Indirect Taxation in India: Insights and Constitutional Aspects

Indirect Tax Certification Course -

Central Excise

Rajesh Kumar T.R.

B’com, LLB, FCA, DISA

1

Revenue from different streams of

taxes

2

3

4

Constitutional Aspects of Taxation

5

Part XII – Finance, Property, Contracts

and Suits

Article 265 of the Constitution of India

- 

No tax shall be levied or collected

without the authority of law

6

Part XI – Relation Btwn Union – States -

245



Parliament Make Laws – Whole or any part

of the Territory of India



State Legislature – Whole or any part of the

State



No law made by Parliament shall be deemed

to be invalid on the ground that it would

have extra-territorial operation

7

Article 246



Parliament has exclusive power to make

laws of matters covered in List I (union List)

of VII Schedule



State Legislature has exclusive power to

make laws of matters covered in List II

(State List)



Concurrent List – Both have powers

8

Seventh Schedule

Union List- List -I



Entry 83. Duties of customs including export

duties.



Entry 84. 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-paragraph (

b

) of this entry.



Entry 92C – Taxes on Services



Entry 97 - Any other matter not enumerated in

List II or List III including any tax not

mentioned in either of those lists.

State List- List - II



Entry 51. Duties of excise on the following

goods manufactured or produced in the State

and countervailing duties at the same or lower

rates on similar goods manufactured or

produced elsewhere in India:-



(a) alcoholic liquors for human consumption;



(b) opium, Indian hemp and other narcotic

drugs and narcotics,

but not including medicinal and toilet

preparations containing alcohol or any

substance included in sub-paragraph (b) of

this entry.



Entry 54. Taxes on the sale or purchase of

goods other than newspapers, subject to the

provisions of entry 92A of List I.

9



Duties of excise on tobacco and other goods manufactured or

produced in India except:



alcoholic liquors for human consumption;



opium, Indian hemp and other drugs and narcotics,



but including medicinal and toilet preparations containing alcohol or

any substance including in sub-paragraph (b) of this entry (eg. Medical

syrups for cold/cough)

Entry 84 of Union List

10

Entry 51 of state list



Duties of excise on the following goods manufactured or

produced in the State and countervailing duties at the same

or lower rates on similar goods manufactured or produced

elsewhere in India:-



alcoholic liquors for human consumption



opium, Indian hemp and other narcotic drugs and narcotics



but not including medicinal and toilet preparations

containing alcohol or any substance included in sub-

paragraph (b) of this entry

11

Entry 97 of Union List



any other matter not included in List II, III and any tax not

mentioned in list II or III



This is residuary powers within the hands of Union.



Challenge of levy of any new Central tax, has to pass the test

of proving that it is beyond this residuary powers irrespective

of what the tax is named/characterised as.

12

Basic Elements of Taxation



Levy – Will define the event upon which the duty/tax gets

attracted



Assessment – Quantification of the levy attracted



Collection – The mechanism by which the Governments

would collect the assessed tax

13



Levy – collection – meaning



Somaiya Organics Ltd Vs State of UP, 2001 (130) ELT 3

(SC) – the word collection in Art.265 would mean physical

realization of tax, which is levied or imposed. Levy and

collect are not synonymous terms. Levy means assessment

or charging or imposition of tax, collect means physical

realization.

Levy and collection

14



Art.366(28) of Const. of India – Taxation includes the

imposition of any tax or impost, whether general or local or

special, and ‘tax’ shall be construed accordingly.

Tax

15



The Central Board of Revenue Act, 1963 defines ‘direct tax’ to

mean any duty leviable or tax chargeable under Estate Duty Act,

1953, Wealth-tax Act, 1957, Expenditure Tax Act, 1957, Gift Tax

Act, 1958, Income-tax Act, 1961, Super Profits Tax Act, 1963,

Interest Tax Act, 1974, Hotel Receipts Tax Act, 1980, and any

other duty or tax which, having regard to its nature or incidence,

may be declared by the Central Government, by notification in

the official gazette to be a direct tax.

What is Direct Tax

16



Eri Beach Company Ltd Vs Attorney General of

Ontario, AIR 1930 PC 10



direct tax is one which is demanded from the very person

who it is intended or desired should pay it. Indirect taxes are

those which are demanded from one person in the

expectation and intention that he shall indemnify himself at

the expense of another.

