THE SETTLEMENT COMMISSION [SECTION 127MA] The section provides f or withdrawal of appeal from the Tribunal and opting for settlement of the case. It also provides for consequential matters. Notwithstanding anything contained in this Chapter, any person who has filed an appeal to the Appellate Tribunal un der this Act, on or before the 29th day of February, 2000 and which is pending, shall, on withdrawal of such appeal from the Appellate Tribunal, be entitled to make an application to the Settlement Commission to have his case settled under this Chapter. However, that no such person shall be entitled to make an applicat ion under this section in a case where the Commissioner of Customs or any office r on his behalf has, on or before the date on which the Finance Act, 2000 receiv es the assent of the President, applied to the Appellate Tribunal for the determ ination of such points arising out of the decision or order specified by the Boa rd in its order under sub section (1) of section 129D or filed an appeal under s ub section (2) of section 129A, as the case may be. [Sub section (1)] Any person referred to in sub section (1) may make an application to the Appellate Tribuna l for permission to withdraw the appeal. [Sub section (2)] On receipt of an appl ication under sub section (2), the Appellate Tribunal shall grant permission to withdraw the appeal. [Sub section (3)] Upon withdrawal of the appeal, the procee dings in appeal immediately before such withdrawal shall, for the purposes of th is Chapter, be deemed to be a proceeding pending before a proper officer. [Sub s ection (4)] An application to the Settlement Commission under this section shall be made within a period of thirty days from the date on which the order of the Appellate Tribunal permitting the withdrawal of the appeal is communicated to th e person. [Sub section (5)] An application made to the Settlement Commission und er this section shall be deemed to be an application made under sub section (1) of section 127B and the provisions of this Chapter,

Settlement Commission 13.9 except sub section (11) of section 127C and 127 I(1), shall apply accordingly [S ub section 6] Where an application made to the Settlement Commission under this section is not entertained by the Settlement Commission, then, the appeal shall be deemed to have been revived before the Appellate tribunal and the provisions contained in section 129A, section 129B and section 129C shall, so far as may be , apply accordingly.[Sub section 7] The Settlement Commission may, if it is of o pinion that any person who made an application under sub section (5) has not co operated with the proceedings before it, send the case back to the Appellate Tri bunal and the provisions containing in section 129A, section 129B and section 12 9C shall, so far as may be, apply accordingly.[Sub section 8] 13.12 APPLICATIONS OF CERTAIN PROVISIONS OF CENTRAL EXCISE ACT [SECTION 127N] The provisions of Ch apter V of the Central Excise Act, 1944 (1 of 1944) in so far as it is not incon sistent with the provisions of this Chapter shall apply in relation to proceedin gs before the Settlement Commission under this Chapter. 13.13 CUSTOMS (SETTLEMEN T OF CASES) RULES, 1999 In exercise of the powers conferred by Section 156 of th e Customs Act, the Central Government has notified Customs (Settlement of Cases) Rules, 1999 vide Notification No.59/99 Cus. (N.T) dated 22 10 99, and Notificat ion No.20/00 Cus. (N.T) dated 8 3 2000. The rule is reproduced below: CUSTOMS (S ETTLEMENT OF CASES) RULES, 1999 In exercise of the powers conferred by section 1 56 of the Customs Act, 1962 (52 of 1962), the Central Government hereby makes th e following rules, namely: 1. Short title and commencement. (1) These rules ma y be called the Customs (Settlement of Cases) Rules,1999. (2) They shall come in to force on the date of their publication in the Official Gazette. 2. Definition s. In these rules, unless the context otherwise requires, (a) "Act" means the Customs Act, 1962 (52 of 1962). (b) "Form" SC(C) 1 means the form appended to th ese rules. (c) "Settlement Commission" means the Customs and Central Excise Sett lement Commission constituted under section 32 of the Central Excise Act, 1944(1 of 1944). (d) "Officer of Customs" means an officer of Customs as referred to i n section 3 of the Act. 3. Form and manner of application. (1) An application under sub section (1) of section 127B of the Act shall be made in Form SC(C) 1.S ee Customs Series Form No. 121 in Part 5 of this Manual.

13.10 Customs (2) The application referred to in sub rule (1), the verification contained therein and all relevant documents accompanying such application shall be signed,(a) in case of an applicant, by the applicant himself or where the ap plicant is absent from India, then, either by the applicant himself or by any ot her person duly authorised by him in this behalf and where the applicant is a mi nor or is mentally incapacitated from attending to his affairs, by his guardian or by any other person competent to act on his behalf; (b) in the case of a Hind u undivided family, by Karta of such family and, where the Karta is absent from India or is mentally incapacitated from attending to his affairs, by any other a dult member of such family, (c) in the case of a company or local authority, by the principal officer thereof, (d) in the case of a firm, by any partner thereof , not being a minor, (e) in the case of any other association, by any member of the association or the principal officer thereof, and (f) in the case of any oth er person, by that person or some person competent to act on his behalf. (3) Every application in Form SC(C) 1 shall be filed in quintuplicate and shall be accompanied by a fee of one thousand rupees. 4. Disclosure of information in the application for settlement of cases. (1) The Settlement Commission may, whil e calling for a report from the Commissioner of Customs under sub section (1) of section 127C of the Act, forward a copy of the application referred to in sub r ule (1) of rule 3 (other than the annexure and the statements and other document s accompanying such annexure). (2) Where an order under sub section (1) of secti on 127C of the Act, has been made to proceed with the application by the Settlem ent Commission, the information contained in the Annexure to the application in Form SC(C) 1 and the statements and other documents accompanying such annexure s hall be sent to the Commissioner of Customs along with a copy of the said order. 5. Manner of Provisional Attachment of Property. (1) Where the Settlement Com mission, orders attachment of property under sub section (1) of section 127D of the Act, it shall send a copy of such order to the Commissioner of Customs or th e Commissioner of Central Excise having jurisdiction over the place in which the applicant owns any movable or immovable property or resides or carries on his b usiness or has his bank account. (2) On receipt of the order referred to in sub rule (1), the Commissioner may authorise any officer subordinate to him and not below the rank of an Assistant Commissioner of Customs or an Assistant Commissio ner of Central Excise, as the case may be take steps to attach such property of the applicant.

Settlement Commission 13.11 (3) The officer authorised under sub rule (2) shall prepare an inventory of the property attached and specify in it, in the case of the immovable property the description of such property sufficient to identify i t and in the case of the movable property the place where such property is lodge d or kept and shall hand over a copy of the same to the applicant or to the pers on from whose charge the property is attached. (4) The officer authorised under sub rule (2) shall send a copy of the inventory so prepared each to the Commissi oner of Customs or the Commissioner of Central Excise as the case may be and als o to the Settlement Commission. 6. Fee for copies of reports. Any person who, under section 127G of the Act, makes an application for obtaining copies of repo rts made by any Officer of Customs, shall pay a fee of rupees five per page of e ach report or part thereof. Self examination questions 1. 2. 3. 4. 5. State the circumstances under which an application will not be entertained by the Settleme nt Commission. What is the time limit for filing a case in case of seizure under s ection 110 of the Customs Act, 1962? Briefly explain the powers of the Settlemen t Commission under the Customs Act, 1962. When will a person be not entitled to apply for settlement under section 127B? Discuss with reference to the provision s of section 127L. Can the Settlement Commission entertain applications involvin g evasion of duty by fraudulent means and misdeclaration? Discuss This issue has been addressed to by the High Court in the case of Tata Teleservices (Maharasht ra) Ltd. v. Union of India 2006 (201) ELT 529 (Bom.). In this case the assessee had evaded duty and had applied for settlement in the Settlement Commission. The contention of the department was that the companies or the persons, who evaded the customs duty fraudulently, could not avail of the benefit of approaching the Settlement Commission. It was submitted by the department that the Settlement C ommission had a limited jurisdiction of accepting only the cases of short levy o n account of misclassification or otherwise and not other cases. The High Court observed that the Settlement Commission had wide jurisdiction to entertain all k inds of settlement claim applications, with liberty to reject the same even at p reliminary stage, depending upon the nature, circumstances and complexity of a c ase. However, a case would be accepted by the Settlement Commission only if the mandatory requirements of: (i) filing Bill of Entry/Shipping Bill and issuance o f a show cause notice in relation to such a Bill of Entry/Shipping Bill Answer 5.

13.12 Customs (ii) making a full and true disclosure of duty liability which was not disclosed earlier before the proper officer and the manner in which such li ability had been incurred and additional amount of customs duty accepted to be p ayable by the assessee and (iii) furnishing such other particulars as may be spe cified by the rules including the particulars of such dutiable goods in respect of which the assessee admits short levy on account of misclassification or other wise of goods have been fulfilled. The High Court observed that the jurisdiction of the Settlement Commission was not restricted only to cases of short levy on account of misclassification or otherwise. The object of introducing Chapter XIV A to the Customs Act, 1962 was to resolve all disputes so as to collect revenue for the department. The High Court held that if interpretation of section 127B w as restricted to mean only bona fide cases, then there would be no scope of unea rthing revenue. It was pointed out by the High Court that earlier part of sectio n 127B ibid laid down the jurisdiction and only the latter part dealt with the r ules whereby certain details were to be provided. Therefore, it was held by the High Court that the argument with regard to short levy due to misclassification or otherwise was purely a procedural one and there was no need to decide the sam e.

14 ADVANCE RULING Chapter VB was inserted in the Customs Act, 1962 by Finance Act, 1999. The Finan ce Act, 1999 decided to set up an Advance Ruling Authority to give rulings on cl assification and valuation issues in advance for the benefit of joint ventures w ith NRIs. The provisions relating to Advance Rulings are contained in sections 2 8E to 28M. The provisions are summarised below: 14.1 DEFINITIONS [SECTION 28E] ( a) activity means import or export; (b) advance ruling means the determination, by t he Authority, of a question of law or fact specified in the application regardin g the liability to pay duty in relation to an activity which is proposed to be u ndertaken, by the applicant; (c) applicant means a (i) (a) a non resident setting up a joint venture in India in collaboration with a non resident or a resident; or (b) a resident setting up a joint venture in India in collaboration with a no nresident; or (c) a wholly owned subsidiary Indian company, of which the holding company is a foreign company, who or which, as the case may be, proposes to und ertake any business activity in India; (ii) a joint venture in India; or (iii) a resident falling within any such class or category of persons, as the Central G overnment may, by notification in the Official Gazette, specify in this behalf,

14.2 Customs and which or who, as the case may be, makes application for advance ruli ng under sub section (1) of section 28H. The collaboration would mean either tec hnical or financial collaboration. Joint venture would mean participation by bot h persons. Residents in the country having joint venture with other residents ar e not given the benefit. (d) application means an application made to the Authority under subsection (1) of section 28H; (e) Authority means the Authority for Advance Rulings (Central Excis e, Customs and Service Tax) constituted under section 28F; (f) non resident shall have the meaning assigned to it in clause (30) of section 2 of the Income tax Ac t, 1961 (43 of 1961). 14.2 AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) [SEC TION 28F] Sub section (1) empowers the Central Government to constitute an Autho rity for giving advance rulings to be called the Authority for Advance Rulings (C entral Excise, Customs and Service Tax), by notification in the Official Gazette. The Authority shall consist of the following Members appointed by the Central G overnment, namely: (a) a Chairperson, who is a retired Judge of the Supreme Cour t; (b) an officer of the Indian Customs and Central Excise Service who is qualif ied to be a Member of the Board; (c) an officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India. T he salaries and allowances payable to, and the terms and conditions of service o f, the Members shall be such as the Central Government may by rules determine. T he Central Government shall provide the Authority with such officers and staff a s may be necessary for the efficient exercise of the powers of the Authority und er this Act. The office of the Authority shall be located in Delhi. 14.3 APPLICA TION FOR ADVANCE RULING [SECTION 28H] The procedure involved in making an applic ation for advance ruling is as follows:

Advance Ruling 14.3 (1) An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and in such manner as may be prescribed, statin g the question on which the advance ruling is sought. (2) The question on which the advance ruling is sought shall be in respect of the following: (a) classific ation of goods under the Customs Tariff Act, 1975; (b) applicability of a notifi cation issued under sub section (1) of section 25, having a bearing on the rate of duty; (c) the principles to be adopted for the purposes of determination of v alue of the goods under the provisions of this Act. (d) the applicability of not ifications issued in respect of duties under the Customs Act, 1962, the Customs Tariff Act, 1975 and any duty chargeable under any other law for the time being in force in the same manner as duty of customs leviable under the Customs Act. ( e) determination of origin of the goods in terms of the rules notified under the Customs Tariff Act, 1975. (3) The application shall be made in quadruplicate an d be accompanied by a fee of two thousand five hundred rupees. (4) An applicant may withdraw his application within thirty days from the date of the application . 14.4 PROCEDURE ON RECEIPT OF APPLICATION [SECTION 28 I] The following procedur e is to be followed by the Advance Ruling Authority on receipt of an application for Advance Ruling. 14.4.1 Calling for relevant records: On receipt of an appli cation, the Authority shall cause a copy thereof to be forwarded to the Commissi oner of Customs and, if necessary, call upon him to furnish the relevant records . Where any records have been called for by the Authority in any case, such reco rds shall, as soon as possible, be returned to the Commissioner of Customs. 14.4 .2 Allowing or rejecting the application [Sub section (2)] : The Authority may, after examining the application and the records called for, by order, either all ow or reject the application. However, the Authority shall not allow the applica tion where the question

14.4 Customs raised in the application is (a) already pending in the applicant s case before any officer of customs, the Appellate Tribunal or any Court; (b) the same as in a matter already decided by the Appellate Tribunal or any Court: Further, no app lication shall be rejected under this sub section unless an opportunity has been given to the applicant of being heard. It is also provided that where the appli cation is rejected, reasons for such rejection shall be given in the order. 14.4 .3 Copy of every order to be sent to Commissioner of Customs: A copy of every or der made under sub section (2) shall be sent to the applicant and to the Commiss ioner of Customs. [Sub section (3)] 14.4.4 Pronouncement of Advance Ruling: Wher e an application is allowed under sub section (2), the Authority shall, after ex amining such further material as may be placed before it by the applicant or obt ained by the Authority, pronounce its advance ruling on the question specified i n the application. [Sub section (4)] 14.4.5 Opportunity to an applicant of being heard: On a request received from the applicant, the Authority shall, before pr onouncing its advance ruling, provide an opportunity to the applicant of being h eard, either in person or through a duly authorised representative. [Sub section (5)] For the purposes of this section, "authorised representative" means a pers on authorised by the person referred to in sub section (1) to appear on his beha lf, being (a) his relative or regular employee; or (b) a custom house agent lice nsed under section 146; or (c) any legal practitioner who is entitled to practis e in any civil court in India; or (d) any person who has acquired such qualifica tions as the Central Government may specify by rules made in this behalf. 14.4.6 Time limit for pronouncing advance ruling: The Authority shall pronounce its ad vance ruling in writing within ninety days of the receipt of application. [Sub s ection (6)] A copy of the advance ruling pronounced by the Authority, duly signe d by the Members and certified in the prescribed manner shall be sent to the app licant and to the Commissioner of Customs, as soon as may be, after such pronoun cement.

