Paper 11

INTERMEDIATE : PAPER - 11
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01
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US
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INDIRECT TAXATION INTERMEDIATE
STUDY NOTES
The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
First Edition : August 2016
Published by :
Directorate of Studies
The Institute of Cost Accountants of India (ICAI)
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
Copyright of these Study Notes is reserved by the Institute of Cost

Accountants of India and prior permission from the Institute is necessary
for reproduction of the whole or any part thereof.
Syllabus - 2016
PAPER 11: INDIRECT TAXATION
Syllabus Structure
1. Canons of Taxation - Indirect Tax
35%
2. Central Excise
3. Customs Law 15%
4. Servce Tax 30%
5. Central Sales Tax and VAT 20%
20%
35%
30%
15%
ASSESSMENT STRATEGY
There will be written examination paper of three hours
OBJECTIVES
To provide an in depth dtudy of the various provisions of indirect taxation laws and their impact on
business decision-making.
Learning Aims
The syllabus aims to test the students ability to:
Understand the principles underlying the Indirect Taxation Statutes (with reference to Central Excise
Act, Customs Act, Service Tax, Value Added Tax, Central Sales Tax)
Compute the assessable value of transactions related to goods and services for levy and
determination of duty liability
I
dentify and analyze the procedural aspects under different applicable statutes related to indirect
taxation
Skill set required

Level B: Requiring the skill levels of knowledge, comprehension, application, analysis.
Note: Subjects related to applicable statutes shall be read with amendments made from time to time.
1. Canons of Taxation - Indirect Tax
35%
2. Central Excise
3. Customs Law 15%
4. Service Tax 30%
5. Central Sales Tax and VAT 20%
1. Canons of Taxation - Indirect Tax:
Features of Indirect Tax and Constitutional Validity

2. Central Excise:
(a) Central Excise Law - Goods - Manufacturer - Valuation Rules - Related Party - Captive Consumption -
Registration - Payment of Duty - Monthly Returns - Job Work.
(b) CENVAT - Input Services capital goods and procedures under Cenvat Credit Rules.
(c) Export Procedures
(d) SSI provisions

3. Customs Laws:
(a) Concepts of Customs Law - Types of Duties, Anti - dumping duties
(b) Valuation rules - Import Procedures - Export Procedures - Baggage - Stores - Warehousing - Demurrage

4. Service Tax:
(a) Introduction, Nature of Service Tax, Service Provider and Service Receiver
(b) Registration Procedure, Records to be maintained
(c) Negative List of Services, Exemptions and Abatements
(d) Valuation of Taxable Services (applicable services will be notified for each term of exam)
(e) Payment of Service Tax, Returns of Service Tax
(f) Point of Taxation Rules, 2011
(g) Place of Provision of Service Rules, 2012
(h) Other aspects of Service Tax

5. Central Sales Tax and VAT:
(a) Central Sales Tax
(i) Introduction, Definitions, Salient Features of CST Act
(ii) Stock Transfer, Branch Transfer, Inter State Sale
(iii) Various forms for filing of returns under CST
(iv) Procedures under Central Sales Tax (CST)
(b) Value Added Tax (VAT)

(i) Introduction, definitions, salient features of State VAT Act
(ii) Treatment of stock & branch transfer under State VAT Act
(iii) Filing of return under State VAT Act
(iv) Accounting & Auditing VAT
Contents
Study Note 1 : Canons of Taxation - Indirect Tax
1.1 Basis for Taxation 1

1.2 Direct Taxes and Indirect Taxes 1
1.3 Features of Indirect Taxes 2
1.4 Coinstitutional Validity 4
1.5 Administration and Relevant Procedures 4
Study Note 2 : Central Excise
2.1 Introduction 6
2.2 Laws relating to Central Excise 7
2.3 Central Excise Act, 1944 7
2.4 Duties Leviable 7
2.5 Levy, Collection & Exemptions from Excise Duty 8
2.6 Goods 10
2.7 Excisability of Plant & Machinery, Waste and Scrap 14
2.8 Manufacture 15
2.9 Manufacturer 17
2.10 Classification of Goods 19
2.11 Valuation of Goods 23
2.12 Valuation in Case of Job Work-Rule 10A 34
2.13 Some Critical Issues in Central Excise 35
2.14 Assessable Value under Section 4 41
2.15 Value Based onb Retail Sale Price 42
2.16 MRP Based Valuation 43
2.17 Assessment under Central Excise Law 53
2.18 Procedural Aspects under Central Excise Duty 55
2.19 Refund & Other Important Provisions 58
2.20 Other Procedures in Central Excise 61
2.21 Excise Audit 66
2.22 Warehousing 70
2.23 Export Benefits and Procedures 71
2.24 Excise on Small Scale Industries 73
2.25 Demands and Penalties 82
2.26 Appeals 83
2.27 Important Provisions of Central Excise Act, 1944 84
2.28 Important Provisions of Central Excise Rules, 2002 90
2.29 Important Rules of Central Excise Valuation Rules, 2000 92
2.30 Rules of Classification 93
Study Note 3 : Cenvat Credit
3.1 Background of Cenvat Credit 115

3.2 Highlights of Cenvat Credit Scheme 116
3.3 Utilization of Cenvat Credit 128
3.4 Reversal of Cenvat Credit 130
3.5 Refund of Cenvat Credit 134
3.6 Obligation of a Manufacturer or Producer of Final Products and a Provider of Taxable Services 138
3.7 Input Service Distributor 141
3.8 Documents and Accounts 143
3.9 Other Provisions 145
Study Note 4 : Customs Law
SECTION - A
4.1 Introduction 158

4.2 Types of Custom Duty 169
4.3 Methods of Valuation 177
4.4 Methods of Valuation 181
4.5 Export Goods - Valuation for Assessment 196
4.6 Self Assessment on Basis of Risk Management System (RMS) 197
4.7 Procedures for Import 197
4.8 Procedures for Export 201
4.9 Transit and Transhipment of Goods 202
4.10 Exemptions and Remission 203
4.11 Refund of Customs Duty 205
4.12 Appointment of Officers of Customs 208
4.13 Appointment of Customs Station, Warehousing Stations etc. 209
4.14 Central Government Power of Prohibition, Detection of Illegally Imported and Export Goods 210
4.15 Warehousing in Customs 211
4.16 Provisional Assessment of Duty (Section 18) 222
4.17 Baggage and Postal Articles 223
4.18 Drawback 238
4.19 Other Provisions in Customs 242
4.20 Project Imports 243
4.21 Offences, Power and Penalties under Customs 246
SECTION - B
4.22 Anti - Dumping Duty - An Overview 249

Study Note 5 : Service Tax

5.2 Registration under Service Tax 284
5.3 Reverse Charge 288
5.4 Brand Name of Another Person 292
5.5 Payment of Service Tax [Rule 6] 292
5.6 Rate of Service Tax 293
5.7 Invoices under Service Tax 294
5.8 Records to be Maintained 295
5.9 Automation of Central Excise and Service Tax (ACES) 295
5.10 Electronic Accounting System in Excise and Service Tax (EASIEST) 296
5.11 Negative List & Exempted Services 298
5.12 Point of Taxation 324
5.13 Taxable Event in Service Tax 330
5.14 Place of Provision of Service Rules 332
5.15 Valuation of Taxable Services (Section 67) 349
5.16 Important issues under Service Tax Provisions 356
5.17 E-payment of Service Tax 359
5.18 Self Adjustment of Excess Tax Paid 359
5.19 Special Audit 360
5.20 Return 360
5.21 Penalties 362
5.22 Adjudication & Appeals 363
Study Note 6 : Central Sales Tax Act, 1956

6.2 Constitutional Provisions & Nexus Theory 377
6.3 Principles & Objects of CST Act, 1956 377
6.4 Definition (Section 2) 378
6.5 Sale or Purchase in the course of Interstate Sale (Section 3) 383
6.6 Sale or Purchase outside a State (Section 4) 384
6.7 Sale in the course of Export / Import (Section 5) 385
6.8 Person liable to pay CST [Section 6(1) & 6(1A)] 386
6.9 Exemption in respect of Subsequent Sale [Sec 6(2)] 386
6.10 Taxability of Transfer of Goods made otherwise than by way of Sale (Sec. 6A) 387
6.11 Registration of Dealer 388
6.12 Rates of Tax in the couse of Inter-State Trade or Commerce [Section 8(1) & 8(2)] 390
6.13 Purchase of Goods by a Registered Dealer [Section 8(3)] 391
6.14 Furnishing of Declaration [Section 8(4)] 391
6.15 Power to Exempt or Impose Tax at Concessional Rates [Section 8(5)] 392
6.16 Sale for Units Located in Special Economic Zone [Section 8(6)] 392
6.17 Determination of Taxable Turnover [Section 8A] 392
6.18 Levy & Collection of Tax [Section 9] 393
6.19 Penal Provisions under CST Act [Section 10] 393
6.20 Imposition of Penalty in Lieu of Prosecution [Section 10A] 394
6.21 Cognizance of Offences [Section 11 & 12] 394
6.22 Goods of Special Importance [Section 14] 394
6.23 Liability of Liquidator of Company in Liquidation [Section 17] 395
6.24 Liability of Directors of Private Company in Liquidation [Section 18] 396
6.25 Central Sales Tax Appellate Authority [Section 19] 396
6.26 Appeals [Section 20] 397
6.27 Procedure on Receipt of Appeal [Section 21] 397
6.28 Powers of the CST Appellate Authority [Section 22 & 23] 397
6.29 Authority for Advance Rulings [Section 24] 398
6.30 Transfer of Pending Proceedings [Section 25] 398
6.31 Applicability of Order Passed [Section 26] 398
6.32 Forms under CST 398
Study Note 7 : State Level VAT
7.1 Background of State VAT 418

7.2 Basic Principle of VAT 420
7.3 Registration Under VAT 422
7.4 Overview of State VAT 426
7.5 Purchase Tax in VAT or Reverse Charge 427
7.6 Tax Rates Under VAT 428
7.7 Valuation of Taxable Turnover 430
7.8 Procedural Provisions under VAT 431
7.9 Assessment of Tax 432
7.10 Impact of VAT on CST 433
7.11 Role of Cost Accountant Under VAT 435
7.12 Agricultural Products or Commodities 435
7.13 High Seas 435
7.14 Phased out Inter-state Sales-Tax (i.e., Central Sales Tax) 436
Study Note - 1
CANONS OF TAXATION INDIRECT TAX
This Study Note includes

1.1 Basis for Taxation
1.2 Direct Taxes and Indirect Taxes
1.3 Features of Indirect Tax
1.4 Constitutional Validity
1.5 Administration and Relevant Procedures
1.1 BASIS FOR TAXATION
India is a socialist, democratic and republic country. Constitution of India is supreme law of land. All other laws, includ-
ing the Income Tax Act, are subordinate to the Constitution of India. The Constitution provides that no tax shall be
levied or collected except by Authority of Law. The Constitution includes three lists in the Seventh Schedule providing
authority to the Central Government and the State Governments to levy and collect taxes on subjects stated in the
lists.
1.2 DIRECT TAXES AND INDIRECT TAXES
A) Direct Taxes: They are imposed on a persons income, wealth, expenditure, etc. Direct Taxes charge is on per-
son concern and burden is borne by person on whom it is imposed.
Example-Income Tax.
B) Indirect Taxes: They are imposed on goods / services. The Immediate liability to pay is of the manufacturer / ser-
vice provider / seller but its burden is transferred to the ultimate consumers of such goods / services. The burden
is transferred not in form of taxes, but, as a part of the price of goods / services.
Example-Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central Sales Tax (CST).
Adam Smiths Canons of Taxation
Adam Smiths contribution to this part of economic theory is still regarded as classic. His enunciation of canons of taxa-
tion has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:-
1. Canon of Equality: Equality here does not mean that all tax-payers should pay an equal amount. Equality here
means equality or justice. Its means that the broadest shoulder must bear the heaviest burden.
The canon has given rise to two theories.
INDIRECT TAXATION l 1
Canons of Taxation - Indirect Taxes
i. Equality of sacrifice theory. It means that the burden of taxation should involve an equal sacrifice for
every individual. This equality, however, though good in theory, is difficult to attain in practice. Sacrifice is
subjective, something in the mind and feelings of a person. It is difficult to measure. Besides, it has to take
into consideration the number of dependants on the earning member in the family and their standard of
living.
ii. The second principle indicating justice is the Ability or Faculty Theory, which holds that the rich should be
made to pay something more than proportionate to their income. A man with an income of ` 12000 per
month will not, other things being equal, feel the same pinch in parting with Rs. 120 as a man with income
of only ` 2400 feels in paying ` 24 because the formers faculty to pay is greater. On this principle is based
progression in taxation i.e., increasingly higher rates of taxation as incomes increase. Proportional taxa-
tion will not do justice.
2. Canon of Certainty: The individual should know exactly what, when and how he is to pay a tax. Otherwise, it
causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax.
3. Canon of Convenience: Obviously, there is no sense in fixing a time and method of payment which are not
suitable. Land revenue in India is realised after the harvest has been collected. This is the time when cultivators
can conveniently pay.
4. Canon of Economy: This means that the cost of collection should be as small as possible. If the bulk of the tax
is spent on its collection, it will take much out of the peoples pockets but bring little into the States pocket. It is
not a wise tax.
1.3 FEATURES OF INDIRECT TAXES
Government need funds for various purposes like maintenance of law and order, defence, social / health services,
etc. Government obtains funds from various sources, out of which one main source is taxation. Justice Holmes of US-
Supreme Court, has, long ago, rightly said that tax is the price which we pay for a civilized Society.
Difference between Direct Taxes & Indirect Taxes
Particulars Direct Taxes Indirect Taxes
Meaning Direct Taxes are those taxes where Indirect Tax is a tax where incidence and impact
the incidence and impact falls on fall on two different person.
the same person.
Nature of tax Direct Tax progressive in nature. Indirect Taxes is regressive in nature.
Taxable Event Taxable Income of the Assessees. Purchase / Sale / Manufacture of goods and provisio
of services.
Levy & Collection Levied and collected from the Levied & collected from the consumer but paid/
Assessee. deposited to the Exchequer by the Assessee / Dealer.
Shifting of Burden Directly borne by the Assessee. Tax burden is shifted or the subsequent / ultimate user.
Hence, cannot be shifted.
Collected After the income for a year is At the time of sale or purchases or rendering of
earned or valuation of assets is services.
determined on the valuation date.
Advantages of Direct taxes Limitations of Direct taxes

Direct taxes are progressive, as they depend on It Is psychologically very difficult for a person to pay
paying capacity. Rich person is taxed more compared some amount after it is received in his hands. Hence,
to poor person there is psychological resistance [This is the reason why
even Income Tax Act is widening the scope of Tax
Deduction at Source (TDS) and TCS. Thus, a direct
tax is converted to an indirect tax].
2 l INDIRECT TAXATION
Direct taxes do not affect prices of goods and service. Direct taxes are mainly on income of individuals, firms
or corporate bodies, where millions of transactions are
carried out in lakhs
Of places and keeping an eye over all such
transactions is virtually impossible
Low income tax rates decrease tax revenues and tax Tax evasion is comparatively more in direct taxes
evasion and hawala transactions. where it is on unorganized sector, since control is
difficult
Direct taxes do not increase the cost of modern Collection cost of direct taxes as percentage of tax
machinery and technology. collected are higher in direct taxes compared to
indirect taxes
Direct taxes are not inflationary. Direct taxes can control wasteful expenditure only
indirectly by taxing higher income group people.
Government can judiciously use the direct taxes to
support development in desirable areas, while
discouraging in backward areas, infrastructure
development etc
Advantages of Indirect Taxes Limitations of Indirect taxes
Since the price of commodity or service is already Indirect taxes do not depend on paying capacity.
inclusive of indirect taxes, the customer Since the indirect tax is uniform, the tax payable on
i.e. the ultimate tax payer does not feel a direct pinch commodity is same, whether it is purchased by a poor
while paying indirect taxes and hence, resistance to man or a rich person. Hence, the indirect taxes are
indirect taxes is much less compared to resistance to termed as regressive.(This argument is only partially
direct taxes. correct; as it is possible to levy lower taxes on goods of
Manufacturers/Dealers Psychology favours indirect daily consumption while levying higher taxes on luxury
taxes- The manufacturer/ trader who collects the taxes goods and the regressive effect can be reduced in
in his Invoice and pays it to Government, has a many circumstances.)
psychological feeling that he is only collecting the taxes
and is not paying out of his own pocket (though this
feeling may not be always correct).
Indirect taxes are easier to collect as indirect taxes are Tax on goods and services increases its prices, which
mainly on goods/commodities/services, for which may reduce demand as per law of demand of goods
record keeping, verification and control is relatively and services. Lesser demand means lower growth of
easy(atleast in organized sector).Manufacturing industrialization.
activities are carried out mainly in organized sector,
where records and controls are better.
Tax evasion is comparatively less in indirect taxes in High customs/excise duty increases smuggling, hawala
organized sector due to convenience of control trade and mafia gangs, which is harmful in many ways.
Similarly, high excise duty leads to evasion. On the
other hand, low tax rate will affect the government
exchequer.
Collection costs of indirect taxes as percentage of tax Higher customs duty and excise duty increases cost of
collected are lower in indirect taxes compared to modern machinery and technology
direct taxes.
Government can levy higher taxes on luxury goods, Indirect taxes increase the prices of products
which reduces the wasteful expenditure And hence are often perceived as inflationary.
Government can judiciously use the indirect taxes to
support development in desirable areas, while
encouraging it in backward areas also ,e.g. reducing
taxes on goods manufactured in tiny or small scale
units; lowering taxes in backward areas etc.
Canons of Taxation - Indirect Taxes
Recovery from buyer is not essentialc ondition for levy of indirect taxes- In general ,indirect taxes are recovered from
buyer, it is not an essential feature of indirect taxes. Tax on goods or services will be valid even if it is not recovered or
recoverable from buyer. It is valid liability of manufacturer / seller / service provider.
1.4 CONSTITUTIONAL VALIDITY
Power of Taxation under Constitution of India is as follows:

(a) The Central Government gets tax revenue from Income Tax (exception Agricultural Income), Excise (exception
alcoholic drinks), Customs and Central Sales Tax.
(b) The State Governments get tax revenue from sales tax, state excise duty on certain commodities viz. from liquor
and alcoholic drinks. Also tax on agricultural income.
(c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and house property tax.
Article 265 provides that no tax shall be levied or collected except by Authority of Law. The authority for levy of various
taxes, as discussed above, has been provided for under Article 246 and the subject matters enumerated under the
three lists set out in the Schedule-VII to the Constitution.
1.5 ADMINISTRATION AND RELEVANT PROCEDURES
In India, Constitution which came into effect on 26thJanuary, 1950 is supreme and all laws and Government actions
are subordinate to our Constitution. Clear understanding of concepts is vital for any discussion on taxation matters
as power to levy and collect tax is derived from Constitution. If it is found that any Act, Rule, Notification or Govern-
ment order is not according to the provisions of the Constitution, it is illegal, null and void and it is called ultra vires the
Constitution.
India is Union of StatesThe structure of Government is federal in nature. Article1(1) of Constitution of India reads, In-
dia, that is Bharat, shall be a Union of States.
Government of India (Central Government) has certain powers in respect of whole country. India is divided into vari-
ous States and Union Territories and each State and Union Territory has certain powers in respect of that particular
State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Ter-
ritories like Pondicherry, Chandigarh etc.
Sources and Authority of Taxes in India
Powers of Central or State Government to levy tax
Article Empowers For
246(1) Central Government Levy taxes in List I of the Seventh Schedule of the Constitution.
246(2) Central or State Government Levy taxes in List III of the Seventh Schedule
246(3) State Government Levy taxes in List II of the Seventh Schedule of the Constitution.
Bifurcation of powers between Union and States Article 246(1) of Constitution of India states that Parliament has ex-
clusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution
(called Union List). As per Article 246(3), State Government has exclusive powers to make laws for State with respect
to any matter enumerated in List II of Seventh Schedule to Constitution.
Seventh Schedule to Constitution consists of following three lists:
List I (Union List) contains entries under exclusive jurisdiction of Union Government.
List II (State List) contains entries under exclusive jurisdiction of States.
List III (Concurrent List) contains entries where both Union and State Governments can exercise power.[In case
of Union Territories, Union Government can make laws in respect of all the entries in all three lists].
Seventh Schedule to
Article 246 of the Indian
Constitution
List I List II List III

UnionList State List Concurrent List
Taxation under Constitution

Union List (List I) State List (List II)
Only Union Government can make laws. Only State Government can make laws.
Given in Schedule Seven of Constitution Given in Schedule Seven of Constitution.
Important taxes in Union List Important taxes in State List
Entry No. 82 Tax on income other than Entry No. 46 Taxes on agricultural income.
agricultural income. Entry No. 51 Excise duty on alcoholic liquors, opium
Entry No. 83 Duties of customs including export duties. and narcotics.
Entry No. 84 Duties of excise on tobacco and other Entry No. 52 Tax on entry of goods into a local area
goods manufactured or produced in India except for consumption, use or sale there in (usually called
alcoholic liquors for human consumption, opium, Entry Tax or Octroi).
narcotic drugs, but including medicinal and toilet Entry No. 54 Tax on sale or purchase of goods
preparations containing alcoholic liquor, opium other than newspapers except tax on interstate sale
or narcotics. or purchase.
Entry No. 85 Corporation Tax. Entry No. 55 Tax on advertisements other than
Entry No. 86 Taxes on the capital value of assets, advertisements in newspapers.
exclusive of agricultural land, of individuals and Entry No. 56 Tax on goods and passengers carried
companies; taxes on capital of companies by road or inland waterways.
Entry No. 92A Taxes on the sale or purchase of goods Entry No. 59 Tax on professions, trades, callings and
other than newspapers, where such sale or purchase employment.
takes place in the course of interstate trade or
commerce.
Entry No. 92B Taxes on consignment of goods where
such consignment takes place during interstate trade
or commerce.
Entry No. 92C Tax on services [Amendment passed
by Parliament on15-1-2004, but not yet made
effective].
Entry No. 97 Any other matter not included in List
II, List III and any tax not mentioned in list II or list III.
(These are called Residua Powers.)
List III : Concurrent List

