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Conditions for levy of excise duty

Conditions for levy of Excise Duty

Excise duty is a nature of Indirect tax. Section 3, of the Central Excise, Act 1944 is the charging section. As per this section, Conditions for levy of excise duty are:

  1. There must be manufacture or production.
  2. Such manufacturing activity should take place in India.
  3. The manufacture must result in goods.
  4. Such resultant goods must be excisable in nature.

1. Manufacture or production

The first and foremost important condition for levy of excise duty is, an article should be manufactured or produced.

Now let us understand, the basic difference between manufacture or production. Every manufacture can be characterized as production, but every production need not amount to manufacture. 

‘Production’, means new identifiable goods coming into an existence. It may be a result of a natural process like food grains, flowers or it may be an unintentional outcome of process.

‘Manufacture’ means bringing new identifiable goods into existence.

As per section 2(f) of the Central Excise Act,1944Manufacture”, includes any process-

i. Incidental or ancillary to the completion of manufactured product.

ii. which is specified in relation to section or chapter notes of first schedule to the Central Excise and tariff Act, as amounting to manufacture.

iii. which in relation to goods specified in third schedule of the act, involving packing or repacking of goods in a unit container, labelling or relabeling it, declaration or alteration of retail sale price in it or adaption of any other treatment in order to render product marketable to the consumer.

and the word ‘manufacturer’ shall be considered accordingly and shall include not only a person who employees hired labour in  production or manufacture of excisable goods, but  also any person engages in the production or manufacture in his own account.

In the case of Union of India Vs Delhi Cloth and general Mills Co Ltd it was held that, manufacture means a change, but every change does not amount to manufacture. Every change is a result of labour and manipulation, but something more is necessary, a new product having distinct name, character or use must emerge.

Therefore, we can conclude that if a new article having distinctive name, character or use emerge the process would amount to manufacture.

Who is manufacturer?

Analysis of section 2(f), says that, following persons shall be classified as manufacturer:

  1.  Person who manufactures the goods by employing hired labour.
  2. Person who manufactures goods himself.
  3. Person, who employs somebody else to manufacture the goods under his direction and supervision.
  4. Person, who manufactures the goods for others (also known as job worker).

Can raw material supplier be treated as manufacturer?

In the case of Ujagar Prints it was held that, excise duty is on production or manufacture of goods and it is immaterial whether the manufacturer is owner or not. Whosoever manufactures the goods shall be treated as manufacturer. The supplier of raw material will not be considered as manufacturer. Job worker is the real  manufacturer.

However, in the following circumstances a Raw material supplier can be treated as manufacturer:

  1. When there is no Principal to principal relation between raw material supplier or manufacturer
  2. Job worker functions like hired labour or as an agent of raw material supplier.
  3. Job worker functions under supervision and control of raw material supplier.

Manufacture Vs Processing

Manufacture involves series of process, whereas process is one of the activities undertaken for manufacture of a product  from input materials.

As per section 2(f), manufacture includes any process incidental or ancillary to the completion of the manufactured product. Manufacture is not complete unless all these process are complete.

Does assembly amounts to manufacture?

Assembly is a process of putting together a number of items to make a product or an article. Assembly of various parts may amount to manufacture if a new product having distinctive name, character or use emerge. In the case of BPL India Limited Vs CCE, it was held that assembly of imported kits of VTR with color monitors imported in disassembled condition amounted to manufacture since the end product has a distinct character and use.

2. Manufacturing activity should take place in India

For levy of excise duty, an important condition is that manufacture or production activity should take place in India.

India includes:

  1. Territorial waters up to 12 nautical miles.
  2. Exclusive economic zones and continental shelf’s up to 200 nautical miles.
  3. India also includes state of Jammu and Kashmir.

3. Goods

For levy of excise duty, an article manufactured or produced in India must result in Goods.

As per explanation to sec 2(d) of the Central Excise Act,1944 “goods”, includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.

In the case of Union of India Vs Delhi Cloth and General Mills limited, ‘goods’, includes any article which has the capability of coming to the market to be bought and sold.

From this definition, it is clear that to be classified as goods an article must satisfy two basic conditions that is:

  1. Moveablity and
  2. Marketability.

1. Moveablity

Moveablity means capability of product of being moved from one place to another without breaking its original condition.

2. Marketability

Marketability means capability of a product of being put into market for sale.

It is very important to note that, for levy of excise duty the conditions of moveablity and marketability should be satisfied at the time when the manufactured goods come into existence.

For example, in the case of Triveni Engineering and Industries Limited, it was held that the assesse was manufactured steam turbine on which duty was paid. They also purchased duty paid turbine alternator and combined them by aligning properly. From this activity a new product emerged called as turbine alternator. Although, it amounted to manufacture, yet it does not fulfill the test of moveablity. Turbine alternator will come into existence only by the combination of steam turbine and alternator, it cannot bought as an article to the market. Since, it lacks mobility it cannot be classified as goods and no excise duty is leviable.

4. Excisable goods

The last condition for levy of excise duty is that, the resultant goods arising out of manufacturing activity should be excisable in nature.

As per section 2(d), of the Central Excise Act, 1944 “excisable goods”, means those goods specified in first and second schedule of central excise and tariff act as being subject to duties of excise and also includes salt.

Therefore, we can conclude that, in order levy excise duty:

1.An article should be mentioned in Central Excise and Tariff Act

2. If an article is not mentioned in the Central Excise and Tariff Act, there is no levy of duty.

3. Exempted goods are also excisable goods, exempted goods does not become non excisable goods by having merely an exemption notification.

4. Those goods, which are mentioned in the Central excise and Tariff Act and rate is ‘0’ or ‘Nil’ are also excisable goods. But if the goods, mentioned in the Central excise and Tariff Act and the rate is ‘-‘ or ‘blank’ then such goods are non excisable goods.

Further, it is very important to note that mere mentioned in tariff is not enough unless it is proved that goods are marketable in nature. (Bhor Industries Limited Vs CCE)

Conditions for levy of Excise Duty

Therefore, by analyzing section 3 of the Central Excise Act, 1944 we can conclude that for levy of excise duty an article must satisfy the four important conditions. They are:

EExcisable goods
MManufactured or produced
in India

Levy of excise duty for process waste and scrap

Another important aspect is that, is levy of excise duty for process waste and scrap.

As we have understood that, manufacture includes any process which is incidental or ancillary to the completion of manufactured product. Therefore, while carrying out an manufactured activity if a new product having distinct name or character emerge it would be liable to duty.

In the case of Khandelwal Metal and Engineering works Vs UOI, it was held that, if the process waste and scrap is a commercially distinct identifiable product and has commercial value, then such waste and scrap would be chargeable to duty if covered in Tariff.

It is very important to note that, only those waste and scrap which is incidental or ancillary to the manufactured product will be chargeable to duty, if the following conditions are satisfied:

1.They must satisfy the conditions of movablity and marketability.

2.It should be excisable in nature.

3. It should be a resultant of manufacturing process.

Conditions for levy of Excise Duty

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