Advance Ruling 14.5 APPLICABILITY OF ADVANCE RULING [SECTION 28J] 14.5 (1) The advance ruling pronounced by the Authority under section 28 I shall be b inding only (a) on the applicant who had sought it; (b) in respect of any matter referred to in sub section (2) of section 28H; (c) on the Commissioner of Custo ms, and the customs authorities subordinate to him, in respect of the applicant. (2) The advance ruling shall be binding as aforesaid unless there is a change i n law or facts on the basis of which the advance ruling has been pronounced. 14. 6 ADVANCE RULING TO BE VOID IN CERTAIN CIRCUMSTANCES [SECTION 28K] Where the Aut hority finds, on a representation made to it by the Commissioner of Customs or o therwise, that an advance ruling pronounced by it under sub section (6) of secti on 28 I has been obtained by the applicant by fraud or misrepresentation of fact s, it may, by order, declare such ruling to be void ab initio and thereupon all the provisions of this Act shall apply (after excluding the period beginning wit h the date of such advance ruling and ending with the date of order under this s ub section) to the applicant as if such advance ruling had never been made. A co py of the order made under sub section (1) shall be sent to the applicant and th e Commissioner of Customs. 14.7 POWERS OF AUTHORITY [SECTION 28L] The Authority shall, for the purpose of exercising its powers regarding discovery and inspecti on, enforcing the attendance of any person and examining him on oath, issuing co mmissions and compelling production of books of account and other records, have all the powers of a civil court under the Code of Civil Procedure, 1908. Th e Authority shall be deemed to be a civil court for the purposes of section 195, but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 197 3 (2 of 1974), and every proceeding before the Authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the pur pose of section 196, of the Indian Penal Code (45 of 1860).

14.6 Customs The Authority shall, subject to the provisions of this Chapter, have power to re gulate its own procedure in all matters arising out of the exercise of its power s under this Act. Self examination questions 1. 2. 3. 4. 5. What is advance ruli ng? In what matters can the advance ruling be obtained? State briefly as to who can make an application for advance ruling under the Customs Act, 1962? Briefly discuss the provisions of the Customs Act, 1962 regarding rejection of an applic ation for advance ruling. Describe the procedure involved in making an applicati on for advance ruling. Vaikunth, a non resident intends to import certain goods, but has entertained some doubts about their classification. Vaidehi, Vaikunth s friend, has obtained an Advance Ruling under Chapter VB of the Customs Act, 196 2 from the Authority for Advance Rulings on an identical point. Vaikunth propose s to adopt the same ruling in his case. Vaikunth has sought your advice as his c onsultant whether he could adopt the ruling given in the case of Vaidehi. Explai n with reasons. Answer 5. According to section 28J of the Customs Act, 1962 the advance ruling shall be binding only on the applicant who has sought it. In the given problem, in view of the aforesaid provision, Vaikunth cannot make use of t he advance ruling pronounced in the identical case of his friend, Vaidehi. Vaiku nth should obtain a ruling from the Authority of Advance Ruling by making an app lication under section 28H along with a fee of Rs.2,500.

14 ADVANCE RULING Chapter VB was inserted in the Customs Act, 1962 by Finance Act, 1999. The Finan ce Act, 1999 decided to set up an Advance Ruling Authority to give rulings on cl assification and valuation issues in advance for the benefit of joint ventures w ith NRIs. The provisions relating to Advance Rulings are contained in sections 2 8E to 28M. The provisions are summarised below: 14.1 DEFINITIONS [SECTION 28E] ( a) activity means import or export; (b) advance ruling means the determination, by t he Authority, of a question of law or fact specified in the application regardin g the liability to pay duty in relation to an activity which is proposed to be u ndertaken, by the applicant; (c) applicant means a (i) (a) a non resident setting up a joint venture in India in collaboration with a non resident or a resident; or (b) a resident setting up a joint venture in India in collaboration with a no nresident; or (c) a wholly owned subsidiary Indian company, of which the holding company is a foreign company, who or which, as the case may be, proposes to und ertake any business activity in India; (ii) a joint venture in India; or (iii) a resident falling within any such class or category of persons, as the Central G overnment may, by notification in the Official Gazette, specify in this behalf,

14.2 Customs and which or who, as the case may be, makes application for advance ruli ng under sub section (1) of section 28H. The collaboration would mean either tec hnical or financial collaboration. Joint venture would mean participation by bot h persons. Residents in the country having joint venture with other residents ar e not given the benefit. (d) application means an application made to the Authority under subsection (1) of section 28H; (e) Authority means the Authority for Advance Rulings (Central Excis e, Customs and Service Tax) constituted under section 28F; (f) non resident shall have the meaning assigned to it in clause (30) of section 2 of the Income tax Ac t, 1961 (43 of 1961). 14.2 AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) [SEC TION 28F] Sub section (1) empowers the Central Government to constitute an Autho rity for giving advance rulings to be called the Authority for Advance Rulings (C entral Excise, Customs and Service Tax), by notification in the Official Gazette. The Authority shall consist of the following Members appointed by the Central G overnment, namely: (a) a Chairperson, who is a retired Judge of the Supreme Cour t; (b) an officer of the Indian Customs and Central Excise Service who is qualif ied to be a Member of the Board; (c) an officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India. T he salaries and allowances payable to, and the terms and conditions of service o f, the Members shall be such as the Central Government may by rules determine. T he Central Government shall provide the Authority with such officers and staff a s may be necessary for the efficient exercise of the powers of the Authority und er this Act. The office of the Authority shall be located in Delhi. 14.3 APPLICA TION FOR ADVANCE RULING [SECTION 28H] The procedure involved in making an applic ation for advance ruling is as follows:

Advance Ruling 14.3 (1) An applicant desirous of obtaining an advance ruling under this Chapter may make an application in such form and in such manner as may be prescribed, statin g the question on which the advance ruling is sought. (2) The question on which the advance ruling is sought shall be in respect of the following: (a) classific ation of goods under the Customs Tariff Act, 1975; (b) applicability of a notifi cation issued under sub section (1) of section 25, having a bearing on the rate of duty; (c) the principles to be adopted for the purposes of determination of v alue of the goods under the provisions of this Act. (d) the applicability of not ifications issued in respect of duties under the Customs Act, 1962, the Customs Tariff Act, 1975 and any duty chargeable under any other law for the time being in force in the same manner as duty of customs leviable under the Customs Act. ( e) determination of origin of the goods in terms of the rules notified under the Customs Tariff Act, 1975. (3) The application shall be made in quadruplicate an d be accompanied by a fee of two thousand five hundred rupees. (4) An applicant may withdraw his application within thirty days from the date of the application . 14.4 PROCEDURE ON RECEIPT OF APPLICATION [SECTION 28 I] The following procedur e is to be followed by the Advance Ruling Authority on receipt of an application for Advance Ruling. 14.4.1 Calling for relevant records: On receipt of an appli cation, the Authority shall cause a copy thereof to be forwarded to the Commissi oner of Customs and, if necessary, call upon him to furnish the relevant records . Where any records have been called for by the Authority in any case, such reco rds shall, as soon as possible, be returned to the Commissioner of Customs. 14.4 .2 Allowing or rejecting the application [Sub section (2)] : The Authority may, after examining the application and the records called for, by order, either all ow or reject the application. However, the Authority shall not allow the applica tion where the question

14.4 Customs raised in the application is (a) already pending in the applicant s case before any officer of customs, the Appellate Tribunal or any Court; (b) the same as in a matter already decided by the Appellate Tribunal or any Court: Further, no app lication shall be rejected under this sub section unless an opportunity has been given to the applicant of being heard. It is also provided that where the appli cation is rejected, reasons for such rejection shall be given in the order. 14.4 .3 Copy of every order to be sent to Commissioner of Customs: A copy of every or der made under sub section (2) shall be sent to the applicant and to the Commiss ioner of Customs. [Sub section (3)] 14.4.4 Pronouncement of Advance Ruling: Wher e an application is allowed under sub section (2), the Authority shall, after ex amining such further material as may be placed before it by the applicant or obt ained by the Authority, pronounce its advance ruling on the question specified i n the application. [Sub section (4)] 14.4.5 Opportunity to an applicant of being heard: On a request received from the applicant, the Authority shall, before pr onouncing its advance ruling, provide an opportunity to the applicant of being h eard, either in person or through a duly authorised representative. [Sub section (5)] For the purposes of this section, "authorised representative" means a pers on authorised by the person referred to in sub section (1) to appear on his beha lf, being (a) his relative or regular employee; or (b) a custom house agent lice nsed under section 146; or (c) any legal practitioner who is entitled to practis e in any civil court in India; or (d) any person who has acquired such qualifica tions as the Central Government may specify by rules made in this behalf. 14.4.6 Time limit for pronouncing advance ruling: The Authority shall pronounce its ad vance ruling in writing within ninety days of the receipt of application. [Sub s ection (6)] A copy of the advance ruling pronounced by the Authority, duly signe d by the Members and certified in the prescribed manner shall be sent to the app licant and to the Commissioner of Customs, as soon as may be, after such pronoun cement.

Advance Ruling 14.5 APPLICABILITY OF ADVANCE RULING [SECTION 28J] 14.5 (1) The advance ruling pronounced by the Authority under section 28 I shall be b inding only (a) on the applicant who had sought it; (b) in respect of any matter referred to in sub section (2) of section 28H; (c) on the Commissioner of Custo ms, and the customs authorities subordinate to him, in respect of the applicant. (2) The advance ruling shall be binding as aforesaid unless there is a change i n law or facts on the basis of which the advance ruling has been pronounced. 14. 6 ADVANCE RULING TO BE VOID IN CERTAIN CIRCUMSTANCES [SECTION 28K] Where the Aut hority finds, on a representation made to it by the Commissioner of Customs or o therwise, that an advance ruling pronounced by it under sub section (6) of secti on 28 I has been obtained by the applicant by fraud or misrepresentation of fact s, it may, by order, declare such ruling to be void ab initio and thereupon all the provisions of this Act shall apply (after excluding the period beginning wit h the date of such advance ruling and ending with the date of order under this s ub section) to the applicant as if such advance ruling had never been made. A co py of the order made under sub section (1) shall be sent to the applicant and th e Commissioner of Customs. 14.7 POWERS OF AUTHORITY [SECTION 28L] The Authority shall, for the purpose of exercising its powers regarding discovery and inspecti on, enforcing the attendance of any person and examining him on oath, issuing co mmissions and compelling production of books of account and other records, have all the powers of a civil court under the Code of Civil Procedure, 1908. Th e Authority shall be deemed to be a civil court for the purposes of section 195, but not for the purposes of Chapter XXVI of the Code of Criminal Procedure, 197 3 (2 of 1974), and every proceeding before the Authority shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the pur pose of section 196, of the Indian Penal Code (45 of 1860).

14.6 Customs The Authority shall, subject to the provisions of this Chapter, have power to re gulate its own procedure in all matters arising out of the exercise of its power s under this Act. Self examination questions 1. 2. 3. 4. 5. What is advance ruli ng? In what matters can the advance ruling be obtained? State briefly as to who can make an application for advance ruling under the Customs Act, 1962? Briefly discuss the provisions of the Customs Act, 1962 regarding rejection of an applic ation for advance ruling. Describe the procedure involved in making an applicati on for advance ruling. Vaikunth, a non resident intends to import certain goods, but has entertained some doubts about their classification. Vaidehi, Vaikunth s friend, has obtained an Advance Ruling under Chapter VB of the Customs Act, 196 2 from the Authority for Advance Rulings on an identical point. Vaikunth propose s to adopt the same ruling in his case. Vaikunth has sought your advice as his c onsultant whether he could adopt the ruling given in the case of Vaidehi. Explai n with reasons. Answer 5. According to section 28J of the Customs Act, 1962 the advance ruling shall be binding only on the applicant who has sought it. In the given problem, in view of the aforesaid provision, Vaikunth cannot make use of t he advance ruling pronounced in the identical case of his friend, Vaidehi. Vaiku nth should obtain a ruling from the Authority of Advance Ruling by making an app lication under section 28H along with a fee of Rs.2,500.