Both union and State Government can exercise power
Given in Schedule Seven of constitution
Entry No. 17A Forest Income
Entry No. 25 Education Income
Central Excise
Study Note - 2
CENTRAL EXCISE

2.1 Introduction
2.2 Laws relating to Central Excise
2.3 Central Excise Act, 1944
2.4 Duties Leviable
2.5 Levy, Collection & Exemptions from Excise Duty
2.6 Goods
2.7 Excisability of Plant & Machinery, Waste and Scrap
2.8 Manufacture
2.9 Manufacturer
2.10 Classification of Goods
2.11 Valuation of Goods
2.12 Valuation in Case of Job WorkRule 10A
2.13 Some Critical Issues in Central Excise
2.14 Assessable Value under Section 4
2.15 Value Based on Retail Sale Price
2.16 MRP Based Valuation
2.17 Assessment under Central Excise Law
2.18 Procedural Aspects under Central Excise Duty
2.19 Refund & Other Important Provisions
2.20 Other Procedures in Central Excise
2.21 Excise Audit
2.22 Warehousing
2.23 Export Benefits and Procedures
2.24 Excise on Small Scale Industries
2.25 Demands and Penalties
2.26 Appeals
2.27 Important Provisions of Central Excise Act, 1944
2.28 Important Provisions of Central Excise Rules, 2002
2.29 Important Rules of Central Excise Valuation Rules, 2000
2.30 Rules of Classification
2.1 INTRODUCTION
The Central Excise Law is the law which empowers Central Government to collect excise duty on the goods manu-
factured or produced in India.
Excise Duty is a duty on goods manufactured in India.
Chapter II of the Central Excise Act, 1944 deals with levy and collection of Excise Duty with the help of section 3 which
is the charging section. This duty is based on the value of the goods manufactured.
Hence, it is necessary to determine the VALUE of the excisable goods in order to levy and collect the excise duty on
these goods by applying the RATES specified in the First Schedule and the Second Schedule to the Central Excise Tariff
Act, 1985.
The First Schedule gives the Basic Excise Duty (BED) rate and the Second Schedule gives the Special Excise Duty (SED)
rate.
In majority of cases, the general rate of excise duty has been increased from 12.36% (including education cess and
secondary and higher education cess) to 12.50% (excluding education cess and secondary and higher education
cess) [notification no. 01/2015-M&TP dated 01.03.2015]. The education cess which was levied on all excisable goods
as a duty of excise has been fully exempted vide notification no. 14/2015 CE dated 01.03.2015 and secondary and
higher education cess which was levied on all excisable goods as a duty of excise has also been fully exempted vide
notification no. 15/2015 CE dated 01.03.2015.
To solve the practical problems regarding the calculation of excise duty, the general rate of 12.50% is considered here
irrespective of the name and nature of the product. However, the product specific rates of excise duty are mentioned
in CETA.
2.2 LAWS RELATING TO CENTRAL EXCISE
Central Excise Tariff Act, 1985(CETA): This classifies the goods under 96 chapters with specific codes assigned.
Central Excise Act, 1944(CEA): The basic act which provides the constitutional power for charging of duty, valuation,
powers of officers, provisions of arrests, penalty, etc.
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: The provisions regarding the valua-
tion of excisable goods are laid down in this rule.
Central Excise Rules, 2002 : The procedural aspects are laid herein. The rules are implemented after issue of notifica-
tion.
Cenvat Credit Rules, 2004: The provisions relating to Cenvat Credit available and its utilization are mentioned.
Central Excise law extended to designated areas in continental shelf and exclusive Economic Zone of India i.e.,
upto 200 nautical miles inside sea from the baseline of India and represents the limit till which India can be engaged
in economic exploitation.
2.3 CENTRAL EXCISE ACT,1944
The duty of Central Excise is levied if the following conditions are satisfied :
(1) The duty is on goods.
(2) The goods must be excisable.
(3) The goods must be manufactured or produced.
(4) Such manufacture or production must be in India.
In other words, unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Ownership of raw ma-
terial is not relevant for duty liability - Hindustan General Industries v. CCE 2003 (155) ELT 65(CEGAT)
2.4 DUTIES LEVIABLE
(1) Basic Excise Duty: This duty, also known as CENVAT, is levied under section 3(1)(a) of Central Excise Act. It is
levied at the rates specified in First Schedule to the Central Excise Tariff Act, read with exemption notifications,
if any. Currently, the general rate of excise duty on non-petroleum products is 12.5% (w.e.f. 1-3-2015). However,
there is no education cess at all (w.e.f. 1-3-2015). This duty is applicable to majority of the excisable goods.
(2) National Calamity Contingent Duty (NCCD): It is imposed vide section 136 of the Finance Act, 2001 on pan
masala, branded chewing tobacco, cigarettes, domestic crude oil and mobile phones. This rate is 1% on Basic
Excise Duty.
Notification No. 12/2015 Cex. dt. 01-03-2015:
w.e.f. 1-3-2016 Excise duty on mobile handsets including cellular phone is being changed from 1% without CEN-
VAT credit or 6% with CENVAT credit to 1% without CENVAT credit or 12.5% with CENVAT credit.
NCCD of 1% on mobile handsets including cellular phone, remains unchanged. w.e.f. 01.03.2016:
Central Excise
Excise duty of 1% (without CENVAT credit) or 12.5% (with CENVAT credit) has been levied on articles of jewellery
[excluding silver jewellery not studded with diamonds/ruby/emerald/sapphire].
Example 2:
Basic Excise Duty 12.50%
Add: Education Cess
Add: S & H Education Cess
Total effective rate of duty 12.50%
2.5 LEVY, COLLECTION & EXEMPTIONS FROM EXCISE DUTY
Taxable Event
The taxable event (i.e. Manufacture or production of excisable goods in India is taxable event. Central excise duty is
charge on manufactured goods & not on sale of goods that means even if goods are not sold, excise duty should be
payable on it. Captive consumption, free sample, intermediary goods etc. are also liable to central excise duty even
from these goods no revenue is generate. An ownership criterion is irrelevant in paying excise duty) of great signifi-
cance in levy of any tax or duty. Excise duty is leviable on all excisable goods, which are produced or manufactured
in India. Thus, manufacture or production in India of an excisable goods is a taxable event for Central Excise. It
becomes immaterial that duty is collected at a later stage i.e. at the time of removal of goods.
Example 3: Product X is produced on 1st February 2016 by X Ltd. On that date X is an excisable commodity with a tariff
rate of 12.5%. Subsequently on 31st March, 2016 Product X was removed from the factory. Hence, the taxable event
is on 1st February 2016 and not on 31st March 2016.
Persons Liable to Pay Duty
Rule 4(1) of the Central Excise Rules, 2002 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 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.
Rule 4(1A) provides that not with standing anything contained in sub-rule (1), every person who gets the goods, fall-
ing under Chapter 61 or 62 or 63 of the First Schedule to the Tariff Act, produced or manufactured on his account on
jobwork, shall pay the duty leviable on such goods, at such time and in such manner as is provided under these rules,
as a if such goods have been manufactured by such person.
Provided that where any person had, instead of paying duty, quthorised 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 notificationin the Official Gazatte.
Rule 4(2) provides that not with standing anything contained in sub-rule (1), where molasses are produced in a khand-
sari 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.
Rule 4(4) provides that not with standing anything contained in sub-rule (1), Commissioner may, in exceptional circum-
stances having regard tothe nature of the goodsand 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, with-
out payment of duty subject to such conditions as he may specified.
From the above discussion it can be concluded that the following persons shall be liable to pay excise duty :
(I) Every person, who produces or manufactures any excisable goods,
(II) Every person, who stores excisable goods in a warehouse,
(III) In case of molasses, the person who procures such molasses,
(IV) In case goods are produced or manufactured on job work,
(a) The person on whose account goods are produced or manufactured by the job worker, or
(b) The job worker, where such person authorizes the job worker to pay the duty leviable on such goods.
Liability to Excise Duty
Section 3(1) of Central Excise Act provides that there shall be levied and collected in such manner, as may be pre-
scribed:
(a) a duty of excise to be called the Central Value Added Tax (CENVAT), on all excisable goods which are pro-
duced 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 the duty of excise specified in clause (a) above, on excisable goods
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 said Second Schedule :
Provided that the duties of excise which shall belevied and collected on any excisable goods which are produced
or manufactured by a hundred percent Export Oriented Undertaking [100%EOU] 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 Cus-
toms Act, 1962 or any other law for the time being in force on like goods produced or manufactured outside India if
imported into India, and where the said duties of customs are chargeable by reference to their value.
The value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be
determined in accordance with the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975.
Explanation.-where in respect of any such like goods, any duty of customs leviable for the time being in force is levi-
able at different rate, then, such duty shall, for the purposes of this proviso, be deemed to be leviable at the highest
of these rates.
Section 3(1A) provides that the provisions of sub-section (1) shall apply in respect of all excisable goods other than
salt which are produced or manufactured in India, by or on behalf of Government as they apply in respect of goods
which are not produced or manufactured by Government.
Section 3(2) provides that Central Government may, by notification in the Official Gazette, fix for the purpose of
levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in First
Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as chargeable with duty ad valorem and
may alter tariff values for the time being in force.
Exemption on DTA (Domestic Tariff Area) Clearance by 100% EOU [Notification no. 23/2003-C.E., Dated 31.3.2003]
DTA clearances by 100% EOU are exempt from-
(a) 50% of the basic duties leviable thereon;
(b) Additional duty of customs u/s 3(5) of Customs Tariff Act, 1975. Exemption from additional duty is available only
if the goods so removed are not exempt from payment of sales tax/VAT in India.
Collection of Excise Duty
For collection of Central Excise Duty, the following two procedures are followed by the Central Excise Department:
(i) Physical Control Procedure: Applicable to cigarettes only. In this case, assessment is done by Central Excise
Offices and thereafter goods are removed under his supervision under cover of an invoice counter signed by
him.
(ii) Self-Removal Procedure: Applicable to all other goods produced or manufactured within the country. Under
this system, the assesee himself determines the duty liability on the goods and clears the goods.
Exemptions from Levy of Excise Duty
Section 5A of the Central Excise Act, 1944 empowers the Central Government to grant Exemption from levy of excise
duty and lays down the provisions relating thereto:
(1) Power to Notify Exemptions in Public Interest
Section 5A(1) provides that the Central Government is empowered to exempt in the public interest, any excis-
Central Excise
able goods from the levy of whole or any part of excise duty. Such exemption may be granted either absolutely
or subject to such conditions, as may be specified in the Notification.
Exceptions However, unless specifically provided in such notification, no exemption shall apply to excisable
goods, which are produced or manufactured:
(i) in a Free Trade Zone or a Special Economic Zone and brought to any other place in India; or
(ii) by a hundred per cent Export Oriented Undertaking and brought to any place in India.
(2) Exemption in public interest
Section 5A(2) provides that 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 of excise, under circumstances of an
exceptional nature to be stated in such order, any excisable goods on which duty of excise is leviable.
(3) Notification may provide for different method of levy of duty as well
Section 5A(3) provides that an exemption in respect of any excisable goods from any part of the duty of excise
leviable thereon may be granted by providing for the levy of a 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 and any exemption
granted in relation to any excisable goods in the manner provided in this sub-section shall have effect subject
to the condition that the duty of excise chargeable on such goods shall in no case exceed the duty statutorily
payable.
Section 5A(2A) provides that the Central Government may, if it considers it necessary or expedient so to do for
the purpose of clarifying the scope or applicability of any notification issued or order issued, insert an Explana-
tion in such notification or order, as the case may be, by notification in the Official Gazette at any time within
one year of issue of the notification or order, and every such Explanation shall have effect as if it had always
been the part of the first such notification or order, as the case may be.
2.6 GOODS
Goods has not been defined in the central Excise Act,1944.

As per Article 366(12) of the Constitution of India, Goods means all articles, materials and commodities.
Section 2(7) of Sale of Goods Act, 1930 defines Goods to mean every kind of movable property other than action-
able 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.
These articles, materials and commodities must be movable and marketable. [Decision of the Supreme Court of India
in the case of Union of India vs Delhi Cloth and General Mills Ltd (1977)].
Those movable and marketable goods must be excisable goods as per section 2(d) of the Central Excise Act, 1944.
Those excisable goods must be manufactured in India as per section 2(f) of the Central Excise Act, 1944 which in-
cludes any process incidental or ancillary to the completion of the manufactured product. [Decision of the Supreme
Court in the case of Wallace Flour Mills Ltd Vs Commissioner of Central Excise (1989)].
Basic conditions for levy of Duty under Section 3
It is obvious from section 3(1) that, to attract excise duty, the following conditions must be fulfilled:
There should be movable goods;
The goods must be excisable;
The goods must be manufactured or produced; and
The manufacture or production must be in India.
Goods manufactured or produced in SEZ are excluded excisable goods. This means, that the goods manufactured
or produced in SEZ are excisable goods but no duty is leviable, as charging section 3(1) excludes these goods. Thus,
the goods manufactured in SEZ are not exempted goods. They can be termed as excluded excisable goods.
As per explanation to section 2(d), 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.
Basic Ingredients
From the above definitions of goods, the two essential elements of goods are emanated:
(i) They should be movable, and
(ii) They should be marketable.
Goods must be Movable
In order to be movable, an article must fulfill two conditions:
(i) It should come into existence (as a result of manufacture); and
(ii) It should be capable of being moved to market to be bought and sold.
Thus, goods must exist. Where goods have not come into existence, they cannot be moved as well. So long as the
goods have not come into existence, no question of levy of excise duty would arise. It has been observed that the
word manufacture or production are associated with movables.
In Municipal Corporation of Greater Mumbaiv. Union of India, a petrol pump of huge storage capacity which was not
embedded to earth but which could not be removed without dismantling was held to be immovable in nature.
In Sirpur Papers Mills Ltd. V. CCE the machinery embedded to a concrete base to ensure its wobble free operation
was held to be a movable property.
CBEC has clarified that whatever is attached to earth, unless it is like a tree/building/similar thing, shall not necessarily
be regarded as immovable property if the whole purpose behind such attaching to the concrete base is to secure
maximum operational efficiency and safety.
Thus, excise duty cannot be levied on immovable property.
Example 4: A Ltd. was engaged in fabrication, assembly and erection of waste
treatment plant. The plant could not function as such until it was wholly built in-
cluding civil construction. A Ltd. purchased duty paid parts of water treatment
plant in unassembled form and assembled to the ground with civil work. Hence,
excise duty is not required to pay. Because, the product emerges as immovable
in nature. Larsen & Toubro Limited v UOI 2009 (243) ELT 662 (Bom).
Waste Water Treatment Plant is an
Example 5: M/s X Ltd., engaged in the manufacture of drums mix/hot mix plant immovable property
by assembling and installing its parts and components. The machine is fixed by
nuts and bolts to a foundation not because the intention was to permanently attach it to the earth, but because a
foundation was necessary to provide a wobble free operation to the machine. Hence, the Supreme Court held that
the plantsin question were not immovable property. Consequently, duty would belevied on them [CCE v Solid & Cor-
rect Engineering Works and Ors 2010 (252) ELT 48 1 (SC)].

Drum Mix Plant Hot Mix Plant
Goods must be Marketable
Marketability denotes the capability of a product, of being put into the market for sale. Where goods are not mar-
Central Excise
ketable, excise duty cannot be charged on them. Marketability is the decisive test for durability. The article must be
capable of being sold to consumer without any additional thing.
The test of marketability will depend on the facts and circumstances of each case. It is a question of fact. The vend-
ibility or marketability test includes the following three essential components: -
(a) the goods should be capable of being sold in the market,
(b) the goods should be capable of being sold ordinarily, and
(c) the goods should be capable of being sold as such.
The following points can be noted
i. Marketability is to be decided on the basis of condition in which goods are manufactured or produced.
ii. Everything that is sold is not necessarily marketable.
iii. Waste and Scrap can be goods but dutiable only if manufactured and are mentioned in Tariff.
iv. The marketability test requires that the goods as such should be in a position to be taken to market and sold. If
they have to be separated, the test is not satisfied. Thus, if machinery has to be dismantled before removal, it will
not be goods - Triveni Engineering v. CCE AIR 2000 SC 2896 = 2000 AIR SCW 3144 = 40 RLT 1 = 120 ELT 273 (SC).
v. Branded Software is goods. However, service tax will be payable on tailor made software (w.e.f. Finance Act,
2008).
Shelf-life of 2 to 3 days sufficient for Marketability:
The Apex Court namely the Supreme Court ruled that short shelf-life could not be equated with no shelf-life. A shelf life
of 2 to 3 days was sufficiently long enough for a product to be commercially marketed. Shelf-life of a product would
not be a relevant factor to test the marketability of a product unless it was shown that the product had absolutely no
shelf-life or the shelf-life of the product was such that it was not capable of being brought or sold during that shelf-
life.
Hence, product with the shelf life of 2 to 3 days was marketable and hence, excisable [Nicholas Piramal India Ltd v
CCEx., Mumbai 2010 (260) ELT 338 (SC)].
Theoretical possibility of product being sold is not sufficient to establish the marketability of a product:
It means to say that a product known in the market with a nomenclature is not sufficient for marketability unless for the
said product there is a buyer to buy it.
Example 6: M/s X Ltd. manufactured Double Textured Rubberized Fabric (i.e. upper lace of the shoe) and removed
from the factory for job work, it has no marketability, because the said product known in the market with no buyer
[Bata India Ltd. v CCE 2010 (252) ELT 492 (SC)].
Case Laws
(a) In Cipla Ltd. V Union of India, it was held by the Karnataka High Court that for dutiability, a product must pass
the test of marketability,even if it is a transient item captively consumed in the manufacture of other finished
goods and that the onus is on the Department to produce evidence of marketability.
(b) In UOI v Indian Aluminium Co. Ltd. v CCE, the Supreme Court held that marketability of a product must be for
its dutiability. Mere manufacture or specification of an article in Tarrif is not enough.
(c) In Bhor Industries Ltd. v CCE, the Supreme Court held that the mere inclusion of a particular article in the Tariff
Schedule will not render it liable to excise duty. The marketability of that articleis of primary importance. The
decision given in this case was a turning point because prior to this decision, it was normal to treat all goods in
the Tariff Schedule, as chargeable to duty regardless of the test of marketability.
(d) In Union Carbide India Ltd. v UOI & Geep Industrial Syndicate Ltd. v Central Government, the Supreme Court
held that intermediate products,which were in a crude form, would not constitute goods. In this case, alumini-
um cans produced by the extrusion process were not tobe goods, as they were neither capable of being sold
nor were marketable.
Example 7: Concept of immovability and marketability hasbeen explained in the following lines:

Bags are movable and marketable Commercial buildings are immovable even
Excise Duty can be levied on bags though marketable, Excise Duty cannot be levied
on commercial buildings
Excisable Goods
Section 2(d) of Central Excise Act, defines Excisable Goods means Goods specified in the First Schedule and the Sec-
ond Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt. As per explana-
tion to section 2(d), 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. Thus, unless the item is specified in the Central
Excise Tariff Act as subject to duty, no duty is leviable.
In terms of the above definition of Excisable Goods, it may be held that all those goods, which are specified in the
Tariff Schedule are Excisable Goods. However, question arises as to whether those goods, which are exempted from
duty by a notification, but find a place in the tariff schedule, are excisable goods. To answer this question we should
know two terms namely dutiable goods and non- dutiable goods.
i. Dutiable goods mean excisable goods which has rate of duty greater than 2% per cent.
ii. Non-dutiable goods or exempted goods mean excisable goods which has rate of duty nil or 0% or 1% or 2%.
Therefore, both dutiable and non-dutiable goods are called as excisable goods.
Impact: Manufacturers paying excise duty @1% or 2% as the case may be are not eligible for claiming CENVAT Credit.
Since, these goods are called as exempted goods.
By analyzing the definition, the following two important ingredients of excisable goods are found:
(a) Goods must be specified in the Schedule to the Central Excise Tariff Act, 1985;
(b) The goods so specified must be subject to duty.
(c) Non-Excisable goods are that goods which has not been very clearly mentioned in the Central Excise Tariff
Act before they are manufactured.
The goods must be Manufactured or Produced in India
The term manufacture as understood under Excise Law refers to a process involving the conversion of an input into
a completely different output. Goods manufactured in Special Economic Zone are not exigible to excise duty as
they are excluded from the scope of charging provisions of section 3 of Central Excise Act, 1944. However the goods
manufactured by 100% EOU will be attracted if goods are cleared for domestic tariff area.
Excisable Goods manufactured in the state of Jammu and Kashmir attracts the excise duty since, the Central Excise
Act, 1944 extended to the whole of India.
The Central Excise Act, 1944 has been extended to the designated areas in the Continental Shelf and Exclusive Eco-
nomic Zone (EEZ) of India (vide Notification No. 166/87-CE, dated 11.6.1987).
Exclusive Economic Zone extends to 200 nautical miles from the base line of the coast. It means goods manufactured
outside EEZ excise duty does not attract.
The entire concept of Goods Manufactured in India has been explained in the following diagram:
Central Excise
Goods Manufactured in India
2.7 EXCISABILITY OF PLANT & MACHINERY, WASTE AND SCRAP
Excisability of Plant & Machinery