Court’s views

17

Introduction to Central Excise Law

18



Central Excise Act, 1944



Rules



CE Rules, 2002,



Cenvat Credit Rules, 2004,



CE (Appeal) Rules, 2001,



CE (Advance Rulings) Rules, 2002,



CE (Settlement of cases) Rules, 2007,



CE (Removal of Goods at Concessional Rate of duty for manufacture of

excisable goods) Rules, 2001,

Sources of CE law

19



CE Valuation (Determination of Price of Excisable Goods) Rules,

2000,



CE (Compounding of Offences) Rules, 2005,



CE (Determination of Retails Sale Price of Excisable Goods) Rules

2008



Central Excise Tariff Act, 1985



Notifications



Case laws and Circulars

Sources of CE law

20

Charging/Levy Section - 3



There shall be levied and collected in such manner as may be

prescribed



a duty of excise to be called the Central Value Added Tax

(CENVAT)



on all excisable goods



(excluding goods produced or manufactured in special

economic zones)]



which are produced or manufactured in India as, and at the

rates, set forth in the First Schedule and Second Schedule to

the Central Excise Tariff Act, 1985 

21

Elements of Levy



Production/Manufacture



In India



Of Goods



Excisable (Set out in 1

st

 & 2

nd

 Sch. To CETA subjected to

duty)

22



Goods Manufactured in EOU and brought to other

place in India



Duties of Excise to be paid



Amount equal to



the aggregate of the duties of customs which would be

leviable on like goods produced or manufactured

outside India if imported into India.



Valuation would be based on Customs



Goods Manufactured by or on behalf of Government

would be same like any other Mfr.



Power to fix Tariff values to C.G.

Sec. 3 – Other Aspects

23

“

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 (5 of 1986) as amounting

to manufacture; 

OR

Manufacture – Definition – 2(f)

24



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-labelling

 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;

Manufacture – Definition – 2(f)

25



Definition starts with the word “includes”



3 limbs in the definition



2

nd

 and 3

rd

 limb – “Deemed manufacture”

Manufacture - analysis

26



UOI Vs Delhi Cloth & General Mills Co.ltd, 1977 (1) ELT J.199 (SC)

– 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

. Also see South Bihar Sugar

Mills ltd Vs UOI, 1978 (2) ELT J.336 (SC).

Manufacture

27



Empire Industries ltd Vs UOI, 1985 (20) ELT 1 (SC) – 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 matter into something else

that would amount to manufacture.

 That something is a question of

degree.

Manufacture

28



What comes out after processing 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.

Manufacture

29



UOI Vs Parle Products, 1994 (74) ELT 492 (SC) - 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.

Manufacture

30



Ujagar Prints Vs UOI, 1988 (38) ELT 535 (SC) – Prevalent and

generally accepted test to ascertain whether there was manufacture

was whether the change or the series of changes brought by

application of processes take the commodity to the point where,

commodity can no longer be regarded as the original commodity but

is, instead, recognised as a distinct and new article that has emerged

because of the result of the processes.

Manufacture

31



There might be borderline 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.

Manufacture

32



Manufacture involves a series of processes.



A process is one of the activities undertaken for manufacture

of a product from input materials.

Manufacture - processes

33



Conversion of jumbo rolls of photographic films into small

flats and rolls in the desired sizes – Indian Cine Agencies Vs

CIT



Purification and filtration done to product hydrochloric acid

and sulphuric acid marketable in the international market –

CCEx Vs Alok Enterprises

Process amounting to Manufacture

34



Process of slitting and cutting of steel sheets and polyester films, which

are used for lamination, as the resultant product was not having

different character, name and use.



Pickling and oiling of metals as preparatory steps does not amount to

manufacture – Circular 927/17/2010 – deemed in 2012



Process of cleaning “used mobil oil doesn’t amount to manufacture as

no new commercial commodity comes into existance.

Processes not amounting to

Manufacture

35



Dictionary meaning of ‘produce’ – to bring forward, to bring forth or

out, to bring (to a specified condition), to bring into existence or

being, to work up from raw material, manufacture (material) objects.



Hyderabad Asbestos Ltd Vs UOI, 1980 ELT 735 – manufactured and

produced were synonymous – same test should be applied.



Produced used in respect of natural items.

Manufacture vs production

36



Processes which may not amount to manufacture in their natural

meaning



Brought under tax ambit by the artificial definition



Processes mentioned in CETA as manufacture



Third schedule in CETA – repacking, re-labelling, putting  or

altering retail sale price etc. – mostly consumer goods.

