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. The
objective of the study material is to provide teaching material to the students 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 case students need any
clarifications or have any suggestions to make for further improvement of the material
contained herein they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for
the students. However, the study material has not been specifically 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 the 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 retrieval system,
or transmitted, in any form, or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without prior permission, in writing, from the publisher.

Website : www.icai.org E-mail : [email protected]

Published by Dr. T.P. Ghosh, Director of Studies, ICAI, C-1, Sector-1, NOIDA-201301
Typeset and designed by Gursharan K Madhwal at Board of Studies, The Institute of 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 expected to advise clients and organisations in
this area of tax management. Accordingly, adequate emphasis has been given in the
chartered accountancy curriculum on the subject. This study material covers the syllabus for
that paper and includes laws relating to central excise, customs, service tax and VAT. VAT is
introduced for the first time in the new Final Course.
The study material has been divided into three sections. Section A covers central excise law,
Section B deals with service tax and VAT and Section C deals with customs law. The subject
matter of all the sections is based on the law as amended by the Finance Act, 2006. Though
the law is vast, we have tried to make the study material simple yet comprehensive. The
chapters have been organised in a logical sequence so as to facilitate easy understanding of
the law. The latest amendments have been given in italics. Another helpful feature in this
study material is the addition of self-examination questions at the end of every chapter which
will be useful to test the understanding of the students with regard to various provisions in the
chapter. Answers have been given in respect of those questions which are based on judicial
decisions or involving legal interpretations.
Students may keep in mind that though 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
material. This would be helpful for solving problems, answering a variety of questions and
remembering sections and rules. Past suggested answers published by the Institute also
provide a rich bank of questions. Students must also update themselves regularly with
amendments in the law and other relevant judicial and legislative 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 friendly. 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 send their suggestions on how to make this
study material more useful for them. Students are welcome to write to the Director of Studies,
The Institute of Chartered 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
Objectives:
(a) To gain expert knowledge of the principles of the laws relating to central excise
customs and service tax,
(b) To acquire the ability to apply the knowledge of the provisions of the above-
mentioned laws to various situations in actual practice.
Contents:
Section A: Central Excise (40 marks)
Central Excise Act, 1944 and the related Rules, Circulars and Notifications; Central
Excise Tariff Act, 1985 and the related Rules.
Section B: Service tax & VAT (40 marks)
Law relating to service tax as contained in the Finance Act, 1994 as amended from time to
time and the related Rules, Circulars and Notifications.
Issues related to Value Added Tax:
1. Backdrop for State-Level VAT in India
2. Taxonomy of VAT
3. Input tax credit, tax invoices
4. Small dealers and composition scheme
5. VAT procedures
6. VAT in relation to incentive schemes, works contract, lease transactions and hire
purchase transactions.
7. 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 inter-
relationship of accounting with excise, customs and service tax and also the ethical
considerations involved in the compliance of these laws.
Note – If new legislations 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 Constitution of India....................................................................................... 1.1
1.2 Direct and indirect taxes ................................................................................ 1.2
1.3 What is excise duty........................................................................................ 1.2
1.4 History of central excise law........................................................................... 1.3
1.5 Body of central excise law.............................................................................. 1.4
1.6 Exemption notifications in central excise......................................................... 1.5
1.7 Departmental circulars and trade notices in central excise............................... 1.6
1.8 Definitions under excise law........................................................................... 1.6
1.9 Levy and collection of duty............................................................................. 1.7
1.10 Goods and excisable goods ........................................................................... 1.8
1.11 Manufacture ................................................................................................ 1.12
1.12 Dutiability of intermediate products and captive consumption......................... 1.20
1.13 Dutiability of site related activities and immovable property ........................... 1.21
1.14 Whether assembly amounts to manufacture .................................................. 1.26
1.15 Dutiability of waste and scrap....................................................................... 1.26
1.16 Packing, labelling and branding activities...................................................... 1.27
1.17 Can the test of change in tariff heading/sub-headings be adopted for
identifying whether a process amounts to manufacture.................................. 1.29
1.18 Determination of taxable event for charge of duty.......................................... 1.30

CHAPTER 2 – CLASSIFICATION OF EXCISABLE GOODS

2.1 Introduction ................................................................................................... 2.1
2.2 Central Excise Tariff ...................................................................................... 2.1
2.3 Explanatory Notes to the HSN ........................................................................ 2.3
2.4 Power of Central Government to amend first and second schedules
of the tariff .................................................................................................... 2.3
2.5 Interpretative Rules to Central Excise Tariff .................................................... 2.3

i
CHAPTER 3 – VALUATION OF EXCISABLE GOODS
3.1 Basis of valuation .......................................................................................... 3.1
3.2 Valuation under section 4 (ad valorem)........................................................... 3.2
3.3. Related persons ............................................................................................ 3.6
3.4 Place of removal.......................................................................................... 3.13
3.5 Price is the sole consideration...................................................................... 3.13
3.6 Ingredients of transaction value.................................................................... 3.13
3.7 Situations where transaction value does not apply ........................................ 3.16
3.8 Valuation Rules, 2000.................................................................................. 3.17
3.9 Analysis of the Valuation Rules .................................................................... 3.24
3.10 Valuation under different circumstances ....................................................... 3.29
3.11 Maximum Retail Price (MRP) based valuation [Section 4A]............................ 3.32

CHAPTER 4 – CENVAT CREDIT RULES, 2004

4.1 Introduction & brief legislative history ............................................................. 4.1
4.2 CENVAT Credit Rules, 2004 .......................................................................... 4.1
4.3 Rule 2 - Definitions ........................................................................................ 4.2
4.4 Rule 3 - Cenvat credit .................................................................................. 4.11
4.5 Rule 4 - Conditions for availing the Cenvat credit .......................................... 4.16
4.6 Job work provisions [Rule 4(5) and 4(6)]....................................................... 4.17
4.7 Rule 5 - Refund of Cenvat credit .................................................................. 4.17
4.8 Rule 6 - Obligation of manufacturer of dutiable and exempted goods and
provider of taxable and exempted services ................................................... 4.20
4.9 Option to pay duty ....................................................................................... 4.23
4.10 Rule 7 – Manner of distribution of credit by input service distributor ............... 4.24
4.11 Rule 8 – Storage of inputs outside the factory of the manufacturer................. 4.24
4.12 Rule 9 - Documents and accounts ................................................................ 4.25
4.13 Rule 9A – Information relating to principal inputs .......................................... 4.27
4.14 Rule 10 - Transfer of credit .......................................................................... 4.28
4.15 Rule 11 - Transitional provisions .................................................................. 4.29
4.16 Rule 12 - Special dispensation in respect 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 Rule 13 – Power of Central Government to notify goods for
deemed Cenvat credit .................................................................................. 4.29
4.18 Rule 14 – Recovery of Cenvat credit wrongly taken or erroneously refunded .. 4.29
4.19 Rule 15 - Confiscation and penalty ............................................................... 4.30
4.20 Rule 16 - Supplementary provision ............................................................... 4.30
4.21 CBEC guidelines on Cenvat credit ................................................................ 4.31
4.22 Cenvat and assessable value ....................................................................... 4.32
4.23 Cenvat on defective goods returned ............................................................. 4.32
4.24 Balance of Cenvat credit lying unutilized at year end..................................... 4.33
4.25 Procedure for removal of inputs.................................................................... 4.33

CHAPTER 5 – GENERAL PROCEDURES UNDER CENTRAL EXCISE

5.1 Introduction ................................................................................................... 5.1
5.2 Removal of excisable goods [Rule 4] .............................................................. 5.2
5.3 Date for determination of duty and tariff valuation [Rule 5]............................... 5.3
5.4 Assessment [Rule 6] ...................................................................................... 5.4
5.5 Manner of payment [Rule 8] ........................................................................... 5.8
5.6 Registration [Rule 9] .................................................................................... 5.11
5.7 Records [Rule 10]........................................................................................ 5.17
5.8 Electronic maintenance of records and preparation
of returns and documents ............................................................................ 5.19
5.9 Invoicing [Rule 11]....................................................................................... 5.20
5.10 Returns [Rule 12] ........................................................................................ 5.23
5.11 Job work in article of jewellery [Rule 12AA]................................................... 5.25
5.12 Maintenance of records & payment of duty by the
independent weaver of unprocessed fabrics [Rule 12C] ................................. 5.27
5.13 Special procedure for payment of duty [Rule 15] ........................................... 5.27
5.14 Return of duty paid goods to the factory [Rule 16] ......................................... 5.27
5.15 Removal of goods for job work etc. [Rule 16A] .............................................. 5.28
5.16 Special procedure for removal of semi-finished goods for certain
purposes [Rule 16B] .................................................................................... 5.28
5.17 Special procedure for removal of excisable goods for carrying out
tests [Rule 16C]........................................................................................... 5.29

iii
5.18 Removal of goods by a 100% export oriented undertaking for domestic
tariff area [Rule 17]...................................................................................... 5.29
5.19 Powers of central excise officers .................................................................. 5.29
5.20 Account current and procedures relating thereto ........................................... 5.31
5.21 Samples...................................................................................................... 5.35

CHAPTER 6 – EXPORT PROCEDURES

6.1 Introduction ................................................................................................... 6.1
6.2 Export without payment of duty under bond/letter of undertaking...................... 6.1
6.3 Categories of exports and the conditions and safeguards thereto................... 6.10
6.4 Export procedure ......................................................................................... 6.13
6.5 Procedure for discharge of bond or the duty liability ...................................... 6.15
6.6 Cancellation of export documents................................................................. 6.16
6.7 Re-entry of the goods cleared for export under bond but not actually
exported, in the factory of manufacture......................................................... 6.17
6.8 Re-import of exported goods for repairs etc. and subsequent re-export .......... 6.17
6.9 Entry of goods in another factory of the same manufacturer for
consolidation and loading of consignment for export ..................................... 6.18
6.10 Samples of export goods ............................................................................. 6.18
6.11 Export under claim for rebate ....................................................................... 6.18
6.12 Miscellaneous matters ................................................................................. 6.29

CHAPTER 7 – BONDS
7.1 Bond ............................................................................................................. 7.1
7.2 Types of bonds.............................................................................................. 7.1
7.3 Guidelines for executing bonds ...................................................................... 7.2
7.4 Bonds for provisional assessment .................................................................. 7.3
7.5 Stamps on bond ............................................................................................ 7.3
7.6 Execution of bond by government undertakings or autonomous
corporations .................................................................................................. 7.3
7.7 Security ........................................................................................................ 7.4
7.8 Surety ........................................................................................................... 7.5
7.9 Guarantee bond executed by bank ................................................................. 7.5
7.10 Preservation of bond and retention of securities.............................................. 7.5

iv
7.11 Verification of sureties ................................................................................... 7.6
7.12 Bond accepting authority ............................................................................... 7.6

CHAPTER 8 – DEMAND, ADJUDICATION AND OFFENCES

8.1 Demand ........................................................................................................ 8.1
8.2 Issue of duty demand notice .......................................................................... 8.1
8.3 Waiver of notice ............................................................................................ 8.3
8.4 Certain common questions about the provisions relating to demand................. 8.3
8.5 Adjudication .................................................................................................. 8.5
8.6 Interest ......................................................................................................... 8.8
8.7 Offences ....................................................................................................... 8.8
8.8 Civil and criminal proceedings...................................................................... 8.10
8.9 Penalty and confiscation .............................................................................. 8.14
8.10 Recovery of dues ........................................................................................ 8.18

CHAPTER 9 – REFUND
9.1 Refund of duty............................................................................................... 9.1
9.2 Interest on delayed refund ............................................................................. 9.1
9.3 Theory of unjust enrichment ........................................................................... 9.1
9.4 Assessment documents to show duty payment particulars ............................... 9.3
9.5 Time-limit for making the application for refund of duty.................................... 9.4
9.6 Presentation of refund claim........................................................................... 9.5
9.7 Payment of refund ......................................................................................... 9.6
9.8 Post Audit ..................................................................................................... 9.6
9.9 Monitoring and control for timely disposal of refunds ....................................... 9.7
9.10 Provisions relating to interest on delayed refunds [Section 11BB] .................... 9.7
9.11 Duty of excise not levied or short-levied as a result of general
practice not to be recovered [Section 11C] ..................................................... 9.8
9.12 Obligation of persons who have collected excise duty from
buyers [Section 11D] ..................................................................................... 9.8
9.13 Interest on the amounts collected in excess of the duty [Section 11DD] ......... 9.19

v
CHAPTER 10 – APPEALS
10.1 Introduction ................................................................................................. 10.1
10.2 Appellate stages.......................................................................................... 10.1
10.3 Appeals to Commissioner (Appeals) ............................................................. 10.2
10.4 Production of additional evidence before Commissioner (Appeals) ................. 10.4
10.5 Appeals to Appellate Tribunal....................................................................... 10.5
10.6 Stay of demand/order [Section 35F] ............................................................. 10.8
10.7 Legal decisions relating to stay applications ................................................. 10.9
10.8 Revision application....................................................................................10.10
10.9 Appeal to High Court [Section 35G] .............................................................10.11
10.10 Appeal to Supreme Court ............................................................................10.12
10.11 Summary ...................................................................................................10.12

CHAPTER 11 – REMISSION OF DUTY AND DESTRUCTION OF GOODS

11.1 Statutory provisions ..................................................................................... 11.1
11.2 Procedure for destruction of goods and remission of duty .............................. 11.2
11.3 Manner of destruction .................................................................................. 11.3
11.4 Case laws pertaining to remission of duty ..................................................... 11.4

CHAPTER 12 – WAREHOUSING
12.1 Statutory provisions ..................................................................................... 12.1
12.2 Place of registration of warehouse................................................................ 12.1
12.3 Procedure for warehousing of excisable goods removed from a factory
or a warehouse ........................................................................................... 12.2
12.4 Failure to receive a warehousing certificate .................................................. 12.2
12.5 Accountal of goods in a warehouse .............................................................. 12.3
12.6 Responsibility of the registered person ......................................................... 12.3
12.7 Revoked or suspended registration of a warehouse....................................... 12.3
12.8 Warehouse to store goods belonging to the registered person ....................... 12.4
12.9 Registered person’s right to deal with the warehoused goods ........................ 12.4
12.10 Export warehousing ..................................................................................... 12.4

vi
CHAPTER 13 – EXEMPTION BASED ON VALUE OF CLEARANCES (SSI)
13.1 Introduction ................................................................................................. 13.1
13.2 Meaning of small scale units ........................................................................ 13.1
13.3 Products covered under the SSI exemption notification ................................. 13.2
13.4 Eligibility ..................................................................................................... 13.2
13.5 Relaxation in the duty .................................................................................. 13.2
13.6 Availability of Cenvat credit.......................................................................... 13.3
13.7 Value of clearances to be excluded for calculation of limit of
Rs.100 lakhs and Rs.400 lakhs .................................................................... 13.3
13.8 Important case laws on value of clearances .................................................. 13.4
13.9 Brand name ................................................................................................ 13.5
13.10 Clubbing of clearances ................................................................................ 13.7
13.11 Case laws relating to clubbing of clearances................................................. 13.8

CHAPTER 14 – NOTIFICATIONS, DEPARTMENTAL CLARIFICATIONS AND

TRADE NOTICES
14.1 Power of the Central Government to make rules ........................................... 14.1
14.2 Power of the Central Government to empower central excise authorities ........ 14.5
14.3 Emergency power of the Central Government under Central Excise
Tariff Act, 1985 to increase duty................................................................... 14.5
14.4 Exemption notifications in central excise....................................................... 14.7
14.5 Effect of amendments, etc., of rules, notifications or orders [Section 38A] ...... 14.8
14.6 Departmental circulars and trade notices in central excise............................. 14.9
14.7 Binding nature of Board circulars.................................................................. 14.9
14.8 Can departmental authorities of one region refuse to accept
a circular issued by another region? ............................................................14.10
14.9 Can departmental circulars be inconsistent with the law? .............................14.10
14.10 Can a Board circular be contrary to a Tribunal decision? ..............................14.10
14.11 Date from which Board circulars are effective ..............................................14.10

CHAPTER 15 – ADVANCE RULING

15.1 Definitions................................................................................................... 15.1
15.2 Procedure for application for advance ruling ................................................. 15.2

vii
15.3 Constitution of Authority for Advance
Ruling (Central Excise, Customs and Service tax) ......................................... 15.3
15.4 Procedure to be followed by Authority for Advance Ruling (Central Excise,
Customs and Service tax) on receipt of application [Section 23D] .................. 15.3

CHAPTER 16 – ORGANISATION STRUCTURE OF THE EXCISE DEPARTMENT

16.1 Organisation structure ................................................................................. 16.1

CHAPTER 17 – EXCISE AUDIT

17.1 Audit under Central Excise Act, 1944 ........................................................... 17.1
17.2 Audit prescribed by central excise department .............................................. 17.2
17.3 What is Excise Audit 2000?.......................................................................... 17.3
17.4 Procedure of Excise Audit 2000 ................................................................... 17.4

CHAPTER 18 – SETTLEMENT COMMISSION

18.1 Introduction ................................................................................................. 18.1
18.2 Salient features of Settlement Commission ................................................... 18.1
18.3 Categories of cases that cannot be settled.................................................... 18.4
18.4 Procedure to make an application before the Settlement Commission ............ 18.5
18.5 Procedure to be followed by the Settlement Commission [Section 32F] .......... 18.6

viii
 SECTION B – SERVICE TAX & VAT
CONTENTS

CHAPTER 1 – INTRODUCTION
1.1 Need for a tax on services ............................................................................. 1.1
1.2 Genesis of service tax in India ....................................................................... 1.1
1.3 Constitutional authority .................................................................................. 1.2
1.4 Service tax law .............................................................................................. 1.3
1.5 Selective vs. comprehensive coverage ........................................................... 1.5
1.6 Administration of service tax .......................................................................... 1.6
1.7 Service tax procedures .................................................................................. 1.7
1.8 Role of a chartered accountant ...................................................................... 1.7

CHAPTER 2 – PRELIMINARY LEGAL PROVISIONS

2.1 Extent, commencement and application [Section 64] ....................................... 2.1
2.2 Definitions [Section 65] .................................................................................. 2.1
2.3 Classification of taxable services [Section 65A] .............................................. 2.2
2.4 Charge of service tax [Section 66] .................................................................. 2.3
2.5 Education Cess ............................................................................................. 2.3
2.6 Nature of service tax ..................................................................................... 2.4
2.7 Valuation of taxable services for charging service tax [Section 67]................... 2.4
2.8 Service Tax (Determination of Value) Rules, 2006 .......................................... 2.4

CHAPTER 3 – BASIC CONCEPTS APPLICABLE TO ALL SERVICES

3.1 Basic exemption to small service providers ..................................................... 3.1
3.2 Payment only on receipt ................................................................................ 3.3
3.3 Service tax payable on advance received ....................................................... 3.4
3.4 Import of services .......................................................................................... 3.4
3.5 Taxation of Services (Provided from Outside India

ix
 and Received in India) Rules, 2006 ................................................................ 3.5
3.6 Export of services........................................................................................ 3.11
3.7 Export of Services Rules, 2005 .................................................................... 3.11
3.8 Concept of deemed service non-existent ...................................................... 3.20
3.9 Services provided by mutual concerns to its members subject to
service tax .................................................................................................. 3.20
3.10 Services provided to United Nations or International Organisation
exempt from payment of service tax ............................................................. 3.20
3.11 Services provided to a developer or units of special
economic zone exempt from payment of service tax ...................................... 3.21
3.12 Exemption to goods and materials sold by service provider to
recipient of service ...................................................................................... 3.21

CHAPTER 4 – GAMUT AND COVERAGE OF SERVICE TAX LAWS

4.1 Stock broking services ................................................................................... 4.1
4.2 Telephone services ....................................................................................... 4.2
4.3 Pager services .............................................................................................. 4.3
4.4 General Insurance services............................................................................ 4.3
4.5 Advertising agency services. .......................................................................... 4.4
4.6 Courier services ............................................................................................ 4.6
4.7 Consulting engineer’s services ....................................................................... 4.6
4.8 Custom house agent’s services ...................................................................... 4.8
4.9 Steamer agent’s services............................................................................... 4.8
4.10 Clearing & forwarding agent’s services ........................................................... 4.9
4.11 Manpower recruitment agent’s services ........................................................ 4.11
4.12 Air travel agent’s services ............................................................................ 4.12
4.13 Mandap keeper’s services............................................................................ 4.12
4.14 Tour operator’s services .............................................................................. 4.15
4.15 Rent-a-cab scheme operator’s services ........................................................ 4.17
4.16 Architect’s services ..................................................................................... 4.18

x
4.17 Interior decorator’s services ......................................................................... 4.19
4.18 Management consultant’s services ............................................................... 4.20
4.19 Practising chartered accountant’s services ................................................... 4.22
4.20 Practising cost accountant’s services ........................................................... 4.22
4.21 Practising company secretary’s services....................................................... 4.22
4.22 Real estate agent’s services ........................................................................ 4.23
4.23 Security agency’s services ........................................................................... 4.23
4.24 Credit rating agency’s services .................................................................... 4.24
4.25 Market research agency’s services............................................................... 4.24
4.26 Underwriter’s services ................................................................................. 4.25
4.27 Scientific or technical consultancy services .................................................. 4.26
4.28 Photography services .................................................................................. 4.27
4.29 Convention services .................................................................................... 4.28
4.30 Leased circuit services ................................................................................ 4.29
4.31 Telegraph services ...................................................................................... 4.29
4.32 Telex services ............................................................................................. 4.30
4.33 Facsimile (Fax) services .............................................................................. 4.31
4.34 On-line information and database access and/or retrieval services ................ 4.32
4.35 Video tape production services .................................................................... 4.34
4.36 Sound recording services............................................................................. 4.35
4.37 Broadcasting (radio and television) services ................................................. 4.36
4.38 Insurance auxiliary services ......................................................................... 4.39
4.39 Banking and other financial services ............................................................ 4.42
4.40 Port services by major ports and other ports ................................................. 4.48
4.41 Authorised service station’s services ........................................................... 4.49
4.42 Beauty parlour’s services ............................................................................. 4.51
4.43 Cargo handling services .............................................................................. 4.51
4.44 Cable operator’s services ............................................................................ 4.53

xi
4.45 Dry cleaning services .................................................................................. 4.54
4.46 Event management services ........................................................................ 4.55
4.47 Fashion designer’s services ......................................................................... 4.56
4.48 Health club and fitness centre services......................................................... 4.57
4.49 Life insurance services ............................................................................... 4.58
4.50 Rail travel agent’s services .......................................................................... 4.60
4.51 Storage and warehousing services ............................................................... 4.60
4.52 Business auxiliary services .......................................................................... 4.61
4.53 Commercial training or coaching services ..................................................... 4.65
4.54 Erection, commissioning and installation services ......................................... 4.67
4.55 Franchise services ...................................................................................... 4.69
4.56 Internet café’s services ................................................................................ 4.69
4.57 Management, maintenance or repair services ............................................... 4.69
4.58 Technical testing and analysis services ........................................................ 4.71
4.59 Technical inspection and certification services .............................................. 4.72
4.60 Airport services ........................................................................................... 4.72
4.61 Transport of goods by air services................................................................ 4.73
4.62 Business exhibition services ........................................................................ 4.74
4.63 Transport of goods by road (by a goods transport agency) ............................ 4.75
4.64 Construction services in respect of commercial or industrial buildings
or civil structures ......................................................................................... 4.77
4.65 Intellectual property service other than copyrights......................................... 4.79
4.66 Opinion poll services ................................................................................... 4.80
4.67 Outdoor catering ......................................................................................... 4.81
4.68 TV or radio programme production services .................................................. 4.81
4.69 Survey and exploration of mineral services ................................................... 4.82
4.70 Pandal or shamiana services ....................................................................... 4.83
4.71 Travel agent’s services (other than air/rail travel agents)............................... 4.84
4.72 Forward contract services ............................................................................ 4.84

xii
4.73 Transport of goods through pipeline or other conduit ..................................... 4.85
4.74 Site preparation and clearance, excavation, earth moving
and demolition services ............................................................................... 4.85
4.75 Dredging services of rivers, ports, harbours, backwaters and estuaries .......... 4.86
4.76 Survey and map-making services other than by
government departments ............................................................................. 4.87
4.77 Cleaning services other than in relation to agriculture,
horticulture, animal husbandry or dairying .................................................... 4.88
4.78 Services in respect of membership of clubs or associations ........................... 4.89
4.79 Packaging services...................................................................................... 4.90
4.80 Mailing list compilation and mailing services ................................................. 4.91
4.81 Construction services in respect of residential complexes ............................. 4.91
4.82 Registrar to an issue’s services ...................................................................... 4.93
4.83 Share transfer agent’s services ............................................................................. 4.94
4.84 Automated teller machine operations, maintenance or management services ....... 4.94
4.85 Recovery agent’s services..................................................................................... 4.94
4.86 Sale of space or time for advertisement, other than in print media ........................ 4.95
4.87 Sponsorship services provided to any body corporate or firm,
other than sponsorship of sports events ................................................................ 4.95
4.88 Transport of passengers embarking on international journey
by air, other than economy class passengers ........................................................ 4.96
4.89 Transport of goods in containers by rail by any person,
other than government railway .............................................................................. 4.96
4.90 Business support services..................................................................................... 4.97
4.91 Auctioneers' services, other than auction of property under directions or
orders of a court of law or auction by the Central Government .............................. 4.97
4.92 Public relations services........................................................................................ 4.98
4.93 Ship management services ................................................................................... 4.98
4.94 Internet telephony services ................................................................................... 4.99
4.95 Transport 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 Registration [Section 69 & Rule 4 of Service Tax Rules, 1994] ........................ 5.1
5.2 Taxable service to be provided or credit to be distributed on invoice,
bill or challan [Rule 4A of Service Tax Rules, 1994] ........................................ 5.3
5.3 Payment of service tax [Section 68 & Rule 6 of Service Tax Rules, 1994] ........ 5.5
5.4 Returns [Section 70 & Rule 7 of Service Tax Rules, 1994] ............................... 5.9
5.5 Records [Rule 5 of Service Tax Rules, 1994] .................................................. 5.9
5.6 Assessment ................................................................................................ 5.10
5.7 Recovery of service tax not levied or paid or short-levied or short paid or
erroneously refunded [Section 73] ................................................................ 5.11
5.8 Service tax collected from any person to be deposited with
the Central Government [Section 73A] ......................................................... 5.13
5.9 Interest on amount collected in excess [Section 73B] .................................... 5.14
5.10 Provisional attachment to protect revenue in certain cases [Section 73C]....... 5.15
5.11 Publication of information in respect of persons in
certain cases [Section 73D] ........................................................................ 5.15
5.12 Refunds ...................................................................................................... 5.16
5.13 Penal consequences.................................................................................... 5.17
5.14 Reasonable cause [Section 80] .................................................................... 5.19
5.15 Power to search premises [Section 82] ......................................................... 5.20
5.16 Powers of revision [Section 84] .................................................................... 5.20
5.17 Appeals to Commissioner of Central Excise (Appeals)- First appeal
[Section 85]................................................................................................. 5.20
5.18 Appeals to the Appellate Tribunal – Second appeal [Section 86] .................... 5.20
5.19 Appeal to High Court and Supreme Court ..................................................... 5.22
5.20 Recovery of any amount due to Central Government [Section 87] .................. 5.22
5.21 Power of the Central Government to grant exemption from
service tax [Section 93] ............................................................................... 5.23

xiv
5.22 Power to grant rebate [Section 93A] ............................................................. 5.23
5.23 Power to make rules [Section 94] ................................................................. 5.24
5.24 Power to remove difficulties [Section 95] ...................................................... 5.25
5.25 Chapter VA – Advance ruling ....................................................................... 5.25
5.26 Applicability of provisions of the Central Excise Act, 1944 to service tax
[Section 83]................................................................................................. 5.29
5.27 Due dates for service tax ............................................................................ 5.30
5.28 Credit of service tax..................................................................................... 5.31

CHAPTER 6 – BACKDROP FOR STATE-LEVEL VAT IN INDIA

6.1 Introduction ................................................................................................... 6.1
6.2 Historical background .................................................................................... 6.2
6.3 VAT in Indian context .................................................................................... 6.3
6.4 Committee of State Finance Ministers ............................................................. 6.3
6.5 Empowered Committee of State Finance Ministers .......................................... 6.4
6.6 Dr. Vijay Kelkar’s views ................................................................................. 6.4
6.7 White paper on State-Level VAT in India ........................................................ 6.5
6.8 Present position ............................................................................................ 6.5
6.9 Discontinuance of the central sales tax........................................................... 6.6
6.10 Goods and service tax ................................................................................... 6.6

CHAPTER 7 – TAXONOMY OF VAT

7.1 Different stages of VAT.................................................................................. 7.1
7.2 How VAT operates......................................................................................... 7.2
7.3 Variants of VAT ............................................................................................. 7.5
7.4 Methods for computation of tax ....................................................................... 7.6
7.5 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 Input tax credit (ITC)...................................................................................... 8.1
8.3 VAT liability................................................................................................... 8.2
8.4 Eligible purchases for availing input tax credit ................................................. 8.3
8.5 Purchases not eligible for input tax credit ........................................................ 8.4
8.6 Carrying over of tax credit.............................................................................. 8.4
8.7 Refund to exporters within three months ......................................................... 8.5
8.8 Exemption or refund to SEZ and EOU units .................................................... 8.5
8.9 Concept of input tax credit on capital goods.................................................... 8.5
8.10 VAT invoice................................................................................................... 8.7

CHAPTER 9 – SMALL DEALERS AND COMPOSITION SCHEME

9.1 Principles laid down in the White Paper .......................................................... 9.1
9.2 Threshold exemption limit .............................................................................. 9.1
9.3 State laws to provide for composition scheme ................................................. 9.1
9.4 Features of composition scheme..................................................................... 9.2
9.5 Eligibility for the composition scheme.............................................................. 9.2
9.6 Exercising of option ....................................................................................... 9.3
9.7 VAT chain under composition scheme ............................................................ 9.3

CHAPTER 10 – VAT PROCEDURES

10.1 Registration ................................................................................................ 10.1
10.2 Tax payer’s identification number (TIN) ........................................................ 10.2
10.3 Records ...................................................................................................... 10.2
10.4 Returns...................................................................................................... 10.3
10.5 Assessment ............................................................................................... 10.4
10.6 Audit ........................................................................................................... 10.4
10.7 Penal provisions .......................................................................................... 10.5
10.8 Tax rates under VAT.................................................................................... 10.5
10.9 Miscellaneous ............................................................................................. 10.6

xvi
CHAPTER 11 – VAT IN SPECIAL TRANSACTIONS
11.1 VAT and sales-tax incentives ....................................................................... 11.1
11.2 VAT and works contract ............................................................................... 11.3
11.3 VAT and lease transactions ......................................................................... 11.6
11.4 VAT and hire-purchase transactions............................................................ 11.9

CHAPTER 12 – VAT AND CENTRAL SALES-TAX

12.1 Central sales tax ......................................................................................... 12.1
12.2 CST leads to cascading of taxes .................................................................. 12.1
12.3 CST is not vatable ....................................................................................... 12.2
12.4 CST after introduction of VAT ..................................................................... 12.2
12.5 Amendments in CST act to facilitate introduction of VAT .............................. 12.3

xvii
 SECTION C– CUSTOMS
CONTENTS

CHAPTER 1 - BASIC CONCEPTS

1.1 Introduction ................................................................................................... 1.1
1.2 Constitutional provisions ................................................................................ 1.2
1.3 An overview of the Customs Act, 1962............................................................ 1.3
1.4 Some important definitions............................................................................. 1.5

CHAPTER 2 - LEVY OF AND EXEMPTIONS FROM CUSTOMS DUTY

2.1 Determining factors ....................................................................................... 2.1
2.2 Point and circumstances of levy ..................................................................... 2.2
2.3 Procedure, mechanism and organisation for assessment of duty...................... 2.5
2.4 Remission, abatement and exemptions........................................................... 2.7

CHAPTER 3 - TYPES OF DUTY

3.1 Basic customs duty [Section 2 of the Customs Tariff Act] ................................ 3.1
3.2 Additional duty of customs [Section 3 of the Customs Tariff Act] ...................... 3.2
3.3 Protective duties [Section 7 of the Customs Tariff Act] .................................... 3.5
3.4 Emergency power to impose or enhance export duties [Section 8 of the
Customs Tariff Act] ........................................................................................ 3.6
3.5 Emergency power to impose or enhance import duties [Section 8A of the
Customs Tariff Act] ........................................................................................ 3.6
3.6 Safeguard duty [Section 8B of the Customs Tariff Act] .................................... 3.7
3.7 Power of Central Government to impose transitional product specific safeguard
duty on imports from China [Section 8C of the Customs Tariff Act]................... 3.8
3.8 Countervailing duty on subsidized articles [Section 9 of the Customs
Tariff Act] ...................................................................................................... 3.9
3.9 Anti-dumping duty [Section 9A of the Customs Tariff Act] .............................. 3.10
3.10 No levy under section 9 or section 9A in certain cases [Section 9B of the
Customs Tariff Act] ...................................................................................... 3.12
3.11 Education cess @ 2% .................................................................................. 3.13

xviii
CHAPTER 4 - CLASSIFICATION OF GOODS
4.1 Customs Tariff............................................................................................... 4.1
4.2 General explanatory notes ............................................................................. 4.1
4.3 Rules of Interpretation of Customs Tariff Act................................................... 4.2
4.4 Special provisions for classification of sets of articles and accessories ............ 4.6
4.5 Some cases on classification ......................................................................... 4.7

CHAPTER 5 - VALUATION UNDER THE CUSTOMS ACT, 1962

5.1 Introduction ................................................................................................... 5.1
5.2 Concept of value ........................................................................................... 5.1
5.3 Terms used in commercial parlance ............................................................... 5.2
5.4 Technical terms relating to value in the course of import or export ................... 5.6
5.5 Concept of indirect tax and valuation for the same .......................................... 5.6
5.6 Computation of assessable value ................................................................... 5.7
5.7 Customs valuation (Determination of Price of Imported Goods) Rules, 1988 ... 5.10
5.8 Notes to Rules............................................................................................. 5.18
5.9 Date for determination of rate of duty and tariff value .................................... 5.30
5.10 Judicial decisions on valuation of imported goods ......................................... 5.31

CHAPTER 6 - ADMINISTRATIVE ASPECTS OF CUSTOMS ACT, 1962

6.1 Appointment of customs ports, airports, warehousing stations, etc., ................. 6.1
6.2 Administrative set up ..................................................................................... 6.4
6.3 Warehousing stations .................................................................................... 6.6

CHAPTER 7 - IMPORTATION, EXPORTATION AND TRANSPORTATION OF GOODS

7.1 Introduction ................................................................................................... 7.1
7.2 Importation.................................................................................................... 7.1
7.3 Definitions of important terms......................................................................... 7.2
7.4 Statutory provisions ....................................................................................... 7.3
7.5 Procedure for clearance of imported goods ................................................... 7.10
7.6 Exportation.................................................................................................. 7.16
7.7 Procedure for the clearance of export goods ................................................. 7.21
7.8 Procedure for postal articles ........................................................................ 7.22

xix
7.9 Special provisions relating to stores ............................................................. 7.26
7.10 Special procedures relating to clearance of baggage..................................... 7.30
7.11 Transit and transhipment ............................................................................. 7.38

CHAPTER 8 - WAREHOUSING
8.1 Introduction ................................................................................................... 8.1
8.2 Parallel provisions for home consumption ....................................................... 8.2
8.3 Special provisions for warehousing ................................................................ 8.2
8.4 Important definitions ...................................................................................... 8.3
8.5 Procedure for deposit in the warehouse and subsequent removal .................... 8.3
8.6 Statutory provisions ....................................................................................... 8.5
8.7 Removal of goods from the warehouse ......................................................... 8.13
8.8 Manufacture in bonded warehouse ............................................................... 8.22
8.9 Free trade zones and export processing zones ............................................. 8.26
8.10 Project imports ............................................................................................ 8.29

CHAPTER 9 - DEMAND AND APPEALS

9.1 Demands under Customs Act, 1962................................................................ 9.1
9.2 Issue of show cause notice [Section 28] ......................................................... 9.1
9.3 Power of the Central Government not to recover duties [Section 28A] .............. 9.3
9.4 Duties collected from the buyer to be deposited with the Central Government
[Section 28B]................................................................................................. 9.4
9.5 Certain common questions on demand ........................................................... 9.5
9.6 Adjudication .................................................................................................. 9.6
9.7 Interest, penalty, confiscation, duty payment under protest.............................. 9.8
9.8 Appeals and revisions.................................................................................... 9.8

CHAPTER 10 - REFUND
10.1 Introduction ................................................................................................. 10.1
10.2 Application for refund................................................................................... 10.1
10.3 Processing of refund claim ........................................................................... 10.2
10.4 Interest on delayed refund ........................................................................... 10.3
10.5 Refund of export duty in certain cases [Section 26] ....................................... 10.3

xx
10.6 Duty paid under protest................................................................................ 10.5
10.7 Doctrine of unjust enrichment with respect to refund of duty .......................... 10.5

CHAPTER 11 - DUTY DRAWBACK

11.1 Introduction ................................................................................................. 11.1
11.2 Drawback of customs duty ........................................................................... 11.1
11.3 Rate of drawback ........................................................................................ 11.4
11.4 Duty Drawback Rules .................................................................................. 11.6
11.5 Drawback on imported materials used in the manufacture of export goods
[Section 75]................................................................................................. 11.7
11.6 Interest on drawback [Section 75A] .............................................................11.13
11.7 Prohibition and regulation of drawback [Section 76] .....................................11.13

CHAPTER 12 - PROVISIONS RELATING TO ILLEGAL IMPORT, CONFISCATION,

PENALTY & ALLIED PROVISIONS
12.1 Introduction ................................................................................................. 12.1
12.2 Prohibition................................................................................................... 12.1
12.3 Detection of illegally imported goods and prevention of the disposal thereof
[Chapter IV A] ............................................................................................. 12.3
12.4 Prevention or detection of illegal export of goods [Chapter IV B] .................... 12.5
12.5 Exemptions from the operation of Chapter IV A & IV B .................................. 12.7
12.6 Confiscation of goods and conveyances and imposition of penalties
[Chapter XIV] .............................................................................................. 12.7
12.7 Penalties on persons ..................................................................................12.12
12.8 Penal provisions under the Customs Act ......................................................12.12
12.9 Adjudication [Section 122]...........................................................................12.16
12.10 Seizure and arrest ......................................................................................12.17
12.11 Offences and prosecution - specific provisions.............................................12.21

CHAPTER 13 - SETTLEMENT COMMISSION

13.1 Introduction ................................................................................................. 13.1
13.2 Definitions [Section 127A] ............................................................................ 13.1
13.3 Application for settlement of cases [Section 127B] ........................................ 13.2
13.4 Procedure on receipt of application [Section 127C] ....................................... 13.3

xxi
13.5 Powers of Settlement Commission ............................................................... 13.5
13.6 Inspection, etc., of reports [Section 127G] .................................................... 13.7
13.7 Order of settlement to be conclusive [Section 127J] ...................................... 13.7
13.8 Recovery of sums due under order of settlement [Section 127K] .................... 13.7
13.9 Bar on subsequent application for settlement in certain cases
[Section 127L] ............................................................................................. 13.7
13.10 Proceedings before Settlement Commission to be judicial proceedings
[Section 127M] ............................................................................................ 13.8
13.11 Certain persons who have filed appeals to the Appellate Tribunal
entitled to make applications to the Settlement Commission
[Section 127MA] .......................................................................................... 13.8
13.12 Applications on certain provisions of Central Excise Act [Section 127N] ......... 13.9
13.13 Customs (Settlement of Cases) Rules, 1999 ................................................. 13.9

CHAPTER 14 - ADVANCE RULING

14.1 Definitions [Section 28E].............................................................................. 14.1
14.2 Authority for Advance Ruling (Central Excise, Customs and
Service tax) [Section 28F] ............................................................................ 14.2
14.3 Application for advance ruling [Section 28H] ................................................. 14.2
14.4 Procedure on receipt of application [Section 28-I] ......................................... 14.3
14.5 Applicability of advance ruling [Section 28J] ................................................. 14.5
14.6 Advance ruling to be void in certain circumstances [Section 28K] .................. 14.5
14.7 Powers of authority [Section 28L] ................................................................. 14.5

CHAPTER 15 - MISCELLANEOUS PROVISIONS

15.1 Conveyance and goods in a customs area subject to control
of officers of customs [Section 141] .............................................................. 15.1
15.2 Recovery of sums due to Government [Section 142]...................................... 15.1
15.3 Power to allow import or export on execution of bonds in certain cases
[Section 143] ............................................................................................... 15.3
15.4 Duty deferment [Section 143A] ..................................................................... 15.4
15.5 Power to take samples [Section 144] ............................................................ 15.5
15.6 Custom house agents to be licensed [Section 146]........................................ 15.6
15.7 Appearance by authorised representative [Section 146A] .............................. 15.6
15.8 Procedure for sale of goods and application of sale proceeds [Section 150] ... 15.8

xxii
15.9 Certain officers required to assist officers of customs [Section 151] ............... 15.9
15.10 Instructions to officers of customs [Section 151A] ........................................15.11
15.11 Delegation of powers [Section 152] .............................................................15.12
15.12 Service of order, decision, etc. [Section 153] ...............................................15.13
15.13 Rounding off of duty, etc. [Section 154A]. ....................................................15.14
15.14 General power to make rules [Section 156] ..................................................15.14
15.15 General power to make regulations [Section 157].........................................15.15
15.16 Provisions with respect to rules and regulations [Section 158] ......................15.15

CHAPTER 16 - SPECIAL ECONOMIC ZONE

16.1 Introduction ................................................................................................. 16.1
16.2 Features of special economic zones ............................................................. 16.1
16.3 Advantages of special economic zones......................................................... 16.2
16.4 Disadvantages ............................................................................................ 16.3
16.5 Approved SEZ ............................................................................................ 16.4

CHAPTER 17 – INTER-RELATIONSHIP OF ACCOUNTING WITH EXCISE, CUSTOMS

AND SERVICE TAX
17.1 Introduction ................................................................................................. 17.1
17.2 Accounting standards issued by Accounting
Standards Board (ASB) of ICAI .................................................................... 17.1
17.3 Cost Accounting Standards issued by ICWAI ................................................ 17.7
17.4 Guidance notes ..........................................................................................17.11
17.5 Accounting for CENVAT credit of service tax ...............................................17.20
17.6 Accounting treatment for PLA......................................................................17.21
17.7 Accounting for import and export duties .......................................................17.21
17.8 Maintenance of books of account ................................................................17.21
17.9 Divergence between accounting and taxation 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 Constitution 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 respective authority to Union and
State governments for levying tax. Seventh Schedule to the Constitution of India contains
three lists setting out matters under which the State and Union have got the authority to
make laws. List I known as Union 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
contains various matters like taxes on agricultural income, excise duty on alcoholic liquors,
opium and narcotics, etc., in respect of which State legislatures have the exclusive powers
to make laws. List III also known as Concurrent list lists out the matters like criminal law and
procedure, trust and trustees, civil procedures, economic and social planning etc., in respect
of which Central Government has authority to make laws.
Part XII of the Constitution of India contains matters related to “Finance, Property, Contracts
and Suits” in the Articles 264 to Article 300A. Article 265 states that “no tax shall be levied
or collected except by authority of law”. It has been held by the Supreme Court in Kunnathat
v. State of Kerala AIR 1961 SC 552 that the term “authority of law” means that tax proposed
to be levied 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 power to tax. It must
not also violate the fundamental rights such as Article 14, 19 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 collected 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 manufactured or produced in India except
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics, but including
medicinal and toilet preparations containing alcohol or any substance included in 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 conducted, the incidence of
which is to be borne by the person himself on whom it is levied. On the other hand, Indirect
taxes are the taxes which are levied on a product or a service the incidence of which is
borne by the consumers who ultimately consume the product or the service, while the
immediate liability to pay the tax may fall upon another person such as a manufacturer or
seller of goods.

1.3 WHAT IS EXCISE DUTY

Excise is derived from the Latin word “Excisum”. Excise, according to the Federal Court and
Privy Council is a tax attracted by the event of manufacture but collected 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 or 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 respect of the commodities produced or manufactured by
him. It is a tax upon manufacture of goods and not upon sales or proceeds of sale of goods.
‘Duty of excise’ has 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 Central 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 excise duty is termed as Cenvat with effect from 12-
5-2000. It is levied at the rates specified in First Schedule to Central Excise Tariff Act, read
with exemption notification, 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 Central Excise Tariff.
Duty in case of 100% EOU and FTZ: Hundred percent Export Oriented Undertakings
(EOU) and units in Free Trade Zone (FTZ) export all their production. 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.
Duties 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 collect these taxes.
Provisions of Central Excise Act and Rules have been made applicable for levy and
collection of these duties/cesses.
A National Calamity Contingent Duty (NCCD) has been imposed vide section 136 of Finance
Act, 2001. This duty 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 Credit Rules, 2004. The
Education Cess so collected is utilized for providing and financing universalised quality
basic education.
The Education Cess on excisable goods is in addition to any other duties of excise chargeable
on such goods, under 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, including those
relating to refunds and exemptions from duties and imposition of penalty, apply in relation to
the levy and collection of the Education Cess on excisable 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 certain specified tobacco
products is levied to finance the National Rural Health Mission. This additional duty is
charged at prescribed specific rates on cigarettes, and at a rate equal to 10% of the aggregate
of normal rates of excise duties payable on pan masala and other tobacco products. This
surcharge is not levied on biris. The additional duty of excise is in addition to any other duty
of excise 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 additional duty of excise on the specified tobacco products
as they apply in relation to the levy and collection of the duty of excise on such goods under
the Central 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 Act, 1944 which came into effect
from 28th February 1944. In I996 the Act was renamed as Central Excise Act, 1944.
The Central Excise Act, 1944 (originally Central Excises and Salt Act, 1944) and Rules
framed there under came into force on 28 th February, 1944. The Act applies to the whole
of India. India includes Indian 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 economic zone’
extends upto 200 nautical miles inside the sea from base line. Though originally 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 Jammu & Kashmir) Act, 1954.

1.5 BODY OF CENTRAL EXCISE LAW

Central Excise Law includes
(a) Central Excise Act, 1944
(b) Central Excise Rules, 2002
(c) Cenvat Credit Rules, 2004
(d) Central Excise (Appeal) Rules, 2001
(e) Central Excise (Advance Rulings) Rules, 2002.
(f) Central Excise (Settlement of Cases) Rules, 2001.
(g) Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of
Excisable Goods) Rules, 2001
(h) Central Excise Valuation (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 provisions relating to the levy
of excise duty. There are 10 chapters in the Central Excise Act. These are briefly as follows:

Chapter I Short title, extent and commencement of the Act including definitions
Chapter II Levy and collection of duty
Chapter IIA Indicating amount of duty in the price of goods, etc., for purpose of
refund and crediting certain amounts to the Consumer Welfare Fund
Chapter III Powers and Duties of Officers and Land Holders
Chapter IIIA Advance Rulings
Chapter V Settlement of Cases
Chapter VI Adjudication of Confiscations and Penalties
Chapter VIA Appeals
Chapter VIB Presumptions as to Documents
Chapter VII Supplemental Provisions
 Basic Concepts 1.5

1.5.2 Central Excise Rules, 2002: These Rules contain the procedure for the assessment
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 relating to Cenvat credit which were a
part of Central Excise Rules, 1944 were given 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, with effect from 10.09.2004 Cenvat Credit Rules, 2002 have been
replaced by a new set 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 procedure relating to appeals are
covered in this rules which was earlier included in 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 contain 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 Central 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 the 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, 2005 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 NOTIFICATIONS IN CENTRAL EXCISE

Central excise legislation is driven by exemption notifications. Under section 5A(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 specified. 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 leviable 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 excisable 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 exceptional 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 TRADE NOTICES IN CENTRAL EXCISE

Departmental circulars and trade notices are a form of delegated legislation. Under section
37B, which is titled “Instructions to Central Excise Officers”, the Central 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 are bound to follow them. These instructions or
orders can be for the purpose of ensuring uniformity in the classification of excisable goods
or with respect to levy 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
discretion of the Commissioner (Appeals). A separate chapter is devoted to notifications and
trade notices and their legal effect thereof.

1.8 DEFINITIONS UNDER EXCISE 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 and 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 Tribunal
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 course 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 Excise (Appeals), Additional
Commissioner of Central Excise, Joint Commissioner of Central Excise, Assistant
Commissioner of Central Excise or Deputy Commissioner of Central Excise or any other
officer of the Central Excise Department, or any person (including an officer of the State
Government) invested by the Central Board of Excise and Customs constituted under the
Central Boards of Revenue Act, 1963 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 rendering 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
Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise 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 wherein or in any part of
which any manufacturing process connected with the production 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 to 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 relation 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
including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer,
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 excisable 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 made under this Act; (Sec 2(g))
1.8.11 "Sale" and "purchase", with their grammatical variations and cognate
expressions, mean any transfer of the possession of goods 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 "Wholesale dealer" means a person who buys or sells excisable goods
wholesale for the purpose 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
others, 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 section, section 4 provides
for the method of valuation of excisable goods and section 4A deals with valuation based on
maximum retail price (MRP).
Section 3(1) which is the charging section states :
There shall be levied and collected in such manner as may be prescribed:
(a) a duty of excise on all excisable goods (excluding goods produced or manufactured in
1.8 Central Excise

special economic zones) which are produced or manufactured in India as, and at the
rates set forth in the First Schedule to the Central Excise Tariff 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 special 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 levied and collected on any excisable goods
which are produced or manufactured,-
(i) in a free trade zone and brought to any other place in India; or
(ii) by a hundred percent export oriented undertaking and brought to any other place in
India
shall 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 like goods produced
or manufactured outside India if imported into India.
Where in respect of any such like goods, any duty of customs leviable for the time being in
force is leviable at different rates, then, such duty shall, be deemed to be leviable at the
highest of those rates.
Section 3(1) speaks of levying two types 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 specified 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 goods 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 manufacture, it must be understood
that unless the goods that are manufactured are excisable 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 are subject to tax must be goods, then they must be
specified in the Tariff and they 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
defined in Article 366(12) of the Constitution of India as “goods include all materials,
commodities and articles”.
Sale of Goods Act, 1930 in section 2(7) defines goods 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 words, immovable property cannot be goods. Any movable property
whether visible, tangible, corporeal or not will constitute goods.
Black’s Law Dictionary define “goods “ as a term of variable content and meaning. It may
include every species of personal 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 articles must be capable of coming to the market to be bought and sold. Therefore, to be
called goods, the items must be moveable and marketable.
From the above, two fundamental aspects of the term “goods” arise that they should be
‘moveable’ and ‘marketable’.
The two fundamental aspects of the term “goods” ‘moveable’ and `marketable’ are
discussed in detail.
1.10.1 Concept of ‘Moveable’: The first aspect of goods is that they should be moveable.
In Union of India Vs. Delhi Cloth Mills (1977) ELT J-199 and in 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 something, which can ordinarily come or can be brought to the
market to be bought and sold. As opposed to moveable goods, immoveable goods like
property cannot be brought 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 property. Section 3(26) of the General Clauses Act, 1897 defines the term
immovable property 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. Marketability 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 to 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 Court held
that to become ‘goods’, an article must be something which can ordinarily come 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, therefore, 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 another 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
sold in the market as goods. Actual sale is not necessary. Usage in captive consumption is
not determinative of whether the article is capable of being sold in the market or is known in
the market as goods. Even transient items or articles can 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 capable of being marketed during the said short period of their
life. Thus, goods with unstable character can be theoretically marketable if there was a
market for such transient types of articles, but one has to take a practical view on the basis
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 essential if an article is to be liable to excise.
Merely because an article is specified 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
decision in Bhor Industries, it was the practice to hold all goods specified in the Tariff 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 decision 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 consumed, it would
not be liable to duty.
In Ion Exchange India Ltd. vs. C.C.EX 1999 (112) ELT-746, the Supreme Court has held
that mere specification of an item in the Central Excise tariff is not sufficient in the absence
of the marketability 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 the Tariff Schedule, unless it is
known as goods in the market. Marketability is an essential ingredient for Dutiability. This
decision of the Tribunal is important since it first interpreted the Supreme Court’s 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 met.
 Basic Concepts 1.11

In Cipla Ltd. Vs. UOI (1990) (46) ELT-240, the Karnataka High Court has held that for
Dutiability, a product must pass the test of marketability even if it is a transient item, which
is captively consumed in, the manufacture of other finished products. It is the onus of the
Department to produce evidence 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, then no excise duty is leviable.
The Calcutta High Court, in UOI Vs. Bata India Ltd. (1993) (68) ELT-756, has held that
articles are not ‘goods’ under section 3 of the 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 non marketable and actual sales are not necessary in order to establish
marketability.
1.10.3 Excisable Goods: “Excisable goods” means goods specified in the Schedule to
the Central Excise Tariff Act, 1935 as being subject to a duty of excise and 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 specified must be subject to duty as per the tariff. In CCE vs Usha
Martin Industries, 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 duty
since nil rate is also an appropriate rate. However, this decision was overruled by a
constitutional bench of Supreme Court in the case of CCEx. v. Dhiren Chemical 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 excise has already
been paid” means the correct or the specified rate of excise duty. In the said phrase, due
emphasis must be given to the words “has already been paid”. 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 specified 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 important 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 headings 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 goods were meant to be taken out of the Schedule to the Tariff Act and
hence cannot 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 excisable
goods. Finally, the Supreme Court’s decision in Wallace Flour Mills Ltd. Vs. C.C.EX. (1989)
(44) ELT-598 has effectively settled the issue. It was held therein 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 manufacture.

1.11 MANUFACTURE
1.11.1 Concept of Manufacture: The term “manufacture” literally means to make by
hand. However, in the context of today’s mechanised world, the term includes making
articles by machines also. However, as far as central excise is concerned the term has a
specific definition in the Central Excise Act, 1944 which is contained in Section 2(f) of the
Act. It defines manufacture in an inclusive manner as follows :
“Manufacture includes any process,
(i) incidental and 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
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
repacking of such goods in a unit container or labelling or re-Iabelling of containers
including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer,
and the term manufacturer shall be construed accordingly and shall include not only a
person who employs hired labour in the production or manufacture of excisable goods, but
also any person who engages in their production or manufacture on his own account.”
The definition stipulates that manufacture will include any process which is specified in the
Section and Chapter Notes of the Central Excise Tariff as amounting to manufacture. In
other words, the concept of deemed 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
commodity. As already indicated, Parliament has power to levy excise duty on goods
manufactured in India. In other words, manufacture or production of goods is a necessary
condition for imposition of the levy. The question therefore arises as to whether Parliament
can levy excise duty on activities which do not amount to manufacture or production by
means of giving artificial meaning to the terms ‘manufacture’ and ‘production’. This has been
held to be valid by the Supreme Court in Ujagar Prints v. U.O.I. 1988 (38) E.L.T. 535 which
said that resort could be had to Entry 97 of List I to the Constitution. Reference may be also
made of the case of Collector v. SD Fine Chemicals Pvt. Ltd. 1995 (75) E.L.T. 49 (S.C.).
Since the definition of manufacture is an inclusive one and does not spell out or enumerate
the 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 that the word manufacture when used as a verb is generally
 Basic Concepts 1.13

understood to mean as bringing into existence a new substance and not merely to produce
some change in the substance. The Court thereafter emphasized 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 :-
“Manufacture 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 manufacture.
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 every 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 distinctive 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 well settled that one cannot absolutely make a thing by hand in the sense that
nobody 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 commodity having its distinct
character, use and name and is commercially known as such, 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 commercially different
commodity cannot result in manufacture – U.O.I. v. Parle Products 1994 (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 there was manufacture was whether the
change or the series of changes brought about by application of processes take the
commodity to the point where, commodity can no longer be regarded as the original
commodity but is, instead, recognized as a distinct and new article that has emerged
because of the result of the processes. There might be border line cases where either
conclusion can be reached with 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 manufacturer 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 Court 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 end
1.14 Central Excise

use of the product.

The production or manufacture of goods is sufficient to attract duty, whether the goods are
consumed, sold or not used thereafter is wholly irrelevant. The mere fact that the product is
not actually sold would not make any difference in determining the excisability of that
product.
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’ under excise law. Any process
or processes creating something else having distinctive name, character and use would
amount to manufacture. The moment there is a transformation of an input into a new
commodity which is commercially known as a distinct and separate commodity, having its
own character, use and name, whether it is the result of a process or several processes,
manufacture takes place and the liability to duty is attracted.
1.11.2 Manufacture and processing: It is necessary 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 effect of various processes to which raw materials
are subjected and each such step towards the finished product would constitute processing
in relation to the manufacture.
The definition of manufacture under section 2(f) states that it includes any process
incidental or ancillary to the completion of the manufactured product. The definition clarifies
that a process, which is incidental to the manufacture 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 means of carrying out one or more processes on raw materials. It is
only when a process 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 goods 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 input material
has undergone a degree of processing, it must be regarded as still retaining its original
identity. Where the article retains its substantial identity through the stage of processing, it
could be said to have been merely processed and not manufactured. If there are separate
and distinct processes of manufacture and each such process results in such a
transformation that a new and distinct article known in the market comes into being, then
each process would be subject 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 manufacture 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 apex court observed that the answer to the question whether the process is that
of “manufacture” 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 of ‘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 purpose even without printing and there is no change in the
commercial product after the printing is carried out, the process cannot be said to be one of
“manufacture”.
The meaning of incidental or ancillary processes needs to be understood. Before a process
can be regarded as “incidental or ancillary to the completion of manufactured product, it
must have some relation to the manufacture of finished product. However inessential the
process may be, if it is found incidental or ancillary 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 particular process is a process of manufacture or not, has to
be determined having regard to the facts and circumstances of each case and having regard
to the well known 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 Manufacture :

Final Product Product/process/activity Citation

Aluminium Cutting, drilling and CCE v. Ajit India Pvt. Ltd. 2000 (119)
punching of aluminium E.L.T. 274 (S.C.)
section
Aluminium cans Aluminium slugs converted Union Carbide India Ltd. v. CCE
(torch bodies) to intermediate product 1986 (24) E.L.T. 169 (S.C.); Geep
Industrial Syndicate Ltd. v. CG 1987
(31) E.L.T. 865 (S.C.)
Butter Stirring of cream State of Tamil Nadu v. Bharat Dairy
Farm 1992 (61) E.L.T. 25 (Mad.)
Cable joining kits Putting together different XI Telecom Ltd. v. CCE 1999 (105)
duty paid items not E.L.T. 263 (A.P.)
manufacture
Chilled water Chilling of water Farm & Co. v. CCE 1987 (30) E.L.T.
541 (T)
Chilly powder Pulverising of chilly Namputhiris Pickle Industries v. State
of Kerala 194 (92) STC 1 (S.C.)
Coffee Reprocessing of coffee CCE v. Brooke Bond India Ltd. 1998
(101) E.L.T. 2965 (T-SZB)
1.16 Central Excise

Coloured/ printed Colouring/printing of white Swastic Products v. SCE 1980 E.L.T.

paper paper 164 (Guj.)
Coloured plastic Conversion of plastic Vadodara CTN No. 61/92, dated 22-
granules granules 7-1992, 1992 (60) E.L.T. T43
Computer Upgradation does not CBEC Circular No. 454/ 20/99-CX,
under Heading No. amount to manufacture dated 12-4-1999
84.71 Installation at customers Universal Micro Systems v. CCE
site not manufacture 1999 (107) E.L.T. 505 (T)

Assembly of computer from Sheth Computers Pvt. Ltd. v. CCE

duty paid parts amounts to 2000 (121) E.L.T. 738 (T)
manufacture
Curry powder Mixing of chilly powder State of Tamil Nadu v. SVS
rasam powder, coriander powder Natarajan & Sons 1992 84STC
masala powder (Mad.)
Cycle Assembling of cycle parts T.I. Cycles of India v. U.O.I. 1983
E.L.T. 681 (Mad.)
Feeding bottle Putting together bought out Dalmia Industries Ltd. v. CCE 1999
parts like bottles, nipples, (112) E.L.T. 305 (T)
lids etc. is not manufacture
Filler wire Straightening and cutting D & H Sechron Electrodes Pvt. Ltd.
into required sizes of wires v. CCE 1990 (40) E.L.T. 401 (T)
(stainless steel)
Furniture (for Polishing/colouring of old CST v. Musarafalli Kutbuddin 35 STC
resale) furniture 503 (Bom.) CST v. Habib Kasambai
35 STC 560 (Bom.)
Garland/ Preparation of flowers Sudhir Ch. Mukherjee v. Addl.
bouquets Commissioner of CT 1976 (37) STC
554 (Cal.)
Ingots/billets Recycling of aluminium Salco Extrusions P. Ltd. v. CCE 1984
waste (16) E.L.T. 356 (T)
Jelly (stone) (See Breaking of boulders Reliable Rock Builders v. State of
contra decision Karnataka, 49 STC 110 (Kant); Kher
under Table Stone Crushers v. G.M. District
below) Industries Centre, 1992 (62) E.L.T.
586 (M.P.)
Pan-masala Mixing of supari, variyali, State of Gujarat v. Sukhram
dhana dal, etc Jagannath 50 STC 76 (Guj.)
 Basic Concepts 1.17

Paper Polishing/ printing of paper Modern Paper Industries v. Union of

India 1983 ECR 636 D (Bom.)
Pillows Covering an uncovered DP Foam Pvt. Ltd. v. CCE 1999
pillow (106) E.L.T. 544 (T)
Pine apple Slicing of pineapple Dy. CST v. PIO Food packers, 1980
(6) E.L.T. 343 (S.C.)
Planks/ Sawing of timber logs Y. Mohiden Kunhi and Others v. CCE
rafters. 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.
Powdered pepper/ Powdering of Mahabirprasad Bishiwala v. State of
Turmeric pepper/turmeric 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.)
Reels of lesser Slitting and rewinding of CCE v. Reelco Paper Products (P)
width and dia- paper (jumbo reels) Ltd. 1989 (40) E.L.T. 435 (T)
meter
Smaller rolls of flat Cutting and slitting of Bombay-I CTN No. 56/1989 dated 9-
rolls of sensitised sensitised photographic 6-1989, 1989 (42) E.L.T. T-33
photographic paper in jumbo rolls
paper
Smaller rolls of Cutting and slitting of X-ray Bombay-I CTN No. 56/89 dated 9-6-
such X-ray films films (industrial as well as 1989, 1989 (42) E.L.T. T-42
medical) in jumbo rolls
Turmeric Pulverising of turmeric Krishna Chander Dutta (Spice) P.
powder Ltd. v. CTO 1994 (70) E.L.T. 501
(S.C.)
Water Process of removing McDowel Co. Ltd. v. CCE 1999 (105)
chemicals to make it soft E.L.T. 577 (T)
without purifying
1.18 Central Excise

1.11.4 Instances of Goods/Processes amounting to Manufacture

Final Product Product/process/activity Citation

Audio cassettes Recording of audio cassettes Gramophone Co. Ltd. v. CC 1999

amounts to manufacture as (114) E.L.T. 770 (SC)
pre- recorded cassette is
distinct
Bagasse Crushing of Deccan Sugar and Abkhari
sugarcane Company v. Union of India, 1986
(26) E.L.T. 209 (Mad.)
Bed sheets, bed Cutting, hemming and Kapri International v. CCE 1986
spreads and table stitching of running cloth (23) E.L.T. 538 (T)
cloths
Biris Rolling of tobacco Y. Tirupathy Rao v. CCE 1983
E.L.T. 2346 (AP)

Brass Mixing of copper & zinc Khandelwal Metal & Engg. v.

Union of India, 1983 E.L.T. 292
(Del.) (affirmed in 1985 (20) E.L.T.
222 (SC)
Brass tubes new Melting and remaking of Multi. Metals Ltd. v. CCE 1995 (75)
tubes of brass out of old E.L.T. 938 (T) affirmed by the
brass tubes Supreme Court in 1995 (78) E.L.T.
A31
Bright bars Drawing of round bars Veekayan Industries v. CCE 1985
(21) E.L.T. 596 (T)
Camphor cubes Conversion of camphor Om Prakash Gupta v. CTO 38 STC
granules 73 (Cal.)
Canned foods Canning of vegetable Ramnagar Cane & Sugar Co. v.
products Union of India, 1983 E.L.T. 6 (Raj.)
Chappals Assembly of rubber sole & Achamma Sebastian v. State of
rubber strap mouldings Kerala, 1967 (20) STC 483 (Ker.)
Cinema wall paper Printing of paper CCE v. Sudhakar Litho Printers,
1988 (36) E.L.T. 346 (T)
Circles Rolling & billets of copper Union of India v. Ramlal, 1978
E.L.T. (J389) (SC)
 Basic Concepts 1.19

Dyed & printed cloth Dyeing & printing of grey Lal Woolen and Silk Mills P. Ltd. v.
cloth CCE 1999 (108) E.L.T. 7 (S.C.)
Evacuated Bottles Empty bottles cleaned, Shri Krishna Keshav Laboratories
siliconized, evacuated sealed Ltd. v. CCE 1999 (105) E.L.T. 117
and sterlised to make a new (T)
product
Fruit Drink Conversion of fruit pulp to Godrej Foods Ltd. v. CCE 2000
ready made drink (122) E.L.T. 231 (T)
Ghee Boiling of butter Motilal Ramchandra Oswal v.
State of Bombay 3STC 140 (Bom.)
Gittis, ballast Crushing of stone boulders Kher Stone Crusher v. G.M. Dist.
Industries Centre 1992 (61) E.L.T.
587 (MP-FB); Contra Reliable
Rock Builders v. State of
Karnataka, 1982 49 STC 110
(Kar.)
Ground black pepper Grinding of black pepper CCE v. Herbal Isolates (P) Ltd.
1994 (74) E.L.T.
929 (T)
Ingots Metting of scrap iron Rangoon Metal & Refining Com v.
State of Tamil Nadu 47 STC 60
(Mad.)
Jewellery Conversion of crude Bapalal & Co. v. Govt of India,
diamonds 1981 E.L.T. 587 (Mad.)
New jewellery Melting/conversion of Chenna Kesavalu v. Board of
jewellery (Old) Revenue, 1981 (47) STC 403
(Mad.)
Photographic films Cutting slitting of jumbo rolls CBEC Circular No. 13/ 92-CX3,
of photographic films dated 28-12-1992, 1993 (63)
E.L.T. T31
Recorded video Recording and re-recording Garware Plastics & Polyesters
cassette of blank video cassette Ltd. v. CCE 1993 (67) E.L.T. 670,
673 (T).
Rice Dehusking of paddy State of Karnataka v. B.
Raghuram Sethy, 47 STC 282
(S.C.)
Rice Milling of paddy M. Narayanan Nambiar v. State of
Karnataka 44 (STC) 191 (Ker.)
1.20 Central Excise

Water filter Putting together parts Eureka Forbes Ltd. v. CCE 2000
alongwith bought out filter (122) E.L.T. 550 (T)
cum purifier

It should be noted that the above decisions may not be the final word since we normally see
conflicting decisions being rendered by various courts on the same set of facts.

1.12 DUTIABILITY OF INTERMEDIATE PRODUCTS AND CAPTIVE CONSUMPTION

The 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 as the
intermediate product was known commercially as a distinct and identifiable product. Further,
the word ‘product’, as occurring in Entry 84, List I, Schedule VII of the Constitution would
cover intermediate goods also. However, although excise duty is chargeable on
manufactured goods, the collection of the levy is postponed to the time of removal of goods
from the factory, In other words, even though 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 case 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
“collection”. Hence, the section creates the “levy” itself and collection is left to be regulated
by the Rules. Captive Consumption in the context of Excise Law signifies utilisation of goods
produced or manufactured within the factory of production. This is normally prevalent in
large factories with several departments in diverse manufacturing processes with their
departmental and intradepartmental stock transfers. In such cases, emergence of goods in
one process, which are used in another process, would require compliance of procedure
relating to captive consumption, as the removal of goods or consumption thereof for or in
another process would 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 1944, 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 from the approved place of storage. Prior to their amendment
by the Finance Act, 1982, 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 from
the factory at all but these goods were consumed within the factory in the manufacture of
finished products.
The Delhi High Court, in J.K Cotton Spinning & Weaving Mills Co. Ltd. Vs. Union of India
(1981) (8) ELT-887, held that intermediate goods were not ‘removed’, since they were
captively consumed and hence no duty could be collected on such goods in terms of Rules
9 and 49(prior to amendment). The decision was rendered in the context of usage of such
goods in an uninterrupted and continuous process. The Gujarat High Court and the
Karnataka High Court took a contrary view. However, several assesses began to follow the
decision in J.K Cotton’s case and discontinued payment of duty on intermediate products.
 Basic Concepts 1.21

However, the Finance Act, 1982 amended the provisions of Rules 9 and 49 of Central
Excise Rules 1944 with retrospective effect from 28.2.1944, being the date on which the
Central Excise Act came into force. The amendments meant that intermediate goods would
be chargeable to duty as they would be deemed 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 UOI 1987 (32) ELT 234 (SC). Therefore, captive
consumption would amount to removal though there are several exemption notifications like
67/95 which under specified circumstances exempt captive consumption from payment of
duty.
It must also be understood that as discussed earlier the Supreme Court in its decisions in
Union Carbide India Ltd. Vs. Union of India (1986) (24) ELT-169 and in Bhor Industries Ltd.
Vs. C.C.EX. (1989) (40) ELT-280 has held that an intermediate product would be excisable
only if it is a complete product in the sense that it is capable 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 being sold it is not dutiable even if it is included in the
Tariff Entry. In other words 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 marketable, are not excisable and that the
burden of proof regarding marketability is on the Revenue.
In Krishna International Vs.C.C.EX.(1994) (71)ELT-694, the Tribunal 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 intermediate goods
would also not be chargeable to duty on the same basis. However, other 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 captive
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 manufacturer
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 created, levy of excise duty being on
manufacture and not on saleability.

1.13 DUTIABILITY 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 property. 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 litigation between department and assesses. Reference may
be made to the definition of immovable property which has been set out earlier.
Excise duty is chargeable when, at site, there emerges moveable goods during the course
of fabrication or bringing into being of immovable property in the form of buildings, plant etc.
In other words, if movable goods such as fabricated parts, structures, equipment are
brought into being and they are thereafter mounted or fixed on civil foundations so as to
complete the construction, excise duty will be chargeable on such movable goods,
notwithstanding that the final products are items of immovable property. On the other hand,
if the site work is carried out on top of civil foundation 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 issued a circular on the
subject in 17/89 dated 21.4.89. The principles laid down therein 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 having the essential character of the
aforementioned goods, the goods would be chargeable to duty under the
headings/sub-headings appropriate to such goods in their complete form; otherwise
such parts and components should be charged to duty under the headings/sub-
headings 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 excisable.
(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 required to be levied on such
property. The Board has thus reiterated the well-known principles for deciding on
whether or not specific site related activities would 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 Indian Oil Co.Ltd 1991 Suppl(2) SCC 18 can be
summarized as under:
“ The test was one of permanency; if the chattel was movable to another place of use in the
same position or liable to be dismantled and re-erected at the later place, if the answer 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 attached to the earth.”
Immovable property or articles embedded to earth, structures, erections 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 1995 (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.). Reference can also be made to the
following :
Otis Elevator Company’s Case 1981 E.L.T. 710 (G.O.I.)
Gujarat Machinery Manufacturers Ltd. v. Collector 1983 (12) E.L.T. 825 (CEGAT)
Hyderabad Race Club’s 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
assembly 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 manufacture. This
decision has caused considerable amount of re-thinking as to what constitutes 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, alternator and coupling them
to form a turbo alternator amounts to a manufacturing process, the resultant property being
immovable the same cannot be brought to excise. 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 consider the facts and proceeded simply upon the basis that
structurals are not exigible to excise duty. It has failed to appreciate that there is a tariff
entry which makes structurals exigible to excise duty and that they are so exigible, provided
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 manufactured at site to be dutiable they should have a new identity,
character and use, distinct from the inputs/ components that have gone into its
production. Further, such resultant goods should be specified in the Central Excise
Tariff as excisable 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 commercial name,
identity and use (prior to such product being assimilated in a structure which would
render them as a part of immovable property), excise duty would be chargeable on
such goods immediately upon their change of identity and prior to their assimilation in
the structure or other immovable property.
(iii) Where change of identity takes place in the course of construction or erection of a
structure which is an immovable property, then there would be no manufacture of
“goods” 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 plants) are actually a system or
a net-work of machines. The system comes into being 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 and is dutiable (e.g. a paper
making machine assembled at site and fixed to the earth only for the purpose of
ensuring vibration free movement)
(v) If items assembled or erected at site and attached by foundation to earth cannot be
dismantled without substantial damage to its components and thus cannot be
reassembled, then the items would not be considered as moveable and will, therefore,
not be excisable 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 without 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 their components/parts for ease of
transportation etc., they will not cease to be dutiable 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 therefore have to be decided keeping in view the facts and
circumstances, particularly 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 and hence not excisable goods, the
same product in CKD or unassembled form will also not be dutiable as a whole by
applying Rule 2(a) of the Rules of Interpretation of the Central Excise Tariff. However,
components, inputs and parts which are specified excisable products will remain
dutiable as such identifiable goods at the time of their clearance from the factory or
warehouse.
(viii) The intention of the party is also a factor to be taken into consideration to ascertain
whether 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, Cement plants, Power plants etc. involving supply
of large number of components, machinery, equipments, pipes and tubes etc. for their
assembly/installation/erection/integration/inter-connectivity on foundation/civil structure
etc. at site, will not be considered as excisable goods for imposition of central excise
duty - the components, however, would be dutiable in the normal course.
(ii) 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 stage, 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 possible to
assemble the tank all over again. Such tanks are, therefore, not moveable and cannot
be considered as excisable goods [Reference para 15 of Triveni judgement supra and
the case of CCE Chandigarh v. Bhagwanpura Sugar Mills reported in 2001 (134) E.L.T.
673 (Tri.-Del.) = 2001 (47) RLT 409 (CEGAT-Del)]
(iii) Refrigeration/Air conditioning plants. These are basically systems comprising of
compressors, ducting, pipings, insulators and sometimes cooling towers etc. 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, however, would continue to
remain dutiable as per the Central Excise Tariff.
(iv) Lifts and escalators. (a) Though lifts and escalators are specifically mentioned in 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). Further, this aspect was also a
subject matter of C&AG’s Audit Para No. 7.1(b)/98-99 [DAP No. 186] which has since
been settled by the C&AG accepting the Board’s 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 complete lifts and escalators which are movable
in nature as a whole and can be temporarily installed at construction sites or
exhibitions for carrying men or material. 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 Tribunal has held that the operation
of supply of manufactured and bought out equipment and components by the assessee and
1.26 Central Excise

erection and commissioning of the plant which comprised of the equipment and components
amounts to manufacture. It was held that manufacture and clearance of various
manufactured and bought out equipments taken from their factory and erected at site led to
the emergence of a new commodity liability to duty. The Tribunal followed the Supreme
Court’s decision in Narne Tulaman Manufacturers 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/components would amount to manufacture and accordingly the person
carrying on such activity was a manufacturer and liable to duty. However, the aspect on non
excisability of immovable property was not argued in Narne Tu aman’s case. If the emergent
final product is immovable property then no liability to excise duty accrues.

1.14 WHETHER ASSEMBLY AMOUNTS TO MANUFACTURE

Assembly is a process of putting 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 in as much as an already manufactured item may be put in a readily usable
form. The assembly may take place before the sale or after the sale of manufactured goods
and again at the factory gate of the manufacturer or the customer’s site. It may 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 new 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 platform, load cells and indicator system which in the assembled form
became a weigh 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 general
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.
In BPL India Ltd. Vs CCE 2002 (143) ELT 3, the Supreme Court held that assembly of
imported kits of VTR with colour monitors imported in disassembled condition amounted to
manufacture since the end product had a distinct character and use and 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 waste 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 incorporation of the specific sub-
headings 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 Khandelwal’s 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 final 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 particular subheading of
the Central Excise Tariff.
Hence the position as it currently stands 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 Indian 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 though they
may fetch a value, they are not marketable and hence not excisable. In that 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 waste
and scrap generated without any process is not liable to excise duty.

1.16 PACKING, LABELLING AND BRANDING ACTIVITIES

Packing of dutiable goods is a process of manufacture. The definition of manufacture as
contained in section 2(f) of the Act, covering incidental and ancillary activities there under,
would incorporate within its ambit the activity of packing, which is a necessary adjunct to
manufacture. Further, goods are normally treated as fully manufactured for the purpose of
accounting in the statutory excise records at the stage where they are packed 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 consequently the activity of packing is part and
parcel of manufacture. Reference is also 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
transformed 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 or labelling or re-Iabelling of
containers amounts to manufacture. Further, the declaration 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 manufacture. The goods specified in Third Schedule of the Central
Excise Tariff are 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 packed and saleable condition. For example, milk powder
is chargeable to duty only if it is put up in unit containers. In case it is produced and
consumed within the factory of production without packing in such unit containers, there is
no liability to duty. Unit containers are also defined in the Tariff as containers, large or
small, designed to hold a predetermined quantity or number. Several examples of unit
containers are also described therein.
The position in law however changes 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 containers. In such a situation, the principle in law is that since the bulk
product has already been fully manufactured and has been marketed or dispatched in the
factory, the repacking activity would not constitute manufacture in law. There are numerous
decisions to this effect both of the Tribunal and of the High Courts. In C.C.EX. Vs. Prabhat
Packaging Corporation (1990) (47) ELT-112, the Tribunal held that repacking of an already-
manufactured product would not amount to manufacture in excise law. Also, the reason why
repacking would not constitute manufacture is that the activity does not result in the
emergence of any commercially 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 the same articles. Hence, the test of transformation into a distinct end product, in
terms of the Supreme Court’s decision in DCM’s 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 purchased item. It was held by the tribunal that packing together of a fully
manufactured product and the bought out item would not bring into existence any new
commodity. Consequently, the duty liability would be restricted to the manufactured product
only. The mere activity of packing together of two distinct goods in a single container would
not bring into existence any new commodity; here it is important to distinguish the activity of
packing together of two different products from that of assembly of the products together to
form a distinct third product. In other words, while such packing would not constitute
manufacture, assembly would certainly constitute manufacture. Reference is made in this
connection to the Supreme Court’s decision in the Narne Tulaman case.
Coming now to the aspect of whether labelling and branding activities constitute
manufacture or not, the settled position in law is that an unlabelled and a labelled product is
normally treated 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 concerned 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 in Sidhosons Vs. UOI (1986) (26) ELT-881. The question whether
branding of already manufactured goods was a process of manufacture was not per se
considered in these 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
Union of India (1994) (70) ELT-181, the Calcutta High Court held that affixation of a brand
name on specified goods did not amount to manufacture. Similarly, in the Pioneer Tools
case (supra), the Bombay High Court impliedly held that the activity of branding carried out
by a wholesale buyer on fully manufactured goods could not constitute manufacture under
excise law so as to require excise duty liability 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 there are serious revenue implications, the
Legislature has introduced the concept of artificial definition of manufacture to include the
activity of repacking, relabelling or branding as amounting to manufacture. For example, you
would find these activities as amounting to manufacture under Chapter 21 or Chapter 30 of
the Tariff. Therefore, wherever the Tariff would state so, such activities would amount 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 manufacture and production of goods is the event for attracting the levy of duty.
However, 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 would 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 order 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 change in Tariff heading or sub heading between input material and the resultant
finished 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 Guardian
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 reasoning was that there
was a transformation from one identifiable and distinct article to another identifiable and
distinct article, known differently in the trade parlance. It was held that since the market
understood the two goods differently, the fact that the tariff headings or sub headings did
not change as a result of the process was of no relevance for determining the chargeability.
The decision was upheld by the Hon’ble Supreme Court in landmark decisions in Laminated
Packings (P) Ltd. Vs. C.C.EX. (1990) (49) ELT-326 and in Union of India Vs. Babubhai
Nychand Mehta (1991) (51) ELT-182. The Supreme Court held that a process would amount
to manufacture when input and output material were differentiated in the commercial or
1.30 Central Excise

trade parlance and that the fact that the same chapter heading or sub heading would govern
both the input and output material was not germane to the issue. The Apex Court held that
the commercial or trade parlance test was a safe and reliable test which must necessarily
be adopted in such a situation 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 Tariff 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 differences between the
exempted goods and the goods which are out side the purview of the Central Excise.
Exempted goods are basically chargeable to duty but with an intention of giving relaxation,
they are exempted from payment of duty. On the other hand the goods out side the purview
of levy are either goods which are not included in the tariff at all .
The taxable event for the charge of excise duty is 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 Rules 4 of the Central Excise Rules 2002. The question which
arises for consideration 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
duty 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 Supreme Court considered the several earlier High Court judgements on the point,
especially, the Madhya Pradesh High Court’s decision in Union of India Vs. Kirloskar
Brothers (1978) (2) ELT-690, the Bombay High Court’s decision in Synthetics & Chemicals
Ltd. Vs. S.C. Coutinho (1981) (8) ELT-414 and the Madras High Court’s decision in
Sudaram, Textiles Ltd. Vs. Asstt. Collector C.EX. (1983) (13) ELT-909. Consequently, 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 exemption from duty is withdrawn. However, in
cases where the goods were outside the purview of the Tariff at the time of manufacture
such goods would not be chargeable 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 manufacture,
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 Court in Vazir Sultan Tobacco
Co.Ltd vs CCE 1996 (83) ELT 3.
To summarise, the current 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 manufacture but
before removal such goods are bought within the purview of the tariff or are made
chargeable to a specified rate of duty under the Tariff. [Vazir Sultan Tobacco case]
Self-examination questions
1. Define the nature of excise duty and enumerate the duties leviable under the various
excise laws and rules made thereunder.
2. Describe the taxable event in central excise.
3. Discuss briefly whether excise duty is attracted on the excisable goods manufactured
in:
(a) Jammu & Kashmir;
(b) Special Economic Zone;
(c) EPZ/100% EOU;
(d) Indian Territorial Waters;
(e) Beyond Indian Territorial Waters.
4. Examine whether the following amount to ‘manufacture’:
(i) Labeling or re-labeling of unit containers of chocolate
(ii) Dyeing and colouring of yarn
(iii) Pulverising of chilly
5. With reference to the Central Excise Act, 1944, define the following:
(i) Factory
(ii) Appellate Tribunal
(iii) Excisable Goods
(iv) Wholesale Dealer
(v) Sale and purchase
(vi) Broker or commission agent
1.32 Central Excise

6. Discuss whether the following can be considered as excisable goods for the purpose
of levying excise duty:
(a) Turn key projects
(b) Lifts and escalators
(c) Refrigeration or Air conditioning plants
7. Explain briefly whether "assembly" would tantamount to "manufacture" under the
Central Excise Act, 1944.
8. 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. However, Department has claimed that cold rolled strips
meant and included unsheared and unslit strips also. The basis of the Department’s
claim is Indian Standard Specification 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 demanded on the unsheared and unslit strips also. Discuss whether the demand
put forth by the Department is tenable in law. You may refer to any decided case laws on
this issue.
9. Agrotech Industries Pvt. Ltd uses coal as fuel for producing steam to run the machines
used for manufacturing the end product. Coal is burnt in boilers 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 combustible 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 following 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. Serial no.26.21 covers
“other slag and ash, including seaweed ash (kelp).
(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 marketable
as the same is sold by the Agrotech Industries Pvt. Ltd.
You are appointed 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 thinner gauge. The
two items fall under different tariff headings. Pravaal claims that the process
undertaken by him does not amount to manufacture. His claim is based on a
decision given by the Apex Court in the case of Collector of Central Excise 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 market and refines it.
Refined edible vegetable oil falls in Chapter 15 of the First Schedule to the Central
Excise Tariff. MTZ Ltd. claims that the process undertaken by it does not amount to
manufacture as there is no Chapter Note or Section Note which specifies that
refining of edible vegetable oil amounts to manufacture.
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 jumbo rolls of toilet paper of
a width exceeding 36 cms. The jumbo rolls are purchased on payment of excise duty
from various suppliers. The process undertaken by 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 different tariff headings. The excise department
contends that such reduction of width amounts 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 case law.
Answers
8. Similar issue came up for consideration before Supreme Court in 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 respect of cold rolled strips
and hot rolled strips.
Another reasoning put forward by the Supreme Court was that there was no proof of
the marketability of the cold rolled strips, which is an essential item of manufacture.
The Court held that 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 cold rolled strips from duty paid hot rolled strips does not amount to
manufacture.
Therefore, the Department’s claim in the instant case is not tenable as the very
process of manufacturing cold rolled strips from hot rolled strips does not amount to
manufacture, thereby, making the demand on unsheared and unslit strips void.
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 mention in one of the
entries of the First Schedule, it does not mean that they are liable for payment of
excise duty. Goods have to satisfy the test of being produced 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 the product sought to excise
duty should have gone through the process of manufacture i.e. the raw material should
have gone through the process of transformation 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. Coal is not tampered with, manipulated or
transformed in to the end product. Burning of coal for purpose of producing stream
cannot be said to be manufacturing activity. From burning coal no new product
emerges except cinder or ash that is nothing but the inferior quality of coal itself.
Moreover, coal which leads to production of cinder is not used as a raw material for the
end product. It is being 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 be 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 cinder fails
the test of being manufactured in India, even if it is saleable, it does not make any
difference.
In the light of the above discussion it can be inferred 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 Central Excise v Technowled
Industries 2003 (155) E.L.T. 209 (S.C.) that there is no 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 inserted a section note in section XV of the
First Schedule to the Central Excise Tariff Act so as to provide that ‘the process of
drawing or redrawing a rod, wire or 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 relation to any goods in the Section or Chapter notes of
the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture.”
Finance Act, 2005 has inserted a Note in Chapter 15 of Central Excise Tariff to
provide that in relation to refined 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. This 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
undertaken by MTZ Ltd. shall amount to manufacture.
 Basic Concepts 1.35

Note: This matter had come up before the Supreme Court in the case of Shyam Oil
Cake Ltd. v. CCEx., Jaipur, 2004 (174) E.L.T. 145 (S.C.). The 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 the process was indicated in the Tariff
Entry, without specifying that the same would 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 product. 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 manufacture. In the absence of it being so specified, the
commodity would not become excisable merely because a separate Tariff Item
existed in respect of that commodity.
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 after the
processing/refining. It was held by the Apex Court that as actual manufacture had
not taken place, deeming provision could not be invoked in the absence of 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 does not hold good anymore.
12. The facts of the problem are similar to that of the 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 character and end-use viz., household purposes,
do not undergo any change on account of winding, cutting/slitting and packing.
Further, slitting and cutting of toilet paper cannot be termed as deemed manufacture
as the said process is not treated as manufacture by legislature under any of the
Section/Chapter Notes of the Central Excise Tariff.
The Apex Court has elaborated that mere mention of a product 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 under two different headings, it
cannot be presumed that process of obtaining finished product from such raw
material automatically constitute manufacture. Therefore, 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 and selling expenses and trading margin without any
change in name, character or end-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 the 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, dependent upon
the rate of duty. The rate of duty is determinable on the basis of classification of goods. The
classification of goods consists of determining the headings 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 reference 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 classification of goods, the nomenclature, character and function of the product is
required to be determined and thereafter the excisable product may be identified accordingly
with one or the other headings or sub headings with reference to the relative Section Notes
and Chapter Notes and Rules of Interpretation.

2.2 CENTRAL EXCISE TARIFF

Prior to 1986, the First Schedule to the Central Excises and Salt Act, 1944 contained a
schedule of the goods. This Schedule contained bare descriptions of products, split up into
number of items and sub-items relating to each type of commodity. 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, the goods used to be classified as per the popular or trade
understanding of the same in commercial parlance.
However, from 28th February, 1986, the Tariff Schedule was taken out of the Central Excises
and Salt Act, 1944, and a new Tariff Schedule based on the Harmonised System of
Nomenclature (popularly known as HSN) was brought into force under an independent
enactment called the Central Excise Tariff Act, 1985. HSN is an internationally accepted
product coding system formulated 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
understanding of products across countries. It consists of two Schedules. First Schedule
consists of 96 chapters which group similar class of products under broad sections and
specific classes of products under specific chapters. The chapters are arranged classifying all
2.2 Central Excise

goods of a kind beginning with the raw material and ending with the finished products, 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 one Chapter in, progressive manner.
The said 96 chapters are grouped into twenty sections. 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 Mineral products. Each of these sections has been divided into various
Chapters and each Chapter contains goods of a particular class. Each Chapter has been
further divided into various Headings, depending upon the different types of goods belonging
to the same class of products. This Schedule provides the rates of basic excise duty
(CENVAT) leviable on various products.
The Second Schedule specifies the 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 Schedule will be interpreted in the same way as those in First Schedule.
Unlike the earlier Central Excise Tariff, the new Central Excise Tariff contains Rules of
Interpretation, Section/Chapter Notes and Chapter Sub-Notes giving detailed explanation as to
the scope and ambit of the respective Chapter. These notes have been given statutory
backing and have been incorporated at the top of each Chapter. Residuary items have been
provided separately for each class of goods under each 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 Tariff, the next two digits refer to heading of
the goods in that Chapter, the next two digits indicate Chapter sub-heading and the last two
digits refer to the Chapter sub-sub-heading. Description with eight digits is termed as ‘tariff
item’.
The 8-digit tariff has a triple dash (---) scheme. If the description of the articles is preceded by
a single dash, it means that it is a sub-classification of the 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 preceding 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
extent that the goods are not covered by the Section Notes and Chapter Notes specifically,
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 the Tariff Headings and relevant Section
and Chapter Notes would take precedence over the commercial or trade parlance test for
classifying excisable goods. However, if the specific headings and notes do not cover the
excisable goods, then resort must be had to the commercial or trade understanding of the
goods.
The Supreme Court has held in CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23 that
HSN can be resorted to in case of ambiguity in classifying goods.
 Classification of Excisable Goods 2.3

2.3 EXPLANATORY NOTES TO THE HSN

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 each and every heading of
the HSN, on the basis of which the present Central Excise 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 value and can be used as an aid to classification of goods when there is ambiguity
as 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. This is subject to the condition that such amendment shall
not alter or affect in any 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
interest, 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 any manner the rates
specified in the First Schedule and the Second Schedule in respect of goods at which duties of
excise shall be leviable on the goods under the Central Excise Act, 1944.
(2) Such notifications shall be laid before each House of Parliament, while it is in session, for
a total period of thirty days as soon 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
following the session or the successive sessions aforesaid, both Houses agree in making any
modification in the notification or both Houses agree that the notification 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 EXCISE TARIFF

The Central Excise Tariff Act, 1985, contains a set of five general rules for the interpretation of
the Tariff Schedules. By and large, these rules for interpretation are identical to those
contained in the HSN. Accordingly, the Explanatory Notes issued for these interpretative rules
under HSN are also relevant for Central Excise purposes.
However, the Supreme Court in the case of CCE Vs K.W.H.Heliplastics Ltd., 1998 (97) ELT
385 (S.C.) held that classification of goods under particular heading depends upon
description, purpose and use of the goods. Therefore, 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 following 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 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.
2. (a) 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 the complete or finished article. It
shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or disassembled.
(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. The classification of goods consisting of more than one
material or substance shall be taken to include a reference to goods consisting
wholly or partly of such material or substance. The classification of goods consisting
of more than 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 follows:
(a) the heading which provides the most specific description shall be preferred to
headings providing a more general description. 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 items in a set put up for retail sale, those
headings are to be regarded as equally specific in relation to those goods, even if
one of them gives a more complete or precise description of the 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 cannot 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 reference to (a) or (b), they shall be classified
under the heading which occurs last in numerical order among those which equally
merit consideration.
4. Goods which cannot be classified in accordance with the above rules shall be classified
under the heading appropriate to the goods to which they are most akin.
5. In addition to the foregoing provisions, the following rules shall apply in respect of the
goods referred to therein:
(a) camera cases, musical instrument cases, gun cases, drawing instrument cases,
necklace cases and similar containers, specially shaped or fitted to contain a
specific article or set of articles, suitable for long-term use and presented with the
articles for which they are intended, 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 essential character;
 Classification of Excisable Goods 2.5

(b) subject to the provisions of (a) above, packing materials and packing containers
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 does not apply
when such packing materials or packing containers are clearly suitable 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 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 requires.

GENERAL EXPLANATORY NOTES

1. Where in column (2) of this Schedule, the description of an article or group of articles
under a heading is preceded by “-“, the said article or group of articles shall be taken to be a
sub-classification of the article or group of articles covered by the said heading. Where,
however, the description 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 preceding
description of the article or group of articles which has “-“. Where the description of an article
or group of articles is preceded by “- -“ or “- - -“, the said article or group of articles shall be
taken to be a sub-classification of the immediately 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 charged on the basis of the
value of the goods fixed, defined or deemed to be, as the case may be, under or in sub-
section (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 column.

ADDITIONAL NOTES
In this Schedule,--
1. (a) “heading,” in respect of goods, means 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 correspond 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) “tariff item” means a description of goods in the list of tariff provisions
accompanying either eight-digit number and the rate of the duty of excise or eight-
digit number with blank in the column of the rate of duty;
2. the list of tariff provisions is divided into Sections, Chapters and Sub-Chapters
2.6 Central Excise

3. in column (3), the standard unit of quantity is specified for each tariff item to facilitate the
collection, comparison and analysis of trade statistics.
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 provided 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.
Where 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 classify the particular product.
The Tribunal held in Rajasthan Synthetic Industries Ltd. v. CCE 1989 (42). E.L.T. 24 that rules
for interpretation are not invokable if 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 Chapter Notes
and Rules of Interpretation.
Rule 2(a) governs classification of incomplete 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.
Complete or finished goods will cover goods removed in unassembled or disassembled form.
It was held in MICO Ltd. v. AC 1992 (62) E.L.T. 13 (Mad.) that only goods requiring minor
adjustments would be covered by this interpretative note and if major processes like turning,
grinding, broaching, etc. are undertaken, the incomplete goods cannot be classified as
complete goods.
Rule 2(b) consists of two parts - 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 be taken to include a reference to mixtures of that material or substances. On the other
hand, the second part of the rule deals with the goods of a given material or substance
mentioned under any heading of the Tariff and states that a reference 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.
Rule 3 states that for the purposes of sub-rule (b) of rule 2 or where goods are prima facie
classifiable under two headings, the following shall be done sequentially:
a. Specific description will have to adopted in place of a general description. 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 relation to those goods,
 Classification of Excisable Goods 2.7

even if one of them gives a more complete or precise description of the goods.
b. Mixtures, composite goods consisting of different materials (generally second part
explained above) shall be classified as if they consist of that material or part which
gives them their essential character.
c. When goods cannot be classified in (a) or (b) above, they shall be classified under
that heading which occurs last in the numerical order.
Rule 4 says where goods cannot be classified using the above principles, they would 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, then 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 says that after classifying the goods under a specific heading classification under sub-
headings 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-statutory principles.
But it must be understood that statutory principles will have precedence over non-statutory
principles.
The Supreme Court in CCE v. Wood Polymers Ltd. 1998 (97) E.L.T. 193 held that Rules of
interpretation will be preferred 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 and chapter will always prevail and the classification shall
be made in accordance 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
Department 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 interpreted as understood in the trade. A different
approach may be required where strictly 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 Ayurved Bhavan Ltd
v. CCE 1996 (83) E.L.T. 492 (S.C.)
HSN a safe guide to interpretation - CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23
(S.C.)
ISI specifications not relevant as compared to circulars issued by trade associations and
statutory 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. Union of India
(1991) (51) ELT-334, it was held that it is well settled that the burden to establish that certain
goods can be classified and excise duty can be levied under a particular tariff item is entirely
on the Department. Similarly, in Union of India Vs. Sahney Steel And Press Works Ltd. (1992)
(58) ELT-38, it was 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 circumstances, it is the responsibility of the Department to establish the correct
Tariff Heading under which the product falls. The onus is on the Department to establish the
alternate classification, when the Department turns down the one claimed by the assessee.
When certain goods are prima facie covered by the generic description, the burden to prove
that they are not so covered would be on the person claiming so.
To sum up, the burden to prove a particular classification is initially on the Department and
once it is discharged, the onus shifts to the assessee, because it is he who has exclusive and
special knowledge about the product produced by him.
2.5.5 Treatment of goods for the purpose of classification and exemption: The
meaning of “for the purpose of classification” as well as “for exemption “ should be the same in
view of the provisions of section 20 of the General Clauses 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 Eskayef 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 confined to goods
falling under a particular Tariff Heading. Merely because a product 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 specified in the Notification because the exemption cannot
transfer product from one 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 of the
statute are the same for the purpose of classification and exemption. In Naffar Chandra Jute
Mills Ltd. Vs. Asst. CCE the Calcutta High Court has held that the Rules for Interpretation of
the Central Excise Tariff are applicable for interpreting 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 mentioned in exemption notification, the Rules for Interpretation will
apply to such exemption notification. However, if an item is specifically mentioned without 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 – whether can be changed by the Department : While it
is open to the Department to review classification matters, it is not open to the Department to
arbitrarily change 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, changes in
classification can be made only if there are cogent reasons.
In J.K Synthetics Ltd. Vs. U.O.I. (1981) (8) ELT 328, the Delhi High Court has held that an
authority 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 relevant Tariff Entry has
undergone modification or, subsequent to earlier decision, there has been pronouncement of a
High Court or the Supreme Court which necessitates the reconsideration of the issue. Thus
review/reopening of a classification list may only be done for cogent reasons.
The Tribunal in CCE Vs. Sunita Textiles Ltd. 1993 (67) ELT 932, has held that abrupt changes
in classification, without any cogent reasons, are not justified, if the construction of a Tariff
entry has continued unchallenged for a considerable length of time, it should not be disturbed.
However, a classification list can be changed or modified by the Department, when material
facts were not disclosed in the classification list and they came to the notice or knowledge of
the Department subsequently. However, change based on re-evaluation of the same facts is
not permissible as it tantamount 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
Sanatha Engg. Industrials Vs. Superintendent of CEX 1991 (52) ELT 376 it was held that once
the classification list filed by the assessee had been accepted by the adjudicating authority, he
cannot direct the assessee to file a revised classification list in the absence of initiation of
proceedings for cancellation of the earlier sanction.
When out of two possible headings, goods are classified by the Department under one of
them, such a classification cannot be subsequently changed 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. Discuss whether classification of goods can be altered by the central excise
department.
2. Discuss briefly the Rules for Interpretation of the Schedules to the Central Excise
Tariff Act, 1985.
3. How are the following goods classified under the Central Excise Tariff Act, 1985?
(i) Incomplete or unfinished goods having the essential characteristics of finished
goods
(ii) Finished goods that are removed in an unassembled condition or in a
disassembled condition such as semi-knocked down or completely knocked
down condition.
4. Does the maxim “Latter the Better” apply in classifying the excisable goods?
5. Vertex 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 of 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 Dermatology & Venereology, which
confirm that “MICEL” is an insecticide. Further, various statements 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 the 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 Chapter 30 defines "Medicament", inter
alia, as a product comprising of two or more constituents which have been mixed or
compounded together for therapeutic or prophylactic use.
Give your opinion on the issue with the help of decided case laws, if any.
Answers
4. The Central Excise Tariff Act, 1985 incorporates five Rules 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 shall be classified under the heading which
occurs last in the numerical order among those which equally merit consideration.
Thus the maxim “Latter the Better” applies 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., & Cus., Pune 2005 (181) E.L.T. 206 (S.C.) wherein the Supreme Court
observed that even though, in normal parlance, a product might be considered to be
an insecticide if that product had any therapeutic and prophylactic use, but for the
purposes of classification, that product could not fall under Chapter 38. The Apex
Court clarified that any medicine or substance which treats disease or is a palliative
or curative is therapeutic. Therefore, since Licel cured the infection or infestation of
lice in human hair, it was therapeutic. Further, it was also prophylactic 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 therapeutic and prophylactic
purposes. It would thus be a Medicament within the meaning of the term
"Medicament" in Note 2 of Chapter 30 and would be excluded from Chapter 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 Tariff 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 Retail 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 payable 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 prices may be increasing, the duty would remain the
same quantum when based on length. Since specific duties do not keep pace with
inflation, more and more tariff entries are designed based on advalorem duty structure.
Presently, specific rates have been specified for:
(i) cigarettes -on the basis of length
(ii) matches- per 100 boxes or packs
(iii) sugar -on the basis of quintal
(iv) marble slabs and 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 size 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 charged on the
basis of value, such value may be charged on either of the following 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 Excise Tariff Act, 1975. In such a case,
the task is easy since the value is already 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 Government 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 section 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. Prior 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 after giving permissible
deductions. This has been done under section 4A on many mass 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 manufacturer has
shifted much of the overheads away from the manufacturing location.
The valuation under section 4 and also section 4A (MRP valuation) are discussed 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 VALUATION 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 commercially
acceptable new mechanism based on “transaction value”. Valuation provisions 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 their value, then, on each removal of the goods, such value shall –
(a) in a case where 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 and
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 value
determined in such manner as may be prescribed.
Explanation – For the removal of doubts, it is hereby declared that the price-cum-
duty of the excisable goods sold by the assessee shall be the price actually paid to
him for the goods sold and the money value of the additional consideration, if any,
flowing directly or indirectly from the buyer to the assessee in connection with the
sale of such goods, and such price-cum-duty, excluding sales tax and other taxes, if
any, actually paid, shall be deemed to include the duty payable on such goods.

Chart showing the scheme of valuation under Central Excise

Valuation under
Central Excise

Are tariff values being fixed Valuation under Section

under Section 3(2)? Yes
3(2)

No

Are the goods notified for Valuation under Section

Yes
valuation with reference 4A
to retail sale price?

No

Valuation under
Section 4

[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 goods for
which a tariff value has been fixed under sub-section (2) of section 3.
(3) For the purpose of this section
(a) “assessee” means the person who is liable to pay the duty of excise under this
Act and includes his agent;
(b) persons shall be deemed to be “related” if
(i) they are inter-connected undertakings
(ii) they are 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) “inter-connected undertakings” shall have the meaning assigned to it in clause (g) of
section 2 of the Monopolies and Restrictive Trade Practices Act, 1969; and
(ii) “relative” shall have the meaning assigned to it in clause (41) of section 2 of the
Companies Act, 1956;
(c) “place of removal” means –
(i) a factory or any other place or premises wherein the excisable goods have been
permitted to be deposited without payment of duty.
(ii) a warehouse or any other place or premises wherein the excisable goods
have been permitted to be deposited without payment of duty from where such
goods are removed.
(iii) 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.
(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 the 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, advertising or
publicity, marketing and selling organization expenses, storage, outward handling,
 Valuation of Excisable Goods 3.5

servicing, warranty, commission or any other matter; but does not include the amount
of duty of excise, sales tax and other taxes, if any, actually paid or actually 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 Tariff 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.
Scheme of Valuation under section 4

Scheme under Sec. 4

Duty chargeable with reference to value

Goods not sold or

where the value at any of the four
which goods are conditions is not
sold by assessee to fulfilled - Central
be the Transaction Excise Valuation
value (DPEG) Rules, 2000

Delivery at Delivery at Buyer being Price is the sole

the time of the place of not related consideration
removal removal person
3.6 Central Excise

3.3. RELATED PERSONS

Section 4(3) (b) states that persons shall be deemed to be related if :
(a) they are inter-connected undertakings;
(b) they are relatives;
(c) amongst them the buyer is a relative and distributor of the assessee or a sub-
distributor of such distributor; or
(d) they are so associated that they have interest directly or indirectly in the business of
each other.
Inter-connected undertakings 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 undertakings" means two or more undertakings which are
inter-connected with each other 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 corporate 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 over 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 partners of the firm,-
(a) hold, directly or indirectly, not less than fifty per cent of the shares, whether
preference or equity, of the body corporate, or
(b) exercise control, directly or indirectly, whether as director or otherwise, over the
body 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 under the same management,
(vi) if the undertakings are owned or controlled by the same 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 of
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 of the same group or any of the constituents of the same group; or

(ii) if the managing director or manager of one such body corporate is the managing
director or 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 other; 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 management, constituted (whether
independently or together with relatives of such directors or the employees of the first
mentioned body corporate) one-fourth of the directors 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 hold (whether by themselves or together with their relatives)
not less than one-fourth of the equity shares in the other; or

(vi) if the same body corporate or bodies corporate belonging to a group, holding, whether
independently or along with its or their subsidiary or subsidiaries, not less than one-fourth
of the equity 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 power 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 belonging 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 are 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 corporate 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 less 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
mentioned bodies corporate.

Explanation IV - In determining whether or not two or more bodies corporate are under
the same management, the shares held by financial institutions in such bodies corporate
shall not be taken into account.

Illustration

Undertaking N is inter-connected with undertaking A and undertaking C is inter-connected

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 on.
Therefore we can understand that interconnected undertakings under MRTP Act is very
wide enough to cover many types of connections including the holding and subsidiary
company. Under Central Excise Valuation (Determination of Price of Excisable Goods)
Rules, 2000, the applicability of the definition of inter-connected 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 subsidiary 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 together. 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 following are relatives :-
(a) members of a HUF;

(b) husband and wife;

(c) persons related to one another in the manner indicated in Schedule I-A. The
Schedule is a detailed one and enumerates 22 different relationships. Thus, all of the
above categories will be covered within the definition of relatives and transactions
between 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 assessee’ as occurring in the
section apparently implies that even a distributor should be a related person. In its
landmark decision in the Bombay Tyres International’s 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 distributor but they are limited
only to a distributor who is also a relative of the assessee, 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 person 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 distributor 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 assessable value, when the
dealings are on principal to principal basis - UOI v. Mahindra & Mahindra Ltd. 1989 (43)
E.L.T. 611 (Bom.)

3.3.4 Mutuality of business interest : In U.O.I Vs. Atic Industries Ltd. 1984 (17)
E.L.T. 323, The Supreme Court has held that in order to attract the first part of the
definition, the assessee 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 indirect
interest in the business of the other. The quality and degree of interest which each has in
the business of the other may be different, the interest of the one in the business of the
other may be direct, while interest of the latter in the 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 the principle that
it is not enough that the assessee has an interest, direct or indirect, in the business of the
assessee. Both must have an interest in the business 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, the Tribunal followed the decision in Atic’s case by
holding that the degree of mutual interest was not material in order to attract the definition
but the existence of some interest was all that was required.

Corporate concern and a partnership concern were not related persons, and where the
price charged from a person was 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

Sales of the entire quantity of excisable products through a single agency, which also
undertook advertising of such products would not, per se make the manufacturer 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 there being a common registered office and common usage of telephone
and gowdown was 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 Summary of various decisions on this issue is given in the following table.

Decision Citation

The definition of 'related person' requires UOI v. Atic Industries Ltd. 1984 (17)
mutuality of interest in the business to be E.L.T. 323(S.C.)
proved.

The mutuality of business interest between the Cibatul Ltd. v. UOI 1979 (4) E.L.T.
manufacturer and his buyer can be shown only (J407) (Guj.)
if one has special interest in the promotion or
development of the business of another.

If one of the directors of the buyer company is Jay Engg. Works Ltd. v. UOI 1981 (8)
also chairman of the manufacturing company, E.L.T. 284 (Del.)
it can not be said that they have mutual
interest in the business.

A limited company can not have indirect Collector v. T.I. Miller Ltd. 1988 (35)
interests in the business carried by one of its E.L.T. 8 (S.C.)
shareholders.

The words “relative & a distributor of the UOI v. Bombay Tyre International Ltd.
assessee” do not refer to any distributor but 1983 (14) E.L.T. 1986 (S.C.)
the distributor who is relative of the assessee
within the meaning of the Companies Act,
1956.

Goods sold to dealers under agreement. Moped India Ltd v. AC 1986 (23) E.L.T.
Dealers to have own show room, repair shop 8 (S.C.)
etc. Dealer not a related person.
 Valuation of Excisable Goods 3.11

Goods sold to dealers having no funds of their JK Cotton Spg. & Weaving Mills Co.
own or business premises. Dealers merely a Ltd v. CCE
sham and to be ignored. 1997 (91) E.L.T. 534 (SC).

Once existence of mutual interest is UOI v. Atic Inds. Ltd. 1984 (17) E.L.T.
established, the extent of such interest is not 323 (S.C.)
material.

Merely because, goods are manufactured with Ceam Electronics P. Ltd. v. UOI 1991
customer's brand name and entire production (51) E.L.T. 309 (Bom.)
sold to customer, does not mean that sales
are to related person.

Regional sale offices/godowns are not related Indo-National Ltd. v. UOI 1979 (4)
persons. E.L.T. (J334) (A. P.)

After sales service by dealers during warranty S.M. Chemicals & Electronics v. R.
period do not make such dealers related Parthasarathi 1980 (6) E.L.T. 197
persons. (Bom.)

Price charged by the manufacturer to the UOI v. Mahindra & Mahindra Ltd. 1989
distributor, to be assessable value, when the (43) E.L.T. 611 (Bom.)
dealings are on principal to principal basis.

"Main dealer" can not be treated as distributor GOI v. Ashok Leyland Ltd. 1983 (14)
or related person, when goods are sold E.L.T. 2168 (Mad.)
through main dealer as well as independent
purchasers.

Sale of entire production to one buyer does Ceam Electronics P. Ltd. v. UOI 1991
not make Buyer & Seller related persons. (51) E.L.T. 309 (Bom.)

Customers can not be treated as related, if the UOI v. Hind Lamps Ltd. 1989 (43)
sales are on principal to principal basis to a E.L.T. 161 (S.C.)
shareholding company and associate
companies of foreign shareholding companies.
3.12 Central Excise

Merely because goods are manufactured with UOI v. Play World Electronics P. Ltd.
customer's brand name and entire production 1989 (41) E.L.T. 368 (S.C.)
sold to him, it can not be treated as a sale to a
related person.

Brand name value can not be added to the UOI v. Purolator India Ltd. 1989 (24)
value of goods manufactured by manufacturer ECR 216 (S.C.)
for brand name owner unless it is proved that
they are related persons.

Whole sale price at which goods are sold to UOI v. Cibatul Ltd. 1985 (22) E.L.T.
the buyer to be the assessable value, when 302 (S.C.)
goods are manufactured under agreement with
buyer's trade mark.

Buyer to be held as related person when Snow White Indl. Corpn. v. Collector
manufacturer was to accept back unsold stock 1990 (46) E.L.T. 3 (S.C.)
etc. and the buyer's price held to be
assessable value.

Partner of one of the dealers related to UOI v. Kantilal Chunilal 1986 (26)
director of the manufacturing company to E.L.T. 289 (S.C.)
whom only 34% - 40% of production is sold,
can not be treated as related person and the
price at which goods are sold to him is
assessable value.

Dealers can not be treated as relative of the Mopeds India Ltd. v. Asst. Collector
manufacturer or even otherwise, when the 1986 (23) E.L.T. 8 (S.C.)
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 Kirloskar Cummins Ltd. v. UOI
wholesaler, and only 10% to the related 1991(51) E.L.T. 325(Bom.)
person, the assessable value will be price
charged to wholesale dealers.
 Valuation of Excisable Goods 3.13

Department can lift the corporate veil even if Calcutta Chromotype Ltd v. CCE 1998
the assessee concerned are limited (99) E.L.T. 202 (SC)
companies.

Holding and subsidiary companies not related Dawn Apparels v. UOI 1989 (43) E.L.T.
persons unless tests of mutuality and extra- 401 (Bom) and Ralliwolf Ltd v. UOI
commercial consideration shown. Note : Not 1992 (59) E.L.T. 220 (Bom.)
applicable after 1-7-2000.

3.4 PLACE OF REMOVAL

Section 4(3)(c) defines ‘the place of removal’ to mean
(a) a factory or any other place or premises of production or manufacture of the
excisable goods;
(b) a warehouse or any other place or premises wherein the excisable goods have been
permitted 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 cash or
in kind which forms part of the transaction has to be converted in monetary terms and
added back to the price. Each such transaction has to be at arm’s length and on principal
to principal basis. If the transaction is not on principal to principal basis, the charges paid
are to be added to the transaction value of the goods.
When the sale is at arm’s length, sale price of subsequent seller is not 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)
Relationship between manufacturer & sole distributor though a special one is not a proof
by itself to show that price is favourable price - UOI v. Hind Lamps Ltd. 1981 (8) E.L.T.
11 (Del.)
Price declared by the assessee to be acceptable even though it is less than cost of raw
material, manufacturing cost & manufacturing profit; when the transactions are at arm’s
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 necessary when we have a full fledged VAT
system, it is rather premature to include 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. CC 2000 (121) ELT 21 that the concept of
transaction value is quite different from the concept of price and such value can include
many items which may classically have been understood to be part of the sale price.

Let us analyse the definition of transaction value through the use of flow charts.

And includes
Transaction Value
means the price
actually paid or
payable when sold

In addition to the price any amount that the buyer is

liable to pay to or on behalf 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 additions to price
which the buyer may be liable to pay to or on behalf of the assessee. However, the
definition specifically states as “including but not limited to” which 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
Servicing
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 worthwhile to examine the issue of includibility or otherwise of certain items.

Items of Cost Includibility or otherwise

1. Advertising and publicity Yes

2. Warranty Yes

3. Marketing and selling Yes

4. Storage and outward handling Yes

5. Servicing Yes

6. Commission Yes

7. Freight No. Since it is an activity being incidental to

manufacturing. See Supreme Courts decision in
CCE v. Indian Oxygen Ltd 1988 (36) E.L.T. 730
(SC)
3.16 Central Excise

8. Discounts No. Since the same is already factored into the

definition of transaction value. See also CBEC
(Trade and Cash) Circular No. 354/81/2000-TRU, dated 30-6-
2000 itself clarifies that 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.

9. Installation and Commissioning No. Since the activity would not be related to
sale of goods and can be done independently.
Ratio of decision in Thermax Ltd v. CCE 1998
(99) E.L.T. 481 would apply.

10. Packing Yes. However, in our opinion, certain packing

like tankers sent to deliver goods may not be
includible. The distinction between
primary/secondary packing and safe packing
will no more be relevant.

11. Taxes and duties No. Specifically excluded by section.

12. Interest on deposits, advances. No.

13. Accessories No. See decision of Supreme Court in Shriram

Bearing Ltd v. CCE - 1997 (91) E.L.T. 255.

14. Dharmada Yes. [CBE&C Circular No. 763/79/2003 C.X.

dated 21.11.2003]

However, the above is not conclusive in all cases and would be subjected to interpretation
of the Courts in future time to come.

3.7 SITUATIONS WHERE TRANSACTION VALUE DOES NOT APPLY

As given in the chart for the valuation scheme under section 4 there are four conditions
which have to be fulfilled.
(a) There should be sale of goods

(b) The goods sold should be for delivery at the time and place of removal
 Valuation of Excisable Goods 3.17

(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 sale.
In those cases where any of the above said requirements are missing, the assessable
value shall be determined on the basis of the Central Excise Valuation (Determination 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, 2000
The text of the rules is given for the reference.
CENTRAL EXCISE VALUATION (DETERMINATION OF PRICE
OF EXCISABLE GOODS) RULES, 2000

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 (Determination of
Price of Excisable Goods) Rules, 2000.
(2) They shall come into force on and from the 1 st day of July, 2000.