15 MISCELLANEOUS PROVISIONS The last 25 sections from section 141 to 161 are covered under this chapter. 15. 1 CONVEYANCE AND GOODS IN A CUSTOMS AREA SUBJECT TO CONTROL OF OFFICERS OF CUSTO MS [SECTION 141] As per this Section, all the conveyances and goods in a customs area shall be subject to the control of officers of customs, for the purpose of enforcing the provisions of this Act. In Oswal Spg & Wvg Mills ltd vs. CC, 1988 (SC), goods were confiscated u/s 111(d) and (m). Section 141 provides that good s in the customs area are subject to the control of the officers of Customs. Bes ides, upon confiscation, the goods are vested in the Central Government. Therefo re, the customs authorities could not shirk from their liability. 15.2 RECOVERY OF SUMS DUE TO GOVERNMENT [SECTION 142] The recovery procedures of any sums due under this Act, is covered under this section. The need to recover sums due to G overnment normally arises in two situations: (a) on confirmation of demand for s hort levy of duty; and (b) on imposition of fine or penalty in an adjudication p roceedings. Two methods of recovery are provided for in this section. Either of the two methods can be followed to recover the dues. Sl No. 01 Recovery procedur e To deduct the amount so payable from any money owing to such person which may be under the control of the proper officer or such other officer of customs. By detaining and selling any goods Power given to Proper officer himself or any oth er officer of customs 02 Assistant Commissioner of

15.2 Customs belonging to such person which are under the control of the Asst or Depu ty Commissioner of Customs or such other officer of customs Customs or Deputy Co mmissioner of Customs; or The above authorities may require any other officer of customs to recover the amount due If the amount cannot be recovered from such person in the manner provided in sl nos 1 and 2 above, the following is provided. Here again, either of the procedur es can be followed to recover the dues. Sl No. 01 Recovery procedure Prepare a C ertificate signed by Asst or Deputy Commissioner of Customs, specifying the amou nt due from such person and send it to the Collector of the district in which su ch person owns any property or resides or carries on his business. Thereon the s aid collector shall recover the dues as if it were an arrears of land revenue. 0 2 Distrain any movable or immovable property belonging to or under the control o f such person, and detain the same until the amount payable is paid. In case, an y part of the said amount or the cost of distress remains unpaid for 30 days nex t after such distress, may cause the said property to be sold and satisfy the am ount payable from the sale proceeds. The surplus if any, shall be paid back to s uch person. The proper officer on any authorisation by a Commissioner of Customs and in accordance with the rules made in this behalf Power given to Assistant C ommissioner of Customs or Deputy Commissioner of Customs

Miscellaneous Provisions 15.3 Sub section (2) of section 142 provides that, where the terms of any bond or oth er instrument executed under this Act or any rules or regulations made thereunde r provide that any amount due under such instrument may be recovered in the mann er laid down in sub section (1), the amount may, without prejudice to any other mode of recovery, be recovered in accordance with the provision of that sub sect ion. The proviso to section 142 states that if a person from whom some recoverie s are due, transfers his business in whole or in part to another person, then al l goods, materials, preparations, plants, machineries, vessels, utensils, implem ents and articles in the possession of the transferee can be attached and sold f or recovery. An officer empowered by the Central Board of Excise and Customs, af ter obtaining written approval from the Commissioner of Customs, can make such r ecovery. Customs (Attachment of Property of Defaulters for Recovery of Governmen t Dues) Rules, 1995 was notified vide Notification No. 31/95 Cus.(N.T) dt 26 5 1 995 amended by Notification No. 67/97 Cus.(N.T) dt 11 12 1997. These rules were framed by the Central Government in exercise of the powers conferred by section 156 read with section 142 of the Customs Act. The rules give procedure for attac hment of property, for sale of property and also special provisions in respect o f sale of immovable property. The relevant case laws are given hereunder: 1. 2. At the stage of investigation, the assessee cannot be harassed to pay the duty B ase Corporation Ltd vs. UOI, 1999. If an adjudication order does not demand duty but merely imposes penalty and fine, this section is inapplicable. Goods cannot be detained under this section for recovery of redemption fine Rishi Exports vs . CC,1988. Company dues can be recovered only by attaching the companys propertie s Hrushikesh Panda vs. State of Orissa, 1996. 3. 15.3 POWER TO ALLOW IMPORT OR EXPORT ON EXECUTION OF BONDS IN CERTAIN CASES [SEC TION143] If the importer or exporter is unable to fulfil the conditions for impo rt/export, the Assistant or the Deputy Commissioner of Customs can permit cleara nce of imported goods/or export, subject to the following: (a) The Asst or Deput y Commissioner of Customs can grant leave for such import/or export or clearance of goods only if he is satisfied that having regard to the circumstances of the case the leave can be granted. (b) A bond in such amount, with such surety or s ecurity and subject to such conditions as the Asst or Deputy Commissioner approv es.

15.4 Customs On fulfillment of conditions within the time specified in the bond, the Assistan t Commissioner of Customs or Deputy Commissioner of Customs shall cancel the bon d as discharged in full and shall, on demand, deliver it, so cancelled, to the p erson who has executed or who is entitled to receive it. If the conditions are n ot fulfilled within the time specified in the bond, the Assistant Commissioner o f Customs or Deputy Commissioner of Customs shall, without prejudice to any othe r action that may be taken under this Act or any other law for the time being in force, be entitled to proceed upon the bond in accordance with law. In an inter esting tribunal case, it was ordered to release the seized vehicle against bond equal to the value of the vehicle and a cash security of Rs. 1000/ [Noor Jahan Alam vs. UOI, 1999] In Mekaster Pvt Ltd vs. CC, 1987 it was held that any sum re covered by enforcing a bond executed under this section is not in the nature of duty or penalty. Therefore, the provisions of section 129E requiring pre deposit of duty, interest or penalty would not apply. 15.4 DUTY DEFERMENT [SECTION 143A ] When any material is imported under an import licence belonging to the categor y of Advance Licence granted under the Imports and Exports (Control) Act, 1947, the Assistant Commissioner of Customs or Deputy Commissioner of Customs may, not withstanding anything contained in this Act, permit clearance of such material w ithout payment of duty leviable thereon. There has to be an obligation to export the goods as are specified in the said licence within the period specified ther ein [Sub section (1)]. The permission for clearance without payment of duty unde r sub section (1) shall be subject to the following conditions: (a) the duty pay able on the material imported shall be adjusted against the drawback of duty pay able under this Act or under any other law for the time being in force on the ex port of goods specified in the said Advance Licence; and (b) where the duty is n ot so adjusted either for the reason that the goods are not exported within the period specified in the said Advance Licence, or within such extended period not exceeding six months as the Assistant Commissioner of Customs or Deputy Commiss ioner of Customs may, on sufficient cause being shown, allow, or for any other s ufficient reason, the importer shall, notwithstanding anything contained in sect ion 28, be liable to pay the amount of duty not so adjusted together with simple interest thereon at the rate of twelve per cent per annum from the date the sai d permission for clearance is given to the date of payment.[Sub section (2)]

Miscellaneous Provisions 15.5 While permitting clearance under sub section (1), the Assistant Commissioner of Customs or Deputy Commissioner of Customs may require the importer to execute a bond with such surety or security as he thinks fit for complying with the condit ions specified in subsection (2). This section has by and large gone unnoticed b y the Revenue, though it is a potent weapon for recovery of dues which may arise under advance license scheme. For example, if there is a disputed consignment o f goods imported under advance licence, the proper officer may allow clearance o f such goods without payment of duty upon execution of bond and giving sureties. This clearance is also subject to the duty on imported goods being adjusted out of duty drawback payable to the importer in the export goods specified in the a dvance licence. In the alternative, as such adjustment is neither possible nor i s the export obligation discharged, the importer would be liable to pay such dut y with 12% p.a. interest. This section overrides section 28 and hence, limitatio n does not create a bar to revenue recovery. However, in practice, it is seen th at neither importers resort to this provision, nor revenue encourages resort to this provision. Routinely, recovery proceedings are initiated under section 28. 15.5 POWER TO TAKE SAMPLES [SECTION 144] This section provides the necessary pow er to the customs authorities to draw adequate samples of such goods in the pres ence of the owner of the goods. The proper officer of the customs can take the s amples for: examination or testing, or ascertaining the value thereof, or any ot her purpose of this Act. the entry; or clearance of any goods; or at any time wh ile such goods are being passed through the customs area. Samples may be taken on After the purpose for which a sample was taken is carried out, such sample shall , if practicable, be restored to the owner, but if the owner fails to take deliv ery of the sample within 3 months of the date on which the sample was taken, it may be disposed of in such manner as the Commissioner of Customs may direct.[Sub section (2)] Amongst several samples drawn from export goods, if one of the sam ples is drawn behind the back of the exporter, and such report is unfavourable t o the exporter, its results cannot be relied on in an adjudication proceeding. T he authorities are bound to rely on the

15.6 Customs test report of samples drawn with the knowledge of the exporter [C.L. Jain Wooll en Mills vs. CC,1997] 15.6 CUSTOM HOUSE AGENTS TO BE LICENSED [SECTION 146] All importers/exporters cannot be expected to have detailed working knowledge of the procedures for clearance of imported or export goods. Further, it may not be po ssible for the importer/exporter to come to the custom house every time and atte nd to the clearance formalities personally, as it would involve time and expendi ture. An institution of Custom House Agents (CHA) has thus arisen out of necessi ty. At the same time, it is necessary to ensure that such agents are knowledgeab le, efficient, loyal both to the parties and Government. Section 146 stipulates that no person shall carry of the business as an agent relating to the entry or departure of a conveyance or the import or export of goods at any customs statio n unless such person holds a licence granted in this behalf in accordance with t he regulations.[Sub section (1)] Sub section (2) empowers the Board to make regu lations for the purpose of carrying out the provisions of this section and, in p articular, such regulations may provide for (a) the authority by which a licence may be granted under this section and the period of validity of any such licenc e; (b) the form of the licence and the fees payable therefor; (c) the qualificat ions of persons who may apply for a licence and the qualifications of persons to be employed by a licensee to assist him in his work as an agent; (d) the restri ctions and conditions (including the furnishing of security by the licensee) sub ject to which a licence may be granted; (e) the circumstances in which a licence may be suspended or revoked; and (f) the appeals, if any, against an order of s uspension or revocation of a licence, and the period within which such appeals s hall be filed. In exercise of the above powers, the Central Board of Excise & Customs made Cust oms House Agents Licensing Regulations, 1984 vide Notification No.85 Cus., dt 19 3 1984 and as amended from time to time. 15.7 APPEARANCE BY AUTHORISED REPRESEN TATIVE [SECTION 146A] 1. Any person who is entitled or required to appear before an officer of customs or the Appellate Tribunal in connection with any proceedi ngs under this Act, otherwise than when required under section 108 to attend per sonally for examination on oath or affirmation, may, subject to the other provis ions of this section, appear by an authorised

Miscellaneous Provisions representative. [Sub section (1)] 15.7 2. For the purposes of this section, "authorised representative" means a person authorised by the person referred to in sub section (1) to appear on his behalf, being (a) his relative or regular employee; or (b) a custom house agent license d under section 146; or (c) any legal practitioner who is entitled to practise i n any civil court in India; or (d) any person who has acquired such qualificatio ns as the Central Government may specify by rules made in this behalf.[Sub secti on (2)] 3. The following persons shall be disqualified to represent any person u nder subsection(1) (a) who has been dismissed or removed from Government service; or (b) who is convicted of an offence connected with any proceeding under this Act, the Central Excise Act , 1944 (1 of 1944), or the Gold (Control) Act, 1968 (45 of 1968); or (c) who has become an insolvent, for such time as the Commissi oner of Customs or the competent authority under the Central Excise Act , 1944, or the Gold (Control) Act, 1968, as the case maybe, may, by order, determine in the case of a person referred to in clause (b), and for the period during which the insolvency continues in the case of a person referred to in clause (c). [Sub section (4)] 4. If any person, (a) who is a legal practitioner, is found guilty of misconduct in his professional capacity by any authority entitled to institu te proceedings against him, an order passed by that authority shall have effect in relation to his right to appear before an officer of customs or the Appellate Tribunal as it has in relation to his right to practise as a legal practitioner ; (b) who is not a legal practitioner, is found guilty of misconduct in connecti on with any proceedings under this Act by such authority as may be specified by rules made in this behalf, that authority may direct that he shall thenceforth b e disqualified to represent any person under sub section (1). 5. Any order or di rection under clause (b) of sub section (4) or clause (b) of sub section (5) sha ll be subject to the following conditions, namely :(a) no such order or directio n shall be made in respect of any person unless he has been given a reasonable o pportunity of being heard;

15.8 Customs (b) any person against whom any such order or direction is made may, within one month of the making of the order or direction, appeal to the Board to have the o rder or direction cancelled; and (c) no such order or direction shall take effec t until the expiration of one month from the making thereof, or, where an appeal has been preferred, until the disposal of the appeal.[Sub section (5)] It would be worthwhile to note that Chartered Accountants are also authorised to appear by virtue of being notified by the Government as persons who have acquired the n ecessary qualifications. 15.8 PROCEDURE FOR SALE OF GOODS AND APPLICATION OF SAL E PROCEEDS [SECTION 150] There are two situations when the customs authorities c an sell the goods of the importer or the exporter. (1) When the goods are confis cated, in which case the goods become the absolute property of the Government. W hen such goods are sold, the entire sale proceeds accrue to the Government. (2) Second, when the goods are not confiscated being the following circumstances: Im ported goods, which are not cleared either for home consumption or for warehousi ng within the prescribed period of 30 days and such goods, are ordered to be sol d under section 48 of the Act. Goods belonging to any defaulter of sums due to t he Government under the control of an officer of customs ordered to be attached and thereafter sold under section142 (1)(b) of the Act for the satisfaction of t he above dues. Where a Commissioner of Customs order distraining any movable or immovable belonging to a defaulter of customs dues under the control of an offic er of customs and if needed, authorising the sale of such property, if the dues are not paid within date of such distrainment for the satisfaction of the above dues. [Refer Section 142(1)(c)(ii)]

Section 150 covers a situation where the goods are not confiscated.(ie., circums tances which are stated in (2) above). Where any goods not being confiscated goo ds are to be sold under any provisions of this Act, they shall, after notice to the owner thereof, be sold by public auction or by tender or with the consent of the owner in any other manner [Sub section(1)].