Deemed manufacture

37



Processes which are specified in relation to any goods in the

Section Notes or Chapter Notes to the First Schedule to CETA;



Mere specification of a process in the Tairff entry not sufficient;



Should be specifically stated that the process amounts to

manufacture.

Deemed Manufacture 2(f)(ii)

38

Deemed Manufacture 2(f)(ii) –

Example

39

Deemed Manufacture 2(f)(ii) –

Example

40



Goods specified in Third Schedule to CETA



Packing or repacking in a unit container



Labelling or re-labelling of containers including the

declaration or alteration of retail sale price on the container

or



Adoption of any other treatment on the goods to render the

product marketable to consumer.

Deemed manufacture 2(f)(iii)

41



Air Liquide North India Pvt. Ltd. Vs CCEx. [2011] 271 ELT

321 (SC)



Relabeling and repacking of gas in small cylinders



Helium gas rendered marketable to ultimate consumers thereof



Amounts to manufacture

Deemed manufacture 2(f)(iii)

42



Person who carries on the activity of manufacture.



Job worker



Brand owner not manufacturer – Cibatul Ltd Vs UOI, 1978

(22) ELT 302 (SC) – principal to principal basis.



Should not be dummy.

Manufacturer

43



Art.366(12) – Goods include all materials, commodities and

articles.



Sale of Goods Act, 1930 – section 2(7) – Goods – every kind of

moveable 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

severed before sale or under the contract of sale.

Goods

44



UOI Vs Delhi Cloth Mills, 1997 (1) ELT J.199 (SC), - in

order to be goods, the articles must be capable of coming to

the market to be bought and sold. Therefore the items must

be 

moveable and marketable

.

Goods

45



Moveability:



DCM case



South Bihar Sugar Mills Vs UOI, 1978 ELT J.336 (SC)

The articles must be something, which can 

ordinarily

come or can be bought to the market to be bought

and sold

. As opposed to moveable goods, immoveable

property cannot be brought to the market to be sold.

Goods

46



Section 3(36) GC Act, 1897 – moveable goods mean

property of every description except immovable

property



Section 3(26) GC Act, 1897 – 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.

Goods

47



Marketability:



Capability of a product of being put into the market for sale.



Union Carbide India ltd Vs UOI, 1986 (24) ELT 169 (SC) – 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 intermediary products and not goods.

Aluminum cans or torch bodies produced by extrusion process –

neither sold nor marketable – not goods.

Goods

48



CCE Vs Ambalal Sarabhai Enterprises, 1989 (43) ELT 214 (SC) –

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.

Goods

49



Even transient items/articles can be goods, provided

they are known in the market as distinct and separate

articles, having separate uses. Thus, goods with unstable

character can be theoretically marketable if there was a

market for such transient types of articles, but one has to

be take a practical view on the basis of available

evidence.

Goods

50



Bhor Industries Ltd Vs CCE, 1989 (40) ELT 280 (SC) –

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

. See also Ion Exchange India Ltd Vs CCE,

1999 (112) ELT 746 (SC)

Goods

51



Number of purchasers not relevant.



Does not confine to territorial limits of India.



The fact that goods are not actually marketed is of no

relevance nor is it necessary that the goods in question

should be generally available in the market.



APSEB case.

Goods

52



Section 2 (d) of CE Act – it means goods specified in the

First and Second Schedules to the CE Tariff Act, 1985 as

being subject to a duty of excise and includes salt.



Explanation – Goods include 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. (2008 amendment)

Excisable goods

53



CETA – 1

st

 and 2

nd

 schedule



Section wise – each section has chapters – each chapter –

heading/sub-heading.



Tough mentioned in the said schedules, but with Blank at the

rate column, not excisable goods

Excisable goods

54

Point of levy & Collection



Levy is on Manufacture,



Collection is postponed as set out in Rules



If levy attracted on the activity, the assessment would be

based on removal



CCE Vs. Vazir Sultan Tobacco Co. Ltd. 1996 (83) ELT (SC)



Wallace Flour Mills Ltd Vs CCE, 1989 (44) ELT 598 (SC) &

UOI Vs Nandi Printers P.Ltd, 2001 (127) ELT 645 (SC).

55



Court’s views:



The Province of Madras Vs Boddu Paidanna & Sons, 1978 (2) ELT

J.272 (FC):

“ Duties of excise 

were on manufacture or production

 of an

article and although the expression “duty of excise” was wide

enough to include sales tax, in view of the power expressly

given to another authority to levy a sales tax, the said expression

must be given a more restricted meaning than it might

otherwise bear.