CHAPTER I
PRELIMINARY

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 transaction 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 expressions 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 VALUE
RULE - 3. The value of any excisable goods shall, for the purposes of clause (b) of sub-
section (1) of section 4 of the Act, be determined in accordance with 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 nearest 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 such goods and of the excisable goods under
assessment, as may appear reasonable to the proper officer.
RULE - 5. Where any excisable goods are sold in the circumstances specified in clause
(a) of sub-section (1) of section 4 of the Act except 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 be 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.
Explanation 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 accordance
with generally accepted principles of costing.
Explanation 2- For removal 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 not 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 value of any additional
consideration flowing directly or indirectly from the buyer to the assessee.
Explanation1 - For removal of doubts, it is hereby clarified that the value, apportioned as
appropriate, of the following goods and services, whether supplied directly or indirectly by
the buyer free of change or at reduced 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 payable, 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
sale of the goods being valued and aggregated accordingly, namely:-
(i) value of materials, components, parts and similar items relatable to such goods;
(ii) value of tools, dies, moulds, drawings, blue prints, technical maps and charts and
similar items used in the production of such goods;
(iii) value of material consumed, 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 sketches
undertaken elsewhere than in the factory of production and necessary for the
production of such goods.
Explanation 2- Where an assessee receives any advance payment from the buyer against
delivery of any excisable goods, no notional interest on such advance shall be added to
the value unless the Central Excise Officer has evidence to the effect that the advance
received has influenced the fixation of the price of the goods by way of charging a lesser
price from or by offering a special discount to the buyer who has made the advance
deposit.
Illustration 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 payment
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 assessee, manufactures and supplies certain goods as design and
specification furnished 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 evidence available with the Central Excise Officer that the notional interest on
the advance has resulted in lowering of the prices. Thus, no notional interest on 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 removal but are transferred to a depot, premises of a consignment agent or any other
place 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 and where the
assessee and the buyer of the said goods are not related and the price is the sole
consideration for the sale, the value shall be the normal transaction value of such goods
sold from such other place at or about the same time and, 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 his 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 goods.
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 per Rule 8 of Central
Excise Valuation Rules, 2000, calculation of cost of production 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 components are:

Direct Material Cost Prime Cost Cost of Production Cost of Sales
+ + + +
Direct Labour Cost Production Overheads Selling Cost Profit
+ + + =
Direct Expenses Administration Overheads Distribution Cost Selling Price
= + =
PRIME COST Research & Development COST OF SALES
Expenses (Apportioned)
=
Cost of Production
Cost of Production: Cost of production shall consist of Material Consumed, Direct
Wages and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research
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 materials, imported materials, bought out items, self manufactured
items, process materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight
inwards, insurance, and other expenditure directly attributable to procurement. Trade
discount, rebates and other similar items will be deducted for determining the cost of
materials. Cenvat credit, credit for countervailing customs duty, Sales Tax set off, VAT,
duty draw back and other similar duties subsequently recovered/ recoverable by the
enterprise shall also be deducted.
Direct wages and salaries shall include house rent allowance, overtime and incentive
payments made to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as contribution to provident fund
and ESIS, bonus/ex-gratia payment to employees, provision for retirement benefits such
as gratuity and superannuation, medical benefits, subsidised food, leave with pay and
holiday payment, leave encashment and other allowances such as children’s education
allowance, conveyance allowance 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
 Valuation of Excisable Goods 3.21

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, technical assistance/know –how fees, amortized cost of moulds,
patterns, patents etc, job charges, hire charges for tools and equipment, and charges for
a particular product designing etc.
Works overheads are the indirect costs incurred in the production process. Works
overheads include consumable stores and spares, depreciation of and machinery, factory
building etc, lease rent of production assets, repair and maintenance of plant and
machinery, factory building etc, indirect employees cost connected with production
activities, drawing and designing department cost., insurance of plant and machinery,
factory building, stock of raw material & WIP etc., amortized cost of jigs, fixtures, tooling
etc and service department cost such as tool room, engineering & maintenance, pollution
control etc.
Quality control cost is the expenses incurred relating to quality control activities for
adhering to quality standard. These expenses shall include salaries & wages relating to
employees engaged in quality control activity and other related expenses.
Research and development cost incurred for development and improvement of the
process or the existing product shall be included in the cost of production.
Administrative overheads in relation to production activities shall be included in the cost
of production. Administrative overheads in relation to activities other than manufacturing
activities e.g. marketing, projects management, corporate office expenses etc. shall be
excluded from the cost of production.
Packing cost includes both cost of primary and secondary packing required for transfer/
dispatch of the goods used for captive consumption. If product is transferred/dispatched
duly packed for captive consumption, cost of such packing shall be included.
Overheads shall be analysed into variable overheads and fixed overheads. The variable
production overheads shall be absorbed in production cost based on actual capacity
utilisation. The fixed production overheads and other similar item of fixed costs such as
quality control cost, research and development costs, administrative overheads relating to
manufacturing shall be absorbed in the production cost on the basis of the normal
capacity or actual capacity utilization of the plant, whichever is higher. Normal Capacity
is the production achieved or achievable on an average over a period or season 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 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 are produced, joint costs are allocated between the products on a
rational and consistent 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 allocation of joint cost to joint products, the sales values of products at the split off
point i.e. when the products become separately identifiable may become the basis. Some
other basis may also be adopted. For example, in case of petroleum products, each
product is assigned certain value based on its certain properties, may be calorific value
and these values become the basis of apportionment of joint cost among petroleum
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 reprocessing, 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 making the scrap suitable for reprocessing shall be deducted
from value of scrap or waste.
Miscellaneous income relating to production shall be adjusted in the calculation of cost
of production, for example, income from sale of empty containers used for despatch of the
captively consumed goods produced under reference.
Inputs received free of cost
In case any input material, whether of direct or indirect nature, including packing material
is supplied free of cost by the user of the captive product, the landed cost of such material
shall be included in the cost of production.
The amortization 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 financial charge shall not be considered to be a
part of cost of production.
Abnormal and non-recurring cost arising due to unusual or unexpected occurrence of
events, such as heavy break down of plants, accident, market condition restricting sales
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.
 Valuation of Excisable Goods 3.23

Qty
Q1 Quantity Produced (Unit of Measure)
Q2 Quantity Despatched (Unit of Measure)
Particulars Total Cost/
Cost unit
(Rs) ( Rs)
1. Material Consumed
2. Direct Wages and Salaries
3. Direct Expenses
4. Works Overheads
5. Quality Control Cost
6. Research & Development Cost
7. Administrative Overheads (relating to production activity)
8. Total (1 to 7)
9. Add : Opening stock of Work - in –Progress
10. Less : Closing stock of Work -in- Progress
11. Total (8+9-10)
12. Less : Credit for Recoveries/Scrap/By-Products / misc income
13. Packing cost
14. Cost of production ( 11 - 12 + 13)
15. Add: Inputs received free of cost
16. Add: Amortised cost of Moulds, Tools, Dies & Patterns etc
received free of cost
17. Cost of Production for goods produced for captive consumption
(14 + 15 + 16)
18. Add : Opening stock of finished goods
19. Less : Closing stock of finished goods
20. 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 thereto 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 through 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, the
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 sell 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 him
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 connected that they are also related in terms of sub-clause
(ii) or (iii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act or the buyer
is a holding company or subsidiary company of the assessee, then the value shall be
detemined in the manner prescribed in rule 9.
Explanation- In this clause "holding company" and "subsidiary company" shall have
the same meanings as in the Companies act, 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.
RULE - 11. If the value of any excisable goods cannot be detemined under the foregoing
rules, the value shall be determined using reasonable means consistent with the
principles and general provisions of these rules and sub-section (1) of section 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 satisfied 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 delivery time is different from the time of removal.

Rule 5 speaks of the conditions that all the condition as per section 4(1)(a) which are
mentioned earlier are fulfilled 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
transportation from the place of removal to the place of delivery. Old rule permitted
exclusion of only the actual cost of transportation from the place of removal upto the place
of the delivery. However, this exclusion was allowed only if the cost of transportation was
charged separately and such cost was shown separately in the invoice. The rule has
been amended to omit the specific requirement for showing the transportation cost
separately in the invoice. Moreover, the actual transportation cost may also now be
 Valuation of Excisable Goods 3.25

excluded on an averaged or equalized basis. For this purpose, the average transportation
cost shall be computed in accordance with the generally accepted principles of costing.
Where necessary, the assessee may be asked to furnish certification 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, for
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 place or premises from which the
goods are to be sold after their clearance from the 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 not 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 consideration to be received for such
goods. If the price received is not the sole consideration, then the rule requires to add the
value of the additional consideration whether directly or indirectly received (not
necessarily from the buyer, it may 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 it 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 relatable 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 goods;
(c) value of material consumed, including packaging materials, in the production of such
goods;
(e) value or engineering, development, art work, design work and plans and sketches
undertaken elsewhere than in the factory of production and 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 transferred 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 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.
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
aggregate 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 identical goods are not
sold by the assessee from depot/consignment agent’s place on the date 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 valuation of goods at the time of removal from factory/warehouse. It follows from
the 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 actual 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 simplification, it has been decided to value goods which are
captively consumed on cost construction method only as there have been disputes in
adopting values of comparable 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 by
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 of profit
etc. is prescribed in the rule itself for ease of assessment of goods used 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 value to be adopted will be the price at which such
related person sells to unrelated 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
goods (captively consumed) then the valuation will be based on the principle of cost plus
10% as per Rule 8.

It is important to note that the definition of related persons includes "inter-connected

undertakings" as defined in the Monopolies and Restrictive Trade Practices Act, 1969.
 Valuation of Excisable Goods 3.27

The definition of inter-connected undertaking in the said Act is comprehensive and

includes two or more undertakings which are inter-connected with each other in any of the
ways such as if one owns or controls the other, or where the undertakings are owned by
firm, if such firms have one or more common partners, etc.

Rule 10 provides that even if the assessee and the buyer are ‘inter-connected
undertakings’, 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 have 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
Subsidiary company and the other types of relationship mentioned in (a), (b) and c above.
"Transaction value" could then form the basis of valuation provided other two conditions,
namely, price is for delivery at the time and place of removal 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, which says when the value of any excisable goods cannot be
determined under any of the aforesaid rules, the value shall be determined using
reasonable means which are consistent with the principles and general provisions of
these rules and sub-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 be taken as the whole day and the transaction value of the "greatest
aggregate quantity" would refer to the price at which the largest quantity of identical
goods are sold on a particular day, irrespective of the number of buyers. In case the
"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 nearest day when
clearances of the goods were affected from the depot or other place 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 the accepted principles of costing. A
cost certificate from a certified Cost Accountant/Chartered Accountant/Company
Secretary, may be accepted. The cost of transportation 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 removal up to the place of delivery is only to be excluded. If the assessee is recovering
an amount from the buyer towards the cost of return fare of the empty vehicle 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 transportation charges indicated therein do
not include cost of transportation for the return journey of the empty truck/vehicle, the
deduction of the said transportation 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 transit 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 containers (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 cost 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 payment 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 over and above the sale price of the goods
g. The erection, installation and commissioning charges should not be included in the
assessable value, if the final product is not excisable.
h. Where the assessee does not sell the inputs/capital goods to any independent buyer
and the only removal of such input/capital goods, outside the factory, is in the nature of
transfer to a sister unit. In such a case proviso to rule 9 will apply and provisions of rule 8
of the valuation rules would 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/capital goods have been received by the assessee from outside and
have not been produced 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 valuation
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 depreciation 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 has 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 Valuation (Determination of Price of Excisable Goods) Rules,
2000.
3.10 VALUATION UNDER DIFFERENT CIRCUMSTANCES
3.10.1 Valuation of goods manufactured on job work basis: If the processing
results in the manufactured product, the assessable value 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 the job conversion charges including
job worker’s profit is Rs.100/- the value of the goods will be Rs.150/- as this is the value
at which the goods leave the factory and enter the main stream. This is the decision of the
Supreme Court in Ujagar 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 is provided by the customer: The
value of the raw material supplied by the customer would form a part of the assessable
value. The fact that the manufacturer does 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 – (1991) 36 ECC-1(SC). In this case the assessee
manufactured wagons for Railways. The latter supplied wheel sets and certain other items
free of cost. The price charged for the vehicle did not include the value of the items
supplied free of cost. 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 how
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 subsequent to the removal of goods, on the
assessable value: The excess amount realised under an escalation clause would form
part of the assessable value and thus attract Central Excise duty.
The effect of reduction in price subsequent to removal on payment of duty, on assessable
value.
If the goods are removed on payment of duty, based on declared price, subsequent
reduction of price for whatever reason, including Government interference, would not
create a claim for refund of Central 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 Rule 7 only for Rule 8

depot sales
If price is not the sole In case of captive
consideration make Value to be the consumption
adjustments for Cost value at which
of tools, dies, moulds, greatest aggregate
materials supplied quantity sold at that
free of cost includible 110% of cost of
depot at the time of production
removal from the
factory.

Rule 9: for sales only to or Adopt the price at which

through related persons (see related person sells to
also Rule 10) unrelated buyers or the value
sold to related persons who in
turn sells in retail.
Rule 10: Sale to interconnected
undertakings (one of the related persons)
Only those related in Section 4(3) (ii), (iii) No
or (iv) or holding/subsidiary companies
would follow valuation under Rule 9.

Rule 11 Adopt best judgment

[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 is
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
within 45 days. Rs.100/- per unit will of course include the interest component pertaining
to the general credit period of 45 days. Even if the payment is made at the time of delivery
Rs.100/- would be the assessable value, irrespective of the possible inclusion of interest
element in the price. If the assessee charges Rs.102/- 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 taken by the
manufacturer from the buyer in influencing the assessable value: Interest 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 wholesale 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 trade 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 in the course of wholesale trade, would constitute the normal price. But
where the 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
assessable value for the brand name owner cannot be treated as manufacturer and the
price 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 towards
drawing, designing and technical specifications are clearly elements of machinery 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 nature 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 the manufacturer bears the cost towards inspection and testing
of goods prior to their removal, such costs are included in the assessable value. The
inspection and 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 assessable value.
Amount charged and recovered from customers by separate bills will be considered as
gross receipts or cum duty price and duty payable is to be calculated 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 certain
parts while repairing a manufactured product, he is liable to pay duty only on value of
spare parts manufactured and used in the said manufactured product.
3.10.12 Maintenance charges, whether part of assessable value: Maintenance
charges (being optional and distinct from warranty obligations), and sight service charges
recovered for rendering special services are not includible in the assessable value. But if
the price is marked up to cover servicing costs, prima facie such amount would form a
part of the assessable value.
3.10.13 Warranty expenses and the assessable value: After sales service expenses
for warranty are a part of the value.
3.10.14 The cost of accessories supplied by the buyer, whether part of the
assessable value: There is a distinction between a component and an accessory. A thing
is a part or a component of the other only if the other is incomplete without it. A thing is an
accessory of the other if the thing is not essential for the other, but only acts to its
convenience or effectiveness. The cost of accessory supplied by the buyer as a package
of sale of the manufactured goods will be included in the value if cenvat credit is taken in
respect of the accessories.

3.11 MAXIMUM RETAIL PRICE (MRP) BASED VALUATION [SECTION 4A]

The provision relating to duty based on MRP is dealt in section 4A. Section 4A was
introduced with effect from 14.5.97 and today covers more than 83 Tariff headings. The
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 states that the Government
may notify such of the aforesaid categories of goods to which the revised principle of
excise valuation would apply. The revised principle would require payment of excise duty
on the basis of the said MRP less such deductions/abatements as the Central
Government may allow in the notification. Thus the goods, which are coved under this
new principle, would be required to discharge 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 fight the evil of
 Valuation of Excisable Goods 3.33

manufacturers transferring cost to trading companies and reducing the excise duty
payable by them. The conditions under which this section will apply are as under:
(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 retail sale
price thereof.
(b) The Government may notify such products for the purpose of this Section. However,
it must be noted that if products are to be so notified, law must require such products
to declare the retail sale price on the package.
(c) The valuation has to be done on the basis of retail sale price declared on the
package less abatement. Abatements can be given by the Central Government 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 maximum price at which the
excisable goods in packaged form may be sold to the ultimate consumer inclusive of
all taxes and expenses and price is the sole consideration 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, local or otherwise, the retail sale
price shall be construed accordingly.
(e) It is 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 purpose 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 Government if the manufacturer does any of
the following acts:
(i) removes excisable goods 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 manufacture.
(g) Where different retail sale prices are declared on different packages 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 excisable goods at the time of
its clearance from the place of manufacture, is altered 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 decision 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 Excise Act, 1944, ‘retail sale
price’ has been defined to mean the maximum price at which the excisable goods in
packaged form may be sold to the ultimate consumer and includes all taxes, local or
otherwise, freight, transport charges, commission 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 consideration 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, local or otherwise, the retail sale price shall be
construed accordingly.
For the purpose 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 the
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 accepted by the Board vide
its circular No. 625/16/2002-cx dt. 28.02.02, wherein the Board 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 provisions of the Standards of Weights and
Measures Act, 1976, or the rules made thereunder or under any other law for time being
in force, to declare on the package thereof the retail sale price of such goods”. In other
words, if there is no statutory requirement under the provisions of Weights and Measures
Act to declare the 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 apply.
Chapter V of the Weights & Measures (Packaged Commodity) Rules, 1977 mentions 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 not statutorily required to
print/declare the retail sale price on the packages under the provisions of the Standards of
Weight & Measures Act, 1976, or the rules 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 Central Excise Act, 1944, if tariff values have been fixed for the
commodity.
 Valuation of Excisable Goods 3.35

Self-examination questions
1. Differentiate between “Tariff value”, “Transaction value” and “Normal value”.
2. How are goods valued when they are sold partly to a related person and partly to an
unrelated person?
3. On 25.02.2007 goods were removed from the factory at Chandigarh for sale from the
depot at Mumbai. On that date the normal transaction value of the goods at
Chandigarh factory was Rs.10,000 and tariff rate was 8%. These goods were sold ex
Mumbai depot on 3.3.2007. On that date the normal transaction value at Mumbai
Depot was 11,000 and tariff rate was 16%. The normal transaction 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.
4. ABC Ltd. of Kanpur agreed to sell an electric motor to DEF Ltd. of New Delhi for
Rs.15000.00 on ex-factory basis. Other particulars are:
(i) Transportation and transit 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.
(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.1300.00.
(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.200 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 Automobiles for supply of a
machine used for welding the steel sheets. The various details are:
Particulars Rs.
Price of machine (net of taxes and duties) 5,45,000.00
Machinery erection expenses 35,000.00
Packing (normally done by him for all machines) 20,000.00

Design and drawing charges relating to 60,000.00

manufacture of machinery (Net of taxes and
duties)
Central Sales Tax 4%
Central Excise Duty 20%
Cash discount (offered if full payment is 15,000
received before dispatch of goods)
Bought out accessories supplied along with the 10,000
machine (accessories were optional)
Cost of loading the machinery in the truck in the 3,500.00
factory (not charged separately to Cantburry
Automobiles)

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
Industries.
6. M/s. Well Welders manufactures welding electrodes that are put first in polythene
bags and then packed together in cardboard cartons. They sell electrodes at the
factory gate packed in cardboard cartons where such electrodes are also packed in
wooden boxes when sold to outstation customers. Is the Department 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.
7. M/s. Cool Air manufactures complete ceiling fans excluding regulators that are
purchased from other 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 to the stand taken by M/s. Cool Air? Give reasons in support of your
answer.
 Valuation of Excisable Goods 3.37

8. Alpha Industries Ltd. manufactures shoes on the basis of bulk orders received from
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. How should the
goods be valued?
9. The value of the operational software should not be included in the value of the
computer. Discuss the correctness of the statement with reference to the provisions
of the Central Excise Act, 1944.
10. M/s. Della Traders is in the practice of charging each of its customers compulsorily, 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 promote marketability.
However, the contention of M/s. Della Traders is that such charges 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 with floppy drive,
keyboard, and CPU. In around 30% of cases, Infotech Systems bought 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 specifies 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 enable Beta Ltd. to
avail the duty exemption scheme, Omega Steel Plant has surrendered the advance
licences held by them for import of refractories.
Against such surrender, advance intermediate licences for import of inputs have
been issued to Beta Ltd. Consequently, Beta Ltd. has imported the inputs without
payment of customs 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 Plant, is additional

consideration towards the value of the refractories and that this additional
consideration forms part of the price of the refractories for purposes of excise duty.
Do you think that the stand taken by the excise department is correct in law?
Discuss.
Answers
2. There is no specific rule covering such a contingency. Transaction value in respect of
sales to unrelated buyers cannot be adopted for sales to related buyers since as per
section 4(1) transaction value is to be determined for each removal. For sales to
unrelated buyers valuation 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 those cases where all the sales are made to related buyers only.
3. According to Rule 7 of Central Excise Valuation Rules, 2000, in cases where the
goods are not sold at the factory gate or at the warehouse but they are transferred by
the assessee to his depots or consignment agents or any other place for sale, the
assessable value for the goods cleared from factory/warehouse shall be the normal
transaction 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 given case, Rs.10,000 represents value on 25.02.2007 (time of removal) but it
is not 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 correct value to be adopted in this case is the depot price of such goods (normal
transaction 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 the sale
is at the factory gate and the seller has merely arranged for the delivery. 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 gate itself.
Transit insurance will also not be included in the assessable value as delivery of
goods to transporter is prima facie delivery of goods to buyer hence 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 included in the
assessable value [Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 13 (SC)].
(ii) Discount of Rs.1000 is given on Rs.15000 (agreed price) i.e., the discounted
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 payment
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 dated
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
over and above the sale price.
(iv) Packing charges will form part of the assessable value.
(v) Charges for ‘free after sale service’ during warranty period are includible in the
assessable value.
(vi) Dharmada charges are includible in the assessable value [CBEC Circular No.
763/79/2003 C.X. dated 21.11.2003].
(vii) Value of 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 Engineering 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. Computation of assessable value and duty payable
Particulars Rs.
Price of machine (net of taxes and duties) 5,45,000.00
Machine installation expenses (See Note 1) -
Packing 20,000.00
Design and drawing charges relating to 60,000.00
manufacture of machinery (Net of taxes and
duties)
Bought out accessories supplied along with the -
machine (See Note 2)
Cost of loading the machine in truck in the -
factory (See Note 3)
Total 6,25,000.00
Less : Cash discount (See Note 4) 15,000.00
Assessable Value 6,10,000.00
Excise duty @ 20% 1,22,000.00
Education cess @ 2% 2,440.00
Total duty payable 1,24,440.00
3.40 Central Excise

Note 1: Installation expenses are not includible in assessable 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 passed on to buyer

[CBEC Circular No. 643/34/2002 – CX dated 01.07.2002].
6. Yes, department is justified to include the cost of wooden boxes in assessable value
of welding electrodes because from the given facts it is clear that the cost of wooden
boxes has been incurred by the reason of or in connection with the sale made to
outstation customers.
As per Section 4(3)(d) of Central Excise Act, transaction 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 assessee, by reason of, or in connection with the
sale.
Further, Board has clarified by its Circular No.354/81/2000 CE dated 30.06.2000 any
charges recovered for packing are charges recovered in relation to the sale of the
goods under assessment 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 the assessable value as goods should be assessed in
the stage in which they are removed. 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 2004 (92) ECC 633 (SC). The Court held that value of
regulators of fans is includible 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 goods 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 3.41

dated 28.02.2002 that read:

“Sec.4A of the Central Excise Act, 1944 is applicable in respect of those cases only
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, 1976 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 the package thereof
the retail sale price of such goods….". In other words, if there is no statutory
requirement under the provisions of Weights and Measures Act to declare the 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 apply. Chapter V of the
Weights & Measures (Packaged Commodity) Rules, 1977 mentions the instances
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 C.E. Act, 1944.
It is, therefore, clarified that, in respect of all goods (whether notified u/s.4A or not) in
which there is no statutory requirement to print/declare the retail sale price on the
packages under the provisions of the Standards of Weight & Measures Act, 1976, or
the rules made there under or any other law for the time being in force, valuation will
be done u/s.4 of the C.E. Act, 1944 (or 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 notified commodity would be partly assessed on the basis
of MRP u/s.4A and partly on the 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 not declare or print the retail sale
price in respect of a notified commodity, which it is statutorily required to do under
the provisions of the Weights & Measures Act, or any other law for the time being in
force, the goods, on removal, will be liable to confiscation u/s. 4A(4) of the C.E. Act,
1944.”
In the situation referred to in the question there is no legal obligation on the
manufacturer to print 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
Circular should be followed in this case also and the valuation of the goods sold in
bulk 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.) wherein it was held by
the Apex Court that the value of the operational software loaded on the computer is
not includible in the assessable value of the computers.
Computer and operative softwares are different marketable commodities. They are
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 and software are distinct and separate, both as a matter of commercial
parlance and also under the statute. A computer may not be capable of functioning
effectively without being loaded with software. However, it will not tantamount to
bringing them within the purview of the part of the computer so as to include their
value in the assessable value of the computers. Both computer and software must
be classified under their respective headings viz., 84.71 and 85.24 and must be
subjected to corresponding rates of duties separately.
Although the information contained in software is loaded in the hard disc, but the
operational software does not lose its value and is still marketable as a separate
commodity. It does not lose its character as a tangible goods being of the nature of
CD-ROM. The fact that the manufacturers put different prices for the computers
loaded with different types of operational software does not make any difference as
regards nature and character of the ‘computer'. Even if the manufacturers in terms
of the provisions of a licence are obliged to preload software on the computer before
clearing 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 along with
the computer.
As regards valuation it was pointed out by the Apex court that the valuation of goods
would be subjected to the charging provisions contained 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 charging 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 justify 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 excisable. 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 duty 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 impermissible to levy a tax indirectly.
The excise duty is chargeable on the excisable 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 both.
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 machinery provision
contained in section 4 and that too the explanation contained therein by way of
definition of 'transaction value' can neither override the charging 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 manufacturing, expenses that
add to the value of the excisable goods are to be considered 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 Tractors Ltd. 2004 (164) E.L.T. 129 (S.C.). On this issue, the
Supreme Court observed that 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 free repair during warranty period then that is something which is
being provided by 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 Apex Court that cost of labour charges recovered from the buyers for free
repair provided by dealers during warranty period should be included in the
assessable value.
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 part
of the computer. It is a peripheral item which may be required along with a computer.
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 and/or printer would be excisable
only in the hands of their manufacturer. The assessee did not manufacture the
monitor or the printer. The Supreme Court observed 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 printer. 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 sells 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 correct.
12. The facts of the problem are similar to that of the case of CCEx. Bhubaneshwar-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 thereof, assessee
getting licences has nothing to do with any Import and Export policy. This is directly
a matter of contract between two parties which has resulted in additional
consideration by way of “advance intermediate licence” flowing from 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 its licence for
the purposes of the contract, then there would have been no additional
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 added to the price of the
refractories.
The Apex Court further clarified that where 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 Central Excise Act, 1944 lead to introduction of Central Value Added
Tax (CENVAT). Section 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
relation to manufacture of excisable goods. Section 37(2) (xviaa) empowers Central
Government to make rules to provide for credit of service tax leviable under Chapter 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 introduced 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 effect of duty on the final products.
Later, this scheme was extended to capital goods to be effective from 1-3-94. In the year
1997, the entire rules were recasted but distinct rules were maintained for inputs and capital
goods.
Over the years, disputes between the department and assessees on the interpretation of
Modvat rules and procedures plagued the system. With the intention to put an end to this
situation, Budget 2000 unified the rules for capital goods and inputs into one set of rules
(Rules starting from Rule 57AA to 57AK) which were simple and transparent. Subsequently,
Cenvat Credit Rules, 2001 were introduced vide Notification 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 Cenvat 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 sector, for the
purpose of setting off the duty incidence.
The new Cenvat Credit Rules 2004 are a follow up of the Union Finance Minister Mr P.
Chidambaram's assurances in the Parliament for taking steps to integrate the tax on goods
and services. The new rules mark a beginning towards a fully integrated 'Goods and
Service 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 can be adjusted
against a manufacturer’s excise duty liability or a service provider’s service tax liability.
Excise duty and service tax shall continue to be separate 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 categories, namely manufacturers, service providers and
manufacturers-cum-service providers.

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 not 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 First Schedule to the Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the 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 final products, but does not include any
equipment or appliance used in an office; or
(2) for providing output service;
(B) motor vehicle registered in the name of provider of output service for providing taxable
 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 taxable 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 the Finance Act.
4.3.4 Final Products : Rule 2(h) defines “final products” as excisable goods manufactured
or produced from input, or using input service. Excisable goods 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 enough to cover all products, whether final or
intermediate, which are manufactured by the assessee by a manufacturing process. This
may also include the goods which are exempted by way of notification.
4.3.5 First Stage Dealer: Rule 2(ij) means a dealer who purchases the goods directly
from-
(i) 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 from
premises of the consignment agent of the said manufacturer or from any other
premises 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 consignment
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 manufacture of final products whether directly or
indirectly and whether contained in the final product or not and includes lubricating oils,
greases, cutting oils, coolants, accessories of the final products cleared along with the final
product, 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, except light diesel oil, high speed diesel oil, motor spirit, commonly known as
petrol and motor vehicles, used for providing any output service;
Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as
petrol, 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 understanding, 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 manufacture of
final products directly or indirectly and whether contained in the final product or not;
and
b. Includes -
i. lubricating oils;
ii. greases,
iii. cutting oils,
iv. coolants,
v. accessories of the final products cleared along with the final products,
vi goods used - as paints
- as packing material,
- as fuel,
- for generation of electricity or steam used for
manufacture of final products
- or for any other purpose, within the factory of
production.
c. All goods, except light diesel oil, high speed diesel oil, motor spirit, commonly 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 the 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 indirect. 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 definition gives the list of various examples of inputs to be included in the
definition 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 materials, used for
generation of electricity and also regarding parts and assessories just fitted in the final
product or given along with the final product.
Further, if we analyse, inputs mean anything that is put into the stream of manufacture.
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 have a wide meaning
so as to cover raw materials, components, consumables, parts etc. but will exclude capital
goods as defined in Rule 2(a). The cardinal tests would 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., plant/machinery/tools,
etc. which are eligible for capital goods credit.
If the above tests are satisfied, then the item would be an eligible input for the purpose of
Cenvat.
The term “input” should be viewed in the light of the fact that the Cenvat 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 that capital goods which
are used as component parts in the manufacture of final products are eligible for Cenvat
credit as inputs. The Tribunal in case of Digital Equipment’s case - 1996 (86) E.L.T. 127
has held that small computers would be considered as a component part of large computers
thereby, making them eligible for MODVAT credit as an input.
The large bench of the Tribunal in Union Carbide India Ltd v. CCE - 1996 (86) E.L.T. 613
held that parts of machines are also eligible 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, this 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 as fuel
With effect from 1-3-1994, inputs used as fuel were made specifically eligible for MODVAT
credit. Fuel is basically raw material for fire. Even prior to this amendment, there were
several Tribunal decisions holding that oxygen and acetylene gas were eligible inputs when
used as fuel. Explanation to Rule 2(g) excludes HSD, LDO and petrol from the scope of
inputs irrespective of the use to which 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 16-
3-1995 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 Industries Ltd v. CCE - 1997 (93) E.L.T. 213 (T-WZB) the Tribunal has held
that furnace 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 for credit. However, now
4.6 Central Excise

light diesel oil has been excluded from the list of inputs eligible for cenvat credit. 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 steam generated is to be used in the
factory of production for any purpose. The Tribunal 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 electric 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
clarificatory and therefore retrospective in effect. In the new definition of the input it is
clearly spelt out that the goods used for generation of electricity or steam used for
manufacture of final products or for any other purpose, within the factory 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 when 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,
inputs used for their generation are eligible provided they are consumed captively within the
same factory. Therefore, power plants whose end product is generation of electricity would
not be eligible for Cenvat credit unless they are located 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 those packing materials
which do not enter the assessable value. It would be worthwhile to look briefly at the
chequered history of packing materials as regards its eligibility.
In the erstwhile Explanation to Rule 57A, packaging material was eligible for MODVAT
credit. This was interpreted by the Department as including only ready to use packages and
not raw materials used for manufacturing such packages. However, this controversy was
set at rest by the Madras High Court in Ponds 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 materials and materials from which such packing materials are
made are eligible inputs 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 which 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 Explanation to Rule
57A (vide notification 28/95). However, the Tribunal took a view in BPL 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 final 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 affixed on the fan is an eligible input since they are essential for marketing
the fans. 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 coolants were excluded from the scope of
inputs and they were specifically held eligible under Rule 57Q pertaining to MODVAT on
capital goods. But, with effect from 1.9.97, lubricating oils, greases, cutting oils and coolants
had been given the 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 eligible 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 (62) E.L.T. 560 (T-
SRB). Even this controversy is settled by decision of Larger Bench 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 manufactured 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 amounting to
removal under the Excise Rules. This concept was brought about vide notification 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 Rule. It would also be pertinent to note that
currently Notification No. 67/95, dated 16.3.95 exempts inputs manufactured and consumed
captively for production of final products on which duty is payable. The Board in its
supplementary instruction dated 1-9-2001, has clarified that Cenvat credit should not be
denied if the inputs are used in any intermediate product arising in the course of
manufacture 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 is used only after
the product is completed. Painting ensures that the final product 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 per 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 that capital goods which
are used as component parts in the manufacture of final products are eligible for Cenvat
credit as inputs. The Tribunal in case of Digital Equipment’s case - 1996 (86) E.L.T. 127
has held that small computers would be considered as a component part of large computers
thereby, making them eligible for MODVAT credit as an input.
The large bench of the Tribunal in Union Carbide India Ltd v. CCE - 1996 (86) E.L.T. 613
held that parts of machines are also eligible 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, this goes to show the wide scope given to the term inputs.
ILLUSTRATIVE LIST OF JUDICIAL DECISIONS ON INPUT CREDIT UNDER
MODVAT/CENVAT
Input Final product Eligibility Authority
(1) (2) (3) (4)
Alumina pellets/ Oxygen Yes CCE v. Indian Oxygen Ltd 1995 (78)
Regenetal E.L.T. 270 (T-SZB)
Acetylene
Abrasive Emery In general No Bajaj Auto Ltd. v. CCE 1998 (101)
Paper E.L.T. 638 (T-WZB)
Clock assembly, `Deluxe’ model Yes Maruti Udyog Ltd v. CCE 1999 (107)
radio, audio system of Maruti car E.L.T. 118 (T-NZB)
Cutting oil & Forgings Yes Bharat Forges Ltd v. CCE 1999 (112)
quenching oil E.L.T. 68 (T-WZB)
Electrodes Used in welding Yes Bajaj Auto Ltd v. CCE 1998 (99)
machines for E.L.T. 479 (T-WZB)
spot welding
Explosives Cement Yes Being used in relation to manufacture.
Jaypee Rewa Cement v. CCE 2001
(133) E.L.T. 3 (SC)
 Cenvat Credit Rules, 2004 4.9

Filter bags Sugar No Gwalior Sugar Co. Ltd v. CCE 1992

(59) E.L.T. 482 (T-NZB)
Luggage carrier Tata Sumo Yes 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 of specified
duty shall be allowed only on those inputs which are used in or in relation to the
manufacture of final products whether directly or indirectly and whether contained in the
final product or not.
The Cenvat scheme allows credit on inputs used in or in relation to the manufacture of final
products. The Supreme 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 normally encompass the entire process carried on by the dealer of converting raw
materials into finished goods. Where any particular process of activity is so integrally
related to the ultimate manufacture of goods, so that, without that process 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 Collector 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 process or is required
to make the article marketable must be deemed to be a raw material 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 deciding on the
scope of the term ‘in relation of manufacture’ held that even processes like handling of raw
materials would be a process in relation to manufacture if it 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 held 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 themselves, 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 plate fixed on a fan is an input eligible for set off under
Notification 201/79 in 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 contained 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 whether without the presence of the said raw material it would be possible to
manufacture the end product.
The Madras High Court in Ponds India Ltd v. Collector - 1993 (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 without 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. 177, the Supreme Court
had to decide whether raw naphtha used in offsite plants to produce ammonia which is in
turn is used in water treatment plant, steam generation plant, effluent treatment plant and
inert gas generation plant, could be eligible for the benefits of exemption notification which
was issued exempting ammonia used for manufacture of fertilizers. The Supreme Court
specifically held that water treatment plant, steam generation and inert gas generation plant
are necessary parts of the process of manufacture of urea. They also held that pollution
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 packing materials. There seems to be no restriction on those
packing materials which do not enter the assessable value. Madras High Court in Ponds
India Ltd v. CCE 1993 (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 materials used for making cartons eligible for MODVAT - Britannia Industries Ltd v.
CCE 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 Input service: Rule 2(l) defines input service as any service
(i) 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 final products from the place of
removal,
and includes services used in relation to setting up, modernization, renovation or repairs of
a factory, premises of provider of output service or an office relating to such factory or
premises, advertisement or sales promotion, market research, storage upto the place of
removal, procurement of inputs, activities relating to business, such as accounting, auditing,
financing, recruitment and quality control, coaching and training, computer networking,
credit rating, share registry, and security, inward transportation of inputs or capital goods
and outward transportation upto the place of removal.
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 output service, which receives
invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input
services and issues invoice, bill or, as the case may be, challan for the purposes of
distributing the credit of service tax 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 processing or working upon of
raw material or semi-finished goods supplied to the job worker, so as to complete a part or
whole of the process resulting in the manufacture or finishing of an article or any operation
which is essential for 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
jewellery falling under heading 7113 of the First Schedule to the Central Excise Tariff 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 service provided
by the provider of taxable service, to a customer, client, subscriber, 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 service" shall include a person liable for paying service tax.
"Person liable for paying service tax" has the meaning as assigned to it in clause (d) of sub-
rule (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. the duty of excise specified in the First Schedule to the Tariff Act, leviable under the
Act; (basic excise duty)
ii. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under
the Act; (special excise duty)
iii. the additional duty of excise leviable under section 3 of the Additional Duties of
Excise (Textile and Textile Articles) Act,1978;
iv. the additional duty of excise leviable under section 3 of the Additional Duties of
Excise (Goods of Special Importance) Act, 1957;
v. the National Calamity Contingent duty leviable under section 136 of the Finance Act,
2001; as amended by section 169 of the Finance Act 2003
vi. the Education Cess on excisable goods leviable 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, equivalent 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 Customs Tariff Act. It is
levied to counter balance the sales tax, value added tax, local 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 credit of such additional
duty.
viii. the additional duty of excise leviable under section 157 of the Finance Act, 2003;
ix. the service tax leviable under section 66 of the Finance Act; and
x. 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 product
or premises of the provider of output service on or after the 10th day of
September, 2004; and
(ii) any input service received by the manufacturer of final product or by the
provider 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
clause 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, by a job-worker availing the
benefit of exemption specified in the Notification No. 214/86 and received by the
manufacturer for use in, or in relation to, the manufacture of final products on or after
10.9.2004.
 Cenvat Credit Rules, 2004 4.13

It has been clarified that the manufacturer of the final products and the provider of output
service shall be allowed Cenvat credit of additional duty leviable under section 3 of the
Customs Tariff Act on goods falling under heading 9801 of the First Schedule to the
Customs Tariff Act.
Sub-rule (2) lays down that in respect of goods which are exempt from duty or are non-
excisable goods, if any duty has been paid on inputs lying in stock or in process 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 products 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 exempt from service tax, if any
duty has been paid on inputs (received on and after the 10th day of September, 2004) lying
in stock and used for providing such service, 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 service.
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 such or after being partially processed or
capital goods removed as such.
(3) payment of duty when duty paid goods are returned to factory and are subsequently
removed after being remade, refined or reconditioned.
(4) for payment of service tax 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 the 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 on the inputs, or input services,
used in the manufacture of final products cleared 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. 39/2001-CE, dated 31 st July, 2001
(iv) No. 56/2002-CE, dated 14 th November, 2002
(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 notifications is availed of.
Also no credit of the additional duty leviable under of section 3(5) of the Customs Tariff Act
shall be utilised for payment of service tax on any output service. Further, CENVAT credit
of only additional duty of excise shall be utilised for payment of said additional duty of
excise on final products.
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 inputs or capital goods. Such removal shall be made
under the cover of an invoice referred to in Rule 9.
However, such payment shall not be required to be made where 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 brought 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 Central Excise, or Assistant Commissioner of Central Excise, as the case
may be, of their removal.
Sub-rule (5A) provides that if the capital goods are cleared as waste and scrap, the
manufacturer shall pay an amount equal to the duty leviable on 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-rule (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 providing 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 valorem rate of additional duty of customs
X = assessable value
Manner of utilisation of Cenvat credit
(1) Clause (b) of sub-rule 7 further lays down the manner of 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 Finance
Act, 2001;
(iii) the education cess on excisable goods leviable under section 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 duty of excise leviable under section 157 of the Finance Act,
2003;
(vi) the education 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 under 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 Taxes Act, 1931, the force of law,
shall be utilized only towards payment of duty of excise or as the case may be, of service
tax leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act,
1978 or the National Calamity Contingent duty leviable under section 136 of the Finance
Act, 2001, or the 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 under
section 157 of the Finance Act, 2003, or the education cess on taxable services leviable
under section 91 read with section 95 of the said Finance (No.2) Act, 2004, or the additional
duty of excise leviable under 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
Taxes Act, 1931, the force of law, 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 the education cess on excisable goods and education cess on taxable
services can be utilised, either for payment of the education cess on excisable goods or for
the 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 Additional Duties of Excise (Goods of Special Importance) Act, 1957 paid on or after
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 Act. 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 utilised for payment of duty under other head.
4.16 Central Excise

(2) The Cenvat credit, in respect of additional duty leviable under section 3 of the Customs
Tariff Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31
respectively of the First Schedule to the Tariff Act shall be allowed to the extent of thirty
rupees per square metre;
It has been explained that where the provisions of any other rule or notification provide for
grant of whole or part exemption on condition of non-availability 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 prevail over the provisions of these rules.
Though there is no reference to waste, refuse or by-product, the C.B.E.C. Circular
No.B/4/7/2000-TRU, dated 3.4.2000 has clarified that cenvat credit shall be admissible on
the part of the input contained in waste, refuse or by-product. Further, the guidelines
issued by the Board on 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-rule 1 allows instant credit
on inputs after receipt into the factory of the manufacturer or in the premises of the provider
of output service.
However, in respect of final products, namely, articles of jewellery falling under heading
7113 of 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 premises of the person
who get such final products manufactured on his behalf, on job work basis, subject to the
condition that the inputs are used in the manufacture 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 premises of the provider of output service at any point of time in a given
financial year as under:
a. Upto 50% in the same financial year;
b. Balance in one or more subsequent financial years provided the capital goods is still
in the possession and use of the manufacturer;
If the capital goods are cleared as such in the same financial year, Cenvat credit 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 duty,
immediately on receipt of the capital goods in the factory of a manufacturer.
In respect of certain capital goods like components, spares and accessories, refractories
and refractory materials, moulds and dies and goods falling under Heading 68.02/6801.10,
of the Central Excise Tariff, the condition regarding possession of the capital goods in the
 Cenvat Credit Rules, 2004 4.17

second year is not there since these are consumable items, provided they are not sold.
Illustration.- A manufacturer received machinery 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 one lakh rupees in the financial year 2002-2003, and the balance
in subsequent years..
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 no 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
manufacturer or provider of output service claims as depreciation under section 32 of the
Income-tax Act, 1961.
In other words the manufacturer or provider of output service cannot enjoy the benefit of
both depreciation allowance as well as Cenvat Credit.
Sub-rule 7 provides that Cenvat credit in respect of input service shall 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 [RULE 4(5) AND 4(6)]

The goods (being inputs or capital goods) may be sent to the job worker for further
processing, testing, repair, reconditioning or for the manufacture of intermediate goods
necessary for the manufacture of final products or any other purpose. 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 returned to the factory. In case the goods 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.
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 time limit for its return.
Sub-rule (6) allows direct despatch or clearance of final products from job worker’s premises
subject to the approval of Deputy Commissioner 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 output 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 cleared 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 refund of such amount subject to such safeguards,
conditions and limitations, as may 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 home 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 Central Excise Duties
Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in
respect of such duty; or claims rebate of service tax under the Export of Service Rules,
2005 in respect of such tax.
Further no credit of the additional duty leviable under sub-section (5) of section 3 of the
Customs Tariff Act shall be utilised for payment of service tax on any output service.
Here, ‘output service which is exported’ means the output service exported in accordance
with the Export of Services Rules, 2005.
The safeguards, conditions and 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 service 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.
2. The claims for such refund are submitted not more than once for any quarter in a
calendar year. However, where,-
(a) the average export clearances of final products or the 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,
 Cenvat Credit Rules, 2004 4.19

the claim for such refund may be submitted for each calendar month.
3. The manufacturer or provider of output service, as the case 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) the 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 the
effect that goods have in fact been exported; or
(b) the registered premises of the service provider from which output services are
exported is situated, along with a copy of the invoice and a certificate from the
bank certifying realization of export proceeds
4. The refund is allowed only in those circumstances where a manufacturer or provider
of output service is not in a position to utilize the input credit or input service credit
allowed under rule 3 of the said rules against goods exported during the quarter or
month to which the claim relates (hereinafter referred to as ‘the given period’).
5. 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 refund = Total CENVAT credit taken on input services during the given
period × export turnover ÷ Total turnover
Illustration: If total credit taken on input services for 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.
2. “Total turnover” means the sum total of the value of,-
(a) all output services and exempted services provided, including value of
services exported;
(b) all excisable and non excisable goods cleared, including the value of goods
exported;
(c) the value of bought out goods sold,
4.20 Central Excise

during the given period.

6. The application in the prescribed form along with the prescribed enclosures and the
relevant extracts of the records maintained under the Central Excise Rules, 2002,
CENVAT Credit Rules, 2004, or the Service Tax Rules, 1994, in original, are filed
with the Deputy/Assistant Commissioner of Central Excise, as the case may be,
before the expiry of the period specified in section 11B of the Central Excise Act,
1944.
7. The refund of excise duty or service tax is allowed by the Deputy/Assistant
Commissioner of Central Excise, as the case may be.
4.8 RULE 6 - OBLIGATION OF MANUFACTURER OF DUTIABLE AND EXEMPTED
GOODS AND PROVIDER 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 the 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 credit on inputs shall not be denied to job worker referred to in rule
12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the
manufacture 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 provider of output
service avails of Cenvat credit in respect of any inputs or input 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 maintain separate accounts
for receipts, consumption and inventory of inputs meant for use in the manufacture of
dutiable final products or in providing output service 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 input 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 manufacturer 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 First Schedule

- Low Sulphur Heavy Stock (LSHS) falling under Chapter 27 used in the
generation of electricity
- Naptha (RN) falling under Chapter 27 used in the manufacture 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 within Chapter 27 used for generating
electricity
- goods cleared for supply to defence personnel, defence projects or to the
Ministry of Defence for official purposes 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) falling 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 sale through public distribution system.
the manufacturer shall pay an amount equivalent to the Cenvat credit
attributable to the inputs and input services used in, or in relation to, the
manufacture of such goods at the time of their clearance from the factory.
(ii) If the exempted goods are other than those mentioned in (i), the manufacturer
shall pay an amount 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 at the time of clearance from the factory.
(iii) the provider of output service shall 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 amount 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 manufacture of exempted goods or exempted services.
Sub-rule (4) specifies that no Cenvat credit would be allowed on capital goods used
exclusively in the manufacture of exempted goods or in providing exempted services, other
4.22 Central Excise

than the final products which are exempt under any notification 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 8/2003, 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 both 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. However,
if these services are exclusively used either in the manufactured of exempted goods or in
rendering exempted service, no credit can be availed.
(i) Consulting engineer.
(ii) Architect.
(iii) Interior decorator.
(iv) Management consultant.
(v) Real estate agent.
(vi) Security agency.
(vii) Scientific or technical consultancy.
(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 and certification.
(xiv) Foreign exchange brokers.
(xv) Construction service.
(xvi) Intellectual property service.
Sub rule (6) exempts the following clearances from 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 categories, 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. Units in 100% EOU

3. Units in Electronic Hardware Technology Park (EHTP)

4. Units in Software Technology Park (STP)

5. United Nations or International Organisations vide Notification 108/95, dated

28.8.1995

6. cleared for export under bond in terms of the provisions of the Central Excise
Rules, 2002

7. 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.

8. 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
against International Competitive Bidding in terms of notification No. 6/2002-Central
Excise dated the 1st March, 2002.

4.9 OPTION TO PAY DUTY

An interesting question which arises is whether a manufacturer can continue to pay duty and
avail Cenvat even if his product is exempt from duty. It is quite true 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 notification exists Modvat credit cannot be availed and that clearance cannot
be added. However, 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. Bansal Auto Parts Industries v. CCE - 1998 (79) ECR 850 (T-NZB);
b. Everest Convertors v. CCE - 1995 (80) E.L.T. 91(T-EZB);
c. Polychem Ltd. v. CCE - 1997 (90) E.L.T. 156 (T-NZB),
d. Gothi Plastic Industries v. CCE - 1996 (83) E.L.T. 123 (T-SZB);
e. Mechciv Engineers 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 wide enough to
cover “exempted goods”, it seems as if this controversy is set to continue. The Department
could take a stance that since there are two separate definitions 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 SERVICE

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 addition, the bill for services which are not specific for
any factory/premises, such as advertising, market research, management consultancy etc.
would also be received only in these offices. Rule 7 tends to provide a way to distribute
such credit to the factory or the premises of the output service provider. Rule 2(m) read
with rule 7 defines an "input service distributor" as an office of manufacturer or provider of
out put service which receives invoices towards purchase of input 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 units 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 being accepted under law as eligible document under rule
9(1)(g) for availing credit. To pass on the credit, the input service distributor has to obtain
service tax registration, comply with new rule 4A of Service Tax Rules and file half-yearly
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 service tax
paid on the input service to its manufacturing units or units providing output service, subject
to the following condition, namely:-
(a) the credit distributed against a document referred to in rule 9 does not exceed the
amount of service 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 OUTSIDE THE FACTORY OF THE

MANUFACTURER
The Assistant/Deputy Commissioner can also permit the inputs in respect of which Cenvat
has been taken to be stored outside the factory of the manufacturer concerned. However,
such storage of inputs outside the factory shall be allowed only in the exceptional
circumstances having regard to the nature of the goods and shortage of storage space at
the premises of such manufacturer, and shall be subject to suitable safeguards against any
loss of revenue. Where such inputs are not subsequently brought into the factory for use 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 distributor
to avail Cenvat credit on the basis of the following documents

Nature of document

1. Invoice issued by manufacturer for clearance of inputs or capital goods from his
factory, his depot, premises of the consignment agent, any other premises from where
the goods are sold by or on his behalf

2. Invoice issued by manufacturer for clearance of inputs or capital goods as such

3. Invoice issued by an importer

4. Invoices issued by an importer from his depot, premises of his consignment agent 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 second 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 appraiser 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 issued 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 rule 4A of the
Service Tax Rules, 1994.

Sub rule 2 provides that the Cenvat credit shall not be denied on technical grounds of the
input document not containing all the particulars required to be indicated therein. However,
for allowing credit on such documents, it is necessary that such documents contain details
of payment of duty or service tax, description of the goods or taxable service, assessable
value, name and address of the factory or warehouse or provider of output service.
4.26 Central Excise

The Deputy Commissioner of Central Excise or the Assistant Commissioner 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 service, is satisfied that the duty of excise or service tax
due on the input or input service has been paid and such input or input service has actually
been used or is to be used in the manufacture of final products or in providing output
service, then, such Deputy Commissioner of Central Excise or the Assistant Commissioner
of Central Excise, as the case may be, shall record the reasons for not denying 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 input 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
goods or services on which the appropriate duty of excise or service tax as indicated in the
documents accompanying the goods or relating to input service, has been 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 input service distributor
distributing Cenvat credit on input service on the basis of, invoice, bill or, as the case may
be, challan received by him for distribution of input service credit shall be deemed to have
taken reasonable steps if he satisfies himself about the identity and address of the
manufacturer or supplier or provider of input service, as the case may be, issuing the
documents specified in sub-rule (1), evidencing the payment of excise duty or the additional
duty of customs or service tax, as the case may be, either-
(a) from his personal knowledge; or
(b) on the basis of a certificate given by a person with whose handwriting 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 input 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 service tax.
Where the identity and address of the manufacturer or the supplier or the provider of input
service is satisfied on the basis of a certificate, the manufacturer or producer or provider of
output service taking the Cenvat credit or input service distributor distributing Cenvat credit
shall retain such certificate for production before the Central Excise Officer on demand
[Sub-rule 3].
Sub-rule (4) lays down that the Cenvat credit in respect of input or capital goods purchased
from a first stage dealer or second stage dealer shall be allowed only if 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 indicated 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 the receipt, disposal, consumption and inventory of the input
and capital goods in which the relevant information regarding the value, duty paid, Cenvat
credit taken and utilized, the person from whom the input or capital goods have been
procured is recorded and the burden of proof regarding the admissibility of the Cenvat credit
shall lie upon the manufacturer or provider of output service taking such credit.
Sub-rule (6) specifies that the manufacturer of final products or the provider of output
service shall maintain proper records for the receipt and consumption of the input services
in which the relevant information regarding the value, tax paid, Cenvat credit taken and
utilized, the person from whom the input service has been procured is recorded and the
burden of proof regarding the admissibility of the Cenvat credit shall lie upon the
manufacturer or provider of output service taking such credit.
The manufacturer of final products shall submit within ten days from the close of each
month to the Superintendent of Central Excise, a monthly return in the form specified, by
notification, by the Board. However, a manufacturer availing exemption under a notification
based on the value 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 the close of the
quarter to which the return relates [Sub-rule 7].
A first stage dealer 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 Excise, 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 credit, shall
submit a half yearly return in form (ST-3) specified, by notification, 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 the input service distributor, shall submit a half yearly return,
giving the details of credit received and distributed during the said half year to the
Superintendent of Central Excise, by the end of the month following the half year.

4.13 RULE 9A – INFORMATION RELATING TO PRINCIPAL INPUTS

A manufacturer of final products has to furnish to the Superintendent of Central Excise a
declaration in the prescribed 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 information so
furnished he shall furnish information to the Superintendent of Central Excise together with
the reasons for such alteration before the proposed change or within 15 days of such
change in the prescribed Form.
Further, as manufacturer of final products has to submit, a monthly return in the prescribed
Form (ER 6), in respect of information regarding the receipt and consumption of each
principal 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 notification and subject to such conditions or limitations,
as may be specified in such notification, specify manufacturers or class of manufacturers
who may not be required 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 such input constitutes not less than 10% of the total cost of raw-materials
for the manufacture of unit quantity of a given final product.

4.14 RULE 10 - TRANSFER OF CREDIT

(1) If a manufacturer of the final products shifts his factory to another 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 joint venture with the specific
provision for transfer of liabilities of such factory, then, the manufacturer shall be
allowed to transfer the Cenvat credit lying unutilized in his accounts to such
transferred, sold, merged, leased or amalgamated factory.
(2) If a provider of output service shifts or transfers his business 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 provision for transfer of liabilities of such
business, then, the provider of output service shall be allowed to transfer the Cenvat
credit lying unutilized in his accounts 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 transferred
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 or, 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
Rules, 2002 and Service tax Credit Rules, 2002 remaining unutilized as on 10.09.2004 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 exemption 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

FACTORIES 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 development of North Eastern India. Notification no. 39/2001-CE dated
31.7.2001 has 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 71/2003 C.E. dated 9.07.2003
has granted exemption to units located in the state of Jammu and Kashmir and Sikkim
respectively. Rule 10 hereby encourages persons in other parts of India to buy goods from
such regions, as goods procured from such regions 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 Government to declare vide notifications certain input or
input service on which the excise duty, additional duty of customs or service tax paid shall
be deemed to have been paid at a rate or equivalent to such amount as may be mentioned
in the notification. 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 final products or by
the provider of taxable service but are contained in the final products or used in providing
taxable service.

4.18 RULE 14 - RECOVERY OF CENVAT CREDIT WRONGLY TAKEN OR

ERRONEOUSLY REFUNDED
This rule allows for recovery of Cenvat credit taken or utilised wrongly or erroneously
refunded along with interest from the manufacturer as provided for in sections 11A and
11AB of the Central 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) provides for confiscation and penalty if any person takes Cenvat credit in
respect of inputs or capital goods, wrongly or without taking reasonable steps to ensure that
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 respect 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 exceeding 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 account of fraud, willful mis-statement, collusion or suppression of facts, or
contravention 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 credit in
respect of input services, wrongly or without taking reasonable steps to ensure that
appropriate service tax on the said input services has been paid as indicated in the
document accompanying the input services specified in rule 9. Further, contravention of
any of the provisions of these rules in respect of any input 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 facts, 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 provider of
output service shall also be liable to pay penalty in terms of the provisions of section 78 of
the Finance Act.
Sub rule (5) provides that any order under sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule
(4) shall be issued by the Central Excise Officer following the principles of natural justice.

4.20 RULE 16 - SUPPLEMENTARY PROVISION

Any notification, circular, instruction, standing order, 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.
References in any rule, notification, circular, instruction, standing order, trade notice or
other order to the Cenvat Credit Rules, 2002 and any provision thereof or, as the case be,
the Service Tax Credit Rules, 2002 and any provision thereof 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 GUIDELINES ON CENVAT CREDIT

The Board vide its guidelines issued on 1st September, 2001, had given following
clarification regarding Cenvat Credit. Though these guidelines 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 in respect of inputs lying in stock, on the inputs
contained in finished goods lying 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
documentary 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 permissible on the raw material used for making packing material.
This is for the reason 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 the
manufacture of finished products.
4. There is no bar for a manufacturer to remove the inputs or capital goods as such for
export under bond.
5. Manufacturer is entitled to take the Cenvat credit in a situation where capital goods
were received 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 credit 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 manufacturer 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 tenable.
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 exceeding 50% of the Additional
Duty of Customs paid on such capital goods. However, on 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-conditioners and refrigerating equipment and computers would be eligible to Cenvat
credit as capital goods. The only condition is that the manufacturers should use them in the
manufacture of final product. For example, an air-conditioner used in the office premises or
a computer used in the office premises of the factory shall not be eligible to Cenvat credit.
4.32 Central Excise

9. Cenvat credit shall be admissible in respect of the amount of inputs contained in any of
the aforesaid waste, refuse or bye product. Similarly, 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 in or in relation to the manufacture of final products, and whether directly or
indirectly.
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 manufacturer 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 back. If part of the goods is received back within 180 days and the rest
of the goods are received back after 180 days, the obligation for debiting the credit shall
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 dealer 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 respect 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. For example if such capital goods were received
prior to 1.4.2001 but not installed up to 1.4.2001, the Cenvat credit would be admissible.
13. The documents on which Cenvat credit can be taken have been prescribed to enable
verification, where needed, by the department. The admissibility of the amount of CENVAT
credit should be discernible from the records of the manufacturer, including the payment
made to the sellers of inputs and capital goods. The basic responsibility is upon the
manufacturer to prove that inputs or capital goods were purchased and were 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 raw materials
by a man of commerce, the question of including the same in the assessable 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 and were duty paid, they
 Cenvat Credit Rules, 2004 4.33

would become inputs since they would have to be remade. Now this concept has been
brought in under rule 16 of Central Excise Rules, 2002 giving benefit of the Cenvat credit on
the goods returned for repair, reprocessing, remaking or for any other purpose.

4.24 BALANCE OF CENVAT CREDIT LYING UNUTILIZED AT YEAR END

It should be kept in mind that if such unutilised credit 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 payment 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 operation for the purposes of manufacture of intermediate products/final
product are contained in Rule 4(5). The procedures are as under:
♦ The manufacturer shall remove the goods to job worker using his own challan (similar
to Annexure-II challans) and entering the same in own register (similar to Annexure-IV
register). The 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. Challans 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 supplier should also be indicated in the challan.
♦ The goods should be sent to job-worker along with original and duplicate copy of
challan mentioning therein the quantity 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 processing 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 challan 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 duty on scrap not received back could be discharged by the job worker
or the principal manufacturer if the material sent is not fully processed or the scrap is
not returnable / returned.
2. In case of direct despatch of inputs directly to job 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 manufacturer in above case shall instruct the supplier to send the inputs directly
to the job worker and would be eligible to Cenvat credit though the input is not
received directly at his factory premises.
♦ The challan would be raised after receiving the duplicate copy of the supplier's invoice
from the job worker. This challan should also indicate the name of and address of the
supplier apart from the name of the manufacturer.
♦ The manufacturer shall make only stock entry for receipt and a contra entry for issue
with reference of the Annexure II challan being issued.
♦ 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 the basis of duly filled in challan and on the strength of
valid duty paying document prescribed U/R 7.
3. The procedure in case of removal of inputs from job worker 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 challan. 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 Annexure III.
♦ The first job-worker should make an endorsement on the earlier challan i.e. suggested
Annexure II challan (under which he originally received the materials) providing the
name of the second job-worker and return the duplicate copy to the manufacturer.
(Supplier of the material)
♦ After the completion of operation the second job worker shall make an endorsement
on both the copies of the challan in Annexure III (original and duplicate) and return
the goods to the parent 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 goods is to be recorded.
♦ The subsequent job worker shall store, process and despatch 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 ensure that the goods are received back within 180 days
from the date on which the 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 of Annexure II challan from the original job worker and the
duplicate of the Annexure III challan from the subsequent job worker.
Self-examination questions
1. What are the duties in respect of which CENVAT credit can be availed under the
CENVAT Credit Rules, 2002?
2. Discuss the provisions prescribed in CENVAT Credit Rules, 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 maintains only one set of books
of accounts for taxable and exempted services.
3. Discuss the provisions relating to information on principal inputs in context of
CENVAT Credit Rules, 2004.
4. Can credit be taken only after making payment against the bill/invoice/challan?
Discuss.
5. Who is an “input service distributor”?
6. Credit for inputs is not available if the final products are exempted goods. What are
the exceptions to this rule?
7. 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 depreciation 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 he can avail?
8. 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 inputs is
common. Whenever the Nil duty product ‘B’ is removed, he debits 10% of its sale
price (excluding sales tax) to CENVAT account. He gets a show cause notice (SCN)
on the following ground:
10% reversal is wrong; the credit actually attributable to the inputs used in the
manufacture of Nil duty goods should be reversed. Discuss whether the contention
of the Department is correct.
4.36 Central Excise

9. India Cements Ltd. is engaged in the business of manufacturing cement. For this
purpose, limestone is excavated from a mine, which is situated at a distance of few
kilometres from the plant where the cement is manufactured. 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.
10. Answer the following with reference to CENVAT Credit Rules, 2004:
(a) ‘A’ manufactures a certain final product in which petrol 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,
groceries, 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 Jammu utilize the credit of service tax availed on
input services received in New Delhi 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 then 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?
11. With reference to CENVAT Credit Rules, 2004, discuss giving reasons whether the
following statements are true or false:
(a) Motor vehicles are eligible capital 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
manufacture of intermediate goods necessary for the manufacture of final
products, if they are received back in the factory within 180 days of their being
sent to the job worker.
(d) Where the capital goods are cleared as waste and scrap, the manufacturer 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 duty 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 (Physical
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 received at any point of time in a financial
year.
(3) Not more than 50% of the duty paid on the capital goods in the same financial
year can be taken as CENVAT credit. Credit for the balance can be taken in
any subsequent year, provided the goods are in the possession and use of
manufacturer.
(4) Capital goods must not be used exclusively in the manufacture of exempted
goods.
(5) Depreciation under section 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 credit.
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 first year and the
balance in any subsequent year, if the machine remains to be in his possession and
use.
8. As per rule 6(3)(a)(i) of the CENVAT Credit Rules, 2004, 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 manufacture of such final products
at the time of their clearance from the factory.
Since, in this particular case manufacturer produces product ‘B’ which falls under
Tariff heading 22.04 carrying Nil duty, reversal of CENVAT credit is on actual basis
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 being explosives used for blasting mines to
produce limestone for use in manufacture 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 Supreme
Court in the case of J.K. Udaipur Udyog Ltd. 2004 (171) E.L.T. 289 (SC). In this
4.38 Central Excise

case, the credit on explosives used for blasting mines was disallowed 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 Vikram 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 integrated unit with the main cement factory. Credit would
not be available if the supplies 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 eligible inputs
under Rule 2(k).
(b) Yes. As per Rule 2(a) motor vehicles are treated as capital goods in the case of
an outdoor caterer.
(c) No. Cenvat Credit Rules, 2004 in relation to availment and utilization of service
tax credit are not applicable in the State of Jammu and Kashmir, as service tax
law does not apply in Jammu and Kashmir.
(d) Yes. ‘R’ shall be liable to a penalty not exceeding the duty 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, Chapter 84, Chapter 85, Chapter
90, heading No. 68.02 and sub-heading No. 6801.10 of the First
Schedule to the Central Excise Tariff Act;
(ii) pollution control equipment;
(iii) components, spares and accessories of the 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 final products, but does not
 Cenvat Credit Rules, 2004 4.39

include any equipment or appliance used in an office; or

(2) for providing output service;
(B) motor vehicle registered in the name of provider of output service for
providing taxable service as specified in sub-clauses (f), (n), (o), (zr), (zzp),
(zzt) and (zzw) of clause (105) of section 65 of the Finance Act.
Motor Vehicles fall under Chapter 87. Thus, the manufacturers cannot avail
credit on motor vehicles. However, in case of taxable services credit on motor
vehicles can be availed in case of abovementioned specific output services.
These services are:
(1) Courier services
(2) Tour operator’s services
(3) Rent-a-cab scheme operator’s services
(4) Cargo handling agency’s services
(5) Goods transport agency’s services
(6) Outdoor caterer’s services
(7) Pandal or shamiana contractor’s 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 specified by the Board to the
jurisdictional Superintendent of Central Excise.
(c) True. Rule 4(5) lays down that CENVAT credit shall be allowed on goods
(being inputs or capital goods) sent to the job worker for further processing,
testing, repair, reconditioning or for the manufacture of intermediate goods
necessary for the 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 they 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, the manufacturer shall pay an amount equal to the duty
leviable on transaction value. Rule 3(6) provides that the amount paid under
sub-rule (5A) shall also be eligible as CENVAT credit as if it was duty paid by
the person who removed such goods under sub-rule (5A).
(e) True. As per rule 3(4) read with rule 3(1) and rule 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 credit 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 per 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 manufactured 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 quantify the duty on the basis of
approved classification list and the price list and clear the goods on payment of appropriate
duty.
In 1994, the gate pass system gave way to the invoice-based system, and all clearances are
now effected on manufacturer’s own invoice. Another major change was brought about in
1996, when the Self-Assessment system was introduced. This system is continuing today
also. The assessee himself assesses his returns and the Department scrutinises it or
conducts selective audit to ascertain correctness of the duty payment. Even the
classification and value of the goods have to be merely declared by the assessee instead of
obtaining approval of the same from the Department. The system of classification 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 in 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
monthly 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.
In 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 Central 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 procedures are simplified. There
are less numbers of rules, only 32 as compared to 234 earlier. Classification declaration and
Price declarations under erstwhile Rule 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 stored in warehouse,
without payment of duty, whether for consumption, export or manufacture of any other
commodity in or outside the place of manufacture, until the 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 clearance 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
documents relating to assessment, sales invoice, and other like documents.
5.2.1 Special provisions for molasses: Sub-rule (2) specially provides that where
molasses are produced in a Khandsari sugar factory, the person who procures such
molasses, whether directly from the factory or otherwise, for use in the manufacture of 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 excisable or not.
In certain industries like sugar, the production is seasonal but the off-take from the factory is
throughout the year. In such cases storage of huge 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 position to remove the goods on payment of duty. Sub-rule (4)
of Rule 4 takes care of these situations. It provides that the Commissioner may, in
exceptional circumstances, having regard to the storage of goods and of storage space at
the premises, permit a manufacturer to store his goods in any other place outside his
premises 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 under Self
Removal Procedure : Today, except cigarettes which is still under physical control, all
other products fall under the self-removal procedure. The manufacturers working under Self-
Removing 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 department providing the process flow chart of manufacture
as well as list of critical raw materials.
2. He shall ensure that the finished goods are all duly entered in the production register
daily. The manufacturer should authenticate the first and last pages of this register.
 General Procedures Under Central Excise 5.3

(This was called the RG-I register earlier).

3. The invoice raised should be in line with the purchase order if any, received from the
customer. Care is to be exercised in calculations in the invoice.
4. The assessable value (whether cum-duty price or otherwise) is to be arrived at
accurately 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
applied.
5. He shall prepare an invoice under Rule 11 and calculate the assessable value and
Excise duty payable.
6. He shall make the removal entry in production register providing details of value,
quantity and duty payable.
7. It is to be ensured that the person / carrier who/ which carries the goods is provided
with " duplicate for transporter" copy of invoice.
8. He shall ensure that at the end of the month (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.
9. 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 month of March payment is to be
made by the end of that month itself.
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 would be discharged only on
the date of realization of the cheque and not earlier as 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 down 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 goods are removed from a factory or a warehoue, as the case may be.
In the case of 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 such
goods shall be the date on which the goods are issued for such use.
5.4 Central Excise

5.4 ASSESSMENT [RULE 6]

As per the Central Excise Rules, 2002 the term ‘assessment’ is defined to include self-
assessment 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 payment of duty
assessed or a producer or manufacturer of excisable goods or a registered person of a
private warehouse in which excisable goods are stored and includes 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 manufactures 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 or under any other law. No excisable goods, on which any duty is payable,
shall be removed without payment of duty from any place, where they are produced or
manufactured, or from a warehouse, unless otherwise provided. However there is in
exception for the goods falling under Chapter 62 of CTA, 1985 and kandsari molasses which
is dealt separately.
5.4.1 Self Assessment : As per Rule 6 of the Central Excise Rules, 2002, the assessee
himself is required to determine duty liability at the time of removal of excisable goods and
discharge the same. In other words, the assessee should apply correct classification and
value on the quantities 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
Inspector of Central Excise has to assess the duty payable before removal by the
assessee).
Therefore before each removal, whether outside the factory of manufacture or production or
for captive consumption, duty has to be assessed on the excisable goods.
The main ingredients of assessment are:
a. Ascertainment of date and time of intended removal;
b. Ascertainment of classification and rate of duty (dealt in Chapter II) at that point of
removal;
c. Valuation of goods (dealt in chapter III) at that point of removal; and
d. 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 within ten days of the
succeeding month. They are also required to submit ‘CENVAT Return’ for a month within 10
days of the succeeding month. A manufacturer availing exemption 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 the

assessee himself assesses the duty liability, the responsibility of the departmental officers is
to scrutinise the assessment made for verification of its correctness.
The Central Excise Officers having jurisdiction over the factory/premises of the assessee is
responsible for the scrutiny of returns. For this purpose, the said officer(s) may require the
relevant documents. Though the statutory records have been dispensed with, the assessee
is required to maintain private records containing all requisite information as required by
different rules and also provide a list of all records maintained by him to the Range Office.
The Officer responsible for scrutiny of return may require the invoices issued by the
assessee, Daily Stock Account, Cenvat Account, cash ledgers, ledger of all receipts and
payments and the source documents etc. It shall be compulsory for the assessee to provide
the necessary records upon receiving the `Requisition Letter’ from the Range Officer or
other superior officers. He shall hand over the records under proper acknowledgement and
receive them back under proper acknowledgement. The officer scrutinizing return may
require presence of the assessee or his authorised person at mutually convenient time, for
seeking certain information relating 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 assessee, will scrutinise all the returns. They shall,
in selected cases, call for all connecting documents including invoices and the records and
scrutinise the correctness of assessment.
The Deputy/Assistant Commissioner of Central Excise will scrutinise the returns of the units,
which pay duty exceeding rupees one crore but less than Rs.5 crores from PLA per annum
every six months. They shall requisition all connecting documents including invoices and the
records and scrutinise the correctness of assessment.
The Additional/Joint Commissioner of Central Excise will scrutinise the returns of the units
which pay duty of Rs. 5 crores or more from PLA per annum every six months. They shall
requisition all connecting documents including invoices and the records and scrutinise the
correctness of assessment.
5.4.3 Provisional Assessment [Rule 7] : As per Rule 7 of the Central Excise 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 with the guidelines issued by the Board on 1.9.2001, sets out the procedure
for provisional 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 writing to the Divisional Deputy/Assistant Commissioner of
Central Excise, indicating:-
a. Specific grounds/reasons, and the documents or information, for want of which final
5.6 Central Excise

assessment cannot be made.

b. period for which provisional assessment is required.
c. the rate of duty or the value or both, as the case may be, proposed to be applied by the
assessee, for Provisional Assessment; and
d. that he undertakes to appear before the Assistant/Deputy Commissioner of Central
Excise within 7 days or such date fixed by him, and furnish all relevant information and
documents within the time specified by the Assistant/Deputy Commissioner of Central
Excise in his order, so as to enable the proper officer to finalise the provisional
assessment.
On receipt of the request, the Deputy/Assistant Commissioner of Central Excise will
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 not necessary, he may pass a reasoned
order rejecting the same and also ordering the rate of duty or the value, to be applied by the
assessee.
Where the Deputy/Assistant Commissioner of Central Excise is satisfied with the
genuineness of the assessee’s request he will issue a specific order directing provisional
assessment clearly stating:-
a. The grounds on which Provisional Assessment has been ordered.
b. The rate and /or value, as the case may be, at which duty has to be provisionally paid.
c. The amount of differential duty for which bond is to be executed covering the period, if
any, during which assessee paid duty provisionally under the deeming provisions, after
applying the rate and/ or value specified in (b) above.
d. The amount of security or surety as may be fixed by Assistant Commissioner keeping
in view the instructions issued by the Board from time to time.
The assessee is required to mark the E.R.1 (monthly/quarterly return) and documents
covered under Provisional Assessment as "PROVISIONALLY ASSESSED" vide Order
No.......... dated .............." . There is a declaration in E.R.1 where assessees have to
mention the goods under ‘provisional assessment’.
Notwithstanding ‘self-assessment’, all cases of provisional assessment have to be finalised
by the Deputy/Assistant Commissioner of Central Excise, within a maximum period of 6
months from the date of communicating the order of provisional assessment.
The Commissioner can extend it if sufficient cause is showed which is recorded in writing,
the period of 6 months. If the period of extension is beyond 6 months, then the permission
 General Procedures Under Central Excise 5.7

of Chief Commissioner is required.

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 along 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 ascertain the duty himself. He may pay the
duty on his own at the earliest and in that case he will not have to incur interest on account
of time taken by the Department to finalise assessment and communicate the amount.
Where any refund becomes 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
assessee will be required to submit proof to the Assistant/Deputy Commissioner of Central
Excise that the duty incidence was borne by him (assessee). If the assessee fails to
produce such proof/evidence, the Assistant/Deputy Commissioner of Central 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 interest at the rate of fifteen
percent per annum from the first day of the month succeeding 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 executes 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 assessee 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 cases with the help of 'Provisional Assessment Register'.
The Assistant/Deputy Commissioner of Central Excise will be held responsible to ensure
that bonds for proper 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 guarantee
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 is important to note that Rule 7 of the said Rules does not provide for the Department, suo
motu, issuing directions for resorting to provisional assessment. Therefore, when the
Central Excise Officers, during scrutiny or otherwise, find that self-assessment is not in
order the assessee may be asked for all necessary documents, 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 collateral
evidences. The burden will be on the assessee to provide information for appropriate re-
determination of duty, if any.
As per the general law, the provisions of Provisional Assessment relating to interest clause
and statutory time limit can only be prospective. Therefore the provisions of interest and
statutory time limit shall be applicable only to those cases of provisional assessment, which
are 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 goods 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 Notification based on the value of clearances in a financial
year, the duty on goods cleared during a calendar month shall be paid by the 15th day of the
following month except in case of goods removed during the month of March for which the
duty shall 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 amount 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 for this purpose shall
be deemed to be the date on which the duty has been paid subject to the realisation of
that cheque
Sub-rule 1(A) provides that in case of goods 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. For units (located in the state of Gujarat) availing the benefit of exemption
under a notification based on the value of clearances, the duty on goods cleared during 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 credit of such duty allowed ,as provided by
or under any rule[Sub-rule(2)].
Sub-rule 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 Act on the
outstanding amount, for the period starting with the first day after due date till the date of
actual payment of the outstanding amount.
If the assessee makes a default in payment of duty by due date and the same is discharged
beyond a period of 30 days from the due date, then he shall loose the facility to pay the duty
in monthly instalments for a period of two months. This period will start from the date of
communication of the order passed by the Assistant Commissioner of Central Excise or the
Deputy Commissioner of Central Excise, as the case 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 shall not be able to utilize the Cenvat credit for the payment of duty
on final products 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 without payment of duty and
the consequences and penalties as provided in these rules 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 interest 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 15th
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 authorities are not agreeable to or acceptable to the assessee. In such cases,
the assesee can file an appeal and in the meanwhile he can pay duty under protest if no
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 excise duty shall not apply where the duty has been paid under protest.
As per the Supplementary Instructions issued by Central Board of Excise and Customs, any
assessee 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 dated acknowledgement will be given
to him.
(b) The assessee shall mark invoices or monthly/quarterly returns indicating the goods on
which duty is paid ‘under protest’. 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 further
appeal is available, he may continue to pay duty under protest. However, if 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 Central Excise (Removal Of
Goods At Concessional Rate Of Duty For Manufacture Of Excisable Goods) Rules, 2001
has been issued by the Central Government.
- Under Rule 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 quadruplicate
in the specified form to the jurisdictional central Excise authorities. However, he is
required to make separate application in respect of each supplier of subject goods.
- Further the manufacturer is required to execute a general bond with surety or security to
cover the recovery of duty liability estimated to be involved at any given point of time.
- The application shall be countersigned by the jurisdictional authorities certifying that the
manufacturer has executed the required bond.
- Of the four copies of application, one copy shall be forwarded to the jurisdictional range
superintendent of the manufacturer of the subject goods and two copies shall be
handed over to the applicant manufacturer and one copy shall 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 required to maintain the simple account
indicating the quantity and value of subject 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 received at concessional rate of duty is not used for intended purpose,
manufacture is 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
damaged 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 the non duty
 General Procedures Under Central Excise 5.11

paid stock of the manufacturer of the 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 from 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 used for intended purpose'.
Consequently, differential duty and interest will become payable.

5.6 REGISTRATION [RULE 9]

For the administration of the Central Excise Act, 1944 and the Central Excise Rules, 2002
manufacturers of excisable goods or any person who deals with excisable goods with some
exceptions, are required to get the premises registered with the 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/State Government
undertakings or undertakings owned or controlled by autonomous corporations) on
which excise duty is leviable.
ii. First stage or second stage dealers (including manufacturer’s depot and importers)
desiring to issue cenvattable invoices.
iii. Persons holding private warehouses for storing non-duty paid goods.
iv. Persons who obtain excisable goods for availing end-use based exemption notification.
vi. Exporters manufacturing or processing export goods by using duty paid inputs and
intending to claim rebate of such duty or by using inputs received without payment of
duty and exporting the finished export goods.
The registration is not as a company or the entity as a whole. Separate registration is
required in respect of separate premises except in cases where two or more premises are
actually part of the same factory (where processes are interlinked), 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 obtain single registration.
According to the Boards instruction issued on 1 st Sep 2001, 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. Interlinked process – products manufactured/produced in one premises are

substantially used in other premises for manufacture of final products.
2. Large number of raw materials are common and received/proposed to be received
commonly for both/all the premises
3. Common electricity supplies.
4. There is common labour /work force
5. Common administration/ works management.
6. Common sales tax registration and assessment
7. Common Income Tax assessment
Any other factor as may be indicative of inter-linkage of the manufacturing processes.
This is neither an exhaustive list of indicators nor each indicator is necessarily in each case.
The Commissioner has to decide the issue from case to case.
Registration Certificate may be granted to minors provided they have legal guardians 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 exemption from registration subject to the conditions and safeguards.
Accordingly the Central Board of Excise and Customs (CBEC), by Notification No. 36/2001-
CE (NT) dt.26.6.2001, has exempted the following specified categories of persons/premises
from obtaining registration
i. Persons who manufacture the excisable goods, which are chargeable to nil rate of
excise duty or are fully exempt from duty by a notification subject to the declaration to
be made in the specified form.
ii. Small scale units availing the slab exemption based on value of clearances under a
notification. However, such units will be required to give a declaration in a specified
form once the value of their clearances touches Rs.40 lakhs.
iii. In respect of final products falling under Chapter 61 or 62 the job-worker need not get
registered if the principal manufacturer undertakes to discharge the duty liability.
iv. Persons manufacturing excisable goods by following the warehousing procedure under
the Customs Act, 1962 subject to the following conditions:
a. the said excisable goods and any intermediary or by-product including the waste
and refuse arising 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 Assistant Commissioner of Customs or the Deputy
 General Procedures Under Central Excise 5.13

Commissioner of Customs, in charge of the Customs Bonded Warehouse;

b. the manufacturer shall file a declaration in the specified form in triplicate for
claiming exemption under this notification;
c. 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.
v. The person who carries on wholesale trade or deals in excisable goods (except first
and second stage dealer, as defined in Cenvat Credit Rules, 2004).
vi. A hundred per cent Export Oriented Undertaking or a unit in Export Processing Zone or
a unit in Special Economic Zone licensed or appointed, as the case may be, under the
provisions of the Customs Act, 1962. These units are deemed to be registered for the
purpose of rule 9.
However, such 100% EOU or a unit in EPZ shall not be deemed 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 or
manufacture of goods availing benefit of concessional duty exemption notification.
5.6.3 Application for Registration : Under authority of section 6 of the Central Excise
Act, 1944 read with rule 9 of the said Rules, the CBEC has prescribed the format for
Application as well as Registration Certificate. The application 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 authorised agent having general power of attorney. The Range
Officer shall have power 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 verification.
ii. In case of unregistered partnership firms, by all partners.
iii. In case of registered partnerships, by the managing partner or other partner so
authorised in the Partnership Deed.
In the application for Registration, the applicant has to submit ground plan. Under the
Central Excise Rules, 2002, there is no stipulation of any specified marked area for storing
the finished goods (traditionally called the ‘bonded store room’). Thus there is no need for
marking such area in the ground plan. As per the instruction of the Board, the only
verification that the jurisdictional officers should conduct are that the premises mentioned in
the application for registration, 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 Filing 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 Notification
no. 36/2001-Central Excise (NT) dt.26/6/2001 have to file a declaration with the Assistant
Commissioner of the respective Divisions. Such declarations received from the assessee
will have to be filed separately, tariff head-wise in the divisional office.
As per the Board’s guidelines issued on 1st September, 2001, genuine delay in filing the
required declaration need not be viewed seriously and the assessee may be allowed to
enjoy the exemption from the operation of Rule 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
Central Excise having jurisdiction over the premises shall make the verification in respect of
which the applicant has sought registration within 5 working days of the receipt of
application. As per the rules/notification, the registration certificate shall be issued within 7
working days.
As per the Board’s guidelines, the Range Officer (Superintendent) either himself or through
the Inspector shall verify whether the declared address and operations (intended) are
genuine and the declarations 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 office
copies of the Registration application and the copy of the application with the registrant. If
any deviations or variations are noticed during the verification, 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 Divisional 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 , commencing with serial no. 1 for each
calendar year . The issuing authority should make every effort to complete all formalities
and grant the Registration Certificate within 7 days of receipt of application in his office.
Every Registration Certificate granted / issued by the registering authority shall be under his
signature. He should also countersign the ground plan accompanying the Registration
Certificate. The Registration Certificate and the duplicate copy of the plan should be
returned to the registered person who shall exhibit his Registration Certificate or a certified
copy thereof in a conspicuous part of the registered premises. 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 Registration 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 to 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
permanent 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 the 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 individual. 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 registration is issued to the body corporate recognizing the same as a legal person.
In the case of partnership firms also normally no difficulty would arise with regard to
succession, since the surviving partners will continue either in the same name or with the
change of name of the business. However, in the case of proprietary 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 fresh registration to the successor in estate shall not be
regarded that the Government has accepted the said person as the legal successor/heir to
the deceased.
5.6.8 Surrender, Cancellation, Suspension or Revocation of Registration :
Registration Certificate may be surrendered as per application in prescribed form. This is
subject to compliance of the statutory obligations under the excise law, particularly the
payment of all dues to the Government including the duty on finished excisable goods lying
in the factory/warehouse. In case of mis-declaration regarding compliance, the surrender of
registration shall not be valid.
The Registering 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 breach 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
Section 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 the 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.
Though technically, a registration Certificate can be suspended or revoked by the issuing
authority, the power to revoke or suspend the Registration is vested only with the
Deputy/Assistant Commissioner. In case of suspension or revocation, the Range Officer
should refer the matter to the Deputy/Assistant Commissioner who will pass appropriate
orders after affording a reasonable opportunity. Appeal against this order lies with the
Commissioner [Appeals] and this should be specifically spelt out in the order -in-original of
the Deputy/Assistant Commissioner (Preamble).
5.6.9 Lost Registration Certificates : When a Registration Certificate is reported to be
lost, the registered person shall submit a written application 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 the computer data.
An importer who intends to issue invoice under Cenvat Credit Rules will have to Register
himself in the manner specified earlier.
5.6.10 Procedure for Assessee : The Registration Procedure can be summed up from
the angle of the assessee as follows.
1. Form A-1: The applicant should file an application in Form A-1 to the jurisdictional
Superintendent of Central Excise properly signed.
2. 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 boundaries,
storeroom, production area as required under old rule 174 of CER, 1944.
3. Manufacturing Process: The applicant may also enclose a brief write up on the
manufacturing process for his products starting from receipt to dispatch for future
benefits and avoiding future confusion.
4. Documents: The copy of the partnership deed, board resolution, memorandum of
association and power of attorney in case of application being made by person other
than the proprietor, partner or director may be provided. [Neither the rule nor the
form specifies this requirement]
5. Tariff Classification: The tariff classification of the excisable goods, which are going
to be manufactured, is also required to be given in the form A-1.
6. Registration Grant: The Superintendent of Central Excise shall grant the Registration
Certificate in specified form containing registration number within 7 days from the
receipt of the duly completed application after conducting the inspection within 5 days
from the receipt of application.
 General Procedures Under Central Excise 5.17

7. Certificate Exhibit: The certificate of registration or its certified copy should be

exhibited in a conspicuous part of the premises.
8. Fresh registration: Fresh registration has to be sought in the event of change in
premises or in case of change in the ownership of the business.
9. 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 be issued.

5.7 RECORDS [RULE 10]

Prior to April 2000, the rules had prescribed the records to be maintained, referred to as
‘Statutory records’. The statutory records under Central Excise Rules, 1944 were dispensed
with in the year 2000 and it was decided to rely on private records 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 the 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 construed that
no record has to be maintained. Every assessee has to compulsorily maintain private
records.
ii. The rules which require certain records to be maintained are self contained and they
specify the minimum information that an assessee MUST enter in their own record by
which the assessee has to decide himself as to the form in which they are going to
maintain such information.
iii. There is no format for record–keeping, except in the case of Rule 17 of the said Rules
where it is provided 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
removed, duty paid and each removal shall be made on an invoice. This format has
been notified by Notification No. 59/2001-Central Excise (N.T.) Dated 6th August, 2001.
iv. This means that the assessee is free to devise his record-keeping, depending upon his
accounting requirements but shall ensure that the requirements of particular rules are
met.
v. There is a specific requirement about maintenance of “Daily Stock Account’ in Rule 10
of the Central Excise Rules, 2002. It provides that every assessee shall maintain
5.18 Central Excise

proper records, on a daily basis, in a legible manner indicating the particulars

regarding
a. description of the goods produced or manufactured,
b. opening balance, quantity produced or manufactured,
c. inventory of goods,
d. quantity removed,
e. assessable value,
f. the amount of duty payable; and
g. particulars regarding amount of duty actually paid.
The first page and the last page of each such account book shall be duly authenticated
by the producer or the manufacturer or his authorised agent. All such records shall be
preserved for a period of five years immediately after the financial year to which such
records pertain.
vi. There is no requirement of ‘authentication’ of records by jurisdictional Central Excise
Officer before a book/register is brought into use by an assessee. These records
(relevant for Central Excise) shall, 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 period of five years immediately after the financial year to which such
records pertain.
vii. Every assessee is statutorily required to furnish to the Range Officer, a list in duplicate,
of all the records prepared or maintained by him for accounting 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 Commissioner or the audit party deputed by the Commissioner or the Comptroller
and Auditor General of India,-
a. the records maintained or prepared by him in terms of sub-rule (2) of rule 22 of
the said Rules;
b. the cost audit reports, if any, under section 233B of the Companies Act, 1956 (1
of 1956); and
c. the Income-tax audit report, if any, under section 44AB of Income-tax Act, 1961 (
43 of 1961),
d. for 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 more than one factory and maintains separate
records in respect of every factory for the purpose of audit, then, he shall produce
the said records for audit purposes.
Records shall mean all the records prepared or maintained by the assessee for accounting
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 document, whether in writing or in any other form shall
be treated as records. Source documents are those documents which form the basis of
accounting of transactions and include sales invoice, purchase invoice, journal voucher,
delivery challan and debit or credit note.
Under Rule 22, every assessee is required to furnish the list of all records prepared or
maintained by him for accounting of transactions in regard to receipt, purchase,
manufacture, storage, sales or delivery of goods 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 mentioned above by the assessee in his private records will mean
contravention of specified rules attracting appropriate penal action. If such non-maintenance
of records is with intent to evade payment of Central Excise duty, the more stringent penal
provisions of the Central Excise Act and Central Excise Rules shall be attracted.
The private records relevant for Central Excise including the Daily Stock Account
maintained in compliance with the provisions of the said Rules shall necessarily be kept in
the factory to which they pertain.

5.8 ELECTRONIC MAINTENANCE OF RECORDS AND PREPARATION OF RETURNS

AND DOCUMENTS
Any person may electronically 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
person’s profile the fact that such person is electronically maintaining records or generating
returns, invoices or other documents, using computer.
The records can be kept on any electronic media, such as hard disk of computers, floppies,
CDs or tapes and preserved.
The records, returns and documents should be in electronically readable format. 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, separately for each type of record, return, documents
etc.
The person should ensure that proper back-up records are also maintained and preserved
so that in the event of destruction due to unavoidable accidents or natural causes, the
information can be restored within reasonable period of time. All such records, returns,
invoices and other documents (both electronic and hard copy, including back-ups) shall 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 or document pertains).
It shall be incumbent upon a person (who maintains electronic records, returns, documents
etc.) to produce, on demand, the relevant records, 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 format (duly authenticated by the assessee), documentation
including policy and procedure manuals, instructions to record the flow and treatment of
transactions through 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 or other
documents will be produced pertaining to such period (subject to the period of preservation)
as may be requested including the daily entries in electronic format relating to the current
month for which the printouts are not taken out.
He shall also provide account of the audit trail and inter-linkages including the source
document, whether paper or electronic, and the financial accounts record 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 Central Excise Officers and submit
the relevant document.
In case any person is found 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 Commissioner of Central Excise may, after recording such reasons and after taking
into consideration the explanation tendered by the person regarding the discrepancies, if
any, prohibit a person from electronically maintaining or generating any records, returns,
invoices or other documents using computer and inform the immediate superior officer.

5.9 INVOICING [RULE 11]

An invoice is the document under cover of which the excisable goods are to be cleared 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
manufacturer’s own document and though the Department has specified the entries thereon,
the format etc. is left to the manufacturer’s choice. The provisions of this rule shall apply
mutatis mutandis to goods supplied by a first stage dealer or a second stage dealer.
5.9.1 Removals only on invoice : Rule 11 of the Central Excise Rules, 2002 provides that
no excisable goods shall be removed from a factory or a warehouse except under an invoice
signed by the owner of the factory or his authorised agent.
However, textile yarns, fabrics and readymade garments can be cleared on proforma
invoice. No duty is payable on such invoice but the manufacturer should prepare the final
invoice within five days after making adjustments of goods rejected and returned by the
buyer. Such a period of five days can be extended to 21 days with the permission of
commissioner. The final invoice and proforma invoice should have cross reference to each
other.
In case of cigarettes, which are under 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 check the operations of the assessee as per instructions. Each invoice has to
be countersigned by the Inspector of Central Excise or the Superintendent of Central Excise
before the cigarettes are removed from the factory.
5.9.2 Serially numbered invoice: As per Rule 11, the invoice shall be serially numbered
and shall contain the registration number, name of consignee, description, classification,
time and date of removal, rate of duty, quantity, mode of transport, vehicle registration
number and value of goods and the duty payable thereon. The serial number shall
commence from 1st April every year [beginning of a financial year].
The serial number can be given at the time of printing or by using franking machine. But
when the invoice book is authenticated in the manner specified in sub-rule (5) of rule 11,
each leaf should contain serial number. Hand written serial number shall not be accepted.
In case of computer-generated invoice, the serial number may be allowed to be generated
and printed by computer at the time of preparation of invoice only if the software is such that
computer automatically generates the number and same number cannot be generated more
than once. For this purpose, the Central Excise Officers may check the system/software
from time to time.
5.9.3 Number of invoice copies
The invoice shall be prepared in triplicate in the following manner, namely:-
i. the original copy being marked as ORIGINAL FOR BUYER;
ii. the duplicate copy being marked as DUPLICATE FOR TRANSPORTER;
5.22 Central Excise

iii. the triplicate copy being marked as TRIPLICATE FOR ASSESSEE.

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 PURPOSES’.
5.9.4 Number of Invoice book : Rule 11 of the said Rules provides that only one invoice
book shall be in use at a time, unless otherwise allowed by the Deputy/Assistant
Commissioner of Central Excise in the special facts and circumstances of each case. But if
assessee requires two different invoice books for the purposes of removals for home-
consumption, and removals for export they may do so by intimating the jurisdictional
Deputy/Assistant Commissioner of Central Excise. No permission is required to use two
different invoice books for home consumption and export.
Wherever an assessee is allowed to keep more than one invoice book, he should be asked
to keep different numerical serial numbers for the different 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 names and marks of the assessee. After the
invoices are prepared, the triplicate copy 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 also the triplicate copy shall be retained in bound-book form.
5.9.5 Authentication of Invoices : The reading of the rule 11 provides that the owner or
working partner or Managing Director or Company Secretary has to authenticate each foil of
the invoice book, before being brought into use. However, the Board has relaxed 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 submitted to the Range Officer before doing so.
5.9.6 Intimation of serial numbers : Before making use of the invoice book, the serial
numbers of the same shall be intimated to the Superintendent of Central Excise having
jurisdiction over the factory of the assessee. This can be done in writing by post/e-
mail/fax/hand delivery 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 be rounded off to the nearest rupee as
provided for under section 37D of the Central 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 Board’s guidelines, when an assessee is
compelled to cancel invoice, the following actions 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 exceptional 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. Along with the intimation of the cancelled invoice sent to the Range Superintendent the
original copy of the cancelled invoice should also be sent.
iii. Triplicate copy of the cancelled invoice may be retained by the assessee in the invoice
book so that the same can be produced whenever required by audit parties, preventive
parties and other visiting officers.
However the new rules do not speak of any procedure to be adopted for the cancellation 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 Rules.

5.10 RETURNS [RULE 12]

The Central Excise Rules, 2002 provide that the assessee shall be required to file certain
periodic returns, which relate to his tax liability and other transactions, such as relating to
CENVAT credit .
5.10.1 Monthly/Quarterly Return : Rule 12(1) provides that every assessee shall submit
to the Superintendent of Central Excise a monthly return in proper form, of production and
removal of goods and other relevant particulars, within ten days after the 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 year (SSI), and textile units in textile sector
manufacturing yarn, unprocessed fabrics 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 removal 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 & textile articles Due date
First Quarter of the year 20th of July
Second Quarter of the year 20th of October
Third Quarter of the year 20th of January
Fourth Quarter of the year 20 th of April

The prescribed monthly and quarterly returns are E.R.-1 and ER – 3 returns respectively.
Sub-rule 2 of Rule 12 requires every assessee to submit to the Superintendent of Central
Excise, an Annual Financial Information Statement for the preceding 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 from account current during
the financial year to which the Annual Financial Information Statement relates are exempted
from filing of such annual information return.
Sub-rule 3 lays down that the proper officer may on the basis of information contained in the
return filed by the assessee under sub-rule (1), and after such 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 prescribed 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 the PLA and relevant TR6 challans. The PLA extracts will
give details of all the credits made through TR6 challans during the month and upto the 5 th
of the following month upto which the duty liability can be discharged for the month. A
summary could also be put at the end of the PLA extracts indicating the following:
a. opening balance, after discharging the duty liability for the second fortnight of the
previous month;
b. the credits made during the month; and upto the 5th of the following month;
c. total duty discharged through PLA for the first fortnight;
d. total duty discharged through PLA for the second fortnight; and
e. closing 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 required 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-Assessment Procedure : The
manufacturers working under Self-Removal Procedure are required to file monthly /
quarterly returns in form ER-1 in terms of provisions of Rule 12. Thus all the assessees are
required to file the ER-1 return within 10th day of subsequent month. The manufacturers
claiming benefits of exemption notifications 8/2003 (SSI Exemption/ Concession) could file
the same by the 20th of month succeeding the quarter. The following are the requirements at
the time of filing ER-1 return –
1. The return shall be filed in quintuplicate.
2. The return shall be filed with the jurisdictional Range Superintendent.
3. The assessee shall obtain an acknowledgement for having filed the return.
 General Procedures Under Central Excise 5.25

4. The ER-1 return shall be complete in respect of all the columns. It is also suggested to
provide details of removals of non-excisable goods (including exempted goods).
Further the export removals under rebate, bond, advance licence, drawback and
removals as such under Rule 4(5) may be disclosed separately. It is also advisable to
keep an ongoing running abstract in the first sheet of the RT-12 to disclose the totality
of the transactions for the year up to the previous month as well as the clearances in
the current month including exempted clearances.
5. The return shall be filed with the following documents-
i. TR-6 challans for any deposits made in PLA.
ii. Original and duplicate copies of extracts of PLA.
6. The return shall give details of opening stock, manufacture, and removals of each final
product sub-heading wise.
7. The Monthly returns under Cenvat Credit Rules on inputs and capital goods has to be
filed within 5 days from the end of the month 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 particular
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 jewellery 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,
(hereinafter referred to as ‘"the said person") shall obtain registration, maintain accounts,
pay duty leviable on such goods and comply with all the relevant provisions 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 said 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 duty 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 of 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 particulars of date and time of removal of goods before
the clearance of goods and after such clearance the job worker shall intimate to the said
person, the date and time of the clearance of goods for completion of the particulars by the
said person in the triplicate copy of the invoice.
(5) The said person may supply or cause to supply to a job worker, the following goods,
namely:-
(a) inputs in respect of which he may or may not have availed CENVAT credit in
terms of the CENVAT Credit Rules. 2004, without reversal of the credit thereon; or
(b) goods manufactured 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 such information as specified in sub-rule (2) of rule 11 of the
Central Excise Rules, 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 registered or shall not be required
to maintain any record evidencing the processes undertaken 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, subject 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 date 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 of the job worker and no excisable
goods shall be removed except under the invoice.
For the purpose of this rule, "job worker" means a person engaged in manufacture or
processing on behalf and under the instructions of the said person from any 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 work" 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 not, that is to say, a name or a mark, such as a symbol,
monogram, label, signature or invented words or any writing which is used in relation to a
product, for the purpose of indicating, or so as to indicate, a connection in the course of
trade 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 clearance of articles of jewellery falling under heading 7113 of the First
Schedule to the Tariff Act or waste, by-products or like goods arising during the course of
manufacture of such goods, the said person shall be liable to pay duty thereon as if such
goods were cleared for home consumption.

5.12 MAINTENANCE OF RECORDS AND PAYMENT OF DUTY BY THE INDEPENDENT

WEAVER OF UNPROCESSED FABRICS [RULE 12C]
An independent weaver of unprocessed fabrics falling under Chapter 50, 51, 52, 53, 54, 55,
58,or 60 of the First Schedule to the Central Excise Tariff Act can 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 unprocessed 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 him.

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
factors 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 power 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 FACTORY [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 with old Rule 173H were very stringent
and there was a lot of difficulty and litigation on this aspect.
Since 1st July, 2001 Rule 16 of Central Excise Rules, 2001 deals with return of any duty paid
5.28 Central Excise

goods. Rule 16 of the Central Excise Rules, 2002 is also drafted along similar lines. The
said rule is wide enough to cover all the purposes including the goods received for being re-
made, refined, re-conditioned.
The rule provides that the assessee shall state the particulars of such return in his records
and shall be entitled to have cenvat credit of the duty paid as if such goods 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 manufactured or produced.
Once the goods are returned, two propositions would follow:
1. Where the returned goods are put through a process not amounting to manufacture;
2. Where the returned goods are put through a process amounting to manufacture
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. In the second situation i.e. the
process conducted on such goods amounts to manufacture, duty at the rate applicable on
the date of removal and on the value determined 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 as Cenvat credit as if it was a duty paid by the manufacturer who
removes the goods.
Sub-rule (3) of Rule 16 says in the event the assessee has any difficulty, the Commissioner
is empowered to resolve the same and permit the entry of the goods into the factory and the
availment of Cenvat credit thereon. For this the Commissioner may , either on case to case
basis by special order or to be applied to “particular type of case” by general order, impose
such conditions as may be necessary for safeguarding interest of revenue.

5.15 REMOVAL OF GOODS FOR JOB WORK, etc. [RULE 16A]

Rule 16A provides that any inputs received in a factory may be removed as such or after
being partially processed to a job-worker for further processing, testing, repair, re-
conditioning or any other purpose subject to the fulfillment of conditions specified in this
behalf by the Commissioner of Central Excise having jurisdiction.

5.16 SPECIAL PROCEDURE FOR REMOVAL OF SEMI-FINISHED GOODS FOR

CERTAIN PURPOSES [RULE 16B]
The Commissioner of Central Excise may by special order and subject to conditions as may
be specified by the Commissioner of Central Excise, permit a manufacturer to remove
excisable goods which are in the nature of semi-finished goods, for carrying out certain
manufacturing processes, to some other premises and to bring back such goods to his
 General Procedures Under Central Excise 5.29

factory, without payment of duty, or to some other registered premises and allow these
goods to be removed on payment of duty or without payment of duty for export from such
other registered premises.

5.17 SPECIAL PROCEDURE FOR REMOVAL OF EXCISABLE GOODS FOR CARRYING

OUT TESTS [RULE 16C]
The Commissioner of Central Excise may by special order and subject to conditions as may
be specified by the Commissioner of Central Excise, permit a manufacturer to remove
excisable goods manufactured in his factory for carrying tests to some other premises and
to bring back such goods to his factory, without payment of duty, or to some other registered
premises and allow these goods to be removed on payment of duty or without payment of
duty for export from such other registered premises. However, this rule shall not apply to
the goods known 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]
Rule 17 provides that where any goods are removed from a 100% EOU to domestic tariff
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 utilizing the Cenvat credit.
Such unit is required to maintain appropriate accounts related to production in the
prescribed form giving the following details :
(i) description of goods
(ii) quantity removed

(iii) duty paid.

Such unit is further required to submit a monthly return in the specified form (E.R. – 2) in
respect of the excisable goods manufactured in, and receipt of inputs and capital goods, in
the unit. The return is to be submitted to the Superintendent of Central Excise within 10
days from the close of the month to which the return relates.

5.19 POWERS 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 Central Excise Officer may exercise the powers and
discharge the duties conferred or imposed on any other Central Excise Officer who is
subordinate to him. However, Commissioner (Appeals) can not exercise the powers and
discharge the duties conferred 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 scrutiny,
verification and checks as may be necessary to safeguard the interest of revenue.
(2) Every assessee, and first stage and second stage dealer shall furnish 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 including
inputs and capital goods, as the case may be;
(ii) all the records prepared and maintained for accounting of transaction in regard to
payment for input services and their receipt or procurement; and
(iii) all the financial records and statements including trial balance or its equivalent.

(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 deputed by the
Commissioner or the Comptroller and Auditor General of India, -

(i) the 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, 1956 ; and

(iii) the Income-tax audit report, if any, under section 44AB of the Income-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 dealer” and “second stage
dealer” shall have the meanings assigned to them in CENVAT Credit 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 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 thereon, the Central Excise Officer 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 whom 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 and 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 production of all documents or things of a certain description in the possession
or under 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 subject 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 such inquiry as aforesaid shall be deemed to be a “judicial proceeding” within the
meaning of section 193 and section 228 of the Indian Penal Code, 1860.

5.20 ACCOUNT 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 registration number, shall obtain the New Excise
Control Code Number (New ECC Number), which is a Permanent Account Number (PAN)-
based number. Once Department adopts ‘common number’ for registration and accounts,
separate ECC number shall not be required.
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 prepared in triplicate by writing with indelible pencil and using double-
sided carbon. Original and duplicate copies of the PLA should be detached by the
manufacturers and sent to the Central Excise Officer in charge along with the
monthly/quarterly periodical return in form E.R.1.
5.20.2 Credit and debit in account current : The assessee may make credit in the PLA
by making cash payment into the Treasury/or Authorised Bank. If allowed by the
Commissioner, in exceptional cases, such as sudden strike in bank, natural calamity, riot
etc., after sending by Registered A.D. post or by a messenger a cheque for the requisite
amount to the Chief 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 Assessee’s ECC No. should also be indicated in
the challans. A copy of each Treasury Challan 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 made the deposit, should be sent by the assessee to the
Central Excise Office along 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 the amount payable is credited to the account of the Central
Government by the specified date. It is being interpreted that it refers to deposit of duty
amount by the focal point banks into the account of Government. This is not the intention.
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 restriction 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 payment
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 wise (for the reasons of
defaults earlier):
i. Duty on each clearance should be paid by the assessee by making debit entry in the
PLA prior to the removal of the goods 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 they will be treated as non-duty paid.
ii. Duty on clearances of any excisable goods as 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 debit in the account current.
 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 original entry should be neatly scored out and attested by the
assessee or his authorised agent.
5.20.3 Payment of rents, fines or penalties : In case where miscellaneous dues like
rents, fines or penalties are to be paid by the holder of account 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 should indicate the particulars of penalties, rent etc, deposited.
If, however, the account holder desires that such miscellaneous dues should also be paid
through an account current, he may be permitted to open a separate account current for this
purpose under the group minor head "E-Miscellaneous-1 Miscellaneous".
5.20.4 Account Code Directory : Regarding the Account Code Directory for the
purpose of computerisation, separate instructions have been issued by the Principal Chief
Controller of Accounts C.B.E.C., which may be referred to. These are not reproduced 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, natural
calamities etc., : This procedure is to be followed only when all the banks nominated to
collect revenues within a Commissionerate are unable to transact business, due to strike of
banks or sudden closure of banks due to riots, imposition 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 gets 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 face 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 strike 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 may adopt the procedure specified hereinafter in
partial relaxation of the provisions 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 sudden 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 registered post, acknowledgement due (R.P.A.D.) or
special messenger, with the TR-6 challans (in quadruplicate) duly filled in, to the Chief
Accounts Officers of the Commissionerates, with a clear declaration that they have sufficient
balance in their bank account.
5.34 Central Excise

i. They should be advised to send a copy of the letter forwarding the cheque, to the
concerned Range Officer also.
ii. On the strength of a cheque so sent, they may take credit in the P.L.As.
iii. On receipt of the cheque in his office, the Chief Accounts Officer will immediately
intimate the concerned Range Officer about the name of the assessee, the number and
date of the cheque and its amount.
iv. Immediately after the strike is over, all such cheques should be deposited by the Chief
Accounts Officer into the Focal Point Bank/State Bank of India at the Headquarters or
Reserve Bank of India, as the case may be, through TR-6 challans (in quadruplicate)
according to the procedure prescribed in the Manual.
v. The Chief Accounts Officer will send the Duplicate/Triplicate copies of the receipted
challans to the assessees and the quadruplicate copy to the R.Os. concerned to
enable them to exercise necessary checks and prepare the monthly statement of
revenue.
vi. 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 Accounts Officer under intimation to
them as also the R.Os.
vii. If any of the cheques sent by the assessees are dishonoured, the Commissioners shall
take appropriate penal action as prescribed under the rules.
viiii. The 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 permitted in the following cases: -
i. If there is a strike in or closures of only one nominated bank of the Commissionerate
and the assessee still remains in a position to deposit money in the other nominated
banks or Departmental Treasury (wherever they exist) – unless the assessees’ bank is
the only nominated bank in the Commissionerate.
ii. In the case of declared bank holidays because such holidays are known well in
advance.
iii. Where the public has been given advance intimation of a strike, unless the strike is
unduly prolonged (say over 3-4 days).
iv. Where bank employees adopt “go-slow” tactics.
5.20.7 Procedure of transshipment of goods en route final destination : The
transshipment 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 permit.
(b) Where the consignment originally cleared on an invoice issued under Rule 11, is
required to be split up en route for transport by different vehicles on account of -
i. breakdown of the original vehicle and non-availability of the substitute vehicle of
the appropriate capacity, or
ii. requirement of splitting up of the consignment and loading in vehicle other than
the vehicle on which goods were cleared from the factory, or
iii. part consignment/package(s) misplaced during 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 transport’s copy of the invoice accompanying 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, including pre-
determined distribution of goods from an intermediate point, the assessee 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 inputs to
ascertain their correct identity or classification or eligibility of any exemption. However,
under various procedures, such as relating to exports, assessment etc. drawal of samples is
required. The Board vide its instructions issued on 1.9.2001 dealt with samples separately.
The same are discussed below.
5.21.1 Categorization of samples : The samples can be categorized, as follows:
i. Trade samples sent to customers for trial;
5.36 Central Excise

ii. Samples for test purposes;

iii. Samples for supply against sale contracts or for enforcement of control measures;
iv. Samples for display at exhibitions, fairs and in show-cases; and
v. Samples for market inquiries by Central Excise Officers.
Apart from the assessee requiring the samples for cogent reasons, the Central Excise
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 Procedure for the drawal and accounting of samples
♦ Trade Samples: The manufacturers’ generally give such samples to their customers for
‘trial and approval’. The removal shall be in the same manner as the removal of goods
for home consumption. The manufacturer 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 specified 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 returned. 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. Samples drawn by in-house laboratory for testing quality and adherence to product
specifications;
ii. Samples drawn for preservation for investigation of complaints;
iii. Samples drawn for test at other concerns and independent testing agencies;
iv. Samples required to be sent to Government Test Centers including the Chemical
Examiners for test.
The assessee is required to maintain a proper account of receipts and the utilisation 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 shall prepare invoice under
Rule 11 the said Rules and make issue entries for the goods (samples) in the Daily Stock
Account. Appropriate duty shall be paid by the assessee on these samples before their
removal for test purposes unless otherwise exempted by a duty exemption notification.
♦ Samples for other purposes : Where samples are required for the purposes specified
at (iii), (iv) and (v) of paragraph 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 samples considering that the goods remain within the factory. Duty
shall be charged, unless exempted by a notification, once the samples are cleared from
the factory. If at any time the manufacturer desires to destroy these samples, procedure
specified in Rule 21 of the said Rules shall be followed.
5.21.3 Quantity of samples: Samples should be drawn in reasonable quantity. However,
in some cases a specific 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 Memo : A test memo should always be prepared in triplicate, the original to
be sent to the Chemical Examiner, triplicate to the Deputy/Assistant Commissioner and
duplicate retained on the Range Officer’s record.
5.21.5 Preservation of samples : The samples drawn by the Range staff but not sent
for test to laboratories should 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
preserved 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 concerned
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 the officers of the Central Excise Department for ascertaining the identity of goods/its
classification or any other official purposes relating to Central Excise, the cost of samples
may be reimbursed on manufacturer’s request out of the contingency 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 through persuasion the same should be borne by
the Department.
5.21.7 Procedure for testing 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 goods or materials taken for testing should be the minimum
necessary for testing and the Commissioner will, in consultation with the Chemical Examiner
concerned, specify 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 obtained 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 permitted 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 along with the declaration
and the relative test memorandum under intimation to the Assistant/Deputy
Commissioner concerned).
b. Duplicate to be sent to the Deputy/Assistant Commissioner of Central Excise (to be
forwarded to him for safe custody for further use in case a dispute arises).
c. Triplicate for Range Officer (to be retained for any future reference or to cover loss by
post or other emergency).
d. Quadruplicate to be given to the manufacturer (for his own record).
Before despatch of sample to the Deputy/Assistant Commissioner of Central Excise and the
Chemical Examiner, the samples should be packed properly, sealed and marked in such a
way that they suffer no loss or deterioration in transit or subsequent 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 the 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 Commissioner 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
test results should be speedily communicated to the Assessee.
The Department shall carefully preserve the remnant sample.
Whenever the assessee is dissatisfied with the test carried out by the Chemical Examiner
he can apply to the Deputy/Assistant 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 was communicated to the him.
Where the remnant sample is available in sufficient quantity in its original state, re-test
should ordinarily be on such remnant sample. 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 desires, 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 for re-test on
duplicate or triplicate sample.
Where an assessee requests for re-test in a laboratory other than a Control Laboratory
(hereinafter in this paragraph 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-Government laboratory with the prior permission of the

Commissioner or the Appellate or the reversionary authority, as the case may be after Chief
Chemist has confirmed that the departmental laboratories do not have the facilities for
performing the particular test in question. The request for re-test in outside laboratories 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 findings of such
laboratory for due consideration on merits of each case, by the appropriate
adjudicating/appellate authority. However, the assessee should ensure that the laboratory
which analyses the samples indicates clearly in its test report the full particulars of the
samples and whether the central excise seals affixed to the samples were intact or not at
the time of its receipt by such laboratory.
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 only a concise edited form of the Test Report.
The editing of the Test Report should 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 Central Excise Officer on written order of the Deputy/Assistant Commissioner of
Central Excise, on returnable basis. There is no need to make any issue entries in Daily
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 acknowledgement of drawl and return of
sample. The officer who draws sample, will also give acknowledgement to the assessee and
take acknowledgement when he returns the sample.
5.21.8 Clearance of model/proto-type without payment of duty for trial etc. : Where
a finished excisable goods falling in the category of model/proto-type are to be sent out for
trail purposes by actually putting them to effective use after conducting certain test to
ensure that they meet with certain standard/specified norm, clearance may be allowed on
payment of duty. Their subsequent return 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 at 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 the
point of export. The Central Excise Officer for his record retains the third set of sample.
The Customs Officer will check the export goods with the sample before allowing export.
5.40 Central Excise

The samples shall be dealt with in accordance with instructions/standing orders of the Board
or the Commissioner of Customs.
Self-examination questions
1. When and how is the assessee required to discharge his liability towards payment of
duty under the Central Excise Rules, 2002?
2. Who is required to obtain registration under Rule 9 of the Central Excise Rules, 2002?
3. Discuss the mechanism for removal of goods at concessional rate of duty for
manufacture of excisable goods with reference to the Central Excise Act, 1944 and the
rules made thereunder.
4. Discuss the provisions in respect of removal of goods by a unit in Hundred Percent
Export Oriented Undertaking for Domestic Tariff Area.
5. What do you mean by payment of excise duty under protest? Explain the procedure
that has to be followed by an assessee who opts to pay duty under protest.
6. Discuss the special provisions for removal of excisable goods in respect of molasses.
7. Explain the provisions relating to provisional assessment.
8. What is an invoice? Describe the special considerations in respect of an invoice with
respect to rule 11 of the Central Excise Rules, 2002.
9. Discuss the special provisions in respect of job work relating to articles of jewellery.
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 under rebate. The
conditions and procedure relating to export without payment of duty are contained in
Notification Nos. 42/2001-Central Excise (N.T.) to 45/2001-Central Excise (N.T.), all dated
26th June, 2001 issued under rule 19 of the Central Excise 2002.
Export without payment of duty [Rule 19]
(1) Any excisable goods 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 factory 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 specified by notification by the Board.

6.2 EXPORT WITHOUT PAYMENT OF DUTY UNDER BOND/LETTER OF

UNDERTAKING
Export without payment of duty is further classified into the export to the countries 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 No. 42/2001-
CE(N.T.) dated 26.6.2001. The details are mentioned in this part.
1. Conditions : Merchant exporter shall furnish bond in Form B-1 and obtain certificate
in Form CT-1. A manufacturer-exporter may furnish annual Letter of Undertaking in Form
6.2 Central Excise

UT-1(no CT-1 is required in this case). The export shall be subject to the following
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
warehouse or other approved premises within such extended period as the
Deputy/Assistant Commissioner of Central Excise or Maritime Commissioner may in
any particular 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 their origin;
2. Forms to be used: ARE.1 is the export document for export clearance 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 should 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 as well as merchant exporter. The different copies of
ARE.1 forms should be of different colours indicated below:
Original White
Duplicate Buff
Triplicate Pink
Quadruplicate Green
Quintuplicate 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 be prepared in terms of rule 11 of the said Rules. It should be
prominently mentioned 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-Central 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 Deputy/Assistant Commissioner of Central Excise having jurisdiction over his factory
from which he intends to export.
The Letter of Undertaking should not be furnished 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 exporter
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 defaults or non-
compliance 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 consignment of export.
The obligation of the manufacturer flows from statutory requirement of exporting the goods
within six months or such extended period as the Deputy/Assistant Commissioner of Central
Excise may allow. Failing this, the exporter is required to deposit the requisite sum (duty
and interest) suo motu, considering that the manufacturer has to do ‘self-assessment’. Any
non-payment within 15 days of expiry of the stipulated time period, shall be treated as
arrears of revenue and the Department will proceed to recover the same as ‘sum due to
Government’. Suo motu payment within 15 days of expiry of the stipulated time period will
not be treated as ‘default’.
On repeated failure of the manufacturer-exporter to comply with the conditions of the Letter
of Undertaking or the procedure for ‘acceptance of proof of export’ under this instruction, the
Deputy/Assistant Commissioner of Central Excise may direct him in writing that the Letter of
Undertaking is not valid 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 Commissioner of
Central Excise 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.
Though any exporter (manufacturer-exporter or merchant-exporter) can furnish 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 therefrom under Customs or as the case may be postal supervision.
The officer who will accept the bond, will also be responsible for discharging that bond upon
furnishing 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 Commissioner 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 merchant-exporters for procuring
goods from a factory or warehouse. Such certificates 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-exporter

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 number of
certificates (CT-1), duly signed/certified, in multiples of 25 copies, normally covering a
period of one to three months, depending upon the track record of compliance by the
exporter. The ‘bond accepting authority’ shall be responsible for 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 should also reflect in the amount of bond). The compliance of the
exporter in submitting 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 description of
goods for procurement from a particular factory or warehouse or an approved place of
storage, quantum, value of procurement (provisional figures) and duty involved therein
(provisional figures – but based on correct rate of duty and contracted transaction value).
This ‘duty’ element will be debited provisionally. The exporter shall ensure that at the time of
debit, sufficient credit is available at that point of time to cover the said debit. The
provisional debit shall be converted into final debit within a period of seven days from the
date of removal of goods on A.R.E.1, based on the ‘duty payable’ in goods cleared for
export reflected in the said A.R.E.1 and invoice.
The manufacturer shall record the clearance 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 has two optional procedures regarding the manner in which he may clear the
export consignments from the factory or warehouse or any other approved premises,
namely: -
(i) Examination and sealing of goods at the place of despatch by a Central Excise
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 application 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 required 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 value may be less than, equal to or more than the
 Export Procedures 6.5

F.O.B. value indicated by the exporter on the Shipping Bill.