Miscellaneous Provisions The following conditions are to be fulfilled for sellin g the goods under this section: 1. 2. 3. 4. The goods should not have been confi scated. The provisions of the Act should allow sale of such goods. Notice should be given to the owner before such sale. Goods can be sold in the following mann er: by public auction; or by tender; or in any other manner with the consent of the owner. 15.9 Sub section (2) deals with application of sale proceeds. Such sale proceeds can be applied as below: 1. 2. First, to the payment of the expenses of the sale; Ne xt, to the payment of the freight and other charges, if any, payable in respect of the goods sold, to the carrier, if notice of such charges has been given to t he person having custody of the goods; Next, to the payment of the duty, if any, on the goods sold; Next, to the payment of the charges in respect of the goods sold due to the person having the custody of the goods; Next, to the payment of any amount due from the owner of the goods to the Central Government under the p rovisions of this Act or any other law relating to customs. 3. 4. 5. The balance, if any, shall be paid to the owner of the goods. An interesting fea ture of this section is that the legitimate dues of other persons such as auctio neer or carrier takes precedence over the duty payable under the Act. The Board has issued instructions about the modalities of disposal of gold, which is seize d or confiscated and ripe for disposal. The Board has nominated Branches of SBI at Mumbai, Delhi, Ahmedabad, Calcutta and Chennai. Under these instructions, the Customs department is responsible for delivery of gold of requisite purity alon g with assaying certificate, duly packed as per the trade practice. SBI is entit led to deduct its out of pocket expenses, sales tax and other taxes. But, no com mission is to be paid to SBI for selling gold on behalf of Customs department. [ CBEC Circular No. 16/2001 Cus, dated 9.3.2001] 15.9 CERTAIN [SECTION 151] OFFICE RS REQUIRED TO ASSIST OFFICERS OF CUSTOMS The following officers are empowered and required to assist officers of customs in the

15.10 Customs execution of the Act: (a) officers of the Central Excise departmen t; (b) officers of the Navy; (c) officers of Police; (d) officers of the Central or State Governments employed at any port or airport; (e) such other officers o f the Central or State Governments or a local authority as are specified by the Central Government in this behalf by notification in the Official Gazette. In ex ercise of the powers conferred on the Central Government, the following notifica tions are issued: Sl No. 01 Notification Number 77 Cus Notification date 23.05.1 964 Officers specified The following officers of Enforcement Directorate: 02 03 47 Cus 18 Cus 09.05.1970 22.01.1972 Deputy Directors; Assistant Directors, Chief Enforcement officers, Enforcement officers, Assistant Enforcement officers. Central Reserve Police Force Officers of Indian Railways and Railway Protection Force in the following places: Within 50 KM width from the border separating Ind ia from Nepal; at New Jalpaiguri, Howrah R.S., Barauni R.S., Garhara Transhipmen t Yard; Katihar R.S., Luchnow R.S., and Bareilly R.S.

Miscellaneous Provisions 15.11 15.10 INSTRUCTIONS TO OFFICERS OF CUSTOMS [SECTIO N 151A] In the exercise of their quasi judicial functions, the adjudicating auth orities under the Customs Act are required to act independently without any bias . In Orient Paper Mills Ltd vs. UOI 1978 (2) ELT J345 (SC): AIR 1969 SC 48., it was held that the adjudicating authorities were totally independent and could no t be directed or guided by any instructions from administrative superiors. But, over time, particularly, in the context of section 37B of the CE Act, the Suprem e Court itself has changed its view. In practice it has been found necessary to issue some guidelines to all adjudicating and assessing authorities to ensure un iformity in decisions and practice. It has been found difficult to maintain such instruction legally, and therefore, as specific provision has been inserted by Customs(Amendment) Act 1985, whereby the CBEC has been empowered to issue such o rders, instructions and directions to officers of custom in order to ensure unif ormity in the classification of goods; or with respect to the levy of duty there on. Such orders, instructions and directions may be issued to officers of customs as the board may deem fit and such officers of customs and all other persons emplo yed in the execution of the Act shall observe and follow such orders, instructio ns and directions of the Board. No such orders, instructions or directions shall be issued (a) so as to require any such officer of customs to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Commissioner of Customs (Appeals) in the exercise of his appellate functions. The relevant Case laws are given below : (a) When the board has issued instruction regarding classification of goods in a particular manner such instructions are binding on them, even though the circ ular may not recite that it has been issued in exercise of power under section 3 7B. This case is pari material with Sec. 151A. [Ranadey Micronutrients vs. CCE, 1996 (66) ECR 638 SC: 1996 (87) ELT 19 (SC)] (b) A public notice issued by one C ustom House will bind all Customs authorities. If the department considers that a public notice is erroneous, it must be withdrawn.[SAIL vs. CC,2000 (115) ELT 4 2 (SC)] (c) Also refer a leading decision under the Income Tax Act, 1961, K.P. V arghese vs. ITO AIR 1980 SC 1922 : 1981 (131) ITR 597 (SC). In this case, bindin g nature of the circulars has been discussed far more elaborately than under cas e laws under the Central Excise or Customs Laws.

15.12 Customs It is necessary to at least make an attempt to reconcile the appar ent contradiction between the view expressed in Orient Paper Mills case and the view expressed in later decisions in the preceding paragraphs. It is submitted t hat the correct view would be to hold that the departmental instructions such as circulars and trade notices bind the departmental authorities under all circums tances. But, they do not bind them in such a manner that even if the departmenta l view is antithetical to the assessees contentions, facts and evidence on record , the adjudicating authority has to blindly follow it. In such a situation, the adjudicating authority is entitled exercise his independent judgment as a quasi judicial authority and arrive at an independent finding. However, if the adjudic ating authority fails to do so, it is open to the assessee to challenge the corr ectness of the departmental instruction itself, or the mindless manner in which the adjudicating authority followed such instructions. This view finds support i n CCE vs. Usha Martin Industries, 1997 (72) ECR 257 SC 1997 (94) ELT 460 (SC) ca se. 15.11 DELEGATION OF POWERS [SECTION 152] It may not always be possible to ha ve the particular level of officer who is empowered to exercise a particular fun ction at a particular place. For example, the Commissioner of Customs are statio ned at the head quarters of Commissionnerate. The other subordinate officers may be stationed at other points. When necessity arises to exercise the power of Co mmissioner at these other points, practical difficulties arise. Depending upon t he volume of such problems, and the exigencies, it is desirable to empower the s ubordinate officer already available at the particular station to exercise the p owers of his immediate superior officer. Section 152 envisages delegation of the powers to the next immediately subordinate authority. The Central Government ma y, by notification in the Official Gazette, direct that subject to such conditio ns, if any, as may be specified in the notification (a) any power exercisable by the Board under this Act shall be exercisable also by a Chief Commissioner of C ustoms or a Commissioner of Customs empowered in this behalf by the Central Gove rnment; (b) any power exercisable by a Commissioner of Customs under this Act ma y be exercisable also by a Joint Commissioner of Customs or an Assistant Commiss ioner of Customs or Deputy Commissioner of Customs empowered in this behalf by t he Central Government; (c) any power exercisable by a Joint Commissioner of Cust oms under this Act may be exercisable also by an Assistant Commissioner of Custo ms or Deputy Commissioner of Customs empowered in this behalf by the Central Gov ernment; (d) any power exercisable by an Assistant Commissioner of Customs or De puty Commissioner of Customs under this Act may be exercisable also by a Gazette d

Miscellaneous Provisions 15.13 Officer of Customs empowered in this behalf by th e Board. Some of the major notifications are given below: 1. The power of CBEC u /s105(1) i.e. power to search premises, may be exercised by Commissioner of Cent ral Excise who are Commissioners of Customs by virtue of Notification issued in this regard [M.F. (D.R.) Notification No.22 Cus, dt 6 2 1965 as amended by Notif ication No.54 Cus., dt 24 5 1965]. Boards powers under section 109 is delegated t o certain Commissioners in respect of goods imported by land [M.F. (D.R.& I.) No tification No.121 Cus., dt 18 6 1966] Every Commissioner of Customs authorised t o exercise Boards powers under clause (ii) of the first proviso to section 61 sub ject to conditions laid out in the notification. [M.F. (D.R. & I.) Notification No.100 Cus., dt 5 12 1975 as amended by Notification No.144 Cus., dt 24 7 1978]. 2. 3. 15.12 SERVICE OF ORDER, DECISION, ETC. [SECTION 153] The date of service of an o rder or a communication containing a decision is of vital importance, in case th e aggrieved party desires to file an appeal. The time limit allowed for appeal n ormally runs from the date of receipt of the communication contrining the impugn ed decision by the aggrieved person. There are circumstances where it is not eff ectively possible to ensure that such communications are received by the concern ed party. There are other circumstances where disputes arise about the actual da te of the receipt of communication. These two problems have necessitated a unifo rm procedure for dispatch and service of orders, decisions, summons and other co mmunications issued under the Customs Act. Section 153 provides the specific mod e of service in this regard which is reproduced below. Any order or decision pas sed or any summons or notice issued under this Act, shall be served (a) by tende ring the order, decision, summons or notice or sending it by registered post to the person for whom it is intended or to his agent; or (b) if the order, decisio n, summons or notice cannot be served in the manner provided in clause (a), by a ffixing it on the notice board of the customs house. This provision is identical to section 37C of the Central Excise Act, but with an important difference. Cla use (b) of that section provides for service of notice by affixture on the wall or door of the residence or office of the noticee. Affixture on the notice board of the custom house is the last method of service. It is neither clear nor does it stand to reason, why there is no provision similar to section 37C(b) of the Central Excise Act.

15.14 Customs Section 153 indicates that in giving notice under the Act, receipt by the addressee is not relevant. What is relevant is issuing of notice in any one of the manners provided in this section. Therefore, it follows that the show cause notice issued within the period of six months as stipulated under section 110 has been properly served [Ambali Karthikeyan vs. CC & CE, 2000 (125) ELT 51 7 (Mad)] In terms of the General Clauses Act, 1897, when a letter is sent by reg istered post and is also correctly addressed, it is presumed that the letter has reached its destination in proper time and has been received by the party. But, this is a rebuttable presumption. The party should be afforded an opportunity t o rebut the same. [Imperial Malts Pvt Ltd vs. CCE, 1990 (48) ELT 104 (T D)] In N ayankumar P. Shah vs. CC, 1993 (63) ELT 311, 317 (T WRB), it was held that when a notice is sent by registered post, the service is complete as the notice leave s the control of the department. The date of receipt is not relevant for the pur pose of completing the service of notice under this section. 15.13 ROUNDING OFF OF DUTY, ETC. [SECTION 154A] This section provides for the rounding off of the d uty or any other sum payable under this Act. This provision is invariably found in all tax laws. The section is reproduced below: The amount of duty, interest, penalty, fine or any other sum payable, and the amount of refund, drawback or an y other sum due, under the provisions of this Act shall be rounded off to the ne arest rupee and, for this purpose, where such amount contains a part of a rupee consisting of paise then, if such part is fifty paise or more, it shall be incre ased to one rupee and if such part is less than fifty paise it shall be ignored. 15.14 GENERAL POWER TO MAKE RULES [SECTION 156] The Central Government is empow ered to make rules consistent with this Act generally to carry out the purposes of this Act. In particular, such rules may provide for all or any of the followi ng matters, namely: (a) the manner of determining the price of imported goods un der sub section (1A) of section 14; (b) the conditions subject to which accessor ies of, and spare parts and maintenance and repairing implements for, any articl e shall be chargeable at the same rate of duty as that article; (c) the detentio n and confiscation of goods the importation of which is prohibited and the condi tions, if any, to be fulfilled before such detention and confiscation and the in formation, notices and security to be given and the evidence requisite for the p urposes of such detention or confiscation and the mode of verification of such e vidence;

Miscellaneous Provisions 15.15 (d) the reimbursement by an informant to any publ ic officer of all expenses and damages incurred in respect of any detention of a ny goods made on his information and of any proceedings consequent on such deten tion; (e) the information required in respect of any goods mentioned in a shippi ng bill or bill of export which are not exported or which are exported and are a fterwards re landed; (f) the publication, subject to such conditions as may be s pecified therein, of names and other particulars of persons who have been found guilty of contravention of any of the provisions of this Act or the rules. (g) the amount to be paid for compounding under sub section (3) of section 137. 15.15 GENERAL POWER TO MAKE REGULATIONS [SECTION 157] This section empowers the Board to make regulations consistent with this Act and the rules, generally to c arry out the purposes of this Act. In particular and without prejudice to the ge nerality of the foregoing power, such regulations may provide for all or any of the following matters, namely:(a) the form of a bill of entry, shipping bill, bi ll of export, import manifest, import report, export manifest, export report, bi ll of transhipment, declaration for transhipment boat note and bill of coastal g oods; (b) the form and manner in which an application for refund shall be made u nder section 27; (c) the conditions subject to which the transhipment of all or any goods under subsection (3) of section 54, the transportation of all or any g oods under section 56 and the removal of warehoused goods from one warehouse to another under section 67, may be allowed without payment of duty; (d) the condit ions subject to which any manufacturing process or other operations may be carri ed on in a warehouse under section 65. 15.16 PROVISIONS WITH RESPECT TO RULES AN D REGULATIONS [SECTION 158] All rules and regulations made under this Act shall be published in the Official Gazette. Any rule or regulation which the Central G overnment or the Board is empowered to make under this Act may provide (i) for t he levy of fees in respect of applications, amendment of documents, furnishing o f duplicates of documents, issue of certificates, and supply of statistics, and for rendering of any services by officers of customs under this Act;

15.16 Customs (ii) that any person who contravenes any provision of a rule or re gulation or abets such contravention or any person who fails to comply with any provision of a rule or regulation with which it was his duty to comply, shall be liable, (a) in the case of contravention or failure to comply with a rule, to a penalty which may extend to five hundred rupees; (b) in the case of contraventi on or failure to comply with a regulation, to a penalty which may extend to two hundred rupees. Self examination questions 1. 2. 3. 4. 5. State the provisions i n the Customs Act, 1962, which govern the appearance by an authorised representa tive and the qualifications for such a person. Discuss the provisions of section 143A of Customs Act, 1962 in respect of duty deferment. Differentiate between r ules and regulations. Briefly explain the provisions in respect of recovery of a ny sums due to the Government under the Customs Act, 1962. Can a custom officer take samples of imported goods? Discuss the provisions in detail.