In view of Entry No. 84 of List-I Seventh Schedule to the Constitution of India, duty of excise could be levied only on
movable and marketable goods and not on immovable property. The goods are classified and charged to duty ac-
cording to the state and condition in which they are removed from the factory.
Assembly of Plant & Machinery at Site:
Mere bringing together of parts of a plant and machinery at site cannot be termed to be manufacture and hence,
assembled plant cannot be treated to be goods.
Where assembly of parts and components brings out a different recognizable marketable product, before its installa-
tion or erection or attachment to the earth, it would be goods and hence chargeable to duty.
In Sirpur Paper Mills Ltd. v CCE, the Supreme Court held that machinery assembled and erected at site from bought
out component was held to be goods and hence chargeable to duty, as it was attached to earth for operational
efficiency and could be removed and sold.
However, in Triveni Engineering v CCE the Supreme Court overruled its decision given in Sirpur case and held that the
marketability test, essentially, requires that goods should be in such condition, as could be brought as such to the mar-
ket and sold, but if machinery requires dismantling before removal, it cannot be goods and hence, not chargeable
to duty.
Excisability of Waste & Scrap
Section 3 imposes duty on manufacture of goods. Waste and scrap are not manufactured, but arise as a result of
manufacture of the final product. Therefore, generally, there should not be levied any tax on the waste and scrap.
Thus, waste and scrap can be goods but dutiable only if manufactured and are mentioned in Tariff.
In view of the amendment made by the Finance Act, 2008 in the definition of excisable goods under Section 2(d) of
the Central Excise Act, 1944, which include bagasse, aluminium / zinc dross and other such products termed as waste,
residue or refuse which arise during the course of manufacture and are capable of being sold for consideration would
be excisable goods and chargeable to payment of excise duty [Circular No. 904/24/09-CX, dated 28.10.2009].
Case Laws
In 1987 in the case of Modi Rubber Ltd., it was held that even though the waste was capable of fetching some amount
of sale, it would not be chargeable to excise duty. Similar decision was given in the case of Captainganj Distilleries.
Later in 1989, the criteria for determining, whether waste generated would be excisable or not was laid down in the
case of Asiatic Oxygen Limited v CCE. The Tribunal held that the question as to whether waste would be charged to
duty or not would depend on:
(a) whether a process of manufacture has taken place,
(b) whether the waste generated is marketable, and
(c) whether the product named in the Tariff.
2.8 MANUFACTURE
Any taxable event for central excise duty is manufacture or production in India. The word produced is broader than
manufacture and covers articles produced naturally, live products, waste, scrap etc. Manufacture means to make,
to inset, to fabricate, or to produce an article by hand, by machinery or by other agency. To manufacture is to pro-
duce something new, out of existing materials.
i. Manufacture means:
(a) Manufacture as specified in various Court decisions i.e. new and identifiable product having a distinctive
name, character or use must emerge or
(b) Deemed Manufacture.
ii. Deemed Manufactureis of two types
(a) CETA specifies some processes as amounting to manufacture. If any of these processes are carried out,
goods will be said to be manufactured, even if as per Court decisions, the process may not amount to
manufacture, [Section 2(f)(ii)].
(b) In respect ofgoods specified in Third Schedule to Central Excise Act, repacking, re-labelling, putting or
altering retail sale price etc. will be manufacture. The goods included in Third Schedule of Central Excise
Act are same as those on which excise duty is payable u/s 4A on basis of MRP printed on the package.
[Section 2(f)(iii) w.e.f. 14-5-2003].
Definition
Section 2(f) defines the term Manufacture to include any process:
(i) incidental or ancillary to the completion of amanufactured product; and
(ii) 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 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 labeling 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 produc-
tion or manufacture on his own account.
[Clauses (ii) and (iii) are called Deemed Manufacture]
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.
Central Excise
Thus, according to the above definition, the manufacturer is a person:

(a) who manufactures or produces any excisable goods, or
(b) carries on any process incidental or ancillary to the completion of the manufactured products.
Case Laws
It was decided in the case of Union of India v Delhi Cloth& General Mills Ltd that, the manufacturer of vanaspati
used to purchase oil from market and vanaspati was manufactured after subjecting the oil with various processes. The
excise was paid on vanaspati. The Excise Department contended that during the process of manufacture of vanas-
pati, vegetable non-essential oil was produced, which is a separate dutiable product. The court decided that :
Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result
of treatment, labour and manipulations. But something more is necessary and there must be transformation; a new
and different article must emerge having a distinctive name and character or use.
Based on the above definition, the Court held that mere processing of basic oils did not amount to manufacture, be-
cause it is not marketable product. The refined oil requires deodorization before marketing.
In South Bihar Sugar Mills Ltd. v UOI the Supreme Court held that there must be such a transformation that a new and
different article must emerge having a distinctive name.
In Ujagar Prints v UOI, the Supreme Court held that the generally accepted test to ascertain whether there was a
manufacture, is whether the change or the series of changes brought about by the application of processes should
take the commodity to the point, where commercially can no longer be regarded as the original commodity, but
instead is recognized as a distinct and new article that has emerged out of and because of the result of processes.
Example 8: X Ltd is engaged in the activity of conversion of gray cloth into embroidered dyed cloth. In the course of
the various activities it gets the sizing done by S and dyeing by D. The cost of gray cloth is ` 50 pe rmeter. S charges
` 10 per meter for sizing and D charges ` 30 per meter. The finished product is sold by X Ltd for ` 100 per meter. In the
context of Central Excise Act, 1944, is there any manufacture involved? Who will be regarded as the manufacturer in
this situation?
Answer:
As per the decided case law of the Supreme Court in Ujagar Paints v Union of India (1998), the end product should
be one which is distinctive in name, usage and commercial character. In the given case, consequent to the value
addition made to the grey cloth which is the input, the end product which emerges is commercially different with its
own price structure, customs and commercial incidents. Hence, there is manufacture within the meaning of section
2(f) of the Central Excise Act, 1944.
It is not necessary that manufacturer should be the owner of the end product. Hence, in the given case, S and D will
be regarded as manufacturers.
Assembly or Repair or Production - Whether the same is Manufacture
Assembly involves use of certain duty paid components to bring into existence an operational or functional product.
As per the cardinal list laid down by the Supreme Court in Emperor Industries case, any process would amount to
manufacture if as a result of the said process the object has been transferred into a commercially known new and
different product.
Thus, where assembly brings into existence of a new commercially known different product, however minor the con-
sequent change, it would amount to manufacture.
Example 9: M/s Antony India Ltd. imported various components of TV (i.e T.V parts) in different consignments sepa-
rately. They assembled these parts to bring into existence TV, it is a complicated procedure. Therefore, components
cannot be considered as if they were finished goods. Hence, assembling of TV parts called as manufacture.
However, in Enfield India Ltd. case the tribunal held that an assembly, repair or reconditioning only improves the qual-
ity of performance of something which is not otherwise useful or fit to use, it would be manufacture.
Explanation as to what is not Manufacture
Any activity shall not be deemed to be manufacture, only because it has been so written in the licence granted. The
following are not manufacture :
(a) Natural activity, even if carried otherwise, e.g. drying yarn in natural sun;
(b) Processing of duty paid goods;
(c) Purchasing various item and putting into a container and selling them;
(d) Obtaining of natural products;
(e) Testing/quality controlof items manufactured by others;
(f) Cutting and polishing of diamond;
(g) Upgradation of computer system;
(h) Printing on glass bottles;
(i) Affixing brand name;
(j) Crushing of boulders into smaller stones.
Example 10: Cigarettes were wrapped in it with the help of roll of Aluminum Foil. It did not change the nature and
substance of foil. The said process did not render any marketable value, only made it usable for packing. CCE v. GTC
Industries Ltd. 2011 (266) E.L.T. 160(Bom.)].
Explanation about Incidental & Ancillary Process
Incidental means anything that occurs incidentally. It refers to occasional or casual process.
Ancillary means auxiliary process, which unless pursued, shall not result into manufacture of the product. The defini-
tion of manufacture under section 2(f), of the Central Excise Act includes the processes which are incidental or
ancillary to the completion of a manufactured product. A process can be regarded as incidental or ancillary to the
completion of the manufactured product, if it comes in relation to the finished product. It is immaterial whether the
process is significant or inessential. On the other hand, where a process is not connected to the manufacture of the
final product, it cannot be termed as incidental or ancillary.
Example 11: Mr. Ram use to purchase duty paid MS tubes from its manufacturers and cut the same into requisite
length. Thereafter, put it in the swaging machine for undertaking swaging process whereby dies fitted in the machine
imparted folds to the flat surface of the MS tube/pipe. The Department took the plea that swaging process amount-
ed to manufacture and hence duty was payable on the goods manufactured by Mr. Ram.
Answer:
As per Section 2(f) of the Central Excise Act, 1944, Manufacture includes any process incidental or ancillary to the
completion of a manufactured product. However, input and output must be different with each other. Therefore, the
process of swaging amounts to manufacture. Mr. Ram was liable to pay the duty. [Prachi Industries v CCEx., Chandi-
garh 2008 (225) ELT 16 (SC)]
Intermediate Products & Captive Consumption
The definition of manufacture under section 2(f) implies that manufacture would take place even at an intermediate
stage, so long as the intermediate product is commercially and distinctly identifiable.
Intermediate products are such products, which are produced in a process naturally in the course of manufacture of
a finished product, which involves more than one process. Thus, such products are output of one process and input for
the subsequent process. Captive consumption means consumption of such output of one process in the subsequent
process. Generally, the intermediate products do not have any marketable identity and can hardly be sold in the
market.
In the case of JK Spinning & Weaving Mills v UOI the Supreme Court held that the captive consumption would amount
to removal, hence chargeable to duty. However, in Union Carbide v UOI, the Supreme Court held that an intermedi-
ate product would be chargeable to excise duty, only if it is a complete product and can be sold in the market to a
consumer. This decision was affirmed in Bhor Industries v UOI.
2.9 MANUFACTURER
Manufacturer is the person who actually brings new and identifiable product into existence.
(i) Duty liability is on manufacturer in most of the cases.
Central Excise
(ii) Mere supplier of raw material or brand name owner is not manufacturer.
(iii) Loan licensee is not manufacturer.
Loan licensee can be treated as manufacturer only if the manufacture is carried out by use of his own raw material
under his own supervision by hiring the premises and equipment shift-wise or otherwise.
Exception:
Brand owners Liable to pay Excise Duty (w.e.f. 1-3-2011)
In case of ready-made garments and made-up articles of textiles manufactured on job-work basis, liability to pay ex-
cise duty and comply with the provisions of the Central Excise Rules, 2002 is on the merchant manufacturer (i.e. person
on whose behalf the goods are manufactured by job workers, namely owner of raw materials), as per rule 4 (1A) of
the Central Excise Rules, 2002 (vide Notification No. 4/2011 C.E. dt. 1-3-2011).
Example 12: X Pvt. Ltd is job worker located at Tambaram South, Chennai, received raw material for manufacture of
articles of apparels, clothing accessories, knitted or crocheted and worn clothing from Peter England a brand owner.
Hence, the liability to pay excise duty is on brand owner namely Peter England.
Who is a Manufacturer as per Statute?
The following are held to be manufacturer:
(a) Person manufacturingfor own consumption,
(b) Person hiring labour oremployees for manufacturing,
(c) A job-order worker,
(d) Acontractor.
Who is not a Manufacturer?
The following have been held as not to be a manufacturer :
(a) Where anactivity is not a manufacture;
(b) Brand Owners, if their relation with the manufaturer is Principal to Principal basis.
(c) Labour Contractors, who supply labor;
(d) Loan licensee.
(e) Raw material supplier is not manufacturer
Example 13: Assessee repairs his worn out machineries / parts with the help of welding electrodes, mild steel, cutting
tools, M.S. Channel, M.S. Beam etc, in this process M.S. Scrap and Iron Scrap generated. Repairing activity in any
possible manner cannot be called as a part of manufacturing activity in relation to production of end product. The
generation of metal scrap or waste during the repair of worn out machineries / parts of cement manufacturing plant
does not amount to manufacture. GRASIM INDUSTRIES LTD v UOI 2011 (273) E.L.T 10 (S.C.)
Dutiability of Packing, Labelling and Repacking Activities
Section 2(f) of the Central Excise Act, defines Manufacture to include 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 (CETA) as amounting
to manufacture. Thus, the process may not amount to manufacture as per principles evolved by Courts, but the same
may be liable to excise duty, if it is defined as amounting to manufacture under CETA.
This provision seemingly includes the process like packing, labeling, re-labelling, re-packing into manufacture, though
otherwise these processes are not manufacture as no new product emerges. In fact, these processes are adjunct to
manufacture. The manufacture shall be complete only when the product is rendered marketable and movable and
for this purpose packing is an inevitable process. Therefore, packing and associated with that the labeling is a part of
the manufacturing process.
In CCE v Prabhat Packging Ltd., the Tribunal has held that repacking of an already manufactured product would not
amount to manufacture in excise law, since repacking does not result into a new commercially distinct product.
Labelling on packaged products is also not manufacture, since in the common market parlance a labeled and unla-
belled product is treated as the same product and the distinction as such is made. The principle was affirmed in the
case of Pioneer Tools and Appliances Ltd. v UOI by the Bombay High Court.
2.10 CLASSIFICATION OF GOODS
Central Excise Duty is chargeable on the goods, which are manufactured in India and are subject to excise duty.
However, all goods cannot be charged with the same rate of duty. Therefore, the goods need to be grouped into
separate categories and sub-categories, for which the rate of excise duty may be determined. This identification of
goods through groups and sub-groups is called classification of goods.
The rate of duty is found out by classifying the product in its appropriate heading under Central Excise Tariff. The
Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 96 chapters and specific code is assigned to each
item. CETA is based on International Convention of Harmonised System of Nomenclature (HSN), which is developed
by World Customs Organisation (WCO) (That time called as Customs Cooperation Council). This is an International
Nomenclature standard adopted by most of the Countries to ensure uniformity in classification in International Trade.
HSN is a multi purpose 6 digit nomenclature classifying goods in various groups. Central Excise Tariff is divided in 20
broad sections. Section Notes are given at the beginning of each Section, which govern entries in that Section. Each
of the sections is divided in to various Chapters and each Chapter contains goods of one class. Chapter Notes are
given at the beginning of each Chapter, which govern entries in that Chapter. There are 96 chapters in Central Excise
Tariff. Each chapter and sub-chapter is further divided into various headings and sub-headings depending on differ-
ent types of goods belonging to same class of products.
The Central Excise Tariff Act, 1985 (CETA) came into force w.e.f. 28th February,1986.
The main features of the Excise Tariff are:
The Central Excise Tariff has been made very detailed and comprehensive as all the technical and legal as-
pects in relation to goods have been in corporated in it.
The Excise Tariff is based on the Harmonised System of Nomenclature, which is an internationally accepted
product coding system formulated under the GATT (General Agreementon Tariffs and Trade).
The goods of the same class have been grouped together to bring about parity in treatment and restrict the
dispute in classification matter.
The Central Excise Tariff provided detailed clarificatory notes under each section/chapter.
The interpretation of the Tariff have been provided for at the beginning of the Schedule. All the section notes,
chapter notes and rules for interpretation are legal notes and/therefore serve as statutory guidelines in classifi-
cation of goods.
The Tariff is designed to group all the goods relating to one industry under one chapter from one raw material
in a progressive manner.
Harmonised System of Nomenclature (HSN)
Goods are classified under Central Excise Tariff Act based on the Harmonized System of Nomenclature having eight
digit classifications. All goods are classified using 4 digit system. These are called headings. Further 2 digits are added
for sub-classification, which are termed as sub-headings. Further 2 digits are added for sub-sub-classification, which
is termed as tariffitem. Rate of duty is indicated against each tariff item and not against heading or sub-heading.
Harmonised System of Nomenclature (HSN) is an internationally accepted product coding system, formulated to fa-
cilitate trade flow and analysis of trade statistics. The system was developed by World Customs Organisation (WCO),
which was earlier known as Customs Cooperative Council. HSN was adopted by International Convention of Harmon-
ised System of Nomenclature.
The CETA is also based on the HSN pattern, of course, with some deviation. HSN has got commercial as well as judicial
recognition.
Example 14:
Chapter XXXX
Sub Chapter XXXX
Heading - - -- - - - (Four digits)
Sub-heading ----------- (Six digits)
Tariff Item ----------- (Eight digits)
Rate %
Central Excise
Trade Parlance Theory/ Commercial Parlance