The duty payable shall be determined on the ARE.1 and invoice and recorded in the Daily
Stock Account as “duty foregone on account of export under rule 19”.
The exporter may request the Superintendent or Inspector of Central Excise having
jurisdiction over the factory of production or manufacture, 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 upon, about the intended time of 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 Superintendent of
Central Excise shall also examine and seal the consignment and sign the documents in
token of having done so. In exceptional cases, where the exporter has unblemished track
record of compliance (Central Excise) and where there is non-availability of Superintendent
of Central Excise due to leave, vacant post or other reasonable causes, the jurisdictional
Deputy/Assistant Commissioner of Central Excise may permit examination and sealing by
Inspector. All other types of export may be examined and sealed by the Inspector of
Central Excise.
The Superintendent or Inspector of Central Excise, as the case may be, will verify the
identity of goods mentioned in the application and also verify whether the duty self-
assessed 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 the goods 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
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 :
Original (First Copy) The said Superintendent or Inspector of Central Excise
shall return to the exporter immediately after
endorsements and signature.
Duplicate (Second Copy) The said Superintendent or Inspector of Central Excise
shall return to the exporter immediately after
endorsements and signature.
Triplicate (Third Copy) Sent to the bond sanctioning authority, either by post
or by handing over to the exporter in a tamper proof
6.6 Central Excise

sealed cover after posting the particulars in official

records.
Quadruplicate (Fourth Copy) Retain for official records.
Quintuplicate (Fifth Copy) Optional copy - The said Superintendent or Inspector 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 warehouse:
Where goods are not exported directly from the factory of manufacture or warehouse, the
distribution of A.R.E.1 will be the same as above except that the triplicate copy of
application shall be sent to the Superintendent having jurisdiction 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 self-
certification 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
examination by a Central Excise Officer. This procedure will also be permitted in the 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 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 (who should be permanent employee of the said
manufacturer or owner of the warehouse holding reasonably high position) duly authorised
by such owner, working partner 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 following
manner:
Original (First copy) and Duplicate Send to the place of export along with the goods
(Second copy)
Triplicate (Third copy) and Superintendent or Inspector of Central Excise
Quadruplicate (Fourth copy) having jurisdiction over the factory or warehouse
within twenty four hours of removal of the goods
Quintuplicate (Fifth copy) Optional copy - Send to the place of export along
with the goods
The said Superintendent or Inspector of Central Excise shall 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 Rule 10 of the Central Excise 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 particulars, he will
endorse the relevant A.R.E. 1 and append his signatures at specified places in token of
having done the verification. In case of any discrepancy, he will take up the matter with the
assessee for rectification and also inform the jurisdictional Assistant/Deputy 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 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 original copies of A.R.E.1s.
Quadruplicate (Fourth copy) Retain for Range records (The notification does not
specify this distribution of this copy)

8. Export by parcel post : In case of export by parcel post after the goods intended for
export has been sealed, the exporter shall affix to the duplicate application sufficient
postage stamps to cover postal charges and shall present the documents, together with the
package or packages to which it refers, to the postmaster 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 Freight Station or Land Customs Station.
The exporter shall present together with original, duplicate and quintuplicate (optional)
copies of the application (A.R.E. 1) to the Commissioner of Customs or other duly appointed
officer – normally goods are presented in the designated export shed.
The goods are examined by the Custom officers 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 same 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 Central 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) 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. Thereafter, he will certify on the copies of the A.R.E. 1 that the
goods have been duly exported citing the shipping bill number and date and other
particulars of export and distribute in the following manner:
6.8 Central Excise

The officer of customs shall return the original and quintuplicate (optional copy 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 tamper proof sealed cover to the officer
specified in the application, from whom exporter 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 export incentive.
10. Procedure relating to proof of export and re-credit against such proof : The
procedure relating to acceptance of proof of export or the ‘validation’ 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 option for exporter to also present quintuplicate copy].
The Customs authority certifies the actual export on these documents and distributes the
copies as specified.
The exporter shall submit a Statement, at least once in a month, in specified form along with
the original copies of A.R.E. 1 with due certification of export (Pass for Shipment Order) by
Customs authorities at the place of export to the Divisional office (through Range)or in the
office of the bond-accepting authority. Other supporting documents shall also be furnished,
namely, self-attested photocopy 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 permitted to take credit in his running bond account on the basis of copy of
the Statement 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 bond-
accepting 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 triplicate copies of A.R.E.1 already with them and the A.R.E.1 or its
summary received directly from the place of export (hard copies or electronic summary or e-
mail) within 15 days of the receipt. The Divisional Officer shall accept the proof 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-accepting
authority shall accept the proof of export or initiate necessary action in case of any
discrepancy. He will also intimate about the acceptance of proof of export 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 within six months from the date of clearance for export (or such
extended period, if any, as may be permitted by the Deputy/Assistant Commissioner of
Central Excise or the bond-accepting authority) or discrepancy, the exporter shall himself
deposit 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
Range/Division office or the Office of the bond-accepting authority. On failure to do so
necessary action can be initiated to recover the excise duties along with interest and
fine/penalty. Failing this, the amount shall be recovered from the manufacturer-exporter
along with interest in terms of the Letter of Undertaking 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 shall be initiated against the exporter.
In case of any loss of document, the Divisional 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 evidences such as remittance certificate, Mate’s receipt etc. to satisfy himself that
the goods have actually been exported.
6.2.2 Export to Nepal and Bhutan without Payment of Duty
The conditions and procedure for export to Nepal and Bhutan without 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 following places: -
(i) the factory of production or manufacture
(ii) warehouse, or
(iii) 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 the 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 export 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 responsible for discharging that bond upon furnishing 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 Commissioner 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.
Invoice in the Form specified in the said notification shall be used for export clearances. Six
copies of invoice shall be prepared. This document shall bear running serial number
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 invoice under
erstwhile notification no. 50/94-Central Excise (N.T.) dated 22.9.1994 may be used for the
time being during this financial year. On the invoice, certain declarations are required to be
given by the exporter. They should be signed 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 other bank authorised to deal in foreign exchange by the Reserve Bank
of India, for the receipt of full payment in freely convertible currency. Certificate may also 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 Nepal 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 subject 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 exporter 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 India, before the export of such goods takes
place.
(ii) condition (i) shall not apply if the excisable goods other than consumer goods, but
excluding motor vehicles, are exported without payment of duty as:-
(a) supplies to projects financed by any United Nations agency, the International
Bank 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 Ministry 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 jurisdiction 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 against an irrevocable letter of credit, the exporter shall furnish a
certificate in the prescribed form from the Reserve Bank of India or any other bank
authorized to 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 freely convertible currency. On
receipt of such a certificate and on the satisfaction that the goods have been
exported in terms of the bond, the Assistant/Deputy Commissioner of Central Excise
or such other officer as authorized by the Board on 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 against any global tender
invited by His Majesty's Government of Nepal without payment of duty, for which payment is
received in Indian currency. Such exports shall be subject to the following further conditions,
namely: -
(i) the exporter shall 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 authorised by the Board on this behalf; and
(ii) the exporter shall furnish a certificate of remittances in specified form from a bank in
India showing that full payment for the goods has been duly received in Indian
currency by the said bank.
On receipt of the certificate of remittances 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 under the bond.
6.3.3 Export in bond of petroleum oil and lubricant products to Nepal: The export in
bond without payment of duty of excise of petroleum oil and lubricant products to Nepal is
permitted through the agency of Nepal Oil Corporation from calibrated stocks of M/s Indian
Oil Corporation registered as a warehouse 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 tanks of other Oil companies or undertakings. For this facility, the Indian Oil
Corporation shall be required to furnish a bond in the specified Form to the Deputy/Assistant
Commissioner of Central Excise having jurisdiction over the installation 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-operative
Store and Embassy Petrol Pump located in Nepal for the bonafide use of officers and staff
of the Embassy in Nepal shall be subject to the following conditions, namely: -
(i) the exporter shall furnish a bond in specified Form to the Deputy/Assistant
Commissioner of Central Excise; and
6.12 Central Excise

(ii) the First Secretary (Economic), Embassy of India, Nepal, certifies the signature and
stamp or seal of the person authorised to place the order for supply of 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 of duty to Kurichu Hydro Electric Project and
Tala Hydro Electric Project in Bhutan shall be subject to the following conditions, namely: -
(i) The exporter shall furnish a bond in specified Form before the Deputy/Assistant
Commissioner of Central Excise having jurisdiction over the factory or warehouse
from which the goods have to be cleared.
(ii) The goods are supplied against one or more specified contract which have been
registered with the Directorate General of Inspection, Customs and Central Excise in
the following manner:
(a) Every Project Authority specified in the notification (notification no. 45/2001-
CE(N.T.), supra, desirous of obtaining supplies under benefits of this
notification shall apply in writing to the Director General, 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 as 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 furnish 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 each 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 all original documents
which are no longer required. This number shall be indicated 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 Commissioner of Central Excise having jurisdiction over the
factory/warehouse to which the contract pertains for extending benefits under
this notification and consequent benefits under the CENVAT Credit Rules, 2002
to the supplier.
 Export Procedures 6.13

Amendment of Contract
If any contract referred to hereinabove is amended, whether before or after registration, the
Project Authority shall make an application for registration of amendments to the said
contract to the 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, duly approved by the
Ministry of External Affairs.
On being satisfied that the application is in order the DGICCE shall make note of the
amendments in the relevant entries.
The DGICCE shall forward a copy of the amended contract and the amended list of items, if
any, to the concerned Commissioner of Central Excise.
Finalisation of Contract
(a) Each Project Authority shall submit a statement of supplies received on quarterly
basis along with relevant invoices and other documents to the DGICCE within one
month from the last date of the quarter.
(b) The Commissioner of Central Excise to whom a registered contract has been
forwarded shall 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, reconcile both and, if satisfied,
finalise the contract and close the entry in the register.
There should be a release order from the officer authorised by the General 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
approved premises or from where the goods are removed for export to the specified project.

6.4. EXPORT PROCEDURE

6.4.1 Procedure at the place of despatch: Six copies of invoice shall be presented to the
Superintendent or Inspector of Central Excise having jurisdiction over the factory,
warehouse or any other approved premises along with the export goods.
In case of export 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, 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 duty 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 specified by the Commissioner of Central Excise
and endorse each copy of the export invoice in token of having such verification and
examination done by him.
The said Superintendent or Inspector will allow export and distribute invoices in the
following manner:
Original (First copy) Hand over to the exporter
Duplicate, triplicate and quadruplicate Hand over to the exporter or his agent in a
(second, third and fourth copies) sealed cover for delivery to the Customs officer
in-charge of the Land Customs Station through
which the goods are intended to be exported.
Quintuplicate copy (Fifth copy) Forwarded to the Assistant Commissioner of
Central Excise or the Deputy Commissioner of
Central Excise who has accepted the bond
Sixtuplicate (Sixth copy) Retain for official record

The exporter or his agent shall then be free to remove the goods for export to Nepal through
the Land Customs Station indicated on the respective invoices.
Where the goods are exported by land, the export shall take place through any of the
following land customs stations, namely, Sukhiapokhri, Panitanki, Jogbani, Jayanagar,
Bairgania, Bhimnagar, Bitamore (Sursand), Raxaul, Sonauli, Barhni, Nepalganj Road,
Shohratgar (Khunwa), Jarwa, Katarniaghat, Gauriphanta, Banbasa, Jhulaghat, 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 customs 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 invoices tally and the packages, goods or container
are satisfactorily identified with their seals in tact, the officer of customs in-charge of the
land customs station 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 running serial
number in red ink prominently visible and encircled. In case the seals 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 opening and examining the goods, if necessary;
Distribution of invoices by Customs Officer
Original (First copy) Hand over to the exporter or his agent alongwith the
goods for presentation to the Customs Officer of Nepal
or Bhutan.
Duplicate and triplicate Send to the Nepalese or Bhutanese Customs Officer in-
(Second and third copy) charge of the check post through which the goods are to
be imported into Nepal or Bhutan, as the case may be

Presentation of goods to Nepalese or Bhutanese Customs Officers: The goods are then
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 original and triplicate copies of
the invoice as directed by His Majesty's Government of Nepal or His Majesty’s Government
of Bhutan and return the duplicate copy, after endorsing his certificate of receipt of goods in
Nepal or Bhutan, as the case may be, directly to the officer of customs-in-charge of the land
customs station 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 Excise Officer in charge of the factory
or warehouse from which the goods were removed for export without payment of duty. For
this purpose, the said officer in charge of the land customs station should keep a note of the
return of duplicate copies from the Customs Officer of Nepal or Bhutan and remind the
exporter for such 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 station shall also maintain a separate record of
all such in-bond exports of the goods without payment of duty and shall assign running
serial number on the invoice at the time of export as indicated earlier.

6.5 PROCEDURE FOR DISCHARGE OF BOND OR THE DUTY LIABILITY

Essential ingredients for discharge of bond have already been mentioned under each
category of exports.
The general procedure would be - the exporter shall submit the quadruplicate copy duly
endorsed by the officer of customs in-charge of land customs station to the Central Excise
officer who has accepted the bond along with bank, certificate evidencing receipt of
payment in freely convertible currency (in Indian Rupee in 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
erstwhile notification.
The Central Excise officer will tally the particulars with quintuplicate copy of the invoice
received from the Central Excise officer who has allowed clearance from the factory or
warehouse or any other approved premises and make suitable entries in Bond Account of
the exporter, giving provisional 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 customs 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 make
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 date of removal from the factory or
warehouse or any other approved premises, or shortages noticed, the exporter shall
discharge the duty liability on the goods not so exported or shortage noticed along with
twenty four per cent interest thereon 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 in 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 from 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
duty 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 reasons 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 the basis of letter of permission, invoice and
TR-6 Challans on which duty is paid. He shall record these facts in the Daily Stock Account.
If the exporter, after clearing the goods for export without payment of duty, intends to
change the destination or buyer or port/place of export, he may do so provided he informs
the 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 the original
export documents and issue fresh ones, the same may be done under permission 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 documents. In such cases, if bond was
furnished for single consignment, fresh bond may not be asked.
 Export Procedures 6.17

6.7 RE-ENTRY OF THE GOODS CLEARED FOR EXPORT UNDER BOND BUT NOT
ACTUALLY EXPORTED, IN THE FACTORY OF MANUFACTURE
The excisable goods cleared for export under bond or undertaking but not actually exported
for any genuine reasons may be returned to the same factory provided –
(i) such goods are returned 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 Form D-3
within twenty-four hours of such re-entry;
(iii) such goods are to be stored 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 shall record details of such goods in the daily stock account and taken
in the stock 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 intimations, within another 24 hours of receipt of
intimation.

6.8 RE-IMPORT OF EXPORTED GOODS FOR REPAIRS ETC. AND SUBSEQUENT RE-
EXPORT
It has been provided in the Notification 42/2001-Central Excise (N.T.), supra, that the
exported excisable goods which are re-imported for carrying out repairs, re-conditioning,
refining, 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 may 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 maintain separate account for
return of such goods in a daily stock account and make suitable entry on the said account
after goods are processed, repaired, re-conditioned, refined or re-made. When such goods
are exported, the usual export procedure 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 destroyed 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 Commissioner of Central Excise and thereupon the duty payable on
such waste or refuse 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 manufacturer (hereinafter referred to as the ‘subsequent factory’) only for the
purpose of consolidation and loading of goods manufactured in subsequent factory and
export therefrom 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 Officers. 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 not be insisted
upon. The Central Excise Officer having jurisdiction over the subsequent 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) belonging to the subsequent factory in
vehicle or container and sealing of the container.
(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 hand 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
samples 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 contained in
Notification No. 19/2004 -Central Excise (N.T.) dated 6th September, 2004 and Notification
No. 20/2004 - Central Excise (N.T.) dated 6th September, 2004 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 Excise 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 are
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 Categories of exports

There are mainly three categories of exports: -
(i) Export of all excisable goods to all countries except Nepal and Bhutan;
(ii) Export to Nepal.
6.11.2 Export of excisable goods to all countries except Nepal and Bhutan
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 of duty” is satisfied once the
exporter records the details of removals in the Daily 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 monthly 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 warehouse. In this
regard, a general permission has been granted in respect of goods 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
they were cleared for export from the factory of manufacture or warehouse.
This date will be indicated on the ARE.1 and invoice issued for the purpose.
However, the 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 could not export within the stipulated 6 months’ period. The
Commissioner should give his decision within 7 working days of the receipt of
the request. It should also be noted that such permissions should not given in a
routine manner.
(d) The excisable goods supplied as ship’s stores for consumption on board a
vessel bound for any foreign port are in such quantities as the Commissioner of
Customs at the port of shipment may consider reasonable.
(e) The rebate claim by filing electronic declaration shall be allowed from such
place of export and such date, as may be specified by the Board in this behalf.
(f) The market price of the excisable goods at the time of exportation is not less
than the amount of rebate of duty claimed.
(g) The amount of rebate of duty admissible is not less than Rs.500.
(h) The rebate of duty paid on those excisable goods, export of which is prohibited
under any law for the time being in force, shall not be made.
6.20 Central Excise

2. Forms to be used
ARE.1 is the export document which shall be prepared in quadruplicate. The assesee can
optionally have quintuplicate copy (5th copy) which can be used for claiming other export
incentives. 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.
They should be read carefully and signed by the exporter or his authorised agent. The
different copies of ARE.1 forms should be of different colours indicated below:
Original- White
Duplicate Buff
Triplicate Pink
Quadruplicate Green
Quintuplicate 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 be 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 exporter 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 warehouse, namely: -
(i) Examination and sealing of goods at the place of despatch by a Central Excise
Officer.
(ii) Under self-sealing and self-certification
4. Sealing of goods and examination at place of despatch
The exporter is required to prepare five copies of application in the Form ARE-1, as per
format specified in Annexure-I to Notification No. 19/2004-Central Excise (N.T.) dated
06.9.2004. 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 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 indicated by the exporter on the Shipping Bill.
The duty payable shall be determined on the ARE.1 and invoice and recorded in the Daily
Stock Account. It should be paid 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 manufacture, 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 upon, about the intended time of 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 Superintendent of
Central Excise shall also examine and seal the consignment and sign the documents in
token of having done so. In exceptional cases, where the exporter has unblemished track
record of compliance (Central Excise) and where there is non-availability of Superintendent
of Central Excise due to leave, vacant post or other reasonable causes, the jurisdictional
Deputy/Assistant Commissioner of Central Excise may permit examination and sealing by
Inspector. Other types of export may be examined and sealed by the Inspector of Central
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 particulars of the duty paid or
payable. 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, and that the exporter 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 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 application in token of having such
examination done and such examination report must accompany the export goods to the
port/airport of export.
5. Distribution of documents (ARE.1)
Export from the factory or warehouse
In the case when export takes 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 Excise
shall return to the exporter immediately after endorsements
and signature
Duplicate (Second Copy) The said Superintendent or Inspector of Central Excise
shall return to the exporter immediately after endorsements
and signature.
6.22 Central Excise

Triplicate (Third Copy) 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.
Quadruplicate (Fourth Copy) Retain for official records
Quintuplicate (Fifth Copy) Optional copy - The said Superintendent or Inspector of
Central Excise shall return to the exporter immediately after
endorsements and signature.
Export from place other than factory or warehouse (including diversion of duty paid
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 except that the triplicate copy of application
shall be sent by the Superintendent having jurisdiction over the factory of manufacture or
warehouse who shall, after verification forward the triplicate copy in the manner specified
above.
6. Despatch of goods by self-sealing and self-certification
Self-sealing and self-certification is a scheme where the exporter who is a manufacturer or
owner of a warehouse, may remove the goods for export from his factory or warehouse
without examination by a Central Excise Officer. This procedure will also be permitted in the
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 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 (who should be permanent employee of the
said manufacturer or owner of the warehouse holding reasonably high position) duly
authorised by such owner, working partner 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 following manner:

Original (First copy) and Send to the place of export along with the goods
Duplicate (Second copy)
Triplicate (Third copy) and Superintendent or Inspector of Central Excise having
Quadruplicate (Fourth copy) jurisdiction over the factory or warehouse within twenty
four hours of removal of the goods
Quintuplicate (Fifth copy) Optional copy - Send to the place of export along with the
goods
 Export Procedures 6.23

The said Superintendent and Inspector of Central Excise shall 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 Rule 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 append their signatures at specified places in token of having done the
verification. 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 handing over to the exporter
in a tamper proof sealed cover after posting the
particulars in official records
Quadruplicate (Fourth copy) Send 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

7. Examination of goods at the place of export

The place of export may be a port, airport, Inland Container Depot, Customs Freight Station
or Land Customs Station.
The exporter shall present together with original, duplicate and quintuplicate (optional)
copies of the application (A.R.E. 1) to the Commissioner of Customs or other duly appointed
officer – normally goods are presented in the designated export shed.
The goods are examined by the Customs 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 same 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 Central 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) 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. Thereafter, he will certify on the copies of the A.R.E. 1 that the
goods have been duly exported 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 copy 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 tamper proof sealed cover to the officer
specified in the application, from whom exporter wants to claim rebate. However, where
exporter claims rebate by electronic declaration on Electronic Data Inter-change system of
Customs, the duplicate shall be sent to the Excise Rebate Audit Section at the place of
export.
The exporter shall use the quintuplicate copy for the purposes of claiming any other export
incentive.
8. Sanction of claim for rebate by Central Excise
The rebate claim can be sanctioned by any of the following officers of Central Excise:-
(i) Deputy/Assistant Commissioner of Central Excise having jurisdiction over the factory
of production of export goods or the warehouse; or
(ii) Maritime Commissioner.
It shall be essential for the exporter to indicate on the A.R.E. 1 at the time of removal of
export goods the office and its complete address with which they intend to file claim of
rebate.
The following documents 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 , corresponding invoice numbers and dates amount of rebate on
each A.R.E. 1 and its calculations,
(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).
After 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 the 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 provided 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
In case of export by parcel post, after the goods intended for export have been sealed, the
exporter shall affix to the duplicate application sufficient postage stamps to cover postal
charges and shall present the documents, together with the package or packages to which it
refers, to the postmaster at the office of booking.
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 different ports/airports/ICDs/CFSs has been incorporated in the new
procedure. However, its implementation is dependent upon development of software and
formats of electronic forms, administrative set-up at the places of exports for auditing such
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 been 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 declaration” has been defined as the declaration
of the particulars relating to the export goods, lodged in the Customs Computer System,
through the data-entry facility provided at the Service Centre or the date communication
networking facility provided by the Indian Customs and Central Excise Gateway (called
ICEGATE), from the authorised person’s computer.
6.11.3 Export to Nepal or Bhutan : For export to Nepal, a different procedure has to be
followed considering that the rebate is granted to the His Majesty’s Government of Nepal
based on Indo-Nepal Treaty. Currently, the procedure is specified only for exports through
specified Land Customs Stations. There is no rebate procedure for Bhutan.
1. Conditions of export
The conditions of export are similar to export to other countries. For clarity, these are
explained below: -
(i) It is essential that the excisable goods shall be exported after payment of duty,
directly from a factory or warehouse. The condition of “payment of duty” is satisfied
once the exporter records the details of removals in the Daily Stock Account
maintained under Rule 10 of the Central Excise Rules, 2002 (hereinafter referred to
as the said Rules), whereas the duty may be discharged 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 which 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 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 could not
export within the stipulated six months’ period. The Commissioner should 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 Customs 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 India.
(v) The goods exported by land can only be exported through the specified land customs
stations.
2. Nepal Invoice
The Format of ‘Nepal Invoice’ has been specified in the notification no. 20/2004-Central
Excise (N.T.) dated 6.9.2004.
3. Procedure for export to Nepal
The exporter is required to prepare five copies of Nepal 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 clarified 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 determined 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 request the Superintendent or Inspector of Central Excise having
jurisdiction over the factory of production or manufacture, 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 upon, about the intended time of 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 Superintendent of
Central Excise shall also examine and seal the consignment and sign the documents in
token of having done so. In exceptional cases, where the exporter has unblemished track
 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 or other reasonable causes, the jurisdictional
Assistant/Deputy Commissioner of Central Excise may permit examination and sealing by
Inspector. Other types of export may be examined and sealed by the Inspector of Central
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 particulars of the duty paid or
payable. If he finds that the declaration in Nepal Invoice 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 goods 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 application in token of having such
examination done.
The distribution of the Nepal invoice shall be, as follows:
Original (First copy) Hand over to the Exporter or his agent along with the goods,
packages or container after sealing it.
Duplicate To be put in a sealed cover and given to the exporter or his agent
(Second Copy) by the Central Excise Officer for being handed over to the officer
of Customs In-Charge of the concerned land customs station
Triplicate To be put in a sealed cover and given to the exporter or his agent
(Third Copy) by the Central Excise Officer for being handed over to the officer
of Customs In-Charge of the concerned land customs station
Quadruplicate To be retained by the Central Excise Officer.
(Fourth Copy)
The exporter or his agent shall then be free to remove the goods for export to Nepal,
through the specified land customs stations.
4. Procedure at the land customs 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 invoice 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 invoice to this effect and
simultaneously indicate the running serial number in red ink prominently visible and
encircled against Item 3 on all the three copies of the invoice.
The customs officer, then deliver the original copy of the invoice duly endorsed to the
exporter or his agent alongwith the goods for presentation to the Nepalese Customs Officer.
He shall also send directly the duplicate and triplicate 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
border check post along with the original copy of the invoice. The Nepalese Customs
Officer, shall deal with the original copy as directed by His Majesty's Government of Nepal
and return the duplicate copy, after endorsing his certificate of receipt 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 Excise, 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 copies from the Nepalese Customs Officer and remind the exporter
for such copies as have not been received.
5. Procedure to be followed by the Directorate General of Inspection, Customs and
Central Excise (Nepal Refund Wing), New Delhi
The Directorate General of Inspection, Customs and Central Excise (Nepal Refund Wing),
New Delhi (hereinafter referred to as “the Directorate”) shall maintain separate registers for
each Indian Border Customs Check Post.
The duplicate invoice will be entered in the respective registers showing the running serial
number in the recapitulation statement register prescribed for the purpose.
At the end of every month 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 to arrive at the amount of rebate due to His Majesty's Government of Nepal.
One copy of the recapitulation statement shall be forwarded to the Commissioner of Central
Excise concerned for verifying the payment of rebate to Nepal Government and for issue
of a post audit certificate in respect of the amount allowed as rebate against each invoice
passed in that bill. In order to detect errors in the duty amount and quantity indicated,
Internal Audit Department of the Commissionerate 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 over payment is noticed the fact should be brought to the notice of the
Directorate for making necessary adjustment.
One copy of the recapitulation statement shall be forwarded to His Majesty's Government of
Nepal.
One copy of the recapitulation 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 which
the rebate is to be given and the Commissioner/PAO of that Commissionerate shall 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 recapitulation statement.
In case the Directorate does not receive the duplicate copy 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 concerned as to the whereabouts of the particular invoice.

6.12 MISCELLANEOUS MATTERS

6.12.1 Time limit for disposal : The rebate sanctioning authority should point out
deficiency, if any, in the claim within 15 days of lodging the same and ask 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 rebate of duty on export of goods should
be disposed of within a period of two months.
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 Central Excises Act,
1944.
6.12.3 Entry of goods in another factory of the same manufacturer for
consolidation and loading of consignment for export: Goods removed on A.R.E.1 from
one factory of a manufacturer may be allowed to enter in another factory of the said
manufacturer ONLY for the purpose of consolidation and loading of goods in second or
subsequent factory(ies) and export therefrom. For this 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 packages 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
Central Excise Officer having jurisdiction over the second or subsequent factory(ies) 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 subsequent 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 under claim of rebate but are not exported for any reason,
the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central
Excise having jurisdiction over the factory or the warehouse, shall, on being requested by
the exporter in writing, cancel the export documents and make necessary endorsements.
Thereafter, 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-examination questions
1. What are the conditions to be followed while exporting to Bhutan under bond, where
payment is in freely convertible currency?
2. What is a CT-1 certificate?
3. Discuss the provisions in respect of re-entry of the goods cleared for export under
bond but not actually exported, in the factory of manufacture.
4. 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 Bhutan?
(i) Should a bond be executed in such export? Support your answer with proper
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
the same?
(iv) Is there any duty limit below which the rebate of duty cannot be granted? If yes,
then, what is the limit? Is there any other restriction on the grant 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 Excise Rules, 2002:
(i) What is the type of bond to be executed? Who is exempted from furnishing such
bond?
(ii) What is the export document for export clearance? How many copies are
required to be prepared for it?
(iii) Is it necessary to prepare an invoice also? If yes, how should it be prepared?
(iv) What will be the duty 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, the rebate of excise duty paid on exported
goods is granted. Procedures and conditions for export of excisable goods under claim
of rebate to countries other than 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 need to execute a bond in such a case as the goods are exported under
claim of rebate after full payment of duty under an invoice.
(ii) Export under claim for rebate should be made under ARE-1 form.
(iii) A claim of rebate of duty paid, along with the original copy of the ARE-1, shall be
lodged with the Assistant/Deputy Commissioner of Central Excise having jurisdiction
over the factory of manufacture or warehouse or, as the case maybe, the Maritime
Commissioner. As per section 11B of the Central Excise Act, 1944, the claim must
be filed within one year from the date of export.
(iv) The rebate will not be granted if amount of rebate of duty is less than Rs.500.
Further, the rebate will also not be granted if the market price of the excisable
goods at the time of exportation is less than the amount of rebate.
(v) Following duties are eligible 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 Additional Duties of Excise (Textiles and
Textile Articles) Act, 1978;
(d) the National Calamity Contingent duty leviable under section 136 of the
Finance 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 of the Finance Act, 2003;
(g) education cess on excisable goods levied under Finance (No.2) Act, 2004;
(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 be obtained only if duty is paid in cash.
Duty on final products can be paid either 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 all 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 excise 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) ARE-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 can
use for claiming other export incentives.
(iii) Yes, the goods have to be cleared 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 as “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 excise duty on such goods along with the
interest. As per rule 5 of the Central Excise Rules, 2002, the applicable duty shall
be computed as per the rate and tariff 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 anything 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 under the Excise law. A bond is a
collateral security, which is secured by the department to ensure payment of appropriate duty
in addition to the available statutory provisions.

7.2 TYPES OF BONDS

Bonds are basically two types,i.e. surety and security. Under a surety bond another 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 Act 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 either from the obligor or from the surety.
The following are the types of bonds, which are presently in vogue :
(a) B-1 Surety / Security (General Bond) - for export 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 without payment of duty.
(d) B-11 Bond - for provisional release of seized goods, and
(e) B-17 Bond (General) Surety / Security -composite bond for EPZ/ 100% EOUs for
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 goods 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 bond, and it should be ensured
that surety is financially sound.
Further, undertaking owned and managed directly through any Ministry,
Directorate/Directorates by the Central Government or State Government is exempt from
furnishing any security 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 should be signed by the
obligor or by the authorised agent. The surety should be for 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 Council & Registered Exporters need not
furnish any bank guarantee/cash security while executing export bonds. They may furnish
sureties only. This is a modification over the previous instruction contained in Board’s Circular
No.284/118/96-Cx dated 31.12.96.
In the case of 100% E.O.Us obtaining indigenous goods without payment 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. In 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 executing combined B17 Bond security to the extent of 5% of the value of
the bond in the form bank guarantee or cash deposit or any other mode of security may be
accepted in lieu of surety (Board’s letter F.No.305/86/98-FTT dated 19./6/98). Fresh bond may
not be taken, where the existing units have already furnished bond in B-17 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 exporter by the Deputy/Assistant
Commissioner of Central Excise or Maritime Commissioner or any other officer authorised by
the Board in this behalf.
Bonds should be executed in favour of and in the name of the President of India. They should
be properly 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 paper of the respective State
Government in which the registered persons business is situated.
 Bonds 7.3

7.4 BONDS FOR PROVISIONAL ASSESSMENT

The amount of the bond in Form B-2 should be fixed on the following basis: -
(i) The amount of the specific bond in Form B-2 should be sufficient to cover the difference
between the duty payable on provisional assessment and the probable duty payable if
the highest rate / value applicable such goods has to be applied.
(ii) The amount of the general bond in Form B-2(Surety)/(Security) should be equal to the
difference between the duty payable on provisional assessment and the probable duty
payable applying the highest rate / value applicable to such goods for a period of 3
months. If the provisional assessment cannot be completed within the 3 months and
longer time is required, say a period of one year, in appropriate cases, differential duty
likely to arise during such period shall be the basis/ determination 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 appropriate cases, for special reasons to be recorded,
the proper officer under Rule 7 of the said Rules may order for a higher security amount.
In the event of death or insolvency or insufficiency of the surety / security, the proper
officer may demand fresh bond. If the security furnished is found to be inadequate, he
may demand additional security also. In the case of provisional assessment, if the
assessee fails to make the due adjustment within the period of 15 days after the final
assessment is made, the proper officer may proceed to enforce the bond or encash the
bank guarantee after due notice to the assessee.

7.5 STAMPS ON BOND

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. Commissionerate should
circulate to their staff the rate of stamp duty required in each State within Commissionerate for
each type of bond.
Whoever affixes an adhesive stamp to any instrument chargeable with duty which has been
executed by any person shall when affixing such stamp cancel the same so that it cannot be
used again and who so ever has executed any instrument on any paper bearing an adhesive
stamp shall at the time of execution unless such stamp has been already been cancelled in
the manner aforesaid, cancel the same so that it cannot be used again. Any instrument
bearing an adhesive stamp, which has not been cancelled so that 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 of his firm with the true date of his so writing, or in any other
effectual manner.

7.6 EXECUTION OF BOND BY GOVERNMENT UNDERTAKINGS OR AUTONOMOUS

CORPORATIONS
The Board has decided that every undertaking owned and managed directly through any
7.4 Central Excise

Ministry, Directorate or Directorates by the Central Government is exempt from the 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 case may be furnishing of security or
surety is required by or under any other provision of the rules made under Central Excise Act,
1944.
An undertaking owned or controlled by the Central Government or State Government does not
include any undertaking belonging to corporation owned or controlled by the Central
Government or State Government and established by or under a Central Provisional or State
Act; or any undertaking belonging to Government Company within the meaning of Section 617
of the Companies Act, 1956 (I of 1956).
7.7 SECURITY
The security to be furnished in respect of the bonds will be as follows:
(i) The security furnished should either be cash, Government promissory notes, post office
savings, bank deposits, national savings Certificates, National Defence Bonds, National
Defence Gold Bonds, 1980 or similar realisable Government papers. Promissory Notes
and stock Certificates of the Central Government or a State Government shall be
accepted subject to the conditions laid down in clause (ii) of Rule 274 of GFR.
(ii) Deposit receipt of bank can also be pledged as securities for Central Excise Bonds
subject to certain specific conditions under Rule 274 (vi) of G.F.R. The conditions inter
alia are:
(a) The deposit receipt shall be made out in the name of the pledgee or if it is made
out in the name of the pledger, the bank shall certify on it that the deposit can be
withdrawn only on demand or with the sanction of the pledgee.
(b) The depositors shall agree in writing to undertake any risk involved in the
investment and make good the depreciation, if any.
(c) The depositors shall receive the interest when due, direct from the bank on a letter
from the pledgee authorising the bank to pay it to him.
(d) The responsibility of the pledgee in connection with the deposit and the interest on it
will cease when he issues a final withdrawal order to the depositor and sends an
intimation to the Bank that he has done so.
(e) Only the larger scheduled banks are to be 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 of the securities.
(g) Where the same bond and security continue for over one year, arrangements must
be made for credit or payment of the interest on such securities to the bonders.
 Bonds 7.5

(h) On cash securities no interest is payable. In the case of Savings Bank Account, the
interest may be paid to the parties on claim preferred by them periodically or can be
collected after the amount is returned to them. In respect of other 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 surety 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 for security, care should be taken to get
the guarantee renewed before expiry from time to time, so as to enable the enforcement of
liability as and when such need 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
different purposes.
A partner or a director of a limited company can also stand as surety in his individual capacity
to guarantee the performances of the firm or a company as the case may be. Since, in law, a
limited company is a distinct legal entity and the member of the company including directors
are distinct from the company, there should be no objection to allow the directors of the limited
company to stand as surety for the companies provided they fulfill all the other conditions
applicable to sureties. (F. No. 8/10/16/CX II dt 5/8/1960)

7.9. GUARANTEE BOND EXECUTED BY BANK

The provisions governing the execution of bonds by banks are as follows:
(i) When the State Bank of India or a scheduled bank gives a guarantee for a registered
person with or without deposit of security, the guarantee bond should provide a period of
validity and an extra period during which obligations arising during the period of validity
to be enforced. The time limit for enforcement of obligation should be at least two
years.
(ii) 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
authority or any other reasons, it should be done by means of supplementary deed of
bank guarantee on a stamp paper.

7.10 PRESERVATION OF BOND AND RETENTION OF SECURITIES

Proper preservation of bonds is to be ensured in the interest of the revenue.
Bonds must be preserved as long as they are valid and should be returned only after all the
obligations under the bond had been discharged.
All officers who filled Central Excise bonds must be careful not to enforce the words
“cancelled” on the bonds even after the apparent fulfilment of obligation ; otherwise it is likely
to be argued that persons liable 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 cancelled on execution of a deed of
cancellation.

7.11 VERIFICATION OF SURETIES

In respect of surety bonds, periodical verification, preferably on an annual basis will be made
by the jurisdictional Central Excise Officers so as to ensure the sureties are financially sound,
solvent and alive. The enquiry to verify the financial stability of the sureties will be made by
any of the following methods:
(i) By reference to the surety’s bankers.
(ii) By making personal enquiries and ascertaining whether the surety possesses a house or
other immovable property, industrial equipment, shop etc. which would cover the bond
amount. Alternatively, the sureties 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 Mamalakdar.
(iv) The result of enquiry as well as the solvency of the surety should be 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 Commissioner 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, airport, land
customs station or post office of exportation is located.
The Deputy/Assistant Commissioner of Central Excise(Export) as officers authorised by the
Board 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 export.
Self-examination questions
1. What is a bond?
2. What are the various types of bonds?
3. Who can accept a bond?
4. Discuss the provisions in respect of bonds for provisional assessment.
5. 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 Black’s Law Dictionary means assertion of a legal right; an
imperative request preferred by one person to another, under a claim of right, requiring
the latter to do or yield something or to abstain from some act.
In accordance with the principles of natural justice the central excise law rightly provides
that before any action is taken against an assessee he must be given reasonable
opportunity of presenting his case. One such situation would be that relating 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
action prejudicial to the assessee. Thus, if on account of an infraction of the provisions of
the central excise law it is considered appropriate to penalise the defaulter, it is necessary
to first issue a show cause notice. The show cause notice 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 notice gives the noticee the opportunity to
present his case.

8.2 ISSUE OF DUTY DEMAND 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 issued demanding the
differential duty. The section reads as provides that -
(1) When any duty of excise has not been levied or paid or has been short-levied or short-
paid 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 valuation of
excisable goods under any other provisions of this Act or the rules made thereunder, a
Central Excise Officer may, within one year from the relevant date, serve notice on the
person chargeable with the duty which has not been levied or paid or which has been
8.2 Central Excise

short-levied or short-paid or to whom the refund has erroneously been made, requiring
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 short-
levied or short-paid or erroneously refunded by reason of fraud, collusion or any willful
mis-statement or suppression of facts, or contravention of any of the provisions of this Act
or of the rules made thereunder with intent to evade payment of duty, by such person or
his agent, the provisions of this sub-section shall have effect, as if, for the words "one
year", the words "five years" were 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 aforesaid period of one year or five years,
as the case may be.
(2) The Central Excise Officer shall, after considering the representation, if any, made by
the person on whom notice is served under sub-section (1), determine the amount of duty
of excise due from such person (not being in excess of the amount specified in the notice)
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 excisable goods exported out of India or
on excisable materials used in the manufacture of goods which are exported out of
India;
(ii) "relevant date" means,—
(a) in the case of excisable goods on which duty of excise has not been levied or
paid or has been short-levied or short-paid—
(A) where under the rules made under this Act a periodical return, showing
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
producer or a licensee of a warehouse, as the case may be, the date on
which such return is so filed;
(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 duty is to be paid under this Act or
the rules made thereunder;
(b) in a case where duty of excise is provisionally assessed under this Act or the
rules made thereunder, the date of adjustment of duty after the final assessment
thereof;
(c) in the case of excisable goods on which duty of excise has been erroneously
refunded, the date of such refund.
 Demand, Adjudication and Offences 8.3

Therefore according to section 11A, the notice of demand will be issued by Commissioner
of Central Excise or the officers subordinate to him if the amount demanded does not
exceed one crore rupees. This will be done only with the prior approval of the
Commissioner. Where amount exceeds one crore rupees, prior approval of the Chief
Commissioner of Central Excise is required.
The Board has also empowered the Officers of Director General of Central Excise
Intelligence to issue show-cause notices in accordance with the powers of Central Excise
Officers conferred 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 provided in
the Act that an assessee may request for waiver of notice, if he deposits 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, collusion etc.
By opting for waiver of issue of notice, the assessee may avoid long 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 opt for this facility.
Normally, a proceeding starts with the issue of a show cause 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 can proceedings Whenever there is a short levy/short payment or non-levy or

be taken under Sec. 11A? non-payment, erroneous refund of duty, the proceedings can
be undertaken.
2. What is the difference When excise duty has not at all been charged on the product,
between non-levy and it becomes non-levy. When the levy has been charged but not
short levy? correctly, there is short levy.
3. What is the difference Short payment means payment of an amount less than what is
between short payment due. Non-payment means the levy itself has not been paid.
and non-payment?
4. What is the difference Short levy arises when the charge itself is done at lower rates,
between short levy and for eg., wrong classification of the product. Short payment can
be due to short levy or short payment of a correct levy (when
8.4 Central Excise

short payment ? payment is made less than what is due).

5. Should the Department It is mandatory for the Department to issue a show cause
intimate the assessee? notice.
6. Within what time should Where there is fraud, collusion, willful mis-statement or
the show cause notice be suppression of facts or contravention of any provisions with
served? 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 this time
limit.
If the matter is before the Settlement Commission, Sec. 32L(3)
specifies that the time commencing from date of application to
receipt of order sending back the case shall be excluded. It is
very important to note that such notice must be received by
the assessee within the time limit stipulated above.
7. What is this relevant Relevant date is defined in Sec. 11A(3)(ii) to mean -
date?
a. in case of short levy/non-levy or short payment/non-
payment the date on which the 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. In case of erroneous refund, the date of such refund
8. Is it obligatory on the Sub-section 2 makes it mandatory for the officer to consider
part of the Department to the representation of the assessee. The officer has to comply
take on record the with the principles of natural justice.
assessee’s representation
?
9. Is it mandatory for the It is mandatory for the officer to pass a speaking order.
officer to pass a written Speaking order is one which gives the reasons for the
order or will a simple decision. A simple letter asking for payment of duty is not an
letter from the department order.
suffice?
10. Should the assessee The assessee has a right of further appeal which grants him
pay the amount after rights of obtaining stay of demanded amounts. Please see
 Demand, Adjudication and Offences 8.5

passsing the order? Chapter on Appellate Procedures.

11. Should the officer For cases involving fraud, etc. adjudication should complete
adjudicate cases within a within 1 year and other cases within 6 months.
particular time limit?
12. Can the assessee pay No notice would be issued if full duty is paid and intimated to
duty before issue of show the Department. However this will not apply to cases of fraud
cause notice? etc. Moreover, 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 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, and in this capacity they
act as quasi-judicial officers.
8.5.1 Adjudication 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. Central
Excise Officers have the power to determine duty short paid or not paid, but erroneously
refunded under section 11A of the said Act. For this purpose, the Board has decided that
the powers of adjudication and determination of duty shall be exercised, based on
monetary limit (duty involved in a case) as follows: -
(a) All cases involving fraud, collusion, any willful mis-statement, suppression of facts, 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-cause-
notices, (including Cenvat cases), will be adjudicated as follows:-
Central Excise Officers Powers of Adjudication
(Amount of duty involved)
(i) Commissioners Without limit
(ii) Additional Commissioners Above Rs.20 lakhs & upto Rs.50 lakhs
(iii) Joint Commissioners Above Rs.5 lakhs & upto Rs.20 lakhs
(iv) Deputy/Assistant
Upto Rs 5 lakhs
Commissioners

(b) Cases which do not fall under the category (a) above, including all cases relating to
determination of classification and valuation of excisable goods and cenvat credit will
be adjudicated as follows:
8.6 Central Excise

Powers of Adjudication
Central Excise Officers
(Amount of duty involved)
(i) Commissioners Without limit
Above Rs. 20 lakhs and
(ii) Additional Commissioner
upto Rs. 50 lakhs
Above Rs. 5 lakhs and up to
(iii) Joint Commissioners
Rs. 20 lakhs
(iv) Deputy/Assistant Commissioners Upto Rs. 5 lakhs.

(c) Cases related to issues mentioned under first proviso to section 35B(1) where the
cases do not go to Tribunal and have to be referred for the revision petition to
Central Government under Section 35EE of Central Excise Act, 1944 would be
adjudicated by the Addl. Commissioners/ Joint Commissioners without any monetary
limit.
(d) All cases relating to determination of classification and valuation will be adjudicated
by the Deputy/Assistant Commissioner of Central Excise without any monetary limit.
8.5.2 Adjournment restricted to three times [Section 33A]
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 be recorded in writing. However, such
adjournment shall not be granted for more than 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 proviso to the section provides that in cases of fraud, collusion,
willful mis-statement 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 terms used in the said proviso are “fraud, collusion, willful mis-statement,
suppression 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 advantage”.
 Demand, Adjudication and Offences 8.7

Collusion may be defined as “to act in concert especially in fraud; a secret agreement to
deceive”.
Willful mis-statement may be explained as “stating wrongly or falsely deliberately”.
Suppression of facts may also be explained as “to hold back the facts”.
‘Intent of evading the payment of duty’ may be analysed as the person acting upon 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 Liniments
1989 (40) E.L.T. 276 - (SC) and also in Padmini Products v. CCE 1989 (43) E.L.T.
195(SC).
2. Demand against approved classification list only prospective - CCE v. Cotspun Ltd.
1999 (113) E.L.T. 353 (SC -LB).
3. Extended period cannot be invoked where classification list is approved. - Nat Steel
Equipment v. CCE 1988(34) E.L.T. 8; Prabhu Steel Industries v. CCE 1997 (95)
E.L.T. 164 (SC).
4. Extended period not invokable when bonafide belief arises out of court judgements -
Cosmic Dye Chemicals v. CCE 1995 (75) E.L.T. 72(SC).
5. Intention to evade payment of duty necessary in addition to proving fraud, etc - Tamil
Nadu Housing Board v. CCE 1994 (74) E.L.T. 9(SC).
6. Extended period not invokable when there are conflicting decisions prevailing and
non-requirement under law to do something.- Pushpam Pharmaceuticals Co.v. CCE
1995 (78) E.L.T. 401 (SC).
7. Proviso to Sec. 11A does not require 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 Factory v. CCE 1999 (114) E.L.T. 429 (T-LB).
8. Wrongful understanding of law does not constitute suppression - Vinod Paper Mills
Ltd. v. CCE 1997 (91) E.L.T. 245 (SC).
9. 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).
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 INTEREST
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 invoked as the
assessee would make the duty payment on time.
Section 11AA is made redundant after passing of the Finance Act 2001 and the provisions
would be contained 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
involves 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 interest 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 date 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. 66/2003 dtd. 12.09.2003
However, if in the appeal the demand is increased or decreased 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
Act, 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 Clauses 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 the 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 Clauses Act, 1897 in 3(38) defines an offence to mean
any Act or omission made punishable by any law for the time being in force. Therefore,
not only a positive act but also inaction where action is required can constitute an offence.
8.7.2 Scheme of offence under Excise Law : The provisions of section 9 of the Act
enumerate what will constitute an offence under the Act. The following type of acts will
constitute an offence:
(i) contravening any of the provisions of Sec. 8, dealing with restriction on possession of
certain goods specified in the Second Schedule (presently tobacco).
 Demand, Adjudication and Offences 8.9

(ii) contravening any of the provisions of Section 37(2)(iii) which relates to transit 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 concerning himself in removing any excisable goods in contravention of
the Act or Rules made thereunder.
(v) acquiring possession of or otherwise dealing (includes possession, transporting,
storing, keeping etc.) in goods which is known to be liable for confiscation.
(vi) failing to supply information which is required under the Act or supplying false
information.
(vii) attempting to abetting the commission 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 imprisonment and/or fine where the offence relates to duty exceeding
one lakh of rupees.
- in any other case, with imprisonment for a term upto three years with or without fine.
If any person is convicted of an offence more than once, for the second and subsequent
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 restrict 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 further adds that conviction for the first
time or the age or that any penalty is being imposed or that the person was not the
principal offender shall not be an adequate or special reasons (see also discussion on
offences and age below). There are 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 result in confiscation and penalty. These offences include removing
any excisable goods in contravention of any rule, non-accountal of manufactured goods,
engaging in the production / manufacture without registration, irregular availment of credit,
falsification of documents; and contravening any rule with an intent to evade 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 these Rules. Besides, as per Section
12 of the act, the provisions of the Customs Act, 1962 become applicable to in respect of
offences, penalties, confiscations etc. In pursuance to Section 12, Notification No. 68/63
dated 4-5-1963 has been issued which makes certain provisions of the Customs Act, 1962
applicable to the Excise Act.
8.10 Central Excise

As per Section 9A, offence under Section 9 are non-cognisable within the meaning of the
Code of Criminal Procedure, 1973. According to Section 2(1) of the Code of Criminal
Procedure, 1973 a non-cognisable offence means an 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 termed “warrant case”. Warrant case according to Section
2(x) of the Code of Criminal Procedure, 1973 means a case relating to an offence
punishable with death, imprisonment 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 before or after the
institution of prosecution, under Chapter II of the Central Excise 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 make 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 person 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
offences can be made applicable retrospectively. Article 20(1) of the Constitution
specifically says that no person shall be convicted of any offence except for violation of
law in force at the time of commission of the act charged as an offence. Therefore, if at
the time of commission of the act, there was no offence, by a subsequent legislative
amendment, that very act cannot be made an offence. In J.K. Spinning and Weaving Mills
Ltd. v. UOI - 1987 (32) E.L.T. 234, the Supreme Court has held that it would be against
principles of legal jurisprudence to impose a penalty on a person or to confiscate his
goods for an act or omission which was lawful at the time when such act was performed or
omission made, but subsequently made unlawful by virtue of any provision of law.

8.8 CIVIL AND CRIMINAL 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 for 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 and 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 individual’s freedom of movement. A Central Excise Officer is empowered to
confiscate and impose penalty and by virtue of Section 13 also has the power to arrest.
However, on arrest, he has to forthwith take the person to the police station or to the
designated Central Excise Officer under Section 19 who shall forthwith release him or
produce him before a Magistrate. Thereafter, the proceedings in personam can be held
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, section 34A of the Act
clearly spells out that confiscation and penalty will not attract 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”.
Basically, 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 by the Supreme Court in
State of Bombay v. Apte AIR 1961 (SC) 578, Kalawati v. State 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 judicial
Tribunal.
(b) the person must have been prosecuted in such proceeding.
(c) the 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 proceeding 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 authorities are not judicial tribunals or courts while adjudging confiscation
and penalty. Therefore the principle of double jeopardy cannot be invoked by the person
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 Supreme 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 judicial acts and not executive acts but had
8.12 Central Excise

made a distinction between proceedings in rem and in personam.

8.8.3 Plea of Limitation : We often take the plea of limitation when issues are time
barred and this constitutes a convenient escape route for otherwise legitimate demands
made. In fact, Chapter XXXVI of the Code of Criminal Procedure, 1973 talks about
limitation for taking cognizance of offences by the Courts trying 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 inapplicable 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 empowers 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 above analysis, the proceedings are taken before the Magistrate’s Court.
However, in certain circumstances the party to the proceeding can approach the High
Court under section 482 of the Code of Criminal Procedure, 1973. Section 482 reads as
under :
“Nothing in this Code shall be deemed to limit or affect the inherent powers of the High
Court to make such orders as may be necessary to give effect to any order under this
Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of
justice”.
The scope of this provision has been discussed 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 specific 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 be quashed at the process stage
itself. In Sharadchandra Shripad Marathe v. Gurushant Kamble, 1989 (44) E.L.T. 11, and
Bhalchandra Keshav Gadre v. Gurushant Kamble, 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 complaint, 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 appreciation 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 directly without undergoing trial before the lower courts.
8.8.5 Presence of culpable mental state : Section 9C of the Act presumes that a
culpable mental state was present at the time the offence was committed unless proved
otherwise. The word “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 mental state the intention, motive, knowledge of a fact and belief or reason to
believe 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 reason to
believe that it was an offence. However, the fact has to be proved beyond reasonable
doubt. As held by the Madras High Court in Lakshmichand v. GOI - 1983 (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. Sayed 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 reasonable 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 means 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 : This concept is known as the principle of vicarious
liability. Section 9AA of the Act 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 diligence to prevent the commission of the offence.
The section also deems any director, manager, secretary or other officer to be guilty
where the offence is attributable to their consent or connivance or neglect. The term
“company” includes a firm and association of individuals and the term “director” will mean
a partner in relation 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 that 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 Attempt/abet to commit an offence : In the earlier paragraph on the scheme of
offences 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 positive act in aid of the commission
of an offence. The meaning of the word “attempt” has 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 attempt, there must be an intention to
commit an offence and some act must also be done which is having close proximity with
and is necessary towards the commission of the offence. The Supreme Court made a thin
distinction between preparation and attempt and held that attempt starts where
preparation ends. It was also held that to constitute an attempt the act need not be the
penultimate act towards the commission of the offence but must be an act during the
course of committing the offence. Thus, it will be seen that even an attempt may amount
to an offence 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 (section 360 of the new code) shall
not be applicable unless the person is under eighteen years of age. Section 360 of the
code of criminal procedure allows the court to relax the rigours in certain circumstances
for persons below 21 years. Instead of sentencing him, an option is given to prove good
conduct and behaviour. However, in central excise cases, only persons below 18 years of
age can take shelter under this provision of the code. Moreover, as per section 9E, this
provision will form a special circumstance wherein the court under section 9(3) can take
cognisance of the fact that the person is below 18 years of age and sentence him to a
lesser term of imprisonment or not to sentence him at all.

8.9 PENALTY AND CONFISCATION

Penalty and confiscation of offending goods i.e. which have violated the provision of the
Central Excise law are an outcome of the adjudication proceedings. These are deterrents
aimed at cautioning the dishonest taxpayer.
8.9.1 Penalty : Penalty 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 penalty 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 shall be 25% of the duty subject to it being paid within the
said period of 30 days.
(ii) Rule 25 of the Central Excise Rules 2002 provides for penalty on any producer,
manufacturer, registered person of a warehouse or a registered dealer not exceeding
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 liable to confiscation. The specified
contraventions are:
(a) Removal of any excisable goods in contravention of any of the provisions of the
said rules or the notifications issued under the said rules; or
(b) Non-accountal of any excisable goods produced or manufactured or stored; or
(c) Manufacture, production or storage of any excisable goods without having
applied for the registration certificate required under section 6 of the Central
Excise Act; or
(d) Contravention of any of the provisions of the said rules or the notifications
issued under the said 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, concealing, selling or purchasing, or in any other manner deals
with, any excisable goods 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 such goods or rupees ten thousand, whichever is greater.
(iv) Rule 27 of the Central Excise Rules, 2002 provides for imposition of a general
penalty which may extend to five thousand rupees and with confiscation of the goods
in respect of which 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 will not be imposed.
This, however, does not preclude the Department from confiscating the goods, imposing
any fine in lieu of confiscation and prosecuting a person.
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 of natural justice. In other
words a notice explaining the reasons why penalty should not be imposed or goods
confiscated has to be given to the person. Thereafter, reasonable opportunity shall be
given to such person to explain or defend his 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, such
thing shall thereupon vest in the Central Government. Accordingly, the Central Excise
Officer adjudging confiscation shall take and hold possession of the things 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 confiscation of which has been
adjudged, exercises his option to pay fine in lieu of confiscation, he may be required to
pay such storage charges as may be determined by the adjudicating officer.
Provisions for disposal of goods confiscated are contained in Rule 29 of the said Rules.
Goods of which confiscation has been adjudged 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 such 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 physical 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 Central Excise Act,1944,
which provides that all searches should be made in accordance 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 place. Further, Rule 24 ibid specifically empowers such officer to effect a seizure or
detention. Moreover, Section 12 of the Central Excise Act, 1944, empowers the Central
Government to apply the provisions of the Customs Act to the Central Excise also. In
exercise of such powers the Central Government has issued Notification No.68/63, dated
4.5.1963 modifying and extending the various sections of Customs Act, 1962 to Central
Excise matters.
In terms of the said rules, an officer not below the rank of the Inspector of Central Excise,
duly authorized by Commissioner by special or general order, can search at any time, any
premises or conveyance 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 search
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. The search is to be carried out in
the presence of two independent witnesses.
Section 22 deals with vexatious searches, seizure etc. by Central Excise Officers. In 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 giving 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 noted that seizure is an act depriving the owner of the
possession of the goods. Confiscation 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 thereon,
the Central Excise Officer may detain or seize such goods.
The power to release seized goods emanates from power to seize itself. The goods seized
may be released 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 who is
normally competent to adjudicate the case. The adjudicating officer will also consider the
importance of such goods for evidence, and will release the goods provisionally if the
bond is furnished. Wherever necessary, sample may also be drawn. The adjudicating
officer, however, will ask the owner or in-charge of the 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 provisionally fails to produce the goods at appointed time, the
bond may be enforced 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 arrest, searches and arrests how to be
made, disposal of persons arrested, procedure 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 arrest 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 approval of Commissioner will be taken before
arresting a person.
The arrested person shall be produced before the Jurisdictional Magistrate or the Chief
Judicial Magistrate, 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 Prosecution : Besides the departmental adjudication, prosecution may also be
launched under section 9 of the Central Excise Act, 1944 for the offences under section
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 business 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 prosecution of offenders in a court
of law and prescribes a minimum imprisonment of six months. However, in cases where
the duty involved is more than one lakh or the 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 complete.
Generally, the adjudicator should indicate whether a case is fit for prosecution, though
this is not a necessary pre-condition.
Confiscation and penalty in departmental adjudication and prosecution in criminal
proceedings are independent 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 Excise 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 exporter requires services of Central
Excise Officers for supervision in accordance of any procedure specified in this regard by
rules or instructions beyond office hours or on Sundays, Saturday or public holidays and
where there is no specific posting of officers in shifts by any Office order, he shall be
required to pay Merchant Overtime at the rates specified under the Customs Act, 1961
under Customs (Fees for Rendering Services by Customs Officers) Regulation, 1998.
If a manufacturer or exporter requisitions services of Central Excise Officers for
supervision and examination of export cargo and stuffing in containers at his premises,
such officers also discharge functions of “Customs Officers”.

8.10 RECOVERY OF DUES

Section 11 contains the provisions, which determine the procedure for recovering 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 Government by:
(i) deducting the amount so payable from any money owing to the person 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, if 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 it 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 recover 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 recoveries are due, transfers his business in whole
or in part to another person, then all excisable goods, materials, preparations, plants,
machineries, vessels, utensils, implements and articles in the possession of the transferee
can be attached and sold for recovery. An officer empowered by the Central Board of
Excise and Customs, after obtaining written approval from the Commissioner of Central
Excise, can make such recovery.
Central Excise Officers not below the rank of Assistant Commissioner have been
empowered vide Notification No.4/2004 – C.E.(N.T.), dated 17.02.2004 to require the
payment of duty and any other sums of any kind payable to the Central Government,
under any of the provisions of the Act or of the 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 jurisdiction and thereby to exercise all the powers of such officers
specified under section 11.
Further, for the recovery of dues the provisions of section 142 of the Customs Act, 1962
have been made applicable to like matters in Central Excise by Notification No. 68/63-
Central Excise dated 4.5.1963 issued under Section 12 of the Central Excise Act, 1944.
If the stay application is filed by the assessee against 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 Commissioner of Central Excise (Appeal). However, the
Commissioner (Appeal) must dispose of the stay application within one month of its filing.
A period of 3 months from the date of communication of the order-in-original/ order-in
appeal should 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 assessee is rejected
by an appellate authority even before the lapse of the time limit of three months, recovery
proceedings should be initiated immediately thereafter.
In respect of cases decided by Commissioner of Central Excise (Appeals), Tribunal,
Government of India or High Court, the assessee should be given a maximum 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 Court 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 communication of the order.
Self-examination questions
1. Can a manufacturer make suo moto payment of duty short paid? Discuss.
2. Explain briefly whether the penalty can be attracted on short levy of duty. When can
the penalty be reduced?
3. Discuss 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 duty liability. How does
the Central Excise Act, 1944 provide for recovery of such money? Will it make any
difference if ‘A’ transfers his whole business to ‘B’? Discuss.
5. Write a note on search and seizure.
 9
REFUND

9.1 REFUND OF DUTY

Refund of any duty of excise is governed by section 11B of the Central Excise Act, 1944. By
definition, refund includes rebate of duty paid on goods exported out of India or on materials
used in the manufacture of goods exported out of India. The refund claim can be filed within
one year from the relevant date in the specified 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 alternative, the amount can be deposited in the Consumer Welfare Fund created by
the statute.

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 refund application in the
prescribed manner and form along with the supporting documentary evidence as laid down in
the relevant rules, interest at the rate notified by the Government which should not be below
5% and should not exceed 30% per annum (notified as 6% p.a. as per Notification no. 67/2003
dated 12.9.2003) shall have to be paid on such duty from the date immediately after the expiry
of three months from the date of receipt of application till the date of refund of such duty.

9.3 THEORY OF UNJUST ENRICHMENT

Section 11B of the Central Excise Act, 1944 is perhaps the most important provision governing
refunds. Explanation to section 11B defines the term “refund” to include rebate of duty of
excise on excisable goods exported out of India or on excisable materials used in the
manufacture of goods exported out of India. The definition 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 amendment took
place on 20.9.91 wherein the theory of unjust enrichment was built into the statute. This theory
postulates that only the person who has not passed on the incidence of duty will be eligible to
claim the refund. The section today recognises 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 constitutional. However, the theory that the
manufacturer would be unjustly impoverished 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 11B 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 of discovery of
mistake has been disapproved.
(d) Unless the levy is struck down as unconstitutional, all Courts must exercise jurisdiction in
terms of section 11B and refuse to grant relief if the incidence of tax has been passed on.
(e) Whatever amount is 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.
The Supreme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refunds will not
be allowed on captive consumption of inputs.
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 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 conclusion 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 Commissioner, 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 excisable goods exported out of India or on excisable
materials used in the manufacture of goods which are exported out of India;
(b) Unspent advance deposits lying in balance in the applicant’s account current maintained
with the Commissioner of Central Excise;
(c) Refund of credit of duty paid on excisable goods used as inputs 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 incidence of
such duty to any other person;
(e) Duty of excise borne by the buyer if he has not passed on the incidence of such duty to
any other person;
(f) The duty of excise borne by any other such class of applicants as the Central
Government 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 persons 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 credited to the “Consumer
Welfare Fund” established under section 12C. The following shall 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 per 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 monies
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 Government 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 be prescribed in consultation with the Comptroller and Auditor-
General of India.
It 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 law of unjust enrichment.
Other than the cases mentioned listed above, the courts have laid few circumstances for
which the unjust enrichment concept does not apply. They are
(a) If the refund relates to pre-deposit of duty made under section 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 - Living Media Ltd. v.
U.O.I. - 1998 (104) E.L.T. 3 (S.C.).

9.4 ASSESSMENT DOCUMENTS TO SHOW DUTY PAYMENT PARTICULARS

1. Section 12A makes it obligatory on the person 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. Section 12B casts a presumption that duty has been passed on to the buyer. This
presumption is rebuttable.
3. 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 on to the buyer as part of the price of goods
sold.
4. The document relating to assessment are :
(a) Invoices/AR1
(b) Monthly RT-12 return
(c) Receipted treasury challans on which deposits were being made.
(d) Original and duplicate copies of the account-current and also of account in
Cenvat credit records as the case may be.
(e) The obligation under this section is applicable only to persons who are liable to
pay excise duty – viz. manufacturers, curers etc. It does not apply to wholesale
dealers, traders etc.

9.5 TIME-LIMIT FOR MAKING THE APPLICATION FOR REFUND OF DUTY

1. Under Section 11B, the application for refund has to be made within one year from the
relevant date.
2. The meaning of the term “relevant date” is set out in the Explanation (B) to section 11B.
3. The relevant date in the various cases 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) 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,

(ii) if the goods are exported by land, the date on which such goods pass the
frontier, or

(iii) if the goods are exported by post, the date of despatch of goods by the Post
Office concerned to a place outside India;
(b) in the case of goods returned for being remade, refined, reconditioned or subjected
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 removed for
home consumption but not so required when exported outside India, if returned to a
factory after having been removed from such factory for export out of India, the date
of entry into the factory;

(d) in the case where a manufacturer is 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 discharge 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 period 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 of purchase of the
goods by such person;

(f) in case of goods which are exempt from 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 final
assessment;

(h) in any other case, the date of payment of duty.

4. The aforesaid 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 be filed within
one year from the relevant date. In this context, the Supreme Court 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 despite 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 other dues, or
has been informed by the department that a refund is due to him shall present a claim in
proper Form, along with all the relevant documents supporting his claim and also the copies of
documents/records supporting his declaration 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 Officer.
The claim shall be presented in duplicate and shall be duly signed by the claimant or by a duly
authorised person on his behalf and shall be pre-receipted (with revenue stamp on original
copy, where necessary).
It may not be possible to scrutinise the claim without the accompanying documents and decide
about its admissibility. If the claim is filed without requisite documents, it may lead to delay 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 without supporting documents
will not be allowed. Even if post or similar mode files the same, the claim should be rejected or
returned with Query Memo (depending 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 non-
availability of any document due to reasons for which the Central Excise or Customs
Department is solely accountable, the claim may be admitted that the claimant is not in
disadvantageous position with respect to limitation period.
Subsequent to filing 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 send a
report to their scrutiny to the Divisional Deputy/Assistant Commissioner of Central Excise.
The Divisional Office will scrutinise the claim, in consultation with Range, and check that the
refund application is complete and is covered by all the requisite documents. This should be
done, as far as possible, the moment refund claim is received and in case of any deficiency,
the same should be pointed out to the applicant with a copy to the Range Officer within 15
days of receipt.
In the Divisional Offices, final processing of refund claims after the receipt of Range Officer’s
report should be completed including the verification of the fact whether the assessee has
passed on the duty incidence to their buyer (in 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 already 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 proving that the duty
incidence has not been passed on, is on the claimant and the latter 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 the duty incidence to any other person.
Claim for refund of less than Rs. 100 shall not be entertained in respect of all excisable
commodities.

9.7 PAYMENT OF REFUND

Where the claim has been admitted whether in part or in full, and claimant is eligible for
refund, the Deputy/Assistant Commissioner of Central Excise should ensure that payment is
made to the party within 3 days of the order passed after due audit, if any.
All claims shall be paid to the applicant by a cheque on the authorised bank with which the
sanctioning authority maintains account.

9.8 POST AUDIT

All refund claim papers should be sent by the Divisional Deputy/Assistant Commissioner to the
Commissionerate Headquarters (to the Additional/Joint Commissioner–Audit) within a week
 Refund 9.7

after the payment thereof irrespective of the amount involved. At the Commissionerate
Headquarters, a special cell comprising Deputy/Assistant Commissioner (Audit) – for
immediate supervision – one superintendent, one Inspector and two Deputy Office
Superintendents - may be created out of the sanctioned strength of the audit staff in the
Commissionerate for post -audit of these claims.
This cell may undertake examination on merits of each such claim where the amount of refund
granted is Rs. 5 lakh or more. In regard to the remaining refund claims involving amounts
below Rs. 5 lakh, post audit may be undertaken on the basis of random selection by the
Deputy/Assistant Commissioner (Audit). This post audit may be completed 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 special Cell may work directly under the charge of
Additional/Joint Commissioner (Audit).

9.9 MONITORING AND CONTROL FOR TIMELY DISPOSAL OF REFUNDS

The Commissioner of Central Excise should devise appropriate control to ensure that the
refund/rebate claims are expeditiously sanctioned within the time limit stipulated above.

9.10 PROVISIONS RELATING TO INTEREST ON DELAYED REFUNDS [SECTION 11BB]

Statutory provisions:
1. Interest is payable to the assessee if the amount 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.
2. 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).
3. The person must take the following safeguards:
a. the application must be in the proper form (Form R or C)
b. the application must be filed before the Assistant Commissioner only.
c. A checklist of the documents must be enclosed with the application. See CBEC
Circular 130/41/95 CX dt..30.5.95 1995 (77) ELT T64.
4. The Department must take the following measures:
a. The application should be scrutinised within 48 hours of receipt of application and
the acknowledgement must be given forthwith.
b. If the application is deficient, a letter must be issued forthwith to the assessee
pointing out the deficiencies.
c. Only when the deficiencies are made good, will the application be acknowledged.
9.8 Central Excise

Interest will start from the expiry of three months after date of acknowledgement of application.
However, if the matter is pending before the Settlement Commission, the period commencing
from date of filing of application and ending with the date of receipt of the case sent back to
the officer will be excluded for calculation of interest [Sec.32L(3)].
9.11 DUTY OF EXCISE NOT LEVIED OR SHORT-LEVIED 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 than the
applicable rate is levied on the excisable goods. In such cases, the Central Government has
the power to direct by notification that such not-levied excise duty or short levied excise duty
shall not be required to be paid in respect of such goods.
When such a notification in respect of any goods is issued, the whole of the excise duty (in
case of non-levy) or excess excise duty (in case of short levy) which would not have been paid
if the said notification had been in force, shall be dealt with in accordance with the provisions
of section 11B(2).
The person claiming the refund of such duty or the excess duty has to make an application to
the Assistant/Deputy Commissioner of Central Excise in the prescribed 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
collected 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 Government. Sec.11D
gets attracted only when goods are sold and not otherwise (Eternit Everest Ltd vs UOI
1996 (89) ELT 28 (Mad).

2. 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 specified in the notice, should not be paid by him to the credit of the Central
Government.

3. The Central Excise Officer shall, after considering the representation, if any, made by the
person on whom the notice is served under sub-section (2), determine the amount due
from such person (not being in excess of the amount specified in the notice) and
thereupon such person shall pay the amounts so determined

4. The amount paid to the credit of the Central Government under sub-section (1) or sub-
section (3) shall be adjusted against the duty of excise payable by the person on
 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. Where any surplus is left after the adjustment under sub-section (4), the amount 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 11B and such person may make an application under that 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 such surplus amount.

It should be noted that section 11D will operate only if any amount has been collected
from the buyer as representing duty of excise. If the duty 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 decision 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 duty collected from the buyer exceeds the amount of duty assessed or
determined under 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 not exceeding thirty-
six 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 under 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 cases where the amount becomes payable consequent to issue of an order,
instruction or direction by the Board under section 37B, and such amount payable is
voluntarily 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 order, 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 cases 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 amount respectively.
Self-examination questions
1. What is the time limit for making the application for refund of duty?
2. What are the relevant dates as set out in the explanation (B) to section 11B?
9.10 Central Excise

3. Enumerate the circumstances under which refund of duty would be granted to the
assessee instead of being credited to the Consumer Welfare Fund.
4. ABC Ltd. has removed the goods manufactured by it by paying excise duty @ 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 from the buyer as part of the
total sale price. Can the Department ask ABC Ltd. to pay the amount so collected by him
to the credit of the Central Government? Discuss the related legal provisions in detail.
5. The refund of an encashed bank guarantee 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.
Answers/Hints
4. Refer section 11D
5. Supreme Court in the case of Oswal Agro Mills Ltd. v. Assistant Collector of C.Ex.,
Ludhiana 1994 (70) ELT 48 (SC) has held that refund of an encashed bank
guarantee for all or part of the disputed excise duty pursuant to an order of the Court
is not governed by the provisions of section 11B, since furnishing of a bank
guarantee is not equivalent to payment of excise duty.
The Supreme Court 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
the excise authorities would be required to repay or refund the excise duty.
The Apex Court explained that a bank guarantee is a security for the Revenue for
recovering 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
principal 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
guarantee. 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,
there arises no question of its refund and hence provisions of section 11B would not
be attracted.
 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 (Appeals) 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), Appellate Tribunal,
procedure orders of Appellate Tribunal, powers of revisions of Board, revision by Central
Government, appeal to High Court (up to the date when the 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 APPELLATE 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. The three stages of Appellate Authorities
are the Commissioner (Appeals), CESTAT and 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 there from to the Appellate Tribunal,
and then to High Court and finally to the Supreme Court. Where the order of the Tribunal
does not relate to determination of rate of duty or value of goods, an appeal is made to
the High Court under sections 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 Appellate 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

1 All officers upto & Commissioner (Appeals)
including Additional
Commissioner

2 Commissioner or CESTAT except in cases where order relates to:–

Commissioner (Appeals) 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 in 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 on excisable
materials used in the manufacture of goods which
are exported to any country or territory outside India;
goods exported outside India (except to Nepal 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 Act or the rules made thereunder
and such order is passed by the Commissioner
(Appeals) on or after the date appointed under
section 109 of the Finance (No.2) Act, 1998].
3. Commissioner or Revision application to Central Govt. (in matters
Commissioner (Appeals) relating to baggage, drawback, export without
payment of duty, goods short landed, loss of goods
in transit). No further appeal.
4 CESTAT Supreme Court (Classification and valuation cases)
5 CESTAT High Court (Other than classification and valuation
matters)
6 High Court Supreme 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-in-
original is passed by the Commissioner 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 decision is of
an officer lower in rank than the Commissioner of Central Excise. Such an appeal can be
filed within sixty days from the date of the communication of decision/ order. This period
can be extended by a further period of thirty days by Commissioner (Appeals) on
sufficient cause being shown. Commissioner (Appeals) 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. The Second Appeal against the
order of the Commissioner (Appeals) can be filed to the Appellate Tribunal except for the
type of cases referred to in Sl.No.2 of the chart above.
As per Rule 3 of Central 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 verification
as contained in Form No.E.A.-1 shall be signed -
(a) in the case of an individual, 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 behalf; and where the individual is a minor 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 Hindu undivided family, by the karta and, where the 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 association, 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 act 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
Commissioner(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 duplicate and accompanied by
two copies of the decision or order passed by the adjudicating authority (one of which at
least shall be a certified copy) and a copy of the order passed by the Commissioner of
Central Excise directing such authority to apply to the Commissioner (Appeals).
10.4 Central Excise

10.3.1 Procedure in appeal [Section 35A]

The Commissioner (Appeals) shall give an opportunity to the appellant to be heard, if he
so desires. At the hearing of an appeal, Commissioner (Appeals) may allow 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 just and proper, confirming, modifying or
annulling the decision or order appealed against. However, an order enhancing any
penalty or fine in lieu of confiscation 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 showing cause against the proposed order. Further, where the
Commissioner (Appeals) 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
appellant to pay any duty not levied or paid, short-levied or short-paid or erroneously
refunded shall be passed unless the appellant is given notice within the time-limit
specified in section 11A to show cause against the proposed order.
The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and
shall state the points for determination, the decision thereon and the reasons 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) shall communicate the order
passed by him to the appellant, the adjudicating authority, the Chief Commissioner of
Central Excise and the Commissioner of Central Excise.

10.4 PRODUCTION OF ADDITIONAL EVIDENCE BEFORE COMMISSIONER (APPEALS)

As per Rule 5 of the Appeal Rules, the appellant shall not be entitled to produce before
the Commissioner (Appeals) any evidence, whether oral or documentary, other than the
evidence produced by him during the course of the proceedings before the adjudicating
authority except in the following circumstances, namely :
(a) Where the adjudicating authority has refused to admit evidence which ought to have
been admitted; or
(b) Where the appellant was prevented by sufficient cause from producing the evidence
which was called upon to produce by the adjudicating authority; or
(c) Where the appellant was prevented by sufficient cause from producing before the
adjudicating authority any evidence which is relevant to any ground of appeal; or
(d) Where the adjudicating authority has made the order appealed against without giving
sufficient opportunity to the appellant to adduce evidence 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(Appeals) 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 reasonable opportunity -
(a) to examine the evidence or document or to cross-examine any witness produced by
the appellant, or
(b) to produce any evidence or any witness in rebuttal of the additional evidence
produced by the appellant under sub-rule (1).
It is also important to note that the power of the Commissioner(Appeals) 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 the long outstanding demand of trade and industry for
establishing an independent machinery to redress the grievances of the Excise and
Customs assesses, the Central Government set up the Customs, Excise and Gold Control
Appellate Tribunal (CEGAT) 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 Customs and Service Tax Appellate Tribunal (CESTAT).
The Benches of the Tribunal are composed of Judicial and Technical Members. Single
member Bench has the jurisdiction 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 following shall be observed:
1. Where an appeal under sub-section (1) of section 35B or a memorandum of cross-
objections (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 cross-
objections and the forms of verification as contained 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).
2. A memorandum of cross objections to the Appellate Tribunal shall be made in Form
No.E.A.4.
3. The form of appeal in Form No.E.A.-3 and the form of memorandum of cross-
objections 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 shall be
a certified copy ).
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 Board 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 accompanied by an
equal number of copies of the decision or order passed by the Commissioner of Central
Excise (one of which at least shall be a certified copy) and 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 appeals to the Appellate Tribunal. The
provisions are summarized as under:
(1) Any person aggrieved by any of the following orders may appeal to the Appellate
Tribunal against such order –
(a) a decision or order passed by the Commissioner of Central Excise as an adjudicating
authority;
(b) an order passed by the Commissioner (Appeals) under section 35A;
However, no appeal shall lie to the Appellate Tribunal 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
warehouse 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 factory
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 manufacture 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 on final
products under the provisions of Central Excise Act or the rules made thereunder.
The Appellate Tribunal may, in its discretion, refuse to admit an appeal 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 determination 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 Committees
as may be necessary for the purposes of the Act. Every Committee so constituted shall
consist of two Chief Commissioners of Central Excise or two Commissioners of Central
Excise, as the case may be.
(2) A Committee of Commissioners 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 authorized 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 three months from the date on
which the order sought to be appealed against is communicated to the Commissioner of
Central Excise, or, as the case may be, the other party preferring the appeal.
(4) On receipt of notice that an appeal has been preferred under this section, 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, within forty-five days of the receipt
of the notice, a memorandum of cross-objections verified in the prescribed manner
against 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 specified in
sub-section (3).
(5) The Appellate Tribunal may admit an appeal or permit the filing 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 accompanied by a
specified amount of fee. The fee payable in different cases has been tabulated as under:
Amount of duty, interest demanded and penalty Fee for filing an appeal
levied
Less than or equal to Rs. 5,00,000 Rs. 1,000.00
More than Rs.5,00,000 but not exceeding Rs.50,00,000 Rs. 5,000.00
More than Rs.50,00,000 Rs.10,000.00
However, no such fee shall be payable in the case of an appeal preferred by Commissioner of
Central Excise. Also, no fee shall be payable in the case of filing of a memorandum of cross-
objections.
Further, a fee of Rs.500 shall be paid for every application 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 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 Commissioner of

Central Excise.
Under Section 35C of the Central Excise Act, the Appellate Tribunal may, after giving the
parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks
fit, confirming, modifying or annulling the decision or order appealed against. The Tribunal
may even refer the case back to adjudicating authority for fresh adjudication. 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.
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 Tribunal 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 proceedings of a appeal, the Appellate Tribunal 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 within the above specified period, the stay order shall stand
vacated on the expiry of the period of 180 days.
The orders passed by the Appellate Tribunal are final unless an appeal is made to the
High Court or the Supreme Court under 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 an 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 Commissioner Appeals of the
Appellate Tribunal specifies that the duty amount will have to be paid unless stayed. The
procedure for this purpose is set out hereunder:
1. For an application to the Commissioner (Appeals), there is no prescribed form under
section 35F. In the EA1 memorandum, the fact that a stay application is made must
be mentioned. Stay application is necessary only when a duty is demanded.
Therefore, appeal pertaining to refund cases and classification orders (not
quantifying demand) need not be accompanied by stay applications.
2. The application for stay / waiver before the Commissioner (Appeals) should be in
duplicate. It should be typed in double space and on one side of foolscap size paper.
3. The 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 copies of profit
 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 whether he is prepared to offer any security. The exact
amount sought to be stayed should be stated clearly and concisely in the prayer of
the application.
5. The application for stay/waiver should be filed along with the appeal in form EA-1.

10.7 LEGAL DECISIONS RELATING TO STAY APPLICATIONS

PARTICULARS CITATION
1. Relevant considerations for deciding stay Triton Valves Ltd. v. CEGAT 1995
applications are (a) hardship likely to caused to (77) E.L.T. 829 (Mad).
appellant and their business (b) whether in the
event of dismissal of appeal, sufficient assets will
be available for recovery (c) interests of revenue.
2. Appellant should show prima facie case. Prima Ruby Rubber Industries v. CCE
facie case does not mean that it should be a case 1998 (104) E.L.T. 330 (Cal).
bound to succeed but one which is arguable and
fit for consideration.
3. Asking for pre-deposit where the appellant has Ruby Rubber Industries v. CCE
prima facie case amounts to undue hardship. 1998 (104) E.L.T. 330 (Cal); Sri
Krishna v. UOI 1998 (104) E.L.T.
325 (Del); Hooghly Mills Co. Ltd. v.
UOI 1999 (108) E.L.T. 637 (Cal).
4. Personal hearing not mandatory for deciding UOI v. Jesus Sales Corporation
stay applications but can be granted if the 1996 (83) E.L.T. 486 (SC).
authority deems it fit.
5. Pre-deposit not required if company is sick Sangfroid Remedies Ltd. v. UOI
industry declared by BIFR. 1998 (103) E.L.T. 5 (SC)
6. Predeposit figure normally not to exceed CCE v. Coronation Litho Works
profits of the company. Appellate authority not to 1994 (69) E.L.T. 238 (Mad)
take into account amount set apart for
depreciation or amount due from sundry debtors.
7. Pre-deposit in RG23 A Part II also possible. India Casting Company v. CEGAT
1998 (104) E.L.T. 17 (All).
8. Conflicting decisions of Courts sufficient for Partap Steel Rolling Mills Ltd. v.
granting full stay . 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 Chief
Commissioners of Central Excise may of its own motion, call for and examine the 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. Thereafter, the Committee of
Chief Commissioners may direct such Commissioner or any other Commissioner to apply
to the Appellate Tribunal to determine such points 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 subordinate 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 period 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 following
cases:
(a) loss of goods in transit from factory to warehouse or from warehouse to warehouse;
(b) rebate of duty of excise of goods exported;
(c) goods exported outside India (except Nepal and Bhutan) without payment of duty;
(d) processing loss;
(e) Cenvat credit.
As per Rule 9 & 10 of the Appeal Rules, the revision application under section 35EE shall
be in Form E.A.-8 & presented in person to the Under-Secretary Revision Application Unit,
Government of India, Ministry of Finance, Department of Revenue, New Delhi or sent by
registered post addressed to such officer.
1. The revision application sent by registered post shall be deemed to have been
submitted to the said Under Secretary on the date on which it is received in the office
of such officer.
2. The grounds of revision application 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.
3. The application shall be filed in duplicate & shall be accompanied by two copies of
following documents, i.e.
i. Order referred to in 1st proviso to section 35B(1)
ii. Decision or order passed by Central Excise Officer which was the subject matter
of the order referred to in Rule 9(4)(i)
 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 after 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 excise
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 Appellate Tribunal may file an appeal to the High Court and such appeal 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 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 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 shall formulate that question. The appeal shall be heard only on the question so
formulated, and the 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, 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 judgment thereon containing the grounds on which such decision is founded
and may award 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 appeal 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 there 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 those who first heard it.
The provisions of the Code of Civil Procedure, 1908, relating 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 Excise 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
Appellate 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 appealable to the
Supreme Court under section 35L of the Central Excise Act. However, where 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 High Court certifies it to be a fit case for
appeal to the Supreme Court.
An appeal shall lie to the Supreme Court from
(a) any judgment of the High Court delivered-
(i) in an appeal made under section 35G,or
(ii) on a reference made under section 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 Tribunal passed before the establishment of NTT having
relation to the determination 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 shall first lie to NTT.

10.11 SUMMARY
The law and procedure relating to appeal can be summarized in the form of following
table.

Order passed by Appeal lies to Form to be used Section

referenc
e
1. Assistant/Deputy/ Commissioner EA1(assessee) Sec. 35
Joint/Additional Commissioner (Appeals) Within
EA2(Department)
60 days of receipt
of order
 Appeals 10.13

2. Commissioner/ Commissioner Appellate Tribunal EA3 Sec. 35B

(Appeals) (within 3 months
–Cross objections
from receipt of
Note: If order of to EA3 to be filed
order)
Commissioner (Appeals) relates in EA4 by
to loss of goods, in transit, opposing party
processing loss, rebate on EA5 for
exports/exports in bond without application by
payment of duty (other than Department
Nepal and Bhutan) and cenvat
credit revision lies to
Central Government
3. Appellate Tribunal (not High Court EA6 (Appellant) Sec.
involving rate of duty or 35H
Within 180 days of EA7 (cross
valuation)
receipt of order objections)
4. Appellate Tribunal (relating to Supreme Court No specified Sec.
rate of duty/valuation) form 35L
Within 60 days of
receipt of order
5. Commissioner (Appeals) Government of EA 8 Sec.
relating to loss of goods, in India 35EE
transit, processing loss, rebate (Revisionary
on exports/exports in bond Authority)
without payment of duty (other
Within 3 months of
than Nepal and Bhutan) and
receipt of order
cenvat credit.

Note: National Tax Tribunal means the National Tax Tribunal established under section 3
of the National Tax Tribunal Act, 2005. The National Tax Tribunal Act, 2005 has been
enacted by the Parliament in pursuance 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 Tribunal (NTT) by the Central Government 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 facilitating quick adjudication of disputes under direct and
indirect tax laws and achieve uniformity in the interpretation of central legislation. This
Act provides that on establishment of the National Tax Tribunal, High Court will not have
appellate jurisdiction in matters of direct and indirect taxes. This Act vests jurisdiction in
10.14 Central Excise

NTT to decide direct and indirect tax disputes 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 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
authorize one or more chartered accountants or legal practitioners or any person duly
authorized by him or it to present the case before the NTT. The Government 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 chartered accountants to present
the case of the Government before the NTT.
The Act provides that any person, including any department of the Government, aggrieved
by any decision 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 Supreme
Court can allow filing of the appeal beyond 60 days, if the appellant was prevented by
sufficient cause from filing the appeal within the said period of 60 days.
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. Therefore, the
constitution of the NTT will take effect only after the stay is vacated.

Self-examination questions
1. What are the matters on which appeal does not lie with CEGAT? Where does
redressal lie in such cases?
2. Discuss the revisionary powers of the Central Excise Authorities under section 35E
and section 35EE of the Central Excise Act, 1944.
3. Who can sign the grounds of appeal and the form of verification as contained in Form
No. E.A. –1?
4. What are the orders that are appelable to the Supreme Court?
5. 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 by 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
corresponding 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 goods
claimed by the manufacturer as unfit for consumption or for marketing, at any time before
removal has also been specified in column 4 of the said Table. Destruction shall be
carried on only after the competent officers have passed the order for remission.

Competent Central Amount of duty Monetary limit to

Excise Officer empowered to be supervise destruction
remitted

1. Commissioner Without limit, but normally Not required

any amount exceeding Rs.
5,000

2. Additional/Joint Rs. 2,500 to Rs. 5,000 Not required

Commissioner

3. Deputy/Assistant Rs. 1,000 to Rs. 2,500 Exceeding Rs. 20,000

Commissioner
11.2 Central Excise

4. Superintendent Below Rs. 1,000 Rs. 5,000 but not

exceeding Rs. 20,000

5. Inspector None Below Rs. 5,000

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
provided the goods are destroyed irrecoverably under the supervision of the proper
officer, and subject to the procedure, specified hereinafter.

11.2 PROCEDURE FOR DESTRUCTION OF GOODS AND REMISSION OF DUTY

The procedure to be followed for destruction of goods and remission of duty thereon shall
be, as follows:
(i) A manufacturer desiring to destroy and seek remission of duty in respect of the
excisable 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 in
duplicate to the Range Officer indicating complete details of the goods and reasons
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 matter falls within
the competency of superior officer, he will forward the application 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 order, allow destruction of goods
and remission of duty, if the case relates to his competency. Otherwise, he will
forward the application with his remarks to the superior authority competent to give
permission for destruction and remission (Additional/Joint Commissioner or
Commissioner, as the case may be) within 3 days.

(iv) Where only physical verification is required, the same may be conducted by the
remission granting authority (proper officer), as specified above and upon 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 recorded in
 Remission of Duty and Destruction of Goods 11.3

writing, order for drawing of samples and its testing by the Central Revenue Control
Laboratory or the Customs House Laboratories or any other Government recognised
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 regard.

(vi) Ordinarily the views of the assessees that the goods are rendered unfit for
consumption or marketing, should be accepted and necessary permission should 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 destruction of goods should be supervised by the officers according to the
monetary limits 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 inordinate delay
once permission for destruction and remission is granted.

(viii) In case of frequent requests for destruction of goods by an assessee, necessary

enquiries into the cause thereof should be conducted before according permission for
destruction of goods.

(ix) The proper officer personally supervising the destruction will check the quantity by
physical verification i.e. by weight or by counting or using appropriate method in case
of liquid, as the case may be, and the identity of goods by reference to relevant
records and the application for destruction. The clearance of goods, within or outside
the factory premises, shall be done 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 possible, destruction should be made inside the factory.

11.3 MANNER OF DESTRUCTION

The goods intended and presented before the proper officer for destruction must be
destroyed in such a manner that they become irretrievable as excisable commodity. 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, cigar and cheroots may
be destroyed by fire. Electric bulb and batteries may be destroyed by crushing into bits
and scraps. Vegetable oils and vegetables products may be destroyed by mixing earth or
kerosene and dumping into pits. Whatever method 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 particular 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 such as AR-1, invoices, RG-1, EB-4, RG23A, RG23C(presently no
such prescribed records are to be maintained by the assessees) or other relevant factory
records indicating the description and quantity of the goods destroyed in his presence at
which time and on which day.

Immediately after destruction of the goods is completed, the officer supervising

destruction must also send a certificate to his immediate 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 before 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 been 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 case of theft should be allowed, since the goods are available for
consumption somewhere. This Board’s instruction is contrary to case laws decided.

11.4 CASE LAWS PERTAINING TO REMISSION OF DUTY

Particulars Citation CitCitation

1. Theft of goods is loss due to CCE v. GTC Industries Ltd. 1994 (71) E.L.T.
unavoidable accident. Hence, remission 806 (T). See contrary decision in CCE v.
of duty is allowable. International Woollen Mills 1987 (28) E.L.T.
310 (T).

Authors note: Theft is an unavoidable

accident. In Sialkot Industrial Corporation v.
UOI 1979 (4) E.L.T. J329, the Delhi High
Court held in the context of Sec.23 of
 Remission of Duty and Destruction of Goods 11.5

Customs Act, that the term lost or destroyed

postulates theft, fire, accident including
pilferage. Though the excise rules use loss
by unavoidable accident or natural causes,
we feel that a narrow interpretation should
not be given.

2. Loss of mollasses due to rain not a CCE v. Dhampur Sugar Mills 1993 (66)
loss due to natural cause. No remission E.L.T. 416 (T). See contrary decision in Saroj
grantable. (The latest decisions do not Sahakar Chini Mills Ltd. v. CCE 1995 (75)
conform to this view) 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 Shankar Sugar Mills v. CCE 1994 (71) E.L.T.
combustion is an unavoidable accident 753 (T)
and remission is admissible.

4. Remission of duty should be granted Purna Sahakari Sakhar Kharkhana Ltd. vs

even if it could be argued that the loss CCE 1998 (100) E.L.T. 513 (T)
could have been prevented.

5. Under second proviso, once the Yashwant SSK Ltd. v. CCE 1990 (49) E.L.T.
goods are ordered for destruction, duty 534 (T)
will be extinguished on goods claimed as
unfit for marketing or consumption.

6. Though second proviso uses the word Godavari Sugar Mills Ltd. v. CCE 1992 (57)
“may” duty cannot be demanded when E.T.L. 159 (T)
there is no allegation that the goods are
marketable/fit for consumption.

7. Remission of duty is grantable though Sarada Plywood Industries Ltd. v. CCE 1987
the assessee has received (32) E.L.T. 116 (T)
compensation for fire accident.
11.6 Central Excise

8. Remission of duty is permitted when Balarmpur Chini Mills Ltd. v. CCE 2000 (120)
the assessee has taken steps to prevent E.L.T. 184 (T)
the combustion of molasses in the tank
including the spraying of water on the
tank.

Self-examination questions
1. Discuss the provisions in respect of remission of duty.
2. Explain the procedure for destruction of goods and remission of duty.
3. Briefly outline the manner of destruction of goods.
 12
WAREHOUSING

12.1 STATUTORY PROVISIONS

Rule 20 of the Central Excise Rules 2002, contains provisions relating to warehousing.

Under Rule 20(1), the Central Government is authorised to extend the warehousing
provisions by issue of notifications. Warehousing allows removal of goods from factory to
warehouse or from one warehouse to another warehouse without payment of duty.

Under Rule 20(2) the Board is authorised 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 consignee. However, if the goods
despatched are not received in the warehouse, the liability will be on the consignor.

The procedure for warehousing and export warehousing 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 Customs has also
specified detailed procedure including the conditions, limitations and safeguards for
removal of excisable goods from warehouse.

2. Any goods warehoused may be left in the warehouse in which they are deposited, or
in any warehouse to which such goods have been removed, till the expiry of three
years from the date on which such goods were first warehoused.

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 have
warehouse will get himself registered under the provisions of Rule 9 of the said Rules.

12.3 PROCEDURE FOR WAREHOUSING OF EXCISABLE GOODS REMOVED FROM A

FACTORY OR A WAREHOUSE
1. The consignor (i.e. the manufacturer or the registered person of the warehouse) shall
prepare an application for removal of goods from a factory or a warehouse to another
warehouse in quadruplicate in the specified Form.

2. 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 factory or
warehouse.

3. The consignor shall send the original, duplicate and triplicate application and
duplicate invoice along with the goods to the warehouse of destination.

4. The consignor shall send quadruplicate copy of the application to the

Superintendent–in-charge of his factory or warehouse within twenty-four hours of
removal of the consignment.

5. On arrival of the goods at the warehouse of destination, the consignee (i.e. the
registered person of the warehouse who receives the excisable 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 application. The consignee shall send the
original application to the Superintendent-in-charge of his warehouse, duplicate to
the consignor and retain the triplicate for his record.

6. The Superintendent-in-charge of the consignee shall countersign the application

received by him and send it to the Superintendent-in-charge of the consignor.

7. The consignor shall retain the duplicate application duly endorsed by the consignee
for his record.

12.4 FAILURE TO RECEIVE A WAREHOUSING CERTIFICATE

The consignor should receive the duplicate copy of the warehousing certificate, duly
endorsed by the consignee, within ninety days after the removal of the goods. If the
warehousing certificate 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
on 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 and 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 original 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 the consignee or ensure that the duty of excise due on the goods
not received at destination is recovered from the consignor.

12.5 ACCOUNTAL OF GOODS IN A WAREHOUSE

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 the value, quantity of
the goods removed, their marks and numbers as well as the rate of duty and amount of
duty involved. The processes carried out on the warehoused goods, if any, shall also be
recorded.

The first and last pages of the register 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 the warehouse shall be responsible for due reception of the
goods in to the warehouse and delivery therefrom including their safety during the period
they are lodged 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 thereunder.

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 either be cleared for home consumption on payment of duty or shall be
removed to another warehouse without payment of duty.
12.4 Central Excise

12.8 WAREHOUSE TO STORE GOODS BELONGING TO THE REGISTERED PERSON

A warehouse shall 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
excisable goods on which duty has been paid.

The Commissioner of Central Excise having jurisdiction over the warehouse may permit
storage of excisable goods along with the excisable goods belonging to another
manufacturer.

The Commissioner of Central Excise having jurisdiction over the warehouse may permit
the registered person of the warehouse to store duty paid excisable goods or duty paid
imported goods along with non-duty paid excisable goods in the warehouse.

12.9 REGISTERED PERSON’S RIGHT TO DEAL WITH THE WAREHOUSED GOODS

The owner of the warehouse may sort, 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 WAREHOUSING

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 Act, 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 notification 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 interest),
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
automobiles manufacturers who have signed Memorandum of Understanding with
 Warehousing 12.5

Directorate General of Foreign Trade in the Ministry of Commerce and Industry.

2. Places: The warehouses may be established and registered in Ahmedabad,

Bangalore, Kolkata, Chennai, Delhi, Hyderabad, Jaipur, Kanpur, Ludhiana, District of
Pune and Mumbai.

12.10.2 Conditions of export warehousing: The exporter shall furnish a general Bond
(B-3) under Rule 19 of the said Rules read with notifications 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 shall be
charged at the rate of twenty four per cent per annum on the duty payable, calculated
from the date of clearance from the factory of production or any other 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 along with application
for registration under Rule 9 to the Commissioner for being allowed to establish a export
warehouse under this provision. The Commissioner may cause an enquiry to be made in
respect of the security of the premise for warehouse indicated by the exporter in the
application. If found in order, the Commissioner will accord his approval subject to such
directions, terms and manners as he may specify and forward the application to the
jurisdictional Superintendent of Central Excise through the jurisdictional Assistant
Commissioner of Central Excise or Deputy Commissioner of Central Excise (having
jurisdiction over the premise) within seven working days of the receipt of the application.

The registration certificate containing registration number will be issued by the

jurisdictional Superintendent of Central Excise immediately on receipt. Procedure relating
to registration will be same as notified in Notification No.35/2001-Central Excise (N.T.)
dated 26.6.2001.

12.10.4 Execution of bond : Every exporter registered 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. The 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
the 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 shall 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 other premise approved by the Commissioner to a warehouse, procedure
laid down in Circular 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) dated
26.6.2001 do not cover removal from one warehouse to another.

The Central Excise Officer in-charge of the warehouse will issue certificate of removal in
duplicate in the Form CT-2 specified indicating details of the general bond executed by
the exporter. The CT-2 shall bear pre-printed serial numbers running for the 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 exporter 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 forwarded to Officer-in charge of the warehouse. One copy will be
sent to the consignor and one copy will remain with the exporter.

The consignor will prepare an application for removal in the Form specified in Annexure-
IV (hereinafter referred to as ARE-3) and an invoice (under Rule 8 taking into account CT-
2 certificate) and follow the procedure specified in Circular No. 579/16/2001-CX dated
26.6.2001 issued under Rule 20. The serial number of the corresponding CT-2 shall be
mentioned 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 goods removed
as indicated in ARE-3, can be ignored. Immediately on receipt of goods, the provisional
debit shall be converted into actual debit on the basis of the details mentioned in ARE-3.

The officer-in-charge of the warehouse will countersign 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 warehousing
certificate, description of goods received including marks and numbers, quantity, value,
amount of duty, details of operation in the warehouse and new packages and their marks
and number, clearance from the warehouse for export (ARE-1 No., Invoice No., quantity,
value, duty) and clearance for home consumption. They shall produce this Register to the
 Warehousing 12.7

Central Excise Officers in-charge of the warehouse whenever required.

12.10.6 Receipt and storage of goods in warehouse: Receipt of goods will be

governed by the procedure specified Circular No. 579/16/2001-CX dated 26.6.2001 issued
under rule 20.

Ten percent of the consignments, subject to minimum of two, received in a month will be
randomly selected, spread over the entire month, for verification by officer-in-charge after
the receipt of the written intimation.

Goods brought under the cover of each ARE-3 shall be stored separately or proper
accountal shall be maintained, till these are exported or diverted for home-consumption.

12.10.7 Packing, re-packing, labelling or re-labelling within the warehouse: The

operations of packing, re-packing, labelling or re-labelling in relation 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 Export-Warehouse register. In case of non-
reconciliation of quantity, after adjusting any wastage or refuse, the differential quantity
shall be treated as unaccounted and action for recovery of duty will be initiated.

The exporter may procure packing or labelling material and bring the same into the
warehouse under the warehousing procedure itself. No duty paid goods will be permitted
to be brought into the warehouse.

Where the process of packing, repacking, labelling or relabelling amounts to manufacture

in terms of the provisions of the Central Excise Tariff Act, 1985, the goods permitted for
clearance for home consumption shall be assessed 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. Registration under Rule 9 shall not be
insisted. The Warehousing Certificate forwarded to the 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 quarterly 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 said Rules. The clearances on those ARE-3 in respect of which
Warehousing Certificate is not received within ninety days of removal or such extended
period as the Commissioner may allow, will be treated as clearances for home-
consumption. If the 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 from
the warehouse, the procedure relating to preparation of application for export (ARE.1),
examination and sealing, acceptance of proof of export etc. shall be governed by
Notification No. 42/2001-Central Excise (N.T.) dated 26.6.2001 and instructions applicable
for this notification.

The requisite copies of application will be filed with the Deputy Commissioner or Assistant
Commissioner having jurisdiction 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 Running 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
goods 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 the removal
from the warehouse and the original copies of the respective ARE.1 duly certified by
Customs authorities that the goods have actually been exported (containing Pass for
Shipment Order). The exporter shall be liable to pay duty with interest where such proof of
export is not available with him within six months 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 than 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
terms 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-consumption, 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 warehouse 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 sealed
cover for delivery to such Range Office.

Photocopies of the Shipping Bill/ Export Application and Bill of Lading duly attested by the
Superintendent in-charge of the Warehouse along with certificate of proof of export should
be accepted 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 Superintendent 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 Commissioner 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 home-
consumption from the warehouse with the permission of the jurisdictional
Deputy/Assistant Commissioner of Central Excise. The clearance shall be effected on
invoice prepared under Rule 8 on payment of duty, interest and any other charges on TR-
6 Challans and after making necessary entries in the export warehouse register
maintained by the exporter in the warehouse. Credit will be permitted in the Running Bond
Account equivalent to the duty involved in the goods so diverted, which shall not exceed
amount of duty debited on the 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 be
liable to pay interest @ 24% per annum on the amount of duty payable on such goods
from the date of clearance from the factory of production or any other premises approved,
till the date of payment of duty and clearance.

12.10.11 Waiver of physical warehousing in case of exigency: The officer- in-charge

of the warehouse may permit waiver from physical warehousing (i.e. permitting export
without physically storing the goods in the warehouse) where exporter so requests in
writing provided all the formalities relating to record-keeping shall be completed in usual
manner with suitable record in the Warehousing Register: 'warehousing waived'. This
permission will be given in exceptional cases where delay occurred due to delayed supply
from the factory or longer transit-period or requirement of 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 accommodation and furniture for the Officer deployed for examination and
supervision, in the warehouse. Where the exporter is willing to bear the cost of the posting
of Officers on “cost recovery basis”, the Commissioner, depending upon the administrative
feasibility, may consider the deployment.

Self-examination questions
1. Discuss the statutory provisions in respect of warehousing.
2. Describe the procedure for warehousing of excisable goods removed from a factory
or a warehouse.
3. Discuss the provisions governing packing, re-packing, labelling or re-labelling within
the warehouse in respect of export warehousing.
4. What will happen if the consignor fails to receive the warehousing certificate within
90 days?
5. 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 notifications are popularly called SSI
exemption notification because they were originally meant to be an incentive to SSIs. But
presently, it must be noted, that any unit 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 provided concessional rate of duty of 60% of the
normal rate with Cenvat credit has 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 general SSI exemption from Rs.300 lakhs to Rs. 400 lakhs.

13.2 MEANING OF SMALL SCALE UNITS

Small Scale Units are not defined in the Central Excise Act 1944 or rules made
thereunder. The Small Scale Unit is defined in Industries (Development and Regulation)
Act, 1951 for the purpose of exempting them from Registration under that Act. The
definition basically takes the investment made on the plant and machinery by any
industries as the basis for determining the small scale industries. But however it would be
pertinent to note that the definition given under the said Act is not applicable for the
purpose of getting the benefit of exemption under Central Excise. The basis for
ascertaining the Small Scale Units as given 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 definition that has to be adopted for ascertaining the Small Scale Units is
not as understood 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 given to SSIs are not applicable for all the goods. The benefit of the
said notification is restricted to the products listed in the notification. The notification
covers most of the products to fulfill the intention of the notification. However, tobacco
products, pan masala, watches, matches and some textile products are specifically
excluded from SSI exemption.

13.4 ELIGIBILITY
The units whose value of clearances computed in accordance of the notification is less
than 400 lakhs (4 crores) in the previous financial year are eligible for the benefit of the
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 of the year 2005-2006
has exceeded Rs. 4 crores. In the same example if ABC Ltd has started up the business
only in the year 2006-2007, then it is entitled for the 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 operation).
The limit will be calculated by taking into account the clearances in respect 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 popularly known as clubbing of
clearances. The basic idea behind this is to curtail the 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 Commissioner of Central Excise and
should obtain a dated acknowledgement. Such declaration 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 present 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) per annum shall not file any declaration at all.

13.5 RELAXATION IN THE DUTY

The exemption given vide notifications 8/2003 can be summarised in the following table:
Notification 8/2003
Value of clearances in Rs. lakhs in a financial year Duty Structure
0- 100 lakhs 0%
>100 lakhs Normal duty
 Exemption Based on Value of Clearances (SSI) 13.3

13.6 AVAILABILITY OF CENVAT CREDIT

In respect of units availing the benefits of notification 8/2003 (i.e. full exemption) 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 clearances of Rs.100 lakhs.

13.7 VALUE OF CLEARANCES TO BE EXCLUDED FOR THE CALCULATION OF LIMIT

OF Rs.100 LAKHS & Rs.400 LAKHS
Value for the purpose of the SSI notification (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 clearances 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 taken 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 clearances) 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 specified goods within the factory of production of the specified goods. Here,
specified goods are those goods, which are eligible for SSI concession;
(d) clearances of strips of plastics used within the factory of production for weaving of
fabrics or for manufacture of sacks or bags made of polymers of ethylene or
propylene.
For the purposes of determining the aggregate value of clearances of all excisable goods
for home consumption, i.e. 400 lakhs, the following clearances shall 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 Park or Software Technology
Park; or
13.4 Central Excise

(v) supplied to the United Nations or an international organization for their official
use or supplied to projects funded by them, on which exemption 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 goods which are used as inputs for further manufacture of
any specified goods within the factory of production of the specified goods. Here,
specified goods are those goods, which are eligible for SSI concession;
(d) clearances of strips of plastics used within the factory of production for weaving of
fabrics or for manufacture of sacks or bags made of polymers of ethylene or
propylene.
(e) clearances which are exempt from the whole of the excise duty leviable thereon
under specific 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 computing 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 computing the
limit of Rs.400 lakhs, turnover of goods exempted under any other notification (except
clearance to FTZ, SEZ, 100%EOU, EHTP/STP, UN etc. and specific 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 clearances 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 cleared. 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 (88) 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
contrary decision should prevail. Also, CBEC Circular allow exports through Merchant
exporters.
 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 unit not to be clubbed with E.L.T. 538 (T-NRB)
the value of cassettes cleared by another unit.

6. Value of clearances of return of processed Sangita Printers & Exporters 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 deducting (17) RLT 883 (T-NRB)
excise duty from cum duty price

8. Total value of excisable 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 notification 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 normal rate of duty. Brand name or trade name is defined in Explanation to
Notification as any mark, symbol, monogram, label, signature or inventor word or writing
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 was
challenged under Article 14 on the ground that the classification of goods into 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 1994 (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 Aerated 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 validity of the notification. However, a perusal of the
decision of the Supreme Courts would surprise the readers that there is no detailed
discussion on most of the 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 components
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
rupees hundred lakhs. This provision is there to cater to the needs of ancillary units
which manufacture components for big industrial units. Such ancillary units used to
mark their goods with the name of the large unit and refer to a code number 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 BHEL
Ancillary Association v. CCE 1990 (49) E.L.T. 33 had held that this code number 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 Village Industry Board or National Small Industries Corporation or a
State Small Industries Development Corporation or a State Small Industrial
Corporation. .
(c) The Supreme Court has held in Astra Pharmaceuticals P Ltd. v. CCE 1995 (75)
E.L.T. 214 that in respect of medicinal preparations the mark made by the
manufacturers would be called a “house mark” and would not be the brand name.
Therefore, the monograph which identifies a manufacturer's name would not be a
brand name.
(d) In the case of CCE v. ESBI Transmission Private Ltd. 1997 (91) E.L.T. 292, the
Division Bench of the Calcutta High Court held that if the brand name belonged 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 notification
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 following cases:
(i) Opus India v. CCE 1992 (62) E.L.T. 447 (T)
(ii) Vikshara Trading and Investment P.Ltd. v. CCE 1996 (87) E.L.T. 499 (T)
(iii) CCE v. Bigen Industries 1999 (107) E.L.T. 213 (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 assigned as the Calcutta High Court
decision in (d) above holds good.
 Exemption Based on Value of Clearances (SSI) 13.7

(f) 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 manufactured
in a rural area. Rural area means the area comprised in a village as defined in the
land revenue records, excluding –
(i) the area under any Municipal Committee, Municipal Corporation, Town Area
Committee, Cantonment Board or Notified Area 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 2001 (127) E.L.T. 609 (T-LB)
has held that if the goods manufactured by the SSI unit fall outside paragraph 1
consequent to their being branded goods, payment of duty on such branded goods
will not disentitle the other products from getting the 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 employs 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 notification when
they find common directors or common shareholders or common employees or common
usage of facilities including funds.
On the other hand, judicial decisions have always stressed the point that unless there is a
flow back of profits 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 units 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 1998 (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 incorporation 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 section 4, the
principles enunciated could well be applied here also.
A perusal of the case laws available on the subject clearly shows that the Tribunal has
been reluctant 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 be
decided based on the facts of the case.

13.11 CASE LAWS RELATING TO CLUBBING OF 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 Jagjivandas & Co. v. CCE 1985 (19) E.L.T.
factories, common expenses, common 441 (T) affirmed by Supreme Court in 1989
partners, common trade mark, sharing of (44) E.L.T. A24.
machinery usage, mutual financial Authors note: This is a landmark
transaction without interest not enough to judgment often used by assessees.
club clearances.
3. Turnover of limited companies being Spring Fresh Drinks v. CCE 1991 (54)
independent not clubbable in the absence of E.L.T. 333 (T)
financial flowback.
4. Common 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 absence
of flow back of profits.
5. When two units are functioning in the Nikhildeep 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, turnover 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 directors 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.175/86-CE dated 1-3-1986- clubbing of 1999 (32) ELT 55 (T)
clearances – P&P medicines – value of
medicines manufactured and cleared by job
worker not to be clubbed with those
manufactured and cleared by raw material
supplier when transactions are on principal
to principal basis.
9. Assessable value – Related person – Plus Cosmetics 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 manufacturer for
meeting day to day requirement (f) incurring
of sale promotion expenses by buyer (g)
doing of research & development work by
buyer, and (h) non-payment of royalty by
buyer for using manufacturer’s brand name
– individually and jointly not sufficient to
hold them related person as there is no
share holdings by the buyer and the
manufacturer in each other’s company and,
therefore, no mutuality of interest.
10. SSI units – Registration of SSI units/ Kemtrode Pvt. Ltd. v. Joint Director (SSI),
undertakings by Director of Industries – Govt. of Karnataka 1999 (108) E.L.T. 616
Clubbing of units/ undertakings for (Kar.)
computing investment 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 number of partners – Same is
13.10 Central Excise

the position of a company having common

director – If the number of partners /
directors differs, then it cannot be said that
the unit is set up with common partner or
director.

Self-examination questions
1. Enumerate five instances when small scale exemption will be available to the
excisable goods bearing the brand name of another person.
2. Answer the following questions with reference to Notification No. 8/2003-CE dated
01.03.2003 relating to small scale 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 notification?
(iv) Comment on the availability of CENVAT credit on capital goods under 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 duty to a unit in special
economic zone.
(b) Clearances worth Rs.50 lakhs exempted under job-work Notification No. 214/86
CE, dated 25.03.1986.
(c) Export clearances worth Rs.100 lakhs (75 lakhs to Sweden and 25 lakhs to
Nepal).
(d) Clearances worth Rs.50 lakhs which are used captively to manufacture finished
products that 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 will be eligible to the benefits of exemption under
notification 8/2003 for the year 2007-2008.
 Exemption Based on Value of Clearances (SSI) 13.11

4. Tasty Biscuits Ltd. manufactures biscuits under the brand name of “Tasty” on its own
account and under the brand 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 application. Is the stand taken by the Central Excise Officer correct?
Examine the case 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 small 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. contended that M/s. Lotus Industries Ltd. owns brand name
'Lotus' only for detergent 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 turnover
of all the factories have to be aggregated for the purpose of claiming exemption
under the said notification.
(iii) The value for the purposes of the said notification would mean the value fixed
under section 4 or section 4A or the tariff value fixed under section 3(2).
(iv) The units availing the benefit of said notification 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 final products only after the turnover
reaches Rs. 100 lakhs.
(v) Paragraph 3A of the 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 international organization for their official
use or supplied to projects funded by them on which exemption of duty is
available in terms of Notification No.108/95-CE dated August, 28, 1995.
3. In order to claim the benefit of SSI exemption the total turnover of a unit must not
exceed Rs.400 lakhs. While calculating turnover of Rs.400 lakhs, some of turnover
of SSI is not to be considered, while some has to be considered. This has been
discussed below:
(a) Clearances of excisable goods without payment of duty to a unit in special
economic zone has to be excluded. Therefore, Rs.50 lakhs worth clearances to
a unit in special economic zone 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 clearances 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 home 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 exported to Nepal will be included in the said
turnover.
(d) Value of intermediate products manufactured while producing final products
which are exempt under Notifications 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 course will be
considered for computing the limit of Rs.400 lakhs. Therefore, the eligible 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 Notification No.175/86-C.E., clearly demarcated the two categories of
manufacturers. A clear-cut distinction was explicit between a manufacturer availing
Modvat credit under 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 Modvat scheme. Input duty relief was given under the
scheme to the manufacturers who had opted to operate under the scheme by
applying for it in the prescribed manner. Ultimately, the manufacturers had the
choice of choosing one of the two concessions, 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 inputs and final products under Modvat Scheme, it
would not be possible to allow the 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 between manufacturer availing Cenvat credit under Rule 3 of
Cenvat Credit Rules, 2004 and the one not opting for the Cenvat scheme. Thus,
here also simultaneous availment of Cenvat for some products and full exemption for
others under the scheme of small-scale exemption shall not be permissible. Thus,
the stand taken by the 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) exemption shall not apply to the goods bearing a brand
name or trade name, whether registered or not, of another person. As per
Explanation (A) to the notification, brand name or trade name means:
♦ a brand name or trade name, whether registered or not, 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 for 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 persons
from the benefit of the SSI exemption who use someone else’s name in connection
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;
(ii) there is no requirement for the owner of the trade mark using the name or mark with
reference to any particular goods;
(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 even in respect of goods of other
class or kind (different from the nature of the goods of the owner of brand name), benefit of
SSI exemption shall not be available.
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 Industries 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 relevance.
 14
NOTIFICATIONS, DEPARTMENTAL CLARIFICATIONS AND
TRADE NOTICES

It can be seen from the earlier chapters that the mechanism employed by the Ministry of
Finance to effect changes in excise law and rules is through the issuance of Notifications.
Further, the procedural requirement of the various provisions of the Central Excise Rules
are laid down from time to time through issuance of Trade Notices by the individual
Commissionerates.

14.1 POWER OF THE CENTRAL GOVERNMENT TO MAKE RULES

Section 37 of the Central Excise Act, empowers the Central Government to make rules to
carry into effect the purposes of this Act. The rules may lay down the procedures
governing several specific situations. A total of 38 different situations have been explicitly
enumerated under section 37(2). Such rules may
1. provide for determining under section 4 the nearest ascertainable equivalent of the
normal price;
2. having regard to the normal practice of the 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 conditions subject to which such discount is to be so
excluded;
3. provide for the assessment and collection of duties of excise, the authorities by
whom functions under this Act are to be discharged, the issue of notices requiring
payment, the manner in which the duties shall be payable, and the recovery of duty
not paid;
4. provide for charging or payment of interest on the differential amount of duty which
becomes payable or refundable upon finalisation of all or any class of provisional
assessments;
14.2 Central Excise

5. provide for the remission of duty of excise leviable on any excisable 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 allowed and the different limit
or limits of percentage for different varieties of the same excisable goods or for
different areas or for different seasons;
6. prohibit absolutely, or with such exceptions, or subject to such conditions as the
Central Government thinks fit, the production or manufacture, or any process of the
production or manufacture, of excisable goods, or of any component parts or
ingredients or containers thereof, except on land or premises approved for the
purpose;
7. prohibit absolutely, or with such exceptions, or subject to such conditions, as the
Central Government thinks fit, the transit of excisable goods from any part of India to
any other part thereof;
8. regulate the removal of excisable goods from the place where produced, stored or
manufactured or subjected to any process of production or manufacture and their
transport to or from the premises of a registered person, or a bonded warehouse, or
to a market;
9. regulate the production or manufacture, or any process of the production or
manufacture, the possession, storage and sale of salt and so far as such regulation
is essential for the proper levy and collection of the duties imposed by this Act, or of
any other excisable goods, or of any component parts or ingredients or containers
thereof;
10. provide for the employment of officers of the Government to supervise the carrying
out of any rules made under this Act;
11. require a manufacturer or the licensee of a warehouse to provide accommodation
within the precincts of his factory or warehouse for officers employed to supervise
the carrying out of regulations made under this Act and prescribe the scale of such
accommodation;
12. provide for the appointment, licensing, management and supervision of bonded
warehouses and the procedure to be followed in entering goods into and clearing
goods from such warehouses;
13. provide for the distinguishing of goods which have been manufactured after
registration, of materials which have been imported under licence, and of goods on
which duty has been paid, or which are exempt from duty under this Act;
14. impose on persons engaged in the production or manufacture, storage 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 collection of the duties
 Notifications, Departmental Clarifications and Trade Notices 14.3

imposed by this Act, of any other excisable goods, the duty of furnishing information,
keeping records and making returns, and prescribe the nature of such information
and the form of such records and returns, the particulars to be contained therein, and
the manner in which they shall be verified;
15. require that excisable goods shall not be sold or offered or kept for sale in India
except in prescribed containers, bearing a banderol, stamp or label of such nature
and affixed 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 salt and
saltpetre shall not exceed, in the case of each such licence, the following amounts,
namely:—

Rs.

Licence to manufacture and refine saltpetre and to separate and purify

salt in the process of such manufacture and refining ... ... ...
50

Licence to manufacture saltpetre ... ... 2

Licence to manufacture sulphate of soda (Kharinun) by solar heat in

evaporating pans ... ... 10

Licence to manufacture sulphate of soda (Kharinun) by artifical heat ... 2

Licence to manufacture other saline substances ... 2

17. provide for the detention of goods, plant, machinery or material, for the purpose of
exacting the duty, the procedure in connection with the confiscation, otherwise than
under section 10 or section 28, of goods in respect of which breaches of the Act or
rules have been committed and the disposal of goods so detained or confiscated;
18. authorise and regulate the inspection of factories and provide for the taking of
samples, and for the making of tests, of any substance produced 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 inspection or search is essential for the
proper levy and collection of the duties imposed 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 exported 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 excisable goods;
22. provide for the giving of credit of sums of money with respect to raw materials used
in the manufacture of excisable goods;
23. provide for charging and payment of interest as the case may be, on credit of duty
paid or deemed to have been paid on the goods used in, or in relation to the
manufacture of 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 incentives 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 area no point in which shall be more than one hundred yards from the
nearest point of any place in which salt is stored or sold by or on behalf of the
Central Government, or of any factory in which saltpetre is manufactured or refined,
and regulate 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
possession, storage and sale of salt within such area;
28. authorise the Central Board of Excise and Customs constituted under the Central
Boards of Revenue Act, 1963 (54 of 1963) or Commissioners of Central Excise
appointed for the purposes of this Act to provide by written instructions, for
supplemental matters arising out of any rule made by the Central Government under
this section;
29. provide for the publication, subject to such conditions as may be specified therein of
names 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
export 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 the manner in which money is to be credited to the Fund;
33. provide for the manner 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 under section 6 and the
manner of their registration.;
36. provide for the lapsing of credit of duty lying unutilised with the manufacturer of
specified excisable goods on an appointed date and also for not allowing such credit
to be utilised for 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 amount to be paid for compounding of offences under section 9A.

14.2 POWER OF THE CENTRAL GOVERNMENT TO EMPOWER CENTRAL EXCISE

AUTHORITIES

In addition to section 37, section 37A authorises the Central Government, by issuance of
a notification, to empower any of the excise authorities, from the Board to the Asst.
Commissioner, to exercise such of those powers as may be delegated by the Central
Government. In other words, the Central Government has unfettered power to delegate its
powers to the authorities specified in section 37A.