16 SPECIAL ECONOMIC ZONE 16.1 INTRODUCTION Special Economic Zones (SEZ) are the zones that are modelled o n Chinese special economic zones. SEZ is a specifically delineated duty free enc lave and shall be deemed to be foreign territory for the purposes of trade opera tions and duties and tariffs. Chapter XA contains Special Provisions Relating to Special Economic Zone. The Chapter contains sections 76A to Section 76N relating to notification, establishment of SEZ, and the procedure to be followed by SEZs, and the exemptions and other benefits available to them. 16.2 FEATURES OF SPECI AL ECONOMIC ZONES The main features of SEZ are as follows: (a) SEZ may be set up in the public, private joint sector or by state Government as notified by the M inistry of Commerce and Industry. (Section 76A) (b) The provisions relating to S EZ are applicable to goods admitted to a SEZ, and in the event of conflict betwe en the provisions of this Chapter and other chapters, the provisions of this Cha pter shall prevail. (Section 76B) (c) The Central Government is empowered to mak e rules regarding the requirements relating to goods or class of goods admissibl e to SEZ, nature of operations and the conditions to be fulfilled and the proced ure to be followed. (Section 76C) (d) Any goods imported directly from outside I ndia or procured from within India shall be authorized for admission to a SEZ Se ction 76D (e) Section 76E exempts any goods admitted to a special economic zone from duties of customs without prejudice to Section 76F, 76G and 76H. (f) Any go ods admitted to a special economic zone from the domestic tariff area shall be c hargeable to export duties at such rates as are leviable on such goods when

16.2 Customs exported. However, this would be subject to the rules made in this regar d under Section 76F. (g) Any goods removed from special economic zone for home consumption shall be c hargeable to duties of customs including anti dumping, counterveiling and safegu ard duties under Customs Tariff Act, 1975 as leviable on such goods when importe d. (h) SEZ units may be set up for: (i) Manufacture of goods, (ii) Rendering of services, (iii) Production, (iv) Processing, (v) Assembling, (vi) Trading, (vii) Repair, re making, re conditioning, and re engineering, (viii) Making of gold / silver/platinum jewellery and articles thereof or in connection therewith. (i) ( j) SEZ will be under the administrative control of the Development Commissioner. All activities in the zone of SEZ units, unless otherwise specified, shall be t hrough self certification procedure. (k) Goods going into the SEZ area from Domestic Tariff Area (DTA) shall be treat ed as deemed exports. (l) Goods coming from the SEZ area into DTA shall be treat ed as if the goods are being imported. 16.3 ADVANTAGES OF SPECIAL ECONOMIC ZONES The advantages of setting up a unit in Special Economic Zone are as follows: (a) Income Tax concessions to units in SE Z, (b) SEZ units may export goods and services including agro products, partly p rocessed jewellery, sub assemblies and component. They may also export by produc ts, rejects, waste, scrap arising out of the productions process. (c) SEZ units may import without payment of duty all types of goods, including capital goods w hether new or second hand required by it for its activities or in connection the rewith.

Special Economic Zone 16.3 (d) Further they may also procure goods required by it without payment of duty, from bonded warehouse in the DTA. (e) SEZ may import without payment of duty all types of goods for creating a central facility for use by software development units in SEZ. (f) SEZ units may also import/procure goods from DTA without payme nt of duty for setting up of units in the Zone. (g) Exemption from payment of Central Excise Duty on all goods eligible for proc urement from DTA. (h) Exemption from Central sales tax to supplies from DTA to S EZ, (i) (j) Duty Drawback available to DTA supplies, DEPB benefit to DTA supplie s, (k) Transactions from DTA to SEZ to be treated as exports under Income Tax Act a nd Customs Act. This is yet to be notified. (l) SEZ unit may also export goods m anufactured by it through a merchant exporter/status holder recognised under EXI M policy or any other EOU/EPZ/SEZ/EHTP/STP unit. (m) SEZ units may export and import under self certification. (n) Imports to DTA allowed on full payment of duty. (o) DTA clearances of SEZ units exempt from ad ditional duty of customs leviable on such goods under section 3(5) of Customs Ta riff Act. Normally, domestic internal taxes would be leviable on such goods. 16. 4 DISADVANTAGES From the above it is clear that setting up a SEZ unit has got nu mber of advantages, however there are certain disadvantages which are listed bel ow: (a) SEZ units can be set up only in the notified areas and to that extent th ere may be disadvantages in the location of the zones. (b) SEZ units require co ordination with Development Commissioner of SEZ and also with Customs department . This may lead to excess monitoring of the units by different authorities. This disadvantage is common however to other units in the EOU regimes. However, it i s envisaged that under SEZ this problem may be less when compared.

16.4 Customs 16.5 APPROVED SEZ The SEZ approved are as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. Po sitra (Gujarat) Nanguneri (Tamil Nadu) Dronagiri (Maharastra) Kakinada (Andhra P radesh) Gopalpur (Orissa) Hassan (Karnataka) Kulpi (West Bengal) Salt Lake (Kolk ata) Bhadohi (Uttar Pradesh) 10. Kanpur (Uttar Pradesh) 11. Greater Noida (Uttar Pradesh) 12. Indore ( Madhya Pradesh) 13. Paradeep ( Orissa ) Self examination questions 1. 2. 3. 4. What is a special economic zone? Discuss the important features of a special economic z one. Briefly explain the advantages of the special economic zones. Discuss the d isadvantages of the special economic zones.

17 INTER RELATIONSHIP OF ACCOUNTING WITH EXCISE, CUSTOMS AND SERVICE TAX 17.1 INTRODUCTION After studying the various statutory provisions of central exc ise, customs and service tax laws, one must understand the inter relationship of these tax laws with accounting, i.e., how these taxes are recorded in the books of accounts, or which accounting standards or guidance notes issued by the ICAI are applicable in respect of these taxes or what are the points of convergence and divergence between the provisions of these tax laws and accountancy principl es. In order to understand the practical implications of these tax provisions, i t becomes utmost necessary to know that how the tax related transactions are acc ounted for in the account books. In this chapter we will try to understand these issues. 17.2 ACCOUNTING STANDARDS ISSUED BY ACCOUNTING STANDARDS BOARD (ASB) OF ICAI Accounting Standards (ASs) are written policy documents issued by expert a ccounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transaction s in the financial statements. In India, accounting standards are issued by the Accounting Standards Board of the Institute of Chartered Accountants of India. T he composition of ASB is such that due representation is given to industry, asso ciations, banks, company law authorities, taxation authorities and the C&AG. The representatives of CBDT and Central Board of Excise and Customs have been invit ed to join the Board. The ostensible purpose of the standard setting bodies is t o promote the dissemination of timely and useful financial information to invest ors and certain other parties having an interest in the company s economic perfo rmance. The Accounting Standards reduce the accounting alternatives in the prepa ration of financial statements within the bounds of rationality, thereby ensurin g comparability of financial statements of different enterprises. The following Accounting Standards have relevance in central excise, customs and service tax m atters:

17.2 (i) Customs AS 1: Disclosure of Accounting Policies The purpose of this statement is to promote better understanding of financial st atements by establishing through an accounting standard the disclosure of signif icant accounting policies and the manner in which accounting policies are disclo sed in the financial statements. Such disclosure would also facilitate a more me aningful comparison between financial statements of different enterprises. There are three fundamental accounting assumptions namely going concern, consistency and accrual. They should be followed in preparing the financial statements. The fundamental accounting assumption of accrual has been recognized in the case of CCEx. v. Akay Cosmetics Pvt. Ltd. 2005 (182) E.L.T. 294 (S.C.). The Apex Court i n this case held that in tax accounting, a matching concept is followed. The val ue of excisable goods under erstwhile section 4(4)(d) of the Central Excise Act, 1944 is co related to the price at the factory gate. Therefore, costs (expenses ) for factors up to the stage of price at the factory gate alone could be taken in to account. When the value for the purposes of section 4 is the price at the facto ry gate, the costs which are includible up to that stage alone are includible. T herefore, costs beyond that stage are not includible in the assessable value. Al l significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Any change in accounting policies whi ch has a material effect in the current period or which is reasonably expected t o have a material effect in later periods should be disclosed. Therefore, the ac counting policies relating to treatment of CENVAT, valuation of inventories with respect to CENVAT, excise duty, customs duty etc. should be disclosed as per th is accounting standard. (ii) AS 2: Valuation of Inventories As per this standard , while valuing the inventory of the raw materials, the amount of CENVAT availed as credit on the purchase of raw materials should not be included in the cost o f such raw materials. Further, trade discounts, rebates, duty drawbacks and othe r similar items should be deducted in determining the cost of purchase of raw ma terials. The said treatment prescribed by this Accounting Standard has found fav our with the judicial rulings as well. The Supreme Court in the case of Collecto r of Central Excise, Pune v. Dai Ichi Karkaria Ltd. 1999 (112) E.L.T. 353 (S.C.) has held that excise duty paid on raw material, if modvatted should not be incl uded in determining the cost of production of excisable product. When cost is no t defined in the statute, its meaning should be interpreted in such a manner as it would be reckoned by a man of commerce. If he has paid the purchase price of Rs.100 for the input (exclusive of freight, insurance and the like) and gets bac k Rs.10 by way of Modvat credit allowed thereon, he would reckon the input cost as Rs.90. The Apex Court held that this, in real terms, would be the cost of the raw material (exclusive of freight, insurance and

Inter relationship of Accounting with Excise, Customs and Service tax 17.3 the like). The Supreme Court pointed out that this was also borne out by the Gui dance Note of the Indian Institute of Chartered Accountants. Here, it is worthwh ile to mention that AS 2 and section 145A of the Income tax Act prescribe differ ent treatments for inclusion/exclusion of CENVAT credit while valuing inventorie s. This concept has been dealt in some length in chapter 30 of Direct Tax Laws S tudy Material. (iii) AS 3: Cash Flow Statements This Standard specifies that the cash payments or refunds of taxes should be classified as operating activities while preparing the cash flow statement, unless these taxes can be identified wi th financing and investing activities e.g. amount deposited in PLA would be clas sified as operating activity while preparing the cash flow statement. (iv) AS 7: Accounting for Construction Contracts This standard prescribes that in respect of construction contracts the revenue and expenses of the contract should be acc ounted for as per the percentage completion method prescribed by this accounting standard. Under this method, contract revenue is matched with the contract cost incurred in reaching the stage of completion at the reporting date. Therefore, only the revenue, expenses and profit that can be attributed to the proportion o f work completed are reported. This method provides useful information on the ex tent of contract activity and performance during a period. Therefore, service pr oviders engaged in rendering taxable construction services should recognise thei r revenue in the account books in accordance with AS 7. (v) AS 9: Revenue Recogn ition The revenue received from rendering of services should be recognized in th e books of accounts in accordance with this standard. This standard provides tha t revenue from rendering of services should be recognized when the service is pe rformed, either by completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as achieved, when no significant uncertainty exis ts regarding: (a) the amount of consideration that will be derived from renderin g the service; (b) the collectibility of the amount when services are rendered. Completed service contract method is a method of accounting which recognises rev enue only when the rendering of services under a contract is completed or substa ntially completed. This method should be applied when the act to be performed is a single act and either it is performed or not performed so as to entitle the s ervice provider to revenue. There cannot be any partial performance in such kind of services e.g. insurance commission, facsimile services, advertising services etc. In case of insurance agency commission, revenue can be recognized on the e ffective commencement or on the renewal date of the related policies.

17.4 Customs Proportionate completion method is a method of accounting which recognises reven ue in the statement of profit and loss proportionately with the degree of comple tion of services under a contract. This method can be applied where performance is measured in terms of a series of acts performed e.g. tuition fee can be recog nized proportionate to period of instruction. (vi) AS 10: Accounting for Fixed A ssets This standard prescribes that the import duties, if any, and other non ref undable taxes paid on purchase of fixed assets should be included in the cost of the fixed assets while recording the same in the account books. Thus, amount of CENVAT (a refundable tax) should not be included in the cost of the fixed asset . Accounting Standards are recognized by the judicial forums was proved once aga in when the High Court in the case of Mangal Textile Mills Pvt. Ltd. v. Union of India 2004 (171) E.L.T. 160 (Guj.) accepted the value of plant and machinery co mputed by a chartered accountant in accordance with the principles set out in AS 10 on Fixed Assets. The value of plant and machinery was computed for the purpo se of compounded levy scheme. (vii) AS 11: Accounting for the Effects of Change in Foreign Exchange rates Accounting for the import/export of goods, services an d assets should be done as per the principles prescribed by this accounting stan dard. AS 11 on Accounting for Effects of Changes in Foreign Exchange Rates provi des that a foreign currency transaction should be initially recognized in the re porting currency on the basis of exchange rates between the reporting currency a nd the foreign currency prevalent at the date of transaction (an average rate fo r the period may be used). However, the average rate may not be used when exchan ge rate fluctuates significantly. A foreign currency transaction involves buying or selling of goods, services, or assets whose price is denominated in a foreig n currency. The exchange gain/loss arising from the difference between the rate prevalent at the date of transaction and rate on the date of settlement of monet ary item should be adjusted in Profit and Loss Account if settlement is in same period as initial recognition. However, if the settlement does not take place in same period as that of recognition, the balances of monetary items should be re stated at the closing rate at the balance sheet date. The gain/loss resulting fr om such restatement should also be adjusted in the Profit and Loss Account. (vii i) AS 12: Accounting for Government Grants Import quotas or import licences are considered as intangible assets (refer point (xi) below). If such import quotas or import licences are given at concessional rate or free of cost in the form of Government grants, they should be accounted for as per the provisions of this a ccounting standard. When these intangible assets are given at concessional rate, they should be recorded at