Nature of Excise duty

56



In appeal before the Privy Council in Governor General

in Council Vs Province of Madras, 1978 (2) ELT J.280

(PC) – Excise was primarily a duty levied upon a

manufacturer producer on the commodity

manufactured or produced.



Tax on goods and not on sales or sale proceeds.

Court’s views

57



There was no overlapping of excise duty and sales tax.



R.C.Jall Parsi and Ors Vs UOI, AIR 1962 SC 1281 – Excise duty is

primarily a duty on production or manufacture of goods within the

country.



It is an indirect duty passed on to ultimate customer.



Ultimate incidence will always be on the customer. Can be levied at any

convenient stage.

Court’s views

58



CCE Vs Acer India Ltd, 2004 (172) ELT 289 (SC) – Duty of excise is a

tax upon goods and not sale or proceeds thereof. 

Taxable event is

manufacture or production.

Court’s views

59



UOI Vs Bombay Tyres International, 1983 (14) ELT

1896 (SC):

Ultimate incidence of an excise duty, a typical indirect

tax, must always be on the consumer, who pays as he

consumes or expends and it continues to be an excise

duty on homemade goods, no matter at what stage it is

collected.

Court’s views

60

Removal of Goods

61

Rule 4 - Removal



RULE 4. Duty payable on removal. — 

(1) 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 or

under any other law, and 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 :



[(1A) Notwithstanding anything contained in sub-rule (1), every person who

gets the goods, falling under Chapter 61 or 62 or 63 of the First Schedule to the

Tariff Act, produced or manufactured on his account on job work, shall pay the

duty leviable on such goods, at such time and in such manner as is provided

under these rules, as if such goods have been manufactured by such person :



Provided

 that where any person had, instead of paying duty, authorized job

worker to pay the duty leviable on goods manufactured in his behalf under the

provisions of sub-rule (1A) as it stood prior to the publication of this

notification, he shall be allowed to obtain registration and comply with the

provisions of these rules within a period of thirty days from the date of

publication of this notification in the Official Gazette.].

62

Rule 4 - Removal



(2) Notwithstanding anything contained in sub-rule (1), where molasses

are produced in a khandsari sugar factory, the person who procures such

molasses, whether directly from such factory or otherwise, for use in the

manufacture of any commodity, whether or not excisable, shall pay the

duty leviable on such molasses, in the same manner as if such molasses

have been produced by the procurer.



[(3)  *            *

* ]



(4) Notwithstanding anything contained in sub-rule (1),

Commissioner may, in exceptional circumstances having regard to the

nature of the goods and shortage of storage space at the premises of the

manufacturer where the goods are made, permit a manufacturer to store

his goods in any other place outside such premises, without payment of

duty subject to such conditions as he may specify.

63

Rule 5 Date for determination



RULE 5. Date for determination of duty and tariff

valuation. — 

(1) The 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 warehouse, as the case may be.



(2)  The rate of duty in the case of khandsari molasses, shall

be the rate in force on the date of receipt of such molasses in

the factory of the procurer of such molasses.



Explanation.

 -

 If any excisable goods are used within the

factory, ‘the date of removal of such goods’ shall mean the

date on which the goods are issued for such use.

64

Job Work under Central Excise

65

Dictionary Meaning

Unabridged Dictionary:



Work done by Job

Chambers Dictionary:



A task, bit of work – Chambers Dictionary

66

Under notification 214/86 - CE

Job work means

i.

Processing or working upon raw materials or semi-finished

goods

ii.

Supplied to the Job worker

iii.

To complete a part of whole the process

iv.

Resulting in manufacture or finishing of an article or any

operation

v.

Essential for the process

67

Job Work under Cenvat Credit Rules

Similar definition as discussed under notification 214/86 – CE

dated 25.03.1986

68

Job Work under Valuation Rules

Job Worker means a person

i.

 Engaged in the manufacture or production

ii.

On behalf of the Principal manufacturer

iii.

From inputs and capital goods supplied by

i.

Principal manufacturer

ii.

Any person authorized by him

69

Supreme Court on Job Work – Prestige

Engineering



No new article should be manufactured i.e. Job worker is a

person contributing only labour and skill on the supplied

materials.