14.3 EMERGENCY POWER OF THE CENTRAL 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 only by
Parliament. This is usually done through the Finance Bill in the Annual Budget. Any
increase in the duties proposed in the Finance Bill will have immediate effect (from the
midnight of the Budget Day). Any decrease will have effect only after the bill is enacted.
However, the Government has the power to grant exemption 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 normally given effect to by an exemption notification.

Generally, the Government increases the duty only through the Finance Bill. However, as
per Section 3 of the Central Excise Tariff Act, the Government also has emergency
powers to increase 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 duty leviable
thereon under section 3 of the Central Excise Act, 1944 should be increased and that
circumstances exist which render it necessary to take immediate action, the Central
Government may, by notification in the Official Gazette, direct 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 Second Schedule in respect of such goods, -

(i) in a case where the rate of duty as specified in the First Schedule and the Second
Schedule as in force immediately before the issue of such notification is nil, a rate of
duty not exceeding fifty per 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 rate of duty
specified in respect of such goods in the First Schedule and the Second schedule as
in force immediately before the issue of the said notification.

However, the Central Government shall not issue any notification for substituting the rate
of duty in respect of any goods as specified by an earlier notification issued under these
provisions by the Government before such earlier notification has been approved with or
without modifications.

Explanation. – “Form or method”, in relation to a rate of duty of excise, means the basis,
namely, valuation, weight, number, length, area, volume or other measure with reference
to which the duty may be levied.

Every notification under the above provisions shall be laid before each House of
Parliament, if it is sitting, as soon as may be after the issue of the notification. However,
if the Parliament is not sitting the notification shall be placed within seven days of its re-
assembly. The Central Government shall seek the approval of Parliament to the
notification by a resolution moved within 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 to have effect, the notification shall thereafter have effect only in such modified
form or be of no effect, as the case may be, but without prejudice to the validity of
anything previously done thereunder.

It has been clarified that any notification issued under the above provisions including any
such notification approved or modified may be rescinded by the Central Government at
 Notifications, Departmental Clarifications and Trade Notices 14.7

any time by notification in the Official Gazette.

14.4 EXEMPTION NOTIFICATIONS IN CENTRAL EXCISE

Central excise legislation is driven by exemption notifications. Under section 5A, 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 the
excisable goods manufactured in FTZ/SEZ/100% 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 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 leviable thereon has been granted absolutely,
the manufacturer of such excisable goods shall not pay the duty of excise on such goods.

Sub section (2) of 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 in
the public interest to do so, under circumstances of an exceptional nature which are to be
stated in such order.

Sub-section (2A) empowers the Central Government, if it considers it necessary or

expedient so to do, to insert an explanation 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), for the purpose of clarifying the scope or applicability of such notification.
This enables the Central Government to issue clarifications retrospectively.

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 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 interest 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 benefit thereof.

Date of effect of Notification - Section 5A provides that the date 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 through
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). Interpretation 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 the notification particularly when there are radio announcements and
press releases explaining the changes on the very day.

14.5 EFFECT OF AMENDMENTS, ETC., OF RULES, 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 rule, is amended, repealed, superseded or rescinded, then,
unless a different intention appears, such amendment, repeal, supersession or rescinding
shall not –
(a) revive anything not in force or existing at the time at which the amendment, repeal,
supersession or rescinding takes effect; or
(b) affect the previous operation of any rule, notification or order so amended, repealed,
superseded or rescinded or anything duly done or suffered thereunder; or
(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under
any rule, notification or order so amended, repealed, superseded or rescinded; or
(d) affect any penalty, forfeiture or punishment incurred in respect of any offence
committed under or in violation of any rule, notification or order so amended,
repealed, superseded or rescinded; or
(e) affect any investigation, legal proceeding or remedy in respect of any such right,
privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid,
and any such investigation, legal proceeding or remedy may be instituted, continued or
enforced and any such penalty, forfeiture or punishment may be imposed as if the rule,
notification or order, as the case may be, had not been amended, repealed, superseded
or rescinded.
 Notifications, Departmental Clarifications and Trade Notices 14.9

14.6 DEPARTMENTAL CIRCULARS AND TRADE NOTICES IN CENTRAL EXCISE

Departmental circulars and trade notices are a form of delegated legislation. Under
section 37B, which is titled “Instructions to Central Excise Officers”, the Central 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 are bound to follow them.
These instructions or orders can be for the purpose of ensuring uniformity in the
classification of excisable goods or with respect to levy 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 discretion of the Commissioner (Appeals).

14.7 BINDING NATURE OF BOARD CIRCULARS

It is well settled in law today that Board Circulars are not binding on the Supreme Court,
High Court or the Tribunal. Departmental clarifications are also not binding 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 exercising 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 beneficial Board Circulars.

In Ranadey Micronutrients v. CCE 1996 (87) E.L.T. 19, the Supreme Court held that even
if it be contended that a circular is not issued under 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 not valid.

The Supreme Court also held that such circulars are not advisory in character 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 statute 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 the Tribunal wants to take a different view from a
circular, it would be difficult for the Department to justify its stand since a beneficial Board
Circular exists.
14.10 Central Excise

14.8 CAN DEPARTMENTAL AUTHORITIES OF ONE REGION REFUSE TO ACCEPT 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 another 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. 42 that authorities cannot take different stand in different states and
that trade notice issued by customs house will bind all customs authorities.

14.9 CAN DEPARTMENTAL 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 Court in UCO Bank v. CIT (1999) 237 ITR 889 has held the law as laid down in
210 ITR 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 presumed that they
are inconsistent with the law.

14.10 CAN A BOARD CIRCULAR BE CONTRARY 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 matter 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 effective from the date of their issue and demands prior to such circular are not valid.
Self-examination questions
1. Explain the emergency power of the Central Government under Central Excise Tariff
Act, 1985 to increase the duty.
2. Write a note on exemption notifications in central excise.
3. Describe the effect of amendments, etc. of rules, notifications or orders.
4. Can Central Government delegate its powers to the excise authorities? Discuss.
5. Enumerate any five matters 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 service tax)’. The provisions relating to advance
ruling have been summarised as under :

15.1.1 Advance ruling: Under section 23A(b) advance ruling means determination of
question of law or fact regarding liability to duty in relation to an activity proposed to be
undertaken.
15.1.2 Applicant: Section 23A(c) defines applicant to mean:
"applicant" means—
(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 non-resident;
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 undertake 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
Government may, by notification in the Official Gazette, specify in this behalf,
and which or who, as the case may be, makes application for advance ruling under sub-
section(1) of section 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 financial 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 Act;

(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 the goods
used in or in relation to the manufacture of the excisable goods.

(f) determination 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 determination 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 non-
resident) 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 withdraw the application within 30 days from date of application.
[Section 23C(4)]

An application fee of Rs. 2500/- is payable alongwith the application.

Under section 23F, advance ruling will be void if, on a representation from Commissioner
or otherwise, it can be proved that it was obtained by fraud or misrepresentation of facts.
 Advance Ruling 15.3

As per section 23E, it is binding only on the applicant who sought it for matters specified
in section 23(C)(2) and on the Commissionerate in respect of the applicant. 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 examine people on oath
and compel production of documents like a Civil Court under Code of Civil Procedure. It is
a civil court for purposes of section 195 of Code of Criminal Procedure and proceedings
are deemed to be judicial proceedings under 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 Supreme Court along with officer of Indian customs and
excise service qualified to be a Member of the Board and officer of Indian Legal Service
qualified to be Additional 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 person or through authorised
representative as set out in section 35Q.

15.4 PROCEDURE TO BE FOLLOWED BY AUTHORITY FOR ADVANCE RULING

(CENTRAL EXCISE, CUSTOMS AND SERVICE TAX) ON RECEIPT OF APPLICATION
[SECTION 23D]

1. On receipt of application for advance ruling, the Authority shall forward a copy to the
relevant Commissioner. The records shall be returnable after the ruling is given.

2. The Authority has the sole discretion to accept or reject the application. However, a
hearing has to be given before rejection. Application is liable to be rejected in the
following cases:

(i) where the question raised in the application is already pending before any
Central Excise Officer, the Appellate Tribunal or any court; or

(ii) where the question raised is the same as in a matter already decided by any
Appellate Tribunal or any court.
15.4 Central Excise

3. The Authority shall pass an order admitting or rejecting the application. A copy
should be given to the applicant and the Commissioner.

4. The Authority can further examine any material placed before him after admission of
the application.

5. The Authority should pronounce the final order within 90 days of receipt of
application.

6. Copies of the order have to be given to the applicant and the Commissioner.

Self-examination questions
1. State briefly as to who can make an application for “Advance Ruling” under section
23A of the Central Excise Act, 1944?
2. Enumerate the matters on which the advance ruling can be sought under the Central
Excise Act, 1944.
3. Explain the circumstances when an advance ruling will be void under the Central
Excise Act, 1944.
4. Discuss the procedure to be followed by the Authority for Advance Rulings on receipt
of application for advance ruling.
5. Ramesh, a non-resident intends to manufacture certain excisable goods but has
entertained some doubts about the admissibility of credit of excise duty paid on the
goods used in the manufacture of the said excisable goods. He wants to seek an
Advance 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 similar to the structure of the Income
Tax Department. However, in view of the fact that the area of indirect taxes encompasses
both customs duties as well as excise 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 candidates
in the Civil Service examinations are required to choose between the direct and indirect
tax streams. The apex body in charge of administration of the collection of both customs
duties and central excise duties is the Central Board of Excise and Customs (CBEC). This
is statutory board, setup under the Central Board of Revenue Act, 1963. The Board
currently consists of a Chairman. The Chairman 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 Commissionerates: Immediately below the CBEC are the Chief

Commissioners. These Chief Commissioners are administratively in-charge of several
Commissionerates, ranging from two to four, each of which is headed by a Commissioner.
Chief Commissioners are responsible for all matters under their jurisdiction and report to
the CBEC as a whole.

The Commissionerate, as its name implies, 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 Commissioners

(v) Deputy Commissioner

(vi) Assistant Commissioner (incharge of Divisions)

(vii) Superintendent (incharge of range)

(viii) Sector Officers (Sectors) like Inspectors etc.

Apart from the Executive Commissioner who heads the Commissionerate, there is also a
Commissioner (Adjudication), who is exclusively engaged in passing of adjudicating
orders in terms of the powers granted under various sections of the Central Excise Act,
depending of course, on jurisdiction and on the monetary amounts involved in the
demands. Apart from the above specified commissioners, who operate on the executive
side of the Department every Commissionerate also consists of a Commissioner
(Appeals), who shall act as an appellate authority 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 Commissioner (Appeals) has jurisdiction to hear and dispose off all
appeals filed against orders of the Assistant Commissioner, Deputy Commissioner, Joint
Commissioner as well as the Additional Commissioner. Prior to the amendment of Rule
2(ii) of the Central Excise Rules, governing the definition of a Commissioner, an
Additional Commissioner was equivalent to a Commissioner for all purposes. Hence,
appeals 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.) dated
14/5/92, whereby the Additional Commissioner was made equivalent to a Commissioner
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 executive Commissioner.

On the executive side, the Additional Commissioner is the immediate senior most officer
after the Commissioner. However, as explained above, in terms of the legal definition, an
Additional Commissioner is also a Commissioner. Thereafter are the Joint Commissioner,
Deputy Commissioners and then the Assistant Commissioner. The Assistant
Commissioner is the highest-ranking field level authority who holds active jurisdiction over
manufacturing units and is charged with the collection of duties. The Assistant
Commissioner is also the quasi-judicial authority who normally passes orders on all
matters of revenue concerning units falling under his jurisdiction and for which show
cause notices have been issued under various sections of the Act. Direct recruits to the
All India Revenue Service are confirmed as Assistant Commissioners after their period of
probation. 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 the level of the Commissionerate, based on sanctioned strength
agreed between the Board and the Commissionerate. The subordinate officers in central
excise consist of Sector Officers (earlier known as Inspectors) and Superintendents. The
Sector Officers are assigned responsibilities concerning specific units and hence are the
first level of contact between assessees and the Excise Department. The Sector Officers
are also functionally in charge of day-to-day matters pertaining to assessees. The Sector
Officers report to the Superintendents, who are functionally responsible for collection of
revenues pertaining to all units located in their jurisdiction. The Superintendents, in turn,
report to the Assistant Commissioners. Whereas Sector Officers are jurisdictionally in
charge of Sectors, the Superintendents are jurisdictionally in charge of Ranges. The
Ranges are thereafter consolidated together into Divisions, which are headed by the
16.4 Central Excise

Assistant Commissioners. Finally, all such Divisions are grouped together to form a
Commissionerate. The Commissionerate holds territorial jurisdiction for collection of
revenues from units located within the Commissionerate.
Self-examination questions
1. Write a brief note on the Central Board of Excise and Customs.
2. 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, and
(b) Special audit for Cenvat credit purposes under section 14AA.
The provisions 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 Commissioner of
Central Excise can order for valuation audit at any stage of enquiry, investigation or any
other proceedings before him if he is of the opinion that the value has not been correctly
declared or determined by a manufacturer or any person. However, for ordering such an
audit prior approval of the Chief Commissioner of Central Excise is necessary.
The Central Excise officer will direct such manufacturer/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, audited 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 Officer. He shall also mention in the report such
other particulars as may be prescribed by such Central Excise Officer. Such period can
be extended by the Central Excise Officer at the request of the manufacturer/person for
material and sufficient reason. However, the maximum period of submission of audit
report shall be 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 any proceedings
under the Central Excise Act or rules made thereunder.

2. CENVAT credit audit [Section 14AA]

The Commissioner of Central Excise may call for an audit if he has reason to believe that
the credit of duty availed of or utilized by a manufacturer of any excisable 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 utilized by reason of fraud, collusion or any willful mis-
statement or suppression of facts.
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 him, audited by a Cost
Accountant nominated by him. 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.
The Cost Accountant has to submit the duly signed and certified audit report within the
period specified by the Central Excise 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 any 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 material
gathered on the basis of the audit and proposed to be utilized in any proceeding under the
Central Excise Act or rules made thereunder.

17.2 AUDIT PRESCRIBED 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 records to be maintained by the assessee have been
abolished in year 2000/01.

17.2.1 History 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 correctness of
recording of facts and the efficiency of a system under study. For Central Excise purposes
“audit” means scrutiny of the records of assessee and the verification of the actual
process of receipt, storage, production and clearance of goods with a view to check
whether the assessee is paying the central excise duty correctly and following the central
excise procedures.
 Excise Audit 17.3

Under the conventional /traditional system of central excise audit, audit parties visit
assessees unit without much preparation and verify all the statutory records (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 audits 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 envisage 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, Sales Tax Act, Companies Act etc.
One of the announcements made during Budget 2000 as a measure of simplification of
procedures, was the dispensation of all statutory 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 whichever form they like (including maintenance of the entire records in
electronic form) provided the essential information required for calculation of central
excise duty liability can be obtained from such records. Under these circumstances it
becomes necessary for the auditors to look into the assessees own (private) records to
verify whether the assessee is paying central excise duty correctly and 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 officers only scrutinise this return to check for any apparent mistake
made by the assessee. They are not required to carry out detailed verification. Therefore,
the entire burden of checking whether the assessee actually paying his taxes correctly,
now lies with audit.
The statutory changes resulting in dispensation of statutory 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 Excise 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 of 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 paying cash duty of Rs.10 lakhs or more but less than Rs.1 crore per
annum are audited 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 crore 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 is a more systematic form of audit wherein the auditors are
required to gather basic 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-depth 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 1500 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 system 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
record (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
beginning of the financial year. The auditors are required to gather as much information
about the assessee as possible. They can gather information from the departmental
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 areas, which warrant closer examination. The auditor may
also require certain documents 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 obtain this information. This step is called 'gathering and documenting
assessee information'.
17.4.4 Touring: The auditor then visits the unit of the assessee to see 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 assessee 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 areas 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 helps him to do that. It must be
remembered that audit plan is not rigid but a dynamic concept. During the course of audit
if the auditor notices certain new facts or new aspects of the planned area of audit, he can
always alter the audit plan 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 after
obtaining approval of the superior officers. Preparation of audit plan is one of the most
important steps of EA 2000. A well thought audit plan generally increases the success of
audit result manifolds.
17.4.6 Verification: The most important 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 scheduled date (informed to the assessee in advance) and carry out the
scrutiny of the records of the assessee as per the audit plan. The auditor is required to
compare the documentation of a fact from different documents. For example, the auditor
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 Sheet, Sales Tax
Returns, Bank statements etc. The auditor may also enquire about the entries which
appear vague (say an entry like 'Misc. Income') in various records and documents. The
idea behind conduct of verification is to reasonably ensure that no amount, which as per
the Central Excise law is chargeable to duty, escapes 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 procedures, he is required to discuss
the issue with the assessee. After explanation provided by the assessee, if the auditor is
satisfied that such non-tax compliance has 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 process. Auditor is advised not to take formal objections to mere procedural
lapses/ 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 follow the correct procedure in
future. Further, while making an audit para, attempt should be made to tabulate the duty
short paid by the assessee at the spot and incorporate it in the para itself. However, if this is
not possible for the paucity of time or for the want of some information not available at that
time, the 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 prepares an
'Draft Audit Report' which incorporates all the audit objections/audit paras. 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 satisfied with the reply, the amount of short
payment (if tabulated) and the recoveries of the same (if could be made at the spot). The
draft audit report is then submitted to the superior officers for review, who examine the
sustainability of the 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
recoveries.
17.4.9 Conclusion: EA 2000 is a modern, transparent and interactive method of audit
wherein the auditor proceeds with audit fully conversant with the business 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 requirement of EA 2000 is that the auditors must be thorough in their knowledge of
Central 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, accountancy and proficiency
in understanding commonly used commercial books and documents is of great help.
Further, being computer literate is an added requirement while auditing an assessee who
maintains his accounts in electronic format.
Self-examination questions
1. Discuss the provisions of section 14A in respect of valuation audit.
2. Briefly explain the provisions of section 14AA in respect of CENVAT Credit audit.
3. What is Excise Audit 2000? Discuss.
4. Explain the procedure of Excise Audit 2000.
 18
SETTLEMENT COMMISSION

18.1 INTRODUCTION
Chapter V was inserted in the Central Excise Act, 1944 by Finance (No. 2) Act, 1998 to
evolve a mechanism for speedy settlement of cases involving high revenue stakes. This
Chapter contains sections 31 to 32P. While these provisions came into effect from 1-8-
1998, the Settlement Commission was constituted vide Notification 40/99-CX(NT) dated 9-
6-1999 - 1999 (111) E.L.T. N4.

18.2 SALIENT FEATURES OF SETTLEMENT COMMISSION

Questions Answers

1. Who can make an Sec. 32E states that an assessee may make a case
application for settlement? Can for settlement. An assessee is defined in Sec. 31(a)
it be withdrawn? as any person 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 be withdrawn [Sec.

32E(4)]

2. What is it that can be A case at any stage can be settled. Case is defined
settled? in Sec. 31(c) as any proceeding for levy, assessment
or collection or any proceeding by way of appeal or
revision pending before a Central Excise officer or
Central Government. However, cases filed late where
delay is not condoned are not cases which can be
settled.
18.2 Central Excise

3. What categories of cases See Table below for such cases.

cannot be settled?

4. What is the procedure to be See Procedure below for details.

followed by the Settlement
Commission on receipt of
application?

5. Can Settlement Commission Under Sec. 32K, the Commission can grant immunity
grant immunity from from prosecution and penalty/interest/fine in whole or
prosecution and penalty/ in part if it is satisfied that the applicant has made full
interest/ fine? and true disclosure an co-operated with the
Commission. However, if prosecution is launched
before receipt of application, immunity against such
prosecution cannot be granted.

6. Can such immunity be Immunity can be withdrawn under Sec. 32K only if
withdrawn? the person fails to pay the sums due within such time
as may be specified by the Commission or where the
applicant has concealed any material to the
settlement or given false evidence relating to the
settlement.

7. Can the case be sent Under Sec. 32L, this can be done only where the
back by the Settlement Commission is satisfied that the person has not co-
Commission to the Central operated. The consequences of this are that it would
Excise officer ? be deemed that no application has been made before
the Commission.

8. Can the Central Excise Yes as per Sec. 32L.

officer who received the case
back use the materials
produced before the
Commission?
 Settlement Commission 18.3

9. Is the order of settlement As per Sec. 32M, except as provided in Chapter V,

final? the order is final and conclusive and shall not be re-
opened in any proceeding under this Act or under any
other law. For example, Sec. 32F(9) provides that if
the order was obtained by fraud or misrep-
resentation, it would become void. The Commission
has the power to void the order.

10. What is the time limit for Under Sec. 32F(4), the Commission will pass an
payment of amounts ordered order admitting the application. Within 30 days
by Settlement Commission? thereof or such extended period given by the
Commission, 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 Sec. 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. However, 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.

11. Can a completed Only with the concurrence of the applicant, if the
proceeding be re-opened? Settlement Commission feels that for the proper
disposal of the case pending it has the power to re-
open completed proceeding. However, no proceeding
can be re-opened after 5 years from the date of
application.

12. Can a bar be imposed on a Under Sec. 32O,

person who has applied once i. if an order of the Commission imposes penalty
to apply for settlement again? for concealment of particulars of his duty
liability;
ii. after passing the order such person is
convicted of any offence in relation to that
case;

iii. the case is sent back under Sec. 32L for

non-cooperation.
18.4 Central Excise

The person cannot apply for settlement in relation to

any other matter.

13. Is the proceeding before Sec. 32P deems that the proceeding is a judicial
the Settlement Commission a proceeding within the meaning of Sec. 193 and 228
judicial proceeding? of the IPC.

14. What is the time limit Departmental instructions reported in 1999 (113)
envisaged for such Settlement? E.L.T. T11 talks of a period of six months to one
year.

15. Where are the Benches of The principal Bench is at New Delhi with other
the Settlement Commission Benches at Chennai, Calcutta and Mumbai. The
located? Central Govt. has appointed a Chairman, three Vice
Chairmen and eight members (Notification 40/99-
C.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.

16. What is the procedure to See Procedure below.

make an application and what
are the fees?

17. Can the applicant take Under Sec. 32F(7), assistance of authorised
legal assistance? representative can be taken.

18. Can the property of the Provisional attachment by Settlement Commission

applicant be attached? possible under Sec.32G. See procedure to be
followed by Commission below for details.

18.3 CATEGORIES OF CASES THAT CANNOT BE SETTLED

The following categories of cases cannot be settled as proviso to section 32E :

a. If the applicant has not filed returns showing production, clearance and central
excise duty paid.

b. Where the applicant has not received a show cause notice;

c. Where the case is pending before the Appellate Tribunal or any Court;
 Settlement Commission 18.5

d. Where the dispute relates to interpretation of classification;

e. Where excisable goods/books/documents are seized, the applicant cannot prefer an

application for 180 days from the date of such seizure.

f. The amount in the application should be at least rupees two lakhs or more. In other
words, cases less than rupees two lakhs cannot be settled.

The Department has issued a detailed note as reported in 1999 (113) E.L.T T11.

18.4 PROCEDURE TO MAKE AN APPLICATION BEFORE THE SETTLEMENT

COMMISSION
1. The assessee must examine whether his case can be settled before the Settlement
Commission. Kindly see the previous title “Categories of cases that cannot be
settled”.

2. Once it is certain that the case can be settled, Rules 220 and 220A/B/C of the
Central Excise Rules, 1944 must be followed. The applicant must note that the
jurisdiction 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.

3. The application to the Settlement Commission must be in Form SC(E)-I. (For Form
see Annexure) Persons authorised to sign under rule 213 must sign the application.
(Kindly see Chapter on Appeals for persons authorised to sign appeals).

4. The application form must be filled properly alongwith the Annexure. The assessee
should give full details of the information which has not been correctly declared in the
monthly returns 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
thereof.

5. The application form alongwith the annexures should be presented in a sealed cover
to the Designated Officer at the Settlement Commission.

6. A fee of Rs.1000 should accompany the application. This should be paid in the
branch of authorised 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 negotiable 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
18.6 Central Excise

must be countersigned by the departmental officer having jurisdiction over assessee.

7. Section 32PA gives an option to the assessee to withdraw appeals filed before
Appellate 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-section (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 all the provisions
of the said Chapter shall apply accordingly. However, provisions 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 Officer may complete the proceedings
before expiry of two years from date of receipt 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 application for settlement has not cooperated
with the Settlement Commission in the proceedings before it, send the case back to
the Central Excise Officer having jurisdiction who shall thereupon dispose of the case
in accordance with the provisions of the Act as if no application under section 32E
had been made.

Sub-section (8) of section 32PA provides for sending a case back to the Tribunal by
the Settlement Commission in the event of non co-operation by an applicant.
Departmental appeals are not covered herein, where the Settlement Commission
refuses to accept the application, the appeal is deemed to be restored.

18.5 PROCEDURE TO BE FOLLOWED BY THE SETTLEMENT COMMISSION [SECTION 32F]

1. On receipt of an application, the Settlement Commission will call for a report from the
Commissioner of Central Excise.

2. The Commissioner must furnish a report within one month of receipt of the
communication from Settlement Commission failing 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 complexity of the materials contained therein
and nature of the case, the Commission may proceed with the application or reject
the same.

3. The application cannot be rejected without giving the applicant an opportunity of

hearing.

4. The hearing will be fixed within two months of receipt of application or within such
extended time as decided in writing by the presiding officer of the Bench.
 Settlement Commission 18.7

5. 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 proceeding, 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 payment
of dues. Attachment is done in accordance with Rule 220B wherein the
Commissioner may authorise his subordinate to prepare an inventory of assets -
details of immovable property and movable property with copies thereof to the
Commissioner and 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 movable or immovable property or resides or carries on his business or has his
bank account.

6. The applicant has to deposit the additional amount due within 30 days of receipt of
order. The Commission may extend this period or allow payment by instalments if
there are good and sufficient reasons.

7. 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.

8. After examining the application and the report of the Commissioner, the Settlement
Commission may require further examination and in such cases, it may direct the
Commissioner (Investigation) to make such inquiry or investigation. Final orders will
be passed after this.

9. Every final order for settlement shall provide the terms of settlement, the amounts
due alongwith penalty or interest, manner of settlement of dues and shall state that if
the order has been obtained by fraud or misrepresentation of facts, it shall be void. If
the order becomes void, the central excise officer can complete proceedings before
expiry of two years from date of receipt of communication that the order has become
void.

10. Dues should be discharged within 30 days of receipt of order failing which the 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 instalment facility.

11. The dues shall be recovered under section 32N by the central 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 any 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 and
prosecution if the applicant has made full and true disclosure and has co-operated
with the Commission. However, if prosecution is launched before the date of receipt
of application, such prosecution cannot be granted immunity.

14. This immunity shall be withdrawn if the sums due under section 32F(7) after final
orders are not paid within the time/extended time given by the Commission or for
concealment of materials or false evidence given by the applicant.

Note: Kindly refer to the Chapter on Settlement Commission in the Customs section as
additional reading.

Self-examination questions

1. Who can make an application for settlement? Can such an application be

withdrawn?
2. Can all cases of disputed excise duty be settled in a Settlement Commission? If no,
then enlist the exceptions?
3. Describe the procedure to make an application before the Settlement Commission.
4. Explain whether the Settlement Commission can grant immunity from prosecution
and penalty/interest/fine?
5. 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 avenues of taxation. Thus
service tax was born. Secondly, services contribute to approximately 50% of the GDP.
Government's argument hence, is substantial revenue should come from the service sector.
Thus the tax on goods (excise duty) has to be complemented with the tax on services. The
Government's plan is to introduce service tax on all services and exempt a few.

1.2 GENESIS OF SERVICE TAX IN INDIA

The imposition of service tax was in sequel to the Report of the Chelliah Committee 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 concept of Service Tax and
stated that “There is no sound reason for exempting services from taxation, when goods are
taxed and many countries treat goods and services alike for tax purposes. The Tax Reforms
Committee has also recommended imposition 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, service
tax was imposed on 3 services.
The baton then passed on to successive finance ministers who widened the service tax net in
their budgets. It is expected that 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 Tax has been
increasing slowly but steadily. Service tax collection is primarily from 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 service tax which is reproduced under :
1.2 Service tax & VAT

Year No. of Gross Collections Percentage(%) No. of Services

assessees (Rs. Crores) of growth
1994-1995 3943 410 Base Year 3
1995-1996 4866 846 101 3
1996-1997 13982 1022 24 6
1997-1998 45991 1515 49 18
1998-1999 107479 1787 18 30
1999-2000 115495 2072 16 27
2000-2001 122326 2540 23 26
2001-2002 187577 3305 26 41
2002-2003 232048 4125 25 51
2003-2004 403856 7890 91 58

Trends of revenue indicate that the Service Tax collection is growing at fast rate since its
inception.

1.3 CONSTITUTIONAL AUTHORITY

The Government derives its power to levy taxes from the Constitution of India. Elaborate
provisions have been made in the Constitution of India to regulate the power of taxation of
both the Central Government and the State Governments. Article 265 of the Constitution of
India prohibits arbitrary collection of tax. It reads 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
Constitution of India. The Constitution, in its Schedule VII, has enumerated the matters on
which the Central Government and the State Government can make laws. Such matters are
divided into three categories--
a) List – I : Union List (It contains the matters in respect of which only the Central
Government has the power of legislation)

b) List – II : State List (It contains the matters in respect of which only the State
Government has the power of legislation)

c) List – III : Concurrent List (It contains the matters in respect of which both the
Centraland the State 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 where 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 entry in the Union List for
levying service tax. Service tax was levied by the Central Government by drawing power from
entry 97 of the Union List. Entry 97 is a 'residuary 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 Government 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 the 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 (92nd 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 reads 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 India and the State in the
manner provided in clause (2).
(2) The proceeds in any financial 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) Appropriated by the Government of India and the States,
in accordance with such principles 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 modalities 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 amendment in the Constitution, the Central Government has become competent to
enact a separate legislation on service tax.

1.4 SERVICE TAX LAW

Service tax was introduced in 1994 but there is no independent statute on service tax as yet.
However, following sources provide statutory provisions relating to service tax and can be
broadly grouped under the following categories:
1.4.1 Finance 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. Later, in the year 2003,
the Finance Act 2003 inserted Chapter VA relating to advance rulings on service tax in the
Finance Act, 1994. In the year 2004, the provisions 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 service tax: Section 94 of Chapter V and section 96 -I of Chapter VA of the
Finance Act, 1994 grants power to the Central Government to make rules for carrying out the
provisions of these Chapters. Using these powers, the Central Government has issued
Services Tax Rules 1994, Service Tax (Advance Rulings) Rules, 2003, CENVAT Credit Rules,
2004, Export of Service Rules, 2005, Service Tax (Registration of Special Category of
Persons) Rules, 2005, Service Tax (Determination of Value) Rules, 2006 and Taxation of
Services (Provided from Outside India and Received in India) Rules, 2006 which are amended
from time to time.
Rules should be read with the statutory provisions contained in the Act. Rules are made for
carrying out the provisions of the Act. The rules can never override the Act and cannot 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 empower the Central Government to issue notifications
to exempt any service from service tax and to make rules to implement service tax provisions.
Accordingly, notifications 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 which the Central
Government may think would facilitate the governance of service tax matters.
1.4.3 Circulars or Office Letters (Instructions) on service tax: The Central Board of
Excise and Customs (CBEC) issues departmental circulars or instruction 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 intention of the
legislature. However, the provisions of any Act of the Parliament cannot be altered or
contradicted or changed by the departmental circulars.
1.4.5 Orders on service tax: Orders on service tax may be issued either by the CBEC or by
the Central Government. Rule 3 of the Service Tax Rules, 1994, empowers the CBEC to
appoint such Central Excise Officers as it thinks fit for exercising the powers under Chapter V
of the Finance Act, 1994. Accordingly, orders have been issued by the CBEC, from time to
time, to define jurisdiction of Central Excise Officers for the purposes of service tax.
 Introduction 1.5

1.4.6 Trade Notices on service tax: Trade Notices are issued by the Central Excise/Service
Tax Commissionerates. These Commissionerates receive various instructions from the
Ministry of Finance or Central Board of Excise & Customs for effective 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 Associations are supplied with the copies of these trade notices.
Individual assesses may also apply for copies of trade notices. The trade notice disseminate
the contents of the notifications and circulars/letters/orders, define their jurisdiction; identify
the banks in which service tax can be deposited; give clarifications 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 Trade
Act, 1994 Notices

Rules Notifications Circulars or Office Orders

Letters (Instructions)

1.5 SELECTIVE VS. COMPREHENSIVE COVERAGE

Depending on the socio-economic compulsions, each country evolved a taxation system 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, selective services are subjected to
service tax. While most of the developed countries tax 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 levied 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.
System 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 Service Tax at Mumbai oversees the
activities at the field level for technical and policy level coordination.
1.6 Service tax & VAT

1.6 ADMINISTRATION OF SERVICE TAX

The Department of Revenue of the Ministry of Finance exercises control in respect 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, whereas those relating to levy and collection of indirect taxes (customs duties,
central excise duties etc.) fall within the purview of CBEC. The two Boards were constituted
under the Central Board of Revenue Act, 1963.
The responsibility of administration and collection of service tax has also been vested upon
the CBEC ('Board'). The Board administers service tax matters through the Central Excise
Zones and each Zone, in turn works through Central Excise Commissionerate falling under 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 revenue collection,
disposal of pendencies, redressal of grievances of trade, etc. He also ensures coordination
among the Commissionerates within the Zone.
1.6.1 Director General (Service Tax): Considering the increasing workload due to the
expanding coverage of service tax, it was decided to centralise all the work and entrust the
same to a separate unit supervised by a very senior official. Accordingly, 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 Director General (Service Tax) are as follows:
(1) To ensure that proper establishment and infrastructure has been created under
different Central Excise Commissionerates to monitor the collection and assessment
of service tax.
(2) To study the staff requirement at field level for proper and effective implementation of
service tax.
(3) To study as to how the service tax is being implemented in the field 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 relation to service tax with a view to
simplify the service tax collection and assessment and make suggestions thereon.
(5) To form a data base regarding the collection of service tax from the date of its
inception in 1994 and to monitor the revenue collection from service tax.
(6) To inspect the service tax cells in the Commissionerate to ensure that they are
functioning effectively.
(7) To undertake any other functions as assigned by the Board from time to time.
The Directorate of Service Tax coordinates between the CBEC and Central Excise
Commissionerates. 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
Commissionerates and monitors the performances of the Commissionerates. It scrutinises the
correspondences received from field formations and service providers and replies to the
clarifications sought for, wherever possible. In cases where the doubts/clarification sought
involves policy matter, the Directorate apprises the 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)

DIRECTOR CENTRAL BOARD OF EXCISE AND CUSTOMS (3)

GENERAL OF
SERVICE TAX
CENTRAL EXCISE ZONES HEADED BY CHIEF COMMISSIONERS (4)
(Co-ordinator
between 3 &
5) CENTRAL EXCISE COMMISIONERATES HEADED BY COMMISSIONERS (5)

1.7 SERVICE TAX PROCEDURES

Service tax procedures include registration, maintenance of books and records, payment of
service tax, availment and utilization of CENVAT credit, filing of service tax returns, self
assessment, provisional assessment and recovery of service 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 professionals to advice
and assist the assessees. A chartered accountant with his training and experience is well-
equipped to position himself in the new role as an advisor and facilitator for due compliance of
service tax law. The nature of services would 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 void.
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 department. A chartered
accountant with his experience and expertise would be the best person to assist the assessee
in all the above functions and ensure compliance.
1.8.3 Personal representation: As per the service tax law read with the Central 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 would 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 the number of service tax assessees. In the ensuing years the department would
have to evolve a mechanism where there is management by exception i.e. generally accept all
the returns as correct and pick and choose those returns which need detailed scrutiny. In this
mechanism a chartered accountant could be of great assistance. Service tax returns and
financial statements could be certified by the chartered accountant from the perspective of
service tax similar to an audit under section 44AB of the Income-tax Act.
1.8.5 Onerous task to keep pace : The service tax like excise is administered more by way
of trade notices issued by various 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 services
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. Which committee recommended the introduction of service tax?
2. Who has the power to levy service tax – Union or States? Discuss.
3. From which Entry of the Union List of the Constitution, does the authority to levy
service tax arise?
4. Under which Act, does the service tax is levied?
5. Which were the first three services to be brought under the service tax net?
6. Write a note on administration of service tax.
7. What do you mean by selective and comprehensive coverage of services for the
purpose of service tax? Which system is being adopted in India?
8. Write briefly about the role of a chartered accountant in the field of service tax
consultancy.
9. 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 extends
to the whole of India except the state of Jammu and Kashmir, and by section 64(3), the
levy applies to “taxable services provided”. Thus, services provided in the State of
Jammu and Kashmir are not liable to service tax.
As per Article 370 of the Constitution, any Act of Parliament applies to Jammu & Kashmir
only with concurrence of State Government. Since, no such concurrence has been
obtained in respect of Finance Act, 1994, service tax provisions are not applicable in
Jammu and Kashmir.
Service tax will not be payable if service is provided in Jammu & Kashmir. However, if a
person from Jammu & Kashmir provides the service outside Jammu & Kashmir in any
other part of India, the service will be liable to service 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 economic zone. The ‘exclusive economic zone’ extends upto 200
nautical miles inside the sea from base line.
Service provided within the territorial waters will be liable 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 extend upto 12 nautical miles from the Indian land mass.

2.2 DEFINITIONS [SECTION 65]

This section contains definitions of various important terms used in the Finance Act, 1994.
The adoption of selective coverage necessitates the definition of various service
categories/service providers. These definitions are contained in section 65 of the Act.
The Act defines the categories of services to which the Act applies by defining the term
“taxable service” which is contained in section 65(105) 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 SERVICES [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 for any reason, a taxable service is, prima facie, classifiable under two or more sub-
clauses of clause (105) of section 65, classification shall be effected as follows:
(a) the sub-clause which provides the most specific description shall be preferred to sub-
clauses providing a more general description;
(b) composite services consisting of a combination of different services which cannot be
classified in the manner specified in clause (a), shall be classified as if they
consisted of a service which gives them their essential character, in so far as this
criterion is applicable;
(c) when a service cannot be classified in the manner specified in clause (a) or clause
(b), it shall be classified under the sub-clause which occurs first among the sub-
clauses which equally merit consideration.
It has been clarified vide C.B.E.&C. Circular No. 51/13/2002 - ST, dated 07.01.2003 that
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 essential 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 position is akin to Central Excise duty which is charged
on manufactured goods. Just as Central Excise duty cannot be charged twice on the
same goods under two separate chapters/headings/sub-headings of the Central Excise
Tariff, so also Service tax cannot be charged twice on the same service (transactions).
However, one 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 of the taxable
services separately.
However, in the absence of any interpretative rules, it may become difficult at times to
decide the classification of a particular service. The guiding principle should be that a
service should be categorised 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 fall
under the category of 'mandap keeper' and exempt from tax vide Notification No.12/2001-
ST dated 20.12.2001, or it will fall under the category of 'convention services' and charged
 Preliminary Legal Provisions 2.3

to service tax. Between the two competing categories, in this case, the more specific one
would be that of a 'convention service' since a 'mandap keeper' includes 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 [SECTION 66]

Section 66 is the charging section of the Act, which provides that there shall be levied a
service tax @ 12% of the value of taxable services referred to in section 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 rate of tax is 12%
(d) the measure of tax is on “value of taxable services” provided which is defined in
section 67 discussed later in this chapter.

2.5 EDUCATION CESS

An Education Cess is levied @ 2%, calculated on the service tax on all taxable services.
Thus, the effective rate of service tax works out to be 12.24%.
The cess paid on input services is available as credit for payment of cess on output
services 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 Act, 1994. The
Education Cess so collected is utilized for providing and financing universalised quality
basic education.
The provisions of Chapter V of the Finance 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 levy and collection of the Education Cess on taxable services, as
they apply in relation 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 taxable services would not be subjected to education cess. In case of
a partial exemption, say by way of abatement, the cess would be calculated on the net tax
paid and not on the entire amount of tax that would have been payable, but for the
exemption
2.4 Service tax & VAT

2.6 NATURE OF SERVICE TAX

Service tax is a tax on services provided. This is not a tax on profession, trade, calling or
employment but is in respect of service rendered. If there is no service, 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 TAXABLE SERVICES FOR CHARGING SERVICE TAX [SECTION 67]
Section 67 provides for the valuation of taxable services. The provisions of this 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 money,
then the value of such service shall be such amount in money, with the addition of
service tax charged, is equivalent to the consideration.
(3) If the consideration 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) Consideration includes any amount that is payable for the taxable services provided
or to 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 value of such taxable service
shall be such amount as, with the addition of tax payable, 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 before, 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 service shall be determined in such manner as may be prescribed.
(8) Money includes any currency, cheque, promissory note, letter of credit, draft, pay
order, travellers cheque, money order, postal remittance and other similar
instruments but does not include currency that is held for its numismatic value.
(9) Gross amount charged includes payment by cheque, credit card, deduction from
account and any 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 (Determination
of Value) Rules, 2006. They have come into force from 19.04.2006.
 Preliminary Legal Provisions 2.5

Rule 2 – Definitions
Clause (c) defines “Value” to have the meaning assigned to it in section 67.
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 Act.
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 determined by the service provider in the manner described below.
However, the same is subject to the provisions of section 67.
(a) the value of such taxable service shall be equivalent to the gross amount charged by
the service provider to provide 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 determined 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 - Rejection of value
(1) The Central Excise Officer shall have the power to satisfy himself as to the accuracy
of any information furnished or document presented for valuation. In other words,
where there are adequate reasons warranting verification 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 Central Excise Officer.
(3) A show cause notice shall be issued to the service provider, if the Central Excise
Officer is satisfied that the value determined by such 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 reasonable opportunity of being heard, to
the service provider. Thereafter, he shall determine the value of such taxable
service for the purpose of charging service tax in accordance with the provisions of
the Act and these rules.
Rule 5 - Inclusion in or exclusion from value of certain expenditure or costs
(1) The expenditure or costs incurred by the service provider 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 included in the value for the purpose of
charging service tax on the said service. It shall not be relevant that various
2.6 Service tax & VAT

expenditure or costs are separately indicated in the invoice or bill issued by the
service provider to his client.
(2) There could be situations where the client of the service provider specifically
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 or 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 purely on behalf of his
client in his capacity as an agent, i.e. “pure agent” of the client. 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 undisclosed 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 reimbursable expenditure.
(4) Subject to the provisions mentioned in point (1) above, the expenditure or costs
incurred by the service provider as a pure agent of the recipient of service shall be
excluded from the value of the taxable service 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 procured by
the service provider in his capacity as pure agent of the recipient of service;
(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 for which payment
has been made by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service
has been separately indicated in the invoice issued by the service provider to
the recipient of service;
(vii) the service provider recovers from 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 the third party as a
pure agent of the recipient of service are in addition to the 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 agent 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 procured
or provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.
It is clarified that the value of the taxable service is the total amount of consideration
consisting of all components of the taxable service and it is immaterial that the details of
individual components of the total consideration is indicated separately in the invoice.
Illustration 1.– X contracts with Y, a real estate agent to sell his house and thereupon Y
gives 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 act 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 issued 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.
Illustration 2.– In the course of providing a taxable service, a service provider incurs costs
such as traveling expenses, postage, telephone, etc., and may indicate these 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 because 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 for building a house. During the course of
providing the taxable service, B incurs expenses such as telephone charges, air travel
tickets, hotel accommodation, etc., 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 separately itemised expense or as part of an inclusive overall fee, service
tax is payable on the total amount charged by B. Value of the taxable service for charging
service tax is what A pays to B.
Illustration 4.– Company X provides a taxable service of rent-a-cab by providing
chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to
cover his food and overnight accommodation and any other incidental expenses such as
parking fees by the Company X during 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 charges these amounts from the recipients of service. The cost incurred by
the chauffeur and billed to the recipient of service constitutes part of gross amount
charged 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 circulars
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 purchase 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 the
subscriber at the time of application for telephone connection or pager or
facsimile 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 agent 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
Railways or the customer;
(viii) the remuneration or commission, by whatever name called, paid to such agent
by the client engaging such agent for the services provided by a clearing and
forwarding agent to a client rendering services of clearing 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 appointing such agent in relation to insurance auxiliary
services provided by an insurance agent.
(2) Subject to the provisions contained in sub-rule (1), the value of any 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;
(ii) the airfare collected by air travel agent in respect of service provided by him;
(iii) the rail fare collected by rail travel agent in respect of service provided by him;
and
 Preliminary Legal Provisions 2.9

(iv) interest on loans.

Rule 7 - Actual consideration to be the value of taxable service provided from

outside India
(1) The value of taxable service received under the provisions of section 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
• which 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 including the
value of service partly performed outside India. Nothing mentioned in point (1) above
shall have any effect in this respect. Specified taxable services, which involve
physical performance, fall under rule 3(ii) of Taxation of services (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 services are partly or wholly
performed in India.

Self-examination questions
1. Whether a person, having a business in any of the Indian States other than the State
of Jammu & Kashmir, who provides the services to the client in the State of Jammu &
Kashmir be liable to pay service tax?
2. What is the extent and application of the provisions of the Finance Act, 1994 relating
to service tax?
3. Discuss the provisions governing classification of taxable services.
4. Write short notes on education cess on service tax.
5. Briefly explain the concept of charge of service tax.
6. How will a taxable service be valued when the consideration thereof is not in wholly
or partly in terms of money?
7. How will a taxable service be valued when the gross amount charged for it includes
service tax payable?
8. Discuss whether the central excise officer has power to satisfy himself as to the
accuracy of the furnished information/document presented for valuation.
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 India 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 service 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 the '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, subject to the following conditions:
(i) the provider of taxable service has the option not to avail the exemption contained
and pay service tax on the taxable services provided by him and such option, once
exercised in a financial year, shall not be withdrawn during the remaining part of
such financial year;
(ii) the provider of taxable service shall not avail the Cenvat credit of service 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 premises 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 services which are
• received on or after the date on which the service provider starts paying service
tax, and
• are used for the provision of taxable services for which service tax is payable;
(v) the provider of taxable service who starts availing the said exemption shall be
required to pay an amount equivalent to the Cenvat credit taken by him, if any, in
respect of such inputs lying in stock or in process on the date on which the 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), if any, shall not
be utilized as per rule 3(4) of the Cenvat Credit Rules, 2004 and shall lapse on the
day such service provider starts availing the said exemption;
(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 value of taxable services rendered by a provider of taxable service
from one or more premises, does not exceed Rs.4 lakhs in the preceding financial
year.
As per Explanation B to the Notification “aggregate value not exceeding Rs.4 lakhs” shall
include the sum total of first consecutive payments totaling to Rs.4 lakhs received during
a financial year towards the gross amount, as prescribed under section 67, charged by the
service provider towards the taxable services. However, payments received towards such
gross amount, which are exempt from whole of service tax, shall not be covered within
such limit of Rs.4 lakhs.
In case of goods transport agency services, the payments received towards taxable service in
respect of 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, whether
registered or not, of another person (use of own brand name will not be a
disqualification for the exemption); or
(ii) such value of taxable services in respect of which service tax shall be paid by such
person and in such manner as specified under sub-section (2) of section 68 of the
said Finance Act read with Service Tax Rules,1994.
As per Explanation 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, monogram, logo, label, signature, or invented word or writing which is used in
relation to such specified services for the purpose of indicating, or so as to indicate a
connection in the course of trade between such specified services and some 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-section (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 communication or a leased circuit;
(ii) 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
consignor 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 Act, 1956;
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration 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
under any law
(v) in relation to business auxiliary service of distribution of mutual fund by a mutual
fund distributor or an agent, as the case may be.
(vi) in relation to sponsorship service provided to any body corporate or firm.
(B) any taxable service provided or to be provided from a country other than India and
received in India, under section 66A of the Finance Act, 1994.

3.2 PAYMENT ONLY ON RECEIPT

It is to be noted that though the service provider charges service tax in his bill 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’. Thus, if a chartered
accountant raises a bill for auditing services say, on 15 th December, 2006 for Rs.105000/-
(including service tax Rs.5000/-) and the client pays his bill only in February 2007, the
liability to pay service tax to the Government would arise only in February 2007. This
alleviates the major grievance of the service providers who otherwise would be required to
pay service tax on amounts 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 deferred 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 service includes “service to be provided”, and
(ii) the payments received before, during, or after the provision of taxable service, 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 domestic customer are
subjected to VAT/GST under reverse charge or tax shift mechanism. Under the reverse
charge method, a legal fiction is created treating as if the 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 provided from outside the country, is required to prevent distortion of competition.
Section 66A provides a separate mechanism for levying service tax on services received
from outside India. Section 66A is to be read with the Taxation of Services (Provided from
outside India and Received in India) Rules, 2006. It may be noted that only services
received in India are taxable under these provisions. Section 66A provides that:
(1) Where any service specified in clause (105) of section 65 is,—
(a) provided or to be provided by a person who has established a business or has a
fixed establishment from which the service is provided or to be provided or has
his permanent address or usual place of residence, in a country other than
India, and
(b) received by a person (recipient) who has his place of business, fixed
establishment, permanent address or usual place of residence, in India,
such service shall be a taxable service. Such service shall be treated as if the
recipient had himself provided the service in India. Accordingly all the
provisions 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 country and
elsewhere, the country, where the establishment of the provider of service directly
concerned with the provision of service is located, shall be treated as the country
from which the service is provided or to be provided.
(4) Where 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
permanent establishment outside India shall be treated as two separate legal
persons for taxation purposes.
(5) A person carrying on a business through a branch or agency 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 TAXATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN

INDIA) RULES, 2006
Notification No.11/2006-ST 19.04.2006 has notified the Taxation of Services (Provided
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 service” 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 Material]
As per clause (e) of rule 2, “India” includes the designated areas in the Continental Shelf
and Exclusive Economic Zone of India as declared by the notifications 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 respectively assigned to them in the Act.
Rule 3 - Taxable services provided from outside India and received in India
Rule 3 classifies taxable services provided from outside India and received in India in to
three categories. However, this classification 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 service 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 services provided or to be provided from outside India
in relation to immovable property situated in India shall be taxable services and thus,
chargeable to service tax:
Sub-clause of section 65(105) Service covered
(d) General insurance services
(p) Architects’ services
(q) Interior decorator’s services
(v) Real estate agent’s services
(zzq) Commercial or industrial construction
services
(zzza) Site preparation and clearance,
excavation, earth moving and
demolition services
(zzzb) Dredging services of rivers, ports,
harbours, backwaters and estuaries
(zzzc) Survey and map making services other
than by Government departments
(zzzh) Construction services in respect of
residential complexes
(zzzr) Auctioneer’ services, other than
auction of property under directions or
orders of a court of law or auction by
the Central Government
(b) As per rule 3(ii) the following services shall be taxable service and charged to
service tax, only if they are performed in India:
Sub-clause of section 65(105) Service Covered
(a) Stock broking
(f) Courier agency’s services
(h) Custom house agent’s services
(i) Steamer agent’s services
(j) Clearing and forwarding agent’s services
(l) Air travel agent’s services
(m) Mandap keeper’s services
(n) Tour operator’s services
 Basic Concepts Applicable to All Services 3.7

(o) Rent-a-cab scheme operator’s services

(s) Practising chartered accountant’s
services
(t) Practising cost accountant’s services
(u) Practising company secretary’s services
(w) Security agency’s services
(x) Credit rating agency’s services
(y) Market research agency’s services
(z) Underwriter’s services
(zb) Photography services
(zc) Convention services
(zi) Video tape production services
(zj) Sound recording services
(zn) Port services
(zo) Authorised service station’s services
(zq) Beauty parlour’s services
(zr) Cargo handling services
(zt) Dry cleaning services
(zu) Event management services
(zv) Fashion designer’s services
(zw) Health club and fitness centre’s services
(zza) Storage and warehousing services
(zzc) Commercial training or coaching services
(zzd) Erection, commissioning or installation
services
(zzf) Internet café’s services
(zzg) Management, maintenance or repair
services
(zzh) Technical testing and analysis services
(zzi) Technical inspection and certification
services
(zzl) Other port services
(zzm) Airport services
(zzn) Transport of goods by air services
3.8 Service tax & VAT

(zzo) Business exhibition services

(zzp) Transport of goods by road
(zzs) Opinion poll services
(zzt) Outdoor caterer’s services
(zzv) Survey and exploration of mineral
services
(zzw) Pandal or shamiana contractor’s services
(zzx) Travel agent services
(zzy) Forward contract services
(zzzd) Cleaning services other than in relation to
agriculture, horticulture, animal
husbandry or dairying
(zzze) Services in respect of Membership of
clubs or associations
(zzzf) Packaging services
(zzzp) 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 in India, it shall
be considered to have been performed in India. The value of such 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 section 65(105) Service Covered
(b) Telephone services
(c) Pager services
(d) General insurance services (other than
immovable property)
(e) Advertising agency’s services
(g) Consulting engineer’s services
(k) Manpower recruitment agency’s services
(r) Management consultant’s services
(za) Scientific and technical consultancy
services
(zd) Leased circuit services
(ze) Telegraph services
 Basic Concepts Applicable to All Services 3.9

(zf) Telex services

(zg) Facsimile (FAX) services
(zh) On-line information and data base access
or retrieval services
(zk) Broadcasting services
(zl) Insurance auxiliary (General Insurance)
services
(zm) Banking and financial services
(zs) Cable operator’s services
(zx) Life insurance services
(zy) Insurance auxiliary (Life insurance)
services
(zz) Rail travel agent’s services
(zzb) Business auxiliary services
(zze) Franchise services
(zzj) Authorised service station’s services in
respect of light motor vehicle
(zzk) Foreign exchange broking services
(zzr) Intellectual property services
(zzu) Programme production (of TV or radio
programmes) services
(zzz) Transport of goods through pipeline or
other conduit
(zzzc) Survey and map making services other
than by government departments (other
than immovable property)
(zzzg) Mailing list compilation and mailing
services
(zzzi) Registrar to an issue’s services
(zzzj) Share transfer agent’s services
(zzzk) Automated teller machine operations,
maintenance or management services
(zzzl) Recovery agent’s services
(zzzm) Sale of space or time for advertisement,
other than in print media
3.10 Service tax & VAT

(zzzn) Sponsorship services provided to any

body corporate or firm, other than
sponsorship of sports events
(zzzq) Business support services
(zzzr) Auctioneer’ 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)
(zzzs) Public relations services
(zzzt) Ship management services
(zzzu) Internet telephony services
(zzzw) Credit card, debit card, charge card or
other payment card related services
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-mentioned three categories, it shall be
deemed that the recipient of the service has himself provided the service in India.
Therefore, he shall pay the service tax.
It is to be noted that services in relation to transport of passengers embarking on
international journey by air, other than economy class passengers and transport of
persons by cruise ship are not covered in any of the three categories.
Rule 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 case.
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 received 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 any 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 products, 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 export of
services. Export of Service Rules, 2005 provide a scientific criteria to decide what is
‘export of service’. The rules make it clear that exemption from service 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. “Act” means the Finance Act, 1994 [Rule 2(a)].
2. “input” shall 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)
3. “input service” shall have the meaning assigned to it in clause (l) of rule 2 of the
CENVAT Credit Rules, 2004 [Rule 2(c)]. (refer Chapter 4 of Part A of this Study
Material)

RULE 3 - EXPORT OF TAXABLE SERVICE

Rule 3 classifies the taxable services in three 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 outside India [Rule 3(1)(ii)]
(c) when service is provided from India, but recipient of service is outside India [Rule
3(1)(iii)].
In order to be treated as export 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) Service covered
(d) General insurance services
(p) Architects’ services
(q) Interior decorator’s services
(v) Real estate agent’s services
(zzq) Commercial or industrial construction
services
3.12 Service tax & VAT

(zzza) Site preparation and clearance,

excavation, earth moving and
demolition services
(zzzb) Dredging services of rivers, ports,
harbours, backwaters and estuaries
(zzzc) Survey and map making services other
than by Government departments
(zzzh) Construction services in respect of
residential complexes
(zzzr) Auctioneer’ services, other than
auction of property under directions or
orders of a court of law or auction by
the Central Government
Thus, in the first category, the service shall be treated as ‘export of taxable service’
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 Service Covered
65(105)
(a) Stock broking
(f) Courier agency’s services
(h) Custom house agent’s services
(i) Steamer agent’s services
(j) Clearing and forwarding agent’s services
(l) Air travel agent’s services
(m) Mandap keeper’s services
(n) Tour operator’s services
(o) Rent-a-cab scheme operator’s services
(s) Practising chartered accountant’s services
(t) Practising cost accountant’s services
(u) Practising company secretary’s services
(w) Security agency’s services
(x) Credit rating agency’s services
(y) Market research agency’s services
 Basic Concepts Applicable to All Services 3.13

(z) Underwriter’s services

(zb) Photography services
(zc) Convention services
(zi) Video tape production services
(zj) Sound recording services
(zn) Port services
(zo) Authorised service station’s services
(zq) Beauty parlour’s services
(zr) Cargo handling services
(zt) Dry cleaning services
(zu) Event management services
(zv) Fashion designer’s services
(zw) Health club and fitness centre’s services
(zza) Storage and warehousing services
(zzc) Commercial training or coaching services
(zzd) Erection, commissioning or installation services
(zzf) Internet café’s services
(zzg) Management, maintenance or repair services
(zzh) Technical testing and analysis services
(zzi) Technical inspection and certification services
(zzl) Other port services
(zzm) Airport services
(zzn) Transport of goods by air services
(zzo) Business exhibition services
(zzp) Transport of goods by road
(zzs) Opinion poll services
(zzt) Outdoor caterer’s services
(zzv) Survey and exploration of mineral services
(zzw) Pandal or shamiana contractor’s services
(zzx) Travel agent services
(zzy) Forward contract services
(zzzd) Cleaning services other than in relation to
3.14 Service tax & VAT

agriculture, horticulture, animal husbandry or

dairying
(zzze) Services in respect of membership of clubs or
associations
(zzzf) Packaging services
(zzzp) 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 outside
India, it shall be considered to have been performed outside India.

(c) Rule 3(1)(iii) covers the following services:

Sub-clause of section Service Covered
65(105)
(b) Telephone services
(c) Pager services
(d) General insurance services (other than immovable
property)
(e) Advertising agency’s services
(g) Consulting engineer’s services
(k) Manpower recruitment agency’s services
(r) Management consultant’s services
(za) Scientific and technical consultancy services
(zd) Leased circuit services
(ze) Telegraph services
(zf) Telex services
(zg) Facsimile (FAX) services
(zh) On-line information and data base access or
retrieval services
(zk) Broadcasting services
(zl) Insurance auxiliary (General Insurance) services
(zm) Banking and financial services
(zs) Cable operator’s services
(zx) Life insurance services
(zy) Insurance auxiliary (Life insurance) services
(zz) Rail travel agent’s services
 Basic Concepts Applicable to All Services 3.15

(zzb) Business auxiliary services

(zze) Franchise services
(zzj) Authorised service station’s services in respect of
light motor vehicle
(zzk) Foreign exchange broking services
(zzr) Intellectual property services
(zzu) Programme production (of TV or radio programmes)
services
(zzz) Transport of goods through pipeline or other conduit
(zzzc) Survey and map making services other than by
government departments (other than immovable
property)
(zzzg) Mailing list compilation and mailing services
(zzzi) Registrar to an issue’s services
(zzzj) Share transfer agent’s services
(zzzk) Automated teller machine operations, maintenance
or management services
(zzzl) Recovery agent’s services
(zzzm) Sale of space or time for advertisement, other than
in print media
(zzzn) Sponsorship services provided to any body
corporate or firm, other than sponsorship of sports
events
(zzzq) Business support services
(zzzr) Auctioneer’ 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)
(zzzs) Public relations services
(zzzt) Ship management services
(zzzu) Internet telephony services
(zzzw) Credit card, debit card, charge card or other
payment card related services
The abovementioned services when provided in relation to business or commerce
shall be eligible for exemption as ‘export of services’ when the recipient of such
services are located outside India. When provided otherwise such services shall be
eligible for exemption as ‘export of services’ when the recipient of such services are
3.16 Service tax & VAT

located outside India at the time of provision of such service.

However, where such recipient has commercial establishment or any office relating
thereto, in India, such taxable services provided shall be treated as export 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 noted that services in relation to transport of passengers embarking on
international 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 following conditions are satisfied:–
(a) such service is delivered outside India and used outside India; and
(b) payment for such service provided outside India is received by the service provider in
convertible foreign exchange.
It has been clarified 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
Zone’ extends up to 200 nautical miles inside the sea from baseline. ‘India’ also includes
territorial waters, i.e., up to 12 nautical miles from landmass. Thus, service tax is leviable
if services are provided within territorial waters or in designated areas of continental shelf
and exclusive economic zone. In other words, services provided in this area/zone will be
treated as ‘service provided in India’.

RULE 4 - EXPORT WITHOUT PAYMENT OF SERVICE TAX

Any service, which is taxable under clause (105) of section 65 of the Act, may be exported
without payment of service tax.

RULE 5 - REBATE OF SERVICE TAX

Where any taxable service is exported, the Central Government can grant rebate of
service tax paid on such taxable service 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 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 taxable service should be received in India in
convertible foreign exchange;
(b) the service tax and cess, rebate of which has been claimed, 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 exported,
the rebate paid, if any, shall be recovered with interest as per the provisions of
section 73 and section 75 of the Finance Act, 1994 as if no service tax and 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 the jurisdictional Assistant/Deputy Commissioner of Central Excise;
(ii) such application shall be accompanied by,–
a. documentary 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 exported;
b. a declaration that such taxable service, rebate of service tax and cess paid 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;
(iii) The jurisdictional Assistant/Deputy Commissioner of Central Excise, 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.
2. Rebate of excise duty/service tax paid on inputs/input service used in providing
exported taxable services
Notification No.12/2005 ST, dated 19.04.2005 has been issued by the Central
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 services’), used in providing taxable services exported in
terms of rule 3 to any country 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 taxable service has been received in India in
convertible foreign exchange;
(b) the 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, rebate of which has been
claimed, have not been paid; or
(ii) the taxable service, rebate for which has been claimed, has not been exported;
or
(iii) Cenvat credit has been availed on inputs and input services on which rebate
has been claimed,
the rebate paid, if any, shall be recoverable with interest as per the provisions of
section 73 and section 75 of the Finance Act, 1994 as if no service tax and cess
have been paid on such taxable service.
Procedure:-
1. Filing of declaration- The provider of taxable service to be exported shall, prior to
date of export of taxable service, file a declaration with the jurisdictional 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 providing taxable service to be exported;
 Basic Concepts Applicable to All Services 3.19

(b) description, value and the amount of service tax and cess payable on input services
actually required to be used in providing taxable service to be exported.
2. Verification of declaration- The Assistant/Deputy Commissioner of Central Excise
shall verify the correctness 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 tax and cess, he may
accept the declaration.
3. Procurement of input materials and receipt of input services- The provider of
taxable service shall,-
(i) obtain the 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 Cenvat
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 under the provisions of
Service Tax Rules, 1994.
4. Presentation of claim for rebate
(a) (i) claim of rebate of the duty paid on the inputs or the service tax and cess paid on
input services shall be filed with the jurisdictional Assistant/Deputy
Commissioner of Central Excise after the taxable service has been exported;
(ii) such application shall be accompanied by, –
a. invoices for inputs issued under Central Excise Rules, 2002 and invoice, a
bill, or as the case may be, a challan for input services issued under
Service Tax Rules, 1994 in respect of which rebate is claimed;
b. documentary evidence of receipt of payment against taxable service
exported, payment of duty on inputs and service tax and cess on input
services used for providing taxable service exported, rebate of which is
claimed;
c. a declaration that such taxable service, has been exported in terms of rule
3 of the said rules, along with documents evidencing such export.
(b) The jurisdictional Assistant/Deputy Commissioner of Central Excise having regard 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 Act, 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 Finance 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 of the Finance Act, 2003;
(g) Education Cess on excisable goods as levied under section 91 read with section 93
of the Finance (No.2) Act, 2004; and
(h) the additional duty of excise leviable under section 85 of the Finance Act, 2005.

3.8 CONCEPT OF DEEMED SERVICE NON-EXISTENT

Section 67(1)(iii) and Service Tax (Determination of Value) Rules, 2006 (as inserted w.e.f.
19.04.2006) make provisions for valuation even when consideration is not ascertainable.
However, these provisions apply only when there is consideration. 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 Cellular 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
zero, 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 recovered through different means.

3.9 SERVICES PROVIDED BY MUTAL CONCERNS TO ITS MEMBERS SUBJECT TO

SERVICE TAX
The explanation after clause (121) of section 65 clarifies 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, deferred payment or any other valuable consideration.
Thus, the concept of mutuality will no longer hold good.

3.10 SERVICES PROVIDED TO UNITED NATIONS OR INTERNATIONAL

ORGANISATION EXEMPT FROM PAYMENT OF SERVICE TAX
Central Government vide Notification No. 16/2002-ST, dated 2.08.2002 has exempted all
the taxable service specified in section 65 of the Act provided by any person to the United
 Basic Concepts Applicable to All Services 3.21

Nations or an International Organisation, from whole of the service tax leviable under
section 66 of the Act.
International Organisation means an International Organisation declared by the Central
Government in pursuance of section 3 of the United Nations (Privileges and Immunities)
Act, 1947 to which the provisions of the schedule to the said Act apply.

3.11 SERVICES PROVIDED TO A DEVELOPER OR UNITS OF SPECIAL ECONOMIC

ZONE EXEMPT FROM PAYMENT OF SERVICE TAX
Taxable service provided to a developer of Special Economic Zone or a unit (including a
unit under construction) of Special Economic Zone by any service provider for
consumption of the services within such Special Economic Zone, are exempt from the
whole of service tax leviable thereon under section 66 of the Act. However, such an
exemption is subject to the following conditions, namely:-
(i) the developer has been approved by the Board of Approvals 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 Zone shall maintain proper account of
receipt and utilization of the said taxable services.
Here,
(1) "Board of Approvals" means the combined Board of Approvals for export oriented
unit and Special Economic Zone units, as notified in the Official Gazette, from time to
time by the Government of India in the Ministry of Commerce and Industry;
(2) "developer" means a person engaged in development or operation or maintenance of
Special Economic Zone, and also includes any person authorized for such purpose
by any such developer;
(3) "Special Economic Zone" means a zone specified as Special Economic Zone by the
Central Government in the notification issued under clause (iii) of Explanation 2 to
the proviso to sub-section (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 materials sold by the service provider to the recipient of service
3.22 Service tax & VAT

has been exempt from the service tax leviable thereon under section 66, subject to
condition that there is documentary proof specifically indicating the value of the said
goods and materials.
However, the said exemption shall apply only in such cases where:
(i) no credit of duty paid on such goods and materials sold, has been taken under the
provisions of the Cenvat Credit Rules, 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 availed
before the sale of such goods and materials [Notification No. 12/2003-S.T, dated
20.6.2003].
Self-examination questions
1. What is the value based exemption available to the service providers?
2. What are the conditions for availment of the value based exemption from service tax?
3. Is the value based service tax exemption compulsory?
4. What are the circumstances when the value based exemption is not available?
5. A service provider raised a bill for the taxable services rendered 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?
6. Explain whether service tax is payable on advance received towards the value of the
taxable services.
7. Is there any tax liability for the services received in India, which are provided by a
person from outside India? Discuss.
8. Who is liable to pay service tax for the services provided from outside India?
9. What are the benefits available for export of services?
10. What is the procedure for claiming the rebate of service tax paid on exported taxable
services?
 4
GAMUT AND COVERAGE OF SERVICE TAX LAWS

This chapter elucidates the specific provisions governing the services covered in the gamut of
service tax.

4.1 STOCK BROKING SERVICES

Effective date: 1st July 1994.
Definitions:
“Stock-broker” means a person, who has either 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 made 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 registration 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 Securities
contracts (Regulation) Act, 1956 — Section 65(93).
“Securities” include —
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
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 investment scheme to the
investors in such schemes;
(ii) Government securities;
(iia) such other instruments as may be declared by the central Government to be
Securities; and
4.2 Service tax & VAT

(iii) rights or interest in securities.

[Section 2(h) of The Securities contracts (Regulation) Act, 1956]
Scope of taxable service shall include any service provided 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 assigned to it in clause (6) of section 3 of the Indian
Telegraph Act, 1885 and includes a person who has been granted a licence under the first
proviso to sub-section (1) of section 4 of that Act — Section 65(111).
“Telegraph authority” means the Director General of Posts and Telegraphs, and includes 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 Government may grant a licence, on such conditions and in
consideration of such payments 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 rules made under this Act and
published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks
fit, the establishment, maintenance and working-
(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or
above India, or Indian territorial waters, and
(b) of telegraphs other than wireless telegraphs within any part of India.
[Section 4(1) of the Indian Telegraph Act, 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 provided by the telegraph authority
— Section 65(104).
Scope of taxable service shall include any service provided or to be provided to a subscriber,
by the telegraph authority, in relation to a telephone connection. — Section 65(105)(b).
Relevant 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 facility in other metro cities
through arrangements with other service operators (visiting network). In case of international
roaming facility, it is clarified that 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 facility
in other countries through arrangements with the foreign network operators (visiting 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, apparatus 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-numeric 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 person 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 service of a telephone connection or facsimile or
a leased circuit or a pager or a telegraph 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 to 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 meaning 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 combination with one or more of them but does not include
capital redemption business and annuity certain business. [Section 3(g) of General Insurance
Business (Nationalization) 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 whose 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 carrying on the general insurance business and includes a re-
insurer — 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 service provided by an insurer, carrying on general
insurance business, to a policyholder in relation to General Insurance Business provided
under the Universal Health Insurance Scheme is exempt from the service tax leviable thereon.
[Notification No. 16/2003-S.T., dated 11.07.2003]
It is to be noted that service tax is payable only on the total amount of the premium charged by
an insurer carrying on general insurance business - fire, marine and miscellaneous insurance.
4.5 ADVERTISING AGENCY SERVICES
Effective date: 1st November 1996.
Definitions:
“Advertisement” includes any notice, circular, label, wrapper, document, hoarding or any
other audio or visual representation made by means of light, sound, smoke or gas — Section
65(2).
“Advertising agency” means any person engaged in providing any service connected with
the making, preparation, display or exhibition of advertisement and includes an advertising
consultant - Section 65(3).
Scope of taxable service shall include any service provided or to be provided to a client, by
an advertising agency in relation to advertisement, in any manner — Section 65(105)(e).
Relevant Circulars/Trade Notices/Case Laws
It has been clarified that the activity of printing and publishing Telephone Directories, Yellow
Pages or Business Directories shall not attract service tax since such activity is essentially of
printing readymade advertisement from the advertisers and publishing the same in the
directory which are similar to the activities carried out by newspapers or periodicals. However,
any activity relating to making or preparation of an advertisement, such as designing,
visualising, conceptualising, etc., will be liable to service 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 persuading them
to give advertisement to a particular newspaper/periodical/magazine. The making and
preparation of the advertisement namely, drafting of the text, preparation of layout is left either
to the advertiser or to newspaper/ periedical /magazine. Such a service is known as 'space
selling'. In such cases, since the agency undertakes the job of merely bringing the order for an
advertisement and does not undertake any further activity, it would not fall within the definition
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 customs),
estimating the space that such advertisement would occupy in the
newspaper/periodical/magazine, negotiating the price, informing the general layout of the
advertisement, 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 would 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 canvassing is involving receiving the text of advertisement,
estimating the space that such advertisement would occupy in the
newspaper/periodical/magazine, negotiating the price, forming the general layout of the
advertisement that would finally appear in the newspaper then such activity would be liable to
service tax under the category of Advertising Agency Services. [Circular No. 64/13/2003-ST
Oct 28, 2003]
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 of advertising agencies.
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 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 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, selling the time allotted to a producer does not fall
within the purview of “advertisement 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 engaged in the door-to-door transportation of time-
sensitive documents, goods or articles utilising the services of a person, either directly or
indirectly, to carry or accompany such documents, goods or articles — Section 65(33).
Scope of taxable 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 documents,
goods or articles — Section 65(105)(f).
Relevant Circulars/Trade Notices
Transporters who advertise themselves as ‘Express Cargo Service’ and provide the service 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]
‘Angadias’ 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 ENGINEER’S SERVICES

Effective date: 7th July 1997
Definition:
“Consulting engineer” means any professionally qualified engineer or any body corporate or
any other firm who, either directly or indirectly, renders any advice, consultancy or technical
assistance in any 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 technical assistance in any manner in
one or more disciplines of engineering but not in the discipline of computer hardware
engineering or computer software engineering — 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 ambit of this clause. The
scope of the services of a consultant may include any one or more of the following categories.
 Gamut And Coverage of Service 4.7

(i) Feasibility study.

(ii) Pre-design services/project report.
(iii) Basic design engineering.
(iv) Detailed design engineering.
(v) Procurement.
(vi) construction, supervision and project management.
(vii) Supervision of commissioning and initial operation.
(viii) Manpower planning and training.
(ix) Post-operation and management.
(x) Trouble shooting and technical services, including establishing systems and procedures
for an existing plant.
Though the above list is not exhaustive, it illustrates the wide scope and nature of the services
rendered by a consulting engineer.
As noted above, services to be within the ambit of service tax under the category of consulting
engineering services should be services in the nature of advice, consultancy or technical
assistance in one or more disciplines of engineering. This means two conditions have to be
satisfied. Firstly, the services must pertain to any of the disciplines of engineering and
secondly, the nature of services should be advice, consultancy or technical assistance.
It has been clarified that the term ‘consulting engineer’ will not include ‘architects’ and hence
architectural services rendered by architects will be outside the ambit of service tax under this
clause. However, the Finance (No.2) Act, 1998 effective from 16.10.1998 has brought
‘architects’ also within the purview of 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 [CCEx., 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
engineer’ does not include those qualified engineers who act as insurance surveyors and loss
assessor within its scope. Therefore, service tax levy on the consulting engineer 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
building, 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 changes 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 taxable [C.B.E.&C. Circular No. 49/11/2002-S.T., dated 18.12.2002].
Charges for erection, installation & commissioning are not covered under the category of
consulting engineer services. Commissioning or installation service will be separately 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 AGENT’S SERVICES

Effective date: 15th June 1997.
Definition:
“Custom house agent” means a person licensed, 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 service 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 or
export of goods — Section 65(105)(h).
Relevant Circulars/Trade Notices
Only persons 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 attract service tax. Service tax will be
payable by the main CHA who renders services to the client and raises the bill on the client.
Refund of service tax arising 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. 39/97-
C.E., S.T.39/97, dated 11.06.1997]

4.9 STEAMER AGENT’S SERVICES

Effective date: 15th June 1997
Definitions:
“Shipping line” means any person who owns or charters a ship and includes an enterprise
which operates or manages the business of shipping — Section 65(97).
 Gamut And Coverage of Service 4.9

“Steamer agent” means any person who undertakes, either directly or indirectly,—
(a) to perform any service in connection with the ship’s husbandry or dispatch including the
rendering of administrative work related thereto; or
(b) to book, advertise or canvass for cargo for or on behalf of a shipping line; or
(c) to provide 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).
Scope of taxable service shall include any service provided or to be provided to a shipping
line, by a steamer agent in relation to a ship’s husbandry or dispatch or any administrative
work related thereto as well as the booking, advertising or canvassing of cargo, including
container feeder services — Section 65(105)(i).
Relevant Circulars/Trade Notices
The taxable service provided by a steamer agent to a shipping line, is the service provided by
a Steamer Agent in relation to a ships’ husbandry or dispatch or any administrative work
related thereto as well as the booking, advertising or canvassing of cargo, including container
feeder services [CCEx., New Delhi, Trade Notice No. 39-C.E., S.T.39/97, dated 11.06.1997].

4.10 CLEARING & FORWARDING AGENT’S SERVICES

Effective date: 16th July 1997
Definition:
“Clearing and forwarding agent” means any person who is engaged in providing any
service, either directly or indirectly, connected with the clearing and forwarding operations in
any manner to any other person and includes a consignment agent — Section 65(25).
Scope of taxable service shall include any service provided or 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 clearing 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 forwarding operations in any manner.
A clearing and forwarding agent’s scope of services is quite wide. Normally, there is a contract
between the principal and the clearing and forwarding agent detailing the terms and conditions
and also indicating 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 agents;
(b) Warehousing these goods;
(c) Receiving despatch orders from the principal;
(d) Arranging despatch of goods as per the directions of the principal by engaging transport
on his own or through the authorised transporters of the principal;
(e) Maintaining records of the receipt and despatch of goods and the stock available 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 operations in any manner
shall deemed to be the gross amount of remuneration or commission (by whatever name
called) paid to such agent by the client engaging such agent. Thus service tax is payable on
the said gross amount of remuneration or commission.
Relevant Circulars/Trade Notices
Normally C & F agents do the job of clearing and forwarding. In a typical situation clearing &
forwarding agents are appointed in outstation location by manufacturers or wholesale
distributors so that 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
and 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 agent is
entitled. Therefore, ICDs(Inland Container Depot)/CFS(Customs Freight Station) cannot be
considered as C&F agents on the following grounds:
(i) There is no agreement or contract between service Provider (ICD/CFS) and Service
receiver (importer/exporter);
(ii) ICDs/CFS are functioning under authority of Govt. of India and not for any principal or
owner (importer/exporter) [C.B.E.&C. Circular No. 39/2/2002-S.T., dated 20.02. 2002].
Coal merchants who act as buyer’s agents and carry out such jobs/assignments as asked 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 agents 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 AGENT’S SERVICES

Effective date: 7th July 1997

Definition:
“Manpower recruitment or supply agency” means any person engaged in providing any
service, directly or indirectly, in any manner for recruitment or supply of manpower,
temporarily or otherwise to a client— Section 65(68).
Scope of taxable service shall include any service provided or to be provided to a client, by a
manpower recruitment or supply agency in relation to the recruitment or supply of manpower,
temporarily or otherwise in any manner— Section 65(105)(k).
Relevant Circulars/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 manpower recruitment agency shall cover
within its fold the entire gamut of services provided 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 such as where a person approaches a manpower recruitment agency for being
employed in a suitable position abroad, the prospective candidate for employment becomes
the client for purposes of service tax.
Modifications may be allowed in the bills raised to the client at the time of final payment but
after verification [CCEx., 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 period or for
completion of particular projects or tasks. Services rendered by commercial concerns for
supply of such manpower to clients would be covered within the purview of service tax.
In these cases, the individuals are generally contractually employed by the manpower
supplier. The supplier agrees for use of the services of an individual employed by him to
another person for a consideration. The terms of the individual’s employment may be laid
down in a formal contract or letter 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.
Gem 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 hired by any organisation or
business, directly, without engaging the services of any other person in any manner, in such
cases, the artisans are contractually employed by the company. There is no intermediary and
hence no consideration is paid 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 supply of artisans
[M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005].

4.12 AIR TRAVEL AGENT’S 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).
Exemptions/Notifications
Notification No. 22/97-S.T., dated 26.06.1997 exempts that portion of the value of taxable
service which is in excess of the commission received 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 agent to pay the service tax @ 0.5% (now 0.6%) of the
basic fare in the case of domestic 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 expression “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 Rules, 1994 as well.
It has been clarified that in respect of tickets issued by GSA/IATA agents directly on collection
of fare, it is the GSA/IATA agents who have to collect and pay service tax on the commission
they get from the airline. Sub-agents, who are not getting commission from the airlines and
also not making out tickets directly from airlines are not required to collect service tax and get
registration from service tax authority of the Central Excise Department. [CCEx., New Delhi,
Letter C. No. CE/20/ST/Air Travel/97, dated 27.08.1997].

4.13 MANDAP KEEPER’S SERVICES

Effective date: 1st July 1997
Definitions:
“Mandap” means any immovable property as defined in section 3 of the Transfer of Property
Act, 1882 and includes any furniture, fixtures, light fittings and floor coverings therein let out
 Gamut And Coverage of Service 4.13

for consideration for organising any official, social or business function — Section 65(66).
“Immovable property” does not include standing timber, growing crops or grass — (Section 3
of the Transfer of Property Act, 1882).
“Mandap keeper” means a person who allows temporary occupation of a mandap for
consideration for organising any official, social or business function — Section 65(67).
“Caterer” means any person who supplies, either directly or indirectly, any food, edible
preparations, alcoholic or non-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 to the use of a mandap in any manner including the facilities
provided or to be provided to the client in relation to such use and also the services, if any,
provided or to be provided as a caterer — Section 65(105)(m).
Exemptions/Notifications
With effect from 1.07.2003 the taxable services provided to any person by a mandap keeper
for the use of the precincts of a religious place as a mandap are exempted from service tax
leviable thereon. Here, religious place means a place which is meant for conduct of prayers or
worship pertaining to a religion [Notification No. 14/2003-S.T., dated 20.06.2003]
In case of services provided by a hotel as mandap keeper, where services provided include
catering services (i.e. supply of food alongwith any service in relation to use of a mandap), an
abatement of 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, in 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
service tax on input services, used for providing such taxable service, has been taken
under the provisions of Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003.
Here, ‘food’ means a substantial and satisfying meal. ‘Hotel’ means a place that provides
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 is granted in case of services in relation to
use of mandap, including the facilities provided to the client in relation to such use and also for
the catering charges. Accordingly, in such cases, service tax is payable on 60% of the gross
amount charged for the above services. This exemption shall apply only in such cases where
the mandap keeper also provides catering services, that is, supply of food and the invoice, bill
4.14 Service tax & VAT

or challan issued indicates that it is inclusive of the charges for catering service. 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 the provisions of Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003.
Here, ‘food’ means a substantial and satisfying meal [Notification No.1/2006- ST dated
01.03.2006].
Relevant Circulars/Trade Notices
The definition of `Mandap' is very 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 halls, 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 halls, rooms, gardens, etc. for holding/organizing any marriages, parties,
conferences, 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 the room, space or hall
should be in exclusive (temporary) possession of the person 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 competition is chargeable to service tax as they are deemed to be social
functions [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-TRU dt.24.9.97,
had clarified that hotels and restaurants, which let out their banquet 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 functions and letting out of a hall for holding these programmes is liable to
service 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 mentioned in Board’s letter dt.24.9.97.
Therefore, renting out of premises by art galleries for such exhibition will not be liable to
service tax under the category of Mandap Keeper.
 Gamut And Coverage of Service 4.15

4.14 TOUR OPERATOR’S SERVICES

Effective date: 1st September 1997
Definitions:
“Tour operator” means any person engaged in the business of planning, scheduling,
organising or arranging tours (which may include arrangements for accommodation,
sightseeing 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 thereunder [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 meaning assigned to it in clause (43) of section 2 of the Motor
Vehicles Act, 1988 — Section 65(114).
“Tourist vehicle” means a contract carriage constructed or adapted and equipped and
maintained in accordance with such specifications as may be prescribed in this behalf —
[Section 2(43) of The Motor Vehicles Act, 1988].
Scope of taxable service shall include any service provided or to be provided to any person,
by a tour operator in relation to a tour — Section 65(105)(n).
Exemptions/Notifications
In case of services provided in relation to a tour by a tour operator where 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 tax 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 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
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003.
Here, ‘package tour’ means a tour in which the provisions for transportation and
accommodation 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 are other than in relation to a package tour, an abatement of 60% of the gross
amount charged is granted if the bill issued for this purpose indicates that the amount charged
in the bill is the gross amount charged for such a tour. Accordingly, in such cases, service tax
4.16 Service tax & VAT

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 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
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003.
Here, ‘package tour’ means a tour in which the provisions for transportation and
accommodation 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
accommodation for any person in relation to a tour, an abatement of 90% of the gross amount
charged is granted if invoice, bill or challan issued for this purpose indicates 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 operator to the client only includes the service
charges for arranging or booking accommodation 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 been taken
under the provisions of Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003 [Notification No.1/2006 ST, dated 01.03.2006].
Relevant Circulars/Trade Notices
It is to be noted that in the context of services rendered by a tour operator the trade notice
does not provide for exemption of 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-contractor where-
a) Service tax has been paid by the principal (who has sub-contracted the services) for
services rendered by him to his client; and
b) the sub-contracting in question is in respect of the same service category.
Service Tax on tour operators will be chargeable only on services rendered in India in respect
of tour within Indian territories. Service rendered towards foreign tours i.e tours abroad does
not attract service tax [Based on CCEx, Pune – I Trade Notice No.1/2000, dated 27.04.2000].
Prior to 10.09.2004, tour operator service covered package tour operators also. However,
such package tours attracted service 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 operator had been
suitably expanded. While the levy on tour operators engaged in operating tours in tourist
vehicles remained as such, in case of a package tour (which are planned, scheduled,
organized or arranged by tour operators), the scope of the levy has been extended by
removing the limitation regarding transportation by tourist vehicles only. Such tourist operators
shall be subjected to service 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 OPERATOR’S SERVICES

Effective date: 16th July 1997
Definitions:
“Rent-a-cab scheme operator” 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 meaning assigned to it in clause (25) of section 2 of the Motor Vehicles
Act, 1988 — Section 65(71).
“Motor cab” means any motor vehicle constructed or adapted to carry not 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 service 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/Notifications
In case of services provided by a rent-a-cab scheme operator in relation to renting 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. 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 the provisions of Cenvat Credit Rules, 2004; or
4.18 Service tax & VAT

(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003 [Notification No.1/2006 ST, dated 01.03.2006].
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 department 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 is 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 ARCHITECT’S 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 field of architecture — Section 65(6).
Scope of taxable service shall include any service 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
Broadly, the work of an architect starts from providing appropriate advice keeping in view the
requirements of the client at the preliminary stage of initial sketches, specifications and
drawings of plans, and consists of providing detailed drawings, approval of the drawings from
the concerned authorities, supervision at each stage of construction and till the point where
the completion certificate is obtained from the authorities [Based on M.F. (D.R.) Letter
No.11/3/98-TRU, dated 07.10.1998].
It has been clarified vide CCEx, Delhi-I, Trade Notice No.1/998-S.T., dated 05.01.1998 that
the term ‘Consulting Engineer’ will not include ‘architects’ 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 architectural services rendered by architects.
Where an engineering firm provides both engineering and architectural services and a lump-
sum amount is charged for both the services, service tax will be collected on the entire amount
charged. However, 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 for 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/interior decorator sub-contracts part/whole of his
work to another architect/interior decorator, no service tax is required to be paid by the sub-
contractor provided that the principal architect/interior decorator has paid the service tax on
the 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 pays the service tax on services rendered by
him to his client, the sub-contracting 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 and the
consulting engineer on the services rendered by them.

4.17 INTERIOR DECORATOR’S 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 related to planning, design or beautification of spaces, whether man-made
or otherwise and includes a landscape designer — Section 65(59).
Scope of taxable service shall include any service provided or to be provided to a client, by
an interior decorator in relation to planning, design or beautification of spaces, whether man-
made or otherwise, in any manner — Section 65(105)(q).
Relevant Circulars/Trade Notices
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 permanency 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 Interior Decorators as they offer
services by way of advice relating to planning and designing of spaces.
4.20 Service tax & VAT

4.18 MANAGEMENT CONSULTANT’S SERVICES

Effective date: 16th October 1998.
Definition:
"Management consultant" means any person who is engaged in providing any service,
either directly or indirectly, in connection with the management of any organisation in any
manner and includes any person who renders any advice, consultancy or technical assistance,
in relation to financial management, human resources 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 connection with the management of any organisation, in any
manner — Section 65(105)(r).
Relevant Circulars’Trade Notices
It has been clarified that any services rendered in relation to merger and acquisition will be
covered under the scope of taxable services provided by management consultant and these
services will be liable to service tax accordingly [Based on M.F. (D.R.) section 37-B Order No.
1/1/2001-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 “person” as “Person shall include any
company or association or body of individuals, whether incorporated or not.” Thus,
management consultancy services rendered by companies, 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 certain services would fall within the scope of services rendered by
Management consultants.
In the context of services rendered in respect of merger and acquisition the Board has issued
an order no. 1/1/2001 ST dated 27/6/2001 under section 37B of the Central Excise Act, 1944
(as applicable to service tax) which brings out the views of the Board on the term
“Management” and “Management consultancy”. The relevant extracts are given below :
“In this regard, the Board had consulted the Indian Institute of Management, Ahmedabad for
obtaining an expert opinion on the subject 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 involves 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 level
functioning and would include tasks such as planning, organising, staffing, directing,
controlling and coordinating. Management also invariably involves designing organisational
structure around functions such as marketing, manufacturing, research and development and
finance and/or business area such as product groups or geographical markets. Thus
management of any organisation involves carrying out a wide variety of clearly defined
activities across a number of organisational sub-units in a coherent and coordinated manner.
Since the expression “Management” is an inclusive term, ‘management consultant’ would also
be equally encompassing expression and would include any adviser who renders services on
any aspect of management. They have further opined that financial advisory services
rendered in merger and acquisition transactions are clearly in the nature of services in
connection with the management of an organisation as merger and acquisition themselves are
important dimension of modern management.
After considering the ILO publication on “management consulting”, various other literature on
the subject, management practices and profiles of practicing management consultants they
have concluded the following : (i) the term ‘management’ is a broad term to cover the various
functions and the multifarious activities required for its efficient and effective 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 basis of the above, the Board has clarified vide M.F. (D.R.) Section 37-B order No.
1/1/2002 –S.T., dated 26.06.2001 that “services rendered in relation to merger and acquisition
will be covered under the scope of taxable services provided by “management consultant” and
these services will be liable to service tax accordingly.
It is further clarified that certain agencies such as merchant bankers who are required to play
only a statutory role under any Act or Regulation such as Takeover 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 merger 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 financial 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 ACCOUNTANT’S 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 practice granted under the
provisions of the Chartered Accountants Act, 1949 and includes any concern engaged in
rendering services in the field of chartered accountancy — Section 65(83).
Scope of taxable service shall include any service provided or to be provided to a client, by a
practising chartered accountant in his professional capacity, in any manner — Section
65(105)(s).

4.20 PRACTISING COST ACCOUNTANT’S SERVICES

Effective date: 16th October 1998
Definition:
"Practising Cost accountant" means a person who is a member of the Institute of Cost and
Works Accountants of India and is holding a certificate of practice granted under the
provisions of the Cost and Works Accountants Act, 1959 and includes any concern engaged in
rendering services in the field of cost accountancy — Section 65(84).
Scope of taxable service shall include any service provided or to be provided to a client, by a
practising cost accountant in his professional capacity, in any manner — Section 65(105)(t).

4.21 PRACTISING COMPANY SECRETARY’S 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 certificate of practice granted under the
provisions of the company Secretaries Act, 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 secretary in his professional capacity, in any manner — Section
65(105)(u).
 Gamut And Coverage of Service 4.23

4.22 REAL ESTATE AGENT’S SERVICES

Effective date: 16th October 1998.
Definitions:
“Real estate agent” means a person who is engaged in rendering any service in relation to
sale, purchase, leasing or renting of real estate and includes a real estate consultant —
Section 65(88).
“Real estate consultant” means a person who renders in any manner, either directly or
indirectly, advice, consultancy or technical assistance, in relation to evaluation, conception,
design, development, construction, implementation, supervision, maintenance, marketing,
acquisition or management, of real estate — Section 65(89).
Scope of taxable service shall include any service 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 noted that some international real estate concerns such as Richard Ellis, colliers and
Jardine, etc. have opened shop in India and they are providing comprehensive real estate
services. Apart from the traditional services in respect of sale/purchase/leasing of real estate,
such concerns are, inter alia, providing services to real estate developers and promoters in
respect of evaluation of a proposed real estate scheme/project by conducting techno-
economic studies, providing feasibility reports, and by even helping in marketing real estate
projects. Such services shall also attract service tax [Based on M.F. (D.R.) Letter No.11/3/98-
TRU, dated 07.10.1998].

4.23 SECURITY AGENCY’S SERVICES

Effective date: 16th October 1998.
Definition:
“Security agency” means any person engaged in the business of rendering services relating
to the security of any property, whether moveable or immovable, or of any person, in any
manner and includes the services of investigation, detection or verification, of any fact or
activity, whether of a personal nature or otherwise, including the services of providing security
personnel — Section 65(94).
Scope of taxable service shall include any service provided or to be provided to a client, by a
security agency in relation to the security of any property or person, by providing security
personnel or otherwise and includes the provision of services of investigation, detection or
verification of any fact or activity — Section 65(105)(w).
4.24 Service tax & VAT

Relevant Circulars/Trade Notices

The ambit of the term security agency is wide enough to include not only agencies rendering
service of providing security but also detective agencies which are providing confidential
services in respect of say, 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 RATING AGENCY’S SERVICES

Effective date: 16th October 1998.
Definition:
“Credit rating agency” means any person engaged in the business of credit rating of any
debt obligation or of any project or programme requiring finance, whether in the form of debt
or otherwise, and includes credit rating of any financial obligation, instrument or security,
which has the purpose of providing a potential investor or any other person any information
pertaining to the relative safety of timely payment 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 in 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 services 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 AGENCY’S SERVICES

Effective date: 16th October 1998.
Definition:
"Market research agency" means any person engaged in conducting market research in any
manner, in relation to any product, service or utility, including all types of customised and
syndicated research services — Section 65(69).
Scope of taxable service shall include any service provided or to be provided to a client by a
market research agency in relation to market research of any product, service or utility, in any
manner — Section 65(105)(y).
Relevant Circulars/Trade Notices
Market research, inter alia, includes research 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 advertising research. Such market research
services includes studies such as strategic research and brand positioning development, new
product development research, creative development research, brand name, logo, pack label
research, corporate image, diagnostic market research, customer research etc. Thus, it is
apparent that the market research services are of a very diverse nature and of a very wide
variety [Based on M.F. (D.R.) Letter No.11/3/98-TRU, dated 07.10.1998].

4.26 UNDERWRITER’S SERVICES

Effective date: 16th October 1998.
Definitions:
“Underwriter” has the 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 person 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
(Underwriters) 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 subscribe 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) Rules, 1993].
“Body corporate” shall have the meaning assigned to it in clause (7) of section 2 of the
companies Act, 1956 — Section 65(14).
“Body corporate” or “corporation” includes a company incorporated outside India but does not
include —
(a) a corporation sole;
(b) a co-operative society registered under any law relating to co-operative societies; and
(c) any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification in the Official Gazette, specify in this behalf;
[Section 2(7) of the companies Act, 1956].
“Securities” has the meaning assigned to it in clause (h) of section 2 of the Securities
contracts (Regulation) Act, 1956 — Section 65(93).
(i) “Securities” include —
4.26 Service tax & VAT

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities 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 investment scheme to the
investors in such schemes;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be Securities;
and
(iii) rights or interest in securities.
Scope of taxable service shall include any service provided or to be provided to a client, by
an underwriter in relation to underwriting, in any manner — Section 65(105)(z).
Relevant Circulars/Trade Notices
Underwriting services can be provided by financial institutions, banks, share brokers who are
members of stock exchanges and investment companies/trusts with adequate financial
capacity, appropriate standing and experience. However, as per Rule 3 of the Securities and
Exchange Board of India (Underwriters) 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
(Underwriters) 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 July 2001.
Definition:
“Scientific or Technical Consultancy” means any advice, consultancy or scientific or
technical assistance rendered in any manner, either directly or indirectly, by a scientist or a
technocrat or any science or technology institution 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 provided or to be provided to a client, by a
scientist or a technocrat, or any science or technology institution or organisation, in relation to
scientific or technical consultancy - Section 65(105)(za)
Relevant Circulars/Trade Notices
The terms “scientist”, “technocrat”, “science or technology institution or organisation” who
should be understood as they occur in common parlance. For example, services rendered by
doctors, medical colleges, nursing homes, hospitals, diagnostic & pathological labs, etc. would
 Gamut And Coverage of Service 4.27

not come within the ambit of service tax since in common parlance, these categories of
service providers are not known as scientists or technocrats or science or technology
institutions or organisations.
The nature of services would cover consultation, advice or technical assistance provided by a
scientist or a technocrat or a science or technology institution on any issue relating to any
branch of science and technology. Such consultation may be in the nature of an expert
opinion/advice in regard to scientific or technical feasibility or any other scientific or technical
aspect of a project, process or design, recommending an apt technology, suggestion for
improvement in existing technology or process, providing consultation on any technical
problem or about new technology, etc.
The Public funded research institutions like CSIR, ICAR, DRDO, IITs and IISc. Regional
Engineering colleges, etc,. which are exempt from payment of income tax shall be liable to pay
service tax when any scientific or technical consultancy service is rendered by them.
However, grants received by such institutions from the government for conducting
research/project work is outside the ambit of service tax since 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 consultancy, then such activity is part and parcel of the taxable service and
exigible to service tax. Service tax is also leviable on Scientific & technical consultancy
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 PHOTOGRAPHY SERVICES

Effective date: 16th July 2001.
Definitions:
“Photography” includes still photography, motion picture photography, laser photography,
aerial photography or fluorescent photography. – Section 65(78)
“Photography studio or agency” means any professional photographer or any person
engaged in the business of rendering 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 photographers 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/photographers, gets such rolls processed from a colour lab and hands over
the prints to the photography studio/photographer. Services provided by such centres shall 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 agent who receive commission
handling charges from the processing labs [Based on Circular 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 which is not open to the general public,
and does not include a meeting or assembly the principal purpose of which is to provide any
type of amusement, entertainment or recreation. – Section 65(32)
Scope of taxable service shall include any service provided or to be provided to a client, by
any person in relation to holding 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 charged 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 the 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 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
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003.
Here, "catering service" means supply of substantial and satisfying meal. [Notification
No.1/2006 ST, dated 01.03.2006].
Relevant Circulars/Trade Notices
Stage shows, music concerts, sport events will not be considered as convention since these
events provide some type of amusement, entertainment or recreation. Further, 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 service tax in
respect of the charges levied towards holding of such seminars. Any service provided for
holding a conference, seminar, meetings etc by a commercial concern will come under the tax
net. The service could be in the nature of providing of room/ hall for the convention. The
services could also include providing other facilities such as video conferencing, equipment -
over head projectors, video-roma (LCD projector), speakers, microphones, technical staff for
operating these equipments and stationery, etc apart from providing space for holding a
convention.
The services provided by a mandap keeper may appear to overlap with convention 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 formal 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 liable 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 09.07.2001].

4.30 LEASED CIRCUIT SERVICES

Effective date: 16th July 2001.
Definition:
“Leased circuit” means a dedicated link provided between two fixed locations for exclusive
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 service provided or to be provided to a subscriber,
by the telegraph authority in relation to leased circuit ; - Section 65(105)(zd)
Relevant Circulars/Trade Notices
'Inter-connectivity linked charges' recovered by Bharat Sanchar Nigam Ltd. (BSNL) from
Basic Telephone Service Providers (BSTP) and Cellular Mobile Service Providers (CMSP) are
chargeable to service tax. Inter connectivity linked charges are nothing but charges for
providing 'leased circuits' [Based on. C.B.E.&C. Circular No.46/09/2002-S.T., dated
08.08.2002].

4.31 TELEGRAPH SERVICES

Effective date: 16th July 2001.
Definitions:
“Telegraph” has the meaning assigned to it in clause (1) of section 3 of the Indian Telegraph
4.30 Service tax & VAT

Act, 1885. - Section 65(110)

“Telegraph” means any appliance, instrument, material or apparatus used or capable of use
for transmission or reception of signs, signals, writing, images, and sounds or intelligence of
any nature by wire, visual or other electro-magnetic emissions, radio waves or Hertzian
waves, galvanic, electric or magnetic means; - Section 3(1) of the Indian Telegraph Act, 1885
“Telegraph Authority” has the meaning assigned to it in clause (6) of section 3 of the Indian
Telegraph Act, 1885 and includes a person who has been granted a license under the first
proviso to sub-section (1) of section 4 of that Act. - Section 65(111)
“Telegraph authority” means the Director General of Posts and Telegraphs, and includes 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 Government may grant a licence, on such conditions and in
consideration of such payments 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 rules made under this Act and
published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks
fit, the establishment, maintenance and working-
(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or
above India, or Indian territorial waters, and
(b) of 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 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 typed communication by using teleprinters through telex exchanges -
Section 65(112)
“Telegraph Authority” has the meaning assigned to it in clause (6) of section 3 of the Indian
Telegraph Act, 1885 and includes a person who has been granted a license under the first
proviso to sub-section (1) of section 4 of that Act. – Section 65(111)
 Gamut And Coverage of Service 4.31

“Telegraph authority” means the Director General of Posts and Telegraphs, and includes 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 Government may grant a licence, on such conditions and in
consideration of such payments 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 rules made under this Act and
published in the Official Gazette, permit, subject to such restrictions and conditions as it thinks
fit, the establishment, maintenance and working-
(a) of wireless telegraphs on ships within Indian territorial waters and on aircraft within or
above India, or Indian territorial waters, and
(b) of 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 any 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 FACSIMILE (FAX) SERVICES

Effective date: 16th July 2001.
Definition:
“Facsimile (Fax)” means a form of telecommunication by which fixed graphic images, such
as printed texts and pictures are scanned and the information converted into electrical signals
for transmission over the telecommunication system. – 65(42)
Scope of taxable service shall include any service provided or to be provided to a subscriber
by the telegraph authority in relation to a Facsimile communication; - Section 65(105)(zg)
Relevant Circulars/Trade Notices
Facsimile services are provided by telegraph authorities in two ways :-
(i) “bureau fax” where the charges are based on a flat rate per page depending upon paper
size; and
(ii) “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 offices.
It has been clarified that in case of “Ordinary fax”, no service tax is payable 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 liable to service tax
[Based on M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001].

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 in 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 formalised 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 (including computer printouts magnetic or optical storage
media, punched cards, punched 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 customer, in electronic form through a computer
network. – Section 65(75)
“Electronic form” 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 reference 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,
2000.
“Information” has the meaning assigned to it in clause (v) of sub-section (1) of section 2 of
the Information Technology Act, 2000. – Section 65(53)
“Information” includes data, text, images, sound, voice, codes, computer programmes,
software and 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 computers through –
(i) the use of satellite, microwave, terrestrial line or other communication media; and
(ii) terminals or a complex consisting of two or more interconnected computers whether or
 Gamut And Coverage of Service 4.33

not the interconnection is continuously maintained;

[Section 2(1)(j) of the Information Technology Act, 2000]
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 access or retrieval or both in
electronic form through computer network, in any manner; - Section 65(105)(zh)
Relevant Circulars/Trade Notices/Case Laws
In the context 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, the 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 element is on-line information
provision services which includes database services, provision of information on web-sites,
provision of on-line data retrieval services from data bases and other information, to all or
limited number of users and provision of on-line information by content providers.
Internet service providers (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 customers 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 neither 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 line
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 shall be also liable to pay service tax on the
paid services provided by them.
ISP’s provide inter-connectivity services to one another and recover charges for such
services. This is done to inter connect various networks so as to reach the server where the
information is stored. Interconnection of one ISP to another is a commercial and technical
arrangement under which service providers connect their equipment, networks and services to
enable their customers to have access to the data or information. Through this arrangement, it
is the customer of an ISP who ultimately receives on-line information and database access
and/or retrieval service. Service tax on the amount charged from him is payable. Therefore,
interconnection 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 cafés, it has been clarified that the cyber cafés
provide only the infrastructure such as computer terminals and internet connection. It is the
ISP or web-sites who provide on-line access or retrieval of information, Therefore, cyber cafés
are not liable to pay service tax. Services provided by ISP to cyber café are taxable [Based on
M.F. (D.R.) Letter No. B11/1/2001-TRU, dated 09.07.2001].
Transmission of two-way voice communication through the medium of Internet is called
Internet Telephony. Even if the licences to Internet Telephony Service Providers are issued
under section 4 of the Indian Telegraph Act, 1885, the two way voice communication is made
possible through data transfer over the Internet. As per Section 65(19), the term “on-line
information and database access and/or retrieval” means providing data or information,
retrievable or, otherwise, to a customer in electronic form through a computer network.
Accordingly, Internet Telephony Services fall under the category of online information and
database access and/or retrieval services [C.B.E.&C. Circular No. 54/3/200-ST, dated
21.04.2003].
It is to be noted that the Act does not restrict the ambit 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 have a direct significance as well as indirect significance depending on the
context [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 be ‘connected with’ provision of on-line
information and database access or retrieval.

4.35 VIDEO TAPE PRODUCTION SERVICES

Effective date: 16th July 2001.
Definitions:
“Video production agency” means any professional vidoegrapher or any commercial
concern engaged in the business of rendering services relating to video-tape production. -
Section 65(119)
“Video-tape production” means the process of any recording of any programme, event or
function on a magnetic tape or on any other media or device and includes services relating
thereto such as editing, cutting, colouring, dubbing, title printing, imparting special effects,
processing, adding, modifying or deleting sound, transferring from one media or device to
another, or undertaking 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 client, by a
video production agency in relation to videotape production, in any manner; - Section
65(105)(i)
 Gamut And Coverage of Service 4.35

Relevant Circulars/Trade Notices

It may be seen that the taxable service covers the service of recording of any programme,
event or function and includes recording of serials, telefilms or any other programme meant for
broadcasting. Also, the scope of taxable service covers any service in relation to video tape
production in any manner. Thus facilitation activities, such as providing studio, other facility as
lights, gadgets, instruments, devices, providing technical persons for operating the recording
devices or for any other activity in relation to video tape production are taxable. Similarly,
editing, colouring, dubbing, printing titles and special effects, film processing etc by a video
production agency will all come within the scope of this service. It is clarified that reproduction
of original master to make further 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 clarified vide D.G.S.T. in October 2003 that lending/hiring of video/sound recording
equipment is in the nature of sub-contracts and because the sub-contractors are not providing
the service to the customer directly, they are not required to pay the 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 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 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, selling the time allotted to a producer does not fall
within the purview of “advertisement 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].

4.36 SOUND RECORDING SERVICES

Effective date: 16th July 2001.
Definitions:
“Sound recording” means recording of sound on any media or device including magnetic
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-mixing or any audio post-
production activity. - Section 65(98)
“Sound recording studio or agency” means any person engaged in the business of
rendering any service relating to sound recording. - Section 65(99)
“Magnetic storage device” includes wax blanks, discs or blanks, strips or films for the
purpose of original sound recording. - 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 sound recording; - Section
65(105)(zj)
Relevant Circulars/Trade Notices
Any service provided by sound recording studio or agency in relation to recording of sound will
be covered under the tax net. The activities which fall under the category of service are
providing the facility of studio, technical persons, musical instruments and other devices or
any other facility or all the facilities in a consolidated manner, required for recording of sound,
editing thereof, providing different 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 usually
in terms of hours of usage. It is clarified that reproduction of original master to make further
copies of the audio tape or CDs etc. 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 clarified vide D.G.S.T. in October 2003 that lending/hiring of video/sound recording
equipment is in the nature of sub-contracts and because 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 TELEVISION) SERVICES

Effective date: 16th July 2001.
Definitions:
"Broadcasting" has the meaning assigned to it in clause (c) of section 2 of the Prasar Bharati
(Broadcasting corporation of India) Act, 1990. It also includes programme selection,
scheduling or presentation of sound or visual matter on a radio or a television 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 situated in any
place outside India, the term includes the activity of selling time slots or obtaining
sponsorships for broadcasting of any programme or collecting the broadcasting charges or
permitting the rights to receive any form of communication like sign, signal, writing, picture,
image and sounds of all kinds by transmission of electro-magnetic waves through 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 said agency or organisation, by its
branch office or subsidiary or representative in India or any agent appointed in India or by any
person who acts on its behalf in any manner. - Section 65(15)
“Broadcasting” means the dissemination of any form of communication like signs, signals,
writing, pictures, images, and sounds of all kinds by transmission of electro-magnetic waves
through space or through cables intended to be received by the general 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 Bharti
(Broadcasting Corporation of India) Act, 1990.
Broadcasting agency or organisation – It means any agency or organisation engaged in
providing service in relation to broadcasting in any manner. In the case of a broadcasting
agency or organisation having its head office situated in any place outside India, it includes its
branch office or subsidiary or representative in India or any agent appointed 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 sponsorships for programme or collecting the
broadcasting charges or permitting the rights to receive any form of communication like sign,
signal, writing, picture, image and sounds of all kinds by transmission of electromagnetic
waves through 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 said agency or
organisation. - Section 65(16)
Scope of taxable service shall include 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 place 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 acts 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 collecting the broadcasting charges or permitting the rights to
receive any form of communication like sign, signal, writing, picture, image and sounds of all
kinds by transmission of electromagnetic waves through 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 said agency or organisation.
Explanation – For the removal of doubts, it is hereby declared that so long as the radio or
television programme broadcast is received in India and intended for listening or viewing, as
the case may be, by the public, such service shall be a taxable service in relation to
broadcasting, even if the encryption of signals or beaming thereof through the satellite through
the satellite might have taken place outside India. – Section 65(105)(zk)
The service provider is the broadcasting agency or organisation i.e. All India Radio (AIR),
Doordarshan, other Indian TV channels and foreign TV channels who broadcast the
programme in India.
Relevant Circulars/Trade Notices
The service covers both radio broadcasting and television broadcasting. While radio
broadcasting is done by the All India Radio or any private radio channel, television
broadcasting is done by Doordarshan, Indian TV Channels and Foreign TV channels. The
broadcasting may be of advertisements, serials/programmes or live events. The client is the
person who wants an advertisement 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. Most of the private TV
channels are using satellite links for broadcasting their programmes. The uplinking of the
programme to the satellite is done through VSNL or other earth stations located in India or
through other agencies located abroad. The up-linking agencies are not broadcasting
agencies and are not liable to service tax in respect of such service. The signals beamed by
satellite are received either by Multi System Operators (MSO) or directly by cable operators. In
the 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 cable operator who in turn
retransmits the same to the viewers. The cable TV operator who merely retransmits the
programme is not a broadcasting agency or organisation with respect to such retransmitted
programmes. The MSO also is not a broadcasting agency to the extent he merely retransmits
signals. However in case the MSO operates a local cable channel such as Spectranet,
Siticable, Incable, Sumangali, etc. and broadcasts a programme or serial or advertisement on
his own, he would be liable to pay service tax on the amount he charges for the service
rendered to his clients in relation to broadcasting of such programmes.
Broadcasting service 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 of broadcasting service, the advertisement charges
or the sponsorship charges received by the braodcasting agency or organisation are the
consideration for the services rendered and service tax is payable on these charges.
In the case of broadcasting service, the advertisement charges or the sponsorship charges
received by the broadcasting agency or organisation are the consideration for the services
rendered and service tax is payable on these charges.
In case of foreign satellite TV channels, their head office may be located outside India.
However, they have their branch offices or subsidiary companies located in India. In some
cases, they have appointed agents. These branch offices/ subsidiary companies/agents act on
behalf of these channels, selling time slots and recovering service charges and remitting the
same to their head office/holding company/principals as the case may be. In such cases,
these branch offices/subsidiary companies/agents are rendering the service in relation to
broadcasting and therefore, they are liable to pay the service tax and comply with all other
procedural formalities relating to service tax [Based on M.F. (D.R.) Letter No. B11/1/2001-
TRU, 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 Broadcasting Services [C.B.E.&C.
Circular No. 61/10/ 2003-ST, dated 14.07.2003].
In the case of radio or TV broadcasting services, the services are subject to tax where the
services are effectively used and enjoyed. Multi System Operators (MSOs) are permitted to
receive signals from the broadcasting agencies on payment of prescribed amount. Cable
operators transmit programmes to customers through cable network after receiving signals
from the multisystem operators (MSOs). Service tax is leviable on services provided by cable
operators to their customers, multisystem operators to cable operators and the charges
recovered by the broadcasting agencies from the multisystem operator for providing the
signals.
In view of the advent of set top boxes, the customers can now access the signals directly
without 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 organizations having their head
office outside India would be on the branch office, subsidiary or any representative or any
agent appointed by such agency or organization in India [M.F. (D.R.) Letter F.No.B1/6/2005-
TRU dated 27.07.2005].

4.38 INSURANCE AUXILIARY SERVICES

Effective date: 16th July 2001 (in relation to general insurance business)
Effective date: 16th August 2002 (in relation to life insurance 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 possessing 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 section 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 procuring 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 intermediary or
insurance intermediary or an insurance agent in relation to general insurance 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 Regulatory and Development Authority Act, 1999. –
Section 65(56)
“Intermediary or insurance intermediary” includes insurance brokers, reinsurance brokers,
insurance consultants, surveyors and loss assessors; -Section 2(1)(f) of the Insurance
Regulatory 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 Holder” 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 thereof whose interest in
the policy is defeasible or is for the time being subject to any condition. [Section 2(2) of the
Insurance Act, 1938.]
Scope of taxable service shall include any service provided or to be provided to a
policyholder or any person or insurer, including re-insurer, by an actuary, or intermediary or
insurance intermediary or insurance agent, in relation to insurance auxiliary services
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 or
insurer, including re-insurer, by an actuary, or intermediary or insurance intermediary or
insurance agent, in relation to insurance auxiliary services concerning life insurance business
– Section 65(105)(zy).
Relevant Circulars/Trade Notices
Insurance auxiliary service concerning general insurance business
Services covered in this category are the services provided by the insurance agents to the
insurance company in relation to marketing of insurance policies. They also provide 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 companies. They cover diverse fields such as
calculating insurance risks and premia, insurance claims adjustment services such as services
of investigating claims, determining the amount of loss or damages covered by the insurance
policies and negotiating 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. It may be
emphasized that only such services are taxable which are in relation to general insurance
business such as motor vehicle insurance, insurance of buildings and other properties, marine
insurance, fire insurance and other miscellaneous 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 assessors, actuaries and
insurance consultants, the service is provided mainly to the insurance companies (insurer)
while in the case of insurance agents, the service is provided to both the insurer and the policy
holder. Service tax is liable to be paid by the insurance auxiliary service provider except in
case of insurance agents. Insurance agents normally do not charge the policyholder.
However, the insurance company pays the agent a commission (usually as a percentage of
the 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 tax 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 service concerning life insurance business
Services covered in this category are the services provided by the insurance agents to the
insurer/policy holder, by actuary to the insurer or by an intermediary or insurance intermediary
to insurer/policy holders. Insurance agents provide service to insurance company in relation to
marketing of insurance policies. They also provide 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
companies. They cover diverse fields such as calculating insurance risks and premia,
insurance claims adjustment services such as services of investigating claims, determining the
amount of loss or damages covered by the insurance policies and negotiating 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.
The service providers in this category includes insurance agents, insurance surveyors and
loss adjusters, actuaries insurance consultants and insurance brokers. In the case of
insurance surveyors and loss adjusters, actuaries and insurance consultants, the service is
provided mainly to the insurance companies (insurer) while in the case of insurance agents,
the service is provided to both the insurer and the policy holder. Service tax is liable to be
paid by the insurance auxiliary service provider except in case of insurance agents. Insurance
agents normally do not charge the policyholder. 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 respect of general insurance business, it has been provided in the Service
Tax Rules 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 effect 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 insurer, including
re-insurer by an actuary, or intermediary or insurance intermediary or insurance agent, in
4.42 Service tax & VAT

relation to insurance auxiliary services concerning general insurance business and life
insurance business.

4.39 BANKING AND OTHER FINANCIAL SERVICES

Effective date: 16th July 2001

Definitions:

“Banking” and “Banking company” shall have the meanings 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 accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order
or otherwise. – Section 5(b) of the Banking Regulation Act, 1949
“Banking company” means 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 financing
its business as such manufacturer or trader shall not be deemed to transact 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. – Section 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, namely:
(i) the financing, whether by way of making loans or advances or otherwise, of any activity
other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a government
or local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement 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, conducting 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 otherwise, by way of subscriptions or by sale of units, or
other instruments or in 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 carries on
as its principal business, –
a) agricultural operations; or
aa) industrial 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 immovable property, so, however, that no portion of
the income of the institution is derived from the financing of purchases, constructions or
sales of immovable property 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 Reserve Bank of India Act, 1934 . – Section 65(74)
“Non-banking financial company” means-
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or
lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the bank may, with the
previous approval of the central Government and by notification in the Official Gazette,
specify.
[Section 45-I(f) of the Reserve Bank of India 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) financial leasing services including equipment leasing and hire-purchase;
(ii) merchant banking services;
(iii) securities and foreign exchange (forex) broking;
(iv) asset management including portfolio management, all forms of fund management,
4.44 Service tax & VAT

pension fund management, custodial, depository and trust services, but does not
include cash management;
(v) advisory and other auxiliary financial services including investment and portfolio
research and advice, advice on mergers and acquisitions and advice on corporate
restructuring and strategy;
(vi) provision and transfer of information and data processing; and
(vii) banker to an issue; and
(viii) other financial services, namely, lending; issue of pay order, demand draft, cheque,
letter of credit and bill of exchange; transfer of money including telegraphic transfer,
mail transfer and electronic transfer, providing bank guarantee, over draft facility,
bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts
(b) foreign exchange broking provided by a foreign exchange broker other than those
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, carrying on the activities relating to an issue including acceptance of
application, application money, allotment money and call money, refund of application money,
payment of dividend and interest warrants [Section 65(9c)].
"Foreign exchange broker" includes any authorised dealer of foreign exchange. [Section
65(46)]
"Authorised dealer of foreign exchange" has the meaning assigned to "authorised person"
in clause (c) of section 2 of the Foreign Exchange Management Act, 1999. [Section 65(8)]
“Authorised person” means an authorized dealer, money changer, off-shore banking 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 include any service provided or to be provided to a customer,
by a banking company or a financial institution including a non-banking financial company or
any other body corporate or any other person in relation to banking and other financial
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 and other financial service referred to in sub-clause (zm). –
Section 65(105)(zzk)
Exemptions/Notifications
Banking company or financial institutions have been exempted from service tax for the service
provided to Government of India or a State Government for collection of any duties or taxes
 Gamut And Coverage of Service 4.45

vide Notification No. 13/2004-S.T., dated 10.09.2004.