Inter relationship of Accounting with Excise, Customs and Service tax 17.5 actual (concessional) rate by debiting asset account and crediting bank account. However, if certain conditions are not fulfilled the Government grant becomes r efundable. Where, the grant becomes refundable and the asset is taken back, the book value of the asset should be written off. In case where the asset is given free of cost, the asset should be recorded at token value say Re.1 or Rs.100 by debiting the asset account and crediting profit and loss account. However, if th e grant becomes refundable (on account of non fulfillment of certain conditions) , the book value of the asset should be increased to the extent of the refund by debiting the asset account. The refund of Government grant should be treated as an extraordinary item as per AS 5 on Prior Period and Extraordinary Items and C hanges in Accounting Policies. Extraordinary items are income or expenses that a rise from events or transactions that are clearly distinct from the ordinary act ivities of the enterprise and, therefore are not expected to recur frequently or regularly. Such items should be disclosed in the statement of profit and loss a s a part of net profit or loss for the period in a manner that its impact on cur rent profit or loss can be perceived. (ix) AS 17: Segment Reporting AS 17 establ ishes principles for reporting financial information about the different types o f products and services an enterprise produces and the different geographical ar eas in which it operates. Large manufacturing companies producing multiple produ cts or having multi locational manufacturing operations or big service providers operating from multi locations (viz. banks) should follow this accounting stand ard for reporting inter alia segment wise revenue and expenses. While income tax expenses are not recorded as segment expenses, excise duty, customs duty and se rvice tax, being operating expenses, have to be recorded as segment expenses. (x ) AS 18: Related Party Disclosures This accounting standard requires the disclos ure of all related parties (as per the definition of the standard) and the trans actions effected with them in the financial statements. Therefore, excisable goo ds and imported goods involving related parties must be valued correctly so as t o avoid unnecessary litigations. (xi) AS 26: Intangible assets Import licences o r import quotas should be treated as intangible assets and recognized as such su bject to the fulfillment of recognition criteria laid down by this standard. As per AS 26, an intangible asset should be recognized if and only if: (a) it is pr obable that the future economic benefits that are attributable to the asset will flow

17.6 Customs to the enterprise; and (b) the cost of the asset can be measured reliably. If given free of cost or at concessional prices by the Government, accounting should be done as per AS 12 Ac counting for Government Grants (discussed in point (viii) above). (xii) AS 29: P rovisions, Contingent Liabilities and Contingent Assets The liability for excise duty arises as soon as the goods are manufactured. This accounting standard pro vides that a provision should be recognized when there is a present obligation t hat probably requires an outflow of resources and a reliable estimate can be mad e of the amount of obligation. A disclosure is also required for such provision. Therefore, a provision for unpaid excise duty in case of finished goods lying i n the factory or warehouse is created at the year end. Further, AS 29 prescribes that effect of new legislation should be considered in estimation of provision when there is sufficient objective evidence that the legislation is virtually ce rtain to be enacted e.g. a provision may be made in respect of a retrospective a mendment made by the Finance Bill which affects the duty liability of the assess ee when at the Balance Sheet date the Bill has been passed by the Parliament and is awaiting Presidents assent. In this case, it is virtually certain that the Bi ll will be enacted by obtaining the assent of the President. However, the variet y of circumstances that arise in practice usually make it impossible to specify a single event that will provide sufficient, objective evidence in every case. E vidence is required for both, i.e. what the legislation will demand and whether it is virtually certain to be enacted and implemented in due course. In many cas es sufficient objective evidence will not exist until the new legislation is ena cted. In the case of Motor Industries Company Ltd. v. Commissioner of Cus., Chen nai 2005 (188) E.L.T. 315 (Tri. Bang.) the CESTAT conformed to the principle s et out in AS 4 (now AS 29) that contingent gains should not be recognized in the financial statements until the realization of the gain is virtually certain. In this case, the assessee had deposited extra duty in the year 1995 at the instan ce of customs authorities pending investigation. In the year 2001 the dispute wa s settled in favour of the assessee. Thus, he filed a refund claim in 2001. The assessee had not recognized the refund as an asset until the customs authorities informed him to file a refund claim as only then, the refund became a reality. Therefore, immediately thereafter the extra duty deposit paid by the assessee wa s indicated and recognized in the financial statement for the year 2000 01 as re ceivables. The lower authority rejected the refund claim on the ground of unjust enrichment in asmuchas the refund was not recognized in 1995 but only in 2001. However, this stand of the lower authority was dismissed by the CESTAT on the gr ound that this was done in accordance with AS 4 (now AS 29).

Inter relationship of Accounting with Excise, Customs and Service tax 17.3 COST ACCOUNTING STANDARDS ISSUED BY ICWAI 17.7 Cost Accounting Standards (CAS) are issued by the Cost Accounting Standard Board (CASB) of the Institute of Cost and Works Accountants of India (ICWAI). Standar ds issued by CASB are recommendatory in nature. CAS 4: Cost of Production for Ca ptive Consumption CAS 4 has been issued by the Institute of Cost and Works Accou ntants of India. This standard deals with determination of cost of production fo r captive consumption of excisable goods. CBE&C, vide Circular No. 692/8/2003 da ted 13 2 2003, has clarified that for the purpose of valuation of excisable good s in case of captive consumption as per rule 8 of Central Excise Valuation Rules , 2000, calculation of cost of production should be done as per CAS 4 issued by the Institute of Cost and Works Accountants of India. It may be reiterated that in case of captive consumption, value of excisable goods is 110% of cost of prod uction of such goods. The provisions of CAS 4 are given below: Cost of productio n will include various cost components as defined in Cost Accounting Standard 1 (Classification of Cost CAS 1). The various cost components are: Direct Material C ost + Direct Labour Cost + Direct Expenses = PRIME COST Prime Cost + Production Overheads + Administration Overheads + Research & Development Expenses (Apportio ned) = Cost of Production Cost of Production: Cost of production shall consist o f Material Consumed, Direct Wages and Salaries, Direct Expenses, Works Overheads , Quality Control cost, Research and Development Cost, Packing cost, and Adminis trative Overheads relating to production. To arrive at cost of production of goo ds dispatched for captive consumption, adjustment for Stock of work in Process, finished goods, recoveries for sales of scrap, wastage etc shall be made. Materi al Consumed shall include materials directly identified for production of goods such as Cost of Production + Selling Cost + Distribution Cost = COST OF SALES Co st of Sales + Profit = Selling Price

17.8 Customs indigenous materials, imported materials, bought out items, self manufactured it ems, process materials and other items Cost of material consumed shall consist o f cost of material, duties and taxes, freight inwards, insurance, and other expe nditure directly attributable to procurement. Trade discount, rebates and other similar items will be deducted for determining the cost of materials. Cenvat cre dit, credit for countervailing customs duty, Sales Tax set off, VAT, duty draw b ack and other similar duties subsequently recovered/ recoverable by the enterpri se shall also be deducted. Direct wages and salaries shall include house rent al lowance, overtime and incentive payments made to employees directly engaged in t he manufacturing activities. Direct wages and salaries include fringe benefits s uch as contribution to provident fund and ESIS, bonus/ex gratia payment to emplo yees, provision for retirement benefits such as gratuity and superannuation, med ical benefits, subsidised food, leave with pay and holiday payment, leave encash ment and other allowances such as childrens education allowance, conveyance allow ance which are payable to employees in the normal course of business etc. Direct expenses are the expenses other than direct material cost and direct employees costs which can be identified with the product. Direct expenses include cost of utilities such as fuel, power, water, steam etc, royalty based on production, te chnical assistance/know how fees, amortized cost of moulds, patterns, patents etc , job charges, hire charges for tools and equipment, and charges for a particula r product designing etc. Works overheads are the indirect costs incurred in the production process. Works overheads include consumable stores and spares, deprec iation of and machinery, factory building etc, lease rent of production assets, repair and maintenance of plant and machinery, factory building etc, indirect em ployees cost connected with production activities, drawing and designing departm ent cost., insurance of plant and machinery, factory building, stock of raw mate rial & WIP etc., amortized cost of jigs, fixtures, tooling etc and service depar tment cost such as tool room, engineering & maintenance, pollution control etc. Quality control cost is the expenses incurred relating to quality control activi ties for adhering to quality standard. These expenses shall include salaries & w ages relating to employees engaged in quality control activity and other related expenses. Research and development cost incurred for development and improvemen t of the process or the existing product shall be included in the cost of produc tion. Administrative overheads in relation to production activities shall be inc luded in the cost of production. Administrative overheads in relation to activit ies other than manufacturing activities e.g. marketing, projects management, cor porate office expenses etc. shall be excluded from the cost of production.

Inter relationship of Accounting with Excise, Customs and Service tax 17.9 Packing cost includes both cost of primary and secondary packing required for tr ansfer/ dispatch of the goods used for captive consumption. If product is transf erred/dispatched duly packed for captive consumption, cost of such packing shall be included. Overheads shall be analysed into variable overheads and fixed over heads. The variable production overheads shall be absorbed in production cost ba sed on actual capacity utilisation. The fixed production overheads and other sim ilar item of fixed costs such as quality control cost, research and development costs, administrative overheads relating to manufacturing shall be absorbed in t he production cost on the basis of the normal capacity or actual capacity utiliz ation of the plant, whichever is higher. Normal Capacity is the production achie ved or achievable on an average over a period or season under normal circumstanc es taking into account the loss of capacity resulting from planned maintenance ( CAS 2). Stock of work in progress shall be valued at cost on the basis of stages of completion as per the cost accounting principles. Similarly, stock of finish ed goods shall be valued at cost. Opening and closing stock of work in progress shall be adjusted for calculation of cost of goods produced and similarly openin g and closing stock of finished goods shall be adjusted for calculation of goods despatched. In case the cost of a shorter period is to be determined, where the figures of opening and closing stock are not readily available, the adjustment of figures of opening and closing stock may be ignored. In case joint products a re produced, joint costs are allocated between the products on a rational and co nsistent basis. In case by products are produced, the net realisable value of by products is credited to the cost of production of the main product. For allocat ion of joint cost to joint products, the sales values of products at the split o ff point i.e. when the products become separately identifiable may become the ba sis. Some other basis may also be adopted. For example, in case of petroleum pro ducts, each product is assigned certain value based on its certain properties, m ay be calorific value and these values become the basis of apportionment of join t cost among petroleum products. The production process may generate scrap or wa ste. Realized or realizable value of scrap or waste shall be credited to the cos t of production. In case, scrap or waste does not have ready market and it is us ed for reprocessing, the scrap or waste value is taken at a rate of input cost d epending upon the stage at which such scrap or waste is recycled. The expenses i ncurred for making the scrap suitable for reprocessing shall be deducted from va lue of scrap or waste. Miscellaneous income relating to production shall be adju sted in the calculation of cost of production, for example, income from sale of empty containers used for despatch of the captively consumed goods produced unde r reference. Inputs received free of cost In case any input material, whether of direct or indirect nature, including packing material is

17.10 Customs supplied free of cost by the user of the captive product, the land ed cost of such material shall be included in the cost of production. The amorti zation cost of moulds, tools, dies & patterns etc received free of cost shall be included in the cost of production. Interest and financial charges being a fina ncial charge shall not be considered to be a part of cost of production. Abnorma l and non recurring cost arising due to unusual or unexpected occurrence of even ts, such as heavy break down of plants, accident, market condition restricting s ales below normal level, abnormal idle capacity, abnormal process loss, abnormal scrap and wastage, payments like VRS, retrenchment compensation, lay off wages etc. The abnormal cost shall not form the part of cost of production. Qty Q1 Q2 Quantity Produced (Unit of Measure) Quantity Despatched (Unit of Measure) Partic ulars Total Cost (Rs) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Material Consumed Direct Wa ges and Salaries Direct Expenses Works Overheads Quality Control Cost Research & Development Cost Administrative Overheads (relating to production activity) Tot al (1 to 7) Add : Opening stock of Work in Progress Less : Closing stock of Wor k in Progress Cost/ unit ( Rs)

Inter relationship of Accounting with Excise, Customs and Service tax 17.11 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Total (8+9 10) Less : Credit for Recoveries/ Scrap/By Products / misc income Packing cost Cost of production ( 11 12 + 13) Add: Inputs received free of cost Add: Amortised cost of Moulds, Tools, Dies & P atterns etc received free of cost Cost of Production for goods produced for capt ive consumption (14 + 15 + 16) Add : Opening stock of finished goods Less : Clos ing stock of finished goods Cost of production for goods despatched (17 + 18 1 9) The cost sheet should be prepared in the format as per Appendix 1 or as near the reto as possible. Statement of Cost of Production of _____________ manufactured/ to be manufactured during the period _____________. The ICWAI has also issued CA S 1: Classification of Cost to prepare cost statements. This standard is useful for assessment of excise duty and other taxes, anti dumping measures etc. CAS 5: Average (Equalized) Cost of Transportation is useful in calculating the amount of deduction on account of freight from assessable value of excisable goods. 17. 4 GUIDANCE NOTES Guidance Notes are primarily designed to provide guidance to me mbers of ICAI on matters which may arise in the course of their professional wor k and on which they may desire assistance in resolving issues which may pose dif ficulty. Guidance Notes are recommendatory in nature. While discharging their at test function, the practicing chartered accountants should examine, inter alia, whether the recommendations in a Guidance Note relating to an accounting matter have been followed or not. Guidance Notes are issued by the Council of the ICAI from time to time. Institute of Chartered Accountants of India has issued Guidan ce Notes on Accounting Treatment for Excise Duty and Accounting Treatment for MO DVAT/CENVAT. Presently, the Guidance Note on Accounting Treatment for MODVAT/CEN VAT is under revision. Also, ICAI has issued the Guidance Note on Accounting for State level value added tax which addresses to all accounting related issues of State level VAT. 17.4.1 Guidance Note on Accounting Treatment for Excise Duty A s per the Guidance Note on Accounting Treatment for Excise Duty, excise duty sho uld be considered as a manufacturing expense and like other manufacturing expens es be considered as an element of cost for inventory valuation.