If a product is not defined in the Schedules and Section Notes and Chapter Notes of the Central Excise Tariff Act, 1985,
then it should be classified according to its popular meaning attached to it by those dealing with it i.e., in its com-
mercial sense.
Interpretative Rules of CETA
The Central Excise Tariff Act, 1985 incorporates six rules of interpretation, which together provide necessary guidelines
for classification of various products under the schedule. Rules for Interpretation of Schedule to Tariff are given in the
Tariff itself. These are termed as General Interpretative Rules (GIR). GIR (General Interpretative Rules) are to be ap-
plied for interpretation of Tariff, if classification is not possible on the basis of tariff entry and relevant chapter notes and
section notes. Following are the steps of classification of a product.
(1) Rule 1 provides that the titles of sections, chapters and sub-chapters are provided for ease of reference and
headings along cannot be used for classification. The determination as to where the goods fall would be de-
pendent on the relevant section and chapter notes contained in the tariff.
Rules for interpretation are not invokable if the section and chapter notes clearly determine the classification.
Example 15: Mr. A manufactured wooden table. There is no ambiguity or confusion while classifying the said product.
Hence, the said product can be classified as wooden table.
(2) If meaning of word is not clear, refer to trade practice. If trade understanding of a product cannot be estab-
lished, find technical or dictionary meaning of the term used in the tariff. We may also refer to BIS or other stan-
dards, but trade parlance is most important.
Example 16: Glass mirror cannot be classified as Glass and Glassware because glass loses its basic character after it is
converted into mirror. It means that mirror has the reflective function [Atul Glass Industries Ltd v CCE (SC) (1986)]
Example 17: M/s. Baidyanath Ayurved Bhawan Limited manufacturing a product called Dant Manjan Lal (DML).
The assessee contended that the product DML was a medicament under Chapter sub-heading 3003.31 of the Cen-
tral Excise Tariff Act, 1985. However, the stand of the Department was that the said product was a cosmetic/toiletry
preparation/tooth powder classifiable under Chapter heading 33.06, by considering common parlance test.
As long as product has popular meaning and understanding which is attached to such products by those using the
product and not to the scientific and technical meaning of the terms and expressions used. Hence, it is important to
note how the consumer looks at a product and his perception in respect of such product.
Moreover, merely because there is some change in the tariff entries, the product may not change its character. There-
fore, it has to be classified as a tooth powder and falls under cosmetics.
Hence, the Department stand is correct. CCEx., Nagpur v Shree Baidyanath Ayurved Bhawan Ltd. 2009 (237) ELT 225
(SC)
(3) Principle for classification of incomplete or unfinished goods Rule 2(a):
Rule 2(a) specifies that if the incomplete or unfinished goods have the essential characteristics of the complete
or finished goods, then such goods would be classified in the same heading as the complete goods.Complete
or finished goods would cover goods removed in unassembled or disassembled form.
Example 18: Motor Car not fitted with wheels or tyres will be classified under the heading of Motor Vehicle.
(4) Mixture or Combinations of goods falls under different classificationsRule 2(b):
Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or com-
binations 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.
Example 19: The Motor Car contains the stereo (music system), here two different products namely Motor Vehicle and
Electronic System, hence we have to refer the Rule 3 for solution. It means to say that if Rule 2(b) is applied, or for any
other reason, goods are prima facie classifiable with two or more headings then classification shall be under Rule 3.
(5) If ambiguity persists, find out which heading is specific and which heading is more general. Prefer specific head-
ing:- Rule 3(a).
Example 20: Electrical lighting used for motor vehicles is more specifically classified as part of motor vehicle.
(6) If problem is not resolved by Rule 3(a), find which material or component is giving essential character to the
goods in question - Rule 3(b).
Example 21: Cell phone which consist a calculator willbe called as Cellphone and not a Calculator. It means to say
that the classification should be done according to its main function and additional function may be ignored.
(7) If both are equally specific, find which comes last in the numerical order in the Tariff and take it- Rule 3(c).
Example 22: If a product by virtue of its essential character comes under two headings namely 8512 and 8513 equally
then the said product can be classified under the heading 8513 (i.e. Latter the better)
(8) In case where the goods cannot be classified based on the above principles, they would be classified under
the head appropriate to the goods to which they are most akin Rule 4.
Example 23: Manufacturer manufacturing the following products can be understood as most akin products:
(a) Window mirror of the car
(b) Front mirror of the car
(9) Packing material is to be classified in the heading in which the goods packed are classified Rule 5.
Example 24: packing material used as cases for camera classifiable as camera product.
(10) Goods compared at the same level of sub-headings-Rule 6: 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.
It means that if one heading contains 4-5 sub-headings, these sub-headings can be compared with each
other. However, sub-heading under one heading should not be compared with the sub-heading of another
heading.
As regards the Interpretative Rules, the classification is to be first tested in the light of Rule 1. Only when it is not
possible to resolve the issue by applying this Rule, recourse is taken to rules 2, 3 and 4 in seriatim.
Steps in Classification
The following steps are involved in classification:
(i) First reference is made to the heading and sub-heading, together with corresponding section notes and chap-
ter notes. In case of no ambiguity, as per Rule 1, the classification would be final.
(ii) Where the product name is not clear, reference is made to the common trade practice, further reference may
be made to dictionary meaning or technical terminology, if the product name is not understood in common
trade practice or, it is a new product.
(iii) In case of incomplete or un-finished goods, the essential characteristics of the product must be matched with
the known finished product. In case of similarity, it should be classified, as per Rule 2, under the same heading.
(iv) In case of ambiguity Rule 3(a) should be applied and specific heading should be preferred over general head-
ing.
(v) If Rule 3(a) does not apply, goods should be classified, as per rule 3(b) as if they consist of material or compo-
nents which give them their essential character.
(vi) When goods cannot be classified with reference to rules 3(a) and 3(b), they should be classified, as per Rule
3(c) under the heading, which occurs last in numerical order.
(vii) In case of residuary items classification should be made as per Rule 4 under heading, which is most akin to the
goods in question.
Tariff Commission and other Tariff Authorities
The Tariff Commission was established in September 1997. The Commission functions as an expert body to recommend
appropriate tariff levels keeping in mind the larger economic interests of our country. Bureau of Industrial Costs & Prices
Central Excise
was merged with the Commission in April 1999, to provide in-house support. The Commission also conducts studies on
costing and price fixation referred to it by Central Ministries and Agencies. Matters concerning State Governments
and their agencies have also been the subject of study by the Commission.
The Commission is headed by a Chairman in the rank of Secretary to the Government of India and assisted by a Mem-
ber Secretary in the rank of Additional Secretary to the Government of India.
Tariff Commission is the only organization in the public domain having multi-disciplinary teams of :-
i. Engineers from the field of Science and Technology belonging to Tariff Commission
ii. Cost Accountants/Chartered Accountants from Indian Costs & Account Service (IC&AS)
iii. Economists from Indian Economic Service (IES); and
iv. Statisticians from Indian Statistical Service (ISS).
The Tariff Commission aims to be a premier knowledge based organisation, and a centre of excellence in the field of
domestic and global market research and in tax, tariff, trade related matters, and realistic cost/price determination.
Mission of Tariff Commission is to advise the Government, Public Sector Undertakings (PSUs) and other client organisa-
tions, in a relevant, fair, and unbiased manner to enable and sharpen their decision making capabilities with practical
recommendations.
Functions of Tariff Commission
A: On a reference from Government Tariff Commission undertakes:
i. Fixation of tariffs and all tariff related issues for goods and services.
ii. Examination of transition period for select industries for gradual phasing out of tariffs.
iii. Identification of tariffication process for select economic activities.
iv. To evolve an overall tariff structure and look into tariff rationalization issues.
v. To examine market access offers from trading partners within WTO framework (including antidumping
and safeguards).
vi. To advise on classification of goods and applicable tariffs on such goods and products.
vii. Such other tasks as may be assigned by the Government from time to time.
B. On suo-moto basis
i. To conduct
Detailed impact analysis in select sectors like textiles, agriculture, automobiles, steel, information technol-
ogy, chemicals and engineering goods.
ii. To maintain & monitor
Tariff changes of competing and trade partner countries and inventorize tariff rates.
iii. To carry out studies
On cost of production of different goods and services and its competitiveness in relation to other coun-
tries.
iv. To discharge
Core functions ofthe merged Bureau of Industrial Costs & Prices.
When two Exemption Notifications are available, assessee can select either
If applicant is entitled to claim benefit under two different notifications, he can claim more (i.e. better) benefit and it is
the duty of authorities to grant such benefit to applicant Share Medical Carev. UOI 2007 (209) ELT 321 (SC).
Benefit of Exemption can be claimed at any stage
Even if an applicant does not claim benefit under a particular exemption notification at initial stage, he is not de-
barred, prohibited or estopped from claiming such benefit at a later stage - Share Medical Carev.UOI 2007 (209) ELT
321 (SC) quoted and followed in Cipla Ltd. v. CC (2007) 218 ELT 547 (CESTAT), where it was held that benefit of ex-
emption notification can be claimed at appellate stage also.
2.11 VALUATION OF GOODS
Excise duty is payable on any one of the following basis:

i. Duty based on production capacity - Some products (e.g. pan masala, rolled steel products) are perceived to
be prone to duty evasion. In case of such products, Central Government, by notification, can issue notification
specifying that duty on such notified products will be levied and collectedon the basis of production capacity
of the factory [section 3A(1) of Central Excise Act inserted w.e.f. 10th May 2008]. When such notification is is-
sued, annual capacity will be determined by Assistant Commissioner [section 3A(2)(a) of CEA]. Factors relevant
to determine production capacity will be specified by rules issued by Central Government [section 3A(2)(b)
(i)].
ii. Specific Duty - It is the duty payable on the basis of certain unit like weight, length, volume, thickness etc. For
example, duty on Cigarette is payable on the basis of length of the Cigarette, duty on sugar is based on per Kg
basis etc.
Example 25:
(a) The seventh schedule to the Finance Act, 2005 is being amended so as to increase the excise duty across all
lengths of non-filter and filter cigarettes as under:
Cigarettes From Rs. Per thousand To Rs. Per thousand
Non-filter not exceeding 65 mm 70 215
Non-filter exceeding 65 mm but not exceeding 70 mm 110 370
Filter not exceeding 65 mm 70 215
Filter exceeding 65 mm but not exceeding 70 mm 70 260
Filter exceeding 70 mm but not exceeding 75 mm 110 370
Other 180 560
(b) Excise duty payable on sugar is based on quintals of sugar. The excise duty is say ` 100 per 100 Kg of sugar pro-
duce irrespective of the price at which it is sold.
iii. Tariff value - In some cases, tariff value is fixed by Government from time to time. This is a Notional Value for
purpose of calculating the duty payable. Once tariff value for a commodity is fixed, duty is payable as per-
centage of this tariff value and not the AssessableValue fixed u/s4.
Products covered under the tariff basis of valuation:
(a) Pan masala packed in retail packs of upto 10 gm per pack
(b) Readymade garments
Example 26: The price of readymade garmentis ` 500 per unit. Suppose the government fixes a rate of 60% for com-
puting tariff value. In this case, the tariff value is 60% of ` 500 i.e. ` 300. If the duty rate is 12.5%, the excise duty payable
will be ` 300 12.5% = ` 37.50 per unit
iv. Duty based on basis of Maximum Retail Price printed on carton after allowing deductions - section 4A of CEA.
As per section 4A of the Central Excise Act 1944, MRP provisions will be covered only when the following two
conditions are satisfied:
(a) Goods must be specified under Legal Metrology Act, 2009, w.e.f. 1-8-2011 (earlier Standards of Weights
and Measures Act, 1976).
(b) Those Goods must be mentioned in the notification issued by the Government of India along with rate of
abatement.
Central Excise
Example 27: The MRP of an Air-condition Machine is ` 40,000 and the abatement per cent is 40%. The Excise duty is the
BED rate is 12.5% will be as under :
Maximum Retail Price = ` 40,000
Less: abatement (40%) = ` 16,000
Assessable Value = ` 24,000
Central Excise Duty (12.5%) = `24,000 12.5/100 = ` 3,000
Total Excise Duty Payable = ` 3,000
v. Compounded Levy Scheme - Normal excise procedures and controls are not practicable when there are
numerous small manufacturers. Rule 15 of Central Excise Rules provides that Central Government may, by noti-
fication, specify the goods in respect of which an assessee shall have option to pay duty of excise on the basis
of specified factors relevant to production of such goods and at specified rates. The scheme is presently ap-
plicable only to stainless steel pattas/pattis and aluminium circles. These articles are not eligible for SSI exemp-
tion.
Example 28: (i)The rate of compounded levy in case of cold rolled Stainless Steel patties/pattas,the manufacturer has
to pay ` 30,000 per cold rolling machine per month plus cess as applicable.
(ii) The rate of compounded levy on aluminum circles is ` 12,000 per machine per month plus cess as applicable.
(iii) Duty as % based on Assessable Value (i.e. Transaction Value) fixed under section 4(ad valorem duty) (If not cov-
ered in any of above)
It means, that payment of excise duties are depends upon value of goods (i.e. ad-valorem duty) or volume of goods
(including production capacity) as the case may be. This concept explained hereunder:
Methods & Techniques of Valuation

Proper valuation of goods manufactured is an integral part towards levy of Excise Duty accurately. Accordingly,
goods manufactured should be valued strictly in the manner as prescribed in the Central Excise Act, 1944 and rules
framed there-under.
Value Under the Central Excise Act, 1944
Value of the excisable goods has to be necessarily determined when the rate of duty is on ad-valorem basis. Accord-
ingly, under the Central Excise Act, 1944 the following values are relevant for assessment of duty. Transaction value is
the most commonly adopted method.
(i) Transaction value under Section 4 of the Central Excise Act.
(ii) Value determined on basis of Maximum Retail Sale Price as per Section 4A of the Act, if applicable to a given
commodity.
(iii) Tariff value under Section 3, if applicable.
Details of all the methods of valuation are discussed below :
1. Transaction Value
Section 4(3) (d) of the Central Excise Act, as substituted by section 94 of the Finance Act, 2000, came into force
from the1st day of July, 2000. This section contains the provision for determining the Transaction Value of the
goods for purpose of assessment of duty.
For applicability of transaction value in a given case, for assessment purposes, certain essential requirements
should be satisfied. If any one of the said requirements is not satisfied, then the transaction value shall not be the
assessable value and value in such case has to be arrived at under the valuation rules notified for the purpose.
The essential conditions for application of a transaction value are :
(a) The excisable goods must be sold by the assessee.
(b) The transaction is between unrelated parties, i.e, the assessee and the buyer are not related parties
(c) The price is the sole consideration for the sale.
(d) The goods are sold by an assessee for delivery at the time of place of removal. The term place of re-
moval has been defined basically to mean a factory or a warehouse, and will include a depot, premises
of a consignment agent or any other place or premises from where the excisable goods are to be sold
after their clearances from the factory.
Transaction value would include any amount which is paid or payable by the buyer to or on behalf of the assessee,
on account of the factum of sale of goods. In other words, if, for example, an assessee recovers advertising charges or
publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim
that such charges are not to be included in the transaction value. The law recognizes such payment to be part of the
transaction value, that is assessable value for those particular transactions.
(1) As per the Sec. 4, transaction value shall include the following receipts/recoveries or charges, incurred or pro-
vided for in connection with the manufacturing, marketing, selling of the excisable goods :
I. Advertising or publicity;
II. Marketing and selling organization expenses;
III. Storage;
IV. Outward handling;
V. Servicing, warranty;
VI. Commission or
VII. Any other matter.
The above list is not exhaustive and whatever elements which enrich the value of the goods before their marketing
and were held by Honble Supreme Court to be includible in value under the erstwhile section 4 would continue to
form part of section 4 value even under section 4 definition.
(2) Thus if in addition to the amount charged as price from the buyer, the assessee recovers any other amount by
reason of sale or in connection with sale, then such amount shall also form part of the transaction value. Where
the assessee includes all their costs incurred in relation to manufacture and marketing while fixing price payable
for the goods and bills and collects an all inclusive price-as happens in most cases where sales are to indepen-
dent customers on commercial consideration - the transaction price will generally be the assessable value.
However, where the amount charged by an assessee does not reflect the true intrinsic value of goods mar-
keted and total value split up into various elements like special packing charges, warranty charges, service
charges etc. it has to be ensured that duty is paid on correct value.
Inclusions in Assessable Value
(i) Packing Charges: Packing charges shall form part of the assessable value as it is a charge in connection with
Central Excise
production and sale of the goods, recovered from the buyer. Under the erst while Sec.4, inclusion of cost of
packing in the value was related to the nature of packing such as preliminary or secondary ete. Such is suesare-
notrelevantin the Sec.4 and any charges recovered for packing, whether ordinary or specialis includible in the
transaction value if the same is not included in the price of the goods.
In the case of reusable containers (glass bottles, crates etc.), normally the costisamortized and included in the
cost of the product itself. Therefore, the same is not required to be included in the value or the product unless it
is found that the cost of reusable container has not been amortised and included in the value of the product.
However, rental charges or cost of maintenance of reusable metal containers like gas cylinders etc. are to
be included in the value since the amount has been charged by reason of, or in connection with the sale of
goods.
Similarly, cost or containers supplied by the buyer will be included in the transaction value of the goods, as the
price will not be the sole consideration of the sale and the valuation would be governed by Rule6 of the Valu-
ation Rules, 2000.
Durable and Returnable Packing: In case of durable / returnable containers, all that would be necessary, as per
the Boards Circular No. 643 / 34 / 2002-CX dated 1-7-2002 [2002 (143) E.L.T.T 39], is to include the a mortised cost
of the container in the price of the product itself; there turnable deposit taken from the buyer or deposit of the
empty container by him would not then be treated as additional consideration.
(ii) Design and Engineering Charges: These charges being an essential process / activity for the purpose of manu-
facture shall be included in the Assessable value.
(iii) Consultancy Charges: The charges relating to manufacturing / production is included as such payment is by
reason of sale.
(iv) Loading and Handling charges: The charges with in the factory are included in Assessable Value.
(v) Royalty Charged in Franchise Agreement: If the agreement is for permission touse the brand name is included
in Assessable value as such payment is by reason of sale or inconnection with sale.
(vi) Advance Authorisation Surrendered: If it is surrendered in favour of seller is additional consideration and includ-
ible. It is considered as an Additional consideration. It shall be included if it is paid by or on behalf of buyer to
manufacturer-assessee and not when it is given by third party.
(vii) Price Increase, Variation, Escalation: If there are subsequent to removal of goods cleared from the factory is not
relevant, provided the price is final at the time of removal.
(viii) Free After Sales Service/Warranty charges: It will form part of the transaction valueir respective of whether the
warranty is optional or mandatory.
(ix) Advertisement and Sales Promotion Expenses Incurred by the Buyer: Manufacturer incurs advertisement expen-
diture. These are obviously builtin the selling & distribution cost for determining these lling price. In addition, often
dealers also advertise for the product at their own cost.
Definition of Transaction Value includes charges for advertisement, publicity and marketing expenses. How-
ever, these are includible only if the buyer is liable to pay the amount to assessee or on behalf of the assessee.
Thus, advertisement and sales promotion expenses in curred by dealer / distributor, if done on his own, are not
to be included, if transaction between buyer and seller is on principle to principle basis. This is because the
buyer is not incurring these expenses on behalf of the assessee.
(x) After Sales Service and Pre Delivery Inspection (PDI) Charges: After sales service and predelivery inspection
(PDI) are services provided free by the dealer on behalf of the assessee and the cost towards this is included in
the dealers margin (or reimbursed to him).
The value of goods which are consumed by the assessee or on his behalf in the manufacture of other articles will
be on cost construction method only (Rule8). The assessable value of captivity consumed goods will be taken
at 110% (substituted by 60/2003 (NT.) 5-10-2003) of the cost of manufacture of goods even if identical or compa-
rable goods are manufactured and sold by the same assessee as there have been disputes in adopting values
of comparable goods. The concept of deemed profit for notional purposes has also been done away with and
a margin of 10% by way of profit etc. is prescribed in the rule itself forease of assessment of goods used for cap-
tive consumption. The cost of production of captively consumed goods will be done strictly in accordance with
CAS-4.
(xi) Receipts / recoveries of manufacturing, marketing and selling expenses: Transaction Value includes receipts
/ recoveries or charges in curred or expenses provided for in connection with the manufacturing, marketing,
selling of the excisable goods to be part of the price payable for the goods sold. In other words, whatever ele-
ments which enrich the value of the goods before their marketing and were held by Honble Supreme Courtto
be includible in value under the erst while Section 4 would continue to formpart of Section 4 value even
under new Section 4 definition. Where the assessee charges an amount as price for his goods, the amount
so charged and paid or payable for the goods will form the assessable value. If however, in addition to the
amount charged as price from the buyer, the assessee also recovers any other amount by reason of sale or
inconnection with sale, then such a mount shall also form part of the transaction value for valuation and as-
sessment purposes. Thus if assessees plits up his pricing system and charges a price for the goods and separately
charges for packaging, the packaging charges will also form part of assessable value as it is a charge incon-
nection with production and sale of the goods recovered from the buyer.
(xii) Dharmada Charges: As per CBE & C Circular No. 763/79/2003-CX dt.21-11-2003 has clarified that dharmada is
includible in Assessable Value and the same view expressed by the Apex Courtnamely Supreme Court of India
in the case of CCE v. Panchmukhi Engg. Works 2003(158) ELT550 (SC).
(xiii) Dealers Margin: Dealers margin contained provision for rendering pre-delivery inspection and there after sale
services, then amount collected by the dealers to wards pre-delivery in spection or after sale services from
the buyer of the goods during the warranty period it would form part of the assessable value of such goods.
Therefore, pre-delivery inspection charges and after sale service recovered from the buyers of vehicles would
be included in the assessable value of vehicles. The same view confirmed by the Tribunal in the case of Maruti
Suzuki India Ltd. v. CCE (2010).
Exclusions from Transaction Value
(i) Taxes and Duties: The definition of transaction value mentions that what ever amount is actually paid or actually
payable to the Government or the relevant statutory authority by way of excise, sales tax and other taxes, such
amount shall be excluded from the transaction value. If any excise duty or other tax is paid at a concession
alrate for a particular transaction, the amount of excise duty or tax actually paid at the concession alrate shall
only be allowed to be deducted from price.
(ii) Erection, Installation and Commissioning Charges: If the final product is not excisable, the question of including
these charges in the assessable value of the product does not arise. As for example, since a thermal power,
as a whole, is an immovable property and there fore not excisable, no duty would be payable on the cost of
erection, instigations and commissioning of the steel plant. Similarly, if a machine is cleared from a factory on
payment of appropriate duty and later on taken to the premises of the buyer for installation / erection and
commissioning into animmovable property, nofurther duty would be payable. On the other hand if parts /
components of a generator are brought to asite and the generat or erected / installed and commissioned at
the site then, the generat or being an excisable commodity, the cost of erection, installation and commission-
ing charges would be included in its assessable value. In other words if the expenditure on erection, installation
and commissioning has been incurred to bringin to existence any excisable goods, these charges would be
included in the Assessable Value of the goods. If these costs are incurred to bring into existence some immov-
able property, they will not be included in the assessable value of such result ant property.
However, time of removal in case of excisable goods removed from the place of removal is deemed to be the
time of clearance of such goods from the factory. Therefore, the assessable value is with reference to delivery
at the time and place of removal, transaction value will be the assessable value.
(iii) Freight: 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 or average cost of transportation
(average freight being calculated according to Generally Accepted Principles of Costing - CAS-5) beyond the
depot / place of sale 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. There is no ques-
tion of including the freight etc. right upto the buyers premises even though delivery may be effected at that
place. Delivery to the carrier at factory gate / depotis delivery to the buyer and element of freight and transit
insurance are not includible in assessable value. Moreover, the ownership of the goods has no relevances of
ar as their transit insurance is concerned. - Escorts JCB Ltd. v. CCE., Delhi-II-2002 (146) E.L.T.31 (S.C) and Prabhat
Zarda Factory Ltd. v. CCE.-2002 (146) E.L.T. 497 (S.C). Freight (actual or average) upto the point of depot etc.
will, however, continue to be included.
(iv) Advertising / Publicity Expenditure by Brand Name/Copyright Owner: The expenditure incurred by brand name/
Central Excise
copyright owner on advertisement and publicity charges, in respect of goods will not be added to assessable
value, as such expenditure is not incurred on behalf of the manufacturer- assessee.
(v) Notional Interest on Security Deposit/Advances: The notional interest on advances may not be includible if
relation between advance and selling price is only casual. There is relation but no connection inrelation to
manufacture.
(vi) Interest on Receivables: As regards interest for delayed payments it is the normal practice in industry to allow
the buyers some credit period for which no interest is charged. That is to say, the assessee allows the buyers
some time (normally 30 days, which could beless or even more depending up on industry) to make the pay-
ment for the goods supplied. Interest is charged by him from the buyer only if the payments are made beyond
this period. A question has been raised whether such interest on receivables (for delayed payments) should
form part of the transaction value or not. As per the earlier practice under Section 4 such amount of interest is
not included in value. Also, similar is the practice followed in this regard on the Customs side, where duties
are collected on transaction value basis, and the importers are given certain free period for payment or to
pay up interest for delayed payments. As the intention is not to disturb the existing trade practice in this regard,
charges for interest under a financing arrangement entered between the assessee and the buyer relating to
the purchase of excisable goods shall not be regarded as part of the assessable value provided that :
(a) the interest charges are clearly distinguished from the price actually paid or payable for the goods;
(b) the financing arrangement is made in writing; and
(c) where required, assessee demonstrates that such goods are actually sold at the price declared as the
price actually paid or payable.
(vii) Discounts: As regards discounts, the definition of transaction value does not make any direct reference. Infact,
it is not needed by virtue of the fact that the duty is chargeable on the net price paid or payable. Thus if in any
transaction a discount is allowed on declared price of any goods and actually passed on to the buyer of goods
as per common practice, the question of including the amount of discount in the transaction value does not
arise. Discount of any type or description given on any normal price payable for any transaction will, therefore,
not form part of the transaction value for the goods, e.g. quantity discount for goods purchased or cash dis-
count for the prompt payment etc. will therefore not form part of the transaction value.
(i) cash discount for prompt payment and
(ii) interest or cost of finance for delayed payment, when not exorbitant, is to be granted abatement wheth-
er availed or not even under Section 4-2006 (204) E.L.T.570 (Tri-L.B.)-CCE v. Arvind Mills Ltd.
The differential discounts extended as per commercial considerations on different transactions to unrelated
buyers if extended cant be objected to and different actual prices paid or payable for various transactions
are to be accepted for working assessable value. Where the assessee claims that the discount of any descrip-
tion for a transaction is not readily known but would be known only subsequently - as for example, year end
discount-the assessment for such transactions may be made on a provisional basis. However, the assessee has
to disclose the intention of allowing such discount to the department and make a request for provision a lassess-
ment. Trade discount not paid to dealers at the time of in voice preparation but paid later on net sale value
was held as deductable for valuation purpose by Honble Supreme Court in the case of Commissioner v. DCM
Textiles - 2006 (195) E.L.T. 129 (S.C). Liquidated damages (as for example price reduction for delay in delivery of
goods) is acceptable - 2006 (204) E.L.T. 626 (Tri.) - United Telecom Ltd. v. CCE.
(viii) Deemed Export Incentives Earned on Goods Supplied: Duty drawback cannot be added to assessable value,
especially if the reis no evidence of drawback with depression of prices.
(ix) Subsidy/Rebate Obtained by Assessee: A general subsidy / rebate is not to be included as it has no connection
with individual clearances of goods. In case of rebate/subsidy which is directly relatable to individual clerances,
it should not be includible.
(x) Price of Accessories and Optional Bought - out items: There are is not includible in Assessable Value.
Valuation Rules to Determine Assessable Value
As per Section 4(1)(b) of the Central Excise Act, if Assessable Value cannot be determined u/s 4(1) (a), it shall be de-
termined in such manner as may be prescribed by rules. Under these powers, Central Excise Valuation (Determination
of Price of Excisable Goods) Rules, 2000 have been made effective from 1-7-2000.
In Ispat Industries Ltd. v CCE 2006, it was observed that Excise Valuation Rules should be applied serially. The rules are
as below :
(i) Value nearest to time of removal if goods not sold: If goods are not sold at the time of removal, then value will
be based on the value of such goods sold by assessee at any other time nearest to the time of removal, subject
to reasonable adjustments. [Rule4].
The rule applies when price at the time of removal is not available as the goods are not sold by the assessee
at the time of removal. Thus, this rule should apply in case of removal of free samples or supply under warranty
claims.
In case of new or improved products or new variety of products, price of similar goods may not be available. In
such case, valuation should be on basis of cost of production plus 10%, in absence of anyother mode available
for valuation.
(ii) Goods sold at different place: Some times, goods may be sold at place other than the place of removal e.g.
Buyers place. In such cases, actual cost of transportation from place of removal upto place of delivery of the
excisable goods will be allowable as deduction. Cost of transportation can be either on actual basis or on
equalized basis. [Rule5]
Explanation:
(1) Cost of transportation includes(i) the actual cost of transportation; and (ii) in case where freight is av-
eraged, the cost of transportation calculated in accordance with Generally Accepted Cost Accounting
Principle.
(2) For removal of doubts, it is clarified that the cost of transportation from the factory to the place of remov-
al, where the factory is not the place of removal, shall not be excluded for the purpose of determining
the value of the excisable goods.
(iii) Valuation when the price is not the sole consideration: Where the price is not the sole consideration for sale, the
value of such goods shall be deemed to be the aggregate of
(a) such transaction value, and
(b) the amount of money value of any additional consideration flowing directly or indirectly from the buyer
to the assessee. [Rule6]
In case any of the goods and services (listed below) is provided by the buyer free of change or at reduced cost
in connection with production and sale of such goods, then, the value of such goods and services, apportioned
as appropriate, shall be deemed to be the money value of the additional consideration.
Only the value of the following goods and services are to be added in the transaction value:
(a) materials, components, parts and similar it emsrelatable to such goods;
(b) tools, dies, moulds, drawings, blue prints, technical maps and charts and similar it emsused in the produc-
tion of such goods;
(c) material consumed, including packaging materials, in the production of such goods;
(d) engineering, development, art work, design work and plans and sketches under taken else where than
in the factory of production and necessary for the production of such goods.
Provided that where price is not the sole consideration for sale of such excisable goods and they are sold by the
assessee at a priceless than manufacturing cost and profit, and no additional consideration is flowing directly
or indirectly from the buyer to such assessee, the value of such goods shall be deemed to be the transaction
value.
(iv) Sale at Depot / Consignment Agent: Section 4(3)(c)(iii) provides that in case of sale at depot / consignment
agent, the depot / place of consignment agent will be the place of removal. As per section 4(3) (cc), in case
of sale from depot / place of consignment agent, time of removal shall be deemed to be the time at which
the goods are cleared from factory.
In other words, in case of sale from depot / place of consignment agent, duty will be payable on the price
prevailing at the depot as on date of removal from factory. Price at which such goods are subsequently sold
from the depot is not relevant for purpose of excise valuation.
Central Excise
When goods are sold through depot, there is no sale at the time of removal from factory. In such cases, price
prevailing at depot (but at the time of removal from factory) shall be the basis of Assessable Value. The value
should be normal transaction value of such goods sold from the depot at the time of removal or at the nearest
time of removal from factory. [Rule 7 of Valuation Rules].
As per Valuation Rule 2(b), normal transaction value means the transaction value at which the greatest ag-
gregate quantity of goods are sold.
Say, if an assessee transfers a consignment of paper to his depot from Delhi to Agra on 5-7-2015, and that vari-
ety and quality of paper is normally being sold at the A grade poton 5-7-2015 at transaction value of ` 15,000
pert on net oun related buyers, where price is the sole consideration for sale, the consignment cleared from the
factory at Delhi on 5-7-2015 shall be assessed to duty on the basis of ` 15,000 pert on neas the assessable value.
If assuming that on 5-7-2015 there were no sales of that variety from Agra depot but the sales were effected on
1-7-2015, then the normal transaction value on 1-7-2015 from the Agra depot to unrealated buyers, where price
is the sole consideration shall be the basis of assessment.
(v) Captive Consumption (Rule8): Where whole or part of 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 of
such goods that are consumed shall be one hundred and ten percent of the cost of production or manufac-
ture of such goods.
Duty payable on intermediated products: In AS Processors v. CCE 1999 (112) ELT706 (CEGAT), it was held that
once anew marketable intermediate product comes into existence, it is to be charged to duty if not exempted
by a notificationsame view in CCE v. CitricIndia 2001 (127) ELT 539 (CEGAT).
Captive consumption for dutiable final products: The intermediate product manufactured with in the factory
is exempt from duty, if it is consumed captively for manufacture of (a) Capital goods as defined in Cenvat
Credit Rules i.e. those which are eligible for Cenvat credit or (b) Used for is or in relation to manufacture of final
products eligible for Cenvat, made from inputs which are eligible for Cenvat. [Notification No. 67/1995 dated
16-3-1995].
Duty payable on captive consumption if intermediate product under Compounded Levy scheme: In Gaya
Aluminium Industries v. CCE (2004) 170ELT98 (CESTAT), it was held that even if Aluminium Circles are captively
consumed, duty will be payable under compounded levy scheme [However, assessee claimed that com-
pounded levy scheme is optional and assessee can opt to pay normal duty. Hence, the matter was remanded
to adjudicating authority for consideration].
In Gouri Shankar Industries v. CCE 2004 (173) ELT247 (CESTAT) also, it was held that duty is payable if Aluminium
circles are consumed captively.
Valuation in case of captive consumption: In case of captive consumption, valuation shall be done on basis of
cost of production plus 10% [The percentage was 15% upto 5-8-2003]. (Rule 8 of Valuation Rules). Cost of pro-
duction is required to be calculated as per CAS 4.
Captive consumption means goods are not sold but consumed with in the same factory or another factory of
same manufacturer (i.e. inter-unit transfers).
The rule may also be helpful if goods are to be transferred to jobworker for jobwork and then brought back
for further processing. If jobworker is utilizing some of his own material, it may be advisable to clear processed
inputs on payment of duty to jobworker. The job worker can avail Cenvat credit and then send back the goods
manufactured by him on payment of duty.
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 hundredand ten percent of
the cost of production or manufacture of such goods.
Captive consumption by related person: In case goods are supplied to a related person but consumed by the
related person and not sold, valuation will be done on the basis of cost of production plus 10% [Provisoto rule9].
CBE&C, vide its circular No. 643/34/2002-CX dated 1-7- 2002, has clarified that this provisoapplies when goods
are transferred to asister unit or another unit of the same factory for captive consumption in their factory.
CostSheet
Suggested Cost Sheetas per CAS-4 (issued by ICAI) is as follows -
Statement of cost of production of...................................................................................................................................
manufactured/ to be manufactured during the period ................................................................................................
Q1 Quantity Produced (Unit of Measure)
Q2 Quantity Dispatched (Unit of Measure)
Sl. No. Particulars Total Cost Cost/Unit

