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Basic Concepts of Excise Tax

Basic Concepts of Excise Tax

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BASIC CONCEPTS OF EXCISE TAX
 A. SOME IMPORTANT ASPECTSGENERAL ± Central Excise Duty is renamed as ³Central Value Added Tax´ (CENVAT) w.e.f.12.5.2000.
1. BASIC CONCEPTS
 Basic pre-requisites for levy of Central excise duty ± In order to acquire basic workingknowledge in relation to law on Central Excise, understanding of some of the basic conceptsof Central Excise would be very much essential.In order to attract levy of excise duty: STEP 1 - There should be production or manufacturerof goods in India: STEP 2 - Such production or manufacturer should result in creation of excisable goods, and STEP: 3 - Such excisable goods should be specified in the Schedule toCentral Excise Tariff Act, 1985 (CETA).
2. MANUFACTURE
 In order to levy central excise duty; it is necessary that a new article should come intoexistence as a result of manufacturing activity. Unless there is manufacture, excise duty isnot payable. (Hawkins Cookers Ltd. V Collector ± 1997 ELT 507 S.C.).Section 2(f) of theCentral Excise Act,1944 (CEA) defines ³manufacture´ as ³manufacture´ includes anyprocess: (i) incidental or ancillary to the completion of a manufactured product; and (ii)which is specified in relation to any goods in the Section or Chapter notes of the FirstSchedule to the Central Excise Tariff Act, 1985, as amounting to manufacture, or (iii) whichin relation to goods specified in Third Schedule, [MRP Goods] involves packing or repackingof such goods in a Unit container or labeling or rebelling of containers including thedeclaration or alteration of retail sale price on it or adoption of any other treatment on thegoods to render the product marketable to the consumer.The statutory definition would indicate that ³manufacture´ under Central Excise has to beconstrued in Two ways: (A) ³general concept´ of manufacture: (B) ³deemed concept´ of manufacture.A. General concept- The general concept of manufacture has been a subject matter of discussions in a number of cases by the Supreme Court. Some of the leading case laws onthe subject are UOI vs. Delhi Cloth and General Mills Co. Ltd. 1 ELT J 199 (SC), South BiharSugar Mills vs. UOI 2 ELT J 336 (SC), Empire Industries Ltd. Vs. UOI 20 ELT 179 (SC),FoodPackers 6 ELT 343 (SC), Sterling Goods vs. State of Karnataka 26 ELT 3 (SC), SiddheshwariCotton Mills P. Ltd. vs. UIO 39 ELT 498 (SC), Mafatlal Fine Spg. & Mfg. Co. Ltd. vs. CCE 40ELT 218 (SC), State of Maharashtra Vs Mahalaxmi Stores 152 ELT 30 S.C. In the Delhi ClothMills case the Apex Court observed that: µan activity or process, in order to amount tomanufacture must lead to emergence of a new commercial product, different from the onewith which the process was started. In other words, it should be article with different name,character and use.¶ µManufacture¶ implies a change but every change in raw material is not
 
manufacture. Something more is necessary. There must be such transformation of rawmaterial that a new and different article emerges having a distinct name character and use.In the case of Mahalaxmi Stores, the Hon. Supreme Court observed that ³Every type of variation of goods or finishing of goods would not amount to manufacture unless it results inemergence of new commercial commodity. Repair or reconditioning of an article does notamount to manufacture because no new goods come into existence.B. Deemed concept of manufacture- Section 2(f) (ii) and (iii) of CEA, provides for concept of deemed manufacture. If an activity, in relation to specified goods, is specified as amountingto manufacturing activity in the relevant Chapter Notes/Section Notes of CETA, then suchactivity would amount to manufacture and the resultant products would attract levy of excise duty. [Section 2(f) (ii)]. To illustrate, normally an activity of repacking from a bulkpack to smaller packs would not amount to manufacture under the general concept.However in Chapter 29 such an activity is specified as amounting to manufacture by way of a Chapter Note. Such activity would therefore be deemed to be manufacture in relation togoods falling under Chapter 29 and attract levy of Central Excise duty, irrespective of theprinciples relating to manufacture under the general concept. Similarly Section 2(f) (iii)provides for a deeming fiction that in relation to goods specified in Third Schedule, [MRPgoods] the activities of packing or repacking in a Unit container or labeling or rebelling of containers including the declaration or alteration of retail sale price on it or adoption of anyother treatment on the goods to render the product marketable to the consumer, shallamount to ³manufacture´.
3
. MANUFACTURER 
 The Excise Duty is payable by a manufacturer. The concept of µmanufacturer¶ is relevant forfixation of liability to Central Excise Duty. Section 2 (f),of the CEA, while defining µmanufacture¶ states that the word µmanufacturer¶ shall be construed accordingly and shallinclude not only a person who employs hired labor in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on hisown account.As per the statutory definition there are two categories of the persons who can be termedas a manufacturer. (i) Persons who manufacture the goods themselves on their own account(including on job work basis) and (ii) persons who get the goods manufactured throughhired labor. If the hired labor is an employee, his employer will be considered asmanufacturer. The relationship of servant and master must be established in order to treatthe employer as manufacturer.
4. EXCISABLE GOODS
 According to Section 2(d) of CEA: ³Excisable goods´ means goods specified in the firstschedule and the second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as
 
being subject to a duty and includes salt´.Thus any manufactured product becomes ³excisable goods´ as defined under CEA, theproduct or article should be µgoods¶. The term ³goods´ has not been defined underCEA/CER.i. Article 366 (12) of the Constitution of India which gives an inclusive definition of the term ³goods´ states that: ³Goods´ includes all materials, commodities and articles´.ii. The Hon Supreme Court in DCM case has observed that an article can be called µgoods¶ if it is known to the market as such and ordinarily come to the market for being bought andsold. Actual sale of the article is not important but it must be capable of being bought andsold.iii. The concept of µgoods¶ and test of marketability has been discussed in detail in SupremeCourt ruling in the case of Moti Laminates Pvt. Ltd. vs. CCE 76 ELT 241 (SC), wherein it isobserved that: ³The duty of excise being on production and manufacture which meansbringing out a new commodity, it is implicit that such goods must be usable, moveablesaleable and marketable. The duty is on manufacture or production but the production ormanufacture is carried on for taking such goods to the market for sale. The obvious rationalfor levying excise duty, linking it with production or manufacture is that the goods soproduced must be a distinct commodity known as such in common parlance or to thecommercial community for purposes of buying and selling´. An Explanation has been addedto Section 2(d) to define the term ³goods´ as including any article, material or substancewhich is capable of being bought and sold for a consideration and that such goods shall bedeemed to be marketable.iv. It may happen that in the course of manufacture of final products, various other articlesarise at intermediate stages which are elementary or unfinished or which are crude, impureor unrefined or which have short shelf life. Such articles not being acceptable to theconsumer or being capable of coming to market to be bought and sold are not µgoods.¶ v. Immovable property or articles embedded to earth, buildings and civil structures are alsonot goods because they cannot ordinarily come to the market to be bought and sold.vi. Information technology/intellectual property may be an intangible asset but the momentthey are put on a media (paper, cassettes, diskettes, etc.) and supplied on such media,they become chattel or goods.vii. An article or product may fall under a specific heading/sub-heading in the Schedule toCETA but upon application of test of marketability, as applied by the Hon. Supreme Courtfrom time to time, it may not constitute µgoods¶ so as to attract excise duty.

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