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 institution including a
non-banking financial company, or any other body corporate or any other person, in relation
to,-
(a) overdraft facility;
(b) cash credit facility; 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 Act, subject to
the condition that the said interest amount is shown separately in 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 including
equipment leasing and hire-purchase from so much of the service tax as is equivalent to the
service tax calculated on 90% of an amount, forming or representing interest. In other words
service tax shall be payable only on 10% of the interest. The interest is the difference between
the installment paid towards repayment 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 management fee, processing fee,
documentation charges and administration fee [Notification No. 4/2006-ST, dated 01.03.2006].
Notification No. 7/2006 ST, dated 01.03.2006 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 Circulars/Trade Notices
Financial Leasing including equipment leasing and hire purchase
It is clarified that service tax will be applicable to financial leasing services only if the lessor is
a body corporate as defined in section 2(7) of the companies Act, 1956. The leasing or hire
purchase may be of motor vehicles, machinery and equipments or other goods. Only financial
leases are covered. Operating leases 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
that 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 called the lease
management fee or the processing fee or documentation charges which is usually a
4.46 Service tax & VAT

percentage of the transaction value. It is clarified that service tax in the case of financial
leasing including equipment leasing and hire purchase will be leviable only on the lease
management fee/processing fee/documentation charges (recovered at the time of entering into
the agreement) and on the finance/interest charges (recovered in equated monthly
installments) and not on the principal amount.
Merchant banking services
Banks and Financial institutions including NBFCs providing merchant banking services are
governed by the SEBI (Merchant Bankers) Rules, 1992 and SEBI (Merchant Bankers)
Regulations, 1992. As per these rules and regulations, merchant banking service is any
service provided in relation to issue management either by making arrangements regarding
selling, buying or subscribing securities as manager, consultant, advisor or rendering
corporate advisory service in relation to such issue management. This, inter-alia, consists of
preparation 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 services also include advisory services on corporate
restructuring, debt or equity restructuring, loan restructuring, etc.
Asset management including portfolio management and all forms of fund management,
pension fund management, custodial depository and trust services.
Asset Management Companies are not liable to pay service tax as they do not fall in the
category of non banking financial company (NBFC).
Custodial depository services attract service tax. However, it is clarified that service tax will
not be leviable on NSDL or CSDL fees paid to the depositories and recovered from the
customers on actual basis.
Service tax will be charged on the fee for providing these services.
Other auxiliary financial services
Some examples of other auxiliary financial services are investment and portfolio research and
advice, advice given on mergers and acquisition, advice on corporate restructuring and
strategy, market analysis and intelligence.
In the case of banks and financial institutions including NBFCs, while some services may be
done 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 financial leasing including equipment
leasing, specified branches may be providing the service with separate billing and accounting.
In respect of a taxable service, where the billing and accounting is centralised in an office of
the bank, only such office needs to be registered and made liable to pay service tax in respect
of such service. Where the billing and accounting is not centralised and is undertaken 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 compliance
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
of 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, dated 09.07.2001].
Central Depository Services (India) Limited (CDSL) provides depository services in respect of
DEMAT stocks to its customers. It has also implemented "Electronic Access to Securities
Information" (EASI), to enable the owner to access accounts in the first phase and transact
depository business in the second phase of the project. CSDL charges certain fee such as
registration fee, annual 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 e-commerce transactions, no service of online information and database access/retrieval is
involved and therefore, e-commerce transactions would not, ordinarily, be covered under the
service tax net. However, this clarification is not applicable to services covered under other
taxable services including "banking and other financial services" which are provided through
internet.
Service tax has been imposed on ‘banking and other financial service’ with effect from
16.07.2001. Depository service is one of the services covered under the category of ‘banking
and other financial services.’ The definition of ‘Banking and other financial services’ as given
in section 65 of the Finance Act 1994 includes "provision and transfer of information and data
processing". "Banking and other financial services" and "on line 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 all depository service even if service is provided through Internet.
Foreign Exchange Broking
Prior to 1-7-2003 the service of “securities and foreign exchange (forex) broking”, when
provided by banking company/financial institution/body corporate was liable to service tax.
Through Finance Act, 2003 “foreign exchange broking” when provided by foreign exchange
brokers, other than banking company/financial institution/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 foreign exchange. Authorised dealer of foreign exchange has been
assigned the meaning of “authorized person” under the FEMA, 1999. Accordingly authorized
dealers/money changer 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 foreign
exchange brokers (other than banking company/financial institution/body corporate 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 PORTS 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 such limits as may, from time to
time, be defined by the central Government for the purposes of this Act by notification in the
Official Gazette, and, until a notification is so issued, within such limits as may have been
defined by the central Government under the provisions of the Indian Ports Act – Section 2(q)
of the Major Port Trusts Act, 1963
“Port service” means any service rendered by a port or other 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 assigned 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 any 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 beings or of
goods and a caisson; Section 2(z) of the Major Port Trusts Act, 1963
“Goods” 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 other than actionable claims and
money, and includes stock and shares, growing crops, 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 Goods Act, 1930]
Scope of taxable service shall include any service provided or to 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 authorized by that
port in relation to port services in any manner. - [Section 65(105)(zzl)]
The first point to be noted is that the situs is on services provided ‘to any person’ in
contradistinction to most of the other services where the situs of taxation is on the services
provided ‘to a client’ or ‘to a customer’. It is to be noted that vessel related and cargo related
services are liable to service tax. Services in relation to passengers are excluded.
Relevant Circulars/Trade Notices
Port 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 rendered in relation to goods). The charges
for these services will be covered under service 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 estate
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/ storage 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 under section
65(50) of the Finance Act, 1994.
The service rendered by ship chandlers 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 service tax [Vide clarifications issued by D.G.S.T. in October, 2003].
Ship repair services including dry docking within port premises comes within the ambit of port
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 STATIONS’S SERVICES

Effective date: 16th July 2001.
Definitions:
"Authorised service station" means any service station, or centre, authorised by any motor
vehicle manufacturer, to carry out any service, reconditioning or restoration or repair of any
motor car, light motor vehicle or two wheeled motor vehicle manufactured by such
manufacturer. [Section 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 roller,
tractor, motorcycle or invalid carriage. [Section 2(26) of the Motor Vehicles 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 “vehicle” 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 type adapted for use
only in a factory or in any other enclosed premises or a vehicle having less than four wheels
fitted with engine capacity of not exceeding thirty five cubic centimeters. [Section 2(28) of the
Motor Vehicles Act, 1988]
“Light Motor Vehicle” means any motor vehicle constructed or adapted to carry more than
six passengers, but not more than twelve passengers, excluding the driver. [Section 65(62)]
Scope of taxable service shall include any service provided or to be provided to a customer,
by an authorised service station, in relation to any service or repair, reconditioning or
restoration of motorcars, light motor vehicles or two wheeled motor vehicles, in any manner -
Section 65(105)(zo)
Relevant Circulars/Trade Notices
Not all garages and service stations are covered. Only service 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 authorizing manufacturer or not.
Some of the examples of the types of services that may 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 balancing, 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 the authorised
service and repairs of motor car and two wheeled motor vehicles.
The 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 authorized 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 vehicles are sold
to the customers after reconditioning or restoration. For this purpose, old vehicles are
reconditioned or restored by such authorized service stations 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 27.07.2005].

4.42 BEAUTY PARLOUR’S SERVICES

Effective date: 16th August 2002.
Definitions:
“Beauty treatment” includes hair cutting, hair dyeing, hair dressing, face and beauty
treatment, cosmetic treatment, manicure, pedicure or counselling services on beauty, 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 provided to a customer,
by a beauty parlour in relation to beauty treatment [Section 65(105)(zq)].
Relevant Circulars/Trade Notices
This service covers the beauty treatments such as facial, manicure; pedicure and other make
ups provided by beauty parlours. However, it does not include hair cutting and shaving.
Further, it does 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: 16th August 2002.
Definition:
"Cargo handling service" means loading, unloading, packing or unpacking of cargo and
includes cargo handling services provided for freight in special containers or for non-
containerised freight terminal, for all modes 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 provided or to be provided to any person,
by a cargo handling agency in relation to cargo handling services [Section 65(105)(zr)].
4.52 Service tax & VAT

Exemptions/Notifications
Taxable service provided to any person by a cargo handling 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. 10/2002 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 agencies who undertake the activity of packing, unpacking, loading and unloading of
goods meant to be transported by any means of transportation namely truck, rail, 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 engaged in the business of cargo handling services.
The services provided in relation to export cargo and passenger baggage are excluded from
tax net. Mere transportation 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 authorized 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 handling service and
the port service. However since port services covers all the service in relation to goods and
vessels and therefore more specific to port, the service provided in a port in relation to
handling of good would be appropriately covered under port service and no separate levy will
be attracted under the category of cargo handling agency service. Similar would be the case in
respect of service provided for storage of goods in the port premises.
All goods meant for export are excluded from the scope of this levy. There may be cases
where goods may be transhipped at a place other than the place of packing before reaching a
place from where it is exported. For example goods are packed say at Agra for transportation
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 be 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 irrespective of the fact that it reaches the place of export after
transshipment. However, 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 has
been raised as to whether unaccompanied baggage of a passenger attracts service tax under
the category of passenger baggage. It is clarified that unaccompanied 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 service tax will be
leviable in respect of handling of transshipment of export cargo from one international carrier
to another international carrier or from a domestic carrier to an international carrier. It is
clarified that so long as the cargo is for export, no service tax on handling of such cargo is
leviable. For domestic cargo service tax will be applicable.
Some of the cargo handling agencies may also act as marketing agents for individual airlines
for which they get a commission, which seems to range from 5% to 15% of the freight. The
question is whether service tax is payable on this. Marketing or canvassing for cargo for
airlines does not come within the ambit of cargo handling services. Hence no service tax is
payable under the category of cargo handling service.
CFSs also sometimes undertake storing/washing/repairing and handling of empty containers
for the shipping lines for which they charge the shipping lines. Empty containers can not be
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 whether 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 proceeds of the auction goes first to the cost of auction, then towards
customs duties and then to the custodian of the goods. It is clarified that no cargo handling
service can be said to have been rendered in such cases, therefore service tax is not leviable.
Another doubt raised in relation to cargo handling services is that whether individuals
undertaking the activity of loading or unloading of cargo would be leviable to service tax. For
example, if someone hires labour/labourer 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 handling agency.
[Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002]

4.44 CABLE OPERATOR’S SERVICES

Effective date: 16th August 2002.
Definitions:
"Cable operator" 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 controls or is responsible for the management and operation of a cable
television network [Section 2(aa) of the Cable Television Networks (Regulation) Act, 1995]
"Cable 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-transmission by

cables of any broadcast television signals. [Section 2(b) of the Cable Television Networks
(Regulation) Act, 1995]
Scope of taxable service shall include any service provided or to be provided to any person,
by a cable operator (including 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 retransmit signals to the cable operator who is turn retransmits the same to the
viewers 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].
In cable TV services, broadcast channels transmit television signals to multi system operators
(MSO) who further send them to the cable operator. The services provided by the MSOs to the
cable operators have been made taxable w.e.f. 10.09.2004 [CBE&C Circular No. 80/10/2004 –
S.T., dated 17.9.2004].

4.45 DRY CLEANING SERVICES

Effective date: 16th August 2002.
Definitions:
“Dry cleaning” includes dry cleaning of apparels, garments or other textile, fur or leather
articles.- Section 65(37)
"Dry cleaner" means any person providing service in relation to dry cleaning.- 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 [Section 65(105)(zt)].
Relevant Circulars/Trade Notices
Dry cleaner normally performs following process as on cloths during the process of dry
cleaning:
i) Tagging and inspection: Dry cleaner inspects the cloths and tags them with an
identification lable.
ii) Pre-treatment: A stain remover is applied to remove the stains. Use of stain remover
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 4.55

iii) Dry cleaning: A dry cleaning machine is a motor driven washer/extractor/dryer and 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 cleaning such as
perchloethlene (perc), carbon, tetrachloride, trichloethlene and petrol etc. As the clothes
rotate in the perforated basket, there is a constant flow of clean solvent from the pump
and filter system. After cleaning, the cloths are drained to expel the solvent and ten goes
into a dry cycle by circulating warm air.
iv) Post spotting: If there is any spot/stain left after the dry cleaning, it is removed using
water or any other appropriate chemical.
Wet cleaning is a process of cleaning garments in water and water soluble detergent. It is
clarified that service tax is leviable only on dry cleaning. Accordingly 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 would normally be understood that clothes have been dry cleaned
and in such situation service tax is liable to be paid.
It is clarified that since the job of dyeing, 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.
Definitions:
"Event management" means any service provided in relation to planning, promotion,
organising or presentation of any arts, entertainment, business, sports 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 client, by
an event manager in relation to event management [Section 65(105)(zu)].
Relevant Circulars/Trade Notices
An event manager is hired to execute an event such as product launch of any corporate,
promotional activities, concerts/ rock show, official meets, award functions, beauty pageants,
entertainment events, exhibitions, private functions, and sports events etc. Event manager
uses his expertise and ideas to manage an event. Event manager is supposed to manage a
venue, sets including decoration of sets, mandap, chair, table, barricades, sound, light video,
electricals, security, communication, invitations to the event/ sale of tickets 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 manager are
liable to service tax. This also covers any consultation provided for organizing an event.
For managing an event, the event manager hires the services of photographer, videographer,
sound recording studio, advertising agency, mandap 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 amount charged by the event manager from the client for organizing the
event is liable to be included in the value of the taxable service for the purpose of calculation
of service tax.
Sometimes an event is organized/managed in-house but certain contractors are appointed say
for stage/mandap preparation, for lighting/sound system, for advertising the event etc and
revenue is generated by renting out the 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 case 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 mandap
keeper, videographer, security agency etc are no doubt liable to pay service tax on their “
taxable service”. It is clarified that service tax under the category of event management is not
leviable on the sale proceeds of tickets or revenue generated from the sale of space. [Based
on M.F. (D.R.) F. No.B11/1/2002 TRU dt. 01.08.2002]
Firm/person who undertakes activities of organising ‘Trade Fairs’ and Exhibitions by soliciting
the participation from the trade and industry and provides space or may in addition provide
furniture, cabins, security, electricity, etc., and charge their customers accordingly do not fall
within the ambit of ‘Event Management’. In a taxable ‘event management service’ there has to
be a sponsor at whose 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 managing
event. Therefore, in case where the event is organised/managed by the sponsor 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 DESIGNER’S SERVICES

Effective date: 16th August 2002.
Definitions:
"Fashion designing" includes any activity relating to conceptualising, outlining, creating the
designs and preparing patterns for costumes, apparels, garments, clothing accessories,
jewellery or any other articles intended to be worn by human beings and any other service
incidental thereto.- Section 65(43)
"Fashion designer" means any person engaged in providing service 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 create designs/patterns applying his sense of aesthetic,
keen sense of colour, visual imagination, knowledge of market trend and as per requirement of
the client. Accordingly fashion designer may be involved in designing of any goods which are
intended to be worn by human being and where aesthetic/looks/fashion is a criterion for
wearing it. Fashion designers work include selection of material (for example type of cloth, its
colour, design, quantity etc), preparing design as per the trend or as per his visual
imagination, preparation of pattern incorporating 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 only in stitching of clothes. As such no designing activity is
involved. Hence tailor will not be covered under the tax net. Similarly jeweller essentially
makes jewelry and sells it. Therefore, no designing is involved. However a jeweller may 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 designing.
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 clarified 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 would be leviable only on the designing charges
provided fashion designer show the designing and making charges separately in the bill.
However it is also clarified that that if a fashion designers designs article for himself and
makes these articles say garments and sells them, in such a case designing service is
provided to oneself by the designer and therefore not liable to service tax.
At times fashion 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 service tax only on
designing service rendered by him provided designing charges are shown separately in the
bill. However if designing charges and stitching charges are shown in consolidated manner,
service tax will be leviable on entire amount. [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:
“Health and Fitness service” means service for physical well-being such as sauna and
steam bath, turkish bath, solarium, spas, reducing or slimming salons, gymnasium, yoga,
meditation, massage (excluding therapeutic massage) or any other like service.- Section
4.58 Service tax & VAT

65(51)
"Health Club and fitness centre" means any establishment, including a hotel or resort,
providing health and fitness service. – Section 65(52)
Scope of taxable service shall include any service provided or to be provided to any person,
by a health 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 massage centers. The services which fall under this category might be for
weight reduction 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 service. Therapeutic
massage basically means a massage provided by qualified professionals under medical
supervision for curing diseases such as arthritis, chronic low back pain and sciatica etc.
Ayurvedic massages, acupressure therapy, etc. given by qualified professionals under medical
supervision for curing diseases/disorders will come under the category of therapeutic
massages. If the massage is performed without any medical supervision or advice but for the
general physical well 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 case 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 membership
fee already collected prior to the date on which the new service tax has 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 the meaning assigned to it under section 2(11) of the
Insurance Act, 1938.- Section 65(61)
“Life insurance business” means the business of effecting contracts of insurance upon human
life, including and contract whereby the payment of money is assured on death (except death
by accident only) or the happening of any contingency dependent on human life, and any
contract which is subject to payment of premiums for a term dependent on human life and
 Gamut And Coverage of Service 4.59

shall be deemed to include-

(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 payable out of any fund
applicable solely to the relief and maintenance of person engaged in any particular
profession, trade or employment or of the dependent of such 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 65(80)
“Policy Holder” 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 thereof whose interest in
the policy is defeasible or is for the time being subject to any condition. [Section 2(2) of the
Insurance Act, 1938.]
Scope of taxable service shall include any service provided or to be provided to any
policyholder 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 element. An insurance policy is a combination of risk cover and savings
instrument. The premium paid towards policy consist of two components-
(a) cost of risk cover; and
(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 before the new levy comes into force.
It has been provided that in the case of composite policies (risk plus saving) life insurer can at
his option pay 1% of the total premium towards discharge of service tax liability. This shall not
be applicable in case an insurance policy is towards risk only or where the premium gives
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 Actuary 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 provisional 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 AGENT’S SERVICES

Effective date: 16th August 2002.
Definitions:
"Rail travel agent" means 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 service provided or to be provided to a customer,
by a rail travel agent in relation to booking of passage for travel by rail [Section 65(105)(zz)].
Relevant Circulars/Trade Notices
Any person whether registered with the Railways or not engaged in providing any service
connected with booking of passage for travel by rail 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.
Service tax is payable in both the cases. [Based on M.F. (D.R.) F. No.B11/1/2002 TRU dt.
01.08.2002]

4.51 STORAGE AND WAREHOUSING SERVICES

Effective date: 16th August 2002.
Definition
“Storage and Warehousing” includes storage and warehousing services for goods including
liquids and gases but does not include any services provided for storage of agricultural
products or any services provided by a cold storage-[(Section 65(102)]
Scope of taxable service shall include any service provided 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/Trade Notices
Storage and warehousing service for all kind of goods are provided by public warehouses,
private warehouses, by agencies such as the Central Ware Housing Corporation, Air Port
Authorities, Railways, Inland Container Depots, Container Freight Stations, storage godown
and tankers operated by private individuals etc. The storage and warehousing service provider
normally make arrangement for space to keep the goods, loading, unloading and stacking of
goods in the storage area, keeps inventory of goods, makes security arrangements and
provide insurance cover etc. Service provided in ports has already been covered under the
 Gamut And Coverage of Service 4.61

category of port service.

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 cover all cereals, pulses,
fruits, nuts and vegetables, spices, copra, sugar cane, jaggery, raw vegetable fibres such as
cotton, flax, jute etc., indigo, unmanufactured tobacco, betel leaves, tendu leaves, and similar
products. However, manufactured 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 only 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 space cannot be said to be in the nature of service provided for storage or
warehousing of goods. Essential test is whether the storage keeper provides for security of
goods, stacking, loading/ unloading of goods in the storage area.
As service provided by a cold storage has been specifically excluded from the tax net, the
service of cold storage provided by the Airport Authority of India (AAI) will also be exempt.
Cloak room services for passenger’s luggage in railway stations, bus stations etc. would not
come within the purview of storage and warehousing services 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) promotion or marketing or sale of goods produced or provided by or belonging to the
client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or
Explanation - For 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) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as
billing, issue or collection or recovery of cheques, payments, maintenance of accounts
4.62 Service tax & VAT

and remittance, inventory management, evaluation or development of prospective

customer or vendor, public relation services, management or supervision, 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 purposes of this
clause,—
(a) "commission agent" means any person who acts on behalf of another person and causes
sale or purchase of goods, or provision or receipt of services, for a consideration,and
includes any person who, while acting on behalf of another person—
(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or
services.
(b) "information technology service" means any service in relation to designing, or
developing of computer software or system networking, or any other service primarily in
relation to operation of computer systems [Section 65(19)].
Scope 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 commission agents in relation to sale or purchase
of agricultural produce are exempt from service tax.
Agricultural produce means any produce resulting from cultivation or plantation, on which
either no further processing is done or such processing is done by the cultivator like tending,
pruning, cutting, harvesting, drying which does not alter its essential characteristics but makes
it only marketable and includes all cereals, pulses, fruits, nuts and vegetables, spices, copra,
sugar cane, jaggery, raw vegetable fibres such as cotton, flax, jute, indigo, unmanufactured
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 service provided to a client by any person in relation to the business auxiliary
service, 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 behalf of, the client;
 Gamut And Coverage of Service 4.63

(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.
and provided in relation to agriculture, printing, textile processing or education 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 behalf of, the client from service tax subject to the following
conditions:
(i) goods are produced or processed using raw material or semi-finished goods supplied by
the client;
(ii) 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 (goods falling under the First Schedule of
the Central Excise Tariff Act, 1985) on which “appropriate excise duty is payable” i.e., the
final product should not be wholly exempt or subject to ‘Nil’ rate of duty.
In this context the expression “production or processing of goods” means working upon raw
materials or semi-finished goods so as to complete part or whole of production 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 the finished product.
The taxable service of production or processing of goods for, 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 diamonds and gem stones; or
(b) plain and studded jewellery of gold and other precious metals,
falling under Chapter 71 of the Central Excise Tariff Act, 1985 is exempt 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 business 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
consignment agent’s job is to receive the goods from the principal and dispatch them on the
directions of the principal, whereas a commission agent’s job is to cause sale/purchase on
behalf of another person. Thus, the essential difference is that a commission agent sells or
purchases on behalf of the principal while consignment agent receives and dispatches the
goods on behalf of a principal. It is possible 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 category. 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 agent who is not a consignment agent and who
deals in agricultural produce.
Insurance agents and Clearing & Forwarding agents working on commission basis do not fall
under the definition of business auxiliary service as they are specifically covered within the
definition of other specified taxable services, namely the Insurance service and C&F Service
respectively. Under Section 65A of Finance Act 1994, it has also been provided that in case of
overlap, a service would be classified under the head, (a) which provides most specific
description, (b) in case of a composite service having combination of different taxable
services, the service which give them their essential character and (c) in case the test of (a)
and (b) does not resolve, the service which comes earlier in the clauses of Section 65, i.e. the
service that was subjected to service tax earlier. Since Insurance services and C&F Services
are more specific description and were also subjected 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 taxed only under one head of service.
Information technology service is outside the 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 mere
fact that a personal computer or a laptop has been used for providing the service 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 make the output service an IT service. Therefore, in such
cases, individual service has to be examined with reference to the explanation provided to the
definition of business auxiliary service and only such output services which qualify to be IT
services in terms of the said explanation shall remain excluded from taxable service under the
heading business auxiliary service [C.B.E.&C. Circular No. 59/8/2003, dated 20th June, 2003]
All business auxiliary services relating to procurement, inventory and production are liable to
service tax. Thus, the procurements of input, capital goods or input services as defined in the
CENVAT Credit Rules, by a commercial concern (now any person) for a client i.e. a person
producing goods or providing services become taxable under this category. Similarly, if a
commercial concern (now any person) produces goods on behalf of the client or provides
service on behalf of a client, such activities come under the scope of this service, unless the
activity of service provider amounts to manufacture in 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 out by the service provider (i.e. the agent) on behalf of the client. Such
activities include procurements, productions or service providing activities done for the client
 Gamut And Coverage of Service 4.65

[Based on C.B.E&C. Circular No. 80/10/2004 –S.T., dated 17.9.2004].

A point was raised whether ‘production of goods on behalf of the client’ covers situations
where the service provider undertakes job work for the client. Production or processing (not
amounting to manufacture) done either for the client or on behalf of the client would be liable
to service tax.
Another taxable activity covered 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
defining inputs (under Explanation in section 65(19) of the Finance Act, 1994) for the 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 intended for use by the client would be
taxable. This definition of input is different 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 SERVICES

Effective date 1st July 2003.
Definitions:
"Commercial training or Coaching" means any training or coaching provided by a
commercial training or coaching center. [Section 65(26)]
“Commercial training or Coaching Centre” means any institute or establishment providing
commercial training or coaching for imparting skill or knowledge or lessons on any subject or
field other than the sports, with or without issuance of a certificate and includes coaching or
tutorial classes but does not include preschool coaching and training centre or any institute or
establishment which issues any certificate or diploma or degree or any educational
qualification 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 training or coaching
[Section 65(105)(zzc)].
Exemptions/Notifications
Taxable services, provided in relation to commercial training or coaching by, -
(a) a vocational training institute;
(b) a recreational training institute;
to any person are exempt from the whole of the service tax leviable thereon. However, this
exemption is not available to the taxable services provided in relation to commercial training or
coaching by a computer training institute.
4.66 Service tax & VAT

Explanation - For the purposes of this notification, -

(i) a vocational training institute” means a commercial training or coaching centre which
provides vocational coaching or training that impart skills to enable the trainee to seek
employment or undertake self-employment, directly after such training or coaching;
(ii) “recreational training institute” means a commercial training or coaching centre which
provides coaching or training relating to recreational activities such as dance, singing,
martial arts, hobbies.
(iii) “computer training institute” means a commercial training or coaching centre which
provides coaching or training relating to computer software or hardware. [Notification
No.24/2004- S.T. dated 10.09.2004]
With effect from 1.07.2003 the taxable 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 time being in force, to any
person, are also exempt from the whole of the service tax leviable thereon. However, this
exemption shall not be applicable if the charges for such services are paid by the person
undergoing such course or curriculum directly to the commercial or coaching centre.
[Notification No.10/2003-S.T.dated 20.06.2003]
Relevant Circulars/Trade Notices
Institutes like the Institute of 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
students undertaking courses for obtaining recognized degrees/diplomas (like Chartered
Accountancy) from their institute. Whereas institutes like the Institute of Chartered
Accountants of India will not be chargeable to service tax because they confer qualifications
recognized by law, the institutes or centers providing such part of training may be otherwise
under service tax net. Vide notification No. 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 centers from service tax which form an essential part of the course or
curriculum leading to issuance of recognized certificate, diploma, degree or any other
educational qualification. The exemption is subject to the condition that the receiver of such
service (for example, student) makes payment for the entire course or curriculum to the
institute or establishment issuing such certificate, diploma etc. 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
on commercial basis. Therefore, the coaching provided by postal means would also be
covered under the service tax and the charges, including the postal charges collected 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 recognized
degrees/diploma/certificates, also impart training for competitive examinations, various
entrance tests etc. It is clarified that by definition, such institutes or establishments, which
issue a certificate, diploma or degree recognized by law, are outside the purview of
"commercial training or coaching institute". Thus, even if such institutes or establishments
provide training for competitive examinations etc., such services rendered would be outside
the scope of service tax.
It is clarified that service tax is on institutions/establishments. Therefore, only those service
providers are covered under the service tax who have some establishment for providing
commercial coaching or training i.e. institutional coaching or training. Thus, individuals
providing services at the premises of a service receiver would not be covered under service
tax. However, if coaching or training center provides commercial coaching by sending
individuals to the premises of service receivers, such services would be chargeable to tax, as
in this case, the individuals are rendering services on behalf of an institution.
It is clarified that in case employers provide any free training themselves, no service tax is
chargeable. However if an employer hires an outside commercial coaching or training center
for imparting some training to its employees, then the payment made by the said employer to
such coaching center will be chargeable to service tax [C.B.E.&C. Circular No. 59/8/2003,
dated 20th June, 2003]
Coaching imparted 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 clarification issued by D.G.S.T. in October, 2003].

4.54 ERRECTION, COMMISSIONING AND INSTALLATION SERVICES

Effective date 1st July 2003.
Definitions:
“Erection, commissioning or installation” means any service provided by a commissioning
and installation agency, in relation to,—
(i) erection, commissioning or installation of plant, machinery, equipment or structures,
whether pre-fabricated or otherwise; or
(ii) installation of—
(a) electrical and electronic devices, including wirings or fittings therefor; or
(b) plumbing, drain laying or other installations for transport of 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 staircases or travelators; or
(f) such other similar services [Section 65(39a)].
"Commissioning and installation agency" means any agency providing service in relation
to erection, commissioning or installation [Section 65(29)].
Scope of taxable service shall include any service provided or to be provided to a customer
by a commissioning and installation agency in relation to erection, commissioning and
installation [Section 65(105)(zzd)].
Exemptions/Notifications
In case of erection, 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 granted. Accordingly,
service tax is payable only on 33% of the gross amount charged for erection commissioning or
installation and supply of plant, machinery or equipment. It is optional for the commissioning
and insatallation agency to avail this abatement. The gross amount (33% of which is
chargeable to service tax) charged from the customer shall include the value of the plant,
machinery, equipment, parts and any other material sold by the commissioning and installation
agency, during the course of providing erection commissioning or installation service.
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 the provisions of Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003 ST, dated
20.06.2003 [Notification No.1/2006- ST dated 01.03.2006].
Relevant Circulars/Trade Notices
The general practice is that 'erection, commissioning and installation' are contracted as a
composite package. Erection would refer to the civil works to installation/commissioning of a
plant or machinery. With effect from 10.09.2004 the scope of service tax under installation and
commissioning is being extended to include erection also. Erection involves civil works, which
would otherwise fall under the category of construction services. However, in case of a
composite contract for erection, commissioning and installation, 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 4.69

4.55 FRANCHISE SERVICES

Effective date 1st July 2003.
Definitions:
"Franchise" means an agreement by which the franchisee is granted representational right to
sell or manufacture goods or to provide service or undertake any process identified with
franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol,
as the case may be, is involved [Section 65(47)].
"Franchisor" means any person who enters into franchise with a franchisee and 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 franchise. – 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 principal on his behalf,
such services by the principal to the service recipient would be taxable. [M.F. (D.R.) Letter
F.No.B1/6/2005-TRU dated 27.07.2005].

4.56 INTERNET CAFÉ’S SERVICES

Effective date 1st July 2003.
Definitions:
"Internet cafe" means a commercial establishment providing facility for accessing internet.
[Section 65(57)]
Scope of taxable service shall include any service provided or to be provided to any person,
by any internet café 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 service provided by-
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorised by him, in relation to,—
4.70 Service tax & VAT

(a) management of properties, whether immovable or not;

(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any
goods, excluding 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 payments for such services, the service tax is leviable on the services provided
towards maintenance and repair. Therefore, for the services provided during the warranty
period by the dealer or any other authorized person, service tax would be leviable on any
amount received by such dealer or such other authorized person from 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 provided without any contract is not
liable to service tax since maintenance or repair service undertaken under a maintenance
contract or agreement is only chargeable to service tax [Vide clarification issued by D.G.S.T.
in October, 2003].
Supreme Court in the case of Tata Consultancy Services vs State of Andhra Pradesh has
observed that all the tests required to satisfy the definition of goods are possible in the case of
software and in computer software the intellectual property has been incorporated on media
for the purpose of transfer and software and media cannot be split up. Therefore, sale of
computer software falls within the scope of sale of goods. Supreme Court has also observed
that they are in agreement with the view that there is no distinction between branded and
unbranded software.
Branded software, also known as canned software, sold off the shelf, is transferred in a media
and is sold as such and the Supreme Court has decided that such branded software falls
within the definition of goods. In the case of unbranded/customized software, the supplier
develops the software and thereafter transfers the software so developed in a media and it is
taken to the customer’s premises for loading in their system. Thus, in the case of
unbranded/customized software also, the intellectual property namely software is incorporated
in a media for use. Supreme Court has held that software in a media is goods.
Any service provided to a customer by any person in relation to maintenance or repair is
leviable to service tax. Accordingly, “maintenance or repair” means any service provided in
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 servicing 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 periodically checking
and servicing or repairing. While repair is a one time activity, maintenance is a continuous
process of which repairing may be incidental or ancillary.
Maintenance or repair, including reconditioning or restoration or servicing 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 service tax under this category of taxable service. To attract
service tax under this category, the contract or agreement need not necessarily be a
maintenance contract/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.
Definitions:
"Technical testing and analysis" means any service in relation to physical, chemical,
biological or any other scientific testing or analysis of goods or material or any immovable
property, but does not include any testing or analysis service provided in relation to human
beings or animals.
It is clarified that technical testing and analysis includes testing and analysis undertaken for
the purpose of clinical testing of drugs and formulations; but does not include testing or
analysis for the purpose of determination of the nature of diseased condition, identification of a
disease, prevention of any disease or disorder in human beings or animals. [Section 65(106)]
"Technical testing and analysis agency" means any agency or person engaged in providing
service in relation to technical testing and analysis. [Section 65(107)]
Scope of taxable service shall include any service provided or to be provided to any person,
by a technical testing and analysis 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 provided 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 as made applicable to service tax) had clarified that certification given under
authority of any code or statute cannot be considered as a consulting engineer service.
4.72 Service tax & VAT

However, technical inspection and certification services would cover certification of all types
including that of immovable property. It is clarified that such services become taxable from the
notified date. Therefore, certification given in respect of immovable property will fall under the
purview of technical inspection and certification services [C.B.E.&C. Circular No. 59/8/2003,
dated 20th June, 2003]

4.59 TECHNICAL INSPECTION AND CERTIFICATION SERVICES

Effective date 1st July 2003.
Definitions:
"Technical inspection and certification" means inspection or examination of goods or
process or material or any immovable property to certify that such goods or process or
material or immovable property qualifies or maintains the specified standards, including
functionality or utility or quality or safety or any other characteristic or parameters, but does
not include any service in relation to inspection and certification of pollution levels. [Section
65(108)]
"Technical inspection and certification agency" means any agency or person engaged 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 facilities and includes aerodrome as defined in clause (2) of
section 2 of the Aircraft 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 [Section 65 (3d)].
“Civil enclave” has the meaning assigned to it in clause (i) of section 2 of the Airports
Authority of India Act, 1994 [Section 65 (24a)].
“Civil Enclave” 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 airport or for the
handling of baggage or cargo by such service, and includes land comprising of any building
and structure on such area.
Scope of taxable service shall include any service provided or to be provided to any person,
by airports authority or any person authorised by it, in an airport or a civil enclave [Section
65(105)(zzm)].
Relevant Circulars/Trade Notices
Services provided in an airport or civil enclave, to any person by Airports Authority of India
(AAI), a person authorized by it, or any other person having charge of management of an
airport are taxable under this category. This includes variety of services provided to airlines,
as well as for cargo and passenger handling such as security, transit facilities, landing
charges, terminal navigation charges, parking and housing charges and route navigation
facility charges. In case a part of airport/ civil 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 rendering a service. [CBE&C Circular No. 80/10/2004 –S.T., dated 17.9.2004]

4.61 TRANSPORT OF GOODS BY AIR SERVICES

Effective date: 10th September 2004
Definitions:
“Aircraft” has the meaning assigned to it in clause (1) of section 2 of the Aircraft Act, 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 against the earth’s surface and includes balloons,
whether fixed or free, airships, kites, gliders and flying machines.
“Aircraft” operator means any person who provides the service of transport of goods or
passengers by aircraft [Section 65(3b)].
Scope 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 by aircraft is exempt from the whole of the service tax leviable thereon
[Notification No.29/2005 ST, dated 15.07.2005].
Relevant Circulars/Trade Notices
In addition to the actual air-freight charges, all charges collected towards storing, handling,
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:
“Business exhibition” means an exhibition,—
(a) to market; or
(b) to promote; or
(c) to 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 provided or to be provided to an exhibitor,
by the organiser of a business exhibition, in relation to business exhibition [Section
65(105)(zzo)].
Relevant Circulars/Trade Notices
Business exhibition service is a service rendered to an exhibitor by an organizer of a business
exhibition that intends to market, promote, advertise 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 trade fairs, road shows, fashion show, display show-cases kept
in airports, railway stations, hotels etc. would be covered under this new levy. A display of
consumer goods in shops or shopping centers for customers to select and purchase would
normally not attract any service tax, as normally no separate charges are collected 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 service tax.
While event management service (a currently taxable service) also relates 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 etc. Thus, an organizer of a business exhibition is
not covered under Event Management Services, but would be covered under the new levy of
‘Business Exhibition Services’. Similarly, while services rendered in relation to a circular,
label, document, hoarding or any other audio visual representation of a product or service falls
under ‘advertisement services’, the services relating to actual exhibition or display of the
product or services would fall under the category of ‘Business Exhibition Services’. [CBE&C
Circular No. 80/10/2004 –S.T., dated 17.9.2004]
 Gamut And Coverage of Service 4.75

4.63 TRANSPORT OF GOODS BY ROAD (BY A GOODS TRANSPORT AGENCY)

Effective date: 1st January 2005
Definitions:
“Goods carriage” has the meaning assigned to it in clause (14) of section 2 of the Motor
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 vehicle not so constructed or adapted when used for the
carriage of goods.
“Goods transport 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 provided to a customer,
by a goods transport agency, in relation to transport of goods by road in a goods carriage
[Section 65(105)(zzp)]
Exemptions/Notifications
Notification No.1/2006 ST, dated 01.03.2006 exempts 75% of the gross amount charged from
the customer by a goods transport agency for providing the taxable service in relation to
transport of goods by road in a goods carriage, from payment of service tax. In other words,
service tax shall be levied only on 25% of the gross 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 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
(ii) the service provider has availed the benefit under Notification No. 12/2003-ST, dated the
20.06.2003.
Notification No. 33/2004, ST, dated 03.12.2004 exempts the taxable service provided by a
goods transport agency to a customer, in relation to transport of fruits, vegetables, eggs or
milk by road in a goods carriage, from the whole of service 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 relation to transport of goods by road in a goods
carriage, from the whole of service tax leviable thereon where, -
(i) the gross amount charged on consignments transported in a goods carriage does not
exceed Rs.1500; or
(ii) the gross amount charged 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 agency
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) Factory registered under or governed by the Factories Act;
(ii) Company established by or under the Companies Act;
(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 Central Excise law; or
(vii) Any body corporate established, or a partnership firm registered, by or under any law.
In cases other than those mentioned above, the service tax is to be paid by the goods
transport agency. The goods transport agencies are required to issue a consignment note
(even in the abovementioned seven cases) 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 serially numbered and should contain the names of the consignor and consignee,
registration number of the goods carriage used for transport of goods, details of goods
transported, place of origin and destination and person liable for paying service tax.
Relevant Circulars/Trade Notices
According to provisions of Section 69 of the Finance Act, 1994, requirement of registration is
limited to persons liable 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 service 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 before 31.12.2005, the consequences
shall be limited to recovery of tax with interest payable thereon. No penalty shall be imposed
on such defaulters unless the default is on account of deliberate fraud, collusion, suppression
of facts or willful misstatement or contraventions of the provisions of service tax with intent to
evade payment of service tax.
If service tax due on transportation of a consignment has been paid or is payable by a person
liable to pay service tax, service tax should not be charged for the same amount from any
other person, to avoid 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 CIVIL STRUCTURES
Effective date: 10th September 2004
Definition:
“Commercial or industrial construction service” means—
(a) construction of a new building or a civil structure or a part thereof; or
(b) construction of pipeline or conduit; or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall
tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and
railing, construction of swimming pools, acoustic applications or fittings and other similar
services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or
civil structure, pipeline or conduit,
which is—
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for
commerce or industry, but does not include such services provided in respect of roads,
airports, railways, transport terminals, bridges, tunnels and dams [Section 65(25b)].
Scope of taxable service shall include any service provided or to be provided to any person,
by any other person, in relation to commercial or industrial construction service [Section
65(105)(zzq)].
Exemptions/Notifications
In case of commercial or industrial construction services, service tax shall be levied only on
33% of the gross charges. This exemption shall not apply in such cases where the taxable
services provided are only completion and finishing 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 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
(ii) the service provider has availed the benefit under the Notification No. 12/2003-S.T.,
dated the 20.06.2003.
4.78 Service tax & VAT

The “gross amount charged” shall include the value of goods and materials supplied or
provided or used by the provider of the construction service for providing such service
[Notification No. 1/2006-S.T., dated 01.03.2006].
The commercial or industrial construction service provided to any person by any other person
in relation to construction of port or other port is exempt from the whole of service tax leviable
thereon vide Notification No. 16/2005 ST, dated 07.06.2005.
Relevant Circulars/Trade Notices
Services provided by a commercial concern (now any person) in relation to construction,
repairs, alteration or restoration of such buildings, 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
buildings/civil structures for themselves (for their own use, renting it out or for selling it
subsequently) are not taxable service providers. However, if such real estate owners hire
contractor/contractors, the payment made to such contractor 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 constructions
which are for the use of organizations or institutions being established solely for educational,
religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of
profit are not taxable, being non-commercial in nature. Generally, government buildings or civil
constructions are used for residential, office purposes or for providing civic amenities. Thus,
normally government constructions would not be taxable. However, if such constructions are
for commercial purposes like local government bodies getting shops constructed 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 residential-cum-commercial construction, tax would
be leviable in case such immovable property is treated as a commercial property under the
local/municipal laws.
The definition of service specifically excludes construction of roads, airports, railway, 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 pipeline 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 present, services rendered for construction of commercial or industrial buildings is taxable.
However, construction of roads is not liable to service tax. A point has been raised that if a
commercial complex is constructed which also contains roads whether the value of
 Gamut And Coverage of Service 4.79

construction of roads would be liable to service tax.

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 contract, then the service tax would
be leviable on the gross amount charged for construction 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 taken on the basis of the facts and circumstances of each case as to whether the service
provider has made a single overall supply or a supply of different services which are to be
treated differently [M.F. (D.R.) Letter F.No.B1/6/2005-TRU dated 27.07.2005].

4.65 INTELLECTUAL PROPERTY SERVICES OTHER THAN COPYRIGHTS

Effective 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 does not include copyright [Section 65(55a)].”
“Intellectual property” service means,—
(a) transferring, temporarily; or
(b) permitting the use or enjoyment of,
any intellectual 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)(zzr)].
Exemptions/Notifications
Service provided by the holders of intellectual property 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 Development Cess Act in relation to such intellectual property services
[Notification No. 17/2004-S.T., dated 10.09.2004].
Relevant Circulars/Trade Notices
Intellectual property emerges from application of intellect, which may be in the form of an
invention, design, product, process, technology, book, goodwill etc. In India, legislations are
made in respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights,
trademarks and designs. The definition of taxable service includes only such IPRs (except
copyrights) that are prescribed under law for the time being in force. As the phrase ‘law for
the time being in force’ 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 Indian law in force
at present alone are chargeable to service tax and IPRs like integrated circuits or undisclosed
information (not covered by Indian law) would not be covered under taxable services.
A permanent transfer of intellectual property right does not amount to rendering of service. On
such transfer, the person selling these rights no longer remains a 'holder of intellectual
property right' so 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 attracts 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 (refer Notification No, 17/2004-S.T., dated 10-9-2004). [CBE&C Circular
No. 80/10/2004 –S.T., dated 17.9.2004]

4.66 OPINION POLL SERVICES

Effective date: 10th September 2004
Definitions:
“Opinion poll” means any service designed to secure information on public opinion regarding
social, economic, political or other issues [Section 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 include any service provided or to be provided to any person,
by an opinion poll agency, in relation to opinion poll [Section 65(105)(zzs)].
Relevant Circulars/Trade Notices
Services provided by an opinion poll agency (i.e. any person providing that service) in relation
to opinion polls are taxable under this category. Opinion poll means securing information on
public opinions regarding social, economic, political and other issues. The term ‘securing’
would include activities like selecting the target groups, preparing questionnaires, gathering
opinions from such target groups, collating their responses, drawing conclusions or analyzing
trends and preparing report based thereon. A similar service i.e. ‘market research agency
service’ is taxable since 1998. However, that service includes conducting of market research
in relation to product, services and utilities. Opinion polls conducted to secure information on
economic issues do not include such market researches about specific products, services or
utilities. Therefore, obtaining opinion of general public on economic issues like price rise,
reaction of people to certain government or corporate policies etc., would fall under the
category of opinion poll services while information gathered in relation to specific products,
services etc. would fall under ‘market research agency service’. [CBE&C Circular No.
80/10/2004 –S.T., dated 17.9.2004]
 Gamut And Coverage of Service 4.81

4.67 OUTDOOR CATERING

Effective date: 10th September 2004
Definitions:
“Caterer” means any person who supplies, either directly or indirectly, any food, edible
preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or
accoutrements for any purpose or occasion [Section 65(24)].
“Outdoor caterer” 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 or otherwise by
the person receiving such services [Section 65(76a)].
Scope of taxable 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 caterer also
provides food and the invoice, bill or challan issued for this purpose indicates that it is
inclusive of charges for supply of food. 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 the provisions of the Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003-Service
Tax, dated 20.06.2003.
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 service 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
Definitions:
“Programme” means any audio or visual matter, live or recorded, which is intended to be
disseminated by transmission of electro-magnetic waves through space or through cables
4.82 Service tax & VAT

intended to be received by the general public either directly or indirectly through the medium
of relay stations [Section 65(86a)].
“Programme producer” means any person who produces a programme on behalf of another
person [Section 65(86b)].
Scope of taxable service shall include any service provided or to be provided to any 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 programme producer have been brought under the purview
of taxable service. Any programme produced (or any service rendered in connection of
producing such programme) by a programme producer, for telecasting/radio transmission by a
broadcaster would fall under this category of taxable service including cases where a
programme 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 Circular 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 of mineral” means geological, geophysical or other prospecting,
surface or sub-surface surveying or map making service, in relation to location or exploration
of deposits of mineral, oil or gas [Section 65(104a)].
Scope of taxable service shall include any service provided or to be provided to a customer,
by any person, in 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 survey and exploration of minerals is
provided by any person to a customer. The survey and exploration may result in locating ores,
crude etc. Subsequent to survey and exploration, the mineral is extracted and transported for
refining, processing and production. The service tax under this category would be limited to
the services rendered in relation to survey and exploration only and not on the activity of
actual extraction after the survey and exploration is complete. The transport, refining,
processing or production of the extracted products would also be out of the ambit of service
tax. Activities such as seismic survey, collection/processing interpretation of data and drilling
or testing in relation to survey and exploration would, however, fall within the ambit of taxable
service. [CBE&C Circular No. 80/10/2004 –S.T., dated 17.9.2004]
 Gamut And Coverage of Service 4.83

4.70 PANDAL OR SHAMIANA SERVICES

Effective date: 10th September 2004
Definitions:
“Pandal or shamiana” means a place specially prepared or arranged for organizing an
official, social or business function [Section 65(77a)].
“Pandal or shamiana contractor” means a person engaged in providing any service, either
directly or indirectly, 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 65(77b)].
Scope of taxable service shall include any service provided or to be provided to a client, by a
pandal or shamiana contractor in relation to a pandal or 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 pandal 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 purpose indicates that it is inclusive of charges for catering
service. 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 the provisions of the Cenvat Credit Rules, 2004; or
(ii) the service provider has availed the benefit under the Notification No. 12/2003-Service
Tax, dated 20.06.2003.
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 services, directly or indirectly, in connection with preparation, arrangement,
erection or decoration of a pandal or shamiana (i.e. a place specially prepared for organizing
official, social or business functions) is a 'pandal or shamiana contractor'. Service provided by
him in any such manner, including that of a caterer is liable to service tax under the category
of 'Pandal or Shamiana Contractor service'.
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 AGENTS’S 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 service shall include any service provided or to be provided to a customer,
by a travel agent, in relation to the booking of passage for travel [Section 65(105)(zzx)].

4.72 FORWARD CONTRACT SERVICES

Effective date: 10th September 2004
Definitions:
“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 association” has the meaning assigned to it in clause (j) of section 2 of the
Forward Contracts (Regulation) Act, 1952 [Section 65(89a)].
“Recognised association” means an association to which recognition for the time being has
been granted by the Central 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 clause (jj) of section 2 of the
Forward Contracts (Regulation) Act, 1952 [Section 65(89b)].
“Registered association” means an association to which for the time being a certificate of
registration has been granted by the Commission under section 14B.
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 association, in relation to a forward
contract [Section 65(105)(zzy)].
Relevant Circulars/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 delivery contract. For commodities notified
under the Act, forward contracts can be entered into only through members of association
recognized under that Act. For 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
commodity exchanges) to any person in relation to forward contracts. [CBE&C Circular No.
80/10/2004 –S.T., dated 17.9.2004]
 Gamut And Coverage of Service 4.85

4.73 TRANSPORT OF GOODS THROUGH PIPELINE OR OTHER CONDUIT

Effective date: 16th June 2005
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 water, through pipeline or
other conduit [Section 65(105)(zzz)].
Relevant Circulars/Trade Notices
Transportation of goods, other than water, through pipeline or conduit is generally employed to
transport petroleum and other petroleum products, 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 CLEARANCE, EXCAVATION, EARTH MOVING AND

DEMOLITION SERVICES
Effective date: 16th June 2005
Definition:
“Site formation and clearance, excavation and earthmoving and demolition” includes,—
(i) drilling, boring and core extraction services for construction, geophysical, geological or
similar purposes; or
(ii) 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) demolition and wrecking of building, structure or road,
but does not include such services provided in relation to agriculture, irrigation, watershed
development and drilling, digging, repairing, renovating or restoring of water sources or water
bodies [Section 65(97)(a)].
Scope of taxable service shall include any service provided 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 other similar activities [Section 65(105)(zzza)].
Exemptions/Notifications
The site formation and clearance, excavation and earthmoving and demolition and such other
similar activities provided to any person by any other person in the course of construction of
roads, airports, railways, transport terminals, bridges, tunnels, 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 activities specifically mentioned are indicative and not
exhaustive. Prior to construction of buildings, factory or any civil structure, activity of mining or
laying of cables or pipes, preparation services of site formation and clearance, excavation and
earthmoving or leveling are normally undertaken for a consideration to make the land suitable
for such activities. Such services include blasting and 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 structures, buildings, streets or highways is also undertaken for a
consideration as a preparatory activity for subsequent construction activity or for clearing the
site for any other purpose. All such activities fall within the scope of this service.
However, site formation and clearance, excavation and earthmoving and demolition services
when provided in relation to agriculture, irrigation, watershed development and drilling,
digging, repairing, renovating or restoring of water 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 DREDGING SERVICES OF RIVERS, PORTS, HARBOURS, BACKWATERS AND

ESTUARIES
Effective date: 16th June 2005
Definition:
“Dredging” includes removal of material including, silt, sediments, rocks, sand, refuse,
debris, plant or animal matter in any excavating, cleaning, deepening, widening or
lengthening, either permanently or temporarily, of any river, port, harbour, backwater or
estuary [Section 65(36)(a)].
Scope of taxable service shall include any service provided or to be provided to any 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 leviable only on dredging of river, port, harbour, backwater or estuary and dredging 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
Effective date: 16th June 2005
Definition:
“Survey and map-making" means geological, geophysical or any other prospecting, surface,
sub-surface or aerial surveying or map-making of any kind, but does not include survey and
exploration of mineral [Section 65(104)(b)].
Scope of taxable service shall include any service provided or to be provided to any person,
by any other person, other than by an agency under the control of, or authorised by, the
Government, in relation to survey and map-making [Section 65(105)(zzzc)].
Relevant Circulars/Trade Notices
This service covers geological, geophysical, geochemical and other prospecting services by
studying the properties of the earth and rock formation and structures. It also includes
services providing information on sub-surface earth formations by different methods such as
seismographic, gravimetric, magnetometric methods or other sub-surface surveying methods.
Further, it covers surface surveying, services of gathering information on the shape, position
or boundaries of a portion of earth’s surface by methods such as transit, photogrammetric, or
hydrographic, for the purpose of preparing maps. It also includes surveying or collection of
data by satellites.
‘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 taxable service of ‘survey and map-making’
classifiable under sub-clause (zzzc) of section 65(105) of the Finance Act, 1994, covers other
such activities excluding “survey and exploration of minerals” classifiable under sub-clause
(zzv) of section 65(105) since 2004.
Map making consists of preparation or revision of maps of all kinds such as topographic,
hydrographic, roads, planimetric, cadastral, city maps etc. using various information sources.
However, survey and map-making services rendered by an agency under the control of the
Government or authorised by the Government, such as ‘Survey of India’ are specifically
excluded and are outside the 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, ANIMAL HUSBANDRY OR DAIRYING
Effective date: 16th June 2005
Definition:
“Cleaning activity” means cleaning, including specialised cleaning services such as
disinfecting, exterminating or sterilising of objects or premises, of—
(i) commercial or industrial buildings and premises thereof; or
(ii) 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, animal husbandry or
dairying [Section 65(24)(b)].
Scope of taxable service shall include 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/Trade Notices
Generally contracts/agreements are entered into for cleaning of commercial complexes such
as multiplexes, shopping complexes, office complexes, industrial buildings etc. The
contracts/agreements may be in writing or may be unwritten. This taxable service includes,-
(i) specialized cleaning services such as disinfecting and exterminating, sterilization of
objects, etc. Such cleaning services would be taxable when performed for commercial or
industrial buildings and their premises, factories, plant and machinery, tank or reservoir
of such buildings;
(ii) Disinfecting, exterminating insects, rodents and other pests and fumigation services in
respect of specified premises would be liable to service tax. In respect of multi-storeyed
commercial buildings, window cleaning is a specialized service. Window cleaning
services, including exterior window cleaning using swing stages would be liable to
service tax;
(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 services and similar services.
However, such cleaning services in relation to agriculture, horticulture, animal husbandry or
dairying would be excluded from the purview of service tax. Further, such cleaning services in
respect of non-commercial 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-TRU dated
27.07.2005].

4.78 SERVICES IN RESPECT OF MEMBERSHIP OF CLUBS OR ASSOCIATIONS

Effective date: 16th June 2005
Definition:
“Club or association” means any person or body of persons providing services, facilities or
advantages, for a subscription or any other amount, to its members, but does not include—
(i) any body established or constituted by or under any law for the time being in force; or
(ii) any person or body of persons engaged in the activities of trade unions, promotion of
agriculture, horticulture or animal husbandry; or
(iii) any person or body of persons engaged in any activity having objectives which are in the
nature of public service and are of a charitable, religious or political nature; or
(iv) any person or body of persons associated with press or media [Section 65(25)(a)].
Scope of taxable service shall include any service provided or to be provided to its members,
by any club or association in relation to provision of services, facilities or advantages for a
subscription or any other 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 charges recovered by
such clubs or associations for membership and providing various 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 established or constituted by or under any law, trade unions,
clubs or association formed for promotion of agriculture, horticulture or animal husbandry,
clubs or association 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 political nature, clubs or
associations associated with press or media.
Legally, bodies which are established or constituted “under a statute” are different from bodies
which are “formed and registered” under a statute. Companies and Societies registered under
the respective Acts are merely bodies “formed and registered” under these Acts 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 Section 65 of Finance Act. In other words,
any body formed and registered as a company or society which provides services, facilities or
advantages for a subscription 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 of services, facilities or advantages for a subscription or any other
amount. Facilities or advantages are provided to members in return for a subscription or other
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 amounts 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 will 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 documents evidencing such sale are available.
Any additional fee should be treated in the same way as subscription. Life membership fees
must be treated in the same way as subscription. In certain professions, persons cannot
practice unless they are registered with a statutory body and have paid fees which are
prescribed by law. In such cases, the organization is not providing any service in the course of
its business and it is merely carrying statutory functions. Since no service is provided, the
question of levy of service tax does not arise. However, if 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

Effective date: 16th June 2005
Definition:
“Packaging activity” means packaging of goods including pouch filling, bottling, labeling or
imprinting of the package, but does not include any packaging activity that amounts to
'manufacture' within the meaning 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 provided to any person,
by any other person, in relation to packaging activity [Section 65(105)(zzzf)].
Relevant Circulars/Trade Notices
This taxable service would cover packaging activity undertaken by a person for any other
person. These kinds of packaging services may be done for pharmaceuticals (aseptic
packaging), fragile goods, heavy machinery and hardware, using variety of automated or
manual packaging techniques, including blister forming, and packaging, shrink or skin
wrapping, form filling and sealing, pouch filling, bottling or aerosol packaging. This service
also includes labeling or imprinting of the package. However, packaging 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 4.91

4.80 MAILING LIST COMPILATION AND MAILING SERVICES

Effective date: 16th June 2005
Definition:
“Mailing list compilation and mailing” means any service in relation to—
(i) compiling and providing list of name, address and any other information from any source;
or
(ii) sending document, information, goods or any other material in a packet, by whatever
name called, by addressing, stuffing, sealing, metering or mailing,
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 mailing [Section 65(105)(zzzg)].
Relevant Circulars/Trade Notices
Business establishments 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 documents, 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 companies 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 RESIDENTIAL COMPLEXES

Effective date: 16th June 2005
Definitions:
“Construction of complex” 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 papering, wood
and metal joinery and carpentry, fencing and railing, construction of swimming pools,
acoustic applications or fittings and other similar services; or
(c) repair, alteration, renovation or restoration of, or similar services in relation to, residential
complex [Section 65(30)(a)]
4.92 Service tax & VAT

“Residential complex” means any complex comprising of—

(i) a building or buildings, having more than twelve residential units;
(ii) a common area; and
(iii) any one or more of facilities or services such as park, lift, parking space, community hall,
common water supply or effluent treatment system,
located within 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 constructed by a
person directly engaging any other person for designing or planning 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 hereby declared that for the purposes of this
clause,—
(a) "personal use" includes permitting the complex for use as residence by another person
on rent or without consideration;
(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 service shall include any service provided or to be provided to any person,
by any 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 from the service tax leviable thereon. This exemption
shall not apply in cases where the taxable services provided are only completion and finishing
services in relation 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 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 the provisions of the CENVAT Credit Rules, 2004; or
(ii) the service provider has availed the benefit under Notification No. 12/2003-ST, dated
20.06.2003.
The “gross amount charged” shall include the value of goods and materials supplied or
provided or used for providing the said taxable service by the service provider [Notification No.
1/2006 ST, dated 01.03.2006].
Relevant Circulars/Trade Notices
This service would generally cover construction services in respect of residential 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) a building or buildings located within a premises;
(ii) total number of residential units within the said premises are more than twelve;
(iii) having common area;
(iv) having common facilities or services; and
(v) layout of the premises has been approved by the appropriate authority.
Common area would include roads, staircases and other similar areas where residents of the
residential complex have easement rights. The list of facilities prescribed is merely illustrative
and not exhaustive. Some residential complexes may also contain 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 taxable.
Similarly, residential complex constructed by an individual, which is intended for personal use
as residence and is constructed by directly availing services of a construction service provider,
is also not covered under the scope of the service tax and not taxable.
Post construction, completion and finishing services such as glazing, plastering, painting, floor
and wall tiling, wall covering and 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 levy of
service tax.
Repair, alteration, renovation or restoration of residential complexes would also be liable to
service tax. Such services provided in relation 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 ISSUE’S SERVICES

Effective date: 1st May 2006
Definitions:
“Registrar to an issue” means any person carrying on the activities in relation to an issue
including collecting application forms from investors, keeping a record of applications and
money received from investors or paid to the seller of securities, assisting in determining the
basis of allotment of securities, finalising the list of persons entitled to allotment of securities
and processing and despatching allotment letters, refund orders or certificates 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 include any service provided or to be provided to any person,
by a registrar to an issue, in relation to sale or purchase of securities [Section 65(105)(zzzi)].

4.83 SHARE TRANSFER AGENT’S SERVICES

Effective date: 1st May 2006
Definition:
“Share transfer agent” means any person who maintains the record of holders of securities
and deals with all matters connected with the transfer or redemption of securities or activities
incidental thereto [Section 65(95a)].
Scope of taxable service shall include any service provided or to be provided to any person,
by a share transfer agent, in relation to securities [Section 65(105)(zzzj)].

4.84 AUTOMATED TELLER MACHINE OPERATIONS, MAINTENANCE OR

MANAGEMENT SERVICES
Effective date: 1st May 2006
Definitions:
“Automated teller machine” means an interactive automatic machine designed to dispense
cash, accept deposit of cash, transfer money between bank accounts and facilitate other
financial transactions [Section 65(9a)].
“Automated teller machine operations, maintenance or management service” means any
service provided in relation to automated teller machines and includes site selection,
contracting of location, acquisition, financing, installation, certification, connection,
maintenance, transaction processing, cash forecasting, replenishment, reconciliation and
value-added services [Section 65(9b)].
Scope of taxable service shall include any service provided or to be provided to any person,
by any other person, in relation to automated teller machine operations, maintenance or
management service, in any manner [Section 65(105)(zzzk)].

4.85 RECOVERY AGENT’S SERVICES

Effective date: 1st May 2006
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 financial company or any other body
corporate or a firm, by any person, in relation to recovery of any sums due to such banking
 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 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 relation to sale of space or 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 programmes, television programmes or motion pictures or
music albums, or on billboards, public places, buildings, conveyances, cell phones,
automated teller machines, internet;
(ii) selling of time slots on radio or television by a person, other than a broadcasting agency
or organisation; and
(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 Press 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 SPORTS EVENTS
Effective date: 1st May 2006
Definition:
“Sponsorship” includes naming an event after the sponsor, displaying the sponsor’s
company logo or trading name, giving the sponsor exclusive or priority booking rights,
sponsoring prizes or trophies 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 the
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 provided or to be provided to any body
corporate or firm, by any person receiving sponsorship, 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 THAN ECONOMY CLASS PASSENGERS
Effective date: 1st May 2006
Definitions:
“Aircraft operator” means any person who provides the service of transport of goods or
passengers by aircraft [Section 65(3b)].
“Passenger” means any person boarding, at any customs airport, an aircraft for performing
an international journey, but does not include—
(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 immigration and does not
leave customs area and continues his journey to a place outside India; and
(ii) a person employed or engaged by the aircraft operator in any capacity on board the
aircraft [Section 65(77c)].
“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 journey”, in relation to a passenger, means his journey from any customs
airport on board any aircraft to a place outside India [Section 65(56a)].
Scope of taxable service shall include any service provided or to be provided to any
passenger, by an 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 class in an aircraft meant for
scheduled air transport of passengers means,—
(i) where there is more than one class of travel, the class attracting the lowest standard
fare; or
(ii) 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-scheduled air
transport of passengers, no class of travel shall be treated as economy class [Section
65(105)(zzzo)].

4.89 TRANSPORT OF GOODS IN CONTAINERS BY RAIL BY ANY PERSON, OTHER

THAN GOVERNMENT RAILWAY
Effective date: 1st May 2006
Scope 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 section 2 of
the Railways Act, 1989, in relation to transport of goods in containers 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 gross 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 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 the provisions of the CENVAT Credit Rules, 2004; or
(ii) the service provider has availed the benefit under Notification No. 12/2003-ST, dated
20.06.2003 [Notification No. 1/2006 ST, dated 01.03.2006].
4.90 BUSINESS SUPPORT SERVICES
Effective date: 1st May 2006
Definition:
“Support services of business or commerce” means services provided in relation to
business or commerce and includes evaluation of prospective customers, telemarketing,
processing of purchase orders and fulfilment services, information and tracking of delivery
schedules, managing distribution and logistics, customer relationship management services,
accounting and processing of transactions, operational assistance for marketing, formulation
of customer service and pricing policies, infrastructural 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
personnel to handle messages, secretarial services, internet and telecom facilities, pantry and
security [Section 65(104c)].
Scope of taxable service shall include 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

DIRECTIONS OR ORDERS OF A COURT OF LAW OR AUCTION BY THE CENTRAL
GOVERNMENT
Effective date: 1st May 2006
Definition:
“Auction of property” includes calling the auction 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(7a)].
Scope of taxable service shall include any service provided or to be provided to any person,
by any other person, in relation to auction of property, movable or immovable, tangible or
intangible, in any manner, but does not include auction 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 based on industry, media and perception
research, corporate image management, media relations, media training, press release, press
conference, financial public relations, brand support, brand launch, retail support and
promotions, events and communications and crisis communications [Section 65(86c)].
Scope of taxable service 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 any
manner [Section65 (105)(zzzs)].

4.93 SHIP MANAGEMENT SERVICES

Effective date: 1st May 2006
Definition:
“Ship management service” includes,—
(i) the supervision of the maintenance, survey and repair of ship;
(ii) engagement or providing of crews;
(iii) receiving the hire or freight charges on behalf of the owner;
(iv) arrangements for loading and unloading;
(v) providing for victualling or storing of ship;
(vi) negotiating contracts for bunker fuel and lubricating oil;
(vii) payment, on behalf of the owner, of expenses incurred in providing services or in relation
to the management of ship;
(viii) the entry of ship in a protection or indemnity 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 SERVICES

Effective date: 1st May 2006
Definitions:
“Internet telephony” means telecommunication service through internet and includes fax,
audio conferencing and video conferencing [Section 65(57a)].
“Internet” means a global information system which is logically linked together by a globally
unique address, based on Internet Protocol or its subsequent enhancements or upgradations
and is able to support communications using the Transmission Control Protocol or Internet
Protocol suite or its subsequent enhancements or upgradations and all other Internet Protocol
compatible protocols [Section 65(56b].
Scope of taxable service shall include any service 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 CRUISE 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 relation 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” means a ship or vessel used
for providing recreational or pleasure trips, but does not 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 2006
Definition:
“Credit card, debit card, charge card or other payment card service” includes any service
provided,—
(i) by a banking company, financial institution including non-banking financial company or
any other person (hereinafter referred to 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 such card business, including receipt and
processing of application, transfer of embossing data to issuing bank’s personalization
agency, automated teller machine personal identification number generation, renewal or
replacement of card, change of address, enhancement of credit limit, payment updation
and statement generation;
(iii) by any person, including an issuing bank and an acquiring bank, to any other person in
relation to settlement of any amount transacted through such card.
Explanation - For the purposes of this sub-clause, “acquiring bank” means any banking
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 marks or brand name to the issuing bank under an agreement, for
use of the trade mark or brand name and other services in relation to such card, whether
or not such owner is a club or association and the issuing bank is a member of such club
or association.
Explanation - For the purposes of this sub-clause, an issuing bank and the owner of trade
marks or brand name shall be treated as separate persons [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 card, debit card, charge card or other payment card
service, in any manner [Section 65(105)(zzzw)].
Self-examination questions
1. Answer the following with reference to the Finance Act, 1994 as amended relating to
applicability of service tax:
(i) Services provided by a mandap keeper from a religious place.
(ii) Services provided by call centres.
(iii) Services provided by medical transcription centers.
(iv) Surfing facilities provided by internet cafes.
2. Answer the following with reference to the Finance 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. Complete Software Solutions for computers
sold by it.
(iii) Services provided by Sarwan Tent House in respect of pandal and shamiana for 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
applicability of service tax.
(i) Service provided by a sub-broker to a main broker.
(ii) Services provided by a banking company or financial institutions to Government 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. State the conditions for availing the exemption from payment of service tax in respect of
production or processing of goods for or on behalf of the client.
5. Answer the following with reference to the Finance Act, 1994 as amended relating to
applicability of service tax:
(i) Maintenance services provided in respect of shopping malls.
(ii) Service provided by goods transport agency in respect of transport of fruits,
vegetables, eggs or milk.
(iii) Service provided by individual videographer.
(iv) Bottling services provided by a commercial concern.
6. Answer the following with reference to the Finance Act, 1994 as amended relating to
applicability of service tax:
(i) Survey and map-making services provided by ‘Survey of India’.
(ii) Construction services provided 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 materials 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) Commercial or industrial construction service

(ii) Services in relation to pandal or shamiana in any manner, including services
rendered as a caterer
(iii) Catering services
(iv) Services provided by a tour operator providing services solely of arranging or
booking accommodation in relation to a tour
(v) Erection, commissioning or installation under a contract for supplying a plant,
machinery or equipment and erection, commissioning or installation of such plant,
machinery or equipment.
8. Answer the following with reference to the Finance Act, 1994 as amended relating to
applicability of service tax:
(i) Services provided by vaastu/feng shui consultants.
(ii) Service provided by an individual in respect 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) Business exhibition service
(ii) Opinion poll service
(iii) Dry cleaning service
(iv) Storage and warehousing service
(v) Real estate agent’s 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 liable for paying
the service tax in Form ST-1 within 30 days from the date on which service tax is levied or
within 30 days from the date of commencement of business, whichever is later, to the
concerned Superintendent of Central Excise having jurisdiction. The Central Government
may, by notification in the Official Gazette, specify such other person or class of persons, who
shall make an application 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 been notified by the Central Government
who shall make an application for registration 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 provides 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 each services or each premises shall be taken into account for computation of
aggregate value of taxable service.
Here, “input service distributor” has the meaning assigned 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 received during a financial year towards the gross amount, as
prescribed under section 67, charged by the service provider towards taxable services but
does not include 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 application to the jurisdictional Superintendent of
Central Excise in the prescribed form for registration within a period of 30 days of the
commencement of business or 16.06.2005, whichever is later. The input service distributor
shall furnish a return to the jurisdictional Superintendent of Central Excise in such form and at
5.2 Service tax & VAT

such frequency as prescribed under sub-rule (10) of rule 9 of CENVAT Credit Rules, 2004.
The provider of taxable service whose aggregate value of taxable service in a financial year
exceeds Rs.3,00,000 shall make an application to the jurisdictional Superintendent of Central
Excise in the prescribed form for registration within a period of 30 days of exceeding the
aggregate value of taxable service of Rs.3,00,000.
Sub-rule (2) of rule 4 lays down that an assessee having a centralized billing systems or
centralized accounting systems in respect of a taxable service may provide such service from
more than one premises or office. If such centralized billing or centralized accounting systems
are located in one or more offices or premises, the assessee may at his option register such
premises or 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 centralized 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 shall 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 taxable service from more than one
premises or offices, and does not have any centralized billing systems or centralized
accounting systems, as the case may be, he shall make separate applications for registration
in respect of each of such premises or offices to the jurisdictional Superintendent of Central
Excise.
Where an assessee is providing more than one taxable service, he may make a single
application 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 rendering multiple taxable
services will be assessed by one Superintendent of Central Excise in respect of all the taxable
services rendered by him.
Change in any information or details furnished by an assessee in Form ST-1 at the time of
obtaining registration or any additional information or detail intended to be furnished should be
intimated in writing by the assessee to the jurisdictional Assistant/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 registration: 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 of the certificate since the registration number is
required for payment of service tax, filing of returns, etc.
When a registered assessee transfers his business to another person, the transferee shall
obtain a fresh certificate of registration [Rule 4(6)].
5.1.3 Surrender of Certificate: Every registered assessee who ceases to provide taxable
service shall surrender his registration certificate immediately to the Superintendent of Central
Excise [Rule 4(7)].
On receipt of the certificate under sub-rule (7), the Superintendent of Central Excise shall
ensure that the assessee has paid all monies due to the Central Government under the
provisions of the Act/Rules/Notifications and thereupon cancel the registration certificate [Rule
4(8)].
Rule 4 does not provide for amendment of the registration certificate.
5.1.4 Service Tax Code Number (STC): Presently, different agencies of the Government
use separate numbers for identification of individuals and business in relation to the activities
concerning the agencies. The Director General of Foreign Trade (DGFT) allocates Importer
Exporter Code No. (IEC No.) for identifying importers and exporters, the Income Tax
Department issues the Permanent 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. Next 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
allocating an alphanumerical number by the Government agencies is to identify the
assessees/exporters/importers. It is also used to identify in some cases the concerned office
where the person would be assessed or registered. Further alphanumeric number helps in
processing of the information in relation to the assessee on computers. 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 DISTRIBUTED 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 taxable service shall issue an invoice, or a bill, or a challan
signed by such person or a person authorized by him in respect of such taxable service
provided or to be provided. Such an invoice has to be issued within fourteen days from the
date of completion of such taxable service or receipt of any payment towards the value of such
taxable service, whichever is earlier. Further, the invoice, bill or 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 receiving taxable service;
(iii) description, classification and value of taxable service provided or to be provided; and
(iv) the service tax payable thereon.
However, banking companies and financial institution including a non-banking financial
company, 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 issuing
serially numbered invoices/bills/challans with the address of the recipient.
In case the service provider is a goods transport agency, an invoice, a bill or, a challan shall
include a document containing the details of the consignment note number and date, gross
weight of the consignment and other required information.
Where any payment towards the value of taxable service is not received and such taxable
service is provided continuously for successive periods of time and the value of such taxable
service is determined or payable 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
from the last day of the said period.
(2) Every input service distributor distributing 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, and
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 company, 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 provides that any goods transport agency, which provides service in relation to
transport of goods by road in a goods carriage, shall issue a consignment note to the
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 5.5

shall not be required to issue the consignment note.

It has been clarified that “consignment note” means a document, issued by a goods transport
agency against the receipt of goods for the purpose of transport of goods by road in a goods
carriage, which is serially numbered, and contains-
(i) the name of the consignor and consignee,
(ii) registration number of the goods carriage 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 PAYMENT OF SERVICE TAX [SECTION 68 & RULE 6 OF SERVICE TAX

RULES, 1994]
5.3.1 Due date for payment: Rule 6(1) provides that service tax on the value of taxable
services received during any calendar month is payable by the 5th of the month immediately
following the said calendar month. However, where the assessee is an individual 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 taxable services received during the month of
March, or the quarter ending in March, 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 amounts
actually received.
No service tax shall be payable for the part or whole of the value of services, which is
attributable to services provided during the period when such services were not taxable. The
time of receipt of payment towards the value of services will not be relevant for this purpose.
Rule 6(1) provides that service tax is payable only on the value of taxable services received
and not 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) into the designated bank. TR-6 challan is to be filled in
quadruplicate and tendered 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
record and the other to be submitted with the return.
Where the amount of service tax 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 non-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. Payment 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 holiday, 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 services which is not wholly or partially rendered by him for
any reason provided he has refunded the amount charged as also the service tax thereon to
the client. The Commissioner of Central Excise Mumbai - 1 vide Trade Notice No. 7/98-
Service tax dated 13.10.1998 has clarified in Para 21.1 that in such cases of adjustment the
assessee is required to file the details in respect of such suo motu adjustments 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 excess service tax paid. It is to be noted that
rule 6(3) does not allow adjustment 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) provides that ‘assessee’ means a person liable to pay service tax and includes
his agent. Person liable to pay service tax is the person providing the service except in the
following cases:
(i) in relation to general insurance business, the person liable to pay service tax is the
insurer or re-insurer, as the case may be, providing 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 of 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, where the
consignor 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 Act, 1956;
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration 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
 Service Tax Procedures 5.7

(g) any body corporate established, or a partnership firm registered, by or under 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 transportation of such goods by road in a
goods carriage.
(v) in relation to business auxiliary service of distribution of mutual fund by a mutual fund
distributor or an agent, 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 person
liable to pay service tax shall be the body corporate or firm, as the case may be, who
receives such sponsorship service.
Section 68(2) provides that in respect 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 may 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 services,-
(i) in relation to a telephone connection or pager or a communication through telegraph
or telex or a facsimile communication or a leased circuit;
(ii) 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 consignor 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 Act, 1956;
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration 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 under
any law
(v) in relation to business auxiliary service of distribution of mutual fund by a mutual
fund distributor or an agent, as the case may be;
(vi) in relation 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 India and
received in India under section 66A of the Finance Act, 1994.
Thus, the onus of paying service tax may be passed on to a person other than the provider of
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 option:
(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 case may be, towards
the discharge of his service tax liability instead of paying service tax at the rate of
specified service tax. The option once exercised, shall apply uniformly in respect of all
the bookings of passage for travel by air made by him and shall not be changed during
a financial year under any circumstances.
For the purposes of this sub-rule, the expression "basic fare" means that part 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 life 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 insurer towards the discharge of his service tax liability
instead of paying service 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 time 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 provisional payment of service tax,
interest on delayed payment of shortfall of service tax is to be computed till the date of final
payment of such tax [Re: Oriental Insurance 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 Directorate of ST that in the cases where the service tax amount has been deposited
by an assessee in the authorized Bank, by cheque, before the due date and such cheque is
not dishonoured later, proceedings of recovery of interest/penalty shall not be initiated.
However, if the cheque is not honoured in due course or the clearance is abnormally delayed
for any lapse on the part of the assessee, penal action may be taken.
 Service Tax Procedures 5.9

5.4 RETURNS [SECTION 70 & RULE 7 OF SERVICE TAX RULES, 1994]

Section 70 provides that every person liable to pay the service tax shall himself assess the tax
due on the services provided by him and shall furnish to the Superintendent 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 under sub-section (2) of section 69, shall furnish to the
Superintendent of the Central Excise, a return in such form and in such manner and at such
frequency as may 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/billed;
(ii) the value of taxable service realised;
(iii) the amount of Service Tax 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 be filed on next working day immediately following the
holiday.
The said Form ST-3 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 who provides more than one taxable service, only a single return will be
sufficient. However, the details in each of the columns of the Forms ST-3 have to be
furnished separately for each of the taxable service rendered by him.
The first return should be accompanied by a list of all accounts maintained by the assessee in
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 has 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 of 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 that 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 will be the records
required for service tax e.g. the Council of the Institute of Chartered Accountants 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 accountant:
(i) Cash Book,
(ii) Ledger
Rule 6F of the Income Tax Rules, 1962, prescribes that the person carrying on legal, medical,
5.10 Service tax & VAT

engineering, or architectural profession or the profession of accountancy or technical

consultancy or interior decoration or authorised representative or film artist, subject to certain
exemptions specified in the proviso to Rule 6F(1), should maintain the following :
(i) Cash Book,
(ii) Journal, if accounts are maintained on mercantile system of accounting,
(iii) Ledger,
(iv) Carbon copies of bills and receipts,
(v) Original Bills & Receipts for expenses.
All records maintained by an assessee shall be preserved at least for a period of 5 years
immediately after the financial year to which such records pertain.
Every assessee shall make available such records for inspection and examination by the
Central Excise Officer. The records should be made available at the registered 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.
Section 12A of the Central Excise Act has been made applicable to Service Tax which implies
that the service tax amount should be prominently indicated in all the 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 himself assess the tax
due on the services provided by him and shall furnish to the Superintendent 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 period and pay the tax on the basis of self-assessment.
5.6.1 Provisional Assessment: Rule 6(4) provides that where an assessee is unable to
correctly estimate the actual amounts of service tax payable for any month or quarter, the
assessee may 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 Commissioner or
Deputy Commissioner as the case may be, may, on receipt of such request, order provisional
assessment of tax. Accordingly, the provisions of Central Excise Rules, 2002 relating to
provisional assessment shall apply except the provisions relating to execution of bond.
Rule 6(4A) lays down that if the assessee [registered under Rule 4(2)] has paid to the credit of
Central Government any amount 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 such 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 provisional assessment, the
assessee shall submit a memorandum in form ST-3A; giving details of difference between the
provisional amount of service tax deposited and the 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 under sub-rule (5), the AC/DC of
Central Excise, as the case may be shall complete the assessment, wherever he deems it
necessary, after calling such further documents 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 Form ST-3A along
with the return in Form ST-3 pursuant to a request for provisional assessment, the AC/DC as
the case may be, may complete the assessment after calling for such further documents and
records as he may consider necessary and proper.

5.7 RECOVERY OF SERVICE TAX NOT LEVIED OR PAID OR SHORT-LEVIED OR

SHORT-PAID OR ERRONEOUSLY REFUNDED [SECTION 73]
Section 73 deals with the value of taxable services escaping assessment. The provisions, as
explained below, are similar to the provisions of section 11A of Central Excise Act.
1. Where any service tax has not been levied or paid or has been short-levied or short-paid
or erroneously 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 to whom such tax refund has
erroneously been made, requiring him to show cause why he should not pay the amount
specified in the notice.
However, where any service tax has not been levied or paid or has been short-levied or short-
paid or erroneously refunded 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 Chapter or of the rules made thereunder
with intent to evade payment of service tax,
by the person chargeable with the service tax or his agent, the period 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 be excluded in computing the aforesaid period of one year or five years, as the
case may be.
Sub-section (1A) provides an option to the person or his agent to whom 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, collusion, 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 penalty 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 Central 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 from, or
erroneously refunded to, such person (not being in excess of the amount specified in the
notice) and thereupon such person shall pay the amount so determined.
However, where such person has paid the service tax in full together with interest 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 Officer 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 levied or paid or has been short-levied or short-paid
or erroneously refunded, the 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 such payment in writing, who, on
receipt of such information shall not serve any notice in respect of the amount so paid.
However, Central Excise Officer may determine 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, Central Excise Officer shall proceed to recover such amount in the manner
specified in this section, and the period of “one year” shall be counted from the date of receipt
of such information of payment.
It has been clarified that the interest under section 75 shall be payable on the amount paid by
the person and also on the 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 not 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 refunded 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 Chapter 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, showing
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 filed;
(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 thereunder;
(ii) in a case where the service tax is provisionally assessed under this Chapter or the
rules made thereunder, the date of adjustment of the service tax after the final
assessment thereof;
(iii) in a case where any sum, relating to service tax, has erroneously been refunded,
the date of such refund.
Any mistake apparent from the records may be rectified 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 reasonable 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 GOVERNMENT [SECTION 73A]
(1)) If any person, who is liable to pay service tax, has collected 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 representing service tax, then he shall forthwith pay the
amount so collected to the credit of the Central Government. In other words, this provision
prescribes compulsory payment by any person of any amount collected in excess of the
service tax 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 service tax, such person shall forthwith
pay the amount so collected to the credit of the Central Government.
(3) If any person, who is liable to pay any of the abovementioned 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 cause 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 Officer shall consider the said representation and then determine
the amount due from 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 the 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 point (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) Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or,
(ii) refunded to the person who has borne the incidence of such amount, in accordance 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 the refund of such surplus amount.

5.9 INTEREST ON AMOUNT COLLECTED IN EXCESS [SECTION 73B]

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 an 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 liable to pay
such amount shall, in addition to the amount, be liable to pay interest.
(2) The interest shall be charged at any rate between 10% and 24% per annum. The exact
rate shall be fixed by the Central Government by notification in the Official Gazette.
Notification 8/2006-ST, dated 19.04.2006 has notified the rate 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 payable from the first day of the month succeeding the month in
which the amount ought 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 of 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,
instruction or direction; and
(b) no right to appeal against such payment at any subsequent 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 the Central Excise Officer under section 73A is
reduced or increased by the Commissioner (Appeals), the Appellate Tribunal, or the Court, the
interest payable thereon shall be on such reduced or increased amount.

5.10 PROVISIONAL ATTACHMENT TO 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 provisionally attach any property belonging to the person on whom notice
is served under 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 when 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 approval of the Commissioner of Central Excise, by order in writing, is a
prerequisite for such provisional attachment.
(3) Such an attachment can be done for a period of 6 months. This period will commence
from the date of the order of the Commissioner 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 shall be
recorded in writing. It is to be noted that the total period of extension in any case shall not
exceed 2 years.

5.11 PUBLICATION OF INFORMATION IN RESPECT OF PERSONS IN CERTAIN CASES

[SECTION 73D]
This section provides for publishing 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) The 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 publication shall be
done if the Government is of the opinion that it is necessary or expedient in the public interest
to publish the name and any other particulars. The 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 persons, the names of the partners
of the firm, directors, managing agents, secretaries and treasurers or managers of the
company, or the members of the association, 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 buyer or to any other person. This
restriction known as the bar of ‘unjust enrichment’, is overriding.
The above bar also applies to service tax. Section 11B(1) of the Central Excise Act, 1944
provides that an application for refund of duty should be made to the AC/DC before the expiry
of one year from the relevant date. “Relevant date” has been defined in Explanation (B) to
section 11B(1) of Central Excise 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.
Thus, 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 following
conditions:
(i) It should be in the prescribed Form .
(ii) It should be filed before the expiry of the limitation period of one year from the date of
payment 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 provisions of section 11BB of the Central Excise Act are applicable for the purpose of
Service 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 Central Board of Excise and Customs
(Board) for the period commencing from the date 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 the Central Excise Act, 1944 provides that the rate of interest payable on
delayed refunds shall be fixed by the Central Government, by Notification in the Official
Gazette.
 Service Tax Procedures 5.17

5.13 PENAL CONSEQUENCES

Sl. No. Section Nature of Default Consequences of Default

1. 76 Failure to pay service tax. 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 date of actual payment
of the outstanding amount of service
tax.

2. 77 Contravention of any Penalty — maximum Rs.1000/-.

provision for which no
penalty is provided

4. 78 Suppressing value of Penalty which shall not be less than,

taxable service but which shall not exceed twice, the
amount of service tax so not levied or
paid or short-levied or short-paid or
erroneously refunded.

The computation of penalty under section 76 can be understood by the following illustration:
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 days. 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 may 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 suppressing value of taxable service provides that:
Where any service tax has not been levied 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 pay such service tax or erroneous refund, as determined under sub-
section (2) of section 73, shall also be liable to pay a penalty, in addition to such service tax
and interest thereon, if any, payable by him, which shall not be less than, but 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 tax determined under sub-section (1) of section 73 and the interest
payable thereon 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 be 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 consequential 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 83A provides that where any person is liable to a penalty, such penalty may be
adjudged by the Central Excise Officer conferred with such power as the Central Board of
Excise and Customs constituted under the Central Boards of Revenue Act, 1963, may, by
notification in the Official Gazette, specify.
The Central Excise Officer 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 the
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 under section
83A
(1) (2) (3)
1. Assistant Commissioner of Not exceeding Rs. 5 lakhs
Central Excise or Deputy
Commissioner of Central Excise
2. Joint Commissioner of Central Above Rs. 5 lakhs but not exceeding Rs.
Excise 20 lakhs
 Service Tax Procedures 5.19

3. Additional Commissioner of Above Rs. 20 lakhs but not exceeding Rs.

Central Excise 50 lakhs
4. Commissioner of Central Excise Without 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 referred back to any authority
which passed such decision or order, with such directions, for a fresh adjudication or decision,
as the case may be.

5.14 REASONABLE CAUSE [SECTION 80]

Section 80 provides that no penalty under section 76, 77or 78 shall be imposed if the
assessee proves that there is “reasonable cause” for the failure 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 assessee an opportunity to prove that there was reasonable cause.
[Commissioner of Central 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 bound to be a lack of clear understanding, service tax being a new
concept [Re:Oriental Insurance Co.Ltd. (1998)103 ELT 459 (Commr.Appl); Ashwani &
Associates v. Collector of Customs, New Delhi (1999) 105 ELT 40 (Tribunal)]. Similarly,
penalty for failure to file ‘nil’ returns under section 77 has been condoned on the grounds that
service tax was new and the assessee was not conversant with the provisions; the assessee
did not carry on any business; the return for the period was a ‘nil’ return; service tax was
introduced for the first time and it was the assessee’s first delay. [ Ashok Rastogi v.
Commissioner of Central Excise, Kanpur (1998) 104 ELT 480 (Tribunal) Northern Bench, New
Delhi; Sri Sajjan Kumar Kariwala v. Commissioner of Central Excise, Allahabad (1997) 20 RLT
885 (Tribunal – NZB), New Delhi]. However, penalty has not been condoned, though reduced
(since tax was deposited on time and the default took place during the initial period of the
imposition of the new tax), even where the return is a ‘nil’ return, where there has been
consistent 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, Mumbai – 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 returns 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 first 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.), Ghaziabad]
5.20 Service tax & VAT

5.15 POWER TO SEARCH PREMISES [SECTION 82]

The Commissioner of Central Excise may, if he has reason to believe that any documents or
books or things which in his opinion will be useful for or relevant to any proceeding under the
Act, are secreted in any place, may authorise the Assistant Commissioner 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 Commissioner of Central Excise may call for the record of any
proceeding in which any adjudicating authority subordinate to him has passed any decision or
order. Thereafter he can make inquiry and pass such orders as he thinks fit.
The assessee shall be given an opportunity of being heard if the order under this section is
prejudicial to him. The order under this section shall be communicated to the assessee, such
adjudicating authority and the Board. No order shall be passed under this section on any issue
which is a subject matter of appeal before the Commissioner of Central Excise (Appeals).
No order shall be passed under this section after 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 revision is conspicuous by its absence.

5.17 APPEALS TO COMMISSIONER OF CENTRAL EXCISE (APPEALS) - FIRST APPEAL

[SECTION 85]
An assessee may appeal to the Commissioner 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 Grounds of
Appeal, all to be filed in duplicate accompanied by a copy of the order appealed against.
The appeal has to be filed within 3 months from the date of receipt of the order of such
adjudicating authority. The Commissioner of Central Excise (Appeals) may allow a further
period of 3 months if sufficient cause is adduced for the delay.

5.18 APPEALS TO THE APPELLATE TRIBUNAL - SECOND APPEAL [SECTION 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 or section 84 or any order
passed by Commissioner of Central Excise (Appeals) under section 85, may apply to the
Appellate Tribunal against such order.
The appeal shall be filed in Form ST-5 along with a Statement of Facts and Grounds of Appeal
all to be filed in quadruplicate and accompanied by an equal number of copies 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 levied Fee for filing an appeal
Less than or equal to Rs. 5,00,000 Rs. 1,000.00
More than Rs.5,00,000 but not exceeding Rs.50,00,000 Rs. 5,000.00
More than Rs.50,00,000 Rs.10,000.00

However, no such fee shall be payable in the case of an appeal preferred by Commissioner 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-objections.
Further, sub-section (6A) prescribes a fee of Rs.500 for every application 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 for restoration 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 Assistant/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 received by the assessee or within such extended time as may be allowed
by the Tribunal.
5.18.2 Appeal by the Department: Under sub-section (2) of section 86 the Central 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 84, 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, if 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 Form ST-7, in quadruplicate, within 3 months from the date
on which the order sought to be appealed against is received by the Board or by the
Commissioner of Central Excise, as the case may be.
The application should be accompanied by a statement of facts, grounds of appeal, and
(a) A copy of the order passed by Commissioner of Central Excise (including one certified
copy) and a copy of the direction issued by the Board in case of an appeal filed under
para 5.18.2 ; or
(b) A copy of the order passed by Commissioner of Central Excise (Appeals) (including
one certified copy) and a copy of the direction issued by the Commissioner of Central
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 cross-
objections 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 Central Excise (Appeals) has been preferred.

5.19 APPEAL TO HIGH COURT AND SUPREME COURT

Appeal may be made to the High Court/Supreme Court in accordance with the provisions 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 amount payable by a person to the credit of the Central Government under any of
the provisions 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 one or more of the
modes mentioned below:—
(a) he may deduct or may require any other Central Excise Officer to deduct the amount so
payable from any money owing to 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 default 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 holds 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 Government.
The money paid shall be so much as is sufficient to pay the amount due from such
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 or
being held or at or within the time specified in the notice. However, the specified
time shall not fall before the money becomes due or is held.
(ii) every person 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
effecting recovery to produce any pass book, deposit receipt, policy or any other
document for the purpose of any entry, endorsement or the like being made before
payment 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 section is sent, fails to make the payment
in pursuance thereof to the Central Government, 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 the control of
such person and detain the same until the amount payable is paid. However, such
distrainment shall be made only with the authorisation of the Commissioner 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 said
amount payable or of the cost of the distress or keeping of the property remains unpaid
for a period of 30 days after such distress. The Central Excise Officer may satisfy the
amount payable and the costs including unpaid cost of sale with 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 amount due from such person
and send it to the Collector of the district in which such person owns any property or
resides or carries on his business. The said Collector, 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 POWER OF THE CENTRAL GOVERNMENT TO GRANT EXEMPTION FROM SERVICE

TAX [SECTION 93]
If 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 certain conditions specified therein,
taxable service of any specified description. Such exemption may be total or partial.
The Central Government may also in public interest exempt by special order in each case, any
taxable service from the whole or part of service tax leviable thereon, as it thinks fit. Such
special order 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) However, where any rebate has been allowed on any goods or services under this
section and the sale proceeds in respect of such goods or consideration in respect of
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 the Foreign Exchange
Management Act, 1999, such rebate shall be deemed never to have been allowed.
(5) Thereupon, the Central Government may recover or adjust the 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) collection and recovery of service tax under section 66 and 68;
(ii) the determination of amount and value of taxable service under section 67;
(iii) the time, manner and form in which the application for registration shall be made
under section 69(1) and 69(2);
(iv) the form, manner and frequency of the returns to be furnished under section 70(1)
and section 70(2);
(v) the manner of furnishing return under section 71A;
(vi) the manner of provisional attachment of property under sub-section (1) of section
73C;
(vii) publication of name of any person and particulars 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 the manner
in which they may be verified;
(ix) the manner in which the memorandum of cross objections under section 86(4) may
be verified;
(x) the credit of service tax paid on the services consumed for providing a taxable
service in case where the services consumed and the service provided fall in the
same category of taxable service;
(xi) the credit of service tax paid on the services consumed and duties paid or deemed to
have been paid on goods in relation to a taxable service.
(xii) the manner of recovery of any amount due to the Central Government under section
87;
(xiii) provisions for determining export of taxable services;
(xiv) grant of exemption 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 services consumed or duties paid
 Service Tax Procedures 5.25

or deemed to have been paid on goods used for providing taxable services which are
exported out of India;
(xvi) rebate of service tax paid or payable on the taxable services used as input services
in the manufacturing 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 matter
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 laid for a total period 30 days which may be
comprised in one session or two or more successive sessions. If, before the expiry of the
session immediately following 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 should
not be issued, then the rule/ notification shall be issued in such modified form or not be issued
at all, as the case may be.

5.24 POWER TO REMOVE DIFFICULTIES [SECTION 95]

Section 95 empowers Central Government to issue orders for removing difficulties, which may
arise in respect of implementing or assessing the value 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 question 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 this 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 application regarding the liability to pay service tax in relation to
a service proposed to be provided, by the applicant.
(b) "applicant" means :-
(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 non-
resident; 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 undertake any business
activity in India;
(ii) a joint venture in India; or
5.26 Service tax & VAT

(iii) a resident falling within any such class or category of persons, as the Central
Government may, by notification 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 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, Customs and
Service Tax) constituted under section 28F of the Customs Act, 1962.
(e) "non-resident", "Indian company" and "foreign company" have the meanings
respectively 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 and defined in the
Central Excise Act, 1944 or the rules made thereunder shall apply, so far as may
be, in relation to service tax as they apply in relation to duty of excise.
(b) Section 96B – Vacancies, etc., not to invalidate proceedings.
No proceeding before, or pronouncement of advance ruling by, the Authority under this
Chapter shall be questioned or shall be invalid on the ground merely of the existence of any
vacancy or defect in the constitution of the Authority.
(c) Section 96C – Application for advance ruling–
(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, 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 valuation of taxable services for charging service tax;
(c) the principles to be adopted for the purposes of determination of value of the
taxable services under the provisions of Chapter V;
(d) applicability of notifications issued under Chapter V;
(e) admissibility of credit of service tax;
(f) determination of the liability 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 of 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 him to
furnish the relevant records.
However where any records have been called for by the Authority in any case, such
records shall, as soon as possible, be returned to the Commissioner of Central
Excise.
(2) The Authority may, after examining the application and the records called for, by
order, either allow or reject the application.
However, the Authority shall not allow the application where the question raised in
the application is-
(a) already pending in the applicant's case 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
opportunity has been given to the applicant of being heard. Also, where the
application 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 and
to the Commissioner of Central Excise.
(4) Where an application is allowed under sub-section (2), the Authority shall, after
examining such further material as may be placed before it by the applicant or
obtained by the Authority, pronounce its advance ruling on the question specified in
the application.
(5) On a request received from the applicant, the Authority shall, before pronouncing its
advance ruling, provide an opportunity to the applicant of being heard, either in
person or through a duly authorised representative.
Explanation.-For the purposes of this sub-section, "authorised representative" has
the meaning assigned to it in sub-section (2) of section 35Q of the Central Excise
Act, 1944.
(6) The Authority shall pronounce its advance ruling in writing within ninety days of the
receipt of application.
(7) A copy of the advance ruling pronounced by the Authority, 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 binding
5.28 Service tax & VAT

only-
(a) on the applicant who had sought it;
(b) in respect of any matter referred to in sub-section (2) of section 96C;
(c) on the Commissioner 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 the 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, that an advance ruling pronounced by it under sub-
section (4) of section 96D has been 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 Commissioner of Central Excise.
(g) Section 96G – Powers of Authority
(1) The Authority shall, for the purpose of exercising its powers regarding discovery and
inspection, enforcing the attendance of any person and examining him on oath,
issuing commissions 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.
(2) The 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, 1973,
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 purpose of
section 196 of the Indian Penal Code.
(h) Section 96H – Procedure of Authority
The Authority 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 under 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 provisions 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 matters, 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 pronounced 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 under this Chapter shall be laid, as soon as may be, after it is
made, before each House of Parliament, while it is in session for a total period of
thirty days which 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 successive sessions aforesaid, both Houses agree in making any
modification in the rule or both Houses agree that the rule should not be made, the
rule shall thereafter 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
prejudice to the validity of anything previously done under that rule.

5.26 APPLICABILITY OF PROVISIONS OF THE CENTRAL EXCISE ACT, 1944 TO

SERVICE TAX [SECTION 83]
The following provisions of the Central Excise Act, 1944 are made applicable to service tax
vide section 83.
Section No. Title
Section 9C Presumption of culpable mental state
Section 9D Relevancy of statements under certain circumstances
Section 11B Claim for refund of duty.
Section 11BB Interest on delayed refunds.
Section 11C Power not to recover duty of excise not levied or short levied as a
result of general practice
Section 12 Application of provisions of Act No. 52 of 1962 to Central Excise
Duties.
Section 12A Price of goods to indicate the amount of duty paid thereon.
Section 12B Presumption that the incidence of duty has been passed on to the
buyer.
Section 12C Consumer Welfare Fund.
Section 12D Utilisation of the Fund.
Section 12E Powers of Central Excise Officers.
Section 14 Power to summon persons to give evidence and produce documents
in inquiries under this Act.
Section 15 Officers required to assist Central Excise Officers
Section 33A Adjudication Procedure
5.30 Service tax & VAT

Section 35F Deposit, pending appeal, of duty demanded or penalty levied.

Section 35G Statement of case to High Court
Section 35H Application to High Court
Section 35I Power of High Court or Supreme Court to require statement to be
amended
Section 35J Case before High Court to be heard by not less than two judges
Section 35K Decision of High Court or Supreme Court on the case stated
Section 35L Appeal to the Supreme Court
Section 35M Hearing before Supreme Court
Section 35N Sums due to be paid notwithstanding reference, etc.
Section 35O Exclusion of time taken for copy
Section 35Q Appearance by authorised representative
Section 36 Definitions
Section 36A Presumptions as to documents in certain cases
Section 36B Admissibility of micro films, facsimile copies of documents and
computer print outs as documents and as evidence.
Section 37A Delegation of powers
Section 37B Instructions to Central Excise Officers
Section 37C Service of decisions, orders, summons, etc.
Section 37D Rounding off of duty, etc.
Section 40 Protection of action taken under the Act.

5.27 DUE DATES FOR SERVICE TAX

1. Registration
Within 30 days from the date on which service tax is levied or within 30 days of
commencement of business whichever is later.
2. Payment of Service Tax
(a) Payable by individuals, proprietary concerns and partnership firms :
Payable on amounts received during the quarter: Payable by:

1st April to 30th June 5th July

1st July to 30th Sept. 5th October
1st Oct. to 31st Dec. 5th January
1st Jan. to 31st March 31st March
 Service Tax Procedures 5.31

(b) Payable by persons other than individuals, proprietary concerns and partnership firms:
Payable on amounts received during the month Payable by:

April 5th May

May 5th June
June 5th July
July 5th August
August 5th September
September 5th October
October 5th November
November 5 th December
December 5 th January
January 5 th February
February 5 th March
March 31 st March
3. Returns
For the half year: To be filed by:
1 st April to 30 th Sept. 25 th October
1 st Oct. to 31 st March 25 th April

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 Section A of this Study Material.
Self-examination questions
1. Who should apply for registration under service tax law?
2. What is to be done with registration when-
(a) A registered assessee transfers his business to another person, or
(b) A registered assessee ceases to carry on the activity for which he is registered?
3. Discuss the provisions governing the registration of premises of service providers who
have centralized billing or centralized accounting system.
4. What is the relevant date for payment of service tax in case of a company for the month
of February and March?
5. Who is responsible to make the payment of service tax in case of service rendered by a
5.32 Service tax & VAT

goods transport agency?

6. ‘A Ltd.’ enters in to an advertising contract with ‘B Ltd.’ for a sum of Rs.15,000.00 on
05.11.2006. A Ltd. receives an 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 month of December and January.
7. When is the invoice, in respect of provision of service, issued?
8. Which documents are to be submitted along with the first return?
9. When should the return be filed if the due date happens to be a public holiday?
10. Under what circumstances, provisional assessment is resorted to? What is the
procedure to be followed for provisional assessment?
11. What are the obligations of the assessee with regard to the records relating to
service tax?
12. Discuss the provisions in respect of provisional attachment to protect revenue in
certain 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 what 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 requirements of
direct and indirect taxes in a fair manner. Too much dependence on direct taxes will be
repressive but at the same time passing heavy burdens to the general public by way of
indirect taxes will constitute hardships to the common citizen. Therefore, economic
administrators throughout the world have been constantly engaged in the exercise of
lightening the burden of indirect taxes on the ultimate consumers.
Suppose, for manufacturing a product A, the manufacturer has to purchase four types of
commodities B, C, D and E on which he pays excise duty. When ultimately he sells his
manufactured product A on which he has to discharge his 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 increase 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 consumer. This is the origin of
Value added tax (VAT).
In simple words, the tax will be levied and collected at each stage of manufacture only on
the value added by the manufacturer represented by the purchase value and the value of
the work performed 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 trading in
commodities also.
In other words, the various taxes paid on inputs purchased 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 of 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 are 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 spread 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 America who recommended
"sales-tax with a credit or refund for taxes paid by the producer 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 Mission for the reconstruction of the Japanese
Economy in 1949. However, the tax was not 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 fifties.
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 1961 and by
Brazil and Denmark in 1967. The tax has gathered further momentum as it was made a
standard form of sales-tax required for the countries of the European 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 system. The Netherlands and
Sweden imposed this tax in 1969 while Luxembourg adopted it in 1970, Belgium in 1971,
Ireland in 1972, and Italy, the United Kingdom, and Austria in 1973. Of the other members
of the European Union, Portugal and Spain 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 countries 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 Singapore in 1994 while
Mongolia has been implementing this tax since 1998.
In the South Asian Association for Regional Cooperation (SMRC) region, VAT has been
considered in great depth in India. In 1986, India introduced VAT in a different way under
the name of Modified Value Added Tax (MODVAT). Unlike the VAT system of other
countries, the Indian MODVAT system was designed to cover manufacturing of goods 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),
which 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 today, 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 Central
Government and the State Governments derive their powers through the instrumentality of
the Union List, the State List and the Concurrent List. So far as powers 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
to the Central Government, the State Governments substantially depend on sales-tax as the
main source of revenue. The Central Government undertook a series of reforms 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 constitutional 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 area of manufacture and services, a need for
uniformity arose wherein similar system was proposed to be incorporated in the area of
sales thereby replacing the existing sales tax system. To materialize this concept, the
then Union Finance Minister 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 meeting. The Committee had to examine all aspects of sales tax reform, including the
introduction of VAT.
The Committee recommended several measures to rationalize 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, 12) and two special floor rates (1 and
20) in place of the existing multiple rates 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 goods 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 incentives
should be given after 1 April, 1997, and the existing ones should be allowed to lapse
in due course.
For implementing the above decisions, an Empowered Committee 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 Revenue Department of the Ministry of
Finance, Government of India. Through repeated 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 implementation 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
incentives, 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 State-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 the very beginning to harmonize the VAT designs in the States, keeping also in view
the distinctive features of each State and the need for federal flexibility. This had been
done by the States collectively agreeing, through repeated discussions in the Empowered
Committee, to certain common points of convergence regarding VAT, and allowing at the
same time certain flexibility for the local characteristics of the States.
Along with these measures at ensuring convergence on the basic issues on VAT, steps
had also been taken for necessary training, computerization 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 effect of taxes, it promotes
competitiveness of exports, it has a simple and transparent 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 level.
 Backdrop for State-Level VAT in India 6.5

Dr. Vijay Kelkar made the following recommendations in regard to State-Level VAT-
(i) A publicity awareness programme should be started jointly with the Central
Government and the State Governments and the former should extend financial
support for this, if required. It is also necessary that the publicity awareness
programme should be implemented at the earliest.
(ii) An attempt should be made towards uniformity of all State legislations, procedures
and documentation relating to VAT.
(iii) The issue of compensation to States must be primarily tackled through mutually
acceptable mechanism of additional resource mobilization through service tax and
not through budgetary support.
(iv) With the introduction of VAT all other local taxes should be discontinued and 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 importing States
for the duty paid in the exporting State, in the course of inter-State movement of
goods.
(vii) For the stability and continuity of VAT, the setting up of a VAT Council or a
permanent suitable alternative vested with adequate powers to take steps against
discriminatory taxes and practices and eliminate barriers 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
repetitive discussions and collective efforts brought out a White paper on 17.01.2005,
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 will 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) Justification of VAT and Background
b) Design of State-Level VAT.
c) Steps taken by the States.

6.8 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 Uttar
Pradesh have yet not introduced VAT.
The States have passed State-Level VAT legislations which are modeled on the draft
model VAT law, prescribed by the Central Government. The legislations also incorporate
the various principles of State-Level VAT as contained in the White Paper released by the
Empowered Committee. However, depending upon the requirements of the States
appropriate variations have been made in these legislations. The concepts relating to
VAT dealt in subsequent 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 revenue on account of its
discontinuance a mechanism is being thought of for compensating the States for such loss of
revenue.1

6.10 GOODS AND SERVICE TAX

The ultimate system of indirect taxes in India will be a goods and service tax. Under such a
system there will be one central authority administering a uniform goods and service tax. Input
tax credit will be available between goods and services throughout the country. However,
such a development will require constitutional amendment. Under such a uniform tax system,
there will be no trade barriers like octroi 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 market. The Union Finance Minister in his Budget speech for the year 2006-07
has announced 1st April, 2010 as the target date to introduce GST.

Self-examination questions
1. Briefly explain the concept of value added tax through a illustration.
2. Write a brief note on the historical background of VAT.
3. Discuss the recommendations made by the Committee of State Finance Ministers in
relation to introduction of State-Level VAT.
4. Explain the recommendations made by Dr.Vijay Kelkar in regard to State-Level VAT.
5. Write a short note on the White Paper on State-Level VAT in India.

1
The concepts relating to central sales tax and VAT have been dealt in Chapter 12 of Section B of
this Study Material.
 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 equivalent to wages plus interest, other costs and
profits. To illustrate, a chart of transactions is given below:

Manufacturer A Wholesaler B
Sale price Rs.300
Gross VAT Rs.37.50 Sale price Rs. 400
Net VAT Rs.21 Gross VAT Rs. 50
{Rs.37.50 - (12.50+4)} Net VAT Rs.12.50
(50-37.50)

Product X Product Y Retailer C

Sale price Rs. 100 Sale price Rs. 100 Sale price Rs. 500
Gross VAT Rs. 12.50 Gross VAT Rs. 4 Gross VAT Rs. 62.50
Net VAT Rs.12.50 Net VAT Rs. 4 Net VAT Rs. 12.50
(62.50 – 50)

Inputs for manufacturer

Note: The rate of tax is assumed to be 12.5% on the transactions relating to goods
manufactured by A.
For a manufacturer A, inputs are product 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 considered. B is a wholesaler and C is a retailer.
The inputs X and Y are purchased at Rs. 100 each on which tax is paid @12.5 % and 4%
respectively. The manufacturer 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, salaries and
other manufacturing expenses. To all this, he would also add his own profit. Assuming that
after the addition of all these costs his sale price is Rs.300, the gross tax (at the rate of 12.5
per cent) would be Rs.37.50. As manufacturer 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 cost 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) and the sales price of Rs.500 by Retailer C would also
have net VAT liability of Rs.12.50 (Rs. 62.50 - 50 = Rs.12.50). Thus, VAT is collected at
each stage of production and distribution process, and in principle, its entire burden falls on
the final consumer, who does not get any tax credit. Thus, VAT is a broad-based tax
covering the value added to each commodity by parties during the various stages 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 trader selling raw materials to a manufacturer of finished products. He imports his
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. Particulars Rs.

(i) A's cost of imported materials (from other State) 10,000
(A will deposit Rs.1250 duty on the above. Since, this is not a State 1,250
VAT it will form a cost of input)
(ii) A's cost of local materials 20,000
(VAT charged by local suppliers Rs.2,500. Since the credit of this
would be available it will not be included in cost of input)
(iii) Other expenditure (such as for storage, transport, interest, etc.)
incurred and profit earned by A
8,750
(iv) Sales price of goods 40,000
(v) VAT on the above @ 12.50% (Approx.) 5,000
(vi) Invoice value charged by A to the manufacturer, B 45,000
 Taxonomy of VAT 7.3

I. A's liability for VAT

Rs.
Tax on the sales price 5,000
Less: Set-off of VAT paid on purchases
On imported goods Nil

On local goods 2,500 2,500

Net Tax Payable 2,500
In the above illustration (as well as in illustrations that 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. Particulars Rs.
(i) B’s cost of raw materials 40,000
(VAT recovered by A Rs.5,000)
(ii) B’s cost of other materials
Local Purchases 20,000
(VAT charged on the above Rs.2,500)
Inter- State Purchases* 10,400
(CST paid Rs.400)
(iii) Manufacturing and other expenses incurred and profit earned by 29,600
B
(iv) Sale price of finished product 1,00,000
(v) VAT on the above 12,500
(vi) Invoice value charged by B to the wholesaler, C 1,12,500

II. B's liability for VAT

Rs.
Tax on the sales price 12,500
Less: Set-off of VAT on Purchases
To A 5,000
To other suppliers 2,500 7,500
Net Tax Payable 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 product to a
retailer. The following would be the position:
Sl. No. Particulars Rs.
(i) C's cost of goods 1,00,000
(VAT recovered by B Rs.12, 500)
(ii) Cost of packing material 2,000
(VAT charged on the above Rs. 250)
(iii) Expenses incurred and profit earned by C 18,000
(iv) Sale price of goods 1,20,000
(v) VAT on the above 15,000
(vi) Invoice value charged by C to D, a retailer 1,35,000

III. C’s liability for VAT

Rs.
Tax on the sales price 15,000
Less: set-off of VAT paid
To B 12,500
To other suppliers 250 12,750
Net Tax payable 2,250

When D sells the goods to the consumers, the position would be as under:
Sl. No. Particulars Rs.
(i) D’s cost of goods 1,20,000
(VAT recovered by C Rs.15,000)
(iii) Expenses incurred and profit earned by D 20,000
(iv) Sale price of goods 1,40,000
(v) VAT on the above 17,500
(vi) Invoice value charged by D to the consumers 1,57,500

IV. D’s liability for VAT

Rs.
Tax on the sale price 17,500
Less: Set-off of VAT paid to C 15,000
Net Tax Payable 2,500
 Taxonomy of VAT 7.5

Total recovery
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 consumers, VAT would be collected as
under:
Sl. No. Particulars Rs.
(i) Paid by suppliers selling raw materials to A 2,500
(ii) Net tax paid by A on his sales to B 2,500
(iii) Paid by suppliers selling other materials to B 2,500
(iv) Net tax paid by B 5,000
(v) Paid by suppliers selling packing materials to C 250
(vii) Net tax paid by C 2,250
(viii) Net tax paid by D 2,500
Total Recovery of Revenue 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 authorities 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 presented in a schematic diagram given below:
Different variants of VAT

Gross product variant Income variant Consumption variant

Tax is levied on all sales Tax is levied on all sales Tax is levied on all sales
and deduction for tax with set-off for tax paid with deduction for tax paid
paid on inputs excluding on inputs and only on all business inputs
capital inputs is allowed. depreciation on capital (including capital goods).
goods.

The gross product variant allows deductions for taxes on all purchases of raw materials
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 not
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 delayed 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 purchases as current expenditure to claim set-off. In practice,
however, there are many difficulties connected with the specification of any method of
measuring depreciation, which basically depends on the life of an asset as well as on the
rate of inflation.
Consumption variant of VAT allows for deduction on all business purchases including
capital assets. Thus, gross investment is deductible in calculating value added. It neither
distinguishes between capital and current expenditures nor specifies the life of assets or
depreciation allowances for different 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 capital for labour or vice versa). The tax is also neutral between the decision
to save or consume.
Among the three variants of VAT, the consumption variant is widely used. Several
countries of Europe and other continents have adopted this variant. The reasons for
preference of this variant are:
Firstly, it does not affect decisions regarding investment because the tax on capital goods
is also set-off against the VAT liability. Hence, the system is tax neutral in respect of
techniques of production (labour or capital-intensive).
Secondly, the consumption variant is convenient from the point of administrative
expediency as it simplifies tax administration by obviating the need to distinguish between
purchases of intermediate and capital goods on the one hand and consumption goods on
the other hand.
In practice, therefore, most countries use the consumption variant. Also, most VAT
countries include many services in the tax base. Since the business gets 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) addition method,
(b) invoice method and
 Taxonomy of VAT 7.7

(c) subtraction method.

The subtraction method can be further divided into:
(a) direct subtraction method
(b) intermediate subtraction method
Methods of computation of VAT

Addition method Invoice method Subtraction method

Aggregating all the factor Deducting tax on inputs

payments and profit. from tax on sales.

Direct subtraction method Intermediate subtraction method

Deducting aggregate value of Deducting tax inclusive value of

purchase exclusive of tax from the purchases from the sales and taxing
aggregate value of sales exclusive of difference between them.
tax.

7.4.1 Addition Method

This method aggregates all the factor payments including profits to arrive at the total
value addition on which the rate is applied to calculate the tax. This type of calculation is
mainly used with income variant of VAT. Addition method does not easily accommodate
exemptions of intermediate dealers. A drawback of this method is that it does not facilitate
matching of invoices for detecting evasion.

7.4.2 Invoice Method

This is the most common and popular 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
calculated, 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 invoice. This method is very
popular in western countries. In India also-, under Central Excise Law this method is
followed. This method is also called the 'Tax Credit 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 Less VAT Tax to

Liability Credit Government

1. Manufacturer/first seller in the State sells 125 - 125

the goods to distributor for Rs.1000. Rate
of tax is 12.50%. Therefore, his tax liability
will be Rs.125. He will not get any VAT
credit, being the first seller.

2. Distributor sells the goods to a wholesale 150 125 25

dealer for say Rs. 1200 @ 12.50% and
will get set-off of tax paid at earlier stage
at Rs. 125. His tax liability will be Rs. 25.

3. Wholesale dealer sells the goods to a 187.50 150 37.50

retailer at say Rs. 1500. Here again he will
have to pay the tax on Rs. 1500. He will
get credit of tax paid at earlier stage of Rs.
150. His tax liability will be Rs. 37.50.

4. Retailer sells the goods to consumers at 250 187.50 62.50

say Rs. 2000. Here again he will have to
pay tax on Rs. 2000. He will get credit for
tax paid earlier at. Rs. 187.50. His tax
liability will be Rs.62.50.

Total 712.50 462.50 250

Thus, the Government will get tax on the final retail sale price of Rs. 2,000. However, 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 basis of tax charged in the purchase invoice. If the
first seller is a manufacturer, he gets the credit of tax paid on raw materials, etc. which are
used in the manufacturing. From the above illustration, it is clear that under this method, tax
credit cannot be claimed unless and until the purchase invoice is produced. As 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 recover the full tax at the next stage. Thus,
the possibility of tax evasion, if not entirely ruled out, will be reduced to a minimum.
However, proper measures should be implemented to prevent the production of fake
 Taxonomy of VAT 7.9

invoices to claim the credit of tax at an earlier stage.

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 whereas 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 set-off will have to be considered to avoid cascading effects of
taxes.

7.4.3 Subtraction 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 claim for set-off or tax credit does not arise. This
method is normally applied where the tax is not charged separately. Under this method for
imposing tax, 'value added' is simply taken as the difference between sales and purchases.
The following illustration will make the working of this system clear:

Stage Particulars Turnover Tax @ 12.50%

No. for tax
under
VAT

(Rs.) (Rs.)

1. First seller sells the goods to a distributor at 1,125 125

say, Rs. 1125 inclusive of tax
⎡ (1125 × 12.50) ⎤
⎢ 100 + 12.50 ⎥
⎣ ⎦

2. Distributor sells the goods to a whole-seller at 225 25

say, Rs.1,350. Here taxable turnover will be
Rs.1,350 - Rs.1,125 ⎡ (225 × 12.50) ⎤
⎢ 100 + 12.50 ⎥
⎣ ⎦

3. Wholesaler sells the goods to a retailer at say, 337.50 37.50

Rs 1,687.50. Here taxable turnover will be Rs.
1,687.50 - Rs. 1,350 ⎡ (337.50 × 12.50) ⎤
⎢ 100 + 12.50 ⎥
⎣ ⎦

4. Retailer selling the goods at say, Rs. 2250. 562.50 62.50

Taxable turnover will be' Rs.2250 - Rs.
1687.50
7.10 Service tax & VAT

⎡ (562.50 × 12.50) ⎤
⎢ 100 + 12.50 ⎥
⎣ ⎦

2,250 250

T ×R
Tax is calculated by the formula
100 + R
T = Taxable turnover, R = Rate of Tax
Thus, under this system also, the incidence of tax is at each stage and the incidence 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:
Invoice Method (All inputs taxable under ONE rate)

Particulars Invoice Material VAT Input tax NET

Value credit

Inputs for A
Product X(@12.50%) 260 231 29 -- 29

Product Y(@12.50%) 450 400 50 -- 50

------ ------- ------- -------- --------

‘A’ sales goods to ‘B’ 710 631 79 -- 79

‘B’ sales goods to ‘C’ 1125 1000 125 79 46

‘C’ sales goods to ‘D’ 1800 1600 200 125 75

‘D’ sales goods to ‘E’ 2250 2000 250 200 50

2700 2400 300 250 50

FINAL 2700 2400 300 -- 300

 Taxonomy of VAT 7.11

Subtraction Method (All inputs taxable under ONE rate)

Particulars Invoice Purchase Price Value Added VAT @

12.50%
Inputs for A
On Input 710 -- -- 79
‘A’ to ‘B’ 1125 710 415 46
‘B’ to ‘C’ 1800 1125 675 75
‘C’ to ‘D’ 2250 1800 450 50
‘D’ to ‘E’ 2700 2250 450 50
FINAL 2700 -- -- 300

Invoice Method (Inputs taxable at different rates)

Particulars Invoice Material VAT Input tax NET

Value credit

Inputs for A

Product X(@12.50%) 450 400 50 -- 50

Product Y(@ 4%) 260 250 10 -- 10

------ ------- ------- -------- --------

‘A’ sales goods to ‘B’ 710 650 60 -- 60

‘B’ sales goods to ‘C’ 1125 1000 125 60 65

‘C’ sales goods to ‘D’ 1800 1600 200 125 75

‘D’ sales goods to ‘E’ 2250 2000 250 200 50

2700 2400 300 250 50

FINAL 2700 2400 300 -- 300

7.12 Service tax & VAT

Subtraction Method (Inputs taxable at different rates)

Particulars Invoice Purchase Price Value Added VAT @

12.50%

Inputs for A

On Input 710 -- -- 60

‘A’ to ‘B’ 1125 710 415 46

‘B’ to ‘C’ 1800 1125 675 75

‘C’ to ‘D’ 2250 1800 450 50

‘D’ to ‘E’ 2700 2250 450 50

FINAL 2700 -- -- 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. Therefore, the
method is not considered as a good method. The method is being objected to on the ground
that under this method, tax is levied on income. The value 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 of goods. However, the mode of calculation of taxable
turnover is value added. Therefore, the method cannot be said to be imposing tax on
income/profit.