(`) (`)
1. Material Consumed
2. Direct Wages and Salaries
3. Direct Expenses
4. Works Overheads
5. Quality Control Cost
6. Research and Development Cost
7. Administrative Overheads (Relating to production capacity)
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 and 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 of goods dispatched (17+18-19)
[Note - The for miscommon both for future cost and historical cost. In case of future cost (say for future quarter or half
year), some of the columns e.g. opening and closing stock of WIP and Finished Goods are not relevant].
Example 29: Raj & Co. furnish the following expenditure in curred by the mandwant you to find the assessable value for
the purpose of paying excise duty on captive consumption. Determine the cost of production intermsof rule 8 of the
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 and as per CAS-4 (Cost Accounting
Standard-4) (i) Direct material cost per unit inclusive of excise duty at 12.5% - `1,320, (ii) Direct wages - `250, (iii) Other
direct expenses - ` 100, (iv) Indirect materials - ` 75, (v) Factory Overheads - ` 200, (vi) Administrative overhead (25%
relating to production capacity) ` 100 (vii) Selling and distribution expenses- ` 150, (viii) Quality Control- ` 25, (ix)Sale of
scrap realized- ` 20, (x) Actual profitmargin-15%.
Answer:
Sr. No. Particulars Amount (`)

(i) Direct Material (exclusive of Excise Duty) [1,320 100/112.50] 1173.33
(ii) Direct Labour 250.00
(iii) Direct Expenses 100.00
(iv) Works Overhead [indirect material (75) plus Factory OHs (200)] 275.00
(v) Quality Control Cost 25.00
(vi) Research & Development Cost Nil
Central Excise
(vii) Administration Overheads (to the extent relates to production activity) 25.00
Less: Realizable Value of scrap (20.00)
Cost of Production 1,828.33
Add: 10% as per Rule 8 182.83
AssessableValue 2,011.16
Example 30: Determine the cost of production on manufacture of the under-mentioned product for purpose
of captive consumption in terms of Rule8 of the Central Excise Valuation (DPE) Rules, 2000- Direct material -
` 11,600, Direct Wages & Salaries - ` 8,400, Works Overheads - ` 6,200, Quality Control Costs- ` 3,500, Research and
Development Costs- ` 2,400, Administrative Overheads- ` 4,100, Selling and Distribution Costs `1,600, Realisable Value
of Scrap - ` 1,200. Administrative overheads are in relation to production activities. Material cost includes Excise duty
` 1,289.
Answer:
Cost of production is required to be computed as per CAS-4. Material cost is required to be exclusive of Cenvatcredi-
tavailable.
Sr. No. Particulars Amount (`)

1 Material Consumed (Net of Excise duty) (11,600 1,289) 10,311
2 Direct Wages and Salaries 8,400
3 Direct Expenses --
4 Works Overheads 6,200
5 Quality Control Cost 3,500
6 Researchand Development Cost 2,400
7 Administrative Overheads 4,100
Less: Sale of Scrap (1,200)
Note- (1) Indirect labour and indirect expenses have been included in Works Overhead
(2) Actual profit margine arned is not relevant for excise valuation.
Example 31: Hero Electronics Ltd. is engaged in the manufacture of colour television sets having its factories at Kol-
kata and Gujarat. At Kolkata the company manufactures picture tubes which are stock transferred to Gujarat factory
where it is consumed to produce televisionsets. Determine the Excise duty liability of captively consumed picture tubes
from the following information:-Direct material cost (per unit) ` 800; Direct Labour ` 100; Indirect Labour ` 50; Direct Ex-
penses `100; Indirect Expenses `50; Administrative Overheads `50; Selling and Distribution Overheads `100.Additional
Information:- (1) Profit Margin as per the Annual Report of the company for 2014-15 was 12% before Income Tax. (2)
Material Cost includes Excise Duty paid `89 (3) Excise Duty Rate applicable is 12.5%.
Answer:
Cost of production is required to be computed as per CAS-4. Material cost is required to be exclusive of Cenvat credit
available.
Sr. No. Particulars Total Cost (`)

1 Material Consumed (Net of Excise duty) (800 89) 711
2 Direct Labour 100
3 Direct Expenses 100
4 Works Overheads 100
5 Quality Control Cost --
6 Research and Development Cost --
7 Administrative Overheads 50
8 Total (1 to 7) 1,061
9 Less - Credit for Recoveries/Scrap/By-Products/Misc Income --
10 Cost of Production (8-9) 1,061
11 Add - 10% as per rule 8 106
12 Assessable Value 1,167
13 Excise duty @ 12% of ` 1,185 145.88
\ Total Duty Liability = ` 145.88
Note - (1) Indirect labour and indirect expenses have been included in Works Overhead (2) In absence of any infor-
mation, it is presumed that administrative overheads pertain to production activity. (3) Actual profit margine arne
disnotrelevant for excise valuation.
(vi) Sale to a Related Person: Transaction Value can be accepted as Assessable Value only when buyer is not
related to seller. In other words, price to an independent buyer has to be considered for excise valuation.
As per section 4(3) (b) of Central Excise Act, persons shall be deemed to be related if
(a) They are inter-connected undertakings
(b) They are relatives
(c) Amongst them, buyer is a relative and a distributor of assessee, or a sub-distributor of such distributor or
(d) They are so associated that they interest, directly or indirectly, in the business of each other.
Inter connected Undertakings: Buyer and seller are related if they are inter-connected undertakings, as de-
fined in section 2 (g) of Monopolies and Restrictive Trade Practices Act, 1969 (MRTP). Explanation (i) to section
4(3) (b) of Central Excise Act.
The essence of the definition under MRTP is that the inter-connection could be through ownership, control or
management. Just 25% of total controlling power in both undertakings is enough to establish inter-connection.
Since only 25% control is enough to make to buyer and assessee as inter connected undertakings, many asses-
sees would comeunder the definition.This would have affected many assessees.
However, the provisions in respect of inter connected undertaking have been made almost in effective in
valuation rules. Now, the inter connected undertakings will be treated as related persononly if they are hold
in gand subsidiary or they are related person under any other clause. In other cases, they will not be treated as
related person. If they are not treated as related person, price charged by assessee to buyer will be accepted
as transaction value confirmed in South Asia Tyres v. CCE (2003) 152 ELT 434 (CEGAT)
Interest in business of each other: As per section 4(3)(b) (iv), buyer and seller are related if they are associ-
ated that they have interest, directly or indirectly, in the business of each other. It is not enough if only buyer has
interest in seller or seller has interest in buyer. Both must have interest, directly or indirectly, in each other -Atic
Industries Ltd. v. UOI (1984) 3SCR930=1984(17)ELT323 (SC) = AIR 1984 SC 1495 = (1984) 3 SCC 575.
The term relative and distributor should be understood to means as distributor who is a Relative of assessee. The
word relative is defined in section 2(77) of Companies Act, 2013 as follows:- A person shall be deemed to be a rela-
tive of another if, and only if,- (a) they are members of a Hindu undivided family; or (b) they are husband and wife;
or (c) the one is related to the other in the manner indicated in Schedule I- A of the Companies Act. This Schedule
contains following relatives: (1) Father (2) Mother (including step-mother) (3) Son (including step-son) (4) Sons wife
(5) Daughter (including step-daughter) (6) Fathers father (7) Fathers mother (8) Mothers mother (9) Mothers fa-
ther (10) Sons son (11) Sons sons wife (12) Sons daughter (13) Sons daughters husband (14) Daughters husband
(15) Daughters son (16) Daughters sons wife (17) Daughters daughter (18) Daughters daughters husband
(19) Brother (including step-brother) (20) Brothers wife (21) Sister (including step-sister) (22) Sisters husband.
It is obvious that only a living i.e. natural person can be relative of other. Thus, a company, partnership firm,
body corporate, HUF, trust cannot be relative of other.
Valuation when sale is through related person: Where whole or part of the excisable goods are sold by the as-
sessee to or through a person who is related in the manner specified in any of the sub-clauses (ii), (iii) or (iv) of
clause (b) of sub-section (3) of section 4 of the Act, the value of such goods shall be the normal transaction
value at which the seare sold by the related person at the time of removal, to buyers (not being related person)
or where such goods are not sold to such buyers (being related person), who sells such goods in retail.
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.
[Rule9]
Valuation when sale is through inter-connected undertaking [Rule 10]: Where whole or part of the excisable
goods are sold by the assessee to or through an inter-connected undertaking, the value of such goods shall be
determined in the following manner, namely:-
(a) If the undertaking 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 Actor the buyer is a holding companyor subsidiary com-
pany of the assessee, then the value shall be determined in the manner prescribed in rule 9.
(b) In any other case, the value shall be determined as if they are not related persons for the purpose of sub-
section (1) of section 4.
For an example, X Ltd (Holding Company) sold goods to Y Ltd (Subsidiary Company) at ` 1,000. In turn
Y Ltd sold goods to Z Ltd (unrelated person) at ` 1,100. Here, the assessable value is ` 1,100 (exclusive of
Excise Duty). If Y Ltd instead of selling the goods to Z Ltd consumed it internally as captive consumption,
then the assessable value will be determined as per Rule 8.
Illustration: Asiatic Thermics Ltd. (ATL) was engaged in the manufacture of dry moulds and thermic weld-
ing equipments and was solely dependant on its Holding Company, India Thermit Corporation Ltd. (ITCL)
for supply orders and all the goods manufactured by ATL had to be sold to ITCL for further marketing by
them. Department view is that they are relatives.
Solution: The Supreme Court of India said that dry moulds manufactured by ATL were supplied to ITCL at
or about the same price as to the third party. Thus, there was no under-valuation. [Commr. of C. EX., New
Delhi v India Thermit Corporation Ltd. 2008 (226) ELT 164 (SC)]
(vii) Best Judgement Assessment: If assessment is not possible under any of the foregoing rules, assessment will be
done by best judgement. If the value of any excisable goods cannot be determined under the foregoing
rules, the value shall be determined using reasonable means consistent with the principles and general provi-
sions of these rules and sub-section (1) of section 4 of the Act. [Rule11]
As the Valuation Rules stand today, there is no provision for calculating Value in following cases - (a) If asses-
see makes sale partly to related person and partly to others. (b) Free samples. In these cases,valuation may be
done under rule 11.
For an example, when a manufacturer replaces spare parts free of cost during the warranty period there is no
separate rule to govern such transactions. Under such circumstances, Rule 11 helps us to navigate to Rule 8 and
the value can be adopted as cost of production plus 10%.
2.12 VALUATION IN CASE OF JOBWORK RULE 10A
Meaning of Job Worker As per Explanation to rule 10A, for the purposes of rule 10A, job worker means a person
engaged in manufacture or production of goods on behalf of a principal manufacturer, from any inputs or capital
goods supplied by the said principal manufacturer or by any other person authorised by him.
Example 32: A Trader supplies raw material of ` 1,150 to processor. Processor processes the raw material and supplies
finished product to the trader. The processor charges ` 450, which include ` 350 as processing expenses and ` 100 as
his (processors) profit. Transport cost for sending the raw material to the factory of processor is ` 50. Transport charges
for returning the finished product to the trader from the premises of the processor is ` 60. The finished product is sold by
the trader at ` 2,100 from his premises. He charges Vat separately in his invoice at applicable rates. The rate of duty is
12.5%. What is the AV, and what is total duty payable ?
Answer:
Assessable Value is to be calculated on basis of selling price of trader which is ` 2,100 (cum-duty). This price is to be
treated as inclusive of excise duty. Hence,assessable value will be (2,100x100) / 112.50 i.e. `1,866.67. Basic exciseduty
@ 12.5% will be ` 233.33.
Valuation in Case of Job Work
Excise duty will not be payable if raw material / semi-finished components are sent for jobwork under Cenvat provi-
sions or under notification No. 214/86-CE. However, in other cases, if jobwork results in manufacture of a product,
duty will become payable by jobworker. Rule10A of Valuation Rules, as inserted w.e.f. 1-4-2007 provides that in such
cases, excise duty will be payable on the basis of price at which the raw material supplier (termed as principal manu-
facturer in valuation rules) sales the goods. Rule 10A has been inserted in the Central Excise Valuation (Determination
of Price of Excisable Goods) Rules, 2000 to provide that where goods are manufactured by a job-worker on behalf
of a person (commonly known as principal manufacturer),the value for payment of excise duty would be based on
the sale value at which the principal manufacturer sells the goods, as against the present provision where the value is
taken as cost of raw material plus the job charges-Para 32.1 of DO letter F.No. 334/1 /2007-TRU dated 28-2 -2007.
(i) When the Goods are Sold by the Principal Manufacturer from the Premises of Job Worker: In a case where the
goods are sold by the principal manufacturer for delivery at the time of removal of goods from the factory of
job-worker, where the principal manufacturer and the buyer of the goods are not related and the price is the
sole consideration for the sale, the value of the excisable goods shall be the transaction value of the said goods
sold by the principal manufacturer;
(ii) When the Goods are Sold by the Principal Manufacturer from a Place Other than the Premises of Job Worker: In a
case where the goods are not sold by the principal manufacturer at the time of removal of goods from the fac-
tory of the job-worker, but are transferred to some other place from where the said goods are to be sold after
their clearance from the factory of job-worker and where the principal manufacturer and buyer of the goods
are not related and the price is the sole consideration for the sale, the value of the excisable goods 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 said goods from the
factory of job-worker;
(iii) When Valuation as per Rule 10A (i) or 10A (ii) of Valuation Rules is not Possible If valuation is not possible as per
rule 10A (i) or 10A (2) of Valuation Rules, value will be determined in accordance with the principles enunci-
ated in the Valuation Rules on a case-to-case basis [rule 10A (iii) of Valuation Rules]. For example, if the excis-
able goods manufactured on job-workare sold by the principal manufacturer where the price is not the sole
consideration for sale, the value of such goods shall be determined in terms of principles laid down in rule 6. If
goods are captively consumed by Principal Manufacturer, valuation can be on basis of rule 8.
Manufacturer not Liable for Duty Liability of Scrap / Waste Generated at end of Job Worker
Earlier rule 57F provided that waste and scrap arising during job work is required to be returned to raw material sup-
plier. New Cenvat Credit Rules make no such provision. Hence, in Rocket Engineering Corporation v. CCE 2006 (193)
ELT33 (CESTAT), it has been held that the scrap is not required to be returned to raw material supplier and the raw ma-
terial supplier is not required to pay any duty on the scrap, since Cenvat Credit Rules after 1-4-2000 do not make any
such provision view confirmed in CCE v. Rocket Engineering Corporation (2008) 223 ELT 347 (Bom HCDB) - followed
in Emco Ltd. v. CCE (2008) 223ELT613 (CESTAT). In Preetam Enterprises v. CCE 2004(173) ELT26 (CESTAT), it was held that
even in respect of inputs sent under Cenvat Credit Rules, jobworker is manufacturer of scrap and he is liable to pay
duty on scrap. Duty on scrap cannot be demanded from raw material supplier after 1-4- 2000 same view in Rocket
Engineering v. CCE 2006 (193) ELT33 (CESTAT) [Scrap is treated as a final product if mentioned in the Tariff. However, it
is final product of jobworker and not of raw material supplier].
In Silicon Cortec v. CCE (2004) 166 ELT 473 (CESTAT SMB), it has been held that was teand scrap is final product of
jobworker and he can clear the same on payment of duty. In Timken India v. CCE (2007) 215ELT182 (CESTAT), it was
held that duty liability on scrap is of the jobworker. If he is under SSI exemption, no duty is payable by him. In GKNS inter
Metals v. CCE 2007 (210) ELT222 (CESTAT), it was held that if was teand scarp is only in nature of floor sweeping, and if
there is invisible loss, no duty is required to be paid on such scrap.
2.13 SOME CRITICAL ISSUES IN CENTRAL EXCISE