Job Worker should return the same article after processing to

the customer



An activity would not be job work when job worker

contributes own material with material supplied to

manufacture different goods. no new article should be

manufactured at the hand of the job worker and he should

return the same article after processing to the customer

70

Job work V/s Manufacture



A job worker can be construed as a manufacturer depending

on the process



Process undertaken by Job Worker can either amount to

manufacture or not



Job worker would be construed as manufacturer even though

the materials are not owned by the job worker

71

Hired Labour



A person who hires himself out to work for and under

control of another for wages.



Controlled and supervised by manufacturer who hires them.



A person who has no independent entity with separate

establishment unit.



However, if manufactures on own account, he cannot be said

to have hired himself out.

72

Hired Labour V/s Job Work



If master – servant relationship or principal – agent relation

exists between raw material supplier and job worker.



Raw material supplier would be the manufacturer

73

Valuation under Job work



Excise duty in hands of job worker is not payable if materials

/ semi-finished goods are sent under:



Notification 214/86 – CE



Cenvat Credit Provisions

74

Rule 10A of Valuation Rules



This provision provides that



Where goods are manufactured by job worker



On behalf of principal manufacturer



Duty would be payable on the sale value at which principal

manufacturer sells the goods



Sold from factory: transaction value



Sold from depot: Normal transaction value



Price is not sole consideration: Rule 6 of valuation rules



For consumption by sister units: Rule 8 of valuation rules

75

 Valuation upto March 2007



No specific provision in valuation rules



Valuation was based on material cost + job charges



The above mechanism was confirmed by Supreme Court in



Ujagar Prints V/s CCE



Pharmasia ltd

If goods are under MRP- MRP less abatement

76

Job work under service tax



Job work under sec 65(19)(v) – 

Production or processing of

goods for, or on behalf of, the client. (prior to 01.07.2012)



After 01.07.2012 – gets covered under service definition and

is liable when process is not amounting to manufacture



Exempted by Notification No. 25/2012-ST if :



It is intermediate process as job work; and



Person sending the goods would pay appropriate duty on final

products.

77

Exemptions



Exemptions from payment of duty when:



Job work is under Cenvat provisions



Job work under notification 214/86



Job work for SSI units

78

Job Work under Cenvat



Rule 4(5)(a) allows manufacturer to send materials for job

work.



The goods after processing can be brought back for further

processing



Goods can also be dispatched directly from place of job work

subject to permission from commissioner



These are independent of exemption provided under

notification 214/86

79

Job Work under Cenvat – Contd.



Goods should be returned within 180 days after job work



Provision applies whether or not job work undertaken

amounts to manufacture



Any input can be sent under the said provision

80

Job work under notification 214/86



This notification was issued to grant exemption from job

work amounting to manufacture



Both raw material and semi-finished goods can be sent



Exemption is available even if the activity results in

intermediate product



Exemption is available subject to the declaration to be filed

with the jurisdictional officer of job worker

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Job work under notification 214/86



Job worker would be exempt from all duties and cess subject

to undertaking from principal manufacturer



No time limit has been prescribed for return of goods



Some inputs are excluded from provisions of the notification

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Job work for SSI units



As they don’t pay duty, goods cannot be sent under cenvat

provision



SSI unit has to file a declaration to AC that goods after job

work will be used in factory for manufacture of products

exempt from duty



SSI unit is also required to file another declaration to AC of

job worker that goods will be used after job work



Exemption is available only for goods covered by SSI

exemption

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Other removals



Rule 16A allows for removal of:



Inputs received in factory



As such or after partially processed



For further processing, testing, repair, re-conditioning



Fulfillment of conditions specified by Commissioner of Central

Excise

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Removal of semi-finished goods – Rule

16B



The manufacturer subject to conditions of Commissioner can

remove semi-finished goods



The removal should be for carrying out manufacturing

process

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Sp. Procedure for excisable goods –

Rule 16C



A manufacturer with specific permission can remove

excisable goods



For carrying out test or any process not amounting to

manufacture



The provision doesn’t apply to proto type sent out for trial

and development



Conditions as specified in permission will have to be followed

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Job Work V/s Works Contract - VAT



A pure job work not liable to VAT i.e. there is no transfer of

property



Where there is transfer of property – VAT would be

applicable



Works contract is a contract for work i.e. it involves use of

both material and labour



The tax can be levied only on the goods involved in the

contract and not on contract



If the job work transaction involves use or transfer of

material, job worker would be liable for VAT

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rajesh@hiregange.com

rajeshkumartr@hotmail.com

Questions????

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