7.5. MERITS 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, suppression
of purchases or production will be difficult because it will lead to loss of revenue. A
perfect system of VAT will be a perfect chain where tax evasion is difficult.
2. Neutrality
The greatest advantage of the system is that it does 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 value is
added and at what stage it is added in the system of production/distribution is of no
consequence. The system is neutral with regard to choice of production 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 purchases and thus ensures that there is no
cascading effect of tax. In short, the allocation 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. Thus 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 applicable to all sales in business leaving little
room for different interpretations. Thus, this system brings certainty to a great extent.
4. Transparency
Under a VAT system, the buyer knows, out of the total consideration paid for purchase 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 exact 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 collection 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 be 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 source 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 been that since the tax is payable on the final
sale price, the VAT usually increases 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 there is only one rate
of VAT and VAT applies to all commodities without any question of exemptions
whatsoever. Once concessions like differential rates of VAT, composition schemes,
exemption schemes, exempted category of goods etc. are built into the system,
distortions are bound to occur and the fundamental principle that VAT will totally
eliminate cascading effects of taxes will also be subject to qualifications.
2. 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 difficult to put the purchases from other
States at par with the State purchases. Therefore, the advantage of neutrality will be
confined only for purchases within the State.
3. 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.
4. 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 paid 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.
5. VAT is a form of consumption tax. Since, the proportion of income spent on
consumption is larger for the poor than for the rich, VAT tends to be regressive.
However, this weakness is inherent in all the forms of consumption tax. While it may
be possible to moderate the distribution impact of VAT by taxing necessities at a
lower rate, it is always advisable to moderate the distribution considerations through
other programmes rather than concessions or exemptions, which create
complications for administration.
6. As a result of introduction of VAT, the administration cost to the State can increase
as the number of dealers to be administered will go up significantly.
Self-examination questions
1. What are the different stages of VAT? Discuss.
2. Explain the mechanism of operation of VAT by an illustration.
3. Briefly discuss the different variants of VAT.
4. Describe the advantages and disadvantages of VAT.
5. Describe the invoice method of calculation of VAT.
 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 any goods made
from a registered dealer of the State. Output tax means the tax charged 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 purchases for resale, raw materials, capital goods as well as
other inputs for use directly 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 credit in relation to any period
means setting off the amount of input tax by a registered dealer against the amount of his
output tax.
It is reiterated that tax paid on the earlier point is called input tax. This amount will be
adjusted/rebated against the tax payable by the purchasing dealer on his sales. This credit
availability 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 goods made within
the State from a dealer holding a valid certificate of registration under the Act. Further, the
input tax credit will be given to both manufacturers and traders for purchase of inputs/supplies
meant for both sale within the State as well as to other States, irrespective of when these will
be utilized/sold.
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 is 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 Service tax & VAT

8.2.2 Input tax credit available on capital goods

Input tax credit on capital goods will also be available for traders and manufacturers. Tax
credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments.
The States may at their option reduce this number of instalments. The State of Maharastra
has decided to give full input tax credit in the month 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 list for capital goods (on the basis of principles already decided by the
Empowered 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 related VAT
liability of the dealer is calculated by deducting input tax credit from tax collected on sales
during the payment period (say, a month).
If, for example, 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, then input tax
credit/set-off and calculation of VAT will be as shown below:
(a) Input purchased within the month : Rs. 1,00,000/-
(b) Output sold in the month : Rs. 2,00,000/-
(c) Input tax paid : Rs. 4,000/-
(d) Output tax payable : Rs. 25,000/-
(e) VAT payable during the month : Rs. 21,000/-
after set-off/input tax credit
[(d) – (c)]
Subject to the provisions relating to credit for input tax, the 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 respect of taxable supplies made by the taxable person during
the tax period and
B = Total 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.
 Input Tax Credit 8.3

Following example illustrates how excess VAT credit can be availed:

Tax paid on purchases made in the State within a month (input tax) Rs.10,000

Tax charged for sales in the State within a month (output tax) Rs.4,500

CST Charged for inter-State sales within a month Rs.15,000

ITC Rs.10,000

VAT liability (Rs.4,500 - 10,000) Nil

Excess credit Rs.5,500

CST to be paid to Govt.(Rs.15,000- 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 be reduced by
excess VAT Credit of Rs.5,500/-)

8.4 ELIGIBLE PURCHASES FOR AVAILING INPUT TAX CREDIT

For the purpose of claiming input tax credit, the taxable goods should be purchased for any
one of the following purposes:
(i) for sale/resale within the State;
(ii) for sale to other parts of India in the course of inter-State trade or commerce;
(iii) to be used as-
(a) containers or packing materials;
(b) raw materials; or
(c) consumable stores,
required for the purpose of manufacture of taxable goods or in the packing of such
manufactured goods intended for sale in the State or in the course of 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 manufacture 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 manufacturing/packing goods to be sold in the course of export out of the territory of
India;
8.4 Service tax & VAT

(vii) for making zero-rated sales other than those referred to in clause (vi) above.

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 should be
used for manufacture etc. of taxable goods. Taxable goods means goods other 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 tax credit
shall be allowed proportionate to the extent the purchases are used for the purposes specified
above.

8.5 PURCHASES NOT ELIGIBLE FOR INPUT TAX CREDIT

Input tax credit may not be allowed in the following circumstances:
(i) purchases from unregistered dealers;
(ii) purchases from registered dealer who opt for composition scheme1 under the provisions
of the Act;
(iii) purchase of goods as may be notified by the State Government;
(iv) purchase of goods where the purchase invoice is not available with the claimant or there
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 goods, which are being utilized in the manufacture of, exempted goods;
(vii) goods in 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/consumption or provided free of charge as gifts
(partial credit is available in the State of Maharashtra);
(ix) goods imported from outside the territory of India (commonly known as high seas
purchases);
(x) goods imported from other States viz. 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 can be then
adjusted against the central sales tax (CST) for the said period. After 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 States have decided to grant refund after the end of the first financial
year itself.

1
The concepts relating to composition scheme have been discussed in Chapter 9 of Section B of
this Study Material.
 Input Tax Credit 8.5

Illustration
(a) Inputs purchased within a month Rs. 10,00,000
(b) Outputs sold in the month Rs. 7,50,000
(c) Input tax paid @12.50% on (a) Rs. 1,25,000
(d) Tax @12.5% on sale of goods of Rs.1,50,000/- during the month Rs. 93,750

(e) Net VAT payable during the month (d) - (c) NIL
(f) Tax credit to be carried to the next month (c) - (d) Rs. 31, 250

8.7 REFUND TO EXPORTERS WITHIN THREE MONTHS

The White Paper provides for the grant of refund of input tax paid if the goods are exported
out of the country. Under the basic design of the White Paper this refund is to be granted
within a period of 3 months from the end of the period in which the transaction for export took
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 paid within three months.
State Governments may reduce the time period of 3 months.

8.9 CONCEPT OF INPUT TAX CREDIT ON CAPITAL GOODS

A dealer has to purchase capital goods, which may include plant and machinery, furniture,
fixture, electrical installations, vehicles etc. Similarly, a dealer may 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 legislations may define ‘capital goods’ differently.
Normally, under VAT system the dealer 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 certainly, to the extent of disallowance, the
principle of VAT gets defeated. For example, a dealer has purchased furniture for his
business, costing Rs.1,00,000/-. Assuming that the vendor has charged tax to him @ 12.5%,
he will incur an additional 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 higher, obviously to that extent the mark up will go
up. If the cost is lower i.e. after 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 indirectly 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 the 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
also 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 manufacturers. It is well known that under traditional
sales-tax system, in some States, partial 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
manufacturers and traders.
However as per the White Paper, the State Governments can provide to give set off on a
staggering basis, at the most in 36 instalments. This is subject to the policy of individual
States. The States, like Maharashtra, have provided set off in one slot and the same is to be
claimed immediately on effecting purchase.

8.9.2 Restrictions on credit relating to capital goods

It should 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 will be based on certain pre-
agreed principles by the Empowered Committee. The capital goods mentioned in the negative
list would not be eligible for input tax credit. However, it appears that the States have taken
their own decisions to provide negative lists or reduction in set off in respect of capital goods.

8.9.3 Procedural requirements for claim of set off

Barring the items covered by the negative list and subject to retention rules, the dealers are
entitled to set off on capital goods like any other purchases. Thus, 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 goods the dealer will be required to follow the procedural
requirements for claiming set off successfully. For example, dealers will be required to support
purchase of capital goods with tax invoice. In the absence of such tax invoice set off will be
disallowed.
Once a dealer is entitled to set off he has to further comply 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 be 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, dealer can adjust his
set off as per the following illustration:
Particulars (Rs.)
(i) VAT paid on procurement of inputs/supplies worth Rs.1 lakh @ 12.50% 12,500
(ii) VAT paid on procurement of capital goods of Rs.10 lakhs @ 12.50% 1,25,000
(iii) VAT credit available in the month 1,37,500
(iv) VAT on sales of Rs.10,00,000 during the month @ 12.50% 1,25,000
(v) VAT payable during the month Nil
(vi) Carry over of tax credit for set off during the next month 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 any goods should not exceed
the tax received on the same goods in Government Treasury. For example, section 48(5) of
the Maharashtra VAT Act provides that a dealer will not be entitled to set off more than the
amount received in the Government Treasury. Therefore, if the vendor fails to make the
payment of tax to the Government, the purchaser’s 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, to that
extent, the set off can be claimed.
Therefore, the purchasing dealer, desirous of claiming set off, should also look into the
credentials of the vendor so as to be sure that he will get the set off of tax paid to him.

8.10 VAT INVOICE

Invoice is a document listing goods sold with price, tax charged and other details as may be
prescribed and issued by a dealer authorized under the Act.
The whole 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 attracts penalty:
(i) Every registered dealer whose turnover of sales exceeds the specified amount shall
issue to the purchaser a serially numbered tax invoice, cash memo or bill with the
prescribed particulars.
(ii) The tax invoice shall be dated and signed by the dealer or his regular employee, showing
the required particulars.
(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) helps in determining the input tax credit;
(ii) prevents cascading effect of taxes;
(iii) facilitates multi-point taxation on the value addition;
(iv) promotes assurance 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 and large there
would be no need for a separate tax invoice, a regular invoice can also be termed as tax
invoice if it has the prescribed contents. Generally, the various legislations provide that the
tax invoice should have the following contents:
(i) the words ‘tax invoice’ in a prominent place;
(ii) name and address of the selling dealer;
(iii) registration number of the selling dealer;
(iv) name and address of the purchasing dealer;
(v) registration number of the purchasing dealer (may not be required under all VAT
legislations);
(vi) pre-printed or self-generated serial number;
(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
purpose.

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 case of small dealers or if the sale is to end consumer,
other invoices are permitted without the details of tax. Such invoices should contain the
following particulars:
(i) name and address of the selling dealer;
(ii) registration number of the selling dealer;
(iii) name and address of the purchasing dealer;
(iv) registration number of the purchasing dealer;
 Input Tax Credit 8.9

(v) pre-printed or self generated serial number;

(vi) date of issue;
(vii) description, quantity and value of goods sold;
(viii) signature of dealer or his/her representative.
However, to ensure that the revenue legally due to the States is realized and remitted, 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 for that matter in
any State VAT Act. Only the contents of the tax invoice have been prescribed. However, a
standard format of the same may look like the one given below:
TAX INVOICE
ORIGINAL – BUYER’S COPY

Seller’s Name ………………………… Tax Invoice No. ………………….

Address …………………………….. Date:
…………………………………………..
Challan No. and date
Phone No. Buyer’s Name & Address …………….
VAT Registration No. Buyer’s VAT Registration No., if any ……….
CST Registration No.

Description of Price per Value

S No. Quantity Goods unit (Rs.) VAT Rate Tax Amt. Total (Rs)

TOTAL

Rupees in figures

E & O.E Signature

(of selling dealer or his authorized employee)
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 cannot issue a ‘tax invoice’.

Self-examination questions
1. Differentiate between input tax and output tax.
2. Who can avail input tax credit?
3. Can input tax credit be carried forward? Discuss.
4. Enumerate the eligible purchases in respect of which input tax credit can be availed.
5. Mention the purchases which are not eligible for input tax credit.
6. How will the input tax credit be availed when common inputs are used for taxable and
tax-free good?
7. Explain whether units in SEZ and EOU units are required to pay input tax on purchases
made by them?
8. Can input tax credit be availed on capital goods? Explain
9. Discuss the procedural requirements to be fulfilled in order to claim input tax credit on
capital goods.
10. Explain the provisions in respect of a tax invoice.
11. Enlist the various contents 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 scheme
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 tax 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 composite scheme of taxation of a
small percentage of gross turnover. However, the Empowered Committee of State
Finance Ministers subsequently 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 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 the 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 total turnover exceeds
Rs.5 lakhs but does not exceed Rs.50 lakhs. Such a dealer would have an option to pay
a composite amount of tax based on its annual gross turnover 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 the rate decided by the State Governments
can now be levied on the taxable turnover instead of gross annual turnover.

Besides this, the State Governments may also provide for different types of composition
schemes to be notified for different classes of retailers.

9.4 FEATURES OF COMPOSITION SCHEME

The decision to join composition scheme will be an individual decision. This decision will
depend on the fact as to how VAT affects the dealer’s business. The advantage of this
scheme is that it saves a lot of labour and effort in keeping records. 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 tax
credit and issue tax invoices in order to pass on tax credit. Hence, the dealers desirous
of availing input tax credit on their purchases may not prefer to buy 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 is generally entitled
to avail this scheme. However, the following are not eligible 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 otherwise than by way of sale or for
 Small Dealers and Composition Scheme 9.3

execution of works contract.

9.6 EXERCISING OF OPTION

It is generally optional for a dealer to opt for this composition scheme. A dealer who
intends to avail such composition scheme shall exercise the option in writing for a year or
a part of the year in which he gets himself registered. For this the dealer has to intimate
to the Commissioner.

If a dealer avails this scheme, 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 records 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 credit on the inventory available on the date on which he opts for composition
scheme.

9.7 VAT CHAIN UNDER COMPOSITION SCHEME

9.7.1 Loss to the seller

If the composition scheme is availed by a dealer then such dealer cannot avail input tax
credit in respect of input tax paid. Hence the dealer will be loosing the 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 Loss to the purchaser

The purchaser shall not get any tax credit for the purchases made by him from the 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 of tax paid earlier will
not be passed on to the subsequent buyers.

Self-examination questions

1. What do you understand by a composition scheme under VAT laws?

9.4 Service tax & VAT

2. What is the eligible turnover to avail the benefit of this scheme?

3. What are the special features of this scheme?

4. Who is not entitled to the benefits of the composition scheme?

5. How does the composite scheme affect the VAT chain?

 10
VAT PROCEDURES

10.1 REGISTRATION
Registration is the process of obtaining certificate of registration (RC) from the authorities
under the VAT Acts. A dealer registered under the VAT Acts is called a registered dealer.
Any dealer, who intends to carry on the 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 registration certificate under the Act.
10.1.1 Eligibility for registration
As per the provisions contained in the White Paper, registration of dealers with gross
annual turnover above Rs.5 lakh will be compulsory. There will be provision for voluntary
registration. All existing dealers will be automatically registered under the 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 Commissioner.
The White Paper specifies that registration under the VAT Act will not be compulsory for
the small dealers with gross annual turnover not exceeding Rs.5 lakhs. However, the
Empowered Committee of State Finance Ministers subsequently 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 means 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
otherwise.
All sales or purchases of goods made within the State except the exempted goods would
be subjected to VAT.
10.1.2 Compulsory registration
If an assessee fails 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 this event the assessee shall have
to forthwith pay such amount of tax. Further, failure to get registered shall result in
attracting default penalty and forfeiture 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 not eligible for registration may also obtain registration if the
Commissioner is satisfied that the business of the applicant requires registration. The
Commissioner may also impose any terms or conditions that he thinks fit.
10.1.4 Cancellation of registration
The registration can be cancelled on:
(i) discontinuance of 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 designated goods or
services falling below the specified amount.

10.2 TAX PAYER’S IDENTIFICATION NUMBER (TIN)

TIN (Tax Payer's Identification Number) is a code to identify a tax payer. It is the
registration number of the dealer. The taxpayer’s identification number will consist of 11
digit numerals throughout the country. First 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, different in different States. TIN will facilitate computer applications, such
as detecting stop filers and delinquent accounts. TIN will help cross-check information on
tax payer compliance, for example, the selective cross-checking of sales and purchases
among VAT taxpayers.

10.3 RECORDS
The following records should be maintained under VAT system:
(i) Purchase records
(ii) sales records
(iii) VAT account
(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 serial number;
 VAT Procedures 10.3

(ii) copies of all credit and debit notes issued, in chronological order;
(iii) all purchase invoices, copies of customs entries, receipts for payment of customs
duty or tax, and credit and debit notes received to be filed chronologically either by
date of receipt or under each supplier’s name;
(iv) details of the amount of tax charged on each sale or purchase;
(v) total of the output 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 person;
(vii) details of each supply of goods from the business premises, unless such 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 should 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 introduction 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 getting declaration forms from the department.
There is no provision for concessional sale under the VAT Acts since the provision for set
off makes the input zero-rated. 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/
quarterly/annually as per the provisions of the State Acts/Rules. Returns will be
accompanied 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 treasury.
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 tax credit, payment of VAT
etc. Opportunity may be provided to lodge revised returns.
Every return furnished shall be scrutinized expeditiously within the prescribed 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 appropriately.
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 obligations 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 efficient processing of the data included in the returns.

10.5 ASSESSMENT
The basic simplification 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 self-
assessed by the dealer himself in terms of submission of returns upon setting off the tax
credit, return forms etc. The other procedures are also simple in all the States.
Deemed assessment concept is a major feature of the VAT. If no specific notice 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 been 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 arises 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-assessment. Hence, a system of
cross-checking is essential. Dealers may be asked to submit 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 values exceeding a prescribed monetary
ceiling.
A cross-checking computerized system 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 States and those of Central Excise and Income-tax. This
comprehensive cross-checking system will help reduce tax evasion and also lead to
significant growth of tax revenue. At the same time, by protecting the interests of tax-
complying dealers against the unfair practices of tax-evaders, the system will also bring in
more equal competition in the sphere of trade and industry.

10.6 AUDIT
In the VAT system considerable weightage is placed on audit work in place of routine
assessment work.
Correctness of self-assessment will be checked through a system of Departmental 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 audit, the previous records of the
concerned dealer may be taken up for audit.
Authorized 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 with them. They will be equipped
with the information gathered from various agencies 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 is done in a free, fearless and impartial manner.
10.6.1 Accounts to be audited in certain cases
Under the sales-tax laws, tax evasion is considered to be on a large scale. The sales-tax
departments of various States have not been able to effectively check the menace of tax
avoidance and tax evasion. Therefore, apart from the departmental audit many States
have also incorporated the concept of audit of accounts by chartered accountants. The
State of Maharashtra has prescribed an elaborate list of particulars to be furnished by the
dealers. These particulars have to be verified by the VAT auditor.
However, auditing for all types of dealers may not be necessary. The selection of cases
for auditing has to be made in accordance with the criteria of the size of dealers. In such
a case, the returns supported by the audited statement can be accepted summarily.
However, it might indeed be useful to cull out a fixed proportion of large and medium
sized dealers for regular assessments on a regular basis. In Maharashtra and Rajasthan,
the 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 purely a State subject, States will have incorporated penal provisions as per
their requirements. However, these are in general more stringent than those in the earlier
sales tax laws. Since, the State taxation laws have allowed certain additional benefits in
the form of input tax credit, which was not available earlier, they have introduced more
stringent penal provisions to discourage evasion of taxes.

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 special 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 and
unprocessed products in unorganised sector, items which are legally barred from taxation
10.6 Service tax & VAT

and items which have social implications. Included in this exempted category is a set of
maximum of 10 commodities flexibly chosen by individual States from a list of goods
(finalised by the Empowered Committee) which are of local social importance for the
individual States without having any inter-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 the
States, comprising of items of basic necessities such as medicines and drugs, all
agricultural and industrial inputs, capital goods and declared goods. The schedule of
commodities are attached to the VAT Acts of the States.
10.8.3 12.5% category
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 ornaments
etc.
10.8.5 Non-VAT goods
Petrol, diesel, ATF, other motor spirit, liquor and lottery tickets are kept outside VAT. The
States may or may not bring these commodities under VAT laws. However, 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 get the
benefit of input tax credit.
The few goods which are outside VAT are liquor, lottery tickets, petrol, diesel, aviation
turbine fuel and other motor spirit since their prices are not fully market determined.
These will continue to be taxed under the Sales-tax Act or any other State Act or even by
making special provisions in the VAT Act itself at uniform floor rates decided by the
Empowered Committee.
10.9.2 Stock transfer
Inter-State transfers do not involve sale and, therefore 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 tax credit after retention of 4% of such tax by the State
Governments.
10.9.3 Compensation for losses
Although the introduction of VAT may, after a few years, lead to revenue growth, there
may be a loss of revenue in some States in the initial years of transition. Some of the
State Governments were resistant to introduce VAT account of this reason. The
Government of India therefore agreed to compensate 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 position 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 after 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 powers to levy a tax on imports. It is also essential to bring
imports into the VAT 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
Government of India.
Self-examination questions
1. What is the eligible limit of turnover for registration under VAT laws?
2. When can the registration be cancelled?
3. Differentiate between voluntary and compulsory registration.
4. Write a brief note on tax payer’s identification number.
5. List the records to be maintained under VAT system.
6. Does VAT system require declaration forms? Discuss.
7. What are the provisions in respect of returns under VAT Acts?
8. Does VAT system recognize 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 been using sales-tax incentives as an important
developmental tool particularly, for industrial development of an area of the State which is
undeveloped or underdeveloped and where no one would like to set up an industry because of
several disadvantages such as lack of proper infrastructure, remoteness of the market,
unwillingness of the workers to work in the remote and isolated areas etc. The basic
philosophy of the incentive schemes is that even if the State does not get revenue from sales
tax, the taxpayer will contribute towards the development of the undeveloped area of the State
and get rewarded out of more realisation.
Any fiscal 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 effecting exempted sales are not
allowed to avail input tax credit and they also cannot pass on the credit. Therefore, if a
transaction in the VAT system passes through an exempted dealer, credit earned from the first
point of chain till such dealer gets lost, thereby breaking the VAT chain.
11.1.1 Principles laid down in the 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 deemed appropriate by the States
after ensuring that VAT chain is not affected.
Thus, at the national level, no common policy has been adopted regarding the treatment of
incentive schemes. This was due to the reason that different states have offered various kinds
of incentives depending on the requirements and the local needs of the States and the
relevant tax system in the State. The Empowered Committee while allowing the States to
decide their own policy for treatment of Incentives had prescribed certain preconditions:
(i) the quantum as well as the time period allowed for availing the incentives should not be
increased or extended.
(ii) VAT chain should not be affected.
11.2 Service tax & VAT

11.1.2 Different incentive schemes

By and large the incentives are given in three modes as described below:-
(a) Exemption 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
entitlement is to be availed within a specified period. The exemption so allowed, ceases either
with the expiry of exemption period or the exemption amount whichever occurs 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 and also pays the tax to its vendors on the purchase of raw materials etc.
However, such eligible unit/industry is not required to pay the collected tax to the Government
immediately. The tax liability is assessed by applying the normal provisions. However,
payment of tax to the Government is deferred for particular period. After that particular period,
the liability is required to be paid in prescribed instalments.
(c) Remission of tax
Under this mode an eligible industry is allowed to collect tax at an appropriate rate but is not
required to pay the same. The unit is required to file periodical return and show the tax
liability. After filing the return the department remits the tax liability in full. Thus, the tax
liability as per return is deemed to have been paid. The input tax paid on purchases by the
unit is being given as refund immediately after filing the return.
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 credit. However, under
deferment and remission mode the VAT invoices showing VAT separately can be issued by
the dealer, thereby resulting in continuance of VAT chain. These modes of incentives,
therefore appear to be much better option under VAT regime for exempted units as they fulfill
the objective of grant of incentives without breaking the VAT chain.
11.1.3 Consideration for schemes under VAT laws
The States implementing VAT have taken a uniform decision to continue the incentives under
VAT. However, some States have decided to continue exemption/deferment 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 VAT chain should not be disturbed.
 VAT in Special Transactions 11.3

(ii) There should not be any further revenue loss to the States.
(iii) The Department should be able to track the transactions and should ensure that there is
no evasion/avoidance of tax due to the policy.
(iv) In addition, wherever exemption/deferment as per old provision is continued additional
issues considered are as under:
(a) the units enjoying exemption under the old law should not be put to
disadvantageous position under the VAT system.
(b) the units who are purchasing inputs without payment of any tax should be allowed
to enjoy the benefit under 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) involved in the execution of a works contract. Under
State VAT laws works contract transactions too shall be subjected to VAT within the purview
of Entry 54 of the List II of the Seventh Schedule of the Constitution.
Earlier the judicial decisions took a view that in the case of composite contracts involving sale
of goods and 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 taxation of
transfer of materials used in the execution of a works contract as deemed sale. Clause 29A
was added to Article 366 of the Constitution of India to cover ‘transfer of property in goods
involved in execution of works contract’.
11.2.1 Constitutional authority
The power of the States to levy VAT on sales and purchases 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 purchase of goods other than newspapers, subject to the
provisions of entry 92-A of 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 contract, of property in any goods
for cash, deferred payment or other valuable consideration;
(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 consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a
member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or 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 purchase of those goods by
the person to whom such transfer, delivery or supply is made.
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, 2005 had inserted clause 2(ja) in the Central Sales-tax Act, 1956 which
reads as under:
'(ja) "works contract" means a contract for carrying out any work which, includes assembling,
construction, building, altering, manufacturing, processing, fabricating, erection, installation,
fitting out, improvement, repair or commissioning of any movable or immovable property".
Majority of the States have adopted this definition for works contract in their VAT legislations.
11.2.3 Guidelines to ascertain works contract
To ascertain whether a transaction is a works contract as contemplated in Article 366
(29A)(b), the following points should be kept in mind:
1. There must exist an individual works contract; divisible contracts are out side the scope.
2. Goods must be involved in the execution of the works. Transfer of property in goods
does qualify as works contract when it is incorporated in the works.
3. Transfer of property in goods must pass as goods or in some other form. Form of goods
has no relevance (may have a relevance for determination of rate of tax).
4. Property in goods must pass during the execution of works not before or after the
execution of works.
5. Some work has to be done on the property of the contractee by the contractor.
6. In the works contract, transfer of property must be an integral part of its execution.
7. Pure labour contracts or service contracts are out side the purview of the sales tax/VAT
law.
 VAT in Special Transactions 11.5

8. If during the execution of works contract goods are consumed and their identity is lost
then no transfer of property occurs in those goods.
9. There must be a dominant 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, the
contract will amount to a works contract.
11.2.4 Taxable turnover for works contract
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 taxed. Therefore, turnover for
imposition of VAT in relation to the transfer of property 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 property. The amount representing labour and other service charges
incurred for such execution should be excluded.
Where such labour and other service charges are 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 transferring 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 contractee and where
the property passes in a different form, the sale price shall include 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 VAT legislations provide the following two broad schemes for levy of VAT
on transfer of property involved in the execution of the works contract:
(a) Schedule Rate
As a basic feature, tax is chargeable on the transfer of property in the goods 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 the value of each item of
material transferred in the course of execution of a works contract is identifiable, tax is
charged on the value of individual items of materials as provided under the schedules to
the concerned State VAT legislation. On inputs the contractor is entitled to avail input tax
credit.
(b) Composition Rate
The VAT Legislations have provided for composition rates to be applied on 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 within the State. However, in
some States (e.g. Maharashtra) partial input tax credit is granted.
11.6 Service tax & VAT

11.2.6 Composition scheme

Under works contract the scheme of composition is a mechanism provided to collect 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 the figures. However, it must be
noted that in the composition scheme input tax credit is not allowed.
Provisions for compounding levy are only enabling provisions where an option is given to the
assessee either to opt for composition or to file the returns. Therefore, before opting for the
composition scheme the contractor must analyse the expenditure components like labour
charges, hire charges for machinery and tools, cost of consumables, cost of establishment,
profit element, value of local tax-suffered goods, turnover of sub-contractors, value of
exempted 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 be preferred or not depends upon the nature and scope of
the contract. The composition 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 manufacturing or processing of goods e.g.
contracts for construction of roads, bridges, etc., and yet we find that capital goods of
substantial amount are used in the execution of such contracts. Majority of the VAT
legislations provide for availing of input tax credit on capital goods only where such goods are
used in manufacturing 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
'lessor') provides that asset for use over a certain period of time to another party (called the
'lessee') for consideration (called 'rentals'). The legal ownership of the asset remains with the
lessor, but the lessee retains the possession and uses the asset over the period of the lease.
Therefore, the characteristics of a lease are:
(a) there must be a lessor and a lessee both competent to contract;
(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 property;
(e) there must be transfer of right of enjoyment by the lessor to the lessee;
(f) there must be a consideration.
 VAT in Special Transactions 11.7

11.3.1 Lease as per AS 19

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 return for a
payment or series of payments the right to use an asset for an agreed period of time.”
Generally, there are two different types of leases:
Finance lease : Here the lessor provides finance to the lessee for the purchase of
necessary 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. Lessor’s
interest in the equipment is that of ownership and the rent received or receivable against
such lease. After the end of lease period the lessee has an option to purchase the leased
asset. As per the Accounting Standard (AS 19) on leases issued by the ICAI, a finance
lease is a lease that transfers substantially all 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 and then leases out the same to the customer. The ownership is retained by
the lessor but the use of the assets by the lessee is made for a limited period of time.
The AS 19 on Leases defines an operating lease as a lease other than a finance 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 (refer clause (29A) in para 11.2.1). Sub-clause (d) provides that tax on
sale or purchase includes “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
consideration.” In common parlance, these transactions are known as lease of goods and are
also referred to as "deemed sales". The tax on these sales is referred to as "lease tax". Such
transfer of right to use the goods could be for any 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 consideration. Thus, a
transfer which is gratuitous is not taxable. Also, transfer of the right to use immovable
property, like renting a house or factory is not taxable.
11.3.4 Taxable turnover
Normally, the sale price means the amount of valuable consideration paid or payable for any
sale made during the given period. It also includes some other charges before delivery
thereof. However, certain States have provided for the deduction of interest or finance
charges for the purpose of determination of sale price/taxable turnover.
11.8 Service tax & VAT

11.3.5 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, 1956.
As the definition of "sale" in the Central Sales-tax Act, 1956 has been amended to cover
‘deemed sale’, therefore deemed sales in the course of inter-State trade will attract tax under
the Central Sales Tax Act.
11.3.6 Sub-lease
Transfer of 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 taxed, 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 asset 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 the
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 leased asset
The maintenance of the leased asset involving supply of materials for maintenance/repair by
the lessor would not amount to works contract, as there would 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 the 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
available.
11.3.9 Input tax credit
(a) Input tax credit allowed on purchase of the leased asset
Under the VAT legislations tax is to be charged on each stage of sale with the availing of input
tax credit of the tax charged on the earlier stages. The 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 VAT at the time of procurement of goods. However, liability to
pay VAT on lease rentals 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 entire period of
lease.
This would result in accumulation of input tax credit in the 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 credit instead of claiming a refund from the tax authorities.
Consequently, the lessor 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. However, States
like Maharashtra have provided for immediate utilization of such input 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 books 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 credit 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 would
have paid sales tax at the time of procuring the goods. Further, if the lease agreement related
to first point goods, the lessor would not have been required to pay any tax on the lease
rentals received by him in the sales tax regime.
However, 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 input tax credit would be subject to the
provisions of the concerned VAT legislations.

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 goods 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 hirer
acquires the property (goods) immediately on signing the hire purchase agreement but the
ownership or title of the same is transferred only when the last instalment 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 with the terms of the agreement and includes an
agreement under which:
(i) The owner delivers possession of goods thereof to a person on condition that such
person pays the agreed amount in periodic instalments.
(ii) The property in the goods 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 wherein 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 instalment is paid) buyer gets ownership after
paying the last instalment.
11.4.1 Constitutional authority
Sub-clause (c) of clause (29A) of Article 366 of the Constitution 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 legislations 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 purchase
is exercised only at the end when the title of the goods as per the terms stands transferred
from the dealer to the hirer.
Pure financial transactions
The transactions 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 Supreme 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 merely a financial transaction involving no
sale. In this case, Sundaram Finance Limited was carrying on the business of financing. The
customer who purchased motor 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
repayment got executed a promissory note, a sale letter, receipt for the amount paid, an
undertaking to keep the vehicle insured and a agreement called 'hire purchase agreement' in
which the company was shown as "owner" to let the vehicle to the customer as "hirer." On
interpretation of the total documents, the Supreme Court held that intention of the company in
obtaining hire purchase and other agreement was to secure return of loan advanced to the
customer and there was no real sale of vehicle intended to the customer by the company. The
Court therefore held 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
Delivery of goods under hire-purchase or installment sale has to be a physical or actual
delivery of goods in contradistinction to constructive or symbolic delivery of goods as the
goods are intended to be delivered for use by the hirer/customer. 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 of 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 laws of different States hire-purchase and installment sales are at par with normal
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 of 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 definition of sale under value added tax laws of various States provides that the taxable
event will be the delivery of goods on hire purchase or any system of payment by installments.
It is implicit that such transaction should be for monetary 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 concluded (normal) sale.
In the case of delivery of goods on a system of payment by installments, property in the goods
passes only where all the installments are paid, which the customer is under an obligation to
pay. Such a sale is called 'an installment 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 taxable event has been
made the delivery of the goods and not the completed sale on payment of the last installment.
11.4.4 Point of tax
A debatable question which arises is whether in case of hire-purchase or installment sale VAT
will have to be paid again at the time when transaction fructifies into a concluded sale, inspite
of tax having been deposited on installment (payable as and when due, whether or not
recovered). Answer to this problem depends mostly upon the provisions of 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 fructifies 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 delivery 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 consideration
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 or its market value. The second view
appears to be logical. However, if no consideration 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 pro-
rata credit.
11.4.6 Finance charges/interest
It is common knowledge that the installment fixed for payment in the case of a hire-purchase
arrangement 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 to be claimed as per the provisions of respective State
VAT laws. Many States provide 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
available.
11.4.8 Unpaid installments/ forfeited installments
If for any reason, the transaction 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 relating
to sales return will apply. Normally in such cases the installment received for the intervening
period are forfeited.
Self-examination questions
1. Explain how sales tax incentives cause problems for VAT system?
2. What are the different incentive schemes? Explain.
3. 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
incentive schemes in VAT regime.
5. What is a works contract? Is it a sale? Explain with reference to the constitutional
authority providing for the same.
6. Enlist the guidelines to ascertain whether a transaction is a works contract.
7. What is the taxable turnover for works contract? Also mention the types of tax rates
specified under various VAT laws.
8. What is a lease? Is it liable to tax under VAT laws? Explain.
9. How can the input tax credit be claimed in case of lease transactions?
10. Explain the concept of hire-purchase transactions. Comment upon 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 impose value added tax on the sale/purchase
transactions taking place within the State. So far as the trade between various States of
India is concerned, the same has 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 Governments.
The Central Sales Tax Act, 1956 is an Act of the Parliament to formulate the principles for
determining when sale or purchase of goods takes place in the 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 determining 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 certain goods to be of special importance in inter-State trade and commerce
and specifies in relation to them the restrictions and conditions to which the State sales
tax laws shall be subject.
A dealer, registered under CST Act, effecting an inter-State-purchase of goods, either for
resale, or for use in manufacture or processing of goods, or for mining, or for use in
generation and distribution of power 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 consumer states. Manufacturing States
generate considerable revenues from CST.
A lot of goods come into the consuming States with CST imposed on them. When these
goods are resold in these States, the tax liability of non-manufacturing States becomes
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 concept of CST being non-vatable is explained in para
12.3). Thus, the total tax liability is 16.5% but the States where the raw material (plastic
granules) is available 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 very objective of the VAT system is the lowering of
prices for the consumers. Since, 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 VATABLE

The inter-state purchases liable to CST are not eligible for input tax credit. However, 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 from another dealer of Maharashtra. The
Maharashtra dealer charges CST @ 4% on this sale against the C-form produced by the
dealer of Karnataka. The tax is deposited in the treasury of Maharashtra and thus forms
part of Maharashtra’s revenue. Though 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. The Karnataka dealer later sells these goods in the State of Karnataka to
any other dealer or consumer and collects VAT on the same. Now the question arises
whether the Karnataka dealer can claim input tax credit of the CST paid by him against
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 levied 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 vatable.
However, when liability of CST arises on a inter-state sale, the input tax credit 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 consensus, the inter-State transactions of purchase and sale will
continue to be governed 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
implemented.
 VAT and Central-Sales Tax 12.3

A decision has been taken by the Empowered Committee for duly phasing out of inter-
State sales-tax or CST. The White Paper in this regard states that:
"There is also a need, after introduction of VAT, for phasing out of CST. However, the
States are now collecting nearly Rs.15,000 crores every year from CST. There is
accordingly a need for compensation from the Government 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 frame-work in terms of Taxation Information
Exchange System to give a comprehensive picture of inter-State trade of all commodities.
As already mentioned, this process of setting up of Taxation Information Exchange
System has already been started by the Empowered Committee, and is expected to be
completed within one year. 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 VAT 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 earlier
announced that the CST phase out would begin from October 1, 2006 with a reduction 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. After reducing the rate from 4% to 2%, the review would happen as
planned by December 2007.

12.5 AMENDMENTS IN CST ACT TO FACILITATE INTRODUCTION OF VAT

12.5.1 Amendment in section 15
Finance Act, 2002 had amended section 15(a) of the CST so as 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 response 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%. Once 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 Act, to provide that with effect
from the date to be notified by the Central Government in the Official Gazette, the rate of
12.4 Service tax & VAT

tax payable by a dealer shall be 2% of his turnover or the State sales tax rate, or as the
case may be, the rate applicable under any enactment of that State imposing value added
tax, whichever is lower. However no notification has yet been issued to make the 2% rate
effective.
Self-examination questions
1. What is central sales tax? On which kind of sale is it levied?
2. Explain with the help of an example why CST is not vatable.
3. Discuss the amendments made in the CST Act in order to ensure smooth introduction
of VAT.
4. Explain how the CST in the VAT regime leads to cascading effect of taxes.
5. Briefly explain 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 individuals, for
the use and service of the State, whether under the name of toll, tollgate, tribute, gabel,
impost, duty, customs, excise, subsidy, aid, supply or other name. The power of taxation is
used not only for raising revenue but also to regulate economy, to encourage or discourage a
situation which calls for import or/and export of goods. Taxation is also resorted to achieve the
social objectives of the state.
Basically taxes can be classified as direct taxes and indirect taxes. The basic distinction
between Direct taxes and Indirect taxes is that whereas 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 there appears to be no difference between a tax and a duty, a subtle distinction can
be made in the fact that the latter as opposed to the former is paid before the 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 imported or less commonly exported goods. This term is usually applied to
those taxes which are payable upon goods or merchandise imported or exported.
The term ‘Customs’ derives its colour and essence from the term ‘Custom’, which means a
habitual practice or course of action that characteristically is repeated in like circumstances.
Duties on import and export of goods have been levied from time immemorial 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 kingdom 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 the base upon which the system of democracy works on. The taxes are
levied, imposed and collected under express powers derived from statutes. These statutes
have the legal backing, which is necessary for their enforcement and these statutes and 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 year 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 entire law on the subject of import and export duties, which were earlier
contained in 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
code in itself as to the levy and collection of duties on import and export of goods.

1.2 CONSTITUTIONAL PROVISIONS

All the enactments enacted by the Parliament should have its source in the Constitution 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 make laws for the whole or any
part of the territory of India, and the legislature of a State may make laws for the whole or any
part of the state. No law made by 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 enumerates 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 respect 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 referred to above are;
♦ Union List
Entry No. Subject matter
82 Taxes on income other than agricultural income
83 Duties of Customs including Export duties
84 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, medicinal
and toilet preparations containing alchohol, or any substance stated before.
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.
♦ Concurrent List
Entry No. Subject matter
35 Mechanically propelled vehicles including the principles on which taxes on such vehicles
are to be levied.
44 Stamp duties other than duties or fees collected by means of judicial stamps, but not
including rates of stamp duty.
The Parliament is authorised by virtue of Article 271 to increase any of the taxes 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, 1962

The entire gamut of the Act is grouped into seventeen chapters. The following table presents
an overview of the said chapters and aims at securing the reader’s understanding of the
provisions of the Act in a proper perspective.

Ch. Ch. Heading Sections Content

No.
I Preliminary 1&2 Short title and definitions
II Officers of Customs 3 to 6 Classes, appointment and powers
of the customs officers.
III Customs ports and 7 to 10 Appointment of ports, Airports,
Airports landing stations and customs area
IV Prohibition 11 Power and coverage of prohibition.
IVA Detection and prevention 11A to 11G Notified goods, control over
of illegally imported goods storage, sale, accounting,
transportation etc.
IVB Detection and prevention 11H to 11K Notified goods, storage,
of illegal export of goods transportation etc.
IVC Exemption from Ch. IVA 11N Central Government’s power to
and Ch. IVB grant exemption.
V Levy and exemption of 12 to 28B Dutiable goods, valuation, rate of
Customs duty duty, assessment, remission,
1.4 Customs

exemption, interest on delayed

payments.
VA Amount of duty in the price 28C & 28D Price of goods and passing of
of goods incidence of duty
VB Advance rulings 28E to 28M Authority, application, procedure,
applicability and powers.
VI Control over conveyances 29 to 43 Arrival/departure reports,
carrying import or export Import/Export general manifest,
goods entry inwards, place time and
restrictions on loading/unloading,
water borne goods etc.
VII Clearance of goods 44 to 51 Bill of entry, shipping bill,
clearance for home
consumption/warehousing, storage
of goods,
VIII Goods in transit 52 to 56 Transit and transhipment
procedures
IX Warehousing 57 to 73 Appointment & licensing of
warehouse, bonding of goods,
period of warehousing, payment of
rent and charges, clearance of
warehoused goods, allowance for
volatile goods
X Drawback 74 to 76 Drawback allowable, Interest
allowable, prohibition and
regulation
XA Special Provisions relating 76A to 76N Notification of SEZ, admission of
to Special Economic Zone goods, exemptions, levy of duty
and removal of goods etc.
XI Special provisions relating 77 to 90 Declaration, rate of duty and
to baggage, posts and valuation, exemption and
stores procedures
XII Coastal goods and coastal 91 to 99 Entry, restrictions, clearance,
vessels loading and unloading and
application.
XIII Search, Seizure and Arrest 100 to 110 Powers and procedures of search,
seizure and arrest.
 Basic Concepts 1.5

XIV Confiscation and penalties 111 to 127 Powers and procedures for
confiscation and for levy and
collection of penalties.
XIVA Settlement of cases 127A to 127N Application for settlement,
procedure, powers of settlement
commission, inspection etc.
XV Appeals and revision 128 to 131C Procedure and time limits for
appeals and revisions
XVI Offences and prosecution 132 to 140A Cognizable offences and
procedures for prosecution.
XVII Miscellaneous 141 to 161 Recovery of sums due, power to
take samples, licensing of custom
house agents, liability of principal
and agent, delegation of powers,
General power to make rules etc.

1.4 SOME IMPORTANT DEFINITIONS

1.4.1 Assessment: [Sec 2(2)]: The term is defined to include provisional assessment,
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 term 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 of 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 duty has not been paid. In order to be dutiable, any article
should be within the ambit of the word goods as defined under sec 2(22) and should find a
mention in the Customs Tariff.
1.4.4 Export: [Sec 2(18)]: The term with its grammatical variations 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 Foreign 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 between any port
or airport in India and any port or airport outside India, whether touching any intermediate port
1.6 Customs

or airport in India or not, and includes-

- any naval vessel of any foreign Government 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 proceeding 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, aircrafts and vehicles;
(b) stores;
(c) baggage;
(d) currency and negotiable instruments;
(e) any other kind of movable property;
There are two fundamental aspects for any thing to be called as goods and they are
moveability and marketability.
Concept of moveable: The first aspect of goods is that they should be movables. The
Supreme Court has enunciated this principle in the case of UOI Vs. Delhi Cloth 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 being bought and sold in the market.
Though these judgments are rendered in the context of Excise duty, the subject matter being
pari materia, they can also be applied in the context of Customs duty.
Concept of marketable: The second fundamental aspect of goods is that they should be
capable of being marketed. Marketability is the capability of an article to be put into
market for sale. Whether a particular 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 cleared
for home consumption. For a detailed discussion refer to the chapter on Importation, etc.
1.4.10 Importer: [Sec 2(26)]: Importer 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 person holding himself out to be the importer. For a detailed discussion refer
to the chapter on Importation, etc.
1.4.11 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 base line.
 Basic Concepts 1.7

Goods are deemed to have been imported if the vessel enters the imaginary line on the
sea at the 12 th nautical mile i.e. if the vessel enters the territorial waters of India.
Therefore, a vessel not bound to India should not enter these waters. India includes not
only the surface of sea in the territorial waters but also the air space above and the
ground at the bottom of the sea.
1.4.12 Indian customs 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
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones
Act, 1976 and includes any bay, gulf, harbour, creek or tidal river.
Indian customs waters cover both the Indian territorial waters and contiguous zone as
well. Indian territorial waters extend up to 12 nm from the base line whereas contiguous
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 vessel, 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 conductor, guard or other person having the chief
direction of the train;
(d) in relation to any other conveyance, the driver or other person-in-charge of the
conveyance.
1.4.14 Stores: [Sec 2(38)]: “Stores” 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. Stores are also goods but are covered by special provisions 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, Exportation 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. Distinguish between Indian territorial waters and Indian custom waters.
3. With reference to the provisions of the Customs Act, 1962, explain the following
briefly:
(i) Stores
(ii) Dutiable goods and Imported goods
4. Write a brief note on the constitutional provisions governing the levy of customs
duties.
5. ONGC vessel and foreign vessel are drilling oil beyond 12 nautical miles in the sea.
Which of the two is a foreign going vessel? Explain.
Answer
5. Foreign going 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
intermediate 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.)
outside territorial waters.
(c) A vessel or aircraft going to a place outside India for any purpose whatsoever
[section 2(21)].
In the given case both the vessels are beyond territorial waters hence both of them
are foreign going vessels.
 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 the 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 tax 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 upon manufacture of excisable goods, the duty is collected only upon removal
of goods from the factory.
The Judicial Committee in the United Kingdom in the case of Whilney Vs. Commissioners
of Inland Revenue (1926) appeal cases (reproduced in Jain Shudh Vanaspathi Ltd. Vs.
Union of India) has observed as follows;
“Now there are three stages in the imposition of a tax; there is the declaration of the
liability 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 particularizes the exact sum which
a person liable has to pay. Lastly comes the methods of recovery if the person taxed does
not voluntarily pay”.

2.1 DETERMINING FACTORS

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 becomes
leviable;
2. the procedure, the mechanism and the organization for determining the amount of
customs duty and collection thereof;
3. the exemption to the levy 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
section 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 Act.
1. Except as provided in this Act, or any other law for the time being in force, duties of
customs shall be levied at such rates as may be specified under the 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 propositions arise from the above provisions;
1. Duties of customs shall be levied on goods. However, it may be noted that this levy
is subject to other sections in the Act. For instance:
Section 13 – no duty on pilfered goods
Section 22 – reduced duty on damaged goods
Section 23 – remission of duty on destroyed goods.
2. The goods shall be such as are imported or exported to or from India;
3. The duty shall be at such rates as may be specified under the Customs Tariff Act,
1975.
4. Government 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 makes 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 judgments of the Apex court in the landmark cases of
Union of India Vs. Apar Industries 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 determining the point at which the importation or exportation takes place. The
root cause 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 almost impossible to
determine when exactly the vessel crossed the territorial waters 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 cross 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 time when the goods reach the customs
barriers and bill of entry for home consumption is filed. The main test for determining the
taxable event is the happening of the event on which the charge is affixed. Therefore, to
conclude that importation is completed as soon as the goods enter the territorial waters of
India would be a wrong interpretation of the law in the spirit in which is enacted and
consequently the goods should become part of the mass of the goods within the country
for the charge of customs duty to be attracted.
2.2.2 Distinction between clearance for home consumption and clearance for
warehousing: Clearance for home consumption implies that, the customs duty on import
of the goods has been discharged and the goods are therefore cleared for utilization or
consumption. The goods may instead of being cleared for home consumption be
deposited in warehouse and cleared at a later time. When the goods are deposited in the
warehouse the collection of customs duty will be deferred till such goods are cleared for
home consumption. The revenue for the Government is safeguarded by the importer
executing 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, rent and
charges for storage of goods in warehouse.
2.2.3 Duty liability in certain special circumstances
a. Re-importation of goods produced or manufactured in India [Section 20]:
Section 20 provides that -
if goods are imported into India after 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 goods
manufactured or produced in India, which are exported and thereafter re-imported are
treated on par with other goods, which are imported.
However, the following notifications have provided certain concessions in this regard:
(i) where an exporter has availed export incentives in the nature of duty drawback,
rebate under Central Excise Rules, etc., the import duty shall be restricted to the
amount of incentive availed of at the time of export.
[Notification no. 94/96 Cus. dated 16.12.1996]
(ii) where the imported goods have been originally exported to the 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 for re-importation is 3 years. This is extendable to 5 years.
(b) the exported goods and the re-imported goods must be the same. The
ownership of the goods should also not have changed.
However, the notification is not applicable to exports from EPZ or EOUs, etc.
Further, it is not applicable if the repairs amount to re-manufacture.
[Notification no. 94/96 Cus. dated 16.12.1996]
(iii) Sometimes, the situation might be reverse – 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:
- the re-importation is for repairs only
- the time limit is 3 years
- the goods must be re-exported after repairs
- the time limit for export is 6 months (extendable to one year).
[Notification no.158/95 Cus. dated 14.11.1995]
b. Goods derelict, wreck etc [Section 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 are 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 India.
This implies that apart from goods which are normally imported in the course of
international trade, flotsam, and jetsam, which are washed ashore and derelict 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 refers to any cargo, vessel, etc. abandoned in the sea with no hope of
recovery.
Jetsam – 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
after ship wreck.
 Levy of and Exemptions from Custom Duty 2.5

2.3 PROCEDURE, MECHANISM AND ORGANISATION FOR ASSESSMENT OF DUTY

2.3.1 Meaning of Assessment: In the context of the customs duty, the term
assessment means quantification of the amount of duty payable. The process of
assessment involves the following stages.
a. Determination of the quantity and total value of the consignment;
b. Determination of the proper tariff classification of the goods;
c. Determination of the appropriate rate of duty after considering the various
exemptions, abatements, remissions.
d. Determining whether the goods are to be cleared for home consumption or to be
deposited in the warehouse.
2.3.2 Valuation of goods [Section 14] : The method of valuation has been
explained in detail in chapter 5.
2.3.3 Date for determining the rate of duty and tariff valuation of imported goods
[Section 15] : Section 15 provides that -
(1) The rate of duty and tariff valuation, 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 under 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 such 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 are imported, the bill of entry shall
be deemed to have been presented on the date of such entry inwards or the arrival, as the
case may be.
(2) The provisions of this section shall not apply to baggage and goods imported by
post.
From the reading 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 valuation
prevailing on the date on which the Bill of Entry in respect of such clearance is
presented will be applicable. However, if the Bill of Entry is presented before the
entry inwards of the vessel or arrival of aircraft, then the rate of duty and tariff
valuation prevailing on the date on which entry inwards is granted or as the case may
be arrival of aircraft takes place will be applicable.
2.6 Customs

b. If the goods are deposited into warehouse and cleared therefrom, then the rate of
duty and tariff valuation prevailing on the date on which the bill of entry for home
consumption is presented will be applicable.
c. In any other case, the rate of duty and tariff valuation prevailing on the date of
payment of duty will be applicable.
d. In respect of baggage and goods imported by post the provisions of section 15 will
not be applicable as they are independently covered by other sections.
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 the 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 entry 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 clear that in respect of warehoused
goods, duty becomes payable at the rate in force 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 fault of customs authorities and subsequently the
liability arises, then no such duty would become payable by the importer. With effect from
14.05.2003, these decisions 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 contract is not relevant and only the date of
importation is relevant as per the decision of the Supreme Court in Rajkumar Knitting Mills
P.Ltd vs CC 1998 (98) ELT 292.
2.3.4 Flow of assessment and clearance procedure : a. The master of the vessel
carrying the goods calls on the port, files the arrival report and the import general
manifest [IGM] with customs authorities.
b. Customs authorities check the documents, grant entry inwards to the vessel, assign
an IGM number to the manifest and permit the master of the vessel to land and
unload the cargo.
c. The vessel discharges the cargo into the custody of the port trust authorities.
d. The importer of the goods delivers the negotiable bill of lading received from the
supplier of the goods to the master of the vessel and obtains the delivery order.
 Levy of and Exemptions from Custom Duty 2.7

e. It is the right and responsibility of the importer to file an application for clearance of
goods and this application is called the bill of entry.
f. The customs authorities check the bill of entry with the IGM and note the bill of entry
in the IGM.
g. The bill of entry is then processed by the appraising department to decide upon the
tariff classification and valuation.
h. The customs authorities may physically examine the goods for the above purpose of
classification and valuation.
i. If the bill of entry for home consumption is presented, then the customs duty is
collected and “pass out of customs charge” is issued.
j. If the bill of entry for warehousing is presented, then the importer executes a
warehousing bond equal to twice the amount of duty assessed and then the goods
are deposited into the warehouse.
k. The importer on showing the “pass out of customs charge” to the port trust
authorities takes delivery of the goods.
l. In case the goods are warehoused, the importer files a bill of entry for ex-bond
clearance for home consumption at the time of clearance of goods from such
warehouse.
m. The customs duty is then collected and the goods are allowed to be taken from the
port.

2.4 REMISSION, ABATEMENT AND EXEMPTIONS

The Customs Act provides for remission, abatement and exemptions from customs duty in
certain circumstances. These provisions are discussed in the subsequent paragraphs.
2.4.1 No duty on pilfered goods [Section 13] : Section 13 provides that -
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 in 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. The imported goods should have been pilfered.
b. 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 warehouse.
c. 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 claim pilferage the
following circumstances should exist :
a. there should be evidence of tampering with the packages;
b. there should be blank space for the missing articles in the package; and
c. the missing articles should be unit articles [and not part articles]
The pilferage of goods would normally be noticed at the time of physical verification of
goods by the customs authorities. However, in some circumstances, it may so happen that
the pilferage may be observed only at the time of removal of goods 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 report 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 in the form of a refund.
It is important to note that the Port Trust is the custodian of imported goods. Section 13
disables the Government from collecting the duty on pilfered goods from the importer. On
the other hand, section 45 enables the 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] :
Section 22 provides that -
(1) Where it is shown to the satisfaction of the Assistant Commissioner of Customs or
Deputy Commissioner of Customs -
(a) that any imported goods had been damaged 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 damaged at any
time after the unloading thereof in India but before their examination under section
17, on account of any accident not due to any wilful act, negligence or default of the
importer, his employee or agent; or
(c) that any warehoused 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 accordance with the provisions of sub-section (2).
(2) The duty to be charged on the goods referred to in sub-section (1) shall bear the same
proportion to the duty chargeable 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 2.9

damage or deterioration.
(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 owner:-
(a) the value of such goods may be ascertained by the proper officer, or
(b) such goods may be sold by the proper officer by public auction or by tender, or with
the consent of the owner in any other manner, and the gross sale proceeds shall be
deemed to be the value of such goods.
Thus the abatement is available under the following circumstances:
(a) When the goods are damaged or deteriorated before 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 case of goods cleared for home consumption, when the goods are damaged
after unloading but before examination by the customs authorities;
(c) In the case of warehoused goods, when the goods are damaged before their actual
clearance from such warehouse.
The term ‘damage’ denotes physical damage to the goods. This implies that the goods are
not fit to be used for the purpose for which they are meant. Deterioration is reduction in
quality of goods due to natural causes. In order to avail the benefit of abatement, the
damage should not have been caused by any willful 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
that 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 with 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 damaged 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 goods lost, destroyed or abandoned [Section 23] :
Section 23 provides that -
(1) Without prejudice to the provisions of section 13, where it is shown to the satisfaction
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 order for clearance of
goods for home consumption under section 47 or an order for permitting the deposit of
goods in a warehouse under section 60 has been made, relinquish 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 have been committed under this Act
or any other law for the time being in force.
The following propositions arise from the reading of the above provisions.
a. Goods lost or destroyed: The remission of duty is permissible only in the case of
total loss of goods. This implies that the loss is forever and beyond recovery. The 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 should not be in the
nature of pilferage. If it is in the nature of pilferage, then the provisions of section 13 gets
attracted and remission is consequently allowable under that section. It may be said that
section 13 and section 23 are mutually exclusive.
In the above situation, the loss/ destruction has to be proved to the satisfaction of teh
Assistant Commissioner or Deputy Commissioner. Thereupon, he may pass remission
orders cancelling the payment of duty. In case duty has 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 likely 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
not 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 the 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 unconditionally
and abandon them. Relinquishment is done by endorsing the document of 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 required to pay the duty amount. 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 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 goods [Section 24]: Section 24 of Customs Act,

1962 provides that an importer can request Central Government to denature or mutilate
the imported goods, which are 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 assessed 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. Denaturing of
Spirit rules, 1972 specify procedure for denaturing spirit.

2.4.5 Exemption from customs duty [Section 25]:

Central Government’s power to grant exemption: Article 265 of the Constitution
provides that “No tax shall be levied or collected except 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 subject to superintendence and check by Parliament.
a. General exemption: If the Central 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 absolutely or subject to such conditions (to be fulfilled before or after clearance) as
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 interest 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 amount of duty
leviable is equal to, or less than, one hundred rupees.
Both the above mentioned exemptions may be granted by providing for the levy of duty on
such goods at a rate expressed in a form or method different from the form or method 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 normal form or method.
2.4.5 Rationale for grant of exemption: The power for grant of 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 be 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 controlling 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 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 interest 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 benefit thereof.
The Supreme Court has held in Pankaj Jain Agencies v. U.O.I. 1994 (72) E.L.T. 805 that a
Notification 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 notification will not affect the
operativeness and enforceability of the notification particularly when there are radio
announcements and press releases explaining the changes on the very day.
Effective date: Section 25 of the Act provides that the date of effect of the notification
will be the date of its issue. It also provides for statutory obligation on the part of the
Department to publish and sell the notifications to the public through Directorate of
Publicity and Public Relations on or before the date on which the notification will be
effective.
The following issues need to be kept in mind in case of general exemption.
(i) Where the exemption notification does not mention the date of its effect, the
notification comes into effect from the date of its issue by the Central Government for
publication in the Official Gazette. It shall be published and also offered for sale 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 notification shall be published and offered for sale
on or before the date from which it comes into force.
(iii) Where the exemption is through a special order, the 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 retrospective
effect.
 Levy of and Exemptions from Custom Duty 2.13

2.4.6 List of Important Judicial Decisions on Scope of Exemption Notifications

A. General Principles

Particulars Citation

1. Exemption notifications represent the U.O.I. v. Paliwal Electricals P. Ltd

policy of the Government evolved to sub-serve 1996 (83) E.L.T. 241 (S.C.)
public interest and public revenue. It is a part
and parcel of the enactment subject to it not
being against Article 14 of Constitution.

2. Supervening public equity overrides Shrijee Sales Corporation v. U.O.I.

principle of promissory estoppel. Time bound 1997 (89) E.L.T. 452 (S.C.)
notification can be withdrawn.
(See commentary for decision in
Kasinka Trading)

3. Exemption notification is a class of U.O.I. v. Jalyan Udyog 1993 (68)

delegated or conditional legislation. Power can E.L.T. 9 (S.C.)
be used not only for raising revenue but also
to regulate the economy and for serving social
objectives.

4. Classification between small and big Murthy Match Works v. AC 1978 (2)
manufacturers not discriminatory. E.L.T. J429 (S.C.)

5. Choice of date in exemption notifications ITC Bhadrachalam Paper Boards Ltd.

cannot be questioned being a question of v. CCE 1994 (71) E.L.T. 334 (S.C.)
policy.

6. Exemption notification not valid if it does Ramdhan Pandey v. State of UP 1993

not recite public interest. (66) E.L.T. 547 (S.C.)

7. Public interest means an act beneficial to MJ Exports v. CCE 1992 (59) E.L.T.
general public. 112 (T)

B. How to Interpret ?

Particulars Citation
1. Notification to be treated as a part of the CCE v. Parle Exports P. Ltd. 1998
enactment itself. (38) ELT 741 (SC)
2. Interpretation given at the time of CCE v. Parle Exports P. Ltd. 1988
enactment or issue to be given weight. (38) E.L.T. 741 (S.C.)
2.14 Customs

3.(a) Exemption notification should be HMM Ltd. v. CCE 1996 (87) E.L.T.
construed strictly and reasonably having 593 (SC)
regard to the language employed.
(b) Strictness of construction does not mean
Swadeshi Polytex Ltd. v. CCE 1989
that circuitous process should be followed.
(44) E.L.T. 794 (SC)
Strictness should also result in giving full
effect.
GSFC Ltd. v. CCE 1997 (91) E.L.T. 3
(c) Express language to be given effect.
(SC)
Supposed intention to be gathered from
language used.
CC v. United Electrical Industries Ltd.
(d) Exemption notification not to be
1999 (108) E.L.T. 609 (SC).
rendered nugatory or purposeless. The
word singular includes plural.
4.(a) Exemption notification construable Hemraj Gordhandas v. HH Dave 1978
strictly. No room to be given for intendment (2) E.L.T. J 350 (SC)
in the light of clear words contained in the
notification.
(b) Exemption notification need not be SG Glass Works P. Ltd. v. CCE 1994
construed strictly when there is no doubt or (74) E.L.T. 775 (S.C.)
ambiguity in it.
5. Liberal construction which enlarges the Rajasthan Spg. & Wvg. Mills Ltd. v.
term and scope of notification not CCE 1995 (77) E.L.T. 474 (S.C.)
permissible.
6. Exemption notification to be read as an CCE v. Shibani Engi- neering
ordinary man would read it. The word “and” to Systems 1996 (86) E.L.T. 453 (S.C.)
be read conjunctively as any one would do
so.
7. Ambiguity in notification to be resolved in Novopan India Ltd. v. CCE 1994 (73)
favour of Revenue. E.L.T. 769 (SC); Contrary view in
STP Limited v. CCE 1998 (97) E.L.T.
16 (S.C.)
8. Expressions used in the Act should be Prestige Engg. India Ltd. v. CCE
understood in the same sense if used in 1994 (73) E.L.T. 497 (S.C.)
Rules and notifications.
 Levy of and Exemptions from Custom Duty 2.15

9.(a) Exemption cannot be claimed on the BK Industries v. U.O.I. 1993 (65)

strength of Finance Ministers Budget speech. E.L.T. 465 (S.C.)
(b) Notings on Government files cannot be Doypack Systems P. Ltd. v. U.O.I.
used as an aid in construction. 1988 (36) E.L.T. 201 (S.C.)

10. Exemption notification to be interpreted Bombay Chemicals P. Ltd. v. CCE

differently from statute. Strict interpretation 1995 (77) E.L.T. 3 (SC), Novapan
applicable to find out whether a subject falls India Ltd. v. CCE 1994 (73) E.L.T.
under the exemption. Once this is solved, 769 (S.C.)
liberal interpretation to be given by reading
the notification as a whole.
11.(a) Substantive conditions in notification to MCF Ltd v. Dy. Commissioner 1991
be satisfied mandatorily since it may facilitate (55) E.L.T. 437 (S.C.); Thermax P.
fraud or introduce administrative Ltd. v. CCE 1992 (61) E.L.T. 352
inconveniences. Non- observance of (SC); Formica India Division v. CCE
procedural conditions condonable. 1995 (77) E.L.T. 511 (SC)

(b) If non-observance of procedural condition Indian Aluminium com-pany Ltd. v.

may facilitate fraud or administrative Thane Municipal Corporation 1991
convenience, exemption can be denied. (55) E.L.T. 454 (S.C.).
12. Burden to prove eligibility to exemption Mysore Metal Industries v. CCE 1988
notification on the claimant. (36) E.L.T. 369 (S.C.); Motiram
tolaram v. U.O.I. 1999 (112) E.L.T.
749 (SC)
13. Exemption cannot be denied on a ground Prince Khadi Woollen Handloom
not originally contended. Prod. Coop. Indl. Society v. CCE
1996 (88) E.L.T. 637 (SC)
14. Assessee can opt for that notification CCE v. Indian Petro Chemicals 1997
which is more beneficial. (92) E.L.T. 13 (SC); Abrol Watches Pvt.
Ltd v. CC 1997 (92) E.L.T. 311 (S.C.)
15. A particular item not expressly excluded CC v. Perfect Machine Tools Co. P.
does not mean that it is included. Ltd 1997 (96) E.L.T. 214 (S.C.)
2.16 Customs

16. Benefit not to be extended on the ground Faridabad CT Scan Centre v. DG

that such benefit is wrongly extended to Health Services 1997 (95) E.L.T. 161
others. (S.C.)
17. The term “appropriate amount of duty CCE v. Usha Martin Industries 1997
already has been paid” includes nil rate of (94) E.L.T. 460 (SC LB)
duty.
18. In interpreting an earlier notification, Johnson & Johnson Ltd. v. CCE 1997
narrow or broader view to be taken can be (92) E.L.T. 23 (S.C.)
decided based on subsequent notification.
19. Assessee cannot suffer on account of Kuil Fireworks Industries v. CCE
illegal act of Department. Exemption 1997 (95) E.L.T. 3 (S.C.)
notification applicable.
20. Words in Tariff Schedule to be interpreted CC v. Lekhraj Jessumal & Sons 1996
keeping in mind the rapid march of (82) E.L.T. 162 (S.C.)
technology as industry is not static.

Self-examination questions
1. Distinguish between- :
(a) Jetsam and Flotsam
(b) Pilfered goods and Lost/destroyed goods
(c) General exemptions and Ad hoc exemptions
2. What will be the impact on the customs duty if the goods are–:
(i) damaged inside the warehouse before clearance for home consumption
(ii) deteriorated inside the warehouse before clearance for home consumption
(iii) destroyed in the warehouse before 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
completed on 2nd June, 2006 and the goods were duly warehoused. In the
meantime an exemption notification was issued on 15th October, 2006 reducing the
effective customs duty to 25% ad valorem.
 Levy of and Exemptions from Custom Duty 2.17

Thereafter, the importer filed a bill 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 the same, discussing the relevant provisions of the
Customs Act, 1962.

4. Peerless Scraps, imported during August 2006, by sea, a consignment of metal scrap
weighing 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
and 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 available
at the docks although they had paid duty for the entire 6,000 M.T., since there was
no short-landing of cargo. The short-delivery of 500 M.T. was also substantiated by
the Port-Trust Authorities, who gave a “weighment certificate” to Peerless Scraps.

On filing a representation to the Customs Department, Peerless Scraps has been

directed in writing to justify as to which provision of the Customs Act, 1962 governs
their claim for remission of duty on the 500 M.T. not delivered by the Port-Trust.

You are approached by Peerless Scraps as “Counsel” for an opinion/advice.

Examine the issues and tender your opinion as per law, giving reasons.

5. ASC Ltd. entered in to technical collaboration with MSC Ltd. of Netherlands 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. contended
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 taken 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 goods. 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 entitled to be admitted free of duty.
2.18 Customs

(b) Pilfered goods Lost/Destroyed goods

1. Covered by section 13 Covered by section 23(1)

2. Department gets compensation No such compensation

from the custodian [Section 45(3)]
3. Mandatory benefit Remission is discretionary

4. Petty theft by human being Loss/Destruction by fire, flood etc

(Act of God)
5. Restoration possible Restoration is not possible
6. Occurrence is after unloading and Occurrence may be at any time
before Customs clearance order before clearance for home
for home consumption or consumption
warehousing
7. Occurrence in warehouse not Occurrence in warehouse is
recognised recognised
8. Duty need not be calculated Duty should be calculated for
determining the remission amount
9. No need to prove pilferage. It is Should be proved and remission
quite obvious sought for.

1 Refund arises if pilferage takes Question of refund does not arise

0. place after paying duty at all.

2. (i) When the goods are damaged inside the warehouse abatement in customs duty,
on resultant loss in value, has been provided through section 22. Section 22
contemplates that for claiming abatement of duty, the damage (not
deterioration) should occur at any time before clearance of the imported goods
for home consumption from the warehouse. However, the damage should not
be attributable to the importer. It should be proved to the satisfaction of
Assistant Commissioner or Deputy Commissioner of Customs that the imported
goods have actually suffered damages. The claim for abatement is not tenable
unless the importer factually proves the damage. The following equation
provides the way to calculate the abatement of duty.
Duty after damage = Value after damage
Duty before 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 abatement 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
consumption, 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 pilferage) 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
account 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 the 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 determination
of rate of duty and tariff value in case of goods cleared from a warehouse 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 the given case will be
20.10.2006 (the date on which the bill of entry for home consumption is presented).
Therefore, the relevant rate will be 25%.
4. As per provisions 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 than as a result of pilferage at any time before clearance for home
consumption, the 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 consumption.
In the given case, it is apparent from the facts that quantity of scrap received in India
was 6000 metric tonnes and 500 metric tonnes thereof was lost when it was in
custody of Port Authorities i.e. before clearance for home consumption was made.
Also, the loss of 500 MT of scrap cannot be construed to be pilferage, as loss of
such huge quantity cannot be treated as “Petty Theft”.
Hence, Peerless Scraps may take shelter under section 23 justifying his claim for
remission of duty.
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 observed that
though technical advice or information technology are intangible assets, but the
moment they are put on a media, whether paper or cassettes or diskettes or any
other thing, they become movable and are thus, goods. Therefore, the Supreme
Court held that drawings, designs, manuals and technical material are goods liable to
customs duty.
Therefore, the stand taken by the ASC Ltd. is not correct 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 section 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 easy understanding of the structure of the Tariff
Schedule.
(1) (2) (3) (4) (5)
Coconuts, Brazil nuts
And Cashew nuts, fresh
Or dried, whether or not
Shelled or peeled
-Coconuts:
0801.11 --Desiccated 70% 60%
0801.19 --Other 70% 60%
-Brazil nuts:
0801.21 --In shell 30% 20%
0801.22 --Shelled 30% 20%
-Cashew nuts:
0801.31 --In shell 30% Free
0801.32 --Shelled 30% 20%
3.2 Customs

Generally the rate of duty specified in column (4) is applicable but if the goods are imported
from the areas notified by the Central Government to be preferential areas, then the rate of
duty under column (5) will be applicable. The Government may by notification under section
25 of the Customs Act prescribe preferential rate of duty in respect of imports from certain
preferential areas.
The importer will have to fulfill the following conditions to make the imported goods eligible
for preferential rate of duty.
a) At the time of importation, he should make 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 should 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 discharge the above duties, the goods shall be liable to standard rate
of duty.

3.2 ADDITIONAL DUTY OF CUSTOMS [SECTION 3 OF THE CUSTOMS TARIFF ACT]

This duty is popularly but wrongly referred to as Countervailing duty. In Hyderabad
Industries Ltd .vs UOI 1999 (108) ELT 321, the Supreme Court held that Section 3 of the
Customs Tariff Act would be an independent charging section. The Supreme 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 section 3 of the Customs Tariff Act which provides that -
(1) Any article which is imported 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 India.
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 which 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 notification in the Official Gazette, specify the rate of additional
duty having regard to the excise duty for the time being leviable on a like alcoholic liquor
produced or manufactured in different States. In case if the like alcoholic liquor is not
 Types of Duty 3.3

produced or manufactured in any State, then, the excise duty which would be leviable for
the time being in different States on the class or description of alcoholic liquor to which such
imported alcoholic liquor belongs shall be the applicable rate.
It has been clarified vide an explanation that the expression “excise duty 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 description 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 calculating under sub-sections (1) and (3), the additional duty on
any imported article, where such duty is leviable at any percentage of its value, the value of
the imported article shall be the aggregate of—
(i) the value of the imported article determined under sub-section (1) of section 14 of
the Customs Act, 1962 or the tariff 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 Customs 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 section 9A:
In case of an article imported into India
(a) in relation to which it is required to declare the retail sale price of such article on
the package thereof under the provisions of the Standards of Weights and
Measures Act, 1976 or the 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 such
like article is not so produced or manufactured, then, the class or description 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 abatement, if any, from such retail sale
price as the Central Government may, by notification 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 sale 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 interest 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 same 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 imported article shall, in addition, be liable to an additional duty
representing such portion of the excise duty leviable on such raw materials, components
and ingredients as, in either case, may be determined by rules made by the Central
Government 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 excise duty payable on the raw materials,
components or ingredients used in the production or manufacture of such like article.
(5) If the Central Government is satisfied that it is necessary in the public interest to levy
on any imported article [whether on such article duty is leviable under sub-section (1) or, as
the case 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 being leviable on a
like article on its sale, purchase or transportation in India, it may, by notification in the
Official Gazette, direct that such imported article shall, in addition, be liable to an additional
duty at a rate not exceeding four per cent. of the value of the imported article as specified in
that notification.
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 taxes, or, as
the case may be, such charges are leviable at different rates, the highest such tax or, as the
case may be, such charge.
(6) For the purpose of calculating under sub-section (5), the additional duty on any
imported article, the value of the imported article shall, notwithstanding anything contained
in sub-section (2), or section 14 of the Customs Act, 1962, be the aggregate of—
(i) the value of the imported article determined under sub-section (1) of section 14 of
the 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 Customs 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 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 section 9A.
(7) The duty chargeable under this section shall be in addition to any other duty imposed
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
thereunder, including those relating to drawbacks, refunds and exemption from duties shall,
so far as may be, apply to the duty chargeable under this section as they apply in relation to
the duties leviable under that Act.
3.2.1 Computation of additional 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
computing the additional duty of customs.
Assessable value under section 14 : Rs. 1,000.00
Rate of basic customs duty : 25%
Rate of additional custom duty : 16%
Assessable value : Rs. 1,000.00
Basic custom duty @ 25% of Rs. 1,000.00 : Rs. 250.00
Total value for computing additional customs duty : Rs. 1,250.00
Additional custom duty(16% on Rs.1250) : Rs. 200.00
Total duty payable [250+200] : Rs. 450.00

3.3 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, whereas protective
duties are intended to give protection to indigenous industries. If resort to protective duties
is not made there could be a glut of cheap imported articles in the market making the
indigenous goods unattractive. The protection 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
render 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 increase 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 effect subject to such changes. However, any thing done pursuant to the
notification before the recommendation by the Parliament shall be valid.

3.4 EMERGENCY POWER TO IMPOSE OR ENHANCE EXPORT DUTIES [SECTION 8 OF

CUSTOMS TARIFF ACT]
The Central Government may impose or enhance export duties under the following
circumstances.
a. The goods may or may not be specified in the Second Schedule.
b. The Central 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 notification 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 ENHANCE IMPORT DUTIES [SECTION 8A

OF CUSTOMS TARIFF ACT]
If the following conditions are satisfied, the Central Government may by notification in the
Official Gazette carry out amendments to the First Schedule providing for the imposition or
enhancement of the import duty.
a. The goods should be specified in the First Schedule.
b. The Central Government is satisfied that circumstances exist, which render 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 applicable 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 goods levied under this Act or 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 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 duty the Central Government should be satisfied that,
(a) Any article is imported into India in increased quantities;
(b) Such increased importation is causing or 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 safeguard 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 imports of that article into India.
(b) Articles originating from more than one developing country so long as the aggregate
of imports from all such developing countries taken together does not exceed 9% of the
total imports of that article into India.
(c) Unless specifically made applicable in the notification the articles 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 Central Government is also empowered to impose
provisional safeguard duty pending determination 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
force for a maximum period of 200 days from the date of its imposition. If upon final
determination, the Central Government is of the opinion that the increased imports have not
caused or threatened to cause serious injury to a domestic industry, the duty collected shall
be refunded.
3.8 Customs

3.7 POWER OF CENTRAL GOVERNMENT TO IMPOSE TRANSITIONAL PRODUCT

SPECIFIC SAFEGUARD DUTY ON IMPORTS FROM CHINA [SECTION 8C OF THE
CUSTOMS TARIFF ACT]
The transitional product specific safeguard duty under section 8C is imposable only if the
Central Government is satisfied that any article is imported into India, from the People’s
Republic of China, in such increased quantities and under such conditions 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 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 goods
levied under this Act or 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 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 duty the Central Government should be satisfied that,
a. Any article is imported into India in increased quantities;
b. 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 like article or a directly
competitive article produced by the domestic industry, increase rapidly, either absolutely or
relatively, so as to be a significant cause of material injury, or threat of material injury, to the
domestic industry.
Provisional Assessment under section 8C : Similar to Section 8B the Central
Government is also empowered to impose provisional transitional product specific safeguard
duty pending determination of the final duty under sub-section (2). This provisional duty may
be imposed on the basis of preliminary determination that increased imports have caused or
threatened to cause market disruption to a domestic industry. The provisional duty shall be
in force for a maximum period of 200 days from the date of its imposition. If upon final
determination, the Central Government is of the opinion that the increased imports have not
caused or threatened 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) dated 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 satisfied.
(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 imported into India.
(c) The importation may or may not directly be from the country of manufacture or
production.
(d) The article, if not imported from the country of 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 manufacture, production or otherwise.
The amount of countervailing duty shall not exceed the amount of subsidy paid or bestowed
as aforesaid. This duty is in addition to any other duty chargeable under this Act or any
other law for the time being in force. Unless revoked earlier, the duty imposed under this
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 such cessation is likely to lead to
continuation or recurrence of such subsidization and injury, it may, 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 extension. 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 review for a further period not exceeding 1 year.
Explanation to sub-section (1) provides 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 territory. Such contribution may include direct transfer of funds
like grants, loans 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 in increased export of such article or reduced import of any
article into that country.
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 has been conferred on a limited number of persons engaged in
manufacturing producing 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 country; or
(3) Assistance to promote adaptation of existing facilities to new environmental
requirements.
3.8.1 Provisional Countervailing Duty: When the determination of the amount of subsidy
is pending, the Central Government may impose a provisional countervailing duty not
exceeding the amount of such subsidy as provisionally estimated by it. If the final subsidy
determined is less than the subsidy 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 with retrospective effect.
(a) The injury to domestic industry, which is difficult to repair, is caused by massive
imports in a relatively short period, of the articles benefiting from subsidies.
(b) In order to preclude recurrence of such injury, it is necessary to levy countervailing
duty retrospectively.
The retrospective date from which the duty is payable shall not be beyond 90 days from the
date of notification.
The provisions of the Customs Act, 1962 and the rules and regulations made thereunder in
respect of date of determination of the rate of duty, non levy, short levy, refunds, interest,
appeals, offences and penalties shall 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 or
practically regardless of the price. Further it also includes selling goods abroad at less than
the market price at home.
The anti-dumping duty is country specific i.e. it is imposed on imports from a particular
country. Section 9A provides 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 India,
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 article. The anti-dumping duty
shall not be leviable on articles imported by a 100% EOU or a unit in a Free Trade Zone or
Special Economic zone, unless the notification 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 penalties are incorporated in section 9A. Thus,
the provisions of interest, offences and penalties in the Customs Act, 1962 could be invoked
in relation to any case of evasion of anti-dumping duty.
Unless revoked earlier, the duty imposed under this 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 that such cessation is likely to lead to continuation or recurrence of
such dumping and injury, it may, 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
extension. 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 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 difference between its export
price and normal value.
(b) Export price: in relation to 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 unreliable because of
association or a compensatory arrangement between the exporter and the importer or a
third party, the export price may be construed at the price 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 the
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 means-
The comparable price, in the ordinary course of trade, for the like article when destined
for consumption in the exporting country or territory as determined in accordance with the
rules.
When there are no sales 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
situation or low volume of sales in the domestic market of the exporting country or territory,
such sales do not permit a proper comparison, the normal value shall be either-
a. Comparable representative price of the like article when exported from the exporting
country or territory or an appropriate third country as determined in accordance with the
rules made; or
3.12 Customs

b. The cost of production of the said article in the country of origin along with reasonable
addition for administrative, selling and general costs, and for profits, as determined in
accordance with the rules made:
c. In case the 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 article 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 the 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 under, the Central Government may impose anti-dumping duty on the
basis of provisional 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, then 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 be beyond 90 days
from the date of notification.
(a) There is a history of dumping 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 article dumped and
other circumstances is likely to seriously undermine the remedial effect of the anti-
dumping duty liable to be levied.
Section 9AA provides that where 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 article, in excess of the actual margin of dumping in relation to such
article, he shall be entitled to refund of such excess duty.
In Designated Authority vs Haldor Topsoe 2000 (120) ELT 11, the Supreme Court held that
anti-dumping duty could be fixed with reference to prices in a territory and that European
Union could also be a territory.
3.10 NO LEVY UNDER SECTION 9 OR SECTION 9A IN CERTAIN CASES [SECTION 9B
OF THE CUSTOMS TARIFF ACT]
This section provides that, notwithstanding anything contained in section 9 or section 9A,-
(a) No article shall be subjected to both countervailing and anti-dumping duties to
 Types of Duty 3.13

compensate for the same situation of dumping or export subsidization.

(b) Countervailing and anti-dumping duties shall not be levied just because such articles
are exempt from duties or taxes borne by like articles when meant for consumption in
the country of origin or exportation or by reasons of refund of such duties or taxes.
(c) These duties shall not be levied on imports from 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 article 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
article imported from specified countries unless preliminary findings have been made
of subsidy or dumping and consequent injury to domestic industry and a further
determination has also been made that a duty is necessary to prevent injury being
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 domestic industry of a third country exporting the like articles to
India.
The provisions of section 9C of the Customs Tariff Act enumerate the orders against which
an appeal can be preferred to CESTAT. The procedure, time limit and other related matters
of filing an appeal are addressed to in this section. An appeal filed under this section shall
be accompanied by a fee of fifteen thousand rupees. Every application made before the
Appellate Tribunal,—
(a) in an appeal for grant of stay or for rectification of mistake or for any other purpose; or
(b) for restoration of an appeal or an application,
shall be accompanied by a fee of five hundred 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 aggregate of duties of customs (except safeguard duty
under section 8B and 8C, countervailing duty under section 9 and anti dumping duty under
section 9A of the Customs Tariff Act) leviable on such goods. Items attracting customs duty
at bound rates under International Commitments are exempt from this cess. The cess
attributable to the additional duty of customs leviable under section 3 of the Customs Tariff
Act, paid on inputs and capital goods is available as credit for payment of cess on the final
products manufactured in India. The Education Cess so collected is utilized for providing
and financing universalised quality basic education.
3.14 Customs

The Education Cess on imported goods is in addition to any other duties of customs
chargeable on such goods, under the Customs Act, 1962 or any other 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 and 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 they apply in relation to the levy and collection of the duties of
customs on such goods under the Customs Act, 1962 or the rules or the regulations, as the
case may be.
Self-examination questions
1. Differentiate between protective duty and safeguard duty.
2. Briefly examine the nature and significance of the levy of anti dumping duty under the
Customs Tariff Act, 1975.
3. Write a brief note on education cess on customs duty.
4. Discuss the provisions governing the levy of additional duty of customs chargeable under
section 3(5) of the Customs Act, 1962.
5. 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 thereunder:
(i) where no provisional duty is imposed;
(ii) where provisional duty is imposed;
(iii) where anti-dumping duty is imposed retrospectively from a date prior to the date
of imposition of provisional duty.
Answer
5. The Central Government has power to levy anti-dumping duty on dumped articles in
accordance with the 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 provisional duty is imposed under section 9A(2), the date of publication
of notification in the Official Gazette imposing anti-dumping duty under section
9A(1).
(ii) Where provisional duty is imposed, the date of imposition of provisional duty, i.e.
the date of notification issued in the Official Gazette imposing it under 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 duty 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 classification of the
goods within the ambit of the Schedule to the Customs Tariff Act. The Indian Customs
Tariff is based upon the Harmonized System of Nomenclature
Along the lines of HSN, the customs tariff has a set of Rules of Interpretation of the tariff
schedule and General Explanatory notes. The six rules of interpretation and the two
general explanatory notes are an integral part of the Schedule. The purpose of inclusion
of the rules of interpretation and the general explanatory 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 statutory force to the interpretative rules and the general
explanatory notes.
The First Schedule comprises of 98 chapters grouped under 21 sections. Most of the
sections and chapters are preceded by detailed and exhaustive section and, as the case
may be chapter notes. These notes are part of the statute and hence have the legal
authority in determining the classification of goods.

4.2 GENERAL EXPLANATORY 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-classification of the
article or group of article covered by the said heading. “--“ denotes that that the said
article or group of articles shall be taken to be sub-classification of the immediately
preceding article or group of articles which has “-“.
(b) The abbreviation “%” in any column of the Schedule in relation to the rate of duty
means that the duty shall be computed at the percentage specified on the value of
the goods as defined in section 14 of the Customs Act.
4.2 Customs

Example
Heading Sub-heading Description of the Rate of duty
No. No. Article Standard Preferential
(1) (2) (3) (4) (5)
08.01 Coconuts, Brazil nuts
And Cashew nuts, fresh
Or dried, whether or not
Shelled or peeled
-Coconuts:
0801.11 --Desiccated 35% 25%
0801.19 --Other 35% 25%
-Brazil nuts:
0801.21 --In shell 35% 25%
0801.22 --Shelled 35% 25%
-Cashew nuts:
0801.31 --In shell 35% Free
0801.32 --Shelled 35% 25%
In the above entry, coconut, which is preceded by “-“ is classification of the heading
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 by “-“.
The second explanatory note states that the abbreviation “%” stands for specifying that
the rate of duty is ad valorem. It means the duty shall be computed at the 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 4.3

(a) The titles of sections, chapters and sub-chapters do not have any legal force.
(b) Terms of headings read with relative section and chapter notes are legally relevant
for the purpose of classification.
(c) The rules of interpretation need not be resorted to when classification is possible on
the basis of description in heading, sub-heading, chapter notes and section notes.
(d) Notes of one chapter or section cannot be applied for interpreting entries in other
chapters or sections.
Example: Sub-heading 8422.30 Machinery for filling, closing, sealing or labeling bottles,
cans, boxes, bags or other containers; machinery for capsuling bottles, jars, tubes and
similar containers; machinery for aerating beverages.
Sub-heading 8472.30 inter alia covers machines for closing or sealing opening, closing 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. However, chapter note 2 to chapter 84 inter alia
provides that Heading No. 84.22 does not cover inter alia office machinery of Heading No.
84.72. Therefore, the product in question will be classified under 8472.30.
4.3.2 Rule 2: (a) 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 the complete or finished
article. It shall also be taken to include a reference to 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 rule lays emphasis on the essential character of the goods. Thus goods which have
the essential characteristics of finished goods will be classified under the same heading in
which the final product has to be classified.
In TELCO Vs. CC, 1990 (50) ELT 571 (T-B2), it was held that synchrocones are
components of automobiles. Forgings for synchrocones cannot be treated as parts of
automobiles in view of extensive operations to be carried on, on the forgings. It cannot be
said that they have the essential characteristics 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 classification of goods consisting of more than one material or substance shall be
according 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 or substance.
(b) Any reference to goods containing a particular material or substance would include a
reference to goods consisting wholly or partly of such specified material or
substance.
Example: The term coffee will include coffee mixed with chicory. Likewise natural rubber
will cover a mixture of natural and synthetic rubber.
4.3.3 Rule 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
follows:
(a) The heading which provides the most specific description shall be preferred to
headings providing a more general description. 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 items in a set up for retail sale, those
headings are to be regarded as equally specific in relation to hose goods, even if one
of them gives a more complete or precise description of the 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 cannot be classified with
reference to (a), shall be classified 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 by reference to (a) or (b), they shall be classified
under the heading which occurs last in numerical order among those which equally
merit consideration.
The application 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 specific description should be
preferred over the heading that provides a general description.
Example: Product: Steel forks
Competing headings: Heading 82.15 covers spoons, forks, ladles, skimmers, cake-
servers, fish knives etc.
Heading 73.23 covers table, kitchen or other house hold articles and parts thereof of iron
or steel
Classification: Heading 82.15 provides a more specific description of the product in
question viz steel forks. Therefore, steel forks should be classified under 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 basis of that material
or substance that gives it its essential character.
Example: Product: Lead pencil with an eraser at the back.
Classification: Though the above is a composite goods the essential character is that it is
a pencil and the attachment 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 classified on the basis of the
heading that occurs last in numerical order.
Example: Product: Conveyor belt used in colliery made up of vulcanized rubber in the top
layer, textile as the central layer and plastic as the bottom layer.
Competing headings: Heading 40.10 covers conveyor or transmission belting.
Heading 59.10 covers transmission or conveyor belts or belting of textile material, whether
or not 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 appropriate 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 used 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 the tariff schedule. However,
heading 3925.30 covers Builder’s wares of plastic not elsewhere specified – shutters,
blinds (including Venetian blinds). Even though the product in question is not a builders
ware, they are most akin to plastic blinds and hence it can be classified under 3925.30
heading.
4.3.5 Rule 5: In addition to the foregoing provisions, the following rules shall apply in
respect of goods referred to therein:
(a) Camera cases, musical instrument cases, gun cases, drawing instrument cases,
necklace cases and similar containers, specially shaped or fitted to contain a specific
article or a set of articles; suitable for long 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 containers which give
the whole its essential character;
(b) Subject to the provisions of (a) above, packing materials and packing containers
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 does not apply
when such packing material or packing containers are clearly suitable of repetitive
use.
This rule while recognizing the practice in international trade 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, however
costly they may be, need not be treated separately for the purpose of classification.
(b) Durable containers capable of repetitive use should be classified separately.
(c) Containers, which themselves give the essential character to the contents should be
classified on their on merits.
4.3.6 Rule 6: For legal purposes, the classification of goods in the sub-headings of a
heading shall be determined 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
requires.
The main proposition laid down by this rule is that sub-heading at the same level are
comparable. This implies that a sub-heading can be compared only with another sub-
heading within the same heading.

4.4 SPECIAL PROVISIONS FOR CLASSIFICATION OF SETS OF ARTICLES AND

ACCESSORIES
Section 19 of the Customs Act provides that:
Except as otherwise provided in any law for the time being in force, where 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 liable to duty at the
same rate, be chargeable to duty at that rate, and if they are liable to duty at different
rates, be chargeable to duty at the highest of such rates;
(c) Articles not liable to duty shall be chargeable to duty at the rate at which articles
liable to duty with reference to value are liable under clause (b):
 Classification of Goods 4.7

Provided that, -
(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 behalf shall be
chargeable at the same rate of duty as that article;
(b) If the importer 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 shall be
chargeable to duty separately at the rate applicable to it.
As per the Accessories (Conditions) Rules, 1963, accessories of and spare parts and
maintenance or repairing implements for, any article when imported along with that article
shall be chargeable at the same rate of duty as that article, if the proper officer 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 the relevant article.

4.5 SOME CASES ON CLASSIFICATION

1. M/s Sprint RPG India Ltd. Vs. CCE [(2000) 88 ECR 737 (SC)]
Product imported: In this case, the assessee imported hard disk loaded with computer
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.
Rival 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 85.24 read
with Notification No. 59/95 dated 16-03-95]. The department’s view was that the goods is
classifiable as computer hard drive loaded with software. The assesse’s 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 hard disk or in a printed form and hence what is imported is
software on a container, which is a hard disk. On the facts of the case the court held that
the computer 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 Industrial 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 assesse’s 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 department’s contention was that the
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 observed that the duty liability arises on the goods imported and not
on the products arising from the breaking up of the imported item. Therefore, it was held
that the ship should be classified as such and not as scrap arising from the breaking of a
ship.
3. Saurashtra Chemicals Vs. CC [1986 (23) ELT 283]
This case brings out the importance of section notes and chapter notes in the
classification of goods. The tribunal observed that Section Notes and Chapter Notes in the
Customs Tariff are a part of the statute nd thus are relevant in the matter of classification
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 headings 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 classification in Section A Excise for other principles on
classification.
Self-examination questions

1. How will you determine the customs duty where imported goods consist of articles
liable to different rates of duty?
2. What is the purpose of interpretation rules regarding Customs Tariff? Do they form
part of the tariff schedule?
3. Explain the ‘Akin Rule’ of interpretation.
4. Explain rule 3 of the Rules for Interpretation of the Customs Tariff.
5. India Car Co. is manufacturing passenger 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 CKD packs (completely knocked down condition) of
passenger car components. They filed 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, including components of motor cars in semi-
knocked down packs and completely knocked down packs.
The adjudicating authority held that the imported components being 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 notification as the notification
was only for components.
 Classification of Goods 4.9

Examine brifefly:
(i) 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 CC, 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 Interpretation 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 the complete
or finished article. It shall also be taken to include a reference to 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 rule lays emphasis
on the essential character of the goods. Thus goods which have the essential
characteristics of finished goods will be classified under the same heading in
which the final product has to be classified.
In the Maestro Motors case, the passenger car components were imported in
CKD packs. Thus, what was imported was completely knocked down cars. The
components imported had the essential 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 classified as
cars for the purpose of classification and clearance.
(ii) In the Maestro Motors case, it was observed by the Supreme Court that a
notification has to 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 Tariff 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 manner as they are classified for purposes of payment of customs duty.
However, where the language of the notification is plain and clear, effect must
be given to it.
In this case the notification exempted components, including components of fuel
efficient motor cars in semi-knocked down packs and completely knocked down
packs. The Apex Court held that for purposes of levy of customs duty, by virtue
of 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 considered

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 packs
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 way of –
(a) A specific duty based on the quantity of the goods like Rs. 1000 per metric tone of
steel or
(b) Ad valorem, namely expressed as percentage of the value 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 variation 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 revenue 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 as 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 manufacturer: 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 domestic 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 goods 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 sight draft; (60 or 90 days
draft).
(vi) There are situations where the manufacturer himself may not be exporting the goods
in the course of international trade. This gives rise to the concept of suppliers. As a
result we have supplier’s price.
(vii) In the course of international trade, where the buyer is in another country, the seller
has often to resort price list or catalogues. This is in turn gives 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 terms like
(i) Trade discount
(ii) Quantity discount
(iii) Prompt payment cash discount
(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 have to be sold at the best price available. This yields
disposal price.
(x) The price 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 Indian
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 may be the
sole distributor. He may even be a branch or subsidiary of the seller and the sale
may be a stock transfer. In such a situation, the price is known as dealer’s price.
(xii) Lastly, if we have no information of any of the matters relating to the transaction and
we have only the commercial invoice used in the transaction, 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 used in
the International Trade transactions.
 Valuation Under the Customs Act, 1962 5.3

(1) Invoice This is the basic commercial document

showing particulars regarding description of
goods
- quantity and unit price
- discounts and net price
- names of consignor and consignee
- payment particulars.
- Contract or acceptance of order on the basis
of which the goods are supplied.
(2) Packing specification Giving particulars of the contents of each of
each of the package in the consignment.
(3) Certificate of Origin A certificate issued by the competent authority
in the country of manufacture giving the extent
of the manufacture in that country.
(4) Bill of Lading 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 consignee of the goods, (f)
whether the freight has been pre-paid or is to
be collected at the destination. It is a
negotiable document which has to be
surrendered to the carrier for getting delivery
of the goods.
(5) Air Consignment Note It is a document corresponding to Bill of
Lading, in the case of cargo imported or
exported by air.
(6) Indent It is a document showing the particulars of the
consignment for which the buyer has placed
an order with the supplier. It normally gives
particulars about (i) full description of the
goods (ii) unit price (iii) mode of payment (iv)
quantity required (v) delivery instructions.
5.4 Customs

(7) Quotation It is a document, which indicates the price, the

terms and other conditions on which the seller
is willing to supply goods to the buyer.
It refers to the formalisation of the contract of
(8) Acceptance
sale between the buyer and the seller. Once
the seller of the goods sends his acceptance
of the order of the buyer (the indent) 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.
(9) Letter of Credit 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 goods.
(10) Sight draft A document evidencing the amount of money
paid for the importation.
(11) Delivery Order An authorisation 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 custodian of
the cargo to deliver the consignment to the
importer or his agent.
(12) Mate’s Receipt A receipt given by the First mate or First
officer or cargo supervisor of the conveyance
certifying the total quantity of the consignment
received on board the vessel or the aircraft. A
bill of lading or air consignment note is issued
by the agent of the Carrier Company on
surrender of the mate’s receipt.
 Valuation Under the Customs Act, 1962 5.5

(13) Retirement of documents The original negotiable copies of the shipment

documents like invoice packing specification,
certificate of origin.
(14) Non-negotiable documents Since retirement of the original document
takes time, non negotiable documents are
given to the importer to facilitate clearance.
(15) Landing charges The port authorities have to pay for
(i) Unloading the cargo from the
conveyance;
(ii) Light house charges
(iii) Forklift, warehouse crane charges if
they are used for landing.
(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.
(17) Custom House Agent Since the importers / exporters may not be
able to devote time and energy to clear
imported goods or export goods, and since it
involves running about several organisations
apart from customs, like Port, Trust, steamer
agents, insurance companies, the assistance
of agency organisation having adquate
technical knowledge andexpertise has been
provided in the form of custom house agents.
(18) Insurance cover It is customary to insure all goods in the
course of international trade. The general
cover relates to risk on account of loss,
pilferage, fire, storm etc. However loss of
goods on account of seizure of goods due to
war, is a separate cover. It is therefore
customary 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.
5.6 Customs

5.4 TECHNICAL TERMS RELATING TO VALUE IN THE COURSE OF IMPORT OR

EXPORT
(1) Ex-Factory Price It is the price of the goods as comes out of the factory. It
includes cost of production and manufacturer’s margin of
profit.
(2) F.A.S ( Free Alongside) It is the cost at which the export goods are delivered
alongside the ship, ready for shipment. It includes ex-
factory +local freight + local taxes.
(3) F.O.B. (Free on Board) Technically there is not much of a difference between
FAS and FOB cost. FOB means the stage at which the
goods are placed on board the conveyance carrying the
vessel. It can be said to include FAS + loading charges +
export duty cess.
(4) C.I.F. (Cost Insurance It is the cost at which the goods are delivered at the
Freight) Indian port. It covers cost of goods. Some times there is
referred as CFC also.

5.5 CONCEPT OF INDIRECT TAX AND VALUATION FOR THE SAME

Customs duty is considered to be an indirect tax. It is a tax on the goods and it is not a
tax on the person 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. It
becomes therefore necessary for the importer, who desires to take clearance of the goods
into town for home consumption, to discharge the duty liability. Similarly in case of
baggage the passenger cannot take his goods, unless the duty liability is discharged.
The essence is simple. Like articles in similar situations should attract the same burden.
As a corollary it follows that
(i) There should 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 like good at the same time and place.
(iii) The value of the goods should be proximate 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 2 3 4 5 6 7

Manufac Supplier Port of Port of Cost to Cost to Cost to

turer shipment import Importer Wholesale Retailer/
Dealer consumer
Theoretically the value of the goods at stages (1) (2) (3) (5) (6) (7) is tangible and
ascertainable. Furthermore, these values are documented and capable of verification by
comparison with corresponding values for such or similar goods. The documents involved
in such stages are
(i) Manufacturer’s price list / quotation / sale invoices.
(ii) Supplier’s sale invoices/ market prices
(iii) Customs approved attested documents showing value adopted for levy of export duty
and allied controls.
(iv) Importer’s 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.
The 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 imported goods. These
two are the tangible and readily available data, at the hands of 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 necessary abatements to adjust the post – importation costs;
(ii) the second, to take as base, the value given in the invoice and make necessary
adjustments for factors influencing the price in individual transactions.
5.6.2 Valuation of goods [section 14] : Section 14 provides that -
(1) For the purposes 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
reference 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 other: or
(ii) one of them has no interest in the business of the other; and
the price is the sole consideration for the sale or offer for sale :
Provided that such price shall be calculated with reference to the rate of exchange as in
force on the date on which a bill of entry is presented under section 46, or a shipping bill
or bill of export, as the case may be, is presented under section 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 accordance with the rules made in
this behalf.
(2) Notwithstanding anything contained in sub-section (1) or sub-section (1A), if the Board
is satisfied that it is necessary 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 Exchange Management Act, 1999.
5.6.3 Analysis of section 14 - Deemed value [section 14(1)] : The main ingredients
are
(i) 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 Customs
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 which 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. catalogue price).
(v) Further the terms of the price (whether sale price or offer for sale) should be such
that it is for delivery at the time and place of importation or exportation as the case
may be
 Valuation Under the Customs Act, 1962 5.9

(vi) The sale or offer for sale should be in the course of international trade.
(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 permitted.
(viii) Finally, the price should be the sole consideration for the sale or offer for the sale.
To remember these eight ingredients the provision of section 14(1) can be written as
under:-
− For the purpose of the Customs Tariff Act, 1975, or any other law for the time being in
force, whereunder a duty of customs is chargeable on any goods by reference 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,
− 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 sole
consideration for the sale or offer for the sale .
The parameters laid down by section 14 are applicable to imports as well as exports.
Export goods are to be valued 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 limits 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 by three agencies – the
Central Board of Excise and Customs, the RBI and the Foreign Exchange Dealers’
Association of India (FEDAI). For the purpose of customs valuation, 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 reference 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) or bill of export (vehicle) under section 80
(in case of export goods).

5.7 CUSTOMS 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 duty 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" means the value of imported goods determined in accordance with
rule 7A of these rules;
(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 that are within a group or
range of imported goods produced by a particular industry or industrial sector and
includes identical goods or similar goods;
(c) "identical goods" means imported goods -
(i) which are same in all respects, including physical 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
imported goods where engineering, development work, art work, design work,
plan or sketch 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 with the production and sale for export of these imported goods;
(d) "produced" includes 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 commercially interchangeable with the goods being valued having regard to
the quality, 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 produced by a different person, but shall not
include imported goods where engineering, development work, art work, design
work, plan or sketch 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 with the production and sale 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 these rules, persons shall be deemed to be "related" only if -
(i) they are officers or directors of one another's businesses;
(ii) they are legally recognised partners in business;
(iii) they are employer and employee;
(iv) any person directly or indirectly owns, controls or holds 5 per cent or more of the
outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls 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" also includes legal persons.
Explanation II. - Persons who are associated in the business 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 for 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
these rules, -
(i) subject to Rules 9 and 10A, the value of imported goods shall be the transaction value;
(ii) if the value cannot be determined under the provisions 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 transaction value of imported goods
shall be the price actually paid or payable for the goods when sold for export to India,
adjusted in accordance with the provisions of Rule 9 of these rules.
(2) The transaction value of imported goods under sub-rule (1) above shall be accepted:
Provided that –
(a) the sale is in the ordinary course of trade under fully competitive conditions;
5.12 Customs

(b) the sale does not involve any abnormal discount or reduction from the ordinary
competitive price;
(c) the sale does not involve special discounts limited to exclusive agents;
(d) objective and quantifiable data exist with regard to the adjustments required to be
made under the provisions of rule 9 to the 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 required by law or by the public authorities in India; or
(ii) limit the geographical area in which the goods may be resold; or
(iii) do not substantially affect the 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 being valued;
(g) no part of the proceeds of any subsequent resale,disposal or use of the goods by the
buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment
can be made in accordance with the provisions of Rule 9 of these rules; and
(h) the buyer and seller are not related, or where the buyer and seller are related, that
transaction value is acceptable for customs purposes under the provisions of sub-
rule (3) below.
(3) (a) Where the buyer and seller are related, the transaction value shall be accepted
provided that the examination of the circumstances of the sale of the imported goods
indicate that the relationship did not influence the price.
(b) In a sale between related persons, the transaction value shall be accepted, whenever
the importer demonstrates that the declared value of the goods being valued, closely
approximates to one of the following values ascertained at or about the same time.
(i) the transaction value of identical goods, or of similar goods, in sales to unrelated
buyers in India;
(ii) the deductive value for identical goods or similar goods;
(iii) the computed value for identical goods or similar goods.
Provided that in applying the values used for comparison, due account shall be taken of
demonstrated difference in commercial levels, quantity levels, adjustments in accordance
with the provisions 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 under 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 value 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 valued.
(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 goods 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
transaction value of identical goods sold at a different commercial level or in different
quantities or both, adjusted to take account of the difference attributable to commercial
level or to the quantity or both, shall be used, provided that such adjustments shall be
made on the basis of demonstrated evidence which clearly establishes the
reasonableness and accuracy of the adjustments, whether such 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 valued 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 determine 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 provisions of clauses (b) and (c) of sub-rule (1), sub-rule (2) and sub-rule (3), of
Rule 5 of these rules shall, mutatis mutandis, also apply in respect of similar goods.
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 officer, 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 goods being valued or identical or similar imported goods are sold in India, in
the condition as imported at or about the time at which the declaration for determination of
value is presented, the value of imported goods shall be based on the 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 the sellers in India, subject to the
5.14 Customs

following deductions : —
(i) either the commission usually paid or agreed to be paid or the additions usually made
for profits and general expenses in connection with sales in India of imported goods of the
same class or kind;
(ii) the usual costs of transport and insurance and associated costs incurred within 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 identical 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 which 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 after
such importation.
(3) (a) If neither the imported goods nor identical nor similar imported goods are sold in
India in the condition as imported, then, the value shall be based on theunit price at which
the imported goods, after further processing, are sold in the greatest aggregate quantity to
persons who are not related 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) — Subject to the provisions of Rule 3, the value of
imported goods shall be based on a computed value, which shall consist of the sum of:-
(a) the cost or value of materials 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 cost 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
rules, 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 means
consistent with the principles and general provisions of these rules and sub-section (1) of
Section 14 of the Customs Act, 1962 (52 of 1962) and on the basis of data available in
India.
(2) No value shall be determined under the provisions of' this rule on the basis of —
(i) the selling price in India of the goods produced in India;
(ii) a system which provides for the acceptance for customs purposes of the highest of the
two alternative values;
 Valuation Under the Customs Act, 1962 5.15

(iii) the price of the goods on the domestic market of the country of exportation;
(iiia) the cost of production other than computed values which have been determined 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) minimum customs values; or
(vi) arbitrary or fictitious values.
5.7.10 Cost and services (Rule 9) — (1) In determining the transaction value, there
shall be added to the 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) commissions and brokerage, except buying commissions;
(ii) the cost of containers which 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, apportioned 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 such value has not been included in the price actually paid or payable, namely:-
(i) materials, components, parts and similar items incorporated in the imported
goods;
(ii) tools, dies, moulds and similar items used in the production of the imported
goods;
(iii) materials consumed in the production of the imported goods;
(iv) engineering, development, art work, design work, and plans and sketches
undertaken elsewhere than in India and necessary for the production of the
imported goods;
(c) royalties and licence fees related to the imported goods that the buyer is required to
pay, directly or indirectly, as a condition of the sale of the goods 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, directly 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 extent that such payments are not included in the price
5.16 Customs

actually paid or payable.

(2) For the purposes of sub-section (1) and sub-section (1A) of Section 14 of the Customs
Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value
of such goods, for delivery at the time and place of importation and shall include -
(a) the cost of transport of the imported goods to the place of importation;
Due to non-availability of deep draught all ports are not navigable up to the Jetty and
therefore the goods have to be discharged/transhipped at the outer anchorage. Further,
in many 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 outer
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 transportation” under
Rule 9(2)(a) of Customs Valuation (Determination of Price of Imported Goods) Rules,
1988. The value of the goods is deemed to be the price at which such goods are
ordinarily sold or offered 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
landmass of the country and not at the outer 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 assessable value [M.F. (D.R.) Circular No. 29/2004–
Cus., dated 13.04.2004]
(b) loading, unloading and handling charges associated with the delivery of the imported
goods at the place of importation; and
(c) the cost of insurance :
Provided that —
(i) where the cost of transport referred to in clause (a) is not ascertainable, 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 value of the
goods plus the cost of transport referred to in clause (a) plus the cost of insurance
referred to in clause (c);
(iii) where the cost referred to in clause (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 board 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 imported 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 container from the port of entry to the Inland Container Depot or Container
Freight 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 includable in the
assessable value.
(3) Additions to the price actually paid or payable 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 determining 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
furnish -
(a) a declaration disclosing full and accurate details relating to the value of imported
goods; and
(b) any other statement, information or document including 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 producer, as considered
necessary by the proper officer for determination of the value of imported goods
under these rules.
(2) Nothing contained in these rules shall 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 statement, information, document or declaration presented for valuation
purposes.
(3) The provisions of the Customs Act, 1962 (52 of 1962) relating to confiscation, penalty
and prosecution shall apply to cases where wrong declaration, information, statement or
documents are furnished under these rules.
5.7.12 Rejection of declared 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 or other evidence and if, after receiving such further information, or in the
absence of a response of such importer, the proper officer still has reasonable doubt
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 sub-rule (1) of Rule 4.
(2) At the request of an importer, the proper officer, shall intimate the importer in writing
the grounds for doubting the truth or accuracy of the value declared in relation to goods
imported by such importer and provide a reasonable opportunity of being heard, before
taking a final decision under sub-rule (1).
5.18 Customs

5.7.13 Settlement of dispute (Rule 11) —In case of dispute between the importer and
the proper officer of customs valuing the goods, the same shall be resolved consistent
with the provisions contained in sub-section (1) of Section 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 accepted accounting principles
"Generally accepted accounting principles" refers to the recognized consensus or
substantial authoritative support within a country at a particular time as to which economic
resources and obligations shall be recorded as assets and liabilities, which changes in
assets and liabilities should be recorded, how the assets and liabilities and changes in
them should be measured, what information should be disclosed and how it should be
disclosed and which financial statements should be prepared. These standards may be
broad guidelines of general application as well as detailed practices and procedures.

5.8 NOTES TO RULES

5.8.1 Note to Rule 2: In Rule 2(2)(v), for the purposes of these rules, one person shall
be deemed to control another when the former is legally or operationally in a position to
exercise restraint or direction over the latter.
5.8.2 Note to 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 negotiable
instruments. Payment may be made directly or indirectly. An example of an indirect
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 account, other than those for which an
adjustment is provided in Rule 9, are not considered to be an indirect payment to the
seller, even though they might be regarded as of benefit to the seller. The costs of such
activities shall not, therefore, 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 charges or costs, provided
that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance,
undertaken after importation on imported goods such as industrial plant, machinery or
equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India.
 Valuation Under the Customs Act, 1962 5.19

The price actually paid or payable refers to the price for the imported goods. Thus the flow
of dividends or other payments 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 would not render a price actually paid or
payable unacceptable are restrictions which do not substantially affect the value of
the goods. An example of such restrictions 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 model year.
♦ Rule 4(2)(f) : If the sale or price is subject to some condition or consideration for
which a value cannot be determined with respect to the goods being valued, the
transaction value shall not be acceptable for customs purposes. Some examples of
this include:
(a) The seller establishes the price of the imported goods on condition that the
buyer will also buy other goods in specified quantities;
(b) the price of the imported goods is dependent upon the price or prices at which
the buyer of the imported goods sells other goods to the seller of the imported
goods;
(c) the price is established on the basis of a form of payment extraneous to the
imported goods, such as where the imported goods are semifinished goods
which have been provided by the seller on condition that he will receive a
specified quantity of the finished goods.
However, conditions or considerations relating to the production or marketing of the
imported goods shall not result in rejection of the transaction value. For example, the
fact that the buyer 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.
Likewise, 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 of
these activities is not part of the value of imported goods nor shall such activities
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 seller 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 should 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 doubts 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 requesting further information from the
5.20 Customs

importer. For example, the proper officer of customs may have previously examined
the relationship, or he may already have detailed information concerning the buyer
and the seller, and may already be satisfied from such examination 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
further detailed information as may be necessary to enable him to examine the
circumstances surrounding the sale. In this context, the proper officer of customs
should 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 in
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 seller,
although related under the provisions of Rule 2(2), buy from and sell to each other as
if they were not related, this would demonstrate that the price had not 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 industry 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 influenced 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 representative of the firm's overall profit realized over
a representative period of time (e.g. on an annual basis) in sales of goods of the
same class or kind, this would demonstrate that the price had not been influenced.
4. Rule 4(3)(b) provides an opportunity for the importer to demonstrate that the
transaction value closely 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
influence 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 the tests
provided in Rule 4(3)(b) has been met, there is no reason for him to require the
importer to demonstrate that the test can be met. In Rule 4(3)(b) the term "unrelated
buyers" means buyers who are not related to the seller in any particular case.
♦ Rule 4(3)(b) : A number of factors must be taken into consideration in determining
whether one value "closely approximates" to another value. These factors include the
nature of the imported goods, the nature of the industry itself, 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 case, it would be impossible to apply a
uniform standard such as a fixed percentage, in each case. For example, a small
difference in value in a case involving one type of goods could be unacceptable while
a large difference in a case involving another type of goods might be acceptable in
determining whether the transaction 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 identical goods at the same commercial level and in substantially
the same quantities 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
used:
(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; or
(c) a sale at a different commercial level and in different quantities.
2. Having found a sale under any one of these three conditions adjustments will then be
made, as the case may be, for :
(a) quantity factors only;
(b) commercial level factors only; or
(c) both commercial level and quantity factors.
3. For the purposes of Rule 5, the transaction value of identical imported goods means a
value, adjusted as provided for in rule 5(l)(b) and (c) and rule 5(2) which has already been
accepted under Rule 4.
4. A condition for adjustment because of different 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 demonstrated 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 being valued consist of a shipment of 10 units and the only identical imported
goods 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 may be
accomplished by resorting to the seller's price list and using that price applicable to a sale
of 10 units. This does not require that a sale had to have been made in quantities of 10 as
long as the price list has been established as being bona fide through sales at other
quantities. In the absence of such an objective measure, however, the determination of a
value under the provisions of rule 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 being 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) which has already been accepted under Rule 4.
2. All other provisions contained in 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 the greatest aggregate quantity"
5.22 Customs

means the price at which the greatest number of units is sold in sales 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 favourable unit
prices for purchases made in larger quantities.
Total quantity sold at
Sale quantity Unit price Number of sales each price
10 sales of 5 units,
1-10 units 100 65
5 sales of 3 units
11-25 units 95 5 sales of 11 units 55
1 sale of 30 units,
Over 25 units 90 80
1 sale of 50 units

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 each. In the second sale 400 units are sold at a price of 90
currency units each. in 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 example would be the following situation where various quantities are sold at
various prices.
(a) Sales
Sale quantity Unit price
40 units 100
30 units 90
15 units 100
50 units 95
25 units 105
35 units 90
5 units 100
(b) Totals
Total quantity sold Unit price
65 90
50 95
60 100
25 105
 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 greatest 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 reduced cost for use in connection with the production
and sale for export of the imported 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 should 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 determined on
the basis of information supplied by or on behalf of the importer unless his figures are
inconsistent with those obtaining in sales in India, of imported goods of the same class or
kind. Where the importer's figures are inconsistent 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 importer.
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 goods 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 rule 7(1), the question whether certain goods are "of the same class or
kind" as other goods must be determined on a case-by-case basis by reference to the
circumstances involved. Sales in India, of the narrowest group or range of imported goods
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 countries.
10. For the purposes of rule 7(2) the "earliest date" shall be the date by which sales of
the imported goods or of identical or similar imported, goods are made 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 shall be based on objective and quantifiable data relating to the cost of
such work. Accepted industry formulas, recipes, methods of construction, and other
industry 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 applicable when, as a result of the further processing, the imported goods lose
their identity. However there can be instances where, although the identity of the imported
goods is lost, the value added by the processing can be determined accurately without
unreasonable difficulty. On the other hand, there can also be instances where the
imported goods maintain their identity but form such a minor element 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 considered 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 readily available in India. In order to
determine a computed value, however, it may be necessary to examine the costs of
producing the goods being valued and other 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 supply to the proper officer the necessary costings and to provide facilities for
any subsequent verification which may be necessary.
2. The "cost or value" referred 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 of the producer. It is to be based upon the commercial accounts of the producer,
provided that such accounts are consistent with the generally accepted accounting
principles applied in the country where goods are produced.
3. The "cost or value" 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 under 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 elements specified in rule 9(l)(b)(iv) which are
undertaken in India shall be included 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 profit and general expenses" referred to in clause(b) of rule 7A is to be
determined on the basis of information supplied by or on behalf the producer unless the
producer's figures are inconsistent with those 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.
5. It should be noted in this 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 producer’s profit and general expenses taken
together may nevertheless be consistent with that usually reflected in sales of goods of
the same class or kind. Such a situation might occur, for example, 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 because of particular commercial circumstances, his
actual profit figures should be taken into account provided that he has valid commercial
reasons to justify them and his pricing policy reflects usual pricing policies in the branch
of industry concerned. Such a situation might occur for example, where producers have
been forced 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 and
 Valuation Under the Customs Act, 1962 5.25

accept a low profit to maintain competitivity. Where the producer's own figures for profit
and general expenses are not consistent with those 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, the amount for profit and general expenses may
be based upon relevant information other than that supplied by or on behalf of the
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 certain goods are "of the same class or kind" as other goods must be
determined on a case-by-case basis with reference to the circumstances involved. In
determining the 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 goods
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. Value of imported goods determined under the provisions of
Rule 8 should to the greatest extent possible, be based on previously determined customs
values.
2. The methods 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 methods would be
in conformity with the aims and provisions of Rule 8.
3. Some examples of reasonable flexibility are as follows :
(a) Identical goods. - The requirement that the identical goods should be imported at or
about the same time as the goods being valued could be flexibly interpreted; identical
imported goods produced in a country other than the country of exportation of the goods
being valued could be the basis for customs valuation; customs values of identical
imported 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 interpreted; similar imported
goods produced in a country other than the country of exportation of the goods being
valued could be the basis for customs valuation; customs values of similar imported goods
already determined under the provisions of rules 7 and 7A could be used.
(c) Deductive method. - The requirement that the goods shall have been sold in the
"condition as imported" in rule 7(1) could be flexibly 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 fees 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 apportionment 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 generally accepted accounting
principles.
2. Concerning the value of the element, if the importer acquires the element from a
seller not related to him at a given cost, the value of the element is that cost. If the
element was produced by the importer 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 acquisition or production would have to be adjusted downward to reflect its
use in order 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. There can be various possibilities for such a
situation. For example, the value might be apportioned to the first shipment if the
importer wishes to pay duty on the entire value at one time. As another example, the
importer may request that the value be apportioned over the number of units
produced up to the time of the first shipment. As a further example, he may request
that the value be apportioned over the entire anticipated production where contracts
or firm commitments exist for that production. The method of apportionment used will
depend upon the documentation provided by the importer.
4. As an illustration of the above, an importer provides the producer with a mould to
be used in the production of the imported 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 of the mould over 1,000 units, 4,000 units or 10,000
units.
♦ Rule 9(1)(b)(iv) : 1. Additions for the elements specified in rule 9(1)(b)(iv) should be
based on objective and quantifiable data. In order to minimise the burden for both the
importer and proper officer of customs in determining the values to be added, data
readily available in the buyer's commercial record system should be used in so far 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 lease. 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 firm'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 records 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 direct 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 country
of importation as a general overhead expense without allocation to specific products.
In this instance, an appropriate adjustment could be made under the provisions 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 circumstances will, of course, require different factors to
be considered in determining 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, the adjustment should be limited to the value
actually added to that element outside 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 reproduce the imported goods in the country of
importation shall not be added to the price actually paid or payable for the imported
goods in determining the customs value.
2. Payments made by the buyer for the right to distribute or resell the imported goods
shall not be added to the price actually paid or payable for the 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 and quantifiable data do not exist with regard to the
additions required to be made under the provisions of rule 9, the transaction value
cannot be determined under the provisions of rule 4. As an illustration of this, a
royalty is paid on the basis of the price in a sale in the importing country of a litre of a
particular product that was imported by the kilogram and made up into a solution after
importation. If the royalty is based partially on the imported goods and partially on
other factors, which have nothing to do with the imported goods (such as when the
imported goods are mixed with domestic ingredients and are no longer separately
identifiable, or when the royalty cannot be distinguished from special financial
arrangements between the buyer and the seller), it would be inappropriate 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 addition 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 factors 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 more than the value indicated in
documents. Normally the invoice value would be acceptable 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 price 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 Supreme 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 valuation. 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 negotiation stating that this would be the transaction value in
respect of such consignments and that large discount was a common practice for
bulk buyers. It must be noted that Rule 4 has been amended on 7.9.2001 to negative
this decision wherein clause (b) to proviso to Rule 4(2) states that abnormal
discounts or reductions from ordinary competitive prices shall not be taken into
account. Even special 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 available, 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 for import of 100 packages of dry figs
at an invoice price of 1 US $ per kg. However on the previous day i.e 25.09.80, a
consignment of dry figs was cleared at the 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 importation and not the contract date.
♦ “Ordinarily Sold” : In the case of Maruti, who had a collaboration with Suzuki Motor
Co. Ltd. it was contended by the Department that 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 “ordinarily sold or offered for sale”. Relying
upon the decision of the Supreme Court in Atic Industries case [1984(17) ELT 323]
 Valuation Under the Customs Act, 1962 5.29

where in the scope of parallel provision in the Central Excise & Salt Act (Sec 4) was
interpreted, the CEGAT held that“there is no reason why the interpretation by the
honourable Supreme Court on Section 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 seller 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 Suzuki are not at arm’s length or that the price charged by Suzuki from Maruti
was not a fully commercial price and observing that the purchase agreement clearly
showed 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. Bombay Vs.
Maruti Udyog Ltd. 1987 (28) ELT 390]
(c) In the course of international Trade : In a case of procurement of cocoa beans for
an Indian company, the UK based principal company entered into a contract with
another company also based in UK for delivery of goods on behalf of the Indian
company. It was urged by the Revenue 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 international 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 agency is includible in the assessable value of the imported goods.
(d) At the time 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 invoice dated 23.03.90 relating to one machine with accessories imported by
M/s Mash Leather cannot be held to be goods of like kind and quality imported during
the relevant period. CEGAT held –
(i) That there is a gap of seven months and six days between the imports of M/s
Mash Leather and the impugned imports and therefore 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 importers. 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 which makes the price
charged as unacceptable for the purpose of valuation. It must 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 Narayan International vs CC 1992 (58)
ELT 126 (T).