2.12 VALUATION IN CASE OF JOBWORK RULE 10A 2.13 SOME CRITICAL ISSUES IN CENTRAL EXCISE
Software is Goods, But Unbranded Software is Service

In Tata Consultancy Services v. State of Andhra Pradesh (2005) 1 SCC 308 = 141 Tax man 132 = 271 ITR 401 = AIR 2005 SC
Central Excise
371 = 2004 AIR SCW 6583 = 137 STC 620 = 178 ELT 22 (SC 5 member Constitution bench), it has been held that canned
software (i.e. computer software packages sold off the shelf) like Oracle, Lotus, Master-Key etc. are goods. The copy-
right in the programme may remain with originator of programme, but the moment copies are made and marketed,
they become goods. It was held that test to determine whether a property is goods for purpose of sales tax, is not
whether the property is tangible or intangible or in-corporal. The test is whether the concerned item is capable of
abstraction, consumption and use, and whether it can be transmitted, transferred, delivered, stored, possessed etc.
Even intellectual property, once it is put on a media, whether it be inform of books or canvas (in case of painting) or
computer discs or cassettes and marketed would be come goods. In all such cases, intellectual property has been in
corporated on a media for purpose of transfer. The buyer is purchasing the intellectual property and not the media,
i.e. the paper or cassette or discsor CD. There is no distinction between branded and unbranded software. In both
cases, the software is capable of being abstracted, consumed and used. In both the cases, the software can be
transmitted, transferred, delivered, stores, possessed etc. Unbranded software when marketed / sold may be goods.
However, Supreme Court did not express any opinion because in case of unbranded software, other questions like sit-
uations of contract of sale and/or whether the contract is a service contract may arise. Hence, in case of unbranded
software, the issue is not yetfully settled. [SC up held decision of AP High Court reported in Tata Consultancy Services
v. State of AP (1997) 105 STC 421 (AP HC DB)].
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Tax man 135 = 3 STT 245 =145STC91= 282 ITR 273 (SC 3 member
bench), following extract from decision in case of Tata Consultancy Services v. State of Andhra Pradesh was quoted
with approval and adopted, A goods may be a tangible property or an intangible one. It would become goods
provided it has the attributes there of having regard to (a) its utility; (b) capable of being bought and sold and (c)
capable of being transferred, delivered, stored and possessed. If a software, whether customized or non-customized
satisfies these attributes, the same would be goods.
Earlier also, in Associated Cement Companies Ltd. v. CC 2001(4) SCC 593 = 2001 AIRSCW 559 =128 ELT 21=AIR 2001SC
862=124STC59 (SC 3 member bench), it was held that computer software is goods even if it is copyright able as intel-
lectual property.
In State Bank of India v. Municipal Corporation 1997 (3) MhLJ718 = AIR 1997 Bom 220, it was held that computer soft-
ware is appliance of computer. It was held that it is goods and octroi can belevied on full value and not on only
value of empty floppy. [In this case, it was held that octroi cannot be levied on license fee for duplicating the software
for distribution outside the corporation limits].
Excise duty on software: All software, except canned software i.e. software that can be sold off the shelf, is exempt
under notification No. 6/2006-CE dated 1-3-2006.
Meaning of software: Information Technology Software is defined in Supplementary Note of chapter 85 of Central
Excise Tariff (and also Customs Tariff) as follows-For the purpose of heading 8523, Information Technology Software
means any representation of instructions, data, sound or image, including source code and object code, recorded
in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an
automatic data processing machine.
In CCE v. Pentamedia Graphics (2006) 198 ELT 164 (SC), it was held that motion picture animation file recorded in
a machine readable format and capable of being manipulated by automatic data processing machine is software
referred in Padmini Polymers v. CCE (2007) 215 ELT 392(CESTAT), where it was held that multimedia application soft-
ware on CD ROM is exempt. In this case, Cook Books and games which were interactive were held as software. Ref-
erence was made to CBE&C circular No. 7/98 - Cus dated 10-2-1998 where it was clarified that encyclopedia, games,
books will be software if these satisfy the inter activity criterion.
The SC decision was also followed in Gayatri Impex v. CC (2007) 215 ELT 397 (CESTAT) and Adani Exports v. CCE (2007)
210 ELT 443(CESTAT). However, from the decision, it is not clear what was exactly imported. There is no requirement
that to qualify as software, it must work without any operating system preloaded on computer. Any programme which
requires anther programme like operating system will also be treated as software Contessa Commercial Co. P Ltd. v.
CC (2007) 208 ELT 299 (CESTAT). In this case,the importer had imported educational programmes and games.
Classification of encyclopedia, books on CD: In case of encyclopedia and books, there is hardly any interactivity,
except that search engine helps in locating particular information. Further, search engine, which can be termed as
software forms insignificant part of the whole goods.
Applying the criteria of essential character in case of mixture of goods, in my view, these cannot be termed as soft-
ware. These have to be classified as books.
Chapter 49, Note no 2 reads as follows, For the purpose of Chapter 49, the term printed also means reproduced by
means of a duplicating machine, produced under the control of an automatic data processing machine, embossed,
photographed, photocopies, thermo-copied or type-written. Hence, it can be argued that a book can be printed
on CD since it is produced under the control of an automatic data processing machine.
As per item Sr. No.26 of Notification No. 6 / 2006-CE dated 1-3-2006, CD-ROMs containing books of an educational
nature, journal, periodicals (magazines) or newspaper are fully exempt from excise duty. Thus, a book can be on CD
has been recognized in law.
Unbranded software is service
Though Supreme Court has held that tailor made software is also goods, Finance Bill, 2008 has imposed service tax
on tailor made i.e. unbranded software. Information technology software means any representation of instructions,
data, sound or image, including source code and object code, recorded in a machine readable form, and capable
of being manipulated or providing interactivity to a user, by means of a computer or an automatic data process-
ing machine or any other device or equipment. Any service provided or to be provided to any person, by any other
person in relation to information technology software for use in the course, or furtherance, of business or commerce,
including:
(i) development of information technology software,
(ii) study, analysis, design and programming of information technology software,
(iii) adaptation, upgradation, enhancement, implementation and other similar services related to information
technology software,
(iv) providing advice, consultancy and assistance on matters related to information technology software, including
conducting feasibility studies on implementation of a system, specifications for a database design, guidance
and assistance during the startup phase of a new system, specifications to secure a database, advice on pro-
prietary information technology software
(v) acquiring the right to use information technology software for commercial exploitation including right to repro-
duce, distribute and sell information technology software and right to use software components for the creation
of and inclusion in other information technology software products
(vi) acquiring the right to use information technology software supplied electronically, is a taxable service.
Departmental clarification: CBE & CTRU letter F. No. 334/1/2008-TRU dated 29-1-2008 clarifies as follows-
Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as normal soft-
ware and specific software. Normalised software is mass market product generally available in packaged form
off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as
customized software.
Packaged software sold off the shelf, being treated as goods, is leviable to excise duty. Number of IT services and IT
enabled services (ITeS) are already leviable to service tax under various taxable services:
i. Consulting engineers service-advice, consultancy or technical assistance in the discipline of hardware engi-
neering.
ii. Management or business consultants service - procurement and management of information technology re-
sources.
iii. Management, maintenance or repair service - maintenance of software, both packaged and customized and
hardware.
iv. Banking and other financial services - provision and transfer of information and data processing.
v. Business support service - various outsourced IT and IT enabled services.
vi. Business auxiliary service - services provided on behalf of the client such as call centers.
IT software services provided for use in business or commerce are covered under the scope of the proposed service.
Said services provided for use, other than in business or commerce, such as services provided to individuals for per-
sonal use, continue to be outside the scope of service tax levy. Service tax paid shall be available as input credit under
Cenvat credit Scheme.
Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neu-
Central Excise
tral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the
scope of the proposed service.
With the proposed levy on IT software services, information technology related services will get covered comprehen-
sively.
Duties on packaged/canned software [Notification No. 14/2011, dated 1-3-2011]:
Retail Sale Price (RSP) of packaged/canned software consist of two components namely
(i) Value of the software and
(ii) License (right to use)
The Central Board of Excise and Customs (CBE&C) issued Circular No. 15/2011 - Cus, dated 18.3.2011 to clarify the levy
of Excise, Service Tax and Customs duties on packaged/canned software.
Packaged/Canned Software
Affixation of RSP is mandatory Affixation of RSP is not mandatory

Assessable value based on MRP Assessable value based on Transaction
(Sec.4A of Central Excise Act, 1944) value (Sec.4 of Central Excise Act,1944)

Value of software and license will Value of Software Value of License
attract excise duty with an abatement of 15%

Pay Excise duty Pay Service Tax
Note: if the packaged / canned software imported then the additional customs duty (CVD) under section 3(1) of the
Customs Tariff Act, 1975 would be charged on value on the basis of MRP under section 4A of the Central Excise Act,
1944 provided affixation of RSP is mandatory. Otherwise additional customs duty (CVD) will be charged on the basis
of Sec. 4 of the Central Excise Act, 1944.
Plant and Machinery Assembled at Site
Plant and Machinery assembled and erected at site cannot be treated as goods for the purpose of Excise duty, if
it is not marketable and movable. [It may be noted that even if goods are held as excisable, they will be exempt if
manufactured within factory of production. [See case law Larsen & Toubro Ltd. v UOI (2009 (243) ELT 662 (Mumbai)].
The word goodsapplies to those which can be brought to market for being bought and sold, and it is implied that it
applies to such goods as are movable. Goods erected and installed in the premises and embedded to earth cease
to be goods and cannot be held to be excisable goods. - Quality Steel Tubes (P.) Ltd. v. CCE 75 ELT 17 (SC) = (1995) 2
SCC 372 = 6 RLT 131 = 1995 AIR SCW 11 - in this case, it was held that tube mill and welding head erected and installed
in the premises and embedded in the earth for manufacture of steel tubes and pipes are not goods. followed in Mit-
tal Works v. CCE (1997) 1 SCC 203 = 1996 (88) ELT 622 (SC) = 106 STC 201 - quoted with approval in Thermax Ltd. v. CCE
1998 (99) ELT 481 (SC) - same view in Triveni Engineering v. CCE AIR 2000 SC 2896 = 2000 AIR SCW 3144 = 40 RLT 1 = 120
ELT 273 (SC) * CCE v. Damodar Ropeways 2003(151) ELT 3 = 54 RLT 125 (SC 3 member bench).
In Municipal Corporation of Greater Bombay v. Indian Oil Corporation AIR 1991 SC 686 = 1991 Supp (2) SCC 18, it was
held that if the chattel is movable to another place in the same position (condition?), it is movable property. If it has
to be dismantled and re-erected at later place, it is attached to earth and is immovable property.
Assembly at site is not manufacture, if immovable product emerges: In Mittal Engg Works v. CCE
1996 (88) ELT 622 = 17 RLT 612 = 106 STC 201=(1997) 1 SCC 203, it was held that if an article has to be assembled,erected
and attached to the earth at site and if it is not capable of being sold as it is, without anything more, it is not goods.
Erection and installation of a plant is not excisable - followed in CCE v. Hyderabad Race Club 1996 (88) ELT 633 (SC),
where it was held that an article embedded in the earth was not goods and hence excise duty is not leviable fol-
lowed in TTG Industries v. CCE 2004 AIR SCW 3329 = 167 ELT 501 (SC) same view in case of storage cabinets, kitchen
counters etc. erected at site in Craft Interiors P Ltd. v. CCE 2006 (203) ELT 529 (SC) same view in respect of refrigera-
tion plant, air conditioning plant and caustic soda plant in CCE v. Virdi Brothers 2007 (207) ELT 321 (SC).
Capital Goods manufactured within factory of production are exempt even if manufactured by third party - It may be
noted that capital goods manufactured with in the factory and used within the factory are exempt from excise duty
vide notification No. 67/1995-CE dated 16.3.1995.
The exemption is available even when the capital goods are manufactured in the factory of production by third party.
[refer case law under Captive Consumption].
Assembly is manufacture only if machinery can be removed without dis-assembly: In Triveni Engineering v.CCE AIR
2000 SC 2896 = 2000 AIR SCW 3144 = 40 RLT 1 = 120 ELT 273 (SC), it was observed, The market ability test requires that
the goods as such should be in a position to be taken to market and sold. If they have to be separated, the test is not
satisfied. [Thus, if machine has to be dis-assembled for removal, it is not goods and duty cannot be levied].
If machine (generating set in this case) is only bolted on a frame and is capable of being shifted from that place, it is
capable of being sold. It is goods and not immovable property Mallur Siddeswara Spinning Mills v. CCE 2004 (166)
ELT 154 (SC).
Present legal position in respect of machinery erected at site: The latest judgment on the issue is of Triveni Engineering
judgment dated 8-8-2000, which has been practically accepted by Board vide its circular dated 15-1-2002. Hence,
the present legal provision is, as decided in Triveni Engineering, i.e. The market ability test requires that the goods as
such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied.
Thus, if machinery has to be dismantled before removal, it will not be goods. Following is also clear (a) Duty cannot
be levied on immovable property (b) If plant is so embedded to earth that it is not possible to move it without disman-
tling, no duty can be levied (c) If machinery is superficially attached to earth for operational efficiency, and can be
easily removed without dismantling, duty is leviable (d) Turnkey projects are not dutiable, but individual component /
machinery will be dutiable, if marketable.
Article can be goods if marketable before erection - An article will be liable to duty if its manufacture is complete
before it is fastened to earth. Similarly, if machinery is in marketable condition at the time of removal from factory of
manufacture, duty will be leviable, even if subsequently, it is to be fastened to earth.
Dutiability of Steel and Concrete Structures
Following are covered in iron and steel structure as defined in tariff heading 7308 (i) big structures like bridges, trans-
mission towers, and lattice masts, lock-gates, roofs etc. of iron and steel, (ii) parts of structures e.g. doors, windows and
their frames, shutters, balustrades, pillars and columns etc. of iron and steel, (iii) Plates, rods, angles, shapes, sections,
tubes and the like prepared for use in structures of iron and steel.
In Mahindra & Mahindra Ltd. v. CCE 2005 (190) ELT 301 (CESTAT 3 member LB), it has been held as follows
(i) Immovable iron and steel structures are not goods.
(ii) Structures and parts mentioned in parenthesis of 7308 like bridges, lock-gates, towers, trusses, columns frames
etc., in their movable state will be subject to excise duty, even if latter they get permanently fixed in the struc-
tures. (iii) Plates, rods, angles, sections, tubes and the like, prepared for use in the structures will also be excisable
goods subject to duty in their pre-assembledor disassembled state.
Fabrication of steel structurals like columns, crane, grinders, trusses amounts to manufacture - R S Avtar Singh v. CCE
(2007) 213 ELT 105 (CESTAT).
Structure for pre-fabricated building is dutiable Steel structure for prefabricated building is dutiable. Mittal Pipe Mfg.
Co . v. CCE 2002 (146) ELT 624 (CEGAT).
Fabrication of steel structure at site is exempt: As per Sr. No. 64 of notification No. 3/2005 - CE dated 24- 2-2005, (earlier
it was in tariff entry 7308.50), structures fabricated at site of work for use in construction at site are exempt from duty.
In Delhi Tourism v. CCE 1999 (114) ELT 421 (CEGAT), it was held that the term site should be given wider meaning and
Central Excise
not narrow meaning. Even if structure is cast at different place and brought to site of construction, it will be eligible for
exemption.
with Blank Duty Rate in Central Excise Tariff are Excisable Goods
Some goods are mentioned in Central Excise Tariff but column of rate of duty is blank (e.g. live animals in Chapter 1,
Electrical Energy in chapter 27, Newspaper and maps in Chapter 49).
As per additional note No. 1(c) to Central Excise Tariff, tariff item means description of goods in the list of tariff provi-
sions accompanying either eight-digit number and the rate of duty or eight-digit number with blank in the columns
of the rate of duty. Hence, goods where duty rate is blank is excisable goods para 22 of Geetanjali Woolens v. CCE
(2007) 218 ELT 152 (CESTAT) [Interestingly, in case of Customs Tariff, the note 1(c) does not make mention of blank
rate in the column of rate of duty].
However, in CCE v. Solaris Chemtech (2007) 9 STT 412 = 214 ELT 481 (SC), it is observed that electricity is not an excisable
item. In excise tariff, rate is blank in items like rice, wheat, soyabean, cotton seed etc. These are produced. In excise
tariff, rate is blank in items like rice, wheat, soyabean, cotton seed etc. These are produced.
Goods mentioned as free in Customs Tariff - In Associated Cement Companies Ltd. v. CC 2001 AIR SCW 559 = AIR
2001 SC 862 = (2001) 4 SCC 593 = 128 ELT 18 = 124 STC 59 = (SC 3 member bench), it was held that if duty rate speci-
fied in Customs Tariff Actis FREE (i.e. no duty is payable), no duty is payable on such goods and hence these are not
dutiable goods. [In Central Excise Tariff, the duty rate indicated is Nil. Hence, these are excisable goods].
Manufacture Other Aspects
Cutting of jumbo rolls of typewriter to make ribbon of standard length and winding on spool and blister packed - In
Kores India v. CCE (2003) 152 ELT 395 (CEGAT), it was held that conversion of jumbo reels of ribbons into spool form to
suit particular model and make of typewriting / telex machine is manufacture as new and distinct product emerges
view upheld in Kores India v. CCE (2005) 1 SCC 385 = 174 ELT 7 (SC) followed in CCE v. Sohum Industries Ltd .2006
(203) ELT 493 (CESTAT).
This decision was discussed in Anil Dang v. CCE (2007) 213 ELT 29 (CESTAT 3 member bench). It was held that this was
no mere cutting and slitting but the roll was spooled on metal spools, plaster packed and sealed with aluminium foils.
Hence, this decision will not apply where only slitting and cutting is involved.
Betel Nut to supari powder is not manufacture: Crushing betel nuts into smaller pieces and sweetening them does not
result in a distinct product, as betel nut remains a betel nut Crane Betel Nut Powder Works v. CCE 2007 (210) ELT
171 = 6 VST 532 (SC) decision of Tribunal in CCE v. Crane Betel Nut Powder Works 2005 (187) ELT 106 (CESTAT) is now
not valid.
Upgradation of computer system is not manufacture: Upgradation of computer system by increasing its storage /
processing capacity by increasing hard disk capacity, RAM or changing processor chip is not manufacture as new
goods with different name, character and use do not come into existence. - CBE & C circular No. 454/20/99 - CX
dated 12-4-1999 view confirmed in Maxim Information Tech v. CCE 2005 (184) ELT 78 (CESTAT) * CCS Infotech v. CCE
(2007) 216 ELT 107 (CESTAT).
Classification of Goods
Classification of parachute coconut oil: In Amardeo Plastics Industries v. CCE (2007) 210 ELT 360 (CESTAT 2 v. 1 order),
on the basis of chapter notes, it was held that parachute coconut oilis vegetable oil under chapter 15 and not
preparation for use on the hair, since the marking on package did not say that it is for such specialized use, though
advertisements did indicate so.
However, in Shalimar Chemical Works v. CST (2008) 12 VST 485 (WBTT), it has been held that except in a few Southern
States, coconut oil is not treated as edible oil for use of daily cooking. In West Bengal, considering consumption pat-
tern, coconut oil cannot be treated as edible oil. It has to be treated as hair oil.
Plastic name plate: Plastic name plate for motor vehicle is to be classified as accessory of motor vehicle in chapter
87 and not other articles of plastic in chapter 39, since name plate is not specified in any heading in chapter 39
Pragati Silicons P Ltd. v. CCE (2007) 8 VST 705 = 211 ELT 534 (SC).
Meaning of set of articles: Distinction between laptop and desktop Set of article should consist of more than one
item, each complementing the work of an other and retaining their individual identity all the time CC v. Acer India
P Ltd. (2007) 218 ELT 17 (SC). In this case, it was held that a desktop computer is a combination of CPU with monitor,
mouse and keyboard as a set. A desktop computer does not lose individual identities of CPU, monitor, mouse and
keyboard. Not only they are marketable as separate items but are also used separately. On the other hand, a laptop
(note book computer) comes in an integrated and inseparable form. It is a combination of CPU, monitor, mouse and
keyboard. A laptop cannot be said to be set of CPU with monitor mouse and keyboard confirming Tribunal deci-
sionin CC v. Acer India P Ltd . (2007) 208 ELT 132 (CESTAT).
Software/records/tapes supplied along with equipment Software imports are exempt from customs duty. Earlier,
Customs and Central Excise Tariff had a note No. 6 which stated that software when presented with the apparatus
for which it was intended will be classifiable as software. This note has been deleted w.e.f. 1-1-2007. Hence, software
embedded or pre-loaded in machine is to be classified along with the machine. This will also be case when software
is brought separately, but as a set. If tangible software e.g. operating software or application software loaded on
disk, floppy, CD-ROM etc. is imported, it will be classifiable as software under heading 8523 CC (Import), Mumbai
PN 39/2007 dated 3-12-2007. In CC v. Hewlett Packard India (Sales) P Ltd. (2007) 215 ELT 484 (SC), it was held that
pre-loaded software in laptop forms integral part of the laptop. Without operating system like windows, the laptop
cannot work. Hence, the laptop along with software has to be classified as laptop and values as one unit. Software
pre-loaded cannot be classified separately as software (In this case, the importer wanted to classify hard disk along
with software as software and refused to give value of software even when called upon to do so. Hence, the deci-
sion has to be seen from peculiar facts of the case).
Principles of classification irrelevant for valuation: Classification decides the applicable rate. It is followed by valuation
i.e. value at which rate is to be applied. The concept of classification is therefore different from the concept of valu-
ation. Section and chapter notes in Tariff and interpretative rules do not provide guidelines for valuation - CCE v. Frick
India Ltd . (2007) 216 ELT 497 (SC).
2.14 ASSESSABLE VALUE UNDER SECTION 4
Factory can be Place of Removal even if Insurance taken by Assessee as Service to Customers In Blue Star Ltd. v. CCE
(2008) 224 ELT 258 (CESTAT), transport was arranged by assessee since individual customer cannot arrange for trans-
portation. Insurance was taken for safe transport of goods, as a service to customers. It was held that insurance cover
cannot be taken as criteria for determining ownership of goods. It was held that there was sale at factory gate and
freight is not includible in assessable value.
Charges if Assured Quantity not Purchased, are not Part of Excise Assessable Value
In Jindal Praxair Oxygen v. CCE (2007) 208 ELT 181 (CESTAT), MTOP charges were payable to assessee if buyer fails
to purchase minimum quantity assured, as in such cases, assessee is not in position to operate his plant at optimum
capacity. It was held that these are not includible in assessable value - followed in CCE v. Praxair India (2008) 223 ELT
596 (CESTAT).
Place of Removal in Case of Exports
In case of exports, the place of removal is port where export documents are presented to customs office Kuntal
Granites v. CCE (2007) 215 ELT 515 = 2007 TIOL 930 (CESTAT) quoted and followed in Rajasthan Spinning & Weaving
Mills v. CCE (2007) 8 STR 575 (CESTAT).
Cash Discount Admissible Whether Availed o rNot
In CCE v. Arvind Mills Ltd. (2006) 204 ELT 570 (CESTAT 3 member bench), it has been very clearly held that cash discount
and finance cost are admissible under new section 4 of CEA also. Differential price represents interest for delayed
payment. Cost of finance and cash discount whether availed or not are to be granted as abatement even after 1-7-
2000.
Self Insurance Charges Addible
In Gujarat Borosil v. CCE (2007) 217 ELT 367 (CESTAT), assessee was collecting 7% amount was insurance charges.
Actual insurance premium paid was much less. The charge was to cover breakage of goods in transit. It was held that
this cannot be permitted as deduction since assessee was not an insurance company.
Valuation of Free Samples
CBE & C, vide circular No. 813/10/2005 -CX dated 25-4-2005 has clarified that in case of samples distributed free,
valuation should be done on basis of rule 4 i.e. value of similar goods. The revised circular dated 25-4-2005 stating that
valuation of samples should be on basis of rule 4, has been upheld as valid in Indian Drugs Manufacturers Assn v. UOI
(2008) 222 ELT 22 (Bom HC DB).
Central Excise
Valuation in Case of Stock Transfer