17.12 Customs Where excise duty is paid on excisable goods and such goods are su bsequently utilised in the manufacturing process, the duty paid on such goods, i f the same is not recoverable from taxing authorities i.e. (non Cenvatable), bec omes a manufacturing cost and must be included in the valuation of work in progr ess or finished goods arising from the subsequent processing of such goods. Wher e the liability for excise duty has been incurred but its collection is deferred , provision for the unpaid liability should be made. Such a situation arises in case of finished goods lying in the warehouse or factory as the liability to exc ise duty arises on the manufacture thereof but the collection gets postponed til l the time of sale. Such a provision should be created by applying the rate of d uty prevailing at the Balance Sheet date. For this purpose, other factors affect ing the liability should also be considered, e.g., exemptions being availed by t he enterprise, pattern of sales export or domestic etc. Thus, if a small scale u nit is availing the benefit of exemption allowed in a particular financial year and declares that it wishes to avail such exemption during next financial year a lso, excise duty liability should be calculated after taking into consideration the availability of exemption under the relevant notification. Similarly, if an enterprise is captively consuming all its production of a specific product and h as been availing of exemption from payment of duty on that product, no provision for excise duty may be required in respect of non duty paid stock of that produ ct lying in factory or bonded warehouse. The excise liability so determined shou ld be added in the closing inventory of the finished goods. Disclosure of excise duty payable on final products As per the Accounting Standard Interpretation 14 , Disclosure of Revenue from Sales Transactions the amount of excise duty has to b e disclosed as a deduction from turnover. This excise duty should be the total e xcise duty for the year except the excise duty related to the difference between the closing stock and opening stock of finished goods. The excise duty related to the difference between the closing stock and the opening stock should be reco gnised separately in the profit and loss statements with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty. I t may be noted that the Accounting Standard Interpretations address questions th at arise in course of application of a standard. These are therefore issued afte r issue of the relevant standard. Authority of an interpretation is same as that of the Accounting Standard to which it relates. So far, 30 interpretations have been issued. These (ASIs) issued by ICAI should be read in conjunction with rel evant accounting standards. 17.4.2 Guidance Note on Accounting Treatment of MODV AT/CENVAT (under revision) The accounting treatment for CENVAT credit in the lig ht of the relevant provisions of the Guidance Note on Accounting Treatment of MO DVAT/CENVAT is discussed below:

Inter relationship of Accounting with Excise, Customs and Service tax 17.13 (i) Inputs Specified duty paid on inputs may be debited to a separate account, e.g., CENVAT Credit Receivable (Inputs) Account. As and when CENVAT credit is actually utili sed against payment of excise duty on final products, CENVAT Credit Receivable ( Inputs) Account is credited. (i) On purchase of raw materials Purchases A/c CENV AT Credit Receivable (Inputs) A/c To Creditors (ii) On clearance of finished goo ds Excise duty paid A/c To CENVAT Credit Receivable (Inputs) A/c In this case, t he purchase cost of the inputs would be net of the specified duty on inputs. The refore, the inputs consumed and the inventory of inputs would be valued on the b asis of purchase cost net of the specified duty on inputs. This treatment is als o suggested by the AS2 on Valuation of Inventories. The debit balance in CENVAT Credit Receivable (Inputs) Account should be shown on the assets side of the bal ance sheet under the head Advances. As per CENVAT provisions, credit of the excise duty can be taken immediately after receipt of the inputs. Therefore, necessary entries must be passed even though documents evidencing payment of specified du ty on said inputs are received later than the physical receipt of the same. Howe ver, such credit should be accounted only if one is reasonably certain of gettin g the said documents at a later date. It may be worthwhile to mention here that CENVAT is available instantly on receipt of the inputs and the same may be utili sed even before the said inputs are actually used in the production. If any inpu t is used for the production of both excisable and exempted final products and s eparate inventory of the input is not maintained, the entire inventory of inputs should be valued at net of excise duty. However, if separate inventory is being maintained, the inventory of inputs to be used in the manufacture of excisable final products should be valued at net of excise duty and the inventory of input s meant for manufacture of exempted final products should be valued at the actua l cost inclusive of excise duty. It is to be noted that while valuing inventorie s of final products, the value of inputs should be net of the duty on inputs, th at is, the purchase cost as reduced by the CENVAT credit. Dr. Dr. Dr.

17.14 Customs (ii) Capital goods As per AS 10 on Accounting for Fixed Assets, th e cost of an item of fixed asset comprises its purchase price, including import duties and other non refundable taxes or levies and any directly attributable co st of bringing the asset to its working condition for its intended use; any trad e discounts and rebates are deducted in arriving at the purchase price. Since, C ENVAT credit is a refundable tax, it should be reduced from the purchase cost of capital goods concerned in the light of the above definition. Since, under Inco me tax Act also, the cost of the fixed assets should be net of Cenvatable excise duty, depreciation under section 32 of the Income tax Act cannot be claimed in respect of such Cenvatable duty element of the fixed asset. Rule 4(4) of the CEN VAT Credit Rules, 2004 prescribe the same treatment. The CENVAT credit in respec t of capital goods is allowed for an amount not exceeding 50% of the duty paid o n such capital goods in the financial year in which the goods are received in fa ctory and the balance is allowed in the subsequent year(s). Therefore, amount of CENVAT credit taken in the financial year, in which goods are received, should be debited to an appropriate account, say, "CENVAT Credit Receivable (Capital Go ods) Account" and balance may be debited to another appropriate account, say, "C ENVAT Credit Deferred Account". In the subsequent financial year(s), when balanc e CENVAT credit is availed of, the appropriate adjustment for the same should be made, i.e., amount of CENVAT credit availed of should be credited to "CENVAT Cr edit Deferred Account" with a corresponding debit to "CENVAT Credit Receivable ( Capital Goods) Account". The unadjusted balance standing in the CENVAT Credit Re ceivable (Capital Goods) Account, if any, should be shown on the assets side of the balance sheet under the head advances . (i) On purchase of the asset Fixed as set A/c CENVAT Credit Receivable (Capital Goods) A/c (50% of specified duty) As CENVAT Credit Deferred A/c (50% of the specified duty) To Creditors (ii) On clea rance of finished goods in the year of purchase of fixed asset Excise duty paid A/c To CENVAT Credit Receivable (Capital Goods) A/c (iii) On availing the balanc e 50% credit in the subsequent financial year CENVAT Credit Receivable (Capital Goods) A/c To CENVAT Credit Deferred A/c Dr. Dr. Dr. Dr. Dr.

Inter relationship of Accounting with Excise, Customs and Service tax 17.15 CENV AT credit in respect of capital goods should be recognised in the books of accou nt only when the following conditions are satisfied: (i) (ii) The enterprise is entitled to the CENVAT credit as per the CENVAT provisions and there is a reason able certainty that the CENVAT credit would be utilised. (iii) Capital goods acquired on lease CENVAT credit is available to the lessee w here the capital goods have been acquired on lease. Where the financing arrangem ent between the lessor and the lessee covers the specified duty on capital goods , the asset given on lease should be shown at purchase cost net of the specified duty on the capital goods in the books of the lessor. Such specified duty on ca pital goods, (which would be availed of as CENVAT credit by the lessee) should b e recorded and disclosed separately as the duty recoverable from the lessee. Thi s duty would not form part of Minimum Lease Payments in view of the definition of the aforesaid term in AS 19 on Leases which is reproduced below: Minimum lease p ayments are the payments over the lease term that the lessee is, or can be requi red, to make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with: (a) in the case of the lessee, a ny residual value guaranteed by or on behalf of the lessee; or (i) (ii) by or on behalf of the lessee; or by an independent third party financially capable of m eeting this guarantee. (b) in the case of the lessor, any residual value guarant eed to the lessor: Where the specified duty on capital goods does not form part of the financing ar rangement and the lessee pays the duty directly to the supplier, obviously the s ame need not be recorded in the books of the lessor. In the books of the lessee, CENVAT credit receivable on the capital assets acquired on lease should be trea ted in the same manner as discussed in point no. (ii) above, except that the cos t of the relevant leased capital asset and depreciation would not be accounted i n the books of the lessee. (iv) Capital goods acquired on hire purchase Cenvat C redit is also available on the capital goods acquired on hire purchase. Capital asset acquired on hire purchase should be recorded and disclosed at net cash val ue, i.e., cash value net of CENVAT credit receivable in the books of the hirer. The other accounting treatment in relation to CENVAT in the books of the hirer s hould be the same as if the asset has been acquired on outright purchase basis. Such an accounting treatment, in the books of the hirer, should be made whether or not the specified duty on the capital goods forms part of the financing arran gement.

17.16 Customs In cases where the specified duty on capital goods forms part of t he hire purchase arrangement and the benefit of CENVAT credit is available to th e hirer, the vendor should book the sale in the normal course inclusive of the s pecified duty on the capital goods in his books. However, where the specified du ty on the capital goods does not form part of the financing arrangement and the hirer directly assumes the duty liability, the same need not be recorded in the books of the vendor. (v) Job Work (a) Accounting treatment in case of inputs and /or partially processed inputs/capital goods sent outside the factory to job wor ker for further processing The CENAVT credit on goods (being inputs or capital g oods) sent to the job worker for further processing, testing, repair, reconditio ning or for the manufacture of intermediate goods necessary for the manufacture of final products or any other purpose may be taken. However, if these goods are not returned within 180 days the credit on such goods has to be reversed. The e ntry for such reversal may be: When inputs are not returned Purchases A/c To CEN VAT Credit Receivable (Inputs) A/c When capital goods are not returned Fixed Ass ets A/c To CENVAT Credit Receivable (Capital Goods) A/c The credit can be retake n once the goods come back. Therefore, time factor is quite relevant in accounti ng for CENVAT credit in case of job work. (b) Accounting treatment in case of in puts received by a job worker for further processing on job work basis An enterp rise may receive inputs from a principal for processing and/or converting to fin al products on job work basis and may be required to avail CENVAT credit on such inputs and discharge duty liability on clearance of final products on behalf of the principal. The ownership of the inputs and final products shall continue to be that of the principal. In such cases, the enterprise should, at the time of taking CENVAT credit, debit an appropriate account say, "CENVAT Credit Receivabl e Account" and the account to be credited would depend upon the terms of job wor k with the principal. There are two possible alternatives viz., the job worker b ears excise duty or the principal bears the excise duty. In the first case the e ntry should be: Dr. Dr.

Inter relationship of Accounting with Excise, Customs and Service tax 17.17 CENV AT Credit Receivable A/c To Excise Duty paid A/c On clearance of the goods the e ntry would be: Excise Duty paid A/c To CENVAT Credit Receivable A/c In the secon d case the entry should be: CENVAT Credit Receivable A/c To Principal A/c On cle arance of the goods the entry would be: Principal A/c To CENVAT Credit Receivabl e A/c (vi) Review of balances in CENVAT credit receivable accounts A review of t he balances in CENVAT Credit Receivable Accounts should be taken up at the year end. If after such review, it is found that the balances of the CENVAT credit ar e not likely to be used in the normal course of business within a reasonable tim e, such non usable excess credit should be adjusted in the accounts. This adjust ment may be done irrespective of the right to carry forward such excess credit i n the CENVAT provisions. Such a situation of excess non usable credit may arise when the credit on inputs is more than the duty payable on the final products. T he above adjustment related to input credit should be made to the raw material o r input purchase account. The effect of this would be to increase the cost of pu rchase and thereby to increase the cost of inputs for the purpose of accounting for consumption and valuation of closing stocks. Where it is not possible to deb it or identify this excess credit to a particular lot or lots of materials purch ased, such excess credit may be apportioned over the entire purchases of raw mat erials, components etc., entitled to CENVAT credit during the year on pro rata b asis. The adjustment of excess credit related to capital goods should be made to the concerned Capital Goods Account. The excess CENVAT credit, either availed o r deferred, which relates to fixed assets acquired, should be added to the cost of the relevant fixed asset. Therefore, for accounting purposes, depreciation on the revised unamortised depreciable amount should be provided prospectively ove r the residual useful life of the asset. In case the fixed asset no longer exist s, the relevant amount should be written off in the profit and loss account. To facilitate such a treatment, CENVAT credit records should be maintained fixed as set wise. Dr. Dr. Dr. Dr.

17.18 Customs In relation to capital goods other than fixed assets (e.g. spares, accessories etc.), the accounting treatment for the excess CENVAT credit would be the same as that of inputs. It is, therefore, advisable that CENVAT Credit Re ceivable (Capital Goods) Account is maintained separately for fixed assets and o ther capital goods. Where, at any time during the year, it is revealed that the terms and conditions subject to which the benefit of CENVAT credit is available, have not been complied with or are not being capable of compliance, e.g., where the inputs are destroyed prior to the manufacture of final product or the relev ant plant and machinery cannot be put to use for the manufacture of final produc t, appropriate adjustments should be made in the accounts to reverse such credit which cannot be availed of for inputs and for capital goods. As a result of suc h adjustments, the balances of the CENVAT Credit Receivable Accounts in the fina ncial accounts may be lower than the credit available in the excise records. In such a case, a reconciliation statement should be prepared indicating the amount s adjusted so that a track is kept for the difference between the financial acco unts and the credit available as per the excise records. The balance of CENVAT a ccount (unavailed credit), in case of exports should not be written off as the s ame can be refunded in cash. (vii) Duty demands paid by debit to CENVAT credit b alance An enterprise may choose to discharge excise duty demands made by Central Excise Department from time to time by way of debit to CENVAT credit balance pe rtaining either to inputs or to capital goods. In that case, the duty demand so paid out of the CENVAT credit balance should be debited to appropriate account, depending upon the nature of demand and credit should be given to CENVAT Credit Receivable Account. For example, if the duty demand pertains to excise duty on f inished goods, the same should be debited to excise duty account. If, on the oth er hand, it pertains to disallowance of CENVAT credit taken on purchase of raw m aterials during the year, the same should be added to the cost of inputs. Approp riate adjustment in that case would have to be made while valuing inventory of i nputs. If the duty demand pertains to disallowance of CENVAT credit in respect o f purchases effected in earlier years, the accounting treatment would depend on whether the said inputs are consumed or are available in stock. If they are cons umed, the disallowance should be debited to excise duty account and treated as e xpense of the current year. If raw materials are still lying in stock, duty dema nd should be added to the cost of stock of inputs. Illustration of accounting fo r CENVAT Credit on Inputs The illustration is based on the following assumptions : (i) There is an opening stock of 50 units purchased at Rs. 100/ per unit (Exc ise duty @ 8%).