5.9 DATE FOR DETERMINATION OF RATE OF DUTY AND TARIFF VALUE

For imported goods [section 15]: Section 15 of the Customs Act, 1962 specifies that
the relevant date for determining the rate of duty and tariff valuation of imported goods.
They are different for different situations as given below:
(a) Goods 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
would 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 date
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 customs airport – the relevant date is the
date of filing the B/E under section 46 or date of arrival of aircraft, whichever is
later.
(b) Goods cleared from a warehouse under section 68 – the relevant date is the date
on which a bill of entry for home consumption in respect of such goods is presented.
(c) In the case of any other goods – the relevant date is the date of payment of duty.
These provisions relating to determination of relevant date do not apply to baggage
and imports by post, 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 as 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 officer permitting
export and loading of cargo on board under section 51.
(b) In case 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 Citation
1. Section 14(1A) and Valuation Rules Plast Fab vs CC 1993 (66) ELT
relating to valuation of imported goods are 441 (T).
subject to the provisions of Section 14.
2. Before resorting to valuation under Polyvinyl Industrial Corporation vs
residuary Rule 8, applicability of other rules CC 1994 (74) ELT 426.
will have to be exhausted.

♦ 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 value of the imported goods.
Particulars Citation
1. Rule 4 of the Valuation Rules talk of “the Eicher Tractors Ltd vs CC 2000
transaction value” and therefore unless that (122) ELT 21 (SC).
is unacceptable for the reasons set out in
Section 14, it has to be accepted.
2. The best evidence of price of imported CC vs Nippon Bearings P.Ltd
goods is the manufacturers invoice. 1996 (82) ELT 3 (SC).
Sai Impex vs CC 1992 (62) ELT
616.
3. Holding subsidiary relationship may not be Siemens Ltd vs CC 2000 (126)
relevant if transaction value for ELT 1134 (T).
contemporaneous import of identical goods is
the same.
4. Transaction value cannot be rejected Eicher Tractors Ltd vs CC 2000
based on price list only. (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 cannot be
determined, then Rules 5 to 8 shall be applied serially.
Rule 5 determines the value of the imported goods by reference to the value of identical
goods.
5.32 Customs

Particulars Citation

1. Comparison of goods must be of identical Sandip Agarwal vs CC 1992 (62) ELT

goods at same commercial levels. 528 (Cal).

2. Branded and unbranded goods could be CC vs Shibani Engineering Systems

compared. Comparison of goods from different 1996 (86) ELT 453 (SC)
countries of origin possible only if there is
proximate linkage.

3. Where the importer has adduced evidence, CC vs Nippon Bearings Ltd. 1996
department should produce contemporaneous (82) ELT 3 (SC).
import values at higher prices to discard
transaction value.

4. Price list is not conclusive as evidence of Eicher Tractors Ltd vs CC 2000 (122)
contemporaneous imports. Discounts beyond ELT 321 (SC).
the price list can be given.

5. For ascertaining contemporaneous imports, Rajkumar Knitting Mills P.Ltd. vs CC

date of import is relevant and not the date of 1998 (98) ELT 292 (SC).
contract.

♦ Transaction value of similar goods (Rule 6) : If Rule 4 or Rule 5 cannot be applied

then this rule states that transaction value of similar goods can be taken provided
they are at the same commercial levels and in substantially the same quantities. The
case laws provided under Rule 5 will be equally applicable here as relating to the
principles stated herein.

Particulars Citation

1. The word “similar” is more expansive CCE vs Wood Craft Products Ltd
than the word “same”. Plywood or veneer 1995 (77) ELT 23 (SC).
panels is similar to laminated wood.

2. Enhancing the value of goods imported Nitisoya Diamond Tools vs CC 1994

from Japan on the basis of supplies from (74) ELT 49 (T).
France not acceptable. Comparing a
quantity of 4986 kgs imported with another
import of 360 kgs is not correct.
 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 officer 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 transaction 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 related 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
should 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 this alternative to rule 7, value is computed with
reference to the cost of manufacture 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 rule has very limited applicability since foreign companies are
loath to disclose their costing details.
♦ Residual Method (Rule 8): Under this method, where the other methods cannot be
used, value will be fixed consistent with the Act and Rules and with data available in
India. However, value cannot be fixed under this Rule on the basis of
− selling price in India;
− highest of two alternatives;
− price in the market of exportation;
− cost of production other than under Rule 7A;]
− price to any other country;
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 are not
included in the transaction value already:
− Costs such as commission and brokerage (excluding buying commission);
− Cost of containers;
− 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
and designs.
− Royalties and licence fees which is payable as a condition of sale of goods being
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) transportation – 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 summarized as under:

Particulars Citation
1. Customs department can add landing Coromandal Fertilisers Ltd vs CC
charges at actuals or as percentage. But once 2000 (115) ELT 7 (SC).
percentage is used, no further sum can be
added in that component.
2. Addition of royalty on final products UOI vs Mahindra & Mahindra Ltd.
(vehicles) mentioned in the collaboration 1995 (76) ELT 481 (SC).
agreement in the value of imported engines
 Valuation Under the Customs Act, 1962 5.35

not tenable since the two were not subject to

each other.
3. Separate agreements does not make for Andhra Petrochemicals vs CC 1997
separate transactions. Charges paid for (90) ELT 275 (SC).
design of equipment through separate
agreement to be added to value of equipment.
4. Cost of dismantling, process licences, CC vs Essar Gujarat Ltd 1996(88)
consultancy and technical services rendered ELT 609 (SC). Bombay Dyeing
abroad to make it ready for import into India Co.Ltd vs CC 1997 (90) ELT 276.
includible.
5. Cost of product when shown as licence fee SBI vs CC 2000 (115) ELT 597
– value not deductible. In this case, SBI (SC).
imported a software worth USD 4084475 and
contended that the actual value was USD
401,047 while the balance USD 3683438
represented licence for using the software at
multiple locations. The Tribunal held that
since SBI paid nothing to the supplier as
licence fee for reproduction of software, the
entire value was the product value. This
decision was affirmed by the Supreme Court.

♦ Declaration by the Importer (Rule 10) : The importer has to furnish full and
accurate details of the value of imported goods and shall produce the manufacturers
invoice or the invoice from where the goods were imported.
♦ Rejection of declared 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-examination questions
1. Differentiate between deductive value (Rule 7) and computed value (Rule 7A).
2. 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. What is residual method of valuation? Discuss with reference to the Customs

Valuation (Determination of Price of Imported Goods) Rules, 1988.
4. 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.
5. ‘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 anchorage. The charges incurred
for such unloading amounted to Rs.18000 and the cost incurred on transport of the
lift from outer anchorage to the jetty was Rs.3500.00. ‘A’ claims that such charges
form part of the loading and unloading charges and should be deemed to be included
in the addition of 1% of the CIF value of the lift, made under Rule 9(2)(b) of Customs
Valuation (Determination of Price of Imported Gods) Rules, 1988. Discuss the
tenability of ‘A’s’ claim with reference to recent Circulars, if any.
6. 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.
7. RI is an indenting agent of an Italian company. The agreement provides for payment
of 20% commission on the imported equipments supplied by RI to users in India.
However in respect of RI’s own requirements of the equipment supplied by the Italian
company no commission was payable as there was to be no value addition by the
indenting agent. 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 services” and Rule 2(2) regarding “Related persons”.
8. C & Co. imported second hand machinery 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 transaction value and based on Chartered
Engineer's certificate showing that the machinery was in working condition and had a
residual life of 10 years he completed the assessment under Rule 8 of the Customs
Valuation (Determination of Price of Imported Goods) Rules, 1988 after allowing
maximum depreciation of 70%.
Discuss briefly giving reasons whether the action of the Assistant Commissioner is
valid 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
 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 same. Customs Authorities assessed the
landing charges at 1.4% on C.I.F. value thereof and the importer had paid the same
as demanded. Later on, Customs Authority claimed that the said 1.4% did not
include stevedoring charges and unloading charges. 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 Textiles Ltd. imported nylon/polyester cloth from Taiwan. Mysore Textiles Ltd.
declared 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 import
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
insurance value should be adopted for the purpose of valuation. Can insurance value
be regarded as the assessable value without making any deductions therefrom?
Discuss.
11. Mother Mary Hospital and Research Centre imported a machine from Delta Scientific
Equipments, Chicago for in house research. The price of the machine was settled at
US $ 5000. The machine was shipped on 10.01.2004. Meanwhile, the Hospital
Authorities negotiated for a reduction in the price. As a result, Delta Scientific
Equipments agreed to reduce the price by $ 850 and sent the revised 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 price 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 Commissioner? Give reasons in support of
your answer.
Answers
5. Due to non-availability of deep draught all ports are not navigable up to the jetty and
therefore the goods have to be discharged/transhipped at the outer anchorage. Further,
in many busy ports, goods are off-loaded at the anchorage on barges in order to ease the
congestion in the docks. Odd dimensional cargo/heavy lifts/hazardous cargo often has to
be off-loaded at anchorage for technical/safety reasons. Such charges associated with
the delivery of cargo at outer anchorage are known as barging/lighterage charges.
5.38 Customs

The Supreme Court has held in the case of M/s. Garden Silk Mills Limited 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 offered 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 landmass of the Country and not at the outer
anchorage point.
Recently, CBE&C in its 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
be 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 importation, i.e.,
the final jetty at which the goods are unloaded. The charges borne by the importer in
bringing the goods from the outer anchorage to the landmass has to be included in the
assessable value as “extended cost of transportation” under 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 Valuation Rules, 1988, are towards the
loading, unloading and handling charges at the place of importation, which is the
landmass of the Country. Therefore, ‘A’s’ claim is not tenable in law.
6. As per Rule 5(1)(c) of the Customs Valuation Rules, 1988 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 commercial level or to the quantity or both.
According to Rule 5(2) where costs and charges referred to in Rule 9 are included in
the value of identical goods, adjustment has to be made of the difference in such
costs and charges between the imported goods and the identical goods.
Therefore, if the value of the identical goods 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 levy customs duty as per Customs Valuation
(Determination of Prices of Imported Goods) 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’. According 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 laid down in Rule 2(2), it can not be said that indenting agent is a
related person. 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 goods as the rule specifically states that only the
costs and services which are paid by the buyer, and not included in the price, are to
be added to the price paid 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) 163 ELT 289 (SC). In this case the Supreme Court stated that the
value of the goods 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
transaction 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
rejecting 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 case 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 (2000). Landing charges are
assessed at a percentage of the value of the goods. However, 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 Commissioner of
Customs, New Delhi 2004 (163) E.L.T. 464 (Tri. – Del.) that the insurance value takes
into account not only the Cost Insurance Freight value but also duties and taxes payable
on the goods involving transfer from seller’s premises to buyer’s 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 Commissioner’s approach is not correct in law.
As per Section 14 of the Customs Act, the transaction value of the goods is the value
at the 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 within
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 place. 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 Chemicals Ltd. v
Commissioner of Customs, Ahmedabad 2004 (163) E.L.T. 448 (Tri. – Mumbai)
 6
ADMINISTRATIVE ASPECTS OF CUSTOMS ACT, 1962

6.1 APPOINTMENT OF CUSTOMS PORTS, AIRPORTS, WAREHOUSING STATIONS, ETC.,

The entry/exit of carriers/passengers etc., is regulated in India by the Customs Act, 1962
which governs/regulates this entry/exit of different categories of vessels/crafts/goods/
passengers etc., into or outside the country.
Under the Customs Act, Government is given the powers to appoint Customs ports and
airports where alone the imported goods can be brought in for unloading or export goods
loaded on ships or air crafts. Similar powers have been given to the Government to notify
the places which alone shall be the Land Customs Stations for clearance of imported
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 Section 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 export goods are ordinarily kept before clearance by customs
authorities. In turn Section 2(13) defines a customs station to mean any customs port,
customs airport or 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 the 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 or any class of such goods,
6.2 Customs

(d) the routes specified in the notification by which alone goods or any class of goods
may pass by land or inland water into or out of India,
(e) the coastal ports for the carrying on of trade in coastal goods or any class of such
goods with all or any specified ports in India.

6.1.2 Notified Customs Ports:

Sl No. Notified Customs Ports
1 Port Blair
2 Vishakapatnam
3 Daman and Diu
4 Panaji Port
5 Kandla
6 Porbandar
7 New Mangalore
8 Cochin
9 Ratnagiri
10 Paradeep
11 Madras Sea Port
12 Pondicherry

6.1.3 Notified Customs Airports:

Sl No. Notified Customs Air Ports
1 Port Blair
2 Hyderabad
3 Borjhar (Guwahati)
4 Patna
5 Delhi
6 Ahmedabad
7 Srinagar
8 Bangalore
9 Cochin
10 Trivendrum
 Administrative Aspects of Customs Act, 1962 6.3

11 Indore
12 Sahar (Bombay)
13 Pune
14 Nagpur
15 Imphal
16 Jaipur
17 Madras
18 Lucknow
19 Calcutta
20 Agra

6.1.4 Inland Container Depots:

Sl No. Notified Inland Container Depots
1 Hyderbad
2 Tuglakbad (Delhi)
3 Ahmedbad
4 Baroda
5 Faridabad
6 Bangalore
7 Balasore
8 Amritsar
9 Nagpur
10 Jaipur
11 Coimbatore
12 Kanpur
6.4 Customs

6.1.5 Notified Land Custom Stations:

Sl No. Notified Land Customs Stations
1 Amritsar Railway Station
2 Delhi Railway Station
3 Calcutta Jetties No 4 and 6
4 Howrah Railway Station
5 Phulbari
6 Foreign Post Office of Exchange, New Delhi
7 Sub-foreign Post Office in Special Economic
Zone Complex, Cochin
8 Sub-foreign Post Office in Noida Export
Processing Zone, Noida

6.2 ADMINISTRATIVE SET UP

6.2.1 Classes of Officers: The administration of the Act has to be done by certain
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, specifies the classes of officers of customs namely:
(a) Chief Commissioners of Customs;
(b) Commissioners of Customs;
(c) Commissioners of Customs (Appeals);
(d) Joint Commissioners of Customs;
(e) Deputy Commissioners of Customs;
(f) Assistant Commissioners of Customs or Deputy Commissioners of Customs; and
(g) Such other class of officers of customs as may be appointed for the purposes of this
Act.
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
goods, including classification, valuation and examination of the goods; and
(b) Preventive Officers of Customs, who do the executive duties like
 Administrative Aspects of Customs Act, 1962 6.5

(i) Boarding and checking ships and aircrafts;

(ii) Clearing passengers and crew and their baggage;
(iii) Surpervision and control over loading and unloading of cargo;
(iv) Preventing smuggling by checking suspects, patrolling the customs area,
searching suspected premises, persons and vehicles.
(v) Interrogating suspects/witnesses and investigation.
(c) Ministerial officers who maintain records, keep accounts, etc.
(d) Chemical examiner, who tests samples of imported/export cargo for
determination of true character of the goods for proper classification and value,
necessary for determination of customs duty.
The above is the normal setup in the organization at the major ports of Bombay, Calcutta,
Madras, Cochin, Visakapatnam, Kandla, Goa, known as major custom houses. In other
customs ports/customs airports/land customs station, the job is carried out by the Central
Excise Officers, who are having territorial jurisdiction, with similar designations.
6.2.2 Officers of CE Department : The other class of officers of the Central Excise
Department are known as Superintendents and Inspectors of Central Excise. Since these
officers are not officers of customs, it becomes necessary to empower them to be officers
of customs for the purposes of doing customs work. Section 4(1) enables the Central
Board of Excise and 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
Central Government in this behalf. All Superintendents of Central Excise Class I have
been duly appointed to discharge the duties of Assisstant Commissioner or Deputy
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 necessary to administer customs laws and regulations in all border
areas where there are no customs formations. These places are manned or controlled by
other Government 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, Manipur, Nagaland, Tripura and
other North Eastern States. It has been found convenient 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 conferred or
imposed under this Act on any other officer of customs who is subordinate to 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 those specified
in Chapter XV (Appeals and Revision) and section 108 (Power to summon persons
for giving evidence).

6.2.5 Entrustment of functions of customs officers on certain other officers (Section 6 ):

The Central Government may, by notification in the Official Gazette, entrust either
conditionally or unconditionally 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 WAREHOUSING 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 store 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.

The Central Board of Excise and Customs (the Board) may, by notification in the Official
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 Section 9 : Some of the major notified
warehousing stations in different states are listed below:
 Administrative Aspects of Customs Act, 1962 6.7

Sl No. State Notified Warehousing stations

01 Gujarat Ahmadabad City, Baroda, Gandhinagar, Indore, Mandvi

(Kutch), Nadiad
02 Uttar Pradesh Agra, Gorakhpur, Kanpur, Lucknow, Varanasi
03 Maharastra Ahmednagar, Bombay, Nagpur City, Pune City, Thane
04 Rajasthan Alwar, Jaipur, Jodhpur city
05 Karnataka Bangalore, Mangalore
06 Orissa Bhubaneshwar
07 West Bengal Calcutta, Falta Export Processing Zone(FTZ)
08 Kerala Cochin, Trivandrum, Kozhikode, Port Blair in Andamans
09 Tamil Nadu Coimbatore, Cuddalore, Madras, Manali
10 Delhi Delhi, Noida Export Processing Zone (FTZ)
11 Sikkim Gangtok City

12 Bihar Garhara, Patna

13 Assam Gauhati

14 Madhya Pradesh Gwalior City

15 Andhra Pradesh Hyderabad, Kakinada, Vishakapatnam

16 Pondicherry Pondicherry

6.3.2 Appointment of Public Warehouses: At any warehousing station, the Assistant

Commissioner of Customs or Deputy Commissioner of Customs may appoint public
warehouses 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 only public bodies running a warehouse. There is nothing in this section which
requires that only public bodies be appointed to run public warehouse. It only empowers
the Assistant/Deputy Commissioner of Customs to appoint the public warehouse. This
only means the warehouses where public may deposit goods without payment of duty.
These public warehouses are situated within the city declared as warehousing station and
is under the control of mainly Central Warehousing Corporation 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
respect 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 private bonded warehouse is given where public
bonded warehouses are not available. Therefore, in Ludhiana, upon availability of public
warehouse facility, the Assistant Collector refused to renew licence for private bonded
warehouse [Vardman Spinning & General Amills Ltd vs. UOI, 1981 ELT 911 (P&H)]

The High Court of Rajasthan has held that licence for private bonded warehouse cannot
be cancelled merely 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 before expiry of existing licence, the authority is not
bound to grant extension, particularly when the original licence is granted for a limited
duration.
Self-examination questions
1. Discuss the provisions in respect of appointment of customs ports, airports etc.
2. What is a warehousing station? Discuss.
3. With reference 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 officer of customs to any officer of any other department.
4. Briefly explain the powers of officers of Customs under section 5 of the Customs Act,
1962.
5. Write a brief note on licensing of private warehouses.
 7
IMPORTATION, EXPORTATION AND
TRANSPORTATION OF GOODS

7.1 INTRODUCTION
The principles governing levy and exemption from customs duties have already been
discussed in the previous chapters. There are various procedures under the Customs Act
which govern assessment, collection, transportation and other important aspects. The
procedures relating to assessment and collection of customs duty are discussed in this
chapter.
The provisions relating to transportation are well understood when studied with the
importation and exportation procedures since both chapters are governed by the same
legal provisions. Hence the procedures relating to transportation have been covered in
the current chapter under the relevant 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. Goods imported by Sea
2. Goods imported by Air
3. Goods imported by Land
4. Goods imported by Post
5. Goods imported by passengers as their baggage
6. Ship stores considered 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 Customs

7.3 DEFINITIONS OF IMPORTANT TERMS

7.3.1 Import [Section 2(23)] with its grammatical variations and cognate expressions,
means bringing into India from a place outside India.
The definition of imports is not restricted only to commercial imports. It only means
bringing of goods 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
the settled law is in favour of second school of thought. It has been held in Garden 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 and 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 include goods, which have been cleared for home consumption.
7.3.3 Importer [Section 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 person holding himself out to be the importer.
The definition of importer includes not 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 hand importer also includes any person holding himself to be the
importer for purpose of clearance of goods. It has been held that a State Financial
Corporation, which financed the import and has also cleared the goods on payment of
duty, is liable to pay the differential duty and cannot plead that it is not the actual
importer. [Karnataka State Financial corporation v. Commissioner of Customs 1994 (72)
ELT 904 (T-SRB)]. Also in the case of Traditional Craft v. Commissioner of Customs,
[2000 (125) ELT 513 (T-WZB)] the tribunal has held that the person who has 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)] includes the territorial waters of India.
The definition of India is an inclusive definition and includes not only the land mass of
India but also the territorial waters of India. The territorial waters extend to 12 nautical
miles into the sea from the appropriate base line.
 Importation, Exportation and Transportation of Goods 7.3

7.3.5 Goods [Section 2(22)] includes

(a) vessels, aircrafts and vehicles
(b) stores
(c) baggage
(d) currency and negotiable instruments and
(e) any other kind of movable property.
7.3.6 Coastal goods [Section 2(7)] means goods, other than imported goods, transported
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 Baggage [Section 2(3)] includes unaccompanied baggage but does not include
motor vehicles.
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 vessel, 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 the 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 in the subsequent paragraphs.
7.4.1 Arrival of vessels and aircrafts in India [Section 29] : This section casts the
obligation on the person in charge of the vessel 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 place outside India shall not cause or permit the vessel or aircraft
to call or land -
(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 other 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
place 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. He will have to report the arrival of the vessel to the nearest customs officer or
officer in charge of police station, and produce the log book if demanded.
2. He should not allow any unloading of goods without permission, and should not allow
any passengers or crews to leave the vicinity of the vessel. However 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.
3. He should comply with all the directions given by such officers.
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 confiscation 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 circumstances.
7.4.2 Delivery of import manifest or import report [Section 30] : After ensuring that
the vessels are landed only in approved customs port or airports, further duty is cast upon
the person in charge of the vessel to deliver the import manifest.
Import manifest or import report is a detailed information to customs about goods in the
vessels/air crafts which have been brought in at any port/airport for unloading at that
particular port/international airport as also that which would be carried further for other
ports/airports. Declarations of such cargo has to be made in a prescribed form (which is
termed ‘Import General Manifest’ or IGM)
Time limit for delivery of IGM/IR: The person-in-charge of a vessel, or an 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 proper 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 twelve 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 to the
proper officer within the specified time and if the proper officer is satisfied 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 liable to a penalty not exceeding fifty
thousand rupees.
Belated filing of IGM: Import 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)].
Subsequent amendment of IGM relates back to the date of filing of IGM and is not a
separate event. By the time supplementary IGM is filed, if entry inward has already been
granted, the rate of duty applicable will be as on the date of presentation of bill of entry.
[Associated Forest Products (P) Ltd. V. Assistant Commissioner 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 aircrafts, 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 Manifest (Aircraft) Regulations 1976 in the case of aircrafts;
(c) The Import Report (Form) Regulations1976 in the case of vehicles.
All the three regulations are substantially similar and provide for the following:-
(i) The manifest/report should be delivered in duplicate and should cover all the goods
carried in the aircraft/vessel/vehicle.
(ii) The manifest/import report has to be in four parts as under-
1. General declaration.
2. Cargo declaration.
3. Vessels stores list.
4. a list of private property in the possession of the master, officers and crew.
5. Passenger manifest in case of aircrafts.
(iii) The cargo list is categorized in the manifest/report into the following categories and
shall be delivered in separate sheets.
(1) cargo to be landed; (2) unaccompanied baggage;
(3) goods to be transshipped; (4) same bottom or retention cargo.
(iv) In the cargo declaration, there should be separate mention about
(i) arms (ii) ammunition (iii) explosives
(iv) narcotics (v) dangerous drugs (vi) gold and
(vii) silver.
7.6 Customs

This declaration should be given irrespective of whether these are for landing, or for
transshipment, or for being carried as same bottom cargo. The details 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 these 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 particulars 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/shipping agent, ports called during the present voyage, number of crew,
number of passengers and the following documents are to be enclosed with the
general declaration:
(a) cargo declaration; (b) store list (c) private property list;
(d) crew list (e) passenger 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 permit 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 colloquially that the ship’s entry papers like arrival
report, manifest etc have been received and they have been found to be in order, the
person in charge of the conveyance can commence further import operations namely
unloading of the cargo and disembarking 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 berthing place for discharge
of cargo. There is no provision requiring grant of entry 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 of Customs (Appeals) 1987 (32) ELT 459 (Bom)]
Section 31(2) provides that Entry Inwards shall not be given until the import manifest has
been delivered or a valid reason is given for not delivering it. Grant of Entry Inwards is an
acknowledgement 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
concerned 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 ship’s papers
are in order and the import operations can be allowed. The second part relates to a
situation where the IGM or import report is not complete or is defective. 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 inwards 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 provides that this provision is not applicable to
unloading of baggage accompanying a passenger or a member of the crew, mail bags,
animals, perishable goods and hazardous goods.
7.4.4 Imported Goods not to be unloaded unless mentioned in Import manifest or
import report [Section 32] : Without the permission of the proper officer, the imported
goods cannot be unloaded, unless they are mentioned in the Import General Manifest for
being unloaded in that customs station.
The mention of any consignment in the ship’s/aircraft’s manifest or conveyances cargo list
is a proof 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 import 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 restriction.
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 undertaken only at
places approved under section 8(a) of the Customs Act, 1962.
7.4.6 Goods not to be Loaded or Unloaded except under the supervision of
Customs officer. [Section34] : Section 34 provides that loading and unloading of goods
should be done under the supervision of the proper officer.
However, the Board may, by notification in the Official Gazette, give general permission
and the proper officer may in any particular case, give special permission for any goods or
class of 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 berths 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
customs 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 known as lighters. Even in other
ports like Calcutta, Bombay, Madras, Cochin etc. not all ships arriving in the port get a
berth. They have to wait for some time before they get allotment of berth. At times the
ships have tight itinerary. In such cases the import cargo is taken from the ship to the
shore and the export cargo is taken from the shore to the ship in boats.
Section 35 of the Customs Act stipulates that no imported goods shall be water borne for
being loaded in any vessel, 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 in the prescribed form.
However, the board may, by notification give general permission and the proper officer
may in any particular case, give special permission, for any goods or any class of goods
to be water borne without being accompanied 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 Regulations : 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 should be issued by the proper officer;
(2) however, in a special case, the Commissioner 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, shall 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 notes 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 prescribed for export cargo, import cargo, and transshipment cargo.
7.4.8 Other Controls : The following are further controls exercised on the conveyances
and the loading/unloading of goods.
1. The goods cannot be loaded and unloaded on Sundays or other holidays observed
by the Customs Department, or on any other day after the working hours unless the
 Importation, Exportation and Transportation of Goods 7.9

prescribed notice and the prescribed fee are paid. [Section 36]
2. The proper officer may, at any time, board any conveyance carrying imported goods
ore export goods and may remain on such conveyance for such period, as he
considers necessary. [Section 37]
3. The proper officer may require the person in charge of any conveyance to produce
any document or answer any questions and such person shall be bound to comply
with the same. [Section 38]
7.4.9 Flow Pattern for Import: The following steps would illustrate the complete
operation in this regard.
1. The vessel is escorted into the harbor by the pilot vessel of the port.
2. After entering the harbour, the vessel is brought to the particular quay or berth,
where it is berthed and anchored.
3. The health department officials and police officials go on board the vessel. The
health officials check
(a) Whether the vessel has called during its voyage at any port which is 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 any cargo contaminated by such epidemic diseases,
affecting the health of people or crop, etc.
The immigration authorities check whether the ship has proper documents to call at
an Indian airport.
4. The Customs Officer, who boards the vessel on its arrival alongside the health and
police officials
(a) Collects the arrival report with its supporting papers from the master of the
vessel.
(b) Scrutinizes the arrival report for details on
(i) import cargo/same bottom cargo;
(ii) Special goods like arms, ammunition, explosives, and dangerous drugs.
(iii) Proper clearance from the last port of call, health certificate, payment of
light dues etc.
7.10 Customs

(b) Calls for necessary information/documents from the Master/mate/Chief

officer/Ship’s doctor to carry out the above checks;
(c) If satisfied, collects 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 proper officer, allows the unloading to commence.
5. Once the unloading of the cargo starts, supervises and checks whether the landing is
done by proper tally maintained by Steamer Agents tally clerks and Port Trust’s tally
clerks.
6. Keeps a general surveillance to ensure that the goods are not illicitly removed from
the ship or the storage godowns.

7.5 PROCEDURE FOR CLEARANCE OF IMPORTED GOODS

The procedures for clearance of imported goods are contained in Section 45 to Section 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 removal of imported goods [Section 45] : Once
the imported goods have entered the Customs 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 home consumption or
are warehoused or are exported for transhipment, they shall remain in the custody of such
person as may be approved by the Commissioner of Customs [Section 45(1)]. This person
is called the custodian. The responsibility of the custodian commences in respect of
imported goods the moment the ship is berthed 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 of India is the custodian of the imported cargo. In case of air
cargo, the custodian is the National Airport Authority. For goods brought by rail, the
custodian is the Station Master.
♦ Responsibility of Custodian of goods : During the time the goods are in the
custody of the custodians, they have the following responsibilities [Section 45(2)].
1. Maintain a proper record of goods received from the carriers and send a copy of the
record to the customs authorities.
2. Not to permit 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 particulars of the
goods landed by a vessel, and send a report known as out turn statement to the customs
 Importation, Exportation and Transportation of Goods 7.11

authorities. This enables the customs authorities to check whether all goods manifested
in the import general mainfest for landing in a particular palace have actually been landed.
In case of the goods are not so landed, action is taken against the carriers.
♦ Liability of the Custodians [Section 45(3)]: This provision provides that
notwithstanding anything contained in any law for the time being in force, if any
imported goods are pilfered after unloading in any customs area, while in the custody
the custodian, such custodian shall be liable to pay duty on such goods. Therefore, in
respect of pilfered goods covered by section 13, the loss of revenue is compensated
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 which such goods were carried.
This provision is intended to make the custodian of the imported goods lying in customs
area liable for duty even if they are pilfered when they were in their custody. Earlier, in
the matter of pilfered goods, the government has been losing the revenue, while the
importer’s interest was protected.
Section 45 holds the custodian responsible only in respect of the Customs duty 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 Supreme Court has held that if
the custodian has no explanation at all to show how the 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 Import 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
been mentioned earlier, the goods may be cleared for home consumption or for home
consumption or for deposit in a warehouse or for transit or transhipment. Therefore, there
are three types of Bills of Entries prescribed for these three different purposes.
Form I (white) – for home consumption.
Form II (yellow) – for warehousing (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 (Forms 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) Duplicate, intended as an authority to the custodian of the cargo to release cargo 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 facility 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 importer is required to declare in the Bill of Entry amongst other things the
particulars 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 the correct value of
the goods for the determining the amount of duty. Since the assessment is based on the
declaration made by the importer, the onus is cast upon him to make a declaration and
solemn affirmation about the truth of the contents in the Bill of Entry.
Importer unable to furnish details: If for any reason the importer is unable to furnish
these details, he may request the customs officials to examine the goods in his presence
to enable him to ascertain the necessary 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 appointed under section 57 pending receipt of the necessary information and
the supporting documents under section 49. This is also called warehousing without
warehousing.
Such goods shall not be deemed to be warehoused goods for the purpose of the Act and
accordingly warehousing provisions shall not apply to such goods. A case 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 warehouse 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 warehousing under section
59 because under section 49 it is explicitly made clear that 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.
Normally, a bill of entry is required to be filed per consignment. However, the
Commissioner 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 bill 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 substitute the bill of entry for home consumption with a bill of
entry for warehousing. The reverse proposition is also permissible. In either case, the
proper officer 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 avoid duty. In other words, if the rate of duty is high and the importer
expects the government to reduce the duty, he cannot seek permission to substitute the
bill of entry for home consumption by a bill of entry of warehousing so that he would
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 importer’s
document of title to the goods. The Bill of Lading covers all the goods imported with 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 unloading.
Prior entry Bill of Entry: The second proviso thereunder provided for the presentation of
bill of entry even before the delivery of the import manifest if the vessel (not aircraft) by
which the goods have been shipped for importation into India is expected to arrive within
thirty days from the date of such presentation. The permission under this prior entry
system is applicable to goods brought 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 case of Land Customs Stations, however, the Commissioner’s 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
contained 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, packing specification, payment
particulars, catalogues, brokers note, insurance policy etc, which would enable them to
arrive at a correct decision about the proper classification 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 physical 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, before
assessment. The customs authority have also powers to take samples for chemical test
and make such other enquiry as may be necessary for determination of correct
classification and valuation.
7.5.4 Provisional assessment of duty [Section 18]: Provisional assessment can be
resorted to in the following cases
(i) when the 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 duty

(ii) where the proper officer deems it necessary to subject any imported goods 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 documents and
furnished full information but the proper officer deems it necessary to make further
enquiry for assessing the duty,
In such cases the proper officer may direct that the duty leviable on such goods may,
pending the production of 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 provisionally
assessed.
When the duty leviable on such goods is assessed finally in accordance with the
provisions of this Act, then, -
(i) in the case of goods cleared 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 excess of the duty finally assessed, the importer or the exporter of
the goods shall 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 finally
assessed is in excess of the duty provisionally assessed, require the importer 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 consumption. 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 green channel clearance facility. It means
clearance of goods is done without routine 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 normal 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, if there are specific doubts regarding description or quantity of the goods, physical
examination may be ordered by the senior officers/investigation wing like SIIB.
 Importation, Exportation and Transportation of Goods 7.15

Interest: Further if the importer fails to pay import duty within five days (excluding
holidays) of the determination of the duty amount, he is required to pay interest on the
duty till the time he actually pays the duty and clears the goods.
The rate of interest 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 section 47
It has been held in the above case that the order of clearance undr section 47 is not
required to be set aside to effect seizue & commence confiscation proceedings. 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 held 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?
In case there is detention of goods by Customs authorities for whatever reason, and
goods so detained are given to the custody of approved custodian during the pendency of
adjudication of rival claims between the department and the importer, the importer is
entitled to be furnished with a detention certificate or an order detaining the goods
indicating reasons which is to serve as the evidence of detention 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 cleared [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 deprives the customs department of its legitimate revenue in the
form of customs duty. 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 duty 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 or 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 hazardous 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 arms or ammunition, which cannot be sold in
public auction, the disposal is regulated by the rules made in this regard.
7.5.7 Storage of imported goods is warehouse depending clearance [section 49] :
Where due to some genuine difficulty, the importer 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 facility is available irrespective of whether the goods are
dutiable or not. This is another instance of warehousing without warehousing. However,
in this case the warehouse may be public or private. Such warehousing will not be
covered under Chapter IX of the Act.

7.6 EXPORTATION
7.6.1 Important Definitions
Export [Section 2(18)] with its grammatical variations 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, includes any owner or any person holding
himself out to be the exporter.
7.6.2 Control Over Export Goods: It would be convenient at this juncture to discuss the
provision relating to the export of the goods in so far as it applies to the master of the
vessel or his agent. The steamer agent comes into the picuture only after 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 by Proper Officer.
The person-in-charge of a conveyance shall not permit the loading 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 exporter;
(b) of baggage and mail bags, unless their export has been duly permitted 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
therefore, 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 vessel’s itinerary. 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 loading 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 restriction is for vessels and not for aircraft
and vehicles. Therefore, for loading of goods for export, the following requirements are to
be fulfilled :
(i) Entry 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 the 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 board only if
they are accompanied by the following documents:
(i) In case of export goods other than baggage and mail bags – the goods shall be
accompanied by
- Shipping 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 – they should be permitted by Customs for export.
7.6.5 Export General Manifest [Section 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 Customs 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 provides 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 officer, in the case of a vessel or aircraft an export
manifest, and in the case of a vehicle, an export report in the prescribed form.
7.18 Customs

Amendment to EGM: If the proper officer is satisfied that the export manifest or the
export report is in any way incorrect and there was no fraudulent intention, he may permit
such manifest or report to be amended or supplemented. [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 ship’s 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 issues 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 train 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 manifest or report is the consolidated report of all such Bills of
Lading/air consignment notes/railway receipts/lorry receipts issued.
♦ Form & Content of Export General Manifest or Export Report: The form of the
export general manifest/export report is prescribed under the following:
(a) The Export Manifest (Vessel) Regulations, 1976
(b) The Export Manifest (Aircraft) Regulations, 1976
(c) The Export Manifest (Form) Regulations, 1975
In all the three regulations the common features are as follows:
(1) The manifest/report shall be delivered in duplicate.
(2) It shall consist of
(a) Cargo report
(b) Vessel’s store list,
(c) Private property list of master, officers and crew
(d) In case the vessel/aircraft/conveyance carries passengers, a passenger
manifest.
(3) The cargo list shall give the following details in separate sheets.
(a) Cargo shipped
(b) Cargo transshipped,
(c) Cargo lying in the vessel/aircraft, but not landed or transshipped (same bottom
cargo)
(d) Cargo in respect of which drawback is claimed.
 Importation, Exportation and Transportation of Goods 7.19

(e) In case of the vessel, the dutiable goods, including arms and ammunition
forming part of the ordinary equipment of a vessel.
(4) Specific declaration should be made in respect of the following cargo, irrespective of
whether it comprises same bottom cargo, shipment 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 written order [Section 42] : The person-in-
charge of the conveyance which has brought 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 person-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 bills or bills of export, the bills of transshipment, if any and such other
documents, as the proper officer may require, have been delivered to him;
(d) All duties leviable on any stores consumed in such conveyance and all charges and
penalties 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 satisfied 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 has 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 payment of export
duty or in contravention of any provision of this Act or any other law for the time
being in force in relation to export of goods-
(i) Such goods have 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 as the proper officer may
direct, for bringing back the goods to India.
The obligations on the part of the conveyance and/or the person-in-charge have been
numerated 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 some vital facts. If the
same are not furnished in spite of use of section 38, obviously there is something
wrong and the vessel cannot be permitted to depart without furnishing such
information.
(b) Obvious fulfillment of provisions of section 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 ship’s agent and with
necessary security deposit.
(c) The shipping bills and other shipping documents in respect of the exported goods
have to be furnished to the customs department. The original shipping bill/bill of
export forms the voucher record of the duty and other amounts paid and duplicate
the proof of quantity actually shipped. These are basic records relating to shipment.
(d) Technically speaking, all stores consumed during the stay of the conveyance 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 inventory of ship stores at
the time of arrival and again at the time of departure of the conveyance. Customs
duty is leviable on the difference.
(e) Similarly, a liability is cast on the person-in-charge of the conveyance, to account for
all goods 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 were not unloaded but were over carried and brought back to that
particular station 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 supporting documents, a presumption
arises that such goods are surreptitiously landed in India and smuggled into the country,
in which case he is liable to penalty equal to twice the amount that would be leviable on
such goods as duty and other charges had such goods been properly landed in India.
As seen from above, the liability to penalty for short landing of goods is on the person-in-
charge of the conveyance. 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 held
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 section 50
of the Customs Act, required to present to a proper officer of customs a shipping bill in
case of export by a vessel or by air and a bill of export, in case of export by a vehicle.
The form of the shipping bill is regulated by the Shipping Bill (Forms & Regulations) Act,
1991.
The forms are as follows :
Dutiable goods Yellow
Duty-free goods While
With drawback claim Green
Duty free ex-bond Pink
Export under DE PB Scheme Blue
Normally a shipping bill is permitted to be filed only after an entry outward has been
granted for the particular vessel or aircraft by which the goods are to be exported.
However, under special circumstances the Commissioner of Customs may permit advance
shipping bill to be filed.
7.7.2 Clearance of goods for exportation [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 and rigid, these procedures are very simple. After the customs officer is
satisfied that the goods are not prohibited and the exporter has paid the duty, he makes
the order for shipment on the duplicate copy of the shipping bill. This is known as “Let
Export” orders.
7.7.3 Notice of Short-Export of Goods: According to the Notice 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 goods 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 various 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 Bill.
(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 presented to the Customs
officers in charge of supervision of the loading of the Cargo. (These officers are
generally called Preventive Officers in the major Custom Houses.) The Preventive
Officer after satisfying himself that all the customs checks including Export Trade
Control license and export duty payment have been 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
receipt 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
ship by boats/lighters the boat note procedure would be followed.
(vI) When the Shipping 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 Shipping 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 sea, 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,
contains certain provisions to facilitate this control. The first of these is section 24 of the
Indian Post Office Act, which reads as under:
♦ Power to deal with postal articles containing goods contraband or liable to duty
[Section 24] : Except as otherwise provided in this Act, where a postal article
suspected to contain any goods of which the import by post or the transmission by
post is prohibited by or under any enactment for the time being in force, or anything is
liable to 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 presence of the
addressee, or his agent, or if the addressee or his agent fails to attend 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 postal article.
(2) The right can be exercised only if he has a reasonable suspicion that the goods
contained in the postal article are-(a) liable to duty of customs, 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 addressee 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 article in his absence.
♦ Delivery to customs authority: The power enabling the postal 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 follows:
The Central Government may, by a general or special order, empower any officer 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 liable 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 provisions of the Sea Customs Act [now Customs Act, 1962]
or any other law for the time being in force.
Thus once the postal authorities have found some postal article to contain dutiable or
prohibited goods, that authority should deliver the postal article in question to the customs
authority for necessary action.
7.8.3 Provisions under Customs Act: After considering the provisions of the Indian
Post Office Act, let us now consider the provisions under the Customs Act relating to
goods imported or exported by post. Sections 82 to 84 of the Customs Act are
substantive provisions containing the various provisions.
♦ Label or declaration accompanying goods to be treated as entry [Section 82] :
In the case of goods imported or exported by post, any label or declaration
accompanying the goods, which contains description, quantity and value thereof, shall
be deemed to be an entry for import or export, as the case may be, for the purposes
of this Act.
♦ Relevant date for Rate of duty and tariff valuation in respect of goods imported
or exported by post [Section 83] : (1) The rate of duty and tariff value, if any,
applicable to any goods imported by post shall be the rate and valuation in force on
the date on which postal authorities present to the proper officer a list containing the
7.24 Customs

particulars of such goods for the purposes of assessing the duty thereon.
However, where the postal goods arrive on a vessel, and the list containing the
particulars is available and is filed by the Post Master, before the arrival of the vessel,
the list shall be deemed to have been filed on the date of arrival of the vessel.
The effect of this proviso is that the relevant date for imports by post is the date of
submission of the list by the Post Master or the date 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 authorities for exportation.
♦ Power of the Central Board of Excise and Customs to make 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 any 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, quantity 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 goods 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 Act (which are valid
under the Customs Act) provide that the boxes or bags containing 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) Foreign 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 Parcel department of Golakganj.
 Importation, Exportation and Transportation of Goods 7.25

Clearing : The procedure 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 sheeet containing
(i) Parcel Nos.
(ii) Parcel Bills/sender’s declarations/labels/despatch notes
(iii) Any other information relevant to the assessment of the parcels.
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 detail mail containing
dutiable or prohibited goods.
3. On receipt of the parcels, the customs 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) those 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 documents are necessary for
determining the customs duty, restrictions on importation etc. These documents
will be called from the addressee of the letter mail article.
1. The parcels to be opened will be opened by the postal authorities in the
presence of the customs authorities and after the customs authorities have
ascertained the necessary details for determination of the duty and
prohibition aspects they shall close the letter mail articles or the parcels as
the case may be.
2. 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
postal articles will be presented to the customs authorities once again as
soon as the requisite information is received.
3. As soon as the parcels are assessed to duty, the customs will indicate on
the parcel assessment sheet, the value of the goods, 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.
4. The postal authorities will collect the duty when the parcel s are delivered
to the addressee.
5. The duty amount is credited to the customs authorities periodically. The
duty amount is collected at the time of delivery of the postal article to the
addressee.
7.26 Customs

Section 13 of the Post Office Act provides that customs duty paid as postage is
recoverable as postage. This provision states that when a postal article, on which any
duty of customs is payable, has been received by post from any place beyond the limits of
India, and the duty has been paid by the postal authorities, at any customs port or
elsewhere, the amount of duty shall be recoverable as if it were postage due under the
(Post Office) Act.
♦ Imports through courier service: The provisions applicable for postal goods do not
apply to imports/exports made through courier agencies. They are governed by
Courier Import and Exports (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 fitting”.
The ambit of the term “stores” can be understood if the following needs of the vessel 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, for 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 locomotive 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) Certain essential medical items like first aid boxes, medicine chest, oxygen etc are
also 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 passengers
engaged is a commercial requirement. They include alcoholic liquors, musical
instruments/videos/radio systems, small games, toys and other entertainment items
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 the 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 customs port/airport/station,
that the “Store list” in the prescribed form should be made out separately in the Manifest.
A similar provision has been made in the Export General Manifest required to be filed at
the time of departure from a customs port/airport/land customs station.
Before we go through the statutory provisions as aforesaid we shall analyse the
movement of the vessels/aircrafts and the various possible circumstances that may arise.
Since the stores are not landed and cleared for home consumption, the collection of duty
on an assessment document does occur. There are three different situations:
(i) The vessel/aircraft/conveyance terminates its journey at this port, or
(ii) They proceed towards Indian coastal ports only and as such the stores continue to
remain in Indian customs/territorial waters or Indian territory alone, or
(iii) It proceeds towards a destination 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 the case of other transportation by land.
7.9.2 Transit & Transhipment [Section 86 and 87] : Section 86 of the Customs Act
provides that
1. 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)
2. Any stores imported 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.
(Transhipment)
No duty on consumption of stores on board a foreign going vessel/aircraft [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 to remain on board without
payment of duty during its stay in Indian waters.
Again, 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 permitted to do so
without payment of any duty vide sub-section (2) of this section.
Section 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 payment of duty, be
consumed during the period such vessel or aircraft is a foreign going 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 India.
In other words, no duty is leviable as long as the vessel/aircraft is a foreign going vessel/
aircraft. However, if the vessel/aircraft ceases to be so and 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 voyage at the port of arrival:
(ii) vessel/aircraft arriving in India and subsequently 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 Shipstores [Section 85] : It has been found convenient to
allow imported shipstores 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 warehouse the importer is required to bind him to pay the duty on the imported
goods. It is customary to assess the imported goods to determine the amount of duty
payable thereon before permitting such imported goods to be warehoused. In the case of
shipstores such a detailed procedure is considered to be unnecessary.
Hence section 85 provides for warehousing ship-stores without assessment to duty. It
provides that “where any imported goods are entered for warehousing and the importer
makes and subscribes to a declaration that the goods are to be supplied as stores to
vessels or aircraft, without payment of import duty under this chapter the proper officer
may permit the goods to be warehoused without the goods assessed to duty.”
♦ Bonded Aircraft Stores (Procedure) Regulation, 1965 : A regulation has been
made to regulate such warehousing of shipstores and is called the Bonded 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 Commissioner 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
Commissioner 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 warehoused 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
Commissioner may permit clearance of the warehoused goods specified in the
application for being taken on board the foreign going aircraft as stores.
7.9.4 Application of Section 69 and Chapter X to Shipstores [Section 88] : This
section provides that the provisions of Section 69 and chapter X shall apply to stores
other than those covered by section 90. Thus it follows that,
1. Section 69 allows warehoused goods to be exported without payment of import duty.
By virtue of section 88, this benefit as available to warehoused goods if they are
taken on board any foreign going vessel or aircraft as stores.
2. Further, as per section 74, where duty paid imported goods are exported within two
years then subject to certain conditions, such duty shall be repaid as drawback. By
virtue of section 88, this benefit has been made available to imported shipstores.
In case of imported shipstores, 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 special 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 duty 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 covers the
case of indigenous goods, which are supplied to a vessel as ship stores. It 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 quantities 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, the duty free supply of shipstores, should be reasonable
and not in commercial quantities.
7.9.6 Special provisions regarding shipstores supplied to Indian Naval vessels
[Section 90]: There are special provisions in relation to supply of stores to Naval
vessels. They are:
(i) Stores for the use in a ship of the Indian Navy 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 supplied without payment of duty to be consumed
on board the ship of Indian Navy.
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 applicable.

7.10 SPECIAL PROCEDURES RELATING TO CLEARANCE OF BAGGAGE

7.10.1 Baggage: The 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 baggage 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. Therefore, the restrictions and regulations governing the import
and export of goods will apply mutatis mutandis to baggage also.
7.10.2 Issues relevant to baggage: There is a popular belief that baggage consists of
personal belongings of an individual or family and is essential for the day to day life of
such persons.
There is 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 international trade alone
are liable to customs duty and customs regulations. The customs duty is an indirect tax.
It is on the goods. It is no way influenced by the parties 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 subject 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 baggage.
The duty cast on the person-in-charge of the conveyance is to file an Import 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 declared in separate
sheets.
7.10.3 Statutory Provisions : The statutory provisions relating to Baggage are covered
by sections 77 to 81 of the Customs Act.
Entry 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 is known as Baggage Declaration Form.

Rate of duty and tariff valuation applicable to baggage [Section 78]: Section 78 of
the Customs Act stipulates that -
the rate of the duty and tariff valuation, if any applicable to baggage shall be the rate of
and valuation in force on the date on which a declaration is made in respect 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 respect of baggage. It stipulates that the proper officer, may
subject to any rules made under sub-section (2) pass free of duty
(a) any article in the baggage, of a passenger or a member of the crew, in respect of
which the said officer is satisfied 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 specified in the rule.
The law thus envisages two categories of baggage, namely those belonging to (a)
passengers; and (b) members of the crew.
Similarly it envisages three classes of goods, namely (a) personal effects, which have
been in the use of the person for a minimum period; (b) household effects, which is used
by 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 carrying 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 passenger 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 and 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 which the baggage
may be passed free of duty. Sub-section(3) of section 79 provides that different
rules may be made for different classes of persons.
7.32 Customs

Relevant Cases
1. Gifts: Articles brought in as baggage for personal use of another person cannot be
treated as bona fide baggage for allowing freely. The tribunal has held this view in
the case of Saroj Goenka v. Commissioner of Customs 1987 [(31) ELT 839 (T-SRB)]
2. Software: If software is imported by baggage mode, exemption under notification No
11/97-Cus would not be available because all baggage are liable to be classified and
assessed to duty under heading No. 98.03.
7.10.4 Passenger Baggage Rules: In pursuance of the powers conferred under section
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: This 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 business.
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]
Class of Tourist Articles allowed free of duty
Tourist of Indian Origin (i) Used personal effects and travel souvenirs, if
other than those coming
a. these goods are for personal use of the tourist,
from Pakistan by land
and
route
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 as allowed to be cleared duty free under the
basic allowance for passenger depending upon the
country from which he is coming.
Tourist of foreign origin (i) Used personal effects and travel souvenirs subject to
other than those of the same conditions as that of a person of Indian
Nepalese origin coming Origin.
from Nepal, or
(ii) Articles other than those mentioned in Annexure-I
Bhutanese origin coming
upto a value of Rs. 8,000/- for making gifts.
from Bhutan.
Tourists of Nepalese No Free Allowance.
origin coming from Nepal
or of Bhutanese origin
coming from Bhutan
 Importation, Exportation and Transportation of Goods 7.33

Tourist of Pakistani (i) Used personal effects and travel souvenirs, if-
origin or foreign tourists
(a) These goods are for personal use of the tourist,
coming from Pakistan or
and
tourists of Indian origin
coming from Pakistan by (b) These goods, other than those consumed during
land route 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 passengers consists of
(a) Used personal effects, excluding jewellery required for satisfying daily necessities of
life.
(b) Other articles which are carried on the person or in his accompanying baggage.
There is no value limit for used personal daily necessities of life. However there is a
value limit in respect of other articles of baggage (apart from the goods mentioned in
Annexure-1) as categorized 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. Country coming Age of the Duration of Stay Value
from Passenger Limit
I Nepal, Bhutan, 10 Yrs. or more More than 3 days Rs. 6,000/-
Myanmar or China

-do- upto 10 yrs. -do- Rs. 1500/-

II Countries other 10 Yrs. or more More than 3 days Rs. 25,000/-
than Nepal,
Bhutan, Myanmar
or China

-do- -do- 3 days or less

Rs. 12,000/-

-do- Upto 10 yrs. More than 3 days Rs. 6,000/-

-do- 3 days or less Rs. 3,000/-

It may be noted that these free allowances are per individual passenger only and shall not
be allowed to be pooled with other passengers.
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 addition 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 equipment has been defined to mean portable equipment, instruments,
apparatus and appliance as are required in his profession like a carpenter, a plumber, a
welder, a mason and the like and shall not include items of common use, such as
cameras, cassette recorders, dictaphones, personal computers, typewriters and other
similar articles
This additional allowance may be tabulated as follows:

Sl. No. Duration of Stay Used house hold articles Professional

equipment

1. At least 3 months Rs.12,000/- Rs. 20,000/-

2. At least 6 months Rs.12,000/- Rs. 40,000/-

3. Minimum 365 days All used household articles and personal effects
during the preceding 2 (which have been in possession and use abroad of
years and returning to the passenger or his family for at least six months)
India after termination upto an aggregate value of Rs. 75,000/- . These
of his work. exclude articles listed in Annex I, II or III of the
Baggage Rules.

Jewellery brought by non-tourist Indian passenger: The additional duty free allowance
is applicable to non-tourist passenger of Indian origin who had stayed abroad 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 jewellery allowance. The jewellery
brought by them is specifically excluded from the duty free allowance for used personal
effects. It has to be covered under the normal baggage allowance only. The additional
jewellery allowance is as follows:-
Gentleman Passenger - Rs. 10,000/-
Lady Passenger - 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 allowance 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 Annex II, but including the articles listed in Annexure III and jewellery upto an
aggregate value of
Rs. 10,000/- in the case of a gentleman
Rs. 20,000/- in the case 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 arrival 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 residence during the preceding three years.
However, if the passengers had taken jewellery out of India at the time of their departure
from India, they would be given duty free clearance thereof, if it is proved to the
satisfaction of the Assistant Commissioner of Customs, that they were taken out of India.
All passengers are advised to obtain jewellery Export Certificate from the Customs
authority at the port of export/departure in respect of such jewellery.
7.10.5 Provisions relating to unaccompanied baggage: The various provisions in the
above rules are also applicable to the unaccompanied baggage unless specifically
excluded. The unaccompanied baggage must be dispatched within one month of his
arrival in India or such further period as the Assistant Commissioner may allow. The
unaccompanied baggage can land in India even before the arrival of the passenger. The
unaccompanied baggage may arrive within two months before the arrival of the
passenger. 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, natural
calamities, disturbed conditions etc. the Assistant Commissioner may extend the period of
two months upto a maximum of one year for reasons to be recorded.
Goods listed in Annexure I & II.

Annexure I :
1. Fire arms
2. Cartridges of fire arms exceeding 50.
3. Cigarettes exceeding 200 or cigars exceeding 50 or tobacco exceeding 250 gms.
4. Alcoholic liquor or wine in excess of two litres
7.36 Customs

5. Gold or silver other than ornaments

Annexure II:
1. Colour Television/Monochrome television
2. Digital Video Disc Player
3. Video Home Theatre System
4. Dish Washer
5. Music System
6. Air conditioner
7. Domestic Refrigerators of capacity above 300 litres or its equivalent
8. Deep Freezer
9. 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 reproducing apparatus.
(c) Video reproducing apparatus.
11. Word Processing Machine
12. Fax Machine
13. Portable Photocopying Machine
14. Vessel
15. Aircraft
16. Cinematographic films of 35 mm and above
17. Gold or silver in any form other than ornaments
Annexure III
1. Video Cassette Recorder or Video Cassette Player or Video Television Receiver or
Video Cassette Disk Player
2. Washing Machine
3. Electrical or Liquefied Petroleum Gas Cooking Range
4. Personal computer (Desktop Computer)
 Importation, Exportation and Transportation of Goods 7.37

5. Laptop Computer (Notebook Computer)

6. Domestic Refrigerators of capacity up to 300 litres or its equivalent.
Crew Baggage: These baggage rules are applicable to the members of the crew engaged
in foreign going vessels, when they are finally paid off on termination of their engagement.
However, a crew member of a vessel and aircraft shall be allowed to bring items like
chocolates cheese, cosmetics and other petty gift items for their personal or family use
which shall not exceed the value of Rs.600.
Temporary detention of baggage [Section 80] : It may so happen that a passenger has
brought 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 it 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 into the town, if the duty is heavy. In such case also, he may
opt to take the article with him when he leaves the country.
In both the cases, he will have to deposit 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 dutiable or the import of
which is prohibited and in respect of which a true declaration 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 article at the time of his leaving India the article may
be returned to him through 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 passenger cannot
subsequently claim the benefit under section 80 and the goods are liable 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 the provisions in
respect of baggage are a complete code by themselves, it is desirable to supplement
detailed procedures wherever necessary with the rule making powers. Section 81
therefore provides that the Board may make regulations in the following matters:
(a) providing for the manner of declaring the contents of any baggage;
(b) providing for the custody, examination, assessment to duty and clearance of
baggage;
(c) providing for transit or transhipment of baggage from one 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 transhipment of
baggage from one customs station to another becomes a necessity for convenient
clearance of unaccompanied baggage.
Baggage (Transit to Customs Stations) Regulations: The Central Board of Excise &
Customs has made the regulations for the transit of unaccompanied baggage from the
customs station of arrival at Bombay, Delhi, Calcutta, Madras, Bangalore, Trivandrum,
Hyderabad or Cochin to any other of the aforesaid customs stations.
Conditions: Where the unaccompanied baggage of any passenger arrives at the customs
station at Bombay, Delhi, Calcutta, Madras, Bangalore, Trivandrum, Hyderabad or Cochin
and the passenger desires that the said baggage may be cleared at any of the aforesaid
customs stations, other than the customs station at which the baggage has arrived, then
on a request made in this behalf by the passenger, such baggage may be permitted to be
transported to the customs station at which the passenger desires the same to be cleared,
by air or by passenger train, if-
(a) all arrangements are made by the passenger 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 for its booking to that station , and for its
transport to the custom house in the place at which the station is located,
(b) the baggage remains under the supervision of an officer of customs, deputed for the
purpose, except when it is under 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 transported 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 the 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 transported in passenger train
having regard to the size and weight or that the transport by passenger train would cause
undue financial strain on him.

7.11 TRANSIT AND 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. There 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 carries goods.

(b) The conveyance may call at all other Indian ports/customs stations 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 for Indian ports and foreign ports.
In the latter situation, the goods will continue to be carried by the same conveyance. This
is called transit of goods.
In both the situations, import duty is not collected on the goods even though the liability
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 the Indian port of destination and appropriate duty of customs is
collected thereupon;
(b) in the case of goods intended for foreign ports, the goods are actually 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 transit 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 ship’s/aircraft’s manifest will continue. The goods would have to be shown in the
manifest as same bottom cargo. The destination of the cargo consignment wise has
to be shown in the same bottom cargo manifest. These entries have necessarily to
figure in the export manifest of the conveyance. Thereafter when the conveyance
calls at the next Indian customs port or airport the goods have to figure in the Import
General Manifest filed there as landing cargo or same bottom cargo as the case may
be. Thus there is continuity in the record and there is no chance of the control over
such transit goods being lost.
(b) The position of the transhipment is entirely different. In the first instance such
transhipment goods 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 following stages where care and caution have to be exercised to
ensure that the goods are not illicitly landed and smuggled into India.
(i) during the period when the transhipment goods lie in the Indian customs station;
(ii) when the goods are transhipped by another conveyance to their final
destination;
(iii) where the 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 Transit 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 shall 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
section 11 any goods imported in a conveyance and mentioned in the import manifest or
the import report, as the case may be, as for transit in the same conveyance to any place
outside India or any customs station may be allowed to be so transited without payment of
duty.
Transhipment of goods without payment of duty [Section 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 in the prescribed form. Where the
goods are being transferred under an international treaty or bilateral agreement between
the Government of India and Government of a foreign country, a declaration for
transhipment instead of a bill of transhipment shall be presented to the proper officer in
the prescribed form.
(2) Subject to the provisions of sections 11, where any goods imported into a customs
station are mentioned in the import manifest or the import report, as the case may
be, as for transhipment to anyplace outside India, such goods may be allowed to 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 the case may be, as for transhipment:-
(a) to any major port as defined in the Indian Ports Act, 1908 (15 of 1908), or the
customs airport at Mumbai, Calcutta, Delhi, 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 other 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 to which tanshipment is allowed.
Liability of duty on goods transited under section 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 at such station, be liable to duty and shall be entered in like manner as goods are
entered on the first importation thereof and the provisions of this Act and any rules and
regulations shall, so far as may be, apply in relation to such goods.
Transport of certain classes of goods subject to prescribed conditions [Section 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 customs port/airport. They
do not cover transport by land from one Indian land custom station to another Indian land
customs station.
In the case of goods destined to foreign ports/airports/custom station, the problem had
been specifically faced in the case where imported goods meant for Nepal landed at any
Indian customs port/airport or land customs station. Such goods had to be transported by
road or rail to Indian land customs station along the Indo Nepal Border and thereafter
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 faster and
cheaper compared to movement by sea around the Indian subcontinent. Such a situation
is dealt with by section 56 of the Customs Act.
Section 56 specifically provides that Imported goods may be transported without payment
of duty from one land customs station to another, and any goods may be transported from
one 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 of destination.
In the first part there is a substantial exemption from customs duty. The second part
technically amounts to export and subsequent re-import.
7.11.4 Goods Imported (Conditions of Transhipment) Regulations, 1995.
The legal provisions relating to the transhipment of goods are discussed in section 54.
However the procedures relating to the transhipment of goods are governed by Goods
Imported (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 forms (5 copies), sub-manifest and a
copy of IGM to the Customs. The Customs scrutinizes the details furnished by the
shipping agents in the application for transhipment. In case, the documents are in
order, permission for transhipment is granted by the Customs.
7.42 Customs

2. Execution of Bond and Bank Guarantee: To ensure that imported cargo, 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 bond value) is executed
by the carrier engaged for the transhipment of the goods. The carriers in public
sector i.e. CONCOR and CWC are exempted from the requirement 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 such 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.
3. Sealing of goods: After issuance of transhipment permit and execution of bonds as
mentioned above, 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
agents, 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,
which is just verified by the Customs.
Self-examination questions
1. What are the circumstances under which assessment is done provisionally under
section 18?
2. State the provisions of transhipment of goods without payment of duty under section
54 of the Customs Act, 1962.
3. Explain the procedure prescribed in Customs Act, 1962 in case of goods not cleared,
warehoused or transhipped within 30 days after unloading.
4. Write short notes on:
(a) Export general manifest
(b) Boat note (or restriction on goods being water borne)
5. Discuss briefly:
(a) Temporary detention of baggage
(b) Relevant date for rate of duty and tariff valuation in respect of goods imported
and exported 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
 Importation, Exportation and Transportation of Goods 7.43

(iii) for delivery of import manifest/report and export manifest/report

7. State in brief the provisions of the Customs Act, 1962 relating to filing of “Import
Manifest/Report”.
8. Write a brief note on the declaration made by the owner of Baggage.
9. State and summarise the provisions and procedure in the Customs Act, 1962
governing preparation 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
inwards was given to the vessel on 04.06.2006. An ‘Into Bond Bill of Entry’ was
presented by XML Ltd. on 06.06.2006 and thus, the goods were classified, valued
and stored in the bonded warehouse. On 03.07.2006 safeguard duty @ 8% was
imposed on such goods. XML Ltd. had presented the ‘Bill of Entry for Ex-Bond
Clearance’ in respect 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 goods 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 your 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 is 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 brought to the mass of goods in
the country. As per section 15(1)(b) of the Customs Act 1962, the relevant date for
determination of rate of duty and tariff valuation in case of warehoused goods is the
date when a bill of entry for home consumption (bill of entry for ex-bond clearance) in
respect of such goods has been presented under section 68 of the Customs Act,
1962. Therefore, in view of section 15(1)(b) the taxable event gets completed when
the bill of entry for home consumption in case of warehoused goods is filed.
Thus, in the given problem, the taxable event gets completed on 01.07.2006, the
date on which the bill of entry for ex-bond clearance is submitted and not on
05.07.2006 when the goods are removed form the warehouse. The safeguard duty is
imposed on 03.07.2006 and the bill of entry for ex-bond clearance is submitted on
01.07.2006, thus, no safeguard duty 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 relevant 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 date there was no
safeguard duty.
However, if the bill of entry for ex-bond clearance 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) the
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 freight 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 imported they were assessed to duty. The total
amount of duty was determined. Thereafter instead of clearing the whole consignment the
importer was allowed to clear the consignment in convenient lots after paying appropriate
duty on that particular portion that was cleared. During the intervening period the goods
were held in custody in a place called warehouse. The consideration the importer was
required to pay for this facility was that
(i) he should bind himself to pay to the government a sum equal to double the amount of
total duty determined, with such 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 respect of such
goods is presented.
This facility was also necessary in another situation. Ship stores like liquors, cigarettes,
preserved food were imported into India and supplied to vessels according to their
requirements. The entire consignment imported was intended to be so shipped out of the
country. The same was the case of fuel for the ship like furnace oil, diesel oil etc.
Obviously there was no point in collecting import duty on the whole of the consignment
and granting 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 Customs

8.2 PARALLEL PROVISIONS FOR HOME CONSUMPTION

In these circumstances, in addition to the concept of “clearance for home consumption”
the concepts of “clearance for deposits in a warehouse” and “clearance for home
consumption from the warehouse” came into being. As a result of the above, parallel
provision had also been made corresponding to clearance for home consumption. The
examples are: -
Section 46(1): The importer of any goods, other than goods intended for transit or
transhipment, shall make entry thereof by presenting to the proper officer a bill of entry for
home consumption or warehousing in the prescribed form.
Section 15(1): The rate of duty and tariff valuation, if any, applicable 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 bill of entry in respect of such goods is presented under that section.
(b) In the 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 FOR WAREHOUSING

A separate chapter was therefore incorporated in the Customs Act, 1962, containing
specific provisions relating to warehousing of imported goods. Chapter IX of the Customs
Act, 1962 contains the following provisions: -
(1) Appointment of public warehouses – Section 57
(2) Licensing of private warehouses – Section 58
(3) Warehousing bond – Section 59
(4) Permission for deposit of goods in a warehouse – Section 60
(5) Period for which goods may remain warehoused – Section 61
(6) Control over warehoused goods – Section 62
(7) Payment of rent and warehouse charges – Section 63
(8) Owner’s right to deal with warehoused goods – Section 64
(9) Removal of goods from one warehouse to another – Section 67
(10) Clearance of warehoused goods for 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 – Section 71
(14) Goods improperly removed from the warehouse – Section 72
(15) Cancellation and return of warehousing bond – Section 73
We shall examine each of the provisions 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 [Section 2(44)] means goods deposited in a warehouse.
8.4.3 Warehousing station [Section 2(45)] means a place declared as a warehousing
station under section 9.
The 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 remembered is the liability
of the warehouse keeper. Normally such warehouses are kept under double lock one that
of the warehouse keeper, and the other of the customs 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 warehousing station;
(b) the ground plan of the warehouse should be scrutinized for suitability and security of
the building;
(c) there should be sufficient light and ventilation for proper storage of goods;
(d) the windows should be secured with shutters and stout iron bars. Superfluous
windows should be closed up with brick work;
(e) the entrances should have strong and secured doors with strong locks. They 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 SUBSEQUENT REMOVAL

The following are briefly the various stages and steps involved in deposit of imported
8.4 Customs

goods in a private bonded warehouse and their subsequent removal. The removal can be
normally for
(a) home consumption
(b) export; and
(c) transfer to another warehouse.
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 warehouse at the port of import;
(d) Ascertain availability of space from the inland private bonded warehouse in the
inland station;
(e) Superintendent-in-charge of private warehouse issues space availability certificate;
(f) On the strength of the certificate, the officer-in-charge of the port warehouse would
permit transfer 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 the port of importation and section 59
bond;
(i) The jurisdictional Assistant Commissioner after necessary check of the documents
will accept the section 59 bond and permit the transferred goods to be re-
warehoused;
(j) Before permitting the deposit of the goods in the private warehouse, the packages
will be examined externally 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 damaged 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 the packages;
(k) During custody in the private bonded warehouse, the licensee will maintain
(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 present an
ex-bond for home consumption at least 48 hours before the desired time for
clearance;
 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 payment of duty);
(n) The licensee shall also inform the customs officer about the proposed 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-in-charge of the warehouse who will depute
necessary officers to effect the release 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 on the warehouse register,
stock card and bill of entry file.

8.6 STATUTORY PROVISIONS

8.6.1 Appointment of public warehouses [Section 57] : Under section 57 of the
Customs Act, at any warehousing station, the Assistant Commissioner of Customs may
appoint public warehouses wherein dutiable goods may be deposited.
In other words,
(i) the place should have already been declared as a warehousing station;
(ii) 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 warehouse.
The Assistant Commissioners have appointed the public bonded warehouses and the
Commissionerates have issued trade notices about such appointment of public bonded
warehouses. Some of the Commissionerates have issued public notice giving detailed
instructions for the working of the public bonded warehouse. From these public notices, it
is apparent that:
(1) The policy of the Government is mainly to provide warehousing facility at selected
places in the inland stations, having regard to the following:
(a) the requirement of trade and industry
(b) the 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) procedure 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 warehoused goods;
(8) maintenance of stock card and accounts;
(9) permissible warehousing period;
(10) procedure for extension of warehousing period;
(11) failure to 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 any warehousing station, the Assistant Commissioner of customs or the Deputy
Commissioner of Customs may license private warehouses, wherein dutiable goods
imported by or on behalf of the licensee, or any other imported goods in respect of
which facilities for deposit in a public warehouse are not available, may be deposited.
(2) The Assistant Commissioner of Customs may cancel a licence granted under sub-
section(1)
(a) by giving one month’s notice, in writing to the licensee; or
(b) if the licensee has contravened any provision of this Act or the rules or
regulations 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
given a reasonable opportunity of being heard.
(3) Pending an enquiry whether a licence granted under sub-section (1) should be
cancelled under clause(b) of sub-section (2) the Assistant Commissioner may
suspend the licence.
8.6.3 Private warehouses not to be permitted under this section where public
warehouses are available: Under this section, grant of private bonded warehouse where
public bonded warehouses are available are clearly debarred. This view is upheld by the
High Court 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 categories
viz., storage of sensitive goods such as liquor, cigarettes, foodstuffs, consumables, etc.
and other non-sensitive goods. Under Board’s 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 at 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 such offences, the licence may be terminated
after following the prescribed procedure;
(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 liability (effective
duty foregone) will be taken for each consignment. At the same time, a revolving
bond with a single bank guarantee for a higher amount can be accepted 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, should be solvent for Rs. 10 lakhs and should possess a good record. A double
duty bond 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, the applicant
may be asked to furnish a bank guarantee.
8.6.5 Warehousing Bond [Section 59]
Section 59 provides as follows:
(1) The importer of any goods, specified 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 himself 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 duties, and interest if any, payable under sub-section(2) of section 61;
(ii) rent and charges claimable on account of such goods under this Act,
together with interest on the same from the date so specified at such rate
not below eighteen percent and not exceeding thirty six percent per annum
as is for the time being fixed by the central government in the Official
Gazette, and
(iii) to discharge all penalties incurred in violation of the provisions of this Act
and the rules and 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 be
imported by him within a specified period.
(3) A bond executed under this section by an importer in respect of any goods shall
continue in force notwithstanding 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 thereof are transferred to another
person, the proper officer may accept a fresh bond 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 enforceable only for a sum mentioned therein less the
amount for which a fresh bond is accepted from the transferee.
The double duty indemnity bond plays a very important role in the entire concept of
warehousing.
The rate of duty and valuation 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 increasing. Therefore there has been no risk of loss of revenue on account of
warehousing. 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 security.
This is basically the underlying objective of the warehousing bond.
♦ Determination of the bond amount: : Subsection (2) specifies that instead of an
individual 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 particular period.
The bond amount will be determined by the Assistant Commissioner of Customs, having
regard to the
(a) Past imports warehoused and the duty involved 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
duty. 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) provides for such a
coercive method for the realization of duty.
♦ Notification fixing 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-section (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 the deposit of the goods in a warehouse.
8.6.7 Period for which goods may remain warehoused [Section 61] : (1) Any
warehoused goods may be left in the warehouse in 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 oriented
undertaking, till the expiry of five years; and
(aa) Goods other than capital 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 which 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 are not likely to deteriorate, the period specified in
clause (a) or clause (aa) or 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 the Commissioner of Customs, for such period as he may deem
fit, and
(B) in any other 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 deteriorate, 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 from the date on which notice
of such cancellation is given or within such extended 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) Where 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 goods for the
period from the expiry of said warehousing period till the date of payment of
duty on the warehoused goods;
(ii) Specified in sub-clause (b) of sub-section (1), remain in a warehouse beyond a
period of ninety days, interest shall be payable at such rate or rates not
exceeding 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
goods.
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 specified in such order
waive the whole or part of any interest payable under this section 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 the 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 Central Excise Act, 1994.
CBEC vide Notification No. 18/2003-cus-(NT) dated 1.03.2003 has fixed the rate of
interest at 15% for the purpose of clause (ii) of section 61.
Main features of the provisions of section 61: The main features of section 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 undertaking and
(b) goods other than capital goods intended for use in 100% export oriented
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 period 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 further, authorisation of Chief Commissioner of
Customs is required.
(4) The Explanation under section 3 of the Central Excise Act, 1944 defines hundred
percent export oriented unit to mean an undertaking which has been approved as a
hundred percent 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
Industries (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” alone. Their
warehousing period can be reduced to a shorter period by the Commissioner of
Customs.
(6) The interest under section 47 is chargeable only after the expiry 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.
Application for extension of warehousing period: There is nothing in section 61 to
indicate that application for extension of warehousing period must be made before expiry
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 was 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] : Warehouse 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 warehoused goods shall be subject to the control of the proper officer;
(2) No person shall enter a warehouse or remove any goods there from without the
permission of the proper officer;
(3) The proper officer may cause any warehouse to be locked with 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 keeper, rent and
warehouse charges at the rates fixed under any law for the time being 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 within ten days from the date when
they became due, the warehouse keeper may, after notice to the owner of the
warehoused goods and with the permission of the proper officer cause to be sold
(any transfer of the warehoused goods notwithstanding) 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 ports and
the central warehousing authorities in other interior places is the owner of the warehouse.
Naturally these authorities will charge the owners of the warehouse for the storage. This
cargo will generally consist of the storage rent and other maintenance charges like
electricity, cleaning, security etc.
The rates for these charges may be fixed by the Government or quasi Government
authorities concerned. If they are not so fixed, the Customs Act gives the power to the
Commissioner of Customs concerned.
8.6.10 Owner’s right to deal with warehoused goods [Section 64] : Section 64
provides as follows: With the sanction of the proper 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 or deteriorated goods from the rest;
(c) sort the goods or change their containers 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) show the goods for sale; or
(f) take samples of goods without entry for home consumption, and if the proper officer
so permits, without payment of duty on such samples.
When the imported goods are warehoused, the temporary possession and the custody 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 access 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 part 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 container of the goods is damaged and requires repair or replacement, the
owner will have to attend to these requirements;
(v) again if the goods require to be repacked or the containers changed for the purposes
of export of the goods or disposal for home consumption he should be permitted to
carry out such operations;
(vi) show the goods to prospective buyers or local consumers;
(vii) draw samples to check the quality of the goods;
(viii) draw such samples to show to prospective buyers or local consumers.
The only restriction on all these operations is that such operation should not cause any
damage or deterioration to the goods. If such 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 loss 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) clearance 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 separate 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 [Section 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 warehoused 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 destination 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
Goods (Removal) Regulations, 1963 to govern the same.
8.7.2 Warehoused Goods (Removal) Regulations, 1963
1. Conditions for transport of warehoused goods in the same town: Where the
goods are to be removed from one warehouse to another in the same town the
proper officer may require the transport of the goods between the two warehouses to
be under the supervision of an officer of customs, the owner meeting the cost of such
supervision.
2. 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 removal 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.
3. 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
such officer may allow a certificate issued by the proper officer at the place of
destination that the goods have arrived at that place, the bond shall stand discharged
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.
4. Surety or Security : The proper officer may require that the bond shall be with such
surety or security or both as is acceptable to him.
8.7.3 Clearance of warehoused goods for home consumption [Section 68] : The
importer of any warehoused goods may clear them for home consumption, if-
(a) a bill of 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, rent, 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 before an order for
clearance of goods for home consumption has been made in respect of such goods,
relinquish his title to the goods upon payment of rent, interest, other charges and
penalties that may be payable in respect of the goods and upon such relinquishment, he
shall not be liable to pay duty thereon.
It may be noted that the owner of any such warehoused goods shall not be allowed to
relinquish his title to such goods, regarding which an offence appears to have been
committed 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 be 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 charges payable under section 63, namely warehouse
charges should be paid.
(iv) If 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 the owner of the
goods including duty, warehouse rent, warehouse charges, interest under section 47,
any penalty or fine or any other charges payable on the warehoused goods, have
been paid, he may permit removal of the goods from the warehouse and pass a
suitable order for clearance.
8.7.4 Brief outline of the procedure for clearance of warehoused goods for home
consumption : In order to have a better understanding of the process of clearance of
warehoused goods for home consumption, 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 warehouse
is situated.
(3) The particulars of ex-bond bill of entry, like bill of entry no. quantity and description
of warehoused goods sought to be cleared, its quantity 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 having 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 claimed under section 22(1)(c), the same is also examined.
(6) In the case of import licence regulations and other prohibitions on imports, the
common sense law is that they are relevant to the date of actual importation into
India. Subsequent changes in the import policy would not NORMALLY affect the
warehoused goods. However the details of such changes if any would be applicable
to the subject goods 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 payable thereon would be paid to the customs.
(8) The goods would then be subjected to 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 warehouse rent and
other charges determined by the warehouse keeper and make necessary payment.
(10) The proper officer of customs would thereupon make the permitted 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 communicated to the
customs authorities concerned.
8.7.5 Clearance of warehoused goods 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, which 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 goods 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 exportation has been made by the
proper officer.
(2) Notwithstanding anything contained 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 Official Gazette direct that
such goods shall not be exported to any place outside without payment of duty or
may be allowed to be so exported subject to such restrictions and conditions as may
be specified in the notification.
♦ Notifications issued 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 01.02.1963, the Central Government has
prohibited export of warehoused goods to Bhutan, Nepal, Burma, Sikang, Tibet or
Sinkiang, without payment of import duty payable on such goods, as such exported
goods are likely to be smuggled back into India. The exceptions are when export to
Nepal are made against irrevocable LCs, supply is made to Nepal of UN Projects,
capital goods are supplied to Nepal against global tenders of His Majesty’s
Government.
2. By Notification No. 46-Cus, dated 01.02.1963, the Central Government has banned
export of goods in vessel of less than 1000 tons gross. Such export is permitted if
the exporter executes a bond for payment of import duty on the exported warehoused
goods and undertakes to provide 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 conditions 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 before sailing to a foreign port and they cannot undertake long voyage.
3. By Notification 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 sailing to a
foreign port, there is every likelihood of the goods being smuggled back into India.
♦ 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 followed.
(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 appropriate export duty including cess leviable on such goods on export should
be assessed and paid.
(5) The import dues on the goods, namely penalties, warehouse rent, 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 customs 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 for export.
(7) In case Government of India is of the opinion that goods of any specified description
are likely to be smuggled back into India, it may
- demand payment of import duty payable otherwise, on the warehoused goods;
- prescribe conditions to be fulfilled including execution of an Indemnity bond
undertaking to produce 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
traditionally imported and warehoused are the following:
(1) Petroleum products
(2) Liquor and
(3) Ethylene dichloride and liquid helium.
Petroleum products like aviation turbine fuel, superior kerosene; high speed diesel oil,
light diesel oil, motor spirit, vapourising stored in tanks, subjected to atmospheric
pressure had a tendency to evaporate during long period of storage. Similarly, liquor like
brandy and whisky were imported under over proof conditions, in wooden casks stored in
bonded warehouses, were volatile in nature and there was considerable evaporation loss
during storage. Even articles like wine, beer, suffered evaporation losses during storage.
Among the lower order mineral products raw naptha, furnace oil and batching oil also
were prone to evaporation. As such there was invariably difference between the bonded
quantity and the quantity at the time of removal from the warehouse. This loss was due to
natural causes and neither the importer nor the warehouse keeper can be found fault with.
On the same grounds neither 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 footing 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
Assistant 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, having
 Warehousing 8.19

regard to the volatility of the goods and the manner of their storage, may be
notification in the Official Gazette specify.
♦ Essential ingredients of section 70(1):
(i) The goods should be warehoused goods;
(ii) The provisions 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 time 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 Commissioner and the Deputy Commissioner are empowered to grant
the remission.
The essential ingredients of section 70(2) are:
(a) The power to specify vests with the 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-Cus
dt.11.5.1963 as amended subsequently the following goods have been specified as goods
to which the provisions of section 70 apply when they are deposited in a warehouse,
namely:
Aviation fuel motor spirit mineral turpentine
acetone menthol raw Naptha
vaporising oil kerosene high speed diesel oil
batching oil diesel oil 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 goods are lost before
clearance for home consumption is made. Whereas, section 70 provides 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 section 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 penalty 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 corollary 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] : Section 71 provides that -
No warehoused goods shall be taken out of a warehouse except on clearance for home
consumption, or re-exportation, or for removal to another warehouse, or as otherwise
provided by this Act.
8.7.9 Goods improperly removed from warehouse etc. [Section 72]: (1) In any
of the following cases, that is to say-
(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 warehouse at the
expiration of the period during which such goods are permitted under section 61 to
remain in the warehouse;
(c) where any warehoused goods have been taken 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 been cleared for home consumption or exportation are not duly
accounted for to the satisfaction of the proper officer.
The proper officer may demand and the owner of such goods shall forthwith pay, the
full amount of duty chargeable on account of such goods together with all penalties,
rent, interest and other charges payable in respect of such goods.
(2) If any owner fails to pay any amount demanded 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 the warehouse, as the said officer may select.
Section 72(1) provides for penal action for violation of section 71. As a natural corollary,
provision has been made 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 realise 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 the 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
before the order is passed by the Assistant Commissioner under provisions of section 72,
no duty need to be paid. If, however, the relinquishment is made after the order is passed,
he has to pay the duty.
♦ Effect of Goods not being removed from 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 extended, 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 permitted 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) applies
only to the cases where a bill of entry is presented for removal from warehouse under
section 68, and the payment of duty, interest, penalty, rent, etc. Section 15 (1) (b) has no
application where the goods are removed from warehouse beyond the permitted period of
warehousing. [ Kesoram Rayon vs CC 1996 (86) ELT 464 (SC)]
8.7.10 Cancellation and return of the warehousing bond [Section 73] : When the
whole of the goods covered by any bond executed under section 59 have been 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 officer 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
proper manner provided therefor;
(ii) all the consequential charges on the goods as well as the owner of the goods like
warehouse rent, warehouse charges, interest on the duty amount, penalty etc
leviable from the importer have been paid;
(iii) all the conditions and obligations undertaken under the warehousing bond have been
compiled with or duly fulfilled.
Then the bond gets discharged and the proper officer shall formally endorse 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 shall remain with the proper officer.
8.22 Customs

8.8 MANUFACTURE IN BONDED WAREHOUSE

As mentioned earlier warehousing was considered in the initial stage as a device for:
(i) temporary storage of imported goods which were intended to be ultimately exported
out of India;
(ii) piecemeal clearance of imported goods, for home consumption to suit importer’s
requirements.
As an improvement of the above facilities, certain operations were permitted to be carried
out in the bonded warehouse itself before export of the 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) effective 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. There 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 within or adjacent to the customs area in the port, and subsequently
extending this facility to interior places as an adjunct to inland bonded warehouses and
finally evolving the concept of 100% Export Oriented Undertakings.
Statutory Provisions
The statutory provisions relating to the manufacture in the bonded warehouse are
contained in sections 65 and 66 of the Customs Act, 1962. Now we can discuss 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 Assistant 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 any 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 operations 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 operations are exported,
import duty shall be remitted on the quantity of the warehoused goods contained
in so much of the waste or refuse as has arisen from the operations carried on
in relation to the goods exported:
Provided that such waste or refuse is either destroyed or duty is paid on such
waste or refuse as if it had been imported into India in that form.
(b) If the whole or any part of the goods resulting from such operations are cleared
from the warehouse for home consumption, import duty shall be charged on the
quantity of the warehoused goods contained in so much of the waste of refuse
as has arisen from the operations carried on in relation to the goods cleared for
home consumption.
8.8.2 Power to exempt 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 imported materials exceeds the rate of duty leviable on such goods, the Central
Government, if satisfied that in the interest of establishment or development of any
domestic 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 rate of duty.
♦ Analysis of Section 65
The substantial ingredients of section 65(1) are
(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 of
Customs;
(iii) It will be subject to such conditions and on payment of such fees as may be
prescribed.
♦ Rules prescribing the conditions aforesaid: A comprehensive regulations called
the Manufacture and Other Operations in Warehouse Regulations, 1966, was promulgated
by the Board under its Notification No. 155/66-Cus dated 30-7-1966. These regulations
superseded several rules made earlier covering individual situations.
Subsection (2) of section 65 deals with any waste of refuse arising during the
manufacturing operations or other processes done in the warehouse. The question that is
considered in this provision is whether any import duty should be levied on the waste or
refuse. The answer is dependent upon whether finished product manufactured out of the
manufacturing process or other operations is exported out of India or cleared for home
consumption.
8.24 Customs

If the finished products are cleared for home consumption on payment 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 case of cutlery manufactured out of imported high speed
cutting steel strips. Locally procured plastic is used for providing handles to the cutlery i.e.
knife, fork, 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 manufactured and
they are cleared for home consumption. The steel strip content in the above 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)=37kg]. 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 alternative is where the finished goods are exported out of the country. Take
the same example. In this case the manufacturer has two options. He can destroy the
waste. 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 the steel strip
content in the waste. Remission of duty on the imported material content in the waste or
refuse is allowed only when the final product concerned is exported out of India and the
waste is destroyed.
Example 2: Let us now take an example where the final products are both exported and
cleared for home consumption. The question of appropriating the waste will have to be
decided first. The imported raw material is rubber. The end product is motor vehicle tyre.
The additional materials used are (1) beading wire, (2) tyre cord warp sheet (3) chemicals
and (4) mineral oil.
Total quantity of rubber issued 1500kg
Weight of beadwire used 10kg
Weight of tyre chord warp sheet used 180kg
Weight of chemical used 4kg
Weight of mineral oil used 16kg
Total weight of raw materials issued 1710kg
Total no. of tyres manufactured 100pcs
Weight per tyre 16.5kg
Thus total weight 100 tyres 1650kg
Wastage 60kg
 Warehousing 8.25

Total no. of tyres cleared for home consumption 25pcs.

Total no. of tyres exported 75pcs.
75
Wastage relatable to tyres exported 60kg × = 45
100
Imported rubber content in the waste relatable to the exported tyres
1500
= 45× = 39.5 kg(appx)
1710
Import duty leviable on the import rubber content in the waste can be remitted if 45 kgs of
the waste are destroyed.
Weight of waste relatable to tyres cleared for home consumption = 15 kg
Imported rubber content in the waste = 13.2 kg
Import duty is compulsorily leviable on this quantity of import rubber. The value would be
the original import value; but the rate of duty would be that prevailing on the date of
payment of duty.
♦ Relevant date for determination of rate of duty leviable on import material
content in the waste: The next question is the relevant date for valuation and tariff
valuation of the import material content in 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 presentation 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. Hence 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 payment 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 warehouse and cleared as such the classification
would not change. The rate of duty prevailing on the date of presentation of bill of entry
for home consumption will apply. Normally it would not be less than the rate prevalent at
the time of importation. Hence, there would normally be no loss of revenue on account of
warehousing. 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 instead of attaching the difference in duty, that is lost in
the process of manufacture 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 main conditions of section 66 are:
(i) imported materials are used in the manufacture 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 that in the interest of establishment or
development of a domestic industry, it is necessary to give protection to the finished
products. Then, the Central Government 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) the double duty bond under section 59 and the bond under section 65 cause undue
financial 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 manufacture at the discretion and control of the customs causes undue
operational bottlenecks
(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 manufactured out of these
material will be exported out of India, has been found to be a more feasible and viable
alternative to the manufacture-in-bonded warehouse procedure.
The shift of supervisory control from the Customs Authorities to the Administrators of the
Zone, had certain inherent advantages, which were in the interests of the manufacturers
and conducive to the growth of the industries.
 Warehousing 8.27

Several ministries and departments were involved in the development and welfare of
these zones -
- The Industries department offered facilities in the form of favourable policy.
- Banking department offered banking facilities including loans etc
- Railways offered quick transport facilities
- Civil supplies department looked after the marketing needs of consumer products.
- DGTD attended to the 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 administrative set up, more interested in solving the
problems and practical difficulties of the entrepreneurs. The administrator did not belong
to or identify himself with any one of the above ministries or departments. As such he did
not have any over-riding vested interest.
8.9.1 Qualification of the importer: The importer 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 Development 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. Machinery;
2. Raw materials;
3. Components;
4. Spare parts for machinery;
5. Consumables;
6. Packaging materials;
7. Office equipments, spares and consumables thereof;
8. Tools jigs, gauges, fixtures, moulds, dies, instruments and accessories;
9. 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 within 1 year from the date of exportation from the Zone due to
the failure of the foreign buyer to take delivery;
13. Goods received for repairs or reconditioning, within three years of the date of
exportation, for export after repairs or reconditioning.
The sweep of the coverage is very wide. It covers:
(a) Capital goods like plant and machinery, components and spaceports, ancillaries like
tools, jigs fixtures etc;
(b) Auxiliary equipment, like handling equipment, forklifts cranes etc.;

(c) Establishment equipment like office equipment;

(d) Drawings, blue prints, prototypes, samples etc. for development of the product;
(e) Raw materials, components, packaging material and consumables;

(f) Goods returned without the buyer taking delivery; goods sent back for repair and
return.

8.9.3 Maintenance of accounts: The importer shall maintain proper accounts of

import, 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
Assistant Commissioner of Customs, undertaking to fulfil the obligations and conditions
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
goods, which are not proved to the satisfaction of the Assistant Commissioner to have
been used in the manufacture of articles for export.
8.9.5 Temporary removal, transfer or export of imported goods/manufactured
goods:
Any imported goods or manufactured goods may be permitted to, subject to such
conditions prescribed by the Commissioner/Assistant Commissioner of Customs,
(a) be removed without payment of duty for repairs, processing or display: or
(b) be supplied or transferred to another unit in the zone or 100% EOU, with the
permission of the Development Commissioner of the zone
 Warehousing 8.29

(c) be re-exported out of the country with the permission of the 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% Export 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 PROJECT IMPORTS

Project Imports are the imports of machinery, instruments, and apparatus etc., falling
under different classifications, required for initial set up of a unit or for substantial
expansion of an existing unit. In a project several different items are required, each of
which is importable at different rates of customs duties. Hence, it becomes very
complicated to make assessment for such project imports. Therefore, one consolidated
rate of customs duty has been made applicable for all items imported under a project
irrespective of the nature of the goods and their customs classification.
The items eligible for project import are specified in Heading 98.01 of the Customs Tariff
Act, 1975. These include all items of machinery, spare parts within prescribed limits,
components or raw materials etc for initial setting up of a unit or for substantial expansion
of the same. This scheme has been made applicable to Industrial Plants, Irrigation
Projects, Power Projects, Mining Projects, Projects for Oil or Mineral Exploration and
other projects as may be notified by the Central Government.
Self-examination questions
1. Discuss the procedure for deposit of the imported goods in a private bonded
warehouse and their subsequent removal.
2. How long the imported goods can remain in a warehouse as per the Customs Act,
1962?
3. What are the owner’s right to deal with the warehoused goods under the Customs
Act, 1962?
4. With reference to the provisions of the Customs Act, 1962, explain the following
briefly:
(i) Power of the Central Government to exempt imported material used in the
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 whether any
interest is payable by ‘X’?
Answer
5. As per section 61(2)(ii) of the Customs 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. on 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-existing
duty. Liability to pay interest under section 61(2) of the Customs Act is 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
payable on clearances from the warehouses, then no interest is payable thereon.
Therefore, since in this case the goods have been re-exported without payment of
duty, 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 provisions
under Central Excise law.
The word “demand” as per Black’s Law Dictionary means assertion of a legal right; an
imperative request preferred by one person to another, 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 rightly provides that
before any action is taken against an assessee he must be given reasonable opportunity of
presenting his case. One such situation would be that relating 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 action
prejudicial to the assessee. Thus, if on account of an infraction of the provisions of the
customs law it is considered appropriate to penalise the defaulter, it is necessary to first issue
a show cause notice. The show cause notice 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 notice gives the noticee the opportunity to present his case.
(1) These provisions are invoked in the following situations:
(i) when duty has not been levied;
(ii) when duty has been short-levied;
(iii) when duty has been erroneously refunded;
(iv) when interest payable has not 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 notice 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, research or charitable institution or hospital – within one year from the
relevant date;
(b) in any other case – within six months from the relevant date.
Where any duty has not been levied or has been short-levied or the interest has not been
charged 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 the 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 computing the aforesaid period of one year or six months or five years, as the
case 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 determine 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 amount 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 interest 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-levied/ short-paid or the duty or interest has been
erroneously refunded by reason 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 from the date
of service of the notice on the person under sub-section (1).
(2B) Payment 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 officer 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 interest 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 proper officer shall
proceed to recover such amount in the manner specified in this 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, this 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 or 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 and also on the amount of short-payment of duty, if any, as may be determined by
the 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 payable or ought to have been paid before the date on which the Finance
Bill, 2001 receives 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 provisionally assessed under section 18, the date of adjustment of
duty after the final assessment thereof;
(c) in a case where duty or interest has been erroneously refunded, the date of refund;
(d) in any other case, the date of payment of duty or interest.

9.3 POWER OF THE CENTRAL GOVERNMENT NOT TO RECOVER DUTIES [SECTION

28A]
Notwithstanding anything contained in this Act, if the Central Government is satisfied -
(a) that a practice was, or is, generally prevalent regarding levy of duty (including non-levy
thereof) on any goods imported into, or exported from, India; and
(b) that such goods were, or are, liable -
(i) to duty, in cases where according to the said practice the duty was not, or is not being,
levied, or
(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 Official 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, short-levied, in
accordance with the said practice.
(2) Where any notification under sub-section (1) in respect of any goods has been issued, the
whole of the duty paid on such goods, or, as the case may be, the duty paid in excess of that
payable on such goods, which would not have been paid if the said notification had been in
force, shall be dealt with in accordance with the provisions of sub-section (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 Assistant Commissioner of Customs or Deputy
Commissioner of Customs, in the form referred to in sub-section (1) of section 27, before the
expiry of six months from the date of issue of the said notification.

9.4 DUTIES COLLECTED FROM THE BUYER TO BE DEPOSITED WITH THE CENTRAL
GOVERNMENT [SECTION 28B]
Notwithstanding anything 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 determined or paid on any goods
under this Act from the buyer of such goods in any manner as representing duty of customs,
shall forthwith pay the amount so collected to the credit of the Central Government.
Where any amount is required to be paid to the credit of the Central Government under sub-
section (I) and which has not been so paid, the proper officer may serve on the person liable
to pay such amount, a notice requiring him to show cause why he should not pay the amount,
as specified 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 excess
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 Government under sub-section (I) or sub-section
(3) shall be adjusted against the duty payable by the person on finalisation of assessment or
any other proceeding for determination of the duty relating to the goods referred to in sub-
section (1).
Where any surplus is left after the adjustment made under sub-section (4), the amount 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 surplus amount.
 Demand and Appeals 9.5

9.5 CERTAIN COMMON QUESTIONS ON DEMAND

The following table summarises certain common questions about the provisions
relating to demand.

1. When can proceedings be Whenever there is a short levy/short payment or non-levy

taken under Sec.28? or non-payment, erroneous refund of duty, the proceedings
can be undertaken.

2. What is the difference When excise duty has not at all been charged on the
between non-levy and short product, it becomes non-levy. When the levy has been
levy? charged but not correctly, there is short levy.

3. What is the difference Short 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. What is the difference Short levy arises when the charge itself is done at lower
between 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 levy (when payment is made less than what is due).

5. Should the Department It is mandatory for the Department to issue a show cause
intimate the assessee? notice.

6. Within what time should Where there is fraud, collusion, willful mis-statement or
the show cause notice be suppression of facts or contravention of any provisions with
served? 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 this
time limit.
If the matter is before the Settlement Commission, Sec.
32L(3) specifies that the time commencing from date of
application to receipt of order sending back the case shall
be excluded. It is very important to note that such notice
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. in case of short levy/non-levy or short payment/non-

payment 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. In case of erroneous refund, the date of such refund

d. any other case, date of payment of duty.

8. Is it obligatory on the part Sub-section 2 makes it mandatory for the officer to consider
of the Department to take on the representation of the assessee. The officer has to
record the assessee’s comply with the principles of natural justice.
representation ?

9. Is it mandatory for the It is mandatory for the officer to pass a speaking order.
officer to pass a written Speaking order is one which gives the reasons for the
order or will a simple letter decision. A simple letter asking for payment of duty is not
from the department suffice? an order.

10. Should the assessee pay The assessee has a right of further appeal which grants
the amount after passsing him rights of obtaining stay of demanded amounts. (Please
the order? see Chapter on Appellate Procedures.)

11. Should the officer For cases involving fraud, etc. adjudication should
adjudicate cases within a complete within 1 year and other cases within 6 months.
particular time limit?

12. Can the assessee pay No notice would be issued if full duty is paid and intimated
duty before issue of show to the Department. However this will not apply to cases of
cause notice? 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, and 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 28 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, willful mis-statement,
suppression of fact and very important with an ‘intent of evading the payment of duty’.
 Demand and Appeals 9.7

Fraud may be defined as “Deceit, imposture, criminal deception done with the intention of
gaining an advantage”.
Collusion may be defined as “to act in concert especially in fraud; a secret agreement to
deceive”.
Willful mis-statement may be explained as “stating wrongly or falsely deliberately”.
Suppression of facts may also be explained as “to hold back the facts”.
It is very important to note that unlike section 11A of the excise legislation, under section 28
there is no need to prove intention 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 numerous decisions regarding this section and its 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 Liniments 1989
(40) E.L.T. 276 - (SC) and also in Padmini Products v. CCE 1989 (43) E.L.T. 195(SC).
2. Demand against approved classification list only prospective - CCE v. Cotspun Ltd. 1999
(113) E.L.T. 353 (SC -LB).
3. Extended period cannot be invoked where classification list is approved. - Nat Steel
Equipment v. CCE 1988(34) E.L.T. 8; Prabhu Steel Industries v. CCE 1997 (95) E.L.T.
164 (SC).
4. Extended period not invokable when bonafide belief arises out of court judgements -
Cosmic Dye Chemicals v. CCE 1995 (75) E.L.T. 72(SC).
5. Extended period not invokable when there are conflicting decisions prevailing and non-
requirement under law to do something.- Pushpam Pharmaceuticals Co.v. CCE 1995
(78) E.L.T. 401 (SC).
6. Proviso to Sec. 11A does not require that notice should be issued within 6 months (now
one year) of knowledge of Department. Notice can be issued anytime within 5 years of
relevant date. - Nizam Sugar Factory v. CCE 1999 (114) E.L.T. 429 (T-LB).
7. Wrongful understanding of law does not constitute suppression - Vinod Paper Mills Ltd. v.
CCE 1997 (91) E.L.T. 245 (SC).
8. 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).
9. 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).
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 INTEREST, PENALTY, CONFISCATION, DUTY PAYMENT UNDER PROTEST

9.7.1 Interest [Section 28AA ] : Section 28AA has been made redundant after passing 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 effect
from 11th May 2001, on all cases of short payment etc. interest is liable to be paid under
Section 28AB and would be charged from the month following the month when the duty should
have been paid whether it involves fraud, collusion, willful misstatement or suppression of fact
with in intent to evade the payment of duty or not. Therefore if the demand is raised, the
interest under Sec. 28AB will follow. Under this section the Central Government by notification
is empowered to specify the rate of interest to be charged under Section 28AB and such
interest rate should not be below 10% and should not exceed 36% per annum. Presently, the
interest as said above is payable at the rate of 13% per annum starting from the date of the
next month succeeding the month in which the duty ought to have 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 been
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 stages 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 constituted - refer Note at the end of Chapter].
For orders passed by officers lower than the rank of Commissioner of Customs, the first
appeal lies to the Commissioner (Appeals) and there from to the Appellate Tribunal, and then
to High Court and finally to the Supreme Court. Where the order of the Tribunal does not
relate to determination of rate of duty or value of goods, an appeal is made to the High Court
under sections 130, instead of appeal to Supreme Court. In cases where the order-in-original
is passed by a Commissioner of Customs, appeal lies directly to the Appellate Tribunal.
The provisions contained in sections 128 to 131C are similar to the provisions contained in
sections 35 to 36 of the Central Excise Act.
9.8.2 Appeals to Commissioner (Appeals) [Section 128] Any person aggrieved by any
decision or order passed under this Act by an officer of Customs lower in rank than a
Commissioner of Customs may appeal to the Commissioner (Appeals) within sixty days from
 Demand and Appeals 9.9

the date of the communication to him of such decision or order.

Provided that the Commissioner (Appeals) may, if he is satisfied that the appellant was
prevented by sufficient cause from presenting the appeal within the aforesaid 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 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.
The appeal before the Commissioner (Appeals) is to be filed in Form No.C.A.1. in duplicate
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 this section:
1. The provisions of section 5 of the Limitation Act 1963 will apply only to courts. Therefore,
quasi judicial authorities such as Collectors and Tribunals are not required to follow the
provisions of that Act for computation of 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 prescribed under that particular statute. [Sakuru vs. Tanaju, 1985
(22) ELT 327 (SC)].
2. A person who is not a party to the original proceeding cannot file an appeal. He is not an
aggrieved person as none of his legal rights are affected.
3. Additional 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 authority is
competent to allow such grounds, it should be established that the additional grounds are
bonafide and could not be raised earlier before the assessing officer.
4. In an appeal, several grounds can be raised including alternative grounds. It is not open
to the authority to pick one of the grounds and reach a conclusion. 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. Therefore, it would be improper to pick up one
of the grounds to come to the conclusion that that is all along the claim of the appellant.
[Bombay Chemicals Pvt Ltd vs. UOI, 1982 ELT 171 (Bom)].
5. CHA (Custom House Agent) cannot file an appeal on 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 provisions 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)].
9.10 Customs

9.8.3 Procedure in appeal [Section 128A]: 1. The Commissioner (Appeals) 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 appellant 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 grounds of appeal was not
wilful or unreasonable.
3. The Commissioner (Appeals) shall, 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 confiscation 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 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 duty not levied, short-levied or erroneously refunded shall be passed unless
the appellant is given notice within the time-limit specified in section 28 to show cause
against the proposed order.
4. The order of the Commissioner (Appeals) disposing of the appeal shall be in writing and
shall state the points for determination, the decision thereon and the reasons for the
decision.
5. 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. [Sub-section 4A]
6. On the disposal of the appeal, the Commissioner (Appeals) shall communicate the order
passed by him to the appellant, the adjudicating authority, the Chief Commissioner of
Customs and the Commissioner of Customs.
9.8.4 Appellate Tribunal [Section 129]
1. The Central Government shall constitute an Appellate Tribunal to be called the Customs,
Excise and Service Tax Appellate Tribunal (CESTAT) consisting of as many judicial and
technical members as it thinks fit to exercise the powers and discharge the functions
conferred on the Appellate Tribunal by this Act.
2. A judicial member shall be a person who has for at least ten years held a judicial office in
the territory of India or who has been a member of the Indian Legal Service and has held
a post in Grade I of that service or any equivalent or higher post for at least three years,
or who has been an advocate for at least ten years.
 Demand and Appeals 9.11

For the purposes of this sub-section, -

(i) in computing the period 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,
during 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, there shall be
included any period during which the person has held a judicial office, 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.
3. A technical member shall be a person who has been a member of the Indian Customs
and Central 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.
4. The Central Government shall appoint —
(a) a person who is or has been a Judge of a High Court; or
(b) one of the members of the Appellate Tribunal, to be the President thereof.
5. The Central Government may appoint one or more members of the Appellate Tribunal to
be the Vice-President, or, as the case may be, Vice-Presidents, thereof.
6. 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 delegated to him by the
President by a general or special order in writing.
9.8.5 Appeals to Appellate Tribunal [Section 129A]
1. Orders appellable to Appellate Tribunal: Any person aggrieved by any of the following
orders may appeal to the Appellate Tribunal against such order -
(a) a decision or order passed by the Commissioner of Customs as an adjudicating
authority;
(b) an order passed by the Commissioner (Appeals) under section 128A;
(c) an order passed 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 section 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 not 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 baggage;
9.12 Customs

(b) any goods loaded in a conveyance for importation into India, but which are not
unloaded at their place of destination in India, or so much of the quantity of such
goods as has not been unloaded at any such destination if goods unloaded 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 rules made thereunder.
In the following cases, the Appellate Tribunal may refuse to admit an appeal in respect of an
order referred to in clause (b) or clause (c) or clause (d) where –
(i) 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 under section 125; or
(ii) in any disputed case, other than a case where the determination 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 points 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 necessary for the purposes of this Act. Such
Committee shall consist of two Chief Commissioners of Customs or two Commissioners of
Customs [Sub-section (1B)]. Such Committee 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
section 128A is not legal or proper.[sub-section (2)]
Time limit for filing appeal: Every appeal under this section shall be filed within three
months from the date 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 objections: On receipt of notice that an appeal has been preferred
under this section, 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,
within forty-five days of the receipt of the notice, a memorandum of cross-objections verified in
such manner as may be specified by rules made in this behalf against 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 specified in sub-section (3).
The Appellate Tribunal may admit an appeal or permit the filing 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.
 Demand and Appeals 9.13

Form of Appeal: An appeal to the Appellate Tribunal shall be in form CA3 and shall be
verified in such manner as may be specified by rules made in this behalf.
Sub-section (6), of section 129A prescribes the amount of fee for filing an appeal to the
Appellate Tribunal.

Amount of duty, interest demanded and penalty levied Fee for filing an appeal

Less than or equal to Rs. 5,00,000 Rs. 1,000.00

More than Rs.5,00,000 but not exceeding Rs.50,00,000 Rs. 5,000.00

More than Rs.50,00,000 Rs.10,000.00

However, no such fee shall be payable in the case of an appeal preferred by Commissioner of
Customs. Also, no fee shall be payable in case of filing of a memorandum of cross-objections.
Sub-section (7) prescribes a fee of Rs.500 for every application 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 for restoration of an appeal or an application. However, no such fee
shall be payable in the case of an application filed by or on behalf of the Commissioner of
Customs.
3. Orders of Appellate Tribunal [Section 129B]:
1. The Appellate Tribunal may
- pass such orders thereon as it thinks fit, confirming, modifying or annulling the
decision or order appealed against or
- may refer the case back to the authority which passed such decision or order with
such directions as the Appellate 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 parties 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 time 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 Commissioner of Customs or the other party to the appeal. Such
amendments shall be made 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 reducing a refund or
otherwise increasing the liability of the other party shall not be made unless the Appellate
Tribunal has given notice to him of its intention to do so and has allowed him a
reasonable opportunity of being heard.
Every appeal shall be decided by the Appellate Tribunal 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 proceedings of a appeal, the Appellate Tribunal 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 specified period, the stay order shall
stand vacated on the expiry of the period of 180 days.
3. The Appellate Tribunal shall send a copy of every order passed to the Commissioner of
Customs and the other party to the appeal.
4. Save as otherwise provided in section 130 or section 130E, orders passed by the
Appellate Tribunal on appeal shall be final.
4. Procedure of Appellate Tribunal [Section 129C]
The powers and functions of the Appellate Tribunal are to be exercised and discharged by the
Benches constituted by the President of the Tribunal and such benches would be formed from
amongst the members of the Appellate Tribunal. [Sub-section (1)]
Under sub-section (2) to Section 129C, it is provided that such bench shall 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 other member of the Appellate Tribunal authorized in this behalf by the President may sit
singly and dispose of any case which has been allotted to the bench of which he is a member,
subject to the condition that none of following does not exceed ten lakhs:
(i) 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 under Section 125;
(ii) 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 involved 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 shall be decided
according to the opinion of the majority of these members including those heard first.
Any proceeding before the Appellate Tribunal shall be deemed 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 Customs or Commissioner of

Customs to pass certain orders [Section 129D]
Section 129D 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
Customs has passed any order so as to satisfy itself upon the legality or propriety of the order.
Thereafter, the Committee of Chief Commissioners may direct such Commissioner or any
other Commissioner to apply to the Appellate Tribunal to determine 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 subordinate 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 period of one year from
the date of the order/decisions of the adjudicating authority.
The provisions of this section do not apply to any decision or order in which 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 proceedings 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 powers have also
been given to Commissioner of Customs in respect of proceedings in which an adjudicating
authority subordinate to him has passed any decision or order. 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 shall be passed so as to prejudicially affect any person unless, such
person is given 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 under section 28 to
show cause against the proposed order. Further, such revisionary proceedings cannot be
initiated after the expiry of six months from the date of 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 – Customs and
Excise Revenue Appellate Tribunal with the object of deciding matters relating to classification
and valuation. However, with the CEGAT functioning smoothly, 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 Government is vested with the powers to review orders of the Commissioner or
Commissioner Appeals on an application made by any aggrieved person. The powers can be
exercised only in the following cases:
(a) any goods imported or exported as baggage;
(b) any goods loaded in a conveyance for importation into India, but which are not unloaded
at their place of destination in India, or so much of the quantity of such goods as has not
been unloaded at any such destination if goods unloaded 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 rules 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 on or after 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 customs 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 Customs or the other party aggrieved by any order passed by the
Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-
section 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 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 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
shall formulate that question.
The appeal shall be heard only on the question so formulated, 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 judgment
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 by the Appellate Tribunal, by reason of a decision on any
question of law.
When an appeal 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 there 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 those who first heard it.
The provisions of the Code of Civil Procedure, 1908, relating 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.
9.8.10 Appeal to Supreme Court: The Customs Act, 1962, provides a two tier machinery
for redressal of grievances against the decision of the Appellate Tribunal. In cases where the
decision of the Appellate 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
appellable to the Supreme Court under Section 130E. However, where 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 High Court certifies it to be a fit case for appeal to
the Supreme Court.
It may be noted that the Supreme Court in L. Chandra Kumar v. UOI 1997 (92) E.L.T. 318
(S.C.) held in the context of Central Administrative Tribunals it would be incumbent on the
parties to approach 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 such a decision. The
Madhya Pradesh High Court has held in Neo Sacks Limited v. CEGAT 1999 (114) E.L.T. 826
that the decision of the Supreme Court in L.Chandra Kumars 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
petition.
9.18 Customs

9.8.11 Orders appealable to the Supreme Court: Section 130E specifies 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) in an appeal made under section 130,or
(ii) on a reference made under section 130 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 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 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
establishment of the NTT, the appeal from any order of the Appellate Tribunal having
relation to the determination of rate of customs duty or value of goods, among other
things shall first lie to NTT.
Note: National Tax Tribunal means the National Tax Tribunal established under section 3 of
the National Tax Tribunal Act, 2005. The National Tax Tribunal Act, 2005 has been enacted
by the Parliament in pursuance 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
Tribunal (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 of appeals under the Customs Act by substituting the National Tax Tribunal for the
High Court, for facilitating quick adjudication of disputes under direct and indirect tax laws and
achieve uniformity in the interpretation of central legislation. This Act provides that on
establishment of the National Tax Tribunal, High Court will not have appellate jurisdiction in
matters of direct and indirect taxes. This Act vests jurisdiction in NTT to decide direct and
indirect tax disputes 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 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 authorize
one or more chartered accountants or legal practitioners or any person duly authorized by him
or it to present the case before the NTT. The Government 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 chartered accountants to present the case of the Government before the
NTT.
 Demand and Appeals 9.19

The Act provides that any person, including any department of the Government, aggrieved by
any decision 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 Supreme Court can
allow filing of the appeal beyond 60 days, if the appellant was prevented by sufficient cause
from filing the appeal within the said period of 60 days.
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. Therefore, the
constitution of the NTT will take effect only after the stay is vacated.
Self-examination questions
1. Briefly state the law relating to demand for payment of duty under section 28 of the
Customs Act, 1962.
2. What are the ‘relevant dates’ for the purpose of issuing the show cause notice for
demanding customs duty not levied?
3. Write a brief note on power not to recover duties not levied or short-levied as a result of
general practice under section 28A of the Customs Act, 1962.
4. Mention briefly the orders that are not appealable to the Appellate Tribunal.
5. Write a brief note on the orders appealable to the Supreme Court.
6. Discuss the provisions in respect of making an appeal to the High Court.
7. Explain briefly the powers of revision of Board or Commissioner of Customs in certain
cases.
8. Discuss the revisionary powers of the Central Government.
9. Write a note on the Committee of Commissioners.
10. ‘M’ imported second-hand machinery from Singapore and filed the classification list. ‘M’
claimed that the machinery was fully exempt from payment of customs duty under a
Notification. However, the Assistant Commissioner of Customs, the authority in original,
passed an order-in-original holding that the machinery imported by ‘M’ was classifiable
under a different heading and chargeable to customs duty. Consequently, ‘M’ had to
furnish the bank guarantee for the duty payable under that heading in order to release
the machinery.
Subsequently, the Assistant Commissioner of Customs ordered to encash the bank
guarantee executed by ‘M’ to realise the customs duty. No sooner the aforesaid order-in-
original was issued to ‘M’, the Customs Department 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 the Assistant Commissioner was an
9.20 Customs

appelable order and since the statutory period of filing an appeal was yet to expire, the
Department’s action was not correct.
Do you think the stand taken by the Customs Department is tenable in law? Discuss.
Answer
2. Similar situation was addressed to by the High Court in the case of the Ocean Driving
Centre Ltd. v. Union of India 2005 (180) E.L.T. 313 (Bom.). In this case, the petitioner
contended that he had a statutory right of appeal before the Appellate Authority and at
the same time, he also had a right to move an application to get the pre-deposit waived
in terms of section 129E of the Customs Act, 1962. He further submitted that he had an
arguable case on classification. The debatable question 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 debatable issue, he would not have been allowed to claim
release of the goods on furnishing the bank guarantee. The bank guarantee was
furnished to secure dues of Department. The same was valid and should have been kept
alive till the dispute was finally 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 appeal 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 1998 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 their own policy. The High Court held that it was not
proper on the part of the Department to encash the bank guarantee before the expiry of
the statutory period provided for filing appeal.
In the given case also ‘M’ had a statutory right to file an 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 tenable 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 non-submission of documents required for claim of lower
value or rate of duty. Sometimes, such excess payment of duty may be due to shortage/short
landing, pilferage of goods or even incorrect assessment of duty by Customs. In such cases,
refund 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 duty 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: The refund of any duty and interest, can be claimed either by
a person who has paid 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 application
in duplicate in the form as prescribed in the Customs Refund Application(Form) Regulations,
1995, to the jurisdictional Deputy/Assistant Commissioner of Customs. Such application is to
be made before the expiry of six months from the date 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 before the expiry of one year from the date of payment of duty and interest.
The application for refund is required to be filed with documentary or other evidence including
documents relating to assessment, sales invoice and other like documents to support the
claim that the duty and interest was paid in excess, incidence of duty or interest has not been
passed on by him to any other person, and the refund 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 prescribed Form as per the Customs Refund Application(Form)
Regulations, 1995. However, in case the application is found to be incomplete, the Customs
has to return the application to the applicant, pointing out the deficiency. The applicant has to
re-submit the application after making good the deficiency, for scrutiny by 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 question the correctness of the order subsequently by filing a refund
claim. [Flock (India) Private Ltd. 2000 (120) ELT 285 (SC)]
Refund claim is not maintainable when assessment order is not challenged [M.F. (D.R.)
Circular No. 24/2004 – Cus., dated 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, research 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 limitation of one year or six months, as the case may be, does not apply where any duty
and interest has been paid under protest. Normally, the time limit of six months or one year is
computed from the date of payment of duty, however, in following situations, such time limit is
computed differently:
(a) In case of goods which are exempt from payment of duty by an ad-hoc exemption order
issued under sub-section (2) of section 25 of the Act, the limitation of one year or six months,
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 limitation of one year
or six months, as the case may be, is to be computed from the date of adjustment of duty after
the final assessment thereof;
(c) The date of payment of any duty and interest in relation to a person, other than the
importer shall be 'the date of purchase of goods' by such person.