In case of stock transfer, value to be adopted is the price prevailing in depot at the time of clearance from factory.
Once goods are cleared from factory to depot on payment of duty (on basis of price prevailing at the time of removal
from factory), it is not necessary to chase the goods and see at what price the goods were subsequently sold - CCE
v. Carborandum Universal Ltd. (2008) 224 ELT 290 (CESTAT).
Sale to Parent Company both as Spares as well as for Maintenance
In CCE v. Aquamall Water Solutions (2008) 223 ELT 385 (CESTAT), assessee sold it swater purifying equipment to its par-
ent company (Eureka Forbes Ltd.). Assessee also supplied parts of the water purifying equipment to its parent com-
pany, both for sale as spares and also for maintenance purposes. In case of spares for sale, duty was paid on the basis
of selling price of spares of parent company. In case of parts supplied for use in maintenance, duty was paid on the
basis of cost of production plus 10%. Department contended that in case of parts supplied for maintenance also, duty
should be paid on basis of selling price of parent company. However, Tribunal held that when parts are not sold by
parent company, duty should be paid under rule 8 on basis of cost of production plus 10% since no other specific rule
to cover this (The decision is based on a Board circular which has since been withdrawn).
Part sale and part consumption in Ispat Industries Ltd. v. CCE 2006 (201) ELT 65 (CESTAT), it was held that if goods are
partially sold to unrelated buyers and partially supplied to sister concern, valuation should be under rule 4 i.e. on the
basis of price at which goods are sold to other independent buyers relying on Aquamall Water Solutions v. CCE 2003
(153) ELT 428 (CEGAT). - view upheld in Ispat Industries v.CCE 2007 (209) ELT 185 (CESTAT 3 member bench).
2.15 VALUE BASED ON RETAIL SALE PRICE
Section 4A of CEA empowers Central Government to specify goods on which duty will be payable based on retail
sale price.
The provisions for valuation on MRP basis are as follows :
(a) The goods should be covered under provisions of Legal Metrology Act, 2009, w.e.f. 1-8-2011 (earlier Standards
of Weights and Measures Act, 1976) [section 4A(1)].
(b) Central Government has to issue a notification in Official Gazette specifying the commodities to which the pro-
vision is applicable and the abatements permissible. Central Government can permit reasonable abatement
(deductions) from the retail sale price [section 4A(2)].
(c) While allowing such abatement, Central Government shall take into account excise duty, sales tax and other
taxes payable on the goods [section 4A(3)].
(d) The retail sale price should be the maximum price at which excisable goods in packaged forms are sold to ul-
timate consumer. It includes all taxes, freight, transport charges, commission payable to dealers and all charges
towards advertisement, delivery, packing, forwarding charges etc. If under certain law, MRP is required to be
without taxes and duties, that price can be the retail sale price [Explanation 1 section 4A].
(e) If more than one retail sale price is printed on the same packing, the maximum of such retail price will be con-
sidered [Explanation 2(a) to section 4A]. If different MRP are printed on different packages for different are as,
each such price will be retail sale price for purpose of valuation [Explanation 2(c) to section 4A].
(f) Removing excisable goods without MRP or wrong MRP or tampering, altering or removing MRP declared on a
package is an offence and goods are liable to confiscation [section 4A (4)] If price is altered, such increased
price will be the retail sale price for purpose of valuation [Explanation 2(b) to section 4A].
Say, Government had issued a notification to the effect that excise duty on cosmetics and toilet preparations will be
payable on the basis of MRP printed on retail carton after allowing abatement of 40%. In such case, if MRP printed on
carton is ` 200 and if the duty on cosmetics & toilet preparations is12.5%, the duty @ 12.5% will be payable on ` 120
(i.e. after allowing 40% abatement on MRP of ` 200). Thus duty payable per pack will be `15.
MRP provisions are overriding provisions Section 4A (2) of Central Excise Act uses the words notwithstanding sec-
tion 4A. Hence, when section 4A is applicable, provisions of section 4 for determination of assessable value are not
applicable.
Provision of MRP based valuation are applicable only when product is statutorily covered both under Weights and
Measures Act and notification issued under CEA - reiterated in Swan Sweets v. CCE 2006 (198) ELT 565 (CESTAT).
Same product sold in whole sale and under MRP - CBE&C has clarified in circular No. 737/53/2003 - CX dated 19-8-2003
that when goods covered u/s 4A are supplied in bulk to large buyer (and not in retail), valuation is required to be done
u/s 4. Provisions of section 4A apply only where manufacturer is legally obliged to print MRP on the packages of goods.
Thus, there can be instances where the same commodity would be partly assessed on basis of section 4A and partly
on basis of transaction value u/s 4.
Products covered under the MRP valuation scheme - So far, 96 articles have been covered under this scheme [Notifi-
cation No. 2/2006- CE (NT) dated1-3-2006.
Non-applicability of provisions of MRP - If an article is not covered under provisions in respect of marking MRP, provi-
sions of duty payable on basis of MRP do not apply and in those cases, duty will be payable on a dvalorem basis as
per section 4. As per rules 2A and 34 of Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (as
a mended w.e.f.14-1-2007), the provisions of marking MRP are not applicable to following commodities Packages
above 25Kg (50Kg in case of cement)* Packaged commodities for industrial or institutional consumers * Small pack-
ages of 10gm/10 ml or less *Fast food items* Scheduled drugs and formulations *Agricultural farm produce* Bid is for
retail sale* Domestic LPG gas.
Deemed Manufacture of products covered under MRP - In respect of goods specified in third schedule to Central Ex-
cise Act, any process which involves packing or repacking of such goods in aunit container or labelling or re-labelling
of containers including the declaration or alteration of retail sale price on the container or adoption of anyother treat-
ment on the goods to render the product marketable to consumer will be manufacture. [section 2(f)(iii) effective
from 14-5-2003].
2.16 MRP BASED VALUATION
Product partly sold in retail and partly in Wholesale

CBE&C has further clarified in circular No. 737/53/2003 - CX dated 19-8-2003 that when goods covered u/s 4A are sup-
plied in bulk to large buyer (and not in retail), valuation is required to be done u/s 4. Provisions of section 4A apply only
where manufacturer is legally obliged to print MRP on the packages of goods. Thus, there can be instances where the
same commodity would be partly assessed on basis of section 4A and partly on basis of transaction value u/s 4 view
noted and approved in Jayanti Food Processing v. CCE (2007) 10 STT 375 = 215 ELT 327 (SC).
Valuation on MRP basis even if package is not really intended for Retail Sale
In Jayanti Food Processing v. CCE (2007) 10 STT 375 = 215 ELT 327 (SC), it was observed that nature if sale is not the
relevant factor for application of section 4A but application would depend on five factors i.e. (i) goods should be ex-
cisable goods (ii) They should be such as are sold in the package (iii) There should be requirement of SWM Act or rules
or any other law to declare price of such goods relating to their retail price on package (iv) The Central Government
must have specified such goods by notification of Official gazette and (v) Valuation of such goods would be as per
the declared retail price on the package less the amount of abatement.
In ITEL Industries P Ltd. v. CCE 2004 (163) ELT 219 (CESTAT 2 v. 1 decision), telephone instruments were supplied to DOT/
MTNL in bulk with MRP duly marked. DOT/MTNL lent these to subscribers retaining their ownership. It was held that
since goods were packed, the valuation is required to be done u/s 4A on basis of MRP, even if goods were not sold
to customers followed in BPL Telecom v. CCE (2004) 168 ELT 251 = 60 RLT 664 (CESTAT), where it was held that there is
no requirement under Packaged Commodities Rules that goods covered by those provisions must be actually sold in
retail view confirmed in Jayanti Food Processing v. CCE (2007) 10 STT 375 = 215 ELT 327 (SC).
This was followed in CCE v. Liberty Shoes (2007) 216 ELT 692 (CESTAT), where it was held that MRP provisions apply even
when sale is in bulk to institutional buyers.
Provision does not apply to Ice Cream sold in bulk
In Monsanto Manufacturers v. CCE 2006 (193) ELT 495 (CESTAT), it was held that if ice cream is sold in bulk to hotels and
not intended for retail sale, valuation will be as per section 4 and not on MRP basis view confirmed in Jayanti Food
Processing v.CCE (2007)10 STT 375 = 215 ELT 327 (SC).
Two Items in Combi-Pack with One Item Free
In Icon House hold Products v. CCE (2007) 216 ELT 579 (CESTAT), assessee was selling Mosquito Repellant Liquid (MRL)
and Liquid Vapourising Device (LVD) as combi-pack. MRP was contained only on plastic container of MRLand not on
LVD. It was held that this MRP will be taken for valuation of multipack. LVD supplied free in the multipack is not liable
Central Excise
to assessment separately relying on Himalaya Drug Company v. CCE (2006) 195 ELT 109 (CESTAT) - same view in CCE
v. J L Morison (2008) 223 ELT 655 (CESTAT SMB).
No MRP on Free Gifts/Samples, Hence Valuationas Per Section 4
In Jayanti Food Processing v. CCE (2007) 10 STT 375 = 215 ELT 327 (SC), assessee as selling Kitkat chocolates to Pepsi.
These were distributed as free gift along with Pepsi bottle as amarketing strategy. It was held that even if product
(chocolate) is covered under MRP provisions, since the product was not to be sold in retail, MRP is not required. Hence,
valuation should be on basis of section 4.
Provision when more than One Retail Price Declared
MRP printed on package is required to be inclusive of taxes. Rate of taxes vary from State to State. Hence, in some
cases, a manufacturer may print different prices for different States. In some cases, manufacturer earmarks different
packages for different are as and marks different prices for different are as.
If a package bears more than one retail sale price, maximum out of these will be deemed to be retail price for pur-
pose of section 4A [Explanation 2(a) to section 4A (4)]. If retail price declared on the package at the time of removal
is subsequently altered to increase the price, such increased retail price will be retail price for purpose of section 4A
[Explanation 2(b) to section 4A(4)]. Where different retail sale prices are declared on different packages, each such
retail price shall be the retail sale price for purposes of valuation of excisable goods intended to be sold in area to
which the retail price relates. [Explanation 2(c) to section 4A (4)]. Thus, if different prices are printed on different pack-
ages, each such price will beretail price.
There is no stipulation in the Act that all packages should bear same MRP. Different MRPs for different buyers can be
fixed. Even if MRP is different for each packet, such MRP is required to be adopted for assessable value CCE v. Bell
Granito Ceramics (209) 235 ELT 171 (CESTAT).
Provisions and Requirements of the Standards of Weights and Measures (Packaged Commodity) Rules, 1977 (SWM-
Rules)
The relevant provisions and requirements of the SWM Rules, are as follows
(1) Only Packages Intended for Retail Sale Covered: The requirement to declare retail sale price of the packages
is applicable only in respect of packages intended for retail sale.
(2) Goods on which RSP need not be Declared: There is no requirement to declare RSP on-
(a) Packages of commodities containing quantity of more than 25 Kg or 25 Liters (excluding cement and
fertilizer sold in bags up to 50 Kg.);
(b) Packaged commodities meant for industrial consumers or institutional consumers;
Industrial consumer means those consumers who buy packaged commodities directly from the manu-
factures / packers for using the product in their industry for production etc.;
Institutional consumers means those consumers who buy packaged commodities directly from the
manufacturers / packers for service industry like transportation including airways, railways, hotel or any
other similar service industry;
(c) Any domestic LPG cylinders of which the price is covered under the Administered Price Machanism of
the Government;
(d) goods meant for export;
(e) goods supplied free as marketing strategy (e.g. physicians sample);
(f) any package containing fast food item packed by restaurant/ hotel and the like;
(g) any package containing a commodity if it contains schedule formulation and non-schedule formulations
covered under the Drugs (price Control) order, 1995;
(h) Wholesale packages;
(i) agriculture farm produces in packages of above 50Kg.
(3) Certain Definitions:
(a) retail packages means the packages intended for retail sale to the ultimate consumer for consumption
of the commodity contained there in and includes the imported packages. The expression ultimate
consumer doesnt include industrial or institutional consumers.
(b) retail sale means the sale, distribution or delivery of a commodity through retail sale agencies or other
instrumentalities for consumption by an individual or a group of individual or any other consumer.
(c) wholesale package means a package containing-
(i) A number of retail packages, where whole sale package is intended for sale, distribution or delivery
to an intermediary and is not intended for sale direct to a single consumer ; or
(ii) A commodity sold to an intermediary in bulk to enable such intermediary to sell, distribute or delivery
such commodity to the consumer in smaller quantities; or
(iii) Packages containing ten or more than ten retail packages provided that there tail packages are
labeled as required under the rules.
Example 33: 1,500 pieces of a product A were manufactured during the financial year. Its list price (i.e. retail price)
is ` 250 per piece, exclusive of taxes. The manufacturer offers 20% discount to wholesalers on the list price. During the
year, 840 pieces were sold in wholesale, 510 pieces were sold in retail, 35 pieces were distributed as free samples. Bal-
ance quantity of 115 pieces was in stock at the end of the year. The rate of duty is 12.5%. What is the total duty paid
during the financial year?
Assume that the manufacture is not eligible for SSI concession.
Answer:
The total selling price is as follows
Qty Price Total(`)

510 250 1,27,500
840 200 1,68,000
35 200 7,000
Total 3,02,500
Duty payable is 12.5% of ` 3,02,500 i.e. ` 37,812.50.