Inter relationship of Accounting with Excise, Customs and Service tax 17.19 (ii) 100 units of raw materials are purchased at Rs. 100/ per unit. Excise duty @ 8 %. (iii) 120 units of raw material are consumed in a process involving manufacture of a component. All the 120 units are sold in the year. The balance 30 units are manufactured and sold in the subsequent year. (iv) The manufactured components are sold at a price of Rs. 120/ per unit (including excise duty @ 8%). (v) CENV AT credit is available on the raw material purchased and can be set off against the excise duty payable on the final product. Conversion costs are ignored. For simplification, rates of excise duty are assumed to be inclusive of education ce ss. Profit & Loss Account Particulars To Opening Stock of Raw Materials To Purchases of Raw Materials Less : Closing Stock of Raw Materials To Excise Duty To Gross Profit Total Units 50 R ate 100 Amount (Rs) 5000 By Sales 120 120 Particulars Units Rate Amount (Rs. 144 00 100 150 30 100 100 100 10000 15000 3000 12000 8% 1152 1248 14400 Total 14400 NOTE: 1. 2. Opening balance of the CENVAT Credit Receivable Account is Rs.400 (8 % of Rs.5000) Besides showing stock of raw materials at Rs.3000, the Balance She et would also reflect, CENVAT Credit Receivable Account at Rs.48, arising out of the following entries: (a) Purchase A/c CENVAT Credit Receivable A/c To Sundry Creditors Dr. 10000 Dr. 800 10800

17.20 Customs (Being the purchase of 100 units at Rs.100 plus excise duty @ 8% i n respect of which the company is eligible to claim CENVAT credit) (b) Excise Du ty A/c To CENVAT Credit Receivable A/c (Being the payment of excise duty out of CENVAT credit available to the company) Balance Sheet Liabilities Amount Assets Current Assets, Loans and Advances (A)Current Assets Inventory of raw materials (B) Loans and Advances CENVAT Receivable A/c 3000 48 Amount Dr. 1152 1152 The opening balances of inventories of raw materials and CENVAT Receivable Accou nt, for the next year, would be Rs.3000 and Rs.48 respectively. 17.5 ACCOUNTING FOR CENVAT CREDIT OF SERVICE TAX The Guidance Note on Accounting for MODVAT/CENV AT does not contain the guidelines for accounting of service tax credit availed on input services. However, the CENVAT credit of service tax may be accounted fo r keeping in mind the principles of the CENVAT credit in respect of excise duty. It may be noted that service tax credit can be availed only after paying the va lue of the taxable service and the service tax thereon unlike the excise credit which can be availed as soon as the goods are received in the factory. Therefore , on receiving any input service the following entry may be passed: Input servic e A/c CENVAT Credit Suspense (Input Services) A/c To Sundry Creditors Dr. Dr. On paying the value of the taxable service and the service tax thereon the follo wing entry may be passed: CENVAT Credit Receivable (Input Services) A/c To CENVA T Credit Suspense (Input Services) A/c 17.6 ACCOUNTING TREATMENT FOR PLA Dr.

Inter relationship of Accounting with Excise, Customs and Service tax 17.21 Duty is deposited in Personal Ledger Account (PLA) through TR 6 challans. Whenever d uty is deposited, PLA Account or Account Current Account should be debited and b ank/cash account should be credited. While clearing the finished goods, if balan ce in PLA register is utilized for setting off the liability on finished goods, then excise duty paid account should be debited and PLA Account or Account Curre nt Account should be credited. The balance in the PLA Account or Account Current Account should tally with the balance in PLA register at the year end. Such bal ance should be shown under the Current Assets in the balance sheet. 17.7 ACCOUNTIN G FOR IMPORT AND EXPORT DUTIES The import duty paid on the fixed assets imported from a place other than India is capitalized along with the fixed assets while the import duty paid on imported raw materials is charged to profit and loss acc ount along with the cost of purchase of the same. The cost of inventories of the imported raw material will include the duties paid on them. However, in case of raw materials eligible for duty drawback, the amount of such duty drawback will be deducted from such cost. Export incentives should be recognized only when ul timate collectibility becomes reasonably certain. Here, it may be noted that CEN VAT credit may be taken in respect of additional duty of customs leviable under section 3 of the Customs Tariff Act. Therefore, accounting treatment for such du ty shall be governed by the principles discussed in pare 17.4.2. 17.8 MAINTENANC E OF BOOKS OF ACCOUNT Rule 10 of the Central Excise Rules, 2002 provides for the maintenance of a daily stock account by the assessee. Such records should be ma intained on daily basis indicating particulars regarding. (i) (ii) Description o f goods manufactured or produced Opening balance (iii) Quantity produced or manufactured (iv) Inventory of goods (v) Quantity rem oved (vi) Assessable value (vii) Amount of duty payable (viii) Particulars regarding amount of actual duty paid invoices.

17.22 Customs Further, rule 9 of the CENVAT Credit Rules, 2004 requires a manufa cturer of final products or the provider of output service to maintain proper re cords for the receipt, disposal, consumption and inventory of the input and capi tal goods in which the relevant information regarding the value, duty paid, CENV AT credit taken and utilized, the person from whom the input or capital goods ha ve been procured is recorded. Such records should also be maintained in respect of input services. However, unlike section 44AA of the Income tax Act which pres cribes certain statutory books of accounts which are to be maintained by the ass essee, the excise, customs and service tax laws do not provide for maintenance o f any statutory books of accounts. Therefore, in case of assessee being a compan y the books of account should be maintained as per the requirement of the Compan ies Act. Section 209 of the Companies Act states that every company is required to keep proper books of account showing (i) all monies received and spent and th e details thereof, (ii) sales and purchases of goods, and (iii) assets and liabi lities. A company engaged in production, processing, manufacturing or mining act ivities has also to maintain, if required by the Central Government, cost accoun ting records i.e., particulars relating to utilisation of material, labour and o ther items of costs. If such books of accounts which are necessary to give a tru e and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions are not kept, proper books of accou nts shall not be deemed to have been kept. Also if such books are not kept on ac crual basis and according to system of double entry book keeping, proper books o f accounts shall not be deemed to have been kept. As per rule 5(1) of Service Ta x Rules, 1994, every person shall furnish to the Superintendent of Central Excis e at the time of filing his return for the first time a list of all accounts mai ntained by the assessee in relation to service tax including memoranda received from his branch offices. The records (including computerised data) as maintained by an assessee in accordance with various laws in force from time to time shall be acceptable. Thus, the records as required under other laws applicable to an assessee shall be the records required for service tax e.g. the Council of the I nstitute of Chartered Accountants of India has notified the following books whic h should be maintained by a practising chartered accountant: (i) (ii) Cash Book, Ledger Rule 6F of the Income Tax Rules, 1962, prescribes that the person carrying on le gal, medical, engineering, or architectural profession or the profession of acco untancy or technical consultancy or interior decoration or authorised representa tive or film artist, subject to certain exemptions specified in the proviso to R ule 6F(1), should maintain the following : (i) Cash Book,

Inter relationship of Accounting with Excise, Customs and Service tax 17.23 (ii) Journal, if accounts are maintained on mercantile system of accounting, (iii) Ledger, (iv) Carbon copies of bills and receipts, (v) Original Bills & Rec eipts for expenses. 17.9 DIVERGENCE BETWEEN ACCOUNTING AND TAXATION PRINCIPLES F ollowing are the instances of divergence between accounting and taxation princip les with regards to indirect taxes: (i) Valuation in excise The value of finishe d goods as per the excise provisions may differ from the value recorded in the f inancial records on account of various additions or deductions made to/from the invoice value in terms of section 4 and Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. For example, in financial records the invoice value shall be recorded as the value of finished goods while for excise purposes advertising expenses, storage and outward handling expenses, packing ex penses etc. if any, borne by the buyer in connection with the sale shall be adde d to the invoice value. (ii) Definition of capital goods As per rule 2(a)(A)(iii ) of the CENVAT Credit Rules, 2004 capital goods include components, spares and accessories of specified capital goods whereas these are not always treated as c apital goods in the financial accounts. As per Accounting Standard Interpretatio n 2 on Accounting for Machinery Spares, these items are treated as inventories f or the purpose of AS 2 if they are not specific to a particular item of fixed as set and can be used generally for various items of fixed assets. These should be charged to profit and loss account as and when issued for consumption in the or dinary course of operations. Further, rule 2(a)(A)(1) clarifies that capital goo ds does not cover equipment or appliances used in the office of the manufacturer . However, such a distinction is not being made in the accounting principles. AS 10 on Fixed Assets does not call for exclusion of the capital goods used in the office from the definition of fixed assets. (iii) Review of CENVAT credit balan ces As per the Guidance Note on Accounting Treatment for MODVAT/CENVAT, balances in CENVAT Receivable Account pertaining to inputs and capital goods should be r eviewed at the year end. If on such review any non usable excess credit (i.e. cr edit not likely to be used in normal course of business within reasonable time) is found the same should be adjusted in the accounts. However, the CENVAT provis ions do not provide for such write off. The CENVAT credit

17.24 Customs balance can be carried forward to the next year for being used in setting off the duty/service tax liability. Therefore, a reconciliation statemen t should be prepared to explain the difference between financial accounts and ex cise records. (iv) Valuation in case of customs As per the customs provisions, t he rate of exchange used for conversion of foreign currency in to Indian currenc y for valuation purposes should be the rate declared by the Central Board of Exc ise and Customs. However, as per AS 11 the rate of exchange for conversion of fo reign currency into reporting currency in respect of a transaction should be the rate prevalent at the date of the transaction. Thus, while valuing the imported goods for the purpose of paying customs duty, rate declared by CBEC is used whe reas while recording the value of such goods in the books of accounts the exchan ge rate prevalent on the date of transaction as declared by the RBI is used. It may be important to note here that unlike Customs Act and Incometax Act, where th e rate of exchange to be adopted for the purpose of conversion of currency is pr escribed by section 14(2) and rule 115 and 115A of Income Tax Rules respectively , there is no statutory provision in the service tax laws providing for the rate s of conversion of currency for the purpose of converting consideration of taxab le services received in foreign currency into Indian currency. Further, there ma y be more difference between the value of imported goods derived as per the cust oms provisions and the value computed as per the accounting principles. The diff erences may be on account of various additions or deductions made to/from the in voice value in terms of section 14 and Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. For example, customs laws provide for the addit ion of commission and brokerage, licence or royalty fees etc. to the value of th e imported goods. Also, price reduced after importation is not considered for cu stoms purposes whilst the same is considered for recording the value of the good s in the account books. (v) Recognition of revenue in case of service tax As per accrual concept of accounting the value of taxable services performed should be recognized during the period in which it has been performed even though the pay ment for the same has not been received in that period. However, as per Rule 6(1 ) of the Service Tax Rules, 1994 service tax is payable only on the value of tax able services received i.e., the liability to pay service tax arises only after the receipt of the value of the services.

Inter relationship of Accounting with Excise, Customs and Service tax 17.25 The following entries are suggested in order to avoid any conflicts with the service tax provisions: (a) At the time of billing to the client: Client A/c To Service Income A/c To Service Tax Deferred Liability (b) At the time of realization of the consideration Service Tax Deferred Liability A/c To Service Tax Payable A/c As the service tax for the month of March has to be paid by the 31st of March, t here will not be any balance at the year end in the service tax payable account. Further, there will not be any need of creating any provision for the service t ax payable as there will not be any liability for the same. The balance in the C ENVAT Credit Receivable (Input Service) A/c may be set off against the Service T ax Payable A/c and the difference left in the Service Tax Payable A/c should be paid to the department. (vi) Treatment of advance in case of service tax As per AS 9 on Revenue Recognition, revenue from service transactions is usually recogn ised as the service is performed, either by the proportionate completion method or by the completed service contract method. Therefore, advance received towards the provision of service is not recognized as revenue in the profit and loss ac count but is shown under the head Loans and Advances in the balance sheet. However , as per section 67(3) of the Finance Act, 1994 gross amount charged for the tax able service includes any amount received towards the taxable service before, du ring or after provision of such service and it is this gross amount charged, whi ch is the value of taxable service, on which service tax has to be paid. This is in contrast with AS 9 which does not recognize advance as revenue in the profit and loss account. (vii) Reimbursements in case of service tax Subject to the pr ovisions of rule 5(2), rule 5(1) of the Service Tax (Determination of Value) Rul es, 2006 lays down that the expenditure or costs incurred by the service provide r in the course of providing taxable service forms integral part of the taxable value of the service provided or to be provided. Therefore, they shall be includ ed in the value for the purpose of charging service tax on the said service. It shall not be relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client. Dr. Dr.

17.26 Customs This means that out of pocket expenses incurred by the service pro vider for the provision of services shall form part of the value of taxable serv ices and would be charged to service tax. However, for accounting purposes the v alue received from the service receiver for services alone is treated as revenue in the profit and loss account. Expenditure or costs reimbursed are in the natu re of reimbursement of out of pocket expenses (e.g. conveyance, boarding, lodgin g etc.) incurred by the service provider in the course of providing the service and are thus not recognised in the profit and loss account. (viii) Recognition o f revenue in construction contracts The service providers engaged in constructio n services should account the revenue and expenses of the contract as per the pe rcentage completion method prescribed by this accounting standard. Under this me thod, contract revenue is matched with the contract cost incurred in reaching th e stage of completion. Therefore, only the revenue, expenses and profit that can be attributed to the proportion of work completed are reported. However, as per service tax provisions, the gross amount as and when received is considered for paying service tax. Therefore, cash basis is relevant for charging of service tax whereas accrual basis is adopted for accounting purposes. Self examination questi ons 1. 2. 3. 4. 5. Enumerate any five accounting standards which may be relevant in central excise, customs or service tax matters. Discuss the treatment prescr ibed by the Guidance Note on Excise Duty for accounting excise duty in the books of account. How should the excise duty be disclosed in the profit and loss acco unt? Explain the accounting treatment of inputs on which CENVAT credit has been availed. Write a brief note on divergence between accounting principles and taxa tion laws.