10.3 PROCESSING OF REFUND CLAIM

The application of refund found to be complete in all respects by Customs, 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 interest 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
following 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 any 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 incidence of such
duty and interest to any other person;
(d) if amount found refundable relates to export duty paid on goods which has returned to
exporter as specified in section 26;
 Refund 10.3

(e) if amount relates to drawback of duty payable under section 74 and 75;
(f) if the duty or interest was borne by a class of applicants which has been notified 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 documents. In case, any duty ordered to be refunded to an
applicant is not refunded within 3 months from the date of receipt of application for refund,
interest is to 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 immediately 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, the application is deemed to have been received on the
date on which a complete application, as acknowledged by the proper officer of Customs, has
been made.
Where any order of refund is made by the Commissioner (Appeals), Appellate Tribunal,
National Tax Tribunal or any Court against an order of the Assistant Commissioner/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 refund.
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 deposits for project imports, security
for provisional release of goods etc. [Section 27A]
(Reference : The Customs Refund Application (Form) Regulations, 1995 issued 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 follows:
Where on the exportation of any goods any duty has been paid, such duty shall 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 goods are re-imported within one year from the date of exportation; and
(c) an application 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 refund 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 is-
a. in the 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, before the expiry of
one year;
b. in any other case, before the expiry of six months
from the date of payment of duty and interest, if any, paid on such duty. The limitation period
of 1 year or as the case may be 6 months is not applicable in the case of duty paid under
protest. The application for refund shall be in the format specified in the Customs Refund
Application (Form) Regulations, 1955 and should be accompanied by such documentary or
other evidence including the documents 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 such refund is claimed has been paid by him. The applicant should make a
declaration 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 application for refund of duty should
contain the following details:
a. Import/Export document, Purchase Invoice – No. and date.
b. Duty deposit reference and date
c. Description of goods
d. Name and address of
1. Importer
2. Customs House Agent
3. Applicant
e. Refund claim under section
f. Ground of claim
g. Amount of refund claim
h. Amount of modvat credit availed from the additional duty of customs paid and now
recovered by the refund claim.
i. List of enclosures
j. Any further details deemed necessary and relevant to the refund claim.
 Refund 10.5

In addition to the above the applicant should subscribe to the following declaration:
“I/We ………………… hereby declare that-
a. the contents of the refund claim as per the form above are true and correct to the best of
my/our information and belief;
b. the amount and ground for which this refund claim has been filed has not been previously
claimed and paid; and that
c. the excess duty claimed as refund has not been passed on to any other person by the
importer or the exporter.”
10.5.3 Documents to be attached with the refund claim
1. Letter of authorisation from the importer or buyer if the applicant is an agent.
2. Triplicate copy of the bill of entry/Post parcel wrapper/Shipping bill/Baggage receipt or
the purchase invoice.
3. Duty challan or other document as evidence of duty paid.
4. Signed working sheet for the amount of refund claimed.
5. Customs attested invoice.
6. Customs attested packing list.
7. Document for establishing the applicant’s eligibility to receive the refund amount in terms
of the proviso to sub-section (2) of section 27 of the Act, including documents for the
purposes of sections 28C and 28D of the Act.
8. Contract and purchase order.
9. Modvat credit certificate from the Central Excise Authorities.
10. Short delivery certificate from custodian
11. Short shipment certificate from the supplier.
12. Survey report

10.6 DUTY PAID UNDER PROTEST

In a case where the 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 importer 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 imports goods, he has to pay the customs duty on such goods. This duty is
recovered 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 makes a claim for
refund of duty and on acceptance of such claim if he retains the amount of refund with himself
without passing it to the purchaser, then this would be called as unjust enrichment.
Therefore, wherever there is an over assessment 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
identifiable 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 prove 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. 1000/-. 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 refunded. 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, the 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 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 constitutional. However, the theory that the
manufacturer would be unjustly impoverished 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. 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 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 of
discovery of mistake has been disapproved.
d. Unless the levy is struck down as unconstitutional, all Courts must exercise jurisdiction in
terms of section 11B and refuse to grant relief if the incidence of tax has been passed on.
e. Whatever amount is 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.
The Supreme Court has held in Solar Pesticides case 2000 (116) ELT 401 that refunds 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 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 conclusion that incidence of duty has
been passed on to the buyer, as such uniformity may be due to various factors.
The principle of unjust 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. 40/2002-Cus. dated
17.07.2002, unjust enrichment provisions apply to provisional assessment 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 the full incidence of such duty to the
buyer of such goods.
10.7.1 Exceptions to the Doctrine of Unjust Enrichment
The doctrine of unjust enrichment does not apply to the refund of duty and interest, if any, paid
on such duty if such amount is relatable to:
(i) drawback of duty payable under sections 74 and 75;
(ii) export duty as specified in section 26;
(iii) the duty and interest, if any, paid on such duty paid by the importer or the exporter, as
the case may be, if he had not passed on the incidence of such duty 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 buyer, if he had not passed on the incidence of such
duty and interest to any other person;
(vi) the duty and interest borne by any other such class of applicants as the Central
Government may, by notification in the Official Gazette, specify. However, no notification
under clause (vi) shall be issued unless in the opinion of the Central Government the
incidence of duty and interest has not been passed on by the persons concerned to any
other person.
Self-examination questions
1. With reference to the Customs Act, 1962, explain the circumstances under which refunds
will not be credited to the Consumer Welfare Fund.
2. Discuss the provisions in respect of interest on delayed refunds.
3. List the document to be attached with the refund claim.
4. 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 refund claim was filed by ABC Ltd. on the ground that the
duty had been wrongly levied. However, the claim was rejected by the Department on
10.8 Customs

the ground that since no appeal had been filed against the assessment order, 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 person 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” necessarily implied that a claim for refund could be made
without challenging the assessment in an appeal. Further, if the assessment was not
correct, a party could file a claim for refund and the correctness of the assessment order
could be examined whilst considering the claim for refund.
Give your opinion on the issue with the help of decided case laws, if any.
5. Does the principle of unjust enrichment apply to refund of import duty paid on capital
goods?
Answers
4. The Supreme Court in the case of Priya Blue Industries Ltd. v. Commissioner of Customs
(Preventive) 2004 (172) E.L.T 145 (S.C.) has stated that once 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/or modified in an appeal, that order
would be enforceable. So long as the order of assessment is effective, the duty would be
payable as per that order of assessment. A refund claim is not an appeal proceeding.
The officer considering a refund 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 order.
The Apex Court clarified that as the words “in pursuance of assessment order” come
after the words “Any person claiming refund of any duty and interest, if any, paid 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 only. They enable a person
who has paid duty in pursuance of an order of assessment 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 claim cannot be filed against an assessment
order, which has not been modified in an 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 Department is correct.
5. The Large Bench of the Tribunal in the case of SRF Ltd. v. CCus. Chennai 2006 (193)
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 now been overruled by the above-
mentioned judgement of the Large Bench of the Tribunal.
 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 not so consumed, but are exported out of
the country, the cost of export goods gets 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 goods 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) Goods not conforming to the specification of the order
(ii) 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 importation 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 gained greater importance with the establishment of 100% Export Oriented Units where
goods manufactured are mainly exported to earn foreign exchange.

11.2 DRAWBACK OF 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 passengers
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 consequentially necessitated grant of the rebate or drawback at the port of export of the
goods. This in turn necessitated formulation of certain rules and the procedure for 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 matter 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) are entered for export and the proper officer makes an order permitting clearance and
loading of the goods for exportation under section 51; or
(ii) are to be exported as baggage and the owner of the baggage for the purposes of
clearing it, makes a declaration of its contents to the proper officer under section 77 and
such officer makes an order permitting clearance of the goods for exportation, or
(iii) are entered for export by post under section 82 and the proper officer makes 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 be permissible if
(a) the goods are identified to the satisfaction of the Assistant 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 Section 74(1):
The substance of this provision is that
(a) The goods should have been imported into India
(b) The duty of customs should be paid thereon
(c) The goods should be capable of being easily identified as the goods, which were
originally imported.
(h) The goods should have been entered for export either on a shipping bill through sea
or air; or on a bill of export through land; or as baggage; 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 11.3

goods for export.

(i) the goods are identified to the satisfaction of the Assistant or Deputy Commissioner of
Customs as the goods, which were imported, and
(j) the goods are entered for export within two years from the date of payment of duty on
the importation thereof
Once these conditions are satisfied, then the export goods are entitled to payment of
drawback of an amount equal to 98%. The conditions could be amended or modified
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 goods should be entered for export within two years from
the date of payment of duty on the importation. It may be noted that the time period is related
to the date of payment of duty and not date of importation.
In any particular case, if sufficient reason is shown by the importer as to why he was
prevented from exporting the goods within the said period of two years, the Central Board of
Excise and 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 conditions is that the identity of the
goods exported should be established as the one which has been imported earlier on payment
of duty. The authority who has to be satisfied 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 examination emphasis
will be laid on
(i) description of the goods
(ii) quantity and weight
(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 later, it is desirable to
have the above aspects ascertained during the customs examination 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 authorities at the port of export. The customs authorities would physically
examine the goods with reference to the above recorded examination report recorded at the
time of import. If identity is to be established through documents, the relevant materials are: -
11.4 Customs

(i) import documents including indent, acceptance, contract, invoice, packing specification,
payment documents, triplicate copy of Bill of Entry, insurance and or other survey
reports;
(ii) correspondence covering the circumstances necessitating return of the goods, the
importation/test report thereon, the letter to supplier posing the problem and the
subsequent full correspondence;
(iii) the terms and conditions on which the supplier is prepared to take the goods 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) the 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 goods are used after importation, the
amount of drawback will be at the reduced rates 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
Government, 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
notification 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) separate rates for motor cars and goods other than excluded when imported by a person,
for his personal and private use.
Under this notification, draw back of import duty will not be allowed in respect of the following
goods, if they have been used after their importation in India:
(i) Wearing Apparel;
(ii) 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 they would be entitled
 Duty Drawback 11.5

to 98% drawback.
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 drawback 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 Percentage of duty
consumption and the date when the goods are placed paid as drawback
under the customs control for export
1. Not more than 6 months 85%
2. More than 6 months but not more than 12 month 70%
3. More than 12 months but not more than 18 months 60%
4. More than 18 months but not more than 24 months 50%
5. More than 24 months but not more than 30 months 40%
6. More than 30 months but not more than 36 months 30%
7. More than 36 months 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 Special rate of drawback in respect of motor vehicles: Having regard to the
international 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 person for his personal
and private use. While 98% of the duty paid is refundable if the car or goods are re-exported
immediately, the percentage of reduction of the drawback is related to use of the motor vehicle
per quarter as under:
(i) Use per quarter during the first year 4%
(ii) During second year 3%
(iii) During third year 2½ %
(iv) During fourth year 2%
It has been specifically provided that where such cars are exported after the expiry of the
period of two years, the drawback would be allowed only if the Central Board of Excise and
Customs, on sufficient cause being shown, extends the period for expiry beyond two years. It
is further provided that no drawback shall be 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 out the provision of section 74 and in
particular such rules may provide for the following:
(a) Establishing the manner of identification of goods imported in different consignments
which are ordinarily stored together in bulk;
(b) specifying the goods which shall be deemed to be not capable of being easily identified
and
(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 in exercise of powers of
section 74 (3) inter alia provide that
(i) in the case of exports by post, the outer cover should bear in bold letters an inscription
“Drawback Export”; a declaration/claim in the prescribed form should be submitted along
with parcel; and the date of receipt of this claim in the customs department from the
postal authorities, will be deemed to be the date of filing of the drawback claim;
(ii) in other cases the exporter should state on the shipping bill or Bill of Export:
(a) description, quantity and other relevant particulars of the goods;
(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 thereof
(d) indicate whether the goods were taken for use after importation or not
(e) enclose copies of import, invoice, packing list, export invoice permission of 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 prescribed form, should be filed with the proper officer of
customs, within three months of the date of let export order ( under section 51) and the claim
should be accompanied 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 duty
(c) Export invoice and packing specification
(d) Bill of lading or airway bill as proof of effective export
(e) Permission of RBI etc.
 Duty Drawback 11.7

(f) Import invoice and packing specification

(g) Any other document necessary.
(ii) 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.
(ii) The customs department shall pay to the exporters, or an agent specially authorised by
the exporter to receive the drawback amount, the eligible drawback and interest if any.
(iv) If there is any erroneous or excess payment of drawback, it shall be demanded and if the
exporters fails to pay the demand, it can be recovered in the manner prescribed under
section 142
(v) The Central Government can relax the provisions 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 MANUFACTURE OF

EXPORT GOODS [SECTION 75]
The drawback under section 75 is on a totally different footing. The following important
aspects should be remembered in this regard:
(i) The goods exported are totally different from the inputs.
(ii) 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 final product is
not capable of easy verification at the point of export
(iv) The goods, 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 and may not also be
capable of verification at the time of exportation.
The underlying 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 verification of the mode of manufacture, the
quantum of raw material required, the average content of duty paid articles in the final product
and lastly the standardisation 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 Government that in respect of good of any class or description manufactured,
processed or on which any operation has been carried out in India, being
(1) the goods have been entered for export and an order permitting the clearance and
holding thereof 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 drawback should be allowed of the duties of customs chargeable under this Act or any
imported materials class or description used in the manufacture or processing of such goods
or carrying out any operation on such goods, the Central Government may by notification in
the Official Gazette, direct that drawback shall be allowed.
♦ Explanation In this case, the rate of duty is not determined by the officer granting 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 exported. 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 Government would
be applicable for a prescribed period only. If there is (a) any variation 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 applicable. 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
drawback is required to furnish continuously its costing and production data to the
organisation entrusted with the responsibility of fixation of rates of drawback.
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 any correlation to either the valuation of
the goods at the time of exportation or the prevailing rates of duty on the goods at the time of
export. However, in the case of section 75 drawback, since the identity of the inputs which
have suffered customs or excise duty as the case may be, is extinguished in the final product,
there has been a necessity to correlate the grant of drawback with the value of the goods
exported. It has therefore been prescribed under proviso to section 75(1) of the Customs Act
that no drawback of duty shall be allowed under this section if:
(a) the export value of the finished goods or the class of goods is less than the value of the
imported material used in the manufacture or processing 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 imported materials
used in the manufacture or processing of such goods or carrying out any operation on
such goods or class of goods as may be notified by the Central 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 exporter 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 and 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 more than the total quantity of like material that has been used
in the goods manufactured, processed or on which any operation has been carried out in India
and exported 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 goods exported shall for
the purpose of sub-section (1) be deemed to be imported material.
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, providing for, inter alia
(a) the payment of drawback equal to the amount of duty actually 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 Rules as the average amount of duty paid
on the materials of that class or description used in the manufacture or processing of
export goods or carrying out any operation on export goods of that class or description
either by manufacturers generally or by persons processing or carrying out any operation
generally or by any particular manufacturer or particular person carrying on any process
or other operation, and interest if any payable thereon.
(b) Specifying the goods in respect of which no drawback shall be allowed and
(c) Specifying the procedure for recovery or adjustment of the drawback in case where there
is variation in the basic material on which the drawback rate or the interest chargeable
has been prescribed
(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 officer 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 and the time within which the claim for payment of drawback may be filed.
Sub-section (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 changes in the rates
of duty on inputs used in the export of goods.
11.5.4 Rules made 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
Drawback 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 other 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 determined by the Central
Government under rule 3 or revised under rule 4 can now be allowed with retrospective
effect from a date to be specified by notification. However this date should not be earlier
than the date of changes in the rates of duty on inputs used in the export product. Thus
whereas normal announcement of rate or amount of drawback under rule 3 or rule 4 shall
continue to be made by public notice as hitherto, any retrospective effect to a rate would
have to be necessarily 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 post
(4) Provision has been made for excluding the time taken for testing of sample. Accordingly
time taken in testing of the sample in excess of one month is required to be excluded for
computing the period of three months specified for filing of a claim by the exporter
(5) Provisional payment of drawback has been provided both under rule 6 and rule 7
The drawback rules are discussed in greater detail 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 materials 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 rules.
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 Tariff 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 foreign 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) Packing materials for export of tea, except teachests.
(ii) Goods manufactured out of duty free 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 the date of coming into force and the effective date for application of
rate.
(i) The Central Government will specify the period of validity for the drawback.
(ii) Retrospective effect – from the date of notification.
(iii) The rate must be determined under section 16 or under section 83(2).
A drawback 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 determined the manufacturer has to apply for drawback within
60 days or extended period upto further 60/90 days seeking a brand rate from the
Government giving all date and information about use of inputs, manufacture etc.
Rule 7: When the drawback rate is low a special brand rate will be applicable.
Where the rate is lower than 4/5 of the duty paid, revised rate may be applied for within 60
days/further 30 days. Proper rate will be fixed by the Government brand rate letter will be
issued accordingly and provisional payment will be allowed subject to adjustment.
Rule 8: No drawback will be determined (i) if it is less than 1% of FOB value 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 of information and documents to
determine the rate of drawback.
Rule 10: Access to manufactory has to be provided to Assistant Commissioner Customs of
Central Excise to verify the facts.
Rule 11: Procedure for claiming drawback for goods exported by post:
(a) Outer packing containing the address of the consignee shall carry 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 the 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 shipping 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 shipping 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 there
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 containers, packing
materials and materials used in the manufacture of the export goods on which drawback
is being claimed, no separate claim for rebate of duty under the Central Excise Rules,
2002 has been or will be made to the Central Excise 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 shipping bill is the document
for the claim. Documents are to be enclosed to application 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 drawback 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 drawback and interest : One or more claims can be combined and
adjustments of all dues can be made and cheque issued or amount credited to exporter or his
Custom House 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 case of revised rate granted
(b) Date of communication of the said rate in case of brand rate (rule 6 & 7)
(c) Date of payment of original drawback in other cases.
The three months period can be extended by further 3 months by Assistant Commissioner or
by a further period of 9 months by the Commissioner.
 Duty Drawback 11.13

Rule 16 : Repayment of erroneous or excess payment of drawback and interest :

Erroneous payments are to be repaid on demand or otherwise recovered 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 the 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 case
of non – receipt of payment from the consignee, based on R.E. I or bank certificate.
Rule 17 : Power to relax : Any relaxation in procedure may be made by the Government
after recording the reasons in writing.

11.6 INTEREST ON DRAWBACK [SECTION 75A]

Section 75 A provides for payment of interest on delayed payment of drawback.
(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 claim 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 the 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 erroneously, the claimant shall within
a period of two months from the date of demand pay in addition to the said amount of
drawback, interest at the rate fixed under section 28AA from the date after the expiry of
the said period of three months till the date of recovery of such drawback.

11.7 PROHIBITION AND REGULATION OF DRAWBACK [SECTION 76]

(a) Notwithstanding anything herein before contained, no drawback shall be allowed
(i) in respect of any goods, the market price of which is less than the amount of drawback
due thereon,
(ii) 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 Government is of the
opinion that goods of any specified description in respect of which drawback is claimed under
this chapter are likely to be smuggled back into India, 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 restrictions and conditions as may be specified in the notification.
♦ CASE LAW:
In order to appreciate the importance of the basic principles underlying the law relating 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 of the
Customs Act- section 74 of the Customs Act comes into operation when articles are imported
and therupon exported, such articles being easily identifiable; and section 75 comes into
operation when imported materials are used in the manufacture of goods which are exported.
Facts: The Government of Andhra Pradesh floated an international tender for the
transportation of Monolithic Buddha statue. The statue was required to be transported from
Raigir, Nalgonda District, where 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 Monolithic statue was a highly technical work and a special equipment for
transportation as well as special lifting and erection equipment called Hydra – jack was
required. 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 equipment within a
specified period. However, the job of installation of statue in the 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 hired. A claim for drawback under section 74 of Customs Act was made
claiming drawback of 98% of the total duty paid in respect of the goods. The Assistant
Commissioner, 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 is to be granted
at 98% or 85% as has been allowed by the department. The Delhi High 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 sanctified in accordance with a notification issued under
section 74 prescribing the rates 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 question was used
or not is a question of fact. Since the statue did not reach the 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. Commissioner of Customs Vs. India Steel Industries : Rule of interpretation in tariff
need not be extended to interpretation of classification under the Drawback Rules.
Facts: In the schedule II to Customs and Central Excise Drawback Rules, two entries
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 Rs . 890/- PMT

steel castings, not otherwise specified, made of
austenitic variety of stainless steel
The issue was whether the words “all types” occurring in the entry against 3606 referred to
“steel bars” alone or qualified the next nomenclature “shaftings”. In the Customs 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 stainless 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 castings.
Decision: The Government of India held that the words “all types” did not refer to dimensional
distinction alone but referred to the nature of the material used 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 interpretation of the entries to the Schedule II to drawback, but they would
have persuasive 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. What are the basic requirements for claiming duty drawback?
2. What is the permissible time limit for paying drawback?
3. With reference to section 75 of the Customs Act, 1962, state the cases where drawback
on imported materials used in the manufacture of export goods is not allowed.
4. Discuss the prohibition and regulation of drawback as provided under section 76 of the
Customs Act, 1962.
5. Spatial Wireless Pvt. Ltd. imported five mainframe computer systems from Flextronics
Computers, USA on 31.10.2006 paying customs duty of Rs.30.45 lakhs. The computers
worked for some time but in March 2007 some technical faults developed in the systems
resulting in complete closure 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 solution 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 of Directors have
approached you for advising whether import-duty paid can be taken back from the
Central Government when goods are sent back. Advise, in the light 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 accordance 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 imported into India and upon which duty has been paid on
importation are entered for 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 Commissioner of Customs as the goods that were imported and the goods
should have entered for export within two years from the date of payment of duty on
the importation 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 amount 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 in provisions of
section 74 are satisfied. The goods are identifiable, import duty 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 between the date of clearance for home
consumption and the date when the goods are placed 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 drawback 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 defined under section 2(33) meaning “any goods
the import or export of which is subject to any prohibition under this Act or any other law
for the time being in force but does not include any such goods in respect of which the
conditions subject 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 prohibition
- 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 to
prohibition under this Act but also under any other law in force. One exception is those
goods which complies or fulfills the condition imposed on it.
The prohibition provided under the Customs Act is in four parts:
Provisions Sections Chapter
General power to prohibit 11 IV
Special prohibition relating to detection 11A to 11G IV A
of illegally imported goods and
prevention/disposal thereof
12.2 Customs

Special prohibition relating to detection 11H to 11 M IV B

of illegally imported goods and
prevention/disposal thereof
Power to exempt from the provisions of 11N IV C
Chapters IVA and IVB

12.2.1 General power to prohibit

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
purposes specified in sub-section (2), it may, by notification in the Official Gazette,
prohibit either absolutely or subject to such conditions (to be fulfilled before 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 sub-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) the prevention of smuggling;
(d) the prevention of shortage of goods of any description;
(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 uncontrolled import or
export of gold or silver;
(g) the prevention of surplus of any agricultural product or the product of fisheries;
(h) the maintenance of standards for the classification, grading or marketing of goods in
international trade;
(j) the prevention of serious injury to domestic 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 patents, 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 citizens 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 the
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 similar
goods produced or manufactured in India;
(t) the prevention of dissemination of documents containing any matter which is likely to
prejudicially affect friendly 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

DISPOSAL 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 various consumer articles smuggled into the
country. It was felt necessary to make provisions to deal effectively with such cases.
Therefore, the provisions of chapter IVA cannot be treated as procedural provisions.
Section 11A defines certain terms such as “illegal import” and “intimated place”. The term
“illegal import” is defined as “the import of any goods in contravention of provisions of this
Act or any other law 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
- checking the illegal import,
- circulation or disposal of such goods, or
- facilitating 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 following is an illustrative list of goods notified under this section by the Central
Government.
Sl. Description of goods Notification No. Notification
No. dated
01 Pieces of Copper or mixed metal not 625 01-02-1898
being coin
12.4 Customs

02 Fictitious stamps as defined in F.D(C.R) No.42-Cus` 09-07-1932

Sec.263-A(4)
03 Explosives F.D(C.R) No.64-Cus` 17-09-1932

04 Any copy of book entitled ‘Hindu F.D(C.R) No.25-Cus` 28-04-1934

Heaven’ by Max Wylie

Provisions of Chapter IV A do not apply to goods such as terylene, terricot or cotton 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 the 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 the
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 was 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 person 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 statement 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 notified goods, after the notified date, before making such
acquisition,
- shall deliver 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
- shall, 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 an intimation containing the
particulars of the place to which such goods are proposed to be shifted. No person shall,
after the expiry of seven days from the notified date, keep or store any notified goods at
any place other than the intimated 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 another 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 be taken
from one place to another unless they are accompanied by a transport voucher 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 memorandum referred to in
sub-section (2) of section 11G.
Persons possessing notified goods have to maintain, as prescribed by rules made, a true
and complete account of such goods. [Section 11E]. Sale or transfer of notified goods
should be evidenced by vouchers as per Section 11 F].
Conclusion: The Notified Goods (Prevention of Illegal Import) Rules, 1969 provide for the
particulars to be given in the statements, transport voucher, account forms, sale memos,
etc. These rules also 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 particulars 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 origin 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 goods 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 GOODS [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 not 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 attempted 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 plan
cannot be legally proceeded against. An attempt has been understood in judicial 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 particular situation when an attempt has
commenced and what acts constitute such an offence. Chapter IV B was introduced in the
Customs Act to prevent or detect such export of goods illegally.
Section 11-I defines certain terms relevant for the 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 provisions 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, not
exceeding one hundred kilometres in width from any coast or other border of India,
as the Central Government may, having regard to the vulnerability of that area to
smuggling, by notification in the Official Gazette, specify in this behalf.
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 goods which are likely to be
illegally exported. At present silver and acetic anhydride have been so notified.
The next measure prescribed in this regard is to compel persons possessing such
specified goods, in a specified area to follow the procedure prescribed under section 11J,
11 K, 11 L and 11 M.
The restriction imposed include the following:
1. Section 11J (1) specifies that, every person who owns, 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, deliver to the proper officer an intimation
containing the particulars of the place where such goods are kept or stored within the
specified area.
2. Every person who acquires (within the specified area), after the specified date, any
specified goods, -
(i) the market price of which, or
(ii) the market price of which together with the market price of any specified goods
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 such acquisition, deliver 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.
3. Transport of specified goods has to be covered by vouchers, in such form and
containing such particulars as may be specified by rules made in this behalf.
4. Every possessor of specified goods is required to maintain accounts in the
prescribed form, inter alia, showing details of receipts and disposal.
 Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.7

12.5 EXEMPTIONS FROM THE OPERATION OF CHAPTER IV A & IV B

Section 11N empowers the Central Government to exempt generally, either absolutely 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. Photographic cameras, flash guns and colour films [M.F. (D.R. & I.) Notification No.
74-Cus, dated 7 th April, 1969]
2. 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 compensation
to the owner, often as a consequence of conviction for crime, or because possession or
use of the property was contrary to law.
This chapter deals with 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 shall be liable to confiscation:
(a) any goods imported by sea or air which are unloaded or attempted to be unloaded at
any place other than a customs port or customs airport appointed under clause (a) of
section 7 for the unloading of such goods;
(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 the import of such
goods;
(c) any dutiable or prohibited goods brought into any bay, gulf, creek or tidal river for the
purpose of being landed at a place other than 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 imported, contrary to any prohibition
imposed by or under this Act or any other law for 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 are 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 section 45;
(g) any dutiable or prohibited goods unloaded or attempted to be unloaded in
contravention of the provisions of section 33 or section 34;
(h) any dutiable or prohibited goods found concealed in any manner in any package
either before or after the unloading thereof;
(i) any dutiable or prohibited goods removed or attempted to be removed from a
customs area or a warehouse without the permission of the proper officer or contrary
to the terms of such permission;
(j) any dutiable or prohibited goods imported by land in respect of which the order
permitting clearance of the goods required to be produced under section 109 is not
produced or which do not correspond in any material particular with the specification
contained therein;
(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 the
declaration made under section 77;
(l) any goods which do not correspond in respect 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 declaration
for transhipment referred to in the proviso to sub-section (1) of section 54;
(n) any dutiable or prohibited goods transitted with or without transhipment or attempted
to be so transitted in contravention of the provisions of Chapter VIII;
(0) any goods exempted, subject to any condition, from duty or any prohibition 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 the 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 rule
made under this Act for carrying out the purposes of that Chapter have been
contravened.
♦ Case laws:
1. The word “prohibition” used in clause (d) not only takes within its fold total
prohibition, but also restrictions or controls of all imports and exports [Sheikh Mohd.
Omer vs. CC, 1983 ELT 1439 (SC)].
2. If the goods are imported from countries other than those permitted in the license,
 Provisions Relating to Illegal Import, Confiscation, Penalty & Allied Provisions 12.9

such import would be without license, conferring jurisdiction on the customs

authorities to confiscate the goods under section 111 (d) [CC & CE vs. Hindustan
Motors Ltd, 1979 ELT J313 (Cal)].
3. Prior to 1973, clause (m) provided for confiscation of goods that did not correspond
with the bill of entry in any material particular. By Act 36 of 1973, this was amended
to include “ value” and “any other particular”. Therefore, prior to amendment, any
difference in value between the bill of entry and value as found by the department
cannot be said to be variation in material particular within the meaning of this clause
[Rib Tapes (India) Pvt Ltd & Anr vs. UOI, AIR 1985 SC 2014].
4. In Jacsons Thevara vs. CC & CE 1992 (61) ELT 343 (SC), the importer had cleared
goods under project imports regulations and concessional assessment under heading
no. 84.66 of the Customs Tariff. Subsequently, these goods were diverted to a new
unit and were not used for substantial expansion of capacity at the existing unit.
Since the post importation conditions of exemption had not been complied with, the
goods were confiscated after due process of law. This was upheld by the Supreme
Court rejecting the contention of the appellant that the provisions of the clause (o)
would apply only to exempt goods and not to goods which were liable to duty.
5. Confiscation being a proceeding in rem, is enforceable even against goods whose
ownership is disclaimed [Satyanarayan vs. CCE, 1987 (29) ELT 247 (T-A) etc.].
6. Section 111 does not use the word “imported 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 consumption, Whereas, the expression “goods
brought from a place outside India” makes no such exclusion. It is not permissible to
use definitions in the Act as substitutes for phraseology adopted in the provisions.
[N. Devidas & Co vs. CC, 1987 (29) ELT 247 (T-A)].
7. 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)].
8. In Sigma Electronics vs. CC, 1997 (91) ELT 401 (T), there is an interesting
observation 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 clause
(m). On the other hand, for confiscating the goods under clause (d), no such
declaration is necessary. If, upon examination, the goods are found to be prohibited
or restricted, the goods can be confiscated.
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 attempted to be exported by land or inland water through any route other
than a route specified in a notification issued under clause (c) of section 7 for the export
of such goods;
(c) any goods brought near the land frontier or the coast of India or near any bay, gulf,
creek or tidal river for the purpose of being exported 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 within 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 being 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 which are loaded or attempted to be loaded in contravention of the
provisions of section 33 or section 34;
(g) any goods loaded or attempted to be loaded on any conveyance, 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 baggage in the declaration made under section 77;
(i) any goods entered for exportation 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 declaration made under section 77 in respect thereof;
(ii) any goods entered for exportation under claim for drawback which do not correspond
in any material particular with 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 which are not loaded for exportation on account of
any wilful act, negligence or default 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) any 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 conveyances shall be liable to confiscation:
(a) any vessel which is or has been within 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, altered or fitted in any manner for the purpose of concealing
goods;
(b) any conveyance 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, except 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 officer;
(e) any conveyance carrying imported goods which has entered India and is afterwards
found with the whole or substantial portion of such goods missing, unless the master
of the vessel or aircraft is able to account for the loss of, or deficiency in, the goods.
(2) Any conveyance or animal used as a means of transport in the smuggling of any goods
or in the carriage of any smuggled goods shall be liable to confiscation, unless the owner
of the conveyance or animal proves that 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
owner of any conveyance shall be given an option to pay in lieu of the confiscation 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 Confiscation 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 in 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 therein shall also be
liable to confiscation.
12.6.5 Confiscation of goods used for concealing smuggled goods [Section 119]:
As per this section, any goods used for concealing smuggled goods shall also be liable to
confiscation.
12.6.6 Confiscation of smuggled goods and their sale proceeds [Section 120-121]:
These two provisions 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 shall be liable to
confiscation.

12.7 PENALTIES ON PERSONS

The personal penalty is 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
element of mens rea would defeat the very objective of deterrent action against persons
involved in smuggling. Therefore, the persons involved in smuggling have been
categorised into two, namely,
1. those directly involved in doing any act or omission which legally constitutes
smuggling and
2. others, who wittingly or unwittingly get themselves involved in the various stages of
smuggling.

12.8 PENAL PROVISIONS UNDER THE CUSTOMS ACT

The word ‘penalty’ means punishment under 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 improper importation of goods [Section 112]:

The person involved in omission or commission under the Customs Act, in relation to any
goods which renders such goods liable to confiscation under section 111, or abets the
ame, or acquires possession of or is in any way concerned in carrying, 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 penalties as follows :-
a. in the case of goods in respect of which any prohibition is in force under the Customs
Act or any other 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;
b. 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, whichever is the greater;
c. in the case of goods or baggage in respect of which misdeclaration of value has been
done, to a penalty not exceeding the difference between the declared value and the
value thereof or five thousand rupees, whichever is the greater;
d. 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
 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
declared 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 OFFENCE PENALTY
No.
01 Any 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 abets the doing or omission of
such an act, or
02 who acquires possession of or is in any way
concerned in carrying, 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 the value of the goods or
prohibition is in force under this Act or any other five thousand rupees,
law for the time being in force whichever is the greater;
(b) in the case of dutiable goods, other than the duty sought to be
prohibited goods evaded on such goods or
five thousand rupees,
whichever is the greater;
(c) in the case of goods in respect of which the the difference between the
value stated in the entry made under this Act or in declared value and the
the case of baggage, in the declaration made value thereof or five
under section 77 (in either case hereafter in this thousand rupees,
section referred to as the declared value) is higher whichever is the greater
than the value thereof
(d) in the case of goods falling both under clauses the value of the goods or
(a) and (c) the difference between the
declared value and the
12.14 Customs

value thereof or five

thousand rupees,
whichever is the highest
(e) in the case of goods falling both under clauses the duty sought to be
(b) and (c) evaded on such goods or
the difference between the
declared value and the
value thereof or five
thousand rupees,
whichever is the highest.

12.8.3 Penalties in respect of improper exportation of goods [Section 114]

The person involved in commission or omission, in relation to any goods, which renders
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 other law for the time being in force, to a penalty not exceeding three times the
value of the goods as declared by the exporter or the value as determined under this
Act, whichever is the greater;
2. in the case of dutiable goods, other than prohibited goods, to a penalty not
exceeding the duty sought to be evaded on such goods or five thousand rupees,
whichever is the greater;
3. in the case of any other goods, to a penalty not exceeding the value of the goods as
declared by the exporter or the value as determined under this Act, whichever is the
greater.
12.8.4 Mandatory Penalty for short-levy or non-levy of duty in certain cases
[Section 114A] : In cases of non-levy or short levy of duty or where the interest has not
been charged or paid 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, 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 liable to pay a penalty equal to the duty or
interest so determined. However, where such duty or interest, as the case may be, and
the interest payable thereon, is paid within thirty days from the date of the communication
of the order, the amount 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
Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, then,
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 amount 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 within thirty days of the
communication of the order. Where any penalty has been levied under this section, no
penalty shall be levied under section 112 or section 114.
12.8.5 Penalty for not accounting for goods [Section 116]: If any goods loaded in a
conveyance for importation into India, or any goods transshipped under the provisions of
this Act or coastal goods carried in a conveyance, are not unloaded at their place of
destination in India, or if the quantity unloaded is short of the quantity to be unloaded at
that destination, and if the failure to unload or the deficiency is not accounted for to the
satisfaction of the Assistant Commissioner of Customs or Deputy Commissioner of
Customs, the person-in-charge of the conveyance shall be liable to: -
(a) in the case of goods loaded in a conveyance 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 been 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 penalty 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 goods been exported.
12.8.6 Penalties for contravention, etc., not expressly mentioned [Section 117] :
Any person who contravenes any provision of this Act or abets 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 provided for such contravention or failure, shall be
liable to a penalty not exceeding ten thousand rupees.
12.8.7 Adjudication of confiscations and penalties : The Customs Act enjoins quasi-
judicial proceedings to be followed before any penalties are imposed and any confiscation
action etc. initiated against any offending goods. Apart from issuing proper show cause
notice under section 124, the persons concerned are also required to be given opportunity
of representation in writing and personal hearing in the matter. The proper adjudication
authority is then 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 different
class of officers as follows:-
(i) without limit, by a Commissioner of Customs or a Joint Commissioner of Customs;
(ii) where the value of the goods liable to confiscation does not exceed two lakhs
rupees, by an Assistant Commissioner of Customs or Deputy Commissioner of
Customs;
(iii) where the value of the goods liable 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.

Generally, ‘mens rea’ is not required to be proof for the imposition of penalty under the
provisions of the Customs Act. The amount of penalty depends on the gravity of the
offence and is to act as the deterrent for future.
Whenever the goods are confiscated by an adjudicating authority, if these are not
prohibited goods, an option is to be given to the party as per section 125 of the Customs
Act, to pay a fine known as ‘redemption fine’ of quantum as the adjudicating authority
deems fit, in lieu of the confiscation. Prohibited goods can be confiscated absolutely.

12.9 ADJUDICATION [SECTION 122]

In every case under this Chapter in which anything is 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 confiscation does not exceed two lakhs
rupees, by an Assistant Commissioner of Customs 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 Customs lower in rank than an Assistant
Commissioner of Customs.
12.9.1 Adjournment restricted 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
adjournment shall not be granted for more than three times to a party during the
proceeding.
12.9.2 Issue of show cause notice [Section 124]: No order confiscating any goods or
imposing any penalty on any person shall be made under this Chapter 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 the 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 in 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 smuggled
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 manufactures thereof, watches, and any other class
of goods which the Central Government 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 confiscated under this Act, such goods shall thereupon vest in the
Central Government. The officer adjudging confiscation shall take and hold possession of
the confiscated goods.
12.9.5 Option to pay fine in lieu of confiscation [Section 125] : Whenever
confiscation of any goods is authorised by this Act, the officer adjudging it may, in the
case of any goods, the importation or exportation whereof is prohibited 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 said 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 goods 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 liable to any duty and charges
payable in respect of such goods.
12.9.6 Award of confiscation 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 officer 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 Act 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 liable to confiscation, under the Customs Act. The proper officer
may also seize any document or things that may be relevant to any proceedings under the
Custom Act. 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 Commissioner 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 are perishable or hazardous in nature or is prone to depreciate
in value over time 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. [Section 110]
12.10.2 Arrest: To tackle the menace of smuggling and other serious economic offences
including commercial frauds effectively, apart from penal action in departmental
adjudication, the Customs Act, also provides for criminal prosecution action. The persons
involved can be arrested and prosecuted in a Court of Law. Prosecution action can also
be taken for providing false documents/declarations to Customs and for obstructing
Customs officers working intentionally.
Any person guilty of serious offence under Customs Act, which is punishable under
section 135 of the said Act, can be arrested by a customs officer authorised in this behalf,
as provided under section 104 (1) of the Act. Under the law, the person being arrested is
entitled to be informed about the grounds for such arrest under the law. The said section
also enjoins that provides that every person arrested under the Act has to be taken
without unnecessary delay to the nearest Magistrate. Since the Customs Act doesn’t
contain any provision regulating the manner in 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 applicable to the person arrested under the provisions of the
Customs Act. The power to remand to judicial custody vests in the Magistrate by virtue of
section 165 of the Criminal Procedure Code.
Department has issued several instructions to ensure that powers of arrest by Customs
officers are exercised with care at senior 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 the Customs Act can be broadly
categorised in two categories – non-bailable or cognisable offences & bailable or non-
cognisable offences.

(i) Non-bailable or cognisable offences

The offences punishable with imprisonment for a term of more than 3 years are covered 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-declaration of
value in any fraudulent evasion or attempt at evasion of any duty chargeable 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) acquires possession of or is in any way concerned in carrying, removing, depositing,
harbouring, 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) attempts 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 relating to any of the goods to which section
123 applies and the market price whereof 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 section 135(1) or of section 136 (1)
(applicable to customs officers) of the Act is again convicted of an offence under the same
sections, then, he shall be punishable for the second and for every subsequent offence
with imprisonment for a term which may extend to seven years and with fine.
(ii) Bailable or non-cognisable offences
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 or used, any
declaration, statement or document in the transaction of any business relating to the
customs, knowing or having reason to believe that such declaration, statement or
document is false in any material particular, he shall be punishable with
imprisonment for a term which may extend to six months, or with fine, or with both
(section 132).
(b) If any person intentionally obstructs any officer of customs in the exercise 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 both (section 133).
(c) If any person resists or refuses to allow a radiologist to screen or to take X-ray
picture of his body in accordance with an order made by a Magistrate under section
103, or resists or refuses to allow suitable action being taken on the advice and
under the supervision of a registered medical practitioner for bringing out goods
liable to confiscation secreted inside his body, as provided in section 103, he shall be
punishable 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 imprisonment may extend to a term of three years, or with fine, or with both.
However, 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 contravention of the provisions
of this Act, and from the circumstances of the case it may be reasonably inferred that
if not prevented by circumstances independent 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 including prosecution action, if
they are found abusing their powers or are shown to be colluding/conniving with tax
evaders. In the following cases, prosecution proceeding against a customs officer may be
initiated under section 136 of the Customs Act:-
In cases of connivance in the act or thing whereby any duty of customs leviable 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 term which may extend to three years, or with fine,
or with both.
In cases of vexatious search, i.e., where any person is searched for goods liable to
confiscation 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
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; or
If a customs officer arrests any person without having reason to believe that he has been
guilty of an offence punishable under section 135, 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; or
If a customs officer searches or authorises any other officer of customs to search any
place without having reason to believe that 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 of 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 imprisonment for a term which may extend to six months, or with
fine which may extend to one 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 said 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. When 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 any 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 their mind before
sanctioning prosecution- after being satisfied that there are sufficient reasons justifying
prosecution. Criminal complaint is thereafter filed in appropriate Court of law and followed
up with a view to get expeditious orders / conviction.

12.11 OFFENCES AND PROSECUTION - SPECIFIC PROVISIONS

Adjudication and appellate remedies are measures, which sometimes may not be
adequate to contain smuggling and evasion of custom duty. As an exemplary measure it
becomes necessary in certain situations to initiate criminal proceedings and impose stiffer
actions against the offenders. Apart from prosecution in a court of law the Government
had introduced the COFEPOS ACT in 1974 to preventively detain such smugglers and
foreign exchange racketeers. Sections 132 to 140 contain detailed provisions regarding
the offences which are liable to prosecution in a criminal court of law, the cognisance of
the offences, the procedure to try these offences and the presumption that can be had in
such proceedings. These provisions are briefly discussed below:
12.11.1 False declaration, false documents, etc [Section 132]: Whoever makes, signs
declaration, statement or document in the transaction of any business relating to the
customs, knowing or having reason to believe that such declaration, statement or
document is false in any material particular, shall 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 133] : If any person intentionally
obstructs any officer of customs in the exercise 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 both.
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 [Section 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 evasion of any duty chargeable 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) acquires possession of or is in any way concerned in carrying, 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 or section 113 as the case may be, or
(c) attempts to export any goods which he knows or has reason to believe are liable to
confiscation under section 113
12.22 Customs

Particulars Punishment
01. in the case of an offence relating to Imprisonment for a term which
any of the goods to which section 123 may extend to seven years with
applies and the market price whereof fine
exceeds one lakh of rupees
02. In any other case Imprisonment for a term which
may extend to three years, or
with fine, or with both

If any person is convicted for a second time, he shall be punishable for the second and
subsequent offence with imprisonment for a term which may extend to seven years and
with fine.

The following shall not be considered as special and adequate reasons for awarding
sentence of imprisonment for less than one year:

1. the accused is convicted for the first time

2. the accused has been ordered to pay a penalty

3. the accused was not the principal offender and was a secondary party to the
commission of the offence

4. 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 offence would be
committed, he shall be punishable with imprisonment for a term which 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 provision. AIR Manual reports only two cases, out of which, one has
resulted in acquittal 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 effected or any duty of customs is evaded, he shall be
punishable with imprisonment for three years, or with fine, or with both.

12.11.7 Offences by companies [Section 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 deemed to be guilty
of the offence and shall be liable to be proceeded against and punished accordingly.
Explanation to sub-section (2) defines “company” as a body corporate and includes a firm
or other association of individuals.

12.11.8 Cognizance of offences [Section 137]: No court shall take cognisance of:
- any offence under 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 Customs, except with the
previous sanction of the Central Government.

12.11.9 Compounding of Offences

Sub-section (2) of section 137 provides for compounding of offences, either before or after the
institution of prosecution, by Chief 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
specifying 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. Culpable 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 [Section 138C]: The following
are deemed to be also a document for the purposes of this Act and the rules made
thereunder and shall be admissible in any proceedings thereunder, without further proof
or production of the original:

1. a micro film of a document or the reproduction of the image; or

2. a facsimile copy of a document; or

3. computer printout.

12.11.12 Presumption as to documents in certain case [Section 139]: Where any

document
- 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 investigation 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

contained in the Code of Criminal Procedure, 1898, an offence under this Chapter (ie.,
Chapter XVI) may be tried summarily by a Magistrate. However, the exceptions are:

1. Offence under clause (i) of sub-section (1) of section 135

2. Offence under sub-section (2) of section 135.

Customs Act is a special enactment. This section provides for summary trial of all
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. Discuss briefly the provisions in respect of mandatory penalty for short-levy or non-
levy of duty in certain cases.

2. Explain the provisions in respect of confiscation of a conveyance under section 115

of the Customs Act, 1962.

3. M/s. Shree Ram Traders 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 Act was levied.
You are required to examine the case and offer your views.

4. Pranjal had imported certain goods. Due to some technical problems he had to pay
the 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? Discuss.

5. Two trucks are intercepted by the Customs Department. The officers of the Customs
Department conduct search of the vehicle in the presence of witnesses and it is
found that one of the trucks has a secret compartment and 175 Kgs. of heroine and
39 Kgs. of opium of foreign origin are concealed in that chamber. During the course
 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. However, ‘P’
completely denies his culpability in the crime. He contends that though the vehicle is
registered in his name but he has sold the truck much before the contraband goods
are recovered therefrom.
You are required to examine the situation with the help of case law, if any.

Answers

3. The facts of the case are similar 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 defined in section 2(25) of the Customs Act and as per section 111(d)
only ‘imported’ goods could be confiscated. Hence, power to confiscate the goods, after
their clearance for home consumption, could be exercised only in cases where the order
of clearance is revised and cancelled.
Therefore, in the given case the confiscation of the goods by the Department is illegal.

Section 112 (a) provides that any 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 abets the doing or omission of such act, is liable to a penalty. The High
Court held that the power to impose penalty could be exercised not only when the goods
are available for confiscation but when such goods are liable to confiscation. The 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 for confiscation. The mere
fact that the importers secured such clearance and disposed 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 the Act.

Following the judgment of the High Court, penalty levied by the Department 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 Customs Act give an option to the importer to either
allow the goods to be confiscated 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. Therefore, it was held
by the High Court that the fine should be refunded.
Applying the ratio of this decision in the given case, it can be said that Pranjal can claim
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 was no
evidence to show that the appellant had any control over the vehicle nor was he in
possession of those drugs. Therefore, the registered owner of the vehicle was acquitted
of all charges framed against him.
In the given case also, there 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 resolution of dispute for assessees without going into the
prolonged litigation in adjudication/appeals/revisions etc.
The Settlement Commission has been created by constituting Customs & Central Excise
Settlement Commission. (Provisions of section 127A to 127N of the Customs Act). Presently,
three Benches in the Settlement 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 DEFINITIONS [SECTION 127A]

In this Chapter, unless the context otherwise requires, -
(a) "Bench" means a Bench of the Settlement Commission;
(b) "case" means any proceeding under this Act or any other Act for the levy,
assessment and collection 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 officer or the Central Government on the date on which an
application under sub-section (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 filing 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 pending within the meaning of this clause.
(c) "Chairman" means the Chairman of the Settlement Commission.
(d) "Commissioner (Investigation)" means an officer of the customs or a Central Excise
Officer appointed as such Commissioner to conduct inquiry or investigation for the
purposes of this Chapter.
13.2 Customs

(e) "Member" means a Member of the Settlement Commission and includes the
Chairman and the Vice-Chairman.
(f) "Settlement Commission" means the Customs and Central Excise Settlement
Commission constituted under section 32 of the Central Excise Act, 1944.

13.3 APPLICATION FOR SETTLEMENT OF CASES [SECTION 127B]

13.3.1 Statutory Provisions: This section states that any importer, exporter or any other
person may make a case for settlement, at any stage of a case relating to him.
An “importer” is defined in section 2(26) as 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 person holding himself out to be the importer. An "exporter" is defined 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 person holding himself out to be the exporter.
Further, the section states that the application shall be made in such form and in such manner
as may be specified. Form SC(C) – 1 is prescribed for making such an application along with
the fee of one thousand rupees. [Rule 3 of Customs (Settlement of Cases),1999]
The application 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 particulars 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 have the
case settled and such application shall be disposed of in the manner provided 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 applicant has filed a bill of entry, or a shipping bill, in respect of import or export
of goods, as the case may be, and in relation to such bill of entry or shipping 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 exceeds
two lakh rupees. [Proviso to sub-section (1) of Section 127B]
13.3.3 Exceptions: 1. No application shall be entertained by the Settlement Commission
under sub-section (1) of section 127B, in cases which are pending in the Appellate Tribunal or
any Court.
2. No application under this sub-section shall be made
 Settlement Commission 13.3

- in relation to goods to which section 123 applies or to goods in relation to which any
offence under the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of
1985) has been committed:
- for the interpretation of the classification of the goods under 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 application under sub-section (1)
before the expiry of one hundred and eighty days from the date of the seizure. [Sub-section
(3) of section 127B]
13.3.5 Withdrawal of an application: An application made under sub-section (1) shall not be
allowed to be withdrawn by the applicant. [Sub-section (4) of section 127B]

13.4 PROCEDURE ON RECEIPT OF APPLICATION [SECTION 127C]

13.4.1 Report from the Commissioner of Customs: On receipt of an application under
section 127B, the Settlement Commission shall call for a report from the Commissioner of
Customs having jurisdiction 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
investigation involved therein, the Settlement Commission may, by order, allow the application
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 the Commissioner: The Commissioner of Customs shall
furnish such report within a period of one month of the receipt of the communication from the
Settlement Commission, 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 hearing 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 months 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 the 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 copy of the order under sub-section (1)
allowing the application to be proceeded with, pay the amount of additional duty admitted by
him as payable and shall furnish proof of such payment to the Settlement Commission. [Sub-
section (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-
13.4 Customs

section (3), within the time specified in that sub-section, it may extend the time for payment of
the amount which remains unpaid or allow payment thereof by instalments, if the applicant
furnishes adequate security for the payment thereof. [Sub-section (4)]
13.4.5 Interest on unpaid amount of duty: Where the additional amount of customs duty
referred to in sub-section (3) is not paid by the applicant within the time specified or extended
period, as the case may be, the Settlement 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 over 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 after 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 direct the Commissioner (Investigation) to make or cause to be made
such further enquiry or investigation and furnish a report on the matters covered by the
application and any other matter relating to the case. [Sub-section (6)]
13.4.7 Passing of the Order : After examination of the records and the report of the
Commissioner of Customs received under sub-section (1), and the report, if any, of the
Commissioner (Investigation) of the Settlement Commission under sub-section (6), and after
giving an opportunity to the applicant and to the Commissioner of Customs having jurisdiction
to be heard, either in person or through a representative duly authorised in this behalf, and
after examining such further evidence as may be placed before it or obtained by it, the
Settlement Commission may, in accordance 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 of Customs or
the Commissioner (Investigation) under sub-section (1) or sub-section (6).
13.4.8 Subject to the provisions of section 32A of the Central Excise Act,1944 (1 of 1944), the
materials brought on record before the Settlement Commission shall be considered by the
Members of the concerned Bench before passing any 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 apply. [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 settlement 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 the 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
obtained by fraud, or misrepresentation of facts. [Sub-section (9)]
13.4.10 Interest on non payment of duty payable in pursuance of an order: Where any
duty payable in pursuance of an order under sub-section (7) is not paid by the applicant within
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 aforesaid.
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 be deemed to have been revived
from the stage at which the application was allowed to be proceeded with by the Settlement
Commission and proper officer may, notwithstanding 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 receipt of communication that the settlement became void. [Sub-section (11)]

13.5 POWERS OF SETTLEMENT COMMISSION

13.5.1 Power to order provisional attachment to protect revenue [Section 127D]: The
Settlement Commission may, by order, attach provisionally any property belonging to the
applicant in such manner as may be specified by rules. Such attachment can be made during
the pendency of any proceeding before it, and for protecting the interests of the revenue.
Every provisional 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 such
attachment is made are discharged by the applicant and evidence to that effect is submitted to
the Settlement Commission.
13.5.2 Power to reopen completed proceedings [Section 127E]: If the Settlement
Commission is of the opinion (the reasons for such opinion to be recorded by it in writing) that,
for the proper disposal 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 settlement 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 prosecution and penalty [Section 127H]: The
Settlement Commission may, if it is satisfied 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 prosecution 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 wholly or in part from the imposition of
any penalty, fine and interest under this Act, 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 prosecution 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 under sub-section (1) shall stand withdrawn if such person
fails to pay any sum specified 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 condition subject to
which the immunity was granted and thereupon the provisions of this Act shall apply as if such
immunity had not been granted.
An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the
Settlement Commission, if it is satisfied that such person had, in the course of the settlement
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 which he appears to have been guilty in
connection with the settlement and shall also become liable to the imposition of any penalty
under this Act to which such person 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
Commission may, if it is of opinion that any person who made an application for settlement
under section 127B has not cooperated with the Settlement Commission in the proceedings
before it, send the case back to the proper officer who shall thereupon dispose of the case in
accordance with the provisions of this Act as if no application 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
and other information produced by the assessee before the Settlement Commission or the
results of the inquiry held or evidence recorded by the Settlement Commission 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 recorded 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 28AA, 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 Settlement Commission sending
the case back to the officer of customs shall be excluded.
13.5.5 Other powers and procedure of Settlement Commission [Section 127F]: In
addition to the powers conferred on the Settlement Commission under Chapter V of the
Central Excise Act, 1944 (1 of 1944), it shall have all the powers which are vested in an officer
of the customs under this Act or the rules made thereunder.
Where an application made under section 127B has been allowed to be proceeded 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 Central Excise Officer as the case may be, under this Act or in the
Central Excise Act, 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 contrary, nothing
in this Chapter shall affect the operation of the provisions of this Act in so far as they relate to
any matter other than those before the Settlement 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 places 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 INSPECTION, 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 Settlement 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
and on payment of such fee as may be specified by rules.
Provided that, for the purpose of enabling any person whose case is under consideration to
rebut any evidence brought on record against him in any such report, the Settlement
Commission 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-section (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 Chapter, be reopened in any proceeding under this Act or under any other law
for the time 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 therein, be recovered, and any
penalty for default in making payment of such sum may be imposed and recovered as sums
due to the Central Government in accordance with the provisions of section 142, by the proper
officer having jurisdiction over the applicant.

13.9 BAR ON SUBSEQUENT APPLICATION FOR SETTLEMENT IN CERTAIN CASES

[SECTION 127L]
In the following circumstances, a person shall not be entitled 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 provides
for the imposition of a penalty on the applicant under section 127B for settlement, on
the ground of concealment of particulars of his duty liability; or
13.8 Customs

2. 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 Act in relation
to that case; or
3. where the case of such person is sent back to the proper officer by the Settlement
Commission under section 127-I.

13.10 PROCEEDINGS BEFORE SETTLEMENT COMMISSION TO BE JUDICIAL

PROCEEDINGS [SECTION 127M]
Any proceedings under this Chapter before the Settlement Commission shall be deemed 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 CERTAIN PERSONS WHO HAVE FILED APPEALS TO THE APPELLATE TRIBUNAL
ENTITLED TO MAKE APPLICATIONS TO THE SETTLEMENT COMMISSION [SECTION
127MA]
The section provides for 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 under 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 application under this section in a
case where the Commissioner of Customs or any officer on his behalf has, on or before the
date on which the Finance Act, 2000 receives the assent of the President, applied to the
Appellate Tribunal for the determination of such points arising out of the decision or order
specified by the Board in its order under sub-section (1) of section 129D or filed an appeal
under sub-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 Tribunal
for permission to withdraw the appeal. [Sub-section (2)]
On receipt of an application under sub-section (2), the Appellate Tribunal shall grant
permission to withdraw the appeal. [Sub-section (3)]
Upon withdrawal of the appeal, the proceedings in appeal immediately before such withdrawal
shall, for the purposes of this Chapter, be deemed to be a proceeding pending before a proper
officer. [Sub-section (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 the person. [Sub-section (5)]
An application made to the Settlement Commission under 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 [Sub-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 opinion 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 Tribunal and the provisions containing in section 129A, section 129B and
section 129C 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 Chapter V of the Central Excise Act, 1944 (1 of 1944) in so far as it is not
inconsistent with the provisions of this Chapter shall apply in relation to proceedings before
the Settlement Commission under this Chapter.

13.13 CUSTOMS (SETTLEMENT OF CASES) RULES, 1999

In exercise of the powers conferred by Section 156 of the 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 Notification No.20/00-Cus. (N.T) dated 8-3-2000.
The rule is reproduced below:
CUSTOMS (SETTLEMENT OF CASES) RULES, 1999
In exercise of the powers conferred by section 156 of the Customs Act, 1962 (52 of 1962), the
Central Government hereby makes the following rules, namely: -
1. Short title and commencement. - (1) These rules may be called the Customs (Settlement
of Cases) Rules,1999.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions. - 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 these rules.
(c) "Settlement Commission" means the Customs and Central Excise Settlement
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 in 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.See 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 applicant is absent from
India, then, either by the applicant himself or by any other person duly authorised by
him in this behalf and where the applicant is a minor 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 Hindu 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 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 association, 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 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, while 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-rule (1) of rule 3 (other than the annexure and the statements and other
documents accompanying such annexure).
(2) Where an order under sub-section (1) of section 127C of the Act, has been made to
proceed with the application by the Settlement Commission, the information contained in the
Annexure to the application in Form SC(C)-1 and the statements and other documents
accompanying such annexure shall 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 Commission,
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 the 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 business 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 Commissioner 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 it and in the case of the movable property the place where such
property is lodged or kept and shall hand over a copy of the same to the applicant or to the
person 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 Commissioner of Customs or the Commissioner of Central Excise as the case may
be and also 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 reports made by any Officer of Customs, shall pay a fee of
rupees five per page of each report or part thereof.
Self-examination questions
1. State the circumstances under which an application will not be entertained by the
Settlement Commission.
2. What is the time limit for filing a “case” in case of seizure under section 110 of the
Customs Act, 1962?
3. Briefly explain the powers of the Settlement Commission under the Customs Act, 1962.
4. When will a person be not entitled to apply for settlement under section 127B? Discuss
with reference to the provisions of section 127L.
5. Can the Settlement Commission entertain applications involving evasion of duty by
fraudulent means and misdeclaration? Discuss
Answer
5. This issue has been addressed to by the High Court in the case of Tata Teleservices
(Maharashtra) 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 Commission had a limited jurisdiction of accepting only the cases of
short levy on account of misclassification or otherwise and not other cases.
The High Court observed that the Settlement Commission had wide jurisdiction to
entertain all kinds of settlement claim applications, with liberty to reject the same
even at preliminary stage, depending upon the nature, circumstances and complexity
of a case. 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 of a show cause notice in relation
to such a Bill of Entry/Shipping Bill
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 liability had been
incurred and additional amount of customs duty accepted to be payable by the
assessee and
(iii) furnishing such other particulars as may be specified by the rules including the
particulars of such dutiable goods in respect of which the assessee admits short
levy on account of misclassification or otherwise 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 XIVA 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 was restricted to mean only bona fide cases, then there would be no scope
of unearthing revenue. It was pointed out by the High Court that earlier part of section
127B ibid laid down the jurisdiction and only the latter part dealt with the rules 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 same.
 14
ADVANCE RULING

Chapter VB was inserted in the Customs Act, 1962 by Finance Act, 1999. The Finance
Act, 1999 decided to set up an Advance Ruling Authority to give rulings on classification
and valuation issues in advance for the benefit of joint ventures with NRIs. The provisions
relating to Advance Rulings are contained in sections 28E 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 the Authority, of a question of law or
fact specified in the application regarding the liability to pay duty in relation to an
activity which is proposed to be undertaken, 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 non-

resident; 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 undertake 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
Government 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 ruling
under sub-section (1) of section 28H.

The collaboration would mean either technical or financial collaboration. Joint

venture would mean participation by both persons. Residents in the country having
joint venture with other residents are 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 Excise, 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 Act, 1961 (43 of 1961).

14.2 AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND

SERVICE TAX) [SECTION 28F]
Sub-section (1) empowers the Central Government to constitute an Authority for giving
advance rulings to be called “the Authority for Advance Rulings (Central Excise, Customs
and Service Tax)”, by notification in the Official Gazette.

The Authority shall consist of the following Members appointed by the Central
Government, namely:

(a) a Chairperson, who is a retired Judge of the Supreme Court;

(b) an officer of the Indian Customs and Central Excise Service who is qualified 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.

The salaries and allowances payable to, and the terms and conditions of service of, the
Members shall be such as the Central Government may by rules determine.

The Central Government shall provide the Authority with such officers and staff as may be
necessary for the efficient exercise of the powers of the Authority under this Act. The
office of the Authority shall be located in Delhi.

14.3 APPLICATION FOR ADVANCE RULING [SECTION 28H]

The procedure involved in making an application 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, 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 the
following:

(a) classification of goods under the Customs Tariff Act, 1975;

(b) applicability of a notification 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 value of the
goods under the provisions of this Act.

(d) the applicability of notifications 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 and 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 procedure 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 application, the Authority shall
cause a copy thereof to be forwarded to the Commissioner 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 records 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 allow or reject
the application. However, the Authority shall not allow the application 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 application 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 application 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
order made under sub-section (2) shall be sent to the applicant and to the Commissioner
of Customs. [Sub-section (3)]

14.4.4 Pronouncement of Advance Ruling: Where an application is allowed under

sub-section (2), the Authority shall, after examining such further material as may be
placed before it by the applicant or obtained by the Authority, pronounce its advance
ruling on the question specified in 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 pronouncing its advance ruling, provide an
opportunity to the applicant of being heard, either in person or through a duly authorised
representative. [Sub-section (5)]

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 licensed under section 146; or

(c) any legal practitioner who is entitled to practise in any civil court in India; or

(d) any person who has acquired such qualifications 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
advance ruling in writing within ninety days of the receipt of application. [Sub-section (6)]

A copy of the advance ruling pronounced by the Authority, duly signed by the Members
and certified in the prescribed manner shall be sent to the applicant and to the
Commissioner of Customs, as soon as may be, after such pronouncement.
 Advance Ruling 14.5

14.5 APPLICABILITY OF ADVANCE RULING [SECTION 28J]

(1) The advance ruling pronounced by the Authority under section 28-I shall be binding
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 Customs, 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 in 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 Authority finds, on a representation made to it by the Commissioner of
Customs or otherwise, that an advance ruling pronounced by it under sub-section (6) of
section 28-I has been 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 Act 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.

A copy of the order made under sub-section (1) shall be sent to the applicant and the
Commissioner of Customs.

14.7 POWERS OF AUTHORITY [SECTION 28L]

The Authority shall, for the purpose of exercising its powers regarding
- discovery and inspection,
- enforcing the attendance of any person and examining him on oath,
- issuing commissions 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.
The 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, 1973 (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 purpose 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 regulate its
own procedure in all matters arising out of the exercise of its powers under this Act.
Self-examination questions
1. What is advance ruling? In what matters can the advance ruling be obtained?
2. State briefly as to who can make an application for advance ruling under the
Customs Act, 1962?
3. Briefly discuss the provisions of the Customs Act, 1962 regarding rejection of an
application for advance ruling.
4. Describe the procedure involved in making an application for advance ruling.
5. 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, 1962 from the Authority for
Advance Rulings on an identical point. Vaikunth proposes to adopt the same ruling
in his case. Vaikunth has sought your advice as his consultant whether he could
adopt the ruling given in the case of Vaidehi.
Explain 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
the advance ruling pronounced in the identical case of his friend, Vaidehi. Vaikunth
should obtain a ruling from the Authority of Advance Ruling by making an application
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 Finance
Act, 1999 decided to set up an Advance Ruling Authority to give rulings on classification
and valuation issues in advance for the benefit of joint ventures with NRIs. The provisions
relating to Advance Rulings are contained in sections 28E 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 the Authority, of a question of law or
fact specified in the application regarding the liability to pay duty in relation to an
activity which is proposed to be undertaken, 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 non-

resident; 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 undertake 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
Government 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 ruling
under sub-section (1) of section 28H.

The collaboration would mean either technical or financial collaboration. Joint

venture would mean participation by both persons. Residents in the country having
joint venture with other residents are 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 Excise, 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 Act, 1961 (43 of 1961).

14.2 AUTHORITY FOR ADVANCE RULING (CENTRAL EXCISE, CUSTOMS AND

SERVICE TAX) [SECTION 28F]
Sub-section (1) empowers the Central Government to constitute an Authority for giving
advance rulings to be called “the Authority for Advance Rulings (Central Excise, Customs
and Service Tax)”, by notification in the Official Gazette.

The Authority shall consist of the following Members appointed by the Central
Government, namely:

(a) a Chairperson, who is a retired Judge of the Supreme Court;

(b) an officer of the Indian Customs and Central Excise Service who is qualified 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.

The salaries and allowances payable to, and the terms and conditions of service of, the
Members shall be such as the Central Government may by rules determine.

The Central Government shall provide the Authority with such officers and staff as may be
necessary for the efficient exercise of the powers of the Authority under this Act. The
office of the Authority shall be located in Delhi.

14.3 APPLICATION FOR ADVANCE RULING [SECTION 28H]

The procedure involved in making an application 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, 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 the
following:

(a) classification of goods under the Customs Tariff Act, 1975;

(b) applicability of a notification 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 value of the
goods under the provisions of this Act.

(d) the applicability of notifications 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 and 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 procedure 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 application, the Authority shall
cause a copy thereof to be forwarded to the Commissioner 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 records 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 allow or reject
the application. However, the Authority shall not allow the application 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 application 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 application 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
order made under sub-section (2) shall be sent to the applicant and to the Commissioner
of Customs. [Sub-section (3)]

14.4.4 Pronouncement of Advance Ruling: Where an application is allowed under

sub-section (2), the Authority shall, after examining such further material as may be
placed before it by the applicant or obtained by the Authority, pronounce its advance
ruling on the question specified in 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 pronouncing its advance ruling, provide an
opportunity to the applicant of being heard, either in person or through a duly authorised
representative. [Sub-section (5)]

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 licensed under section 146; or

(c) any legal practitioner who is entitled to practise in any civil court in India; or

(d) any person who has acquired such qualifications 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
advance ruling in writing within ninety days of the receipt of application. [Sub-section (6)]

A copy of the advance ruling pronounced by the Authority, duly signed by the Members
and certified in the prescribed manner shall be sent to the applicant and to the
Commissioner of Customs, as soon as may be, after such pronouncement.
 Advance Ruling 14.5

14.5 APPLICABILITY OF ADVANCE RULING [SECTION 28J]

(1) The advance ruling pronounced by the Authority under section 28-I shall be binding
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 Customs, 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 in 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 Authority finds, on a representation made to it by the Commissioner of
Customs or otherwise, that an advance ruling pronounced by it under sub-section (6) of
section 28-I has been 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 Act 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.

A copy of the order made under sub-section (1) shall be sent to the applicant and the
Commissioner of Customs.

14.7 POWERS OF AUTHORITY [SECTION 28L]

The Authority shall, for the purpose of exercising its powers regarding
- discovery and inspection,
- enforcing the attendance of any person and examining him on oath,
- issuing commissions 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.
The 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, 1973 (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 purpose 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 regulate its
own procedure in all matters arising out of the exercise of its powers under this Act.
Self-examination questions
1. What is advance ruling? In what matters can the advance ruling be obtained?
2. State briefly as to who can make an application for advance ruling under the
Customs Act, 1962?
3. Briefly discuss the provisions of the Customs Act, 1962 regarding rejection of an
application for advance ruling.
4. Describe the procedure involved in making an application for advance ruling.
5. 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, 1962 from the Authority for
Advance Rulings on an identical point. Vaikunth proposes to adopt the same ruling
in his case. Vaikunth has sought your advice as his consultant whether he could
adopt the ruling given in the case of Vaidehi.
Explain 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
the advance ruling pronounced in the identical case of his friend, Vaidehi. Vaikunth
should obtain a ruling from the Authority of Advance Ruling by making an application
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 CUSTOMS [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 goods in the customs area are subject to the control of the
officers of Customs. Besides, upon confiscation, the goods are vested in the Central
Government. Therefore, 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 Government normally arises in two situations:
(a) on confirmation of demand for short levy of duty; and
(b) on imposition of fine or penalty in an adjudication proceedings.
Two methods of recovery are provided for in this section. Either of the two methods can
be followed to recover the dues.

Sl Recovery procedure Power given to

No.
01 To deduct the amount so payable from any Proper officer himself or any
money owing to such person which may be other officer of customs
under the control of the proper officer or
such other officer of customs.
02 By detaining and selling any goods Assistant Commissioner of
15.2 Customs

belonging to such person which are under Customs or Deputy

the control of the Asst or Deputy Commissioner of Customs; or
Commissioner of Customs or such other
The above authorities may
officer of customs
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 procedures can be
followed to recover the dues.

Sl Recovery procedure Power given to

No.
01 Prepare a Certificate signed by Asst or Assistant Commissioner of
Deputy Commissioner of Customs, Customs or Deputy
specifying the amount due from such Commissioner of Customs
person and send it to the Collector of the
district in which such person owns any
property or resides or carries on his
business.
Thereon the said collector shall recover
the dues as if it were an arrears of land
revenue.
02 Distrain any movable or immovable The proper officer on any
property belonging to or under the control authorisation by a Commissioner
of such person, and detain the same until of Customs and in accordance
the amount payable is paid. with the rules made in this
behalf

In case, any part of the said amount or the

cost of distress remains unpaid for 30 days
next after such distress, may cause the
said property to be sold and satisfy the
amount payable from the sale proceeds.
The surplus if any, shall be paid back to
such person.
 Miscellaneous Provisions 15.3

Sub section (2) of section 142 provides that, where the terms of any bond or other
instrument executed under this Act or any rules or regulations made thereunder provide
that any amount due under such instrument may be recovered in the manner 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-section.
The proviso to section 142 states that if a person from whom some recoveries are due,
transfers his business in whole or in part to another person, then all goods, materials,
preparations, plants, machineries, vessels, utensils, implements and articles in the
possession of the transferee can be attached and sold for recovery. An officer
empowered by the Central Board of Excise and Customs, after obtaining written approval
from the Commissioner of Customs, can make such recovery.
Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules,
1995 was notified vide Notification No. 31/95-Cus.(N.T) dt 26-5-1995 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 attachment of property, for sale of property
and also special provisions in respect of sale of immovable property.
The relevant case laws are given hereunder:
1. At the stage of investigation, the assessee cannot be harassed to pay the duty –
Base Corporation Ltd vs. UOI, 1999.
2. 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.
3. Company dues can be recovered only by attaching the company’s properties -
Hrushikesh Panda vs. State of Orissa, 1996.

15.3 POWER TO ALLOW IMPORT OR EXPORT ON EXECUTION OF BONDS IN CERTAIN

CASES [SECTION143]
If the importer or exporter is unable to fulfil the conditions for import/export, the Assistant
or the Deputy Commissioner of Customs can permit clearance of imported goods/or
export, subject to the following:
(a) The Asst or Deputy 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 security and subject to such conditions
as the Asst or Deputy Commissioner approves.
15.4 Customs

On fulfillment of conditions within the time specified in the bond, the Assistant
Commissioner of Customs or Deputy Commissioner of Customs shall cancel the bond as
discharged in full and shall, on demand, deliver it, so cancelled, to the person who has
executed or who is entitled to receive it.
If the conditions are not fulfilled within the time specified in the bond, the Assistant
Commissioner of Customs or Deputy Commissioner of Customs shall, without prejudice to
any other 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 interesting 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 recovered 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 category of
Advance Licence granted under the Imports and Exports (Control) Act, 1947, the Assistant
Commissioner of Customs or Deputy Commissioner of Customs may, notwithstanding
anything contained in this Act, permit clearance of such material without 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 therein [Sub-section (1)].
The permission for clearance without payment of duty under sub-section (1) shall be
subject to the following conditions:
(a) the duty payable on the material imported shall be adjusted against the drawback of
duty payable under this Act or under any other law for the time being in force on the
export of goods specified in the said Advance Licence; and
(b) where the duty is not 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 Commissioner of Customs may, on sufficient cause being shown,
allow, or for any other sufficient reason, the importer shall, notwithstanding anything
contained in section 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 said 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 conditions specified in sub-
section (2).
This section has by and large gone unnoticed by 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 of goods imported under advance licence, the
proper officer may allow clearance of 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 advance licence. In the alternative, as such adjustment is neither possible nor is the
export obligation discharged, the importer would be liable to pay such duty with 12% p.a.
interest. This section overrides section 28 and hence, limitation does not create a bar to
revenue recovery. However, in practice, it is seen that 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 power to the customs authorities to draw adequate
samples of such goods in the presence of the owner of the goods.
The proper officer of the customs can take the samples for:
- examination or testing, or
- ascertaining the value thereof, or
- any other purpose of this Act.
Samples may be taken on
- the entry; or
- clearance of any goods; or
- at any time while such goods are being passed through the customs area.
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 delivery 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 samples is drawn behind
the back of the exporter, and such report is unfavourable to the exporter, its results
cannot be relied on in an adjudication proceeding. The authorities are bound to rely on the
15.6 Customs

test report of samples drawn with the knowledge of the exporter [C.L. Jain Woollen 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 possible for
the importer/exporter to come to the custom house every time and attend to the
clearance formalities personally, as it would involve time and expenditure. An institution of
Custom House Agents (CHA) has thus arisen out of necessity. At the same time, it is
necessary to ensure that such agents are knowledgeable, 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
station unless such person holds a licence granted in this behalf in accordance with the
regulations.[Sub-section (1)]
Sub-section (2) empowers the Board to make regulations for the purpose of carrying out
the provisions of this section and, in particular, 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 licence;
(b) the form of the licence and the fees payable therefor;
(c) the qualifications 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 restrictions and conditions (including the furnishing of security by the licensee)
subject 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 suspension or revocation of a licence, and the
period within which such appeals shall be filed.
In exercise of the above powers, the Central Board of Excise & Customs made Customs
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 REPRESENTATIVE [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 proceedings under this Act, otherwise than
when required under section 108 to attend personally for examination on oath or
affirmation, may, subject to the other provisions of this section, appear by an authorised
 Miscellaneous Provisions 15.7

representative. [Sub-section (1)]

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 licensed under section 146; or
(c) any legal practitioner who is entitled to practise in any civil court in India; or
(d) any person who has acquired such qualifications as the Central Government may
specify by rules made in this behalf.[Sub-section (2)]
3. The following persons shall be disqualified to represent any person under sub-
section(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 Commissioner 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 institute 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 connection 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 be disqualified to
represent any person under sub-section (1).
5. Any order or direction under clause (b) of sub-section (4) or clause (b) of sub-section (5)
shall be subject to the following conditions, namely :-
(a) no such order or direction shall be made in respect of any person unless he has been
given a reasonable opportunity 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 order or
direction cancelled; and
(c) no such order or direction shall take effect 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
necessary qualifications.

15.8 PROCEDURE FOR SALE OF GOODS AND APPLICATION OF SALE PROCEEDS

[SECTION 150]
There are two situations when the customs authorities can sell the goods of the importer
or the exporter.
(1) When the goods are confiscated, in which case the goods become the absolute
property of the Government. When such goods are sold, the entire sale proceeds
accrue to the Government.
(2) Second, when the goods are not confiscated being the following circumstances:
- Imported goods, which are not cleared either for home consumption or for
warehousing within the prescribed period of 30 days and such goods, are
ordered to be sold under section 48 of the Act.
- Goods belonging to any defaulter of sums due to the 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 the 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 officer 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., circumstances
which are stated in (2) above).
Where any goods not being confiscated goods 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 15.9

The following conditions are to be fulfilled for selling the goods under this section:
1. The goods should not have been confiscated.
2. The provisions of the Act should allow sale of such goods.
3. Notice should be given to the owner before such sale.
4. Goods can be sold in the following manner:
- by public auction; or
- by tender; or
- in any other manner with the consent of the owner.
Sub-section (2) deals with application of sale proceeds. Such sale proceeds can be
applied as below:
1. First, to the payment of the expenses of the sale;
2. Next, 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 the person
having custody of the goods;
3. Next, to the payment of the duty, if any, on the goods sold;
4. Next, to the payment of the charges in respect of the goods sold due to the person
having the custody of the goods;
5. Next, to the payment of any amount due from the owner of the goods to the Central
Government under the provisions of this Act or any other law relating to customs.
The balance, if any, shall be paid to the owner of the goods.
An interesting feature of this section is that the legitimate dues of other persons such as
auctioneer 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
seized 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 along with assaying
certificate, duly packed as per the trade practice. SBI is entitled to deduct its out of pocket
expenses, sales tax and other taxes. But, no commission 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 OFFICERS REQUIRED TO ASSIST OFFICERS OF CUSTOMS

[SECTION 151]
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 department;
(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 of 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 exercise of the powers conferred on the Central Government, the following notifications
are issued:

Sl No. Notification Notification Officers specified

Number date
01 77-Cus 23.05.1964 The following officers of Enforcement
Directorate:
- Deputy Directors;
- Assistant Directors,
- Chief Enforcement officers,
- Enforcement officers,
- Assistant Enforcement officers.
02 47-Cus 09.05.1970 Central Reserve Police Force
03 18-Cus 22.01.1972 Officers of Indian Railways and Railway
Protection Force in the following places:
- Within 50 KM width from the border
separating India from Nepal;
- at New Jalpaiguri,
- Howrah R.S.,
- Barauni R.S.,
- Garhara Transhipment Yard;
- Katihar R.S.,
- Luchnow R.S., and
- Bareilly R.S.
 Miscellaneous Provisions 15.11

15.10 INSTRUCTIONS TO OFFICERS OF CUSTOMS [SECTION 151A]

In the exercise of their quasi-judicial functions, the adjudicating authorities 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 not 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 Supreme 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 uniformity 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 orders, instructions and directions to officers of custom in order to ensure
- uniformity in the classification of goods; or
- with respect to the levy of duty thereon.
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 employed in the
execution of the Act shall observe and follow such orders, instructions 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 circular
may not recite that it has been issued in exercise of power under section 37B. 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 Custom 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 42 (SC)]
(c) Also refer a leading decision under the Income Tax Act, 1961, K.P. Varghese vs. ITO
AIR 1980 SC 1922 : 1981 (131) ITR 597 (SC). In this case, binding nature of the
circulars has been discussed far more elaborately than under case laws under the
Central Excise or Customs Laws.
15.12 Customs

It is necessary to at least make an attempt to reconcile the apparent contradiction

between the view expressed in Orient Paper Mills case and the view expressed in later
decisions in the preceding paragraphs. It is submitted that the correct view would be to
hold that the departmental instructions such as circulars and trade notices bind the
departmental authorities under all circumstances. But, they do not bind them in such a
manner that even if the departmental view is antithetical to the assessee’s 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 adjudicating
authority fails to do so, it is open to the assessee to challenge the correctness of the
departmental instruction itself, or the mindless manner in which the adjudicating authority
followed such instructions. This view finds support in CCE vs. Usha Martin Industries,
1997 (72) ECR 257 SC 1997 (94) ELT 460 (SC) case.

15.11 DELEGATION OF POWERS [SECTION 152]

It may not always be possible to have the particular level of officer who is empowered to
exercise a particular function at a particular place. For example, the Commissioner of
Customs are stationed at the head quarters of Commissionnerate. The other subordinate
officers may be stationed at other points. When necessity arises to exercise the power of
Commissioner at these other points, practical difficulties arise. Depending upon the
volume of such problems, and the exigencies, it is desirable to empower the subordinate
officer already available at the particular station to exercise the powers of his immediate
superior officer. Section 152 envisages delegation of the powers to the next immediately
subordinate authority.
The Central Government may, by notification in the Official Gazette, direct that subject to
such conditions, 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 Customs or a Commissioner of Customs empowered in this
behalf by the Central Government;
(b) any power exercisable by a Commissioner of Customs under this Act may be
exercisable also by a Joint Commissioner of Customs or an Assistant Commissioner
of Customs or Deputy Commissioner of Customs empowered in this behalf by the
Central Government;
(c) any power exercisable by a Joint Commissioner of Customs under this Act may be
exercisable also by an Assistant Commissioner of Customs or Deputy Commissioner
of Customs empowered in this behalf by the Central Government;
(d) any power exercisable by an Assistant Commissioner of Customs or Deputy
Commissioner of Customs under this Act may be exercisable also by a Gazetted
 Miscellaneous Provisions 15.13

Officer of Customs empowered in this behalf by the 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 Central 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 Notification No.54-Cus., dt 24-5-1965].
2. Board’s powers under section 109 is delegated to certain Commissioners in respect
of goods imported by land [M.F. (D.R.& I.) Notification No.121-Cus., dt 18-6-1966]
3. Every Commissioner of Customs authorised to exercise Board’s powers under clause
(ii) of the first proviso to section 61 subject 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].

15.12 SERVICE OF ORDER, DECISION, ETC. [SECTION 153]

The date of service of an order or a communication containing a decision is of vital
importance, in case the aggrieved party desires to file an appeal. The time limit allowed
for appeal normally runs from the date of receipt of the communication contrining the
impugned decision by the aggrieved person. There are circumstances where it is not
effectively possible to ensure that such communications are received by the concerned
party. There are other circumstances where disputes arise about the actual date of the
receipt of communication. These two problems have necessitated a uniform procedure for
dispatch and service of orders, decisions, summons and other communications issued
under the Customs Act. Section 153 provides the specific mode of service in this regard
which is reproduced below.
Any order or decision passed or any summons or notice issued under this Act, shall be
served –
(a) by tendering 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, decision, summons or notice cannot be served in the manner provided in
clause (a), by affixing 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. Clause (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 517 (Mad)]
In terms of the General Clauses Act, 1897, when a letter is sent by registered 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 to rebut the same. [Imperial Malts Pvt Ltd
vs. CCE, 1990 (48) ELT 104 (T-D)]
In Nayankumar 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 leaves the control
of the department. The date of receipt is not relevant for the purpose 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 duty 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 any other sum due, under the provisions of this Act shall be rounded
off to the nearest 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 increased 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 empowered 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 following matters, namely:
(a) the manner of determining the price of imported goods under sub-section (1A) of
section 14;
(b) the conditions subject to which accessories of, and spare parts and maintenance and
repairing implements for, any article shall be chargeable at the same rate of duty as
that article;
(c) the detention and confiscation of goods the importation of which is prohibited and the
conditions, if any, to be fulfilled before such detention and confiscation and the
information, notices and security to be given and the evidence requisite for the
purposes of such detention or confiscation and the mode of verification of such
evidence;
 Miscellaneous Provisions 15.15

(d) the reimbursement by an informant to any public officer of all expenses and damages
incurred in respect of any detention of any goods made on his information and of any
proceedings consequent on such detention;
(e) the information required in respect of any goods mentioned in a shipping bill or bill of
export which are not exported or which are exported and are afterwards re-landed;
(f) the publication, subject to such conditions as may be specified 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 carry out the purposes of this Act. In particular and without prejudice to
the generality 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, bill of export, import manifest, import report,
export manifest, export report, bill of transhipment, declaration for transhipment boat
note and bill of coastal goods;
(b) the form and manner in which an application for refund shall be made under section
27;
(c) the conditions subject to which the transhipment of all or any goods under sub-
section (3) of section 54, the transportation of all or any goods 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 conditions subject to which any manufacturing process or other operations may
be carried on in a warehouse under section 65.

15.16 PROVISIONS WITH RESPECT TO RULES AND 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 Government or the Board is empowered to make
under this Act may provide –
(i) for the levy of fees in respect of applications, amendment of documents, furnishing of
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 regulation 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 contravention or failure to comply with a regulation, to a penalty
which may extend to two hundred rupees.
Self-examination questions
1. State the provisions in the Customs Act, 1962, which govern the appearance by an
authorised representative and the qualifications for such a person.
2. Discuss the provisions of section 143A of Customs Act, 1962 in respect of duty
deferment.
3. Differentiate between rules and regulations.
4. Briefly explain the provisions in respect of recovery of any sums due to the
Government under the Customs Act, 1962.
5. 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 on Chinese special
economic zones. SEZ is a specifically delineated duty free enclave and shall be deemed
to be foreign territory for the purposes of trade operations 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 SPECIAL 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 Ministry of Commerce and Industry. (Section 76A)
(b) The provisions relating to SEZ are applicable to goods admitted to a SEZ, and in the
event of conflict between the provisions of this Chapter and other chapters, the
provisions of this Chapter shall prevail. (Section 76B)
(c) The Central Government is empowered to make rules regarding the requirements
relating to goods or class of goods admissible to SEZ, nature of operations and the
conditions to be fulfilled and the procedure to be followed. (Section 76C)
(d) Any goods imported directly from outside India or procured from within India shall be
authorized for admission to a SEZ – Section 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 goods admitted to a special economic zone from the domestic tariff area shall be
chargeable 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 regard under
Section 76F.
(g) Any goods removed from special economic zone for home consumption shall be
chargeable to duties of customs including anti-dumping, counterveiling and
safeguard duties under Customs Tariff Act, 1975 as leviable on such goods when
imported.
(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) SEZ will be under the administrative control of the Development Commissioner.
(j) All activities in the zone of SEZ units, unless otherwise specified, shall be through
self certification procedure.
(k) Goods going into the SEZ area from Domestic Tariff Area (DTA) shall be treated as
deemed exports.
(l) Goods coming from the SEZ area into DTA shall be treated 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 SEZ,
(b) SEZ units may export goods and services including agro-products, partly processed
jewellery, sub-assemblies and component. They may also export by-products,
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 whether new or second hand required by it for its activities or in connection
therewith.
 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 payment of duty for
setting up of units in the Zone.
(g) Exemption from payment of Central Excise Duty on all goods eligible for procurement
from DTA.
(h) Exemption from Central sales tax to supplies from DTA to SEZ,
(i) Duty Drawback available to DTA supplies,
(j) DEPB benefit to DTA supplies,
(k) Transactions from DTA to SEZ to be treated as exports under Income Tax Act and
Customs Act. This is yet to be notified.
(l) SEZ unit may also export goods manufactured by it through a merchant
exporter/status holder recognised under EXIM 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 additional duty of customs leviable on
such goods under section 3(5) of Customs Tariff 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 number of advantages,
however there are certain disadvantages which are listed below:
(a) SEZ units can be set up only in the notified areas and to that extent there 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 is 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. Positra (Gujarat)
2. Nanguneri (Tamil Nadu)
3. Dronagiri (Maharastra)
4. Kakinada (Andhra Pradesh)
5. Gopalpur (Orissa)
6. Hassan (Karnataka)
7. Kulpi (West Bengal)
8. Salt Lake (Kolkata)
9. Bhadohi (Uttar Pradesh)
10. Kanpur (Uttar Pradesh)
11. Greater Noida (Uttar Pradesh)
12. Indore ( Madhya Pradesh)
13. Paradeep ( Orissa )

Self-examination questions
1. What is a special economic zone?
2. Discuss the important features of a special economic zone.
3. Briefly explain the advantages of the special economic zones.
4. Discuss the disadvantages 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 excise, 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
principles. In order to understand the practical implications of these tax provisions, it becomes
utmost necessary to know that how the tax related transactions are accounted 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 accounting body or
by government or other regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements. In India,
accounting standards are issued by the Accounting Standards Board of the Institute of
Chartered Accountants of India. The composition of ASB is such that due representation is
given to industry, associations, banks, company law authorities, taxation authorities and the
C&AG. The representatives of CBDT and Central Board of Excise and Customs have been
invited to join the Board.
The ostensible purpose of the standard setting bodies is to promote the dissemination of
timely and useful financial information to investors and certain other parties having an interest
in the company's economic performance. The Accounting Standards reduce the accounting
alternatives in the preparation of financial statements within the bounds of rationality, thereby
ensuring comparability of financial statements of different enterprises. The following
Accounting Standards have relevance in central excise, customs and service tax matters:
17.2 Customs

(i) AS 1: Disclosure of Accounting Policies

The purpose of this statement is to promote better understanding of financial statements by
establishing through an accounting standard the disclosure of significant accounting policies
and the manner in which accounting policies are disclosed in the financial statements. Such
disclosure would also facilitate a more meaningful 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 in this case held
that in tax accounting, a matching concept is followed. The value 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 into account. When the “value” for the purposes of section 4 is the price
at the factory gate, the costs which are includible up to that stage alone are includible.
Therefore, costs beyond that stage are not includible in the assessable value.
All significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed. Any change in accounting policies which has a material effect
in the current period or which is reasonably expected to have a material effect in later periods
should be disclosed.
Therefore, the accounting policies relating to treatment of CENVAT, valuation of inventories
with respect to CENVAT, excise duty, customs duty etc. should be disclosed as per this
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 of such
raw materials. Further, trade discounts, rebates, duty drawbacks and other similar items
should be deducted in determining the cost of purchase of raw materials.
The said treatment prescribed by this Accounting Standard has found favour with the judicial
rulings as well. The Supreme Court in the case of Collector 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 included in determining the cost of production of excisable product.
When cost is not 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 back 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 Guidance Note
of the Indian Institute of Chartered Accountants.
Here, it is worthwhile to mention that AS 2 and section 145A of the Income-tax Act prescribe
different treatments for inclusion/exclusion of CENVAT credit while valuing inventories. This
concept has been dealt in some length in chapter 30 of Direct Tax Laws Study 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 with financing and investing activities e.g. amount deposited in PLA would be
classified 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 accounted 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 of work completed are
reported. This method provides useful information on the extent of contract activity and
performance during a period.
Therefore, service providers engaged in rendering taxable construction services should
recognise their revenue in the account books in accordance with AS 7.
(v) AS 9: Revenue Recognition
The revenue received from rendering of services should be recognized in the books of
accounts in accordance with this standard. This standard provides that revenue from
rendering of services should be recognized when the service is performed, 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 exists regarding:
(a) the amount of consideration that will be derived from rendering the service;
(b) the collectibility of the amount when services are rendered.
Completed service contract method is a method of accounting which recognises revenue only
when the rendering of services under a contract is completed or substantially 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 service 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 effective commencement or on the renewal date of the related policies.
17.4 Customs

Proportionate completion method is a method of accounting which recognises revenue in the

statement of profit and loss proportionately with the degree of completion 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 recognized proportionate to period of instruction.
(vi) AS 10: Accounting for Fixed Assets
This standard prescribes that the import duties, if any, and other non-refundable 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 again 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 computed 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 purpose 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 and assets should be done as per the
principles prescribed by this accounting standard.
AS 11 on Accounting for Effects of Changes in Foreign Exchange Rates provides that a
foreign currency transaction should be initially recognized in the reporting currency on the
basis of exchange rates between the reporting currency and the foreign currency prevalent at
the date of transaction (an average rate for the period may be used). However, the average
rate may not be used when exchange rate fluctuates significantly. A foreign currency
transaction involves buying or selling of goods, services, or assets whose price is
denominated in a foreign 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 monetary 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 restated at the closing rate at the balance sheet date. The gain/loss resulting
from such restatement should also be adjusted in the Profit and Loss Account.
(viii) 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 accounting
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 refundable. 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 the 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 Changes in Accounting Policies. Extraordinary
items are income or expenses that arise from events or transactions that are clearly distinct
from the ordinary activities 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 as a
part of net profit or loss for the period in a manner that its impact on current profit or loss can
be perceived.
(ix) AS 17: Segment Reporting
AS 17 establishes principles for reporting financial information about the different types of
products and services an enterprise produces and the different geographical areas in which it
operates.
Large manufacturing companies producing multiple products or having multi-locational
manufacturing operations or big service providers operating from multi-locations (viz. banks)
should follow this accounting standard for reporting inter alia segment wise revenue and
expenses. While income tax expenses are not recorded as segment expenses, excise duty,
customs duty and service tax, being operating expenses, have to be recorded as segment
expenses.
(x) AS 18: Related Party Disclosures
This accounting standard requires the disclosure of all related parties (as per the definition of
the standard) and the transactions effected with them in the financial statements. Therefore,
excisable goods and imported goods involving related parties must be valued correctly so as
to avoid unnecessary litigations.
(xi) AS 26: Intangible assets
Import licences or import quotas should be treated as intangible assets and recognized as
such subject 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 probable 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 – Accounting for Government Grants (discussed in point (viii) above).
(xii) AS 29: Provisions, Contingent Liabilities and Contingent Assets
The liability for excise duty arises as soon as the goods are manufactured. This accounting
standard provides that a provision should be recognized when there is a present obligation
that probably requires an outflow of resources and a reliable estimate can be made 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 in 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 certain to
be enacted e.g. a provision may be made in respect of a retrospective amendment made by
the Finance Bill which affects the duty liability of the assessee when at the Balance Sheet
date the Bill has been passed by the Parliament and is awaiting President’s assent. In this
case, it is virtually certain that the Bill will be enacted by obtaining the assent of the President.
However, the variety of circumstances that arise in practice usually make it impossible to
specify a single event that will provide sufficient, objective evidence in every case. Evidence
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 cases sufficient objective evidence will not
exist until the new legislation is enacted.
In the case of Motor Industries Company Ltd. v. Commissioner of Cus., Chennai 2005 (188)
E.L.T. 315 (Tri. - Bang.) the CESTAT conformed to the principle set 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 instance of customs authorities pending investigation. In the year 2001 the
dispute was 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 was indicated and recognized in the
financial statement for the year 2000-01 as receivables. 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 ground that this was done in accordance with AS – 4 (now AS 29).
 Inter-relationship of Accounting with Excise, Customs and Service tax 17.7

17.3 COST ACCOUNTING STANDARDS ISSUED BY ICWAI

Cost Accounting Standards (CAS) are issued by the Cost Accounting Standard Board (CASB)
of the Institute of Cost and Works Accountants of India (ICWAI). Standards issued by CASB
are recommendatory in nature.
CAS – 4: Cost of Production for Captive Consumption
CAS-4 has been issued by the Institute of Cost and Works Accountants of India. This
standard deals with determination of cost of production for captive consumption of excisable
goods. 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 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 production of
such goods. The provisions of CAS-4 are given below:
Cost of production will include various cost components as defined in Cost Accounting
Standard-1 (‘Classification of Cost’ – CAS-1). The various cost components are:
Direct Material Prime Cost Cost of Production Cost of Sales
Cost
+ + + +
Direct Labour Cost Production Overheads Selling Cost Profit
+ + + =
Direct Expenses Administration Overheads Distribution Cost Selling Price
= + =
PRIME COST Research & Development COST OF SALES
Expenses (Apportioned)
=
Cost of Production

Cost of Production: Cost of production shall consist of Material Consumed, Direct Wages
and Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research 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
17.8 Customs

indigenous materials, imported materials, bought out items, self manufactured items, process
materials and other items
Cost of material consumed shall consist of cost of material, duties and taxes, freight inwards,
insurance, and other expenditure directly attributable to procurement. Trade discount, rebates
and other similar items will be deducted for determining the cost of materials. Cenvat credit,
credit for countervailing customs duty, Sales Tax set off, VAT, duty draw back and other
similar duties subsequently recovered/ recoverable by the enterprise shall also be deducted.
Direct wages and salaries shall include house rent allowance, overtime and incentive
payments made to employees directly engaged in the manufacturing activities.
Direct wages and salaries include fringe benefits such as contribution to provident fund and
ESIS, bonus/ex-gratia payment to employees, provision for retirement benefits such as
gratuity and superannuation, medical benefits, subsidised food, leave with pay and holiday
payment, leave encashment and other allowances such as children’s education allowance,
conveyance allowance 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, technical assistance/know –how fees, amortized cost of moulds, patterns,
patents etc, job charges, hire charges for tools and equipment, and charges for a particular
product designing etc.
Works overheads are the indirect costs incurred in the production process. Works overheads
include consumable stores and spares, depreciation of and machinery, factory building etc,
lease rent of production assets, repair and maintenance of plant and machinery, factory
building etc, indirect employees cost connected with production activities, drawing and
designing department cost., insurance of plant and machinery, factory building, stock of raw
material & WIP etc., amortized cost of jigs, fixtures, tooling etc and service department cost
such as tool room, engineering & maintenance, pollution control etc.
Quality control cost is the expenses incurred relating to quality control activities for adhering
to quality standard. These expenses shall include salaries & wages relating to employees
engaged in quality control activity and other related expenses.
Research and development cost incurred for development and improvement of the process
or the existing product shall be included in the cost of production.
Administrative overheads in relation to production activities shall be included in the cost of
production. Administrative overheads in relation to activities other than manufacturing
activities e.g. marketing, projects management, corporate 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 transfer/
dispatch of the goods used for captive consumption. If product is transferred/dispatched duly
packed for captive consumption, cost of such packing shall be included.
Overheads shall be analysed into variable overheads and fixed overheads. The variable
production overheads shall be absorbed in production cost based on actual capacity
utilisation. The fixed production overheads and other similar item of fixed costs such as quality
control cost, research and development costs, administrative overheads relating to
manufacturing shall be absorbed in the production cost on the basis of the normal capacity or
actual capacity utilization of the plant, whichever is higher. Normal Capacity is the production
achieved or achievable on an average over a period or season 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 cost of
goods produced and similarly opening 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 are produced, joint costs are allocated between the products on a
rational and consistent 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 allocation of joint cost to joint products, the sales values of products at the split off point
i.e. when the products become separately identifiable may become the basis. Some other
basis may also be adopted. For example, in case of petroleum products, each product is
assigned certain value based on its certain properties, may be calorific value and these values
become the basis of apportionment of joint cost among petroleum 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 reprocessing, 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 making the scrap suitable for reprocessing shall be deducted from value of scrap
or waste.
Miscellaneous income relating to production shall be adjusted in the calculation of cost of
production, for example, income from sale of empty containers used for despatch of the
captively consumed goods produced under 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 landed cost of such material shall
be included in the cost of production.
The amortization 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 financial charge shall not be considered to be a part
of cost of production.
Abnormal and non-recurring cost arising due to unusual or unexpected occurrence of
events, such as heavy break down of plants, accident, market condition restricting sales 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 Quantity Produced (Unit of Measure)
Q2 Quantity Despatched (Unit of Measure)
Particulars Total Cost/
Cost unit
(Rs) ( Rs)
1. Material Consumed
2. Direct Wages and Salaries
3. Direct Expenses
4. Works Overheads
5. Quality Control Cost
6. Research & Development Cost
7. Administrative Overheads (relating to production activity)
8. Total (1 to 7)
9. Add : Opening stock of Work - in –Progress
10. Less : Closing stock of Work -in- Progress
 Inter-relationship of Accounting with Excise, Customs and Service tax 17.11

11. Total (8+9-10)

12. Less : Credit for Recoveries/Scrap/By-Products / misc income
13. Packing cost
14. Cost of production ( 11 - 12 + 13)
15. Add: Inputs received free of cost
16. Add: Amortised cost of Moulds, Tools, Dies & Patterns etc
received free of cost
17. Cost of Production for goods produced for captive consumption (14
+ 15 + 16)
18. Add : Opening stock of finished goods
19. Less : Closing stock of finished goods
20. 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 thereto as
possible.
Statement of Cost of Production of _____________ manufactured/to be manufactured during
the period _____________.
The ICWAI has also issued CAS-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 members of ICAI on matters
which may arise in the course of their professional work and on which they may desire
assistance in resolving issues which may pose difficulty. Guidance Notes are
recommendatory in nature. While discharging their attest 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 Guidance Notes on Accounting
Treatment for Excise Duty and Accounting Treatment for MODVAT/CENVAT. Presently, the
Guidance Note on Accounting Treatment for MODVAT/CENVAT 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
As per the Guidance Note on Accounting Treatment for Excise Duty, excise duty should be
considered as a manufacturing expense and like other manufacturing expenses 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 subsequently utilised in the
manufacturing process, the duty paid on such goods, if the same is not recoverable from
taxing authorities i.e. (non-Cenvatable), becomes a manufacturing cost and must be included
in the valuation of work-in-progress or finished goods arising from the subsequent processing
of such goods.
Where 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 excise duty arises on the manufacture thereof but
the collection gets postponed till the time of sale. Such a provision should be created by
applying the rate of duty prevailing at the Balance Sheet date. For this purpose, other factors
affecting the liability should also be considered, e.g., exemptions being availed by the
enterprise, pattern of sales-export or domestic etc.
Thus, if a small scale unit 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 also, 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 has 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 product lying in factory or bonded warehouse.
The excise liability so determined should 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 be disclosed as a deduction from turnover.
This excise duty should be the total excise 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 recognised 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.
It may be noted that the Accounting Standard Interpretations address questions that arise in
course of application of a standard. These are therefore issued after 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 relevant accounting standards.
17.4.2 Guidance Note on Accounting Treatment of MODVAT/CENVAT (under revision)
The accounting treatment for CENVAT credit in the light of the relevant provisions of the
Guidance Note on Accounting Treatment of MODVAT/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 utilised against payment
of excise duty on final products, CENVAT Credit Receivable (Inputs) Account is credited.
(i) On purchase of raw materials
Purchases A/c Dr.
CENVAT Credit Receivable (Inputs) A/c Dr.
To Creditors

(ii) On clearance of finished goods

Excise duty paid A/c Dr.
To CENVAT Credit Receivable (Inputs) A/c

In this case, the purchase cost of the inputs would be net of the specified duty on inputs.
Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of
purchase cost net of the specified duty on inputs. This treatment is also suggested by the AS-
2 on Valuation of Inventories. The debit balance in CENVAT Credit Receivable (Inputs)
Account should be shown on the assets side of the balance 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 duty on said inputs are received later than the physical receipt of the
same. However, such credit should be accounted only if one is reasonably certain of getting
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 utilised even before the said inputs are actually used in the
production.
If any input is used for the production of both excisable and exempted final products and
separate 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 inputs meant for manufacture of exempted final products
should be valued at the actual cost inclusive of excise duty.
It is to be noted that while valuing inventories of final products, the value of inputs should be
net of the duty on inputs, that is, the purchase cost as reduced by the CENVAT credit.
17.14 Customs

(ii) Capital goods

As per AS 10 on Accounting for Fixed Assets, the 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 cost of bringing the asset to its working condition for its intended use; any
trade discounts and rebates are deducted in arriving at the purchase price. Since, CENVAT
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 Income-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 CENVAT Credit Rules,
2004 prescribe the same treatment.
The CENVAT credit in respect of capital goods is allowed for an amount not exceeding 50% of
the duty paid on such capital goods in the financial year in which the goods are received in
factory 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 Goods) Account" and balance
may be debited to another appropriate account, say, "CENVAT Credit Deferred Account".
In the subsequent financial year(s), when balance 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 Credit Deferred Account" with a corresponding debit to
"CENVAT Credit Receivable (Capital Goods) Account". The unadjusted balance standing in
the CENVAT Credit Receivable (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 asset A/c Dr.

CENVAT Credit Receivable (Capital Goods) A/c (50% of specified duty) Dr.
As CENVAT Credit Deferred A/c (50% of the specified duty) Dr.
To Creditors
(ii) On clearance of finished goods in the year of purchase of fixed asset
Excise duty paid A/c Dr.
To CENVAT Credit Receivable (Capital Goods) A/c

(iii) On availing the balance 50% credit in the subsequent financial year
CENVAT Credit Receivable (Capital Goods) A/c Dr.
To CENVAT Credit Deferred A/c
 Inter-relationship of Accounting with Excise, Customs and Service tax 17.15

CENVAT credit in respect of capital goods should be recognised in the books of account only
when the following conditions are satisfied:
(i) The enterprise is entitled to the CENVAT credit as per the CENVAT provisions and
(ii) there is a reasonable certainty that the CENVAT credit would be utilised.
(iii) Capital goods acquired on lease
CENVAT credit is available to the lessee where the capital goods have been acquired on
lease. Where the financing arrangement 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 capital goods, (which would be availed of as CENVAT credit by the lessee) should be
recorded and disclosed separately as the duty recoverable from the lessee. This 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 payments are the payments over the lease term that the lessee is, or can be
required, 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, any residual value guaranteed by or on behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of meeting this guarantee.
Where the specified duty on capital goods does not form part of the financing arrangement
and the lessee pays the duty directly to the supplier, obviously the same 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 treated in the same manner as discussed in point no. (ii) above, except that the cost
of the relevant leased capital asset and depreciation would not be accounted in the books of
the lessee.
(iv) Capital goods acquired on hire-purchase
Cenvat Credit 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 value, 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 should 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 arrangement.
17.16 Customs

In cases where the specified duty on capital goods forms part of the hire purchase
arrangement and the benefit of CENVAT credit is available to the hirer, the vendor should
book the sale in the normal course inclusive of the specified duty on the capital goods in his
books. However, where the specified duty 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-worker for further processing
The CENAVT credit on goods (being inputs or capital goods) sent to the job worker for further
processing, testing, repair, reconditioning 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 entry for such reversal may be:
When inputs are not returned
Purchases A/c Dr.
To CENVAT Credit Receivable (Inputs) A/c
When capital goods are not returned
Fixed Assets A/c Dr.
To CENVAT Credit Receivable (Capital Goods) A/c

The credit can be retaken once the goods come back. Therefore, time factor is quite relevant
in accounting for CENVAT credit in case of job work.
(b) Accounting treatment in case of inputs received by a job worker for further processing on
job-work basis
An enterprise may receive inputs from a principal for processing and/or converting to final
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 Receivable Account" and the account to be credited
would depend upon the terms of job work with the principal. There are two possible
alternatives viz., the job worker bears excise duty or the principal bears the excise duty. In the
first case the entry should be:
 Inter-relationship of Accounting with Excise, Customs and Service tax 17.17

CENVAT Credit Receivable A/c Dr.

To Excise Duty paid A/c

On clearance of the goods the entry would be:

Excise Duty paid A/c Dr.
To CENVAT Credit Receivable A/c

In the second case the entry should be:

CENVAT Credit Receivable A/c Dr.
To Principal A/c

On clearance of the goods the entry would be:

Principal A/c Dr.
To CENVAT Credit Receivable A/c

(vi) Review of balances in CENVAT credit receivable accounts

A review of the 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 are not likely
to be used in the normal course of business within a reasonable time, such non-usable excess
credit should be adjusted in the accounts. This adjustment may be done irrespective of the
right to carry forward such excess credit in 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.
The above adjustment related to input credit should be made to the raw material or input
purchase account. The effect of this would be to increase the cost of purchase 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 debit or identify this excess credit to a particular lot
or lots of materials purchased, such excess credit may be apportioned over the entire
purchases of raw materials, components etc., entitled to CENVAT credit during the year on
pro-rata basis.
The adjustment of excess credit related to capital goods should be made to the concerned
Capital Goods Account. The excess CENVAT credit, either availed or 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 over the residual useful life of the asset. In case the fixed asset no
longer exists, 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 asset-wise.
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 Receivable (Capital Goods) Account is maintained
separately for fixed assets and other 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 relevant plant and machinery cannot be put to use for the manufacture of final
product, 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 such adjustments, the balances of the CENVAT Credit Receivable Accounts in
the financial accounts may be lower than the credit available in the excise records. In such a
case, a reconciliation statement should be prepared indicating the amounts adjusted so that a
track is kept for the difference between the financial accounts and the credit available as per
the excise records.
The balance of CENVAT account (unavailed credit), in case of exports should not be written
off as the same can be refunded in cash.
(vii) Duty demands paid by debit to CENVAT credit balance
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 pertaining 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 finished goods, the same should be debited to excise duty
account. If, on the other hand, it pertains to disallowance of CENVAT credit taken on
purchase of raw materials during the year, the same should be added to the cost of inputs.
Appropriate adjustment in that case would have to be made while valuing inventory of inputs.
If the duty demand pertains to disallowance of CENVAT credit in respect of 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 consumed, the disallowance should be
debited to excise duty account and treated as expense of the current year. If raw materials are
still lying in stock, duty demand should be added to the cost of stock of inputs.

Illustration of accounting for 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 (Excise 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) CENVAT 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 cess.

Profit & Loss Account

Particulars Units Rate Amount Particulars Units Rate Amount
(Rs) (Rs.
To Opening 50 100 5000 By Sales 120 120 14400
Stock of Raw
Materials
To Purchases of 100 100 10000
Raw Materials
150 100 15000
Less: Closing 30 100 3000 12000
Stock of Raw
Materials
To Excise Duty 8% 1152
To Gross Profit 1248
Total 14400 Total 14400

NOTE:

1. Opening balance of the CENVAT Credit Receivable Account is Rs.400 (8% of Rs.5000)

2. Besides showing stock of raw materials at Rs.3000, the Balance Sheet would also
reflect, CENVAT Credit Receivable Account at Rs.48, arising out of the following entries:

(a) Purchase A/c Dr. 10000

CENVAT Credit Receivable A/c Dr. 800

To Sundry Creditors 10800

17.20 Customs

(Being the purchase of 100 units at Rs.100 plus excise duty @ 8% in respect of which
the company is eligible to claim CENVAT credit)

(b) Excise Duty A/c Dr. 1152

To CENVAT Credit Receivable A/c 1152

(Being the payment of excise duty out of CENVAT credit available to the company)

Balance Sheet

Liabilities Amount Assets Amount

Current Assets, Loans and Advances
(A)Current Assets
Inventory of raw materials 3000
(B) Loans and Advances
CENVAT Receivable A/c 48

The opening balances of inventories of raw materials and CENVAT Receivable Account, 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/CENVAT 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 for 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 value 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 service A/c Dr.

CENVAT Credit Suspense (Input Services) A/c Dr.
To Sundry Creditors

On paying the value of the taxable service and the service tax thereon the following entry may
be passed:

CENVAT Credit Receivable (Input Services) A/c Dr.

To CENVAT Credit Suspense (Input Services) A/c

17.6 ACCOUNTING TREATMENT FOR PLA

 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 duty is
deposited, PLA Account or Account Current Account should be debited and bank/cash
account should be credited. While clearing the finished goods, if balance 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 Current 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 balance should be shown under the ‘Current Assets’ in the balance sheet.

17.7 ACCOUNTING 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 account 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 ultimate collectibility becomes
reasonably certain.

Here, it may be noted that CENVAT 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 duty shall be governed by the principles discussed in pare 17.4.2.

17.8 MAINTENANCE 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 maintained on daily basis indicating
particulars regarding.
(i) Description of goods manufactured or produced
(ii) Opening balance
(iii) Quantity produced or manufactured
(iv) Inventory of goods
(v) Quantity removed
(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 manufacturer of final products or
the provider of output service to maintain proper records for the receipt, disposal, consumption
and inventory of the input and capital goods in which the relevant information regarding the
value, duty paid, CENVAT credit taken and utilized, the person from whom the input or capital
goods have 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 prescribes certain statutory books
of accounts which are to be maintained by the assessee, the excise, customs and service tax
laws do not provide for maintenance of any statutory books of accounts. Therefore, in case of
assessee being a company the books of account should be maintained as per the requirement
of the Companies 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 the details thereof, (ii) sales and
purchases of goods, and (iii) assets and liabilities. A company engaged in production,
processing, manufacturing or mining activities has also to maintain, if required by the Central
Government, cost accounting records i.e., particulars relating to utilisation of material, labour
and other items of costs.
If such books of accounts which are necessary to give a true 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 accounts shall not be deemed to have been kept. Also if such books
are not kept on accrual basis and according to system of double entry book keeping, proper
books of accounts shall not be deemed to have been kept.
As per rule 5(1) of Service Tax Rules, 1994, every person shall furnish to the Superintendent
of Central Excise at the time of 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 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 Institute of Chartered Accountants of India has notified the
following books which should be maintained by a practising chartered accountant:
(i) Cash Book,
(ii) Ledger
Rule 6F of the Income Tax Rules, 1962, prescribes that the person carrying on legal, medical,
engineering, or architectural profession or the profession of accountancy or technical
consultancy or interior decoration or authorised representative or film artist, subject to certain
exemptions specified in the proviso to Rule 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 & Receipts for expenses.

17.9 DIVERGENCE BETWEEN ACCOUNTING AND TAXATION PRINCIPLES

Following are the instances of divergence between accounting and taxation principles with
regards to indirect taxes:
(i) Valuation in excise
The value of finished goods as per the excise provisions may differ from the value recorded in
the financial 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 expenses etc. if any, borne by the buyer in connection
with the sale shall be added 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
capital goods in the financial accounts. As per Accounting Standard Interpretation 2 on
Accounting for Machinery Spares, these items are treated as inventories for the purpose of AS
2 if they are not specific to a particular item of fixed asset 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 ordinary course of operations.
Further, rule 2(a)(A)(1) clarifies that capital goods 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 balances
As per the Guidance Note on Accounting Treatment for MODVAT/CENVAT, balances in
CENVAT Receivable Account pertaining to inputs and capital goods should be reviewed at the
year end. If on such review any non usable excess credit (i.e. credit 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 provisions 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 statement should be prepared to explain the
difference between financial accounts and excise records.
(iv) Valuation in case of customs
As per the customs provisions, the rate of exchange used for conversion of foreign currency in
to Indian currency for valuation purposes should be the rate declared by the Central Board of
Excise and Customs. However, as per AS 11 the rate of exchange for conversion of foreign
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 whereas while recording the value of such
goods in the books of accounts the exchange 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 Income–tax Act, where the rate
of exchange to be adopted for the purpose of conversion of currency is prescribed 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 rates of conversion of currency for the purpose of
converting consideration of taxable services received in foreign currency into Indian currency.
Further, there may be more difference between the value of imported goods derived as per the
customs provisions and the value computed as per the accounting principles. The differences
may be on account of various additions or deductions made to/from the invoice value in terms
of section 14 and Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.
For example, customs laws provide for the addition of commission and brokerage, licence or
royalty fees etc. to the value of the imported goods. Also, price reduced after importation is
not considered for customs purposes whilst the same is considered for recording the value of
the goods 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 payment 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 taxable 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 Dr.

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 Dr.

To Service Tax Payable A/c

As the service tax for the month of March has to be paid by the 31st of March, there 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 tax payable as there will not be any liability for
the same. The balance in the CENVAT Credit Receivable (Input Service) A/c may be set off
against the Service Tax 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 recognised
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 account 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 taxable
service includes any amount received towards the taxable service before, during or after
provision of such service and it is this gross amount charged, which 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 provisions of rule 5(2), rule 5(1) of the Service Tax (Determination of Value)
Rules, 2006 lays down that the expenditure or costs incurred by the service provider 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 included 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.
17.26 Customs

This means that out-of pocket expenses incurred by the service provider for the provision of
services shall form part of the value of taxable services and would be charged to service tax.
However, for accounting purposes the value 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 nature of reimbursement of out-of pocket expenses (e.g. conveyance, boarding,
lodging 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 of revenue in construction contracts
The service providers engaged in construction services should account the revenue and
expenses of the contract 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. 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 questions
1. Enumerate any five accounting standards which may be relevant in central excise,
customs or service tax matters.
2. Discuss the treatment prescribed by the Guidance Note on Excise Duty for accounting
excise duty in the books of account.
3. How should the excise duty be disclosed in the profit and loss account?
4. Explain the accounting treatment of inputs on which CENVAT credit has been availed.
5. Write a brief note on divergence between accounting principles and taxation laws.