Note (a) Since 115 pieces were in stock at year end, no duty will be payable. Duty will be payable only when goods
are cleared from factory. (b) In case of samples, as per rule 4 of Valuation Rules, value nearest to the time of removal,
subject to reasonable adjustments is required to be taken. However, since prices are varying, value nearest to the time
of removal may not be as certainable and will not be acceptable for valuation as the prices are changing. In such
case, recourse will be taken to rule 11 of Valuation Rules, i.e. best judgment assessment. We can take recourse to rule
7 and 9 where principle of normal transaction value is accepted, when prices are varying.
As per rule 2(b) of Valuation Rules,normal transaction value means the transaction value at which the greatest ag-
gregate quantity of goods is sold. Since greatest quantity of 840 pieces are sold at ` 200, that will be normal transac-
tion value, which can be taken for valuation of free samples.
Example 34: A manufacturer has appointed brokers for obtaining orders from wholesalers. The brokers procure orders
for which they get brokerage of 5% on selling price. Manufacturer sells goods to buyers at ` 250 per piece. The price
is inclusive of State Vatand Central Excise Duty. State Vatrate is 4% and excise duty rate is 12.5%. What is the AV, and
what is duty payable per piece?
Answer:
Assume that Assessable Value = x. No deduction is available in respect of brokerage paid to third parties from Assess-
able Value.
Since Excise duty is 12.5%, State Vat rate is 4%, price including excise will be 1.125x.
State Vat @ 4% of 1.125 x is 0.045 x. Hence, price inclusive of sales tax and excise duty will be 1.17 x.
Now, 1.17 x = ` 250.00
Hence, X= ` 213.68
Central Excise
Check the answer as follows

Assessable Value = ` 213.68
Add duty @ 12.5% of ` 213.68 = ` 26.71
Add: State Vat @ 4% on ` 240.39 (213.68+26.71) = ` 9.61
Total Price (Including duty and tax)
(213.68+26.71+9.61) = ` 250.00
Example 35: Find Assessable Value and duty payable. The product is not covered under section 4A. Maximum Re-
tail Trade Price: ` 1,100 per unit, State Vat, Octroi and other Local Taxes: 10% of net price, Cash Discount: 2%, Trade
Discount: 8%, Primary and Secondary packing cost included in the above MRP: ` 100, Excise duty rate: 12.5% ad va-
lorem.
Answer:
Cash discount ` 22 (2% of `1,100) and trade discount ` 88 [8% of ` 1,100] are available as deduction. Packing cost
is not allowable as deduction. Hence, price of excise purposes is ` 990. [`1,1002288]. Now, if x is the assessable
value, price inclusive of excise duty is 1.125 x. State Vat and local taxes @ 10% of 1.125 x will be 0.11125 x and price
including Excise duty is inclusive of excise duty and sales tax will be 1.2375x.
Now, 1 .2375 x = ` 990.00
Hence, x = ` 800.00
Excise Duty @ 12.5% of ` 800.00 = ` 100.00
Check the answer as follows: Assessable Value = ` 800.00
Add: Excise duty @ 12.5% of ` 800.00 = ` 100.00
Add State Vat @ 10% on ` 900.00 = ` 90.00
(800+100)
Total Price (After allowable deductions) = ` 990
Example 36: A manufacturer has agreed to supply a machinery on following terms and conditions: (a) Price of ma-
chinery: ` 3,40,000 (net of taxes and duties), (b) Machinerye rection expenses: ` 26,000, (c) Packing (normally done
by him for all machinery): ` 4,000, (d) Design and drawing charges relating to manufacture of machinery: 30,000 or
(Net of taxes and duties), (e) Central Sales Tax @2%, (f) Central Excise Duty @12.5%, (g) Cash discount of ` 5,000 will
be offered if full payment is received before dispatch of goods, (h) The buyer made all payment before delivery, (i)
The manufacturer incurred cost of ` 1,200 in loading the machinery in the truck in his factory. These are not charged
separately to buyer. Find the Assessable Value and the duty payable.
Answer:
Erection expenses are not includible in AV.Cash discount is allowable as deduction. Duty is not payable on optional
bought out accessories supplied along with the machinery. The cost of ` 1,200 is already included in the selling price
of machinery (as it is not charged separately) and hence is not to be added again. Hence, AV is ` 3,69,000 [` 3,40,000
+ ` 4,000 + ` 30,000 ` 5,000]. Duty @12.5% will be ` 46,125.
Example 37: M/s. XYZ Ltd., sold machinery to Mr. Kapoor at a price of ` 5 lakhs on 15th June, 2015 and the same was
removed from the factory at Kolkata. The rate of excise duty applicable is 12.5% on the date of removal. Mr. Kapoor
refused to take delivery of the machine when it reached his destination. In the mean time, M/x. XYZ Ltd. increased the
prices of the similar type of machinery to ` 6 lakhs with effect from16th June, 2015. The machinery as refused by Mr.
Kapoor has been sold on 20th June 2015 to Mr. Lal at the revised price of ` 6 lakhs. The excise duty including Education
Cess is 12.5% applicable with effect from10th June, 2015.
Explain the following with reasons:
(i) What is the value to be taken as assessable value?
(ii) What is the rate of excise duty applicable and duty payable on above transaction?
(iii) The Central Excise Officer is demanding duty on the price of ` 6 lakhs at the time of sale to Mr. L. is he right in his
approach?
(iv) Does cost of production have any bearing on the assessable value?
Answer:
(i) The price prevailing at the time of removal from factory i.e. ` 5 lacs on15th June 2015 is the assessable value.
(ii) The applicable rate of duty is @12.5% and duty amount is ` 62,500 (i.e. ` 5 lacs x 12.5/100).
(iii) The Central Excise Officer is not right in his approach.
(iv) Cost of production has no bearing with assessable value in present case. Central Excise valuation can be below
manufacturing cost. If price is the sole consideration and dealing between seller and buyer are arms length,
assessable value will be decided on the basis of selling price, even if it is below manufacturing cost. So cost of
manufacturing will not change the assessable value.
Example 38: ABC Ltd of Kanpur agreed to sell an electronic motor to DEF Ltd of New Delh if or ` 15,000.00 on ex-factory
basis. Other particulars are:
(i) Transportation and transit insurance were arranged by ABC Ltd. This was at the request of DEF Ltd and amount-
ed to for ` 1,250 and ` 1,500 respectively which were charged separately. Actual transportation charges
amounted to ` 1,000 only.
(ii) A discount of ` 1,000 was given to DEF Ltd. on the agreed price on payment of an advance of ` 3,500 with the
order. (Ignore notional interest on advance).
(iii) Interest of ` 800 was charged from DEF Ltd. as it failed to make the payment with in 30 days.
(iv) Packing charges of the motor amount to ` 1300.
(v) The expenditure incurred by ABC Ltd. towards free after sale service during warranty period comes out to be
` 500 per motor.
(vi) Dharmada charges of ` 200 were recovered from DEF Ltd.
(vii) ABC Ltd. sold a lubricant worth ` 250 along with the motor to the interested customers. Lubricant which was
purchased from the market by ABC Ltd. at ` 200 ensured durability and high efficiency of the motor. DEF Ltd.
opted for the said lubricant.
Compute the AssessableValue.
Answer:
Calculation of Assessable Value `
Offered Price to DEF = 14,000
ADD: Discount = 1,000
ADD: Packing charges = 1,300
ADD: Free after sale service = 500
ADD: Dharmada charges = 200
Assessable Value = 17,000
Example 39: How will the assessable value under the subject transaction be determined under section 4 of the Central
Excise Act, 1944. Give reasons with suitable assumptions where necessary.
Contracted sale price for delivery at buyers premises ` 10,00,000. The contracted sale price includes the following
elements of cost:
(I) Costof drawings and designs ` 3,000
(II) Costof primary packing ` 3,500
(III) Cost of packing at buyers request for safety during transport ` 7,500
(IV) Exciseduty ` 2,11,200
(V) VAT (Sales tax) ` 37,000
(VI) Octroi ` 9,500
Central Excise
(VII) Freight and insurance charges paid from factory to place of removal ` 20,000
(VIII) Actual freight and insurance from place of removal to buyers premises ` 42,300
Answer:
Sale price ` 10,00,000
Less: Excise Duty ` 2,11,200
VAT ` 37,000
Octroi ` 9,500
Freight and insurance from Place of removal to buyers premises ` 42,300
3,00,000
AssessableValue ` 7,00,0000
Example 40: Determine the assessable value for purpose of excise duty under the Central Excise Act, 1944 in the fol-
lowing cases:
(i) An assessee sells his excisable goods for ` 1,12,360 per unit and does not charge any duty of excise in his invoice.
Subsequently it was found that the goods were not exempted from excise duty but were liable at12.5%.
(ii) Certain excisable goods were sold for ` 1,12,360 per unit and @ 12.5% is the rate of excise duty. Subsequently
it was found that the price cum duty was infact ` 1,40,000 per unit as the assessee had collected ` 40,124 per
unit separately.
(iii) The cumduty price per unit was ` 1,10,300 and the assessee had paid duty at 12.36%. subsequently it was found
that the rate of duty was 12.5% and the assesee had not collected anything over and above ` 1,10,300 per
unit.
Answer:
Statement showing Assessable Value for the Purpose of Excise Duty in each case : (As per CBE&CDO letter No.
334/1/2003- TRU dated 28.2.2003)
Sl.No. Particulars Value Workings
(`)
(i) Assessable value 99,876 ` 1,12,360 x 100/112.50 = ` 99,876
(ii) Assessable value 1,24,444 Cum-duty price ` 1,12,360 (12.5% duty inclusive). Hence,
assessable value is ` 99,876. Additional consideration re-
ceived subsequently of ` 40,124. Hence, Cum-duty price
is ` 1,40,000.
1,40,000 x 100/112.5 = ` 1,24,444
(iii) Assessablevalue 98,044 Cum-duty price ` 1,10,300 (excise duty included
@12.36%).
However, correct rate of duty is 12.5%. If no additional
consideration has been received, then ` 1,10,300 is it self
considered as inclusive of excise duty @12.5%.
1,10,300 x 100/112.5 = ` 98,044.
Maximum Retail Price (MRP)
Example 41: B Ltd manufactures two products namely, Eye Ointment and Skin Ointment. Skin Ointment is as pecified
product under section 4A of the Central Excise Act, 1944. The sale prices of the two products are ` 43 per unit and `
33 per unit respectively. The sale price of both the products included 12.5% excise duty as BED, education cess of 2%
and SAH of 1%. It also includes CST of 2%. Additional information is as follows:
Units cleared: Eye Ointment - 1,00,000 units, Skin Ointment 1,50,000 units. Deduction permissible under section 4A:
40%
Calculate the total excise duty liability of B Ltd for both the products.
Answer:
Eye Ointment:
Let us assume x as the assessable value
Assessable Value = x
Add: BED @12.5% = 0.125x
1.125x
Add: CST @ 2% = 0.0225x
Selling price = 1.1475x
Assessable value per unit ` 43 x 1/1.1475
=
` 37.47 per unit
Total Assessable Value = ` 37.47,000
Excise duty @12.5% on 1,00,000 units = ` 4,68,375 (i.e. ` 37.47 x 1,00,000 units)
Skin Ointment
Maximum Retail Price = ` 33
Less: Abatement @40% = ` (13)
Assessable Value (per unit) = ` 20
Total Assessable Value = ` 30,00,000 (i.e. ` 20 x 1,50,00 units)
Excise Duty @12.5% = ` 3,75,000
B Ltd liable to pay total excise duty = ` 8,43,375
Transaction Value with Valuation Rules
Example 42: Cost of production of a product X calculated as per Cost Accounting Standard is ` 350 per piece.
550 pieces of a product were manufactured. 120 pieces were sold at ` 700 per piece to Industrial Consumers. 70
pieces were sold to a Central Government department @ ` 690 per piece. 210 pieces were sold to wholesalers at `
720 per piece. 70 pieces were sold in retail @ ` 800 per piece. 20 pieces were given out as free samples. Out of the 70
pieces sold to Government department, 25 pieces were rejected, which were subsequently sold to other customers
@ ` 300 per piece, without bringing them in the factory. Balance pieces were in stock, out of which 25 pieces were so
damaged that they became unsaleable.
Note that all the prices are exclusive of excise and sales tax. The rate of duty on the product is 12.5% plus education
cess as applicable.
(a) What is the total duty payable?
(b) Advise Management about steps to be taken in respect of 25 pieces which were damaged in storage.
Answer:
(a) Calculation of duty payable on product X
Name of the buyer Number of pieces Rate per piece (`) Total (`)
Industrial Consumers 120 700 84,000
Central Government department 70 690 48,300
Wholesalers 210 720 1,51,200
Retailers 70 800 56,000
others (Free samples) (Rule 4) 20 720 14,400
AssessableValue 3,53,900
Total excise duty @12.5% (3,53,900 12.5%) ` 44,238

Central Excise
(b) As per Rule 21 of the Central Excise Rules, 2002, obtain there mission certificate from the central excise depart-
ment for the damaged units of 25 pieces.
Valuation Rules:
Example 43: Compute the assessable value and excise duty under the Central Excise Act, 1944 in the following case:
Production : 2,000 units on 1.7.2015
Quantity sold : 450 units @ ` 200 per unit
: 650 units @ ` 190 per unit
Samples clearances : 50 units
Balance in stock : 850 units
(at the end of factory day for 1-7-2015)
Assume that the rate per unit is exclusive of Central Excise duty. Basic Excise Duty @12.5%.
Answer:
Assessable value
Units Rate per unit (`) Total (`) Remarks

450 200 90,000
650 190 1,23,500
50 190 9,500 Samples are valued as per rule 4 read with rule 2(c) o
f C.Ex. Valuation
Rules, 2000
Total excise duty = ` 27,875 (i.e. ` 2,23,000 x 12.5%)

Example 44: A manufacturer having a factory at Mumbai has uniform price of ` 2,000 per unit (exclusive of taxes and
duties) for sale any where in India. During the financial year 2015-16, he made the following sales:
Particulars Quantity sold in units Cost of transportation (`)
Goods sold at factory in Mumbai 1,000 Nil
Goods sold from New Delhi 500 12,000
Goods sold from Chennai 600 48,000
Goods sold from Kolkata 900 30,000
Find assessable value per unit and total excise duty payable by the manufacturer. Excise duty @ 12.5%.
Answer:
(Rule 5 of valuation rule)
Selling price per unit = ` 2,000
Less: cost of equalized freight = ` 30
Assessable value per unit = ` 1,970
Total excise duty payable = ` 7,38,750 (3,000 units x ` 1,970 per unit x 12.5%)
Working note: (1)
Particulars Quantity sold in units Cost of transportation (`)

Goods sold at factory in Mumbai 1,000 Nil
Goods sold from New Delhi 500 12,000
Goods sold from Chennai 600 48,000
Goods sold from Kolkata 900 30,000
Total 3,000 90,000
(2) Cost of equalized freight = ` 30( `90,000/3,000 units)
(3) The aforesaid equalized freight has to be certified by the Cost Accountant / Chartered Accountant / Company
Secretary in practice.
Example 45: Compute the assessable value and amount of excise duty payable under the Central Excise Act, 1944
and rules made there-under from the following information:
Particulars No. of Priceat Factory Price at Depot Rate of Duty

units Per unit Per unit Advalorem
(i) Goods transferred from factory to depot on 8th 1,000 ` 200 ` 220 12.5%
August
(ii) Goods actually sold at depot on 18th August 950 ` 320 ` 350 8%
Answer:
(Rule 7 of valuation rules)
Amount (`)
Assessable Value 2,20,000 [i.e. 1,000 units ` 220]
Total Excise Duty 27,500 [i.e. ` 2,20,000 12.5/100]
Example 46: Name the Cost Accounting Standard which is to be used while calculating cost of production for valu-
ation for captive consumption under Central Excise. Is the standard mandatory? AS per that standard, which of the
following costs are includible / not includible in Cost of Production?
(i) Research and Development Cost
(ii) Interest on capital borrowed,
(iii) Lay-off wages to workmen
(iv) Packing cost.
Answer:
The Cost Accounting Standard 4 is required to be used while calculating cost of production for valuation for captive
consumption under Central Excise. As per circular issued by CBEC, cost of production is required to be calculated
as per CAS-4 issued by the Central Council Members of The Institute of Cost Accountants of India (ICAI). Hence, the
standard is mandatory.
Cost includible Cost not includible
(i) Research and Development (i) Interest on capital borrowed
(ii) Packing cost (ii) Lay off wages to workmen
Example 47: X Ltd. manufacturer manufactured components with in factory for own use. Cost of raw materials
purchased for ` 50,000 to manufacture said components. Cost of over heads as certified by a Cost Accountant, as
per Cost Accounting Standard (CAS) 4 is ` 20,000. Profit margin on inter departmental transfer @ 20%. These compo-
nents are subject to Excise Duty @12.5% and State VAT rate @12.50%.
You are required to answer (a) Assessable Value of these Components, (b) Total Excise Duty and (c) Value Added
Tax (VAT).
Answer:
`
Cost of Material 50,000
Overhead Cost 20,000
Cost of Production 70,000
ADD: 10% profit margin (as per Rule 8 of Valuation Rules) 7,000
Central Excise
(a) Assessable Value 77,000

(b) Excise Duty ` 77,000 x 12.5/100 = ` 9,625
(c) VAT payable is nil, since these components are consumed internally. VAT will attract only when there is a sale.
Example 48: R & Co. furnish the following expenditure in curred by them and want you to find the assessable value for
the purpose of paying excise duty on captive consumption. Determine the cost of production interms of rule 8 of the
Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 and as per CAS 4 (Cost Accounting
Standard):
`
(i) Direct material cost per unit inclusive of excise duty at 12.5% 880
(ii) Direct wages 250
(iii) Other direct expenses 100
(iv) Indirect materials 75
(v) Factory overheads 200
(vi) Administrative overhead (25% relating to production capacity) 100
(vii) Selling and distribution expense 150
(viii) Quality control 25
(ix) Sale of scrap realised 20
(x) Actual profit margin 15%
Answer:
Cost of production is required to be computed as per CAS-4. Material cost is required to be exclusive of Cenvat credit
available.
Particular Total Cost (`)

1. Material Consumed (Net of Excise duty) [ `(880 -97.77)] 782.23
2. Direct Wages 250.00
3. Other Direct Expenses 100.00
4. Works Overhead [indirect material (`75) plus factory overhead (`200) 275.00
5. Quality control cost 25.00
6. Administrative Overhead (25% relates to production activity) 25.00
Less : Sale of Scrap (20.00)
Cost of Production 1,437.23
Add: 10% profit margin on cost of production (`) 426.23 x 10%) 143.72
Assessable value as per Rule 8 of the valuation rules 1,580.95
Note: Actual profit margin is not relevant for excise valuation.
Tax Planning
Example 49: A company manufacturing a dutiable product in the factory at Cochin, was making sales through its
depot in Mumbai. The sale price at Mumbai depot at ` 30,000 per piece inclusive of transport charges from Cochin to
Mumbai of ` 3,000. The depot price includes excise duty @ 12.5% but excludes Maharashtra VAT. Annually 2,000 pieces
are sold by the depot. The company decides to make direct sale from Cochin to its customers which would attract
CST at 2% to be borne by the company. The company wants to closed own the depot at Mumbai bringing cost saving
of ` 5,00,000 per annum. The sale price will continue to be as earlier.
Evaluate the implications of the decision.
Answer:
Depot continues:
Presently, goods are sold from depot. If the sale is from depot, excise duty is payable on the depot price of ` 30,000.
No deduction of transport cost from Cochinto Mumbai depotis allowed.
Since, the price is inclusive of excise duty @ 12.5%, the duty payable is ` 3,333.33 (i.e. ` 30,000 x 12.50 /112.50) and As-
sessable Value is ` 26666.67 (i.e. ` 30,000 x 100/112.5).
Value per piece
Depot sale price ` 30,000
Less: Transport charges ` 3,000
Less: Excise duty ` 3,333
Net revenue if depot continues ` 23,667
Depot closes down:
If goods are sold directly from Cochin, CST @ 2% will be payable. The price chargeable to dealers is required to remai-
nun changed at ` 30,000 per piece.
Net price of Product x
Add- Excise Duty @ 12.50% 0.125x
Taxable turnover 1.125x
Add- CST @ 2% on 1.125x 0.0225x
Total price 1.1475x
Add- Transport charges ` 3,000
Total Invoice Value 1.1475x + 3,000
Note. Excise duty and CST are not payable on transport charges, if charged separately in invoice, because sale is
from factory.
Now, 1.1475 x + 3,000 = ` 30,000
Net price of the product = ` 23,529 [(i.e. ` 30,000 3,000)/1.1475]
Net realizable value is ` 23,529 per piece if the depot closes down.
If depot continues the revenue ` 23,667 per piece
Less: If depot closes down the revenue ` 23,529 per piece
Net revenue loss if depot closes down ` 138 per piece
Total revenue loss for 2,000 pieces annually if depot closes down ` 2,76,000
(i.e. 2,000 pieces ` 138 per piece)
Less: Savings on account of closes down the depot = ` 5,00,000
Net savings on account of close down the depot = ` 2,24,000
If depotis closed, there will be net savings of ` 2,24,000 per annum.
Hence, it is economical to close down the depot.
2.17 ASSESSMENT UNDER CENTRAL EXCISE LAW
Assessment
The expression assessment has been defined in the Central Excise Rules, 2002.
As per Rule 2(b), includes self-assessment of duty made by the assessee and provisional assessment under Rule 7 of
the said Rules.
Assessee
The expression assessee has been defined in the Central Excise Rules, 2002.
As per Rule 2(c), means any person, who is liable for payment of duty assessed or a producer or manufacturer of
Central Excise
excisable goods or a registered person of a private warehouse in which excisable goods are stored and includes an
authorized agent of such person.
Liability to Assessment and Payment of Duty
Rule 4 of the Central Excise Rules, 2002 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 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.
Incidence of Duty i.e. Removal
For the purposes of the Rule 4, excisable goods manufactured in a factory and utilized, as such or after subjecting to
any process, for the manufacture of any other commodity, in such factory, shall be deemed to have been removed
from such factory immediately before such utilization.
Major Ingredients of Assessment
Before each removal, whether outside the factory of manufacture or production or for captive consumption, duty has
to be assessed on the excisable goods.
Classification and Rate of Duty
For determining the rate of duty, classification is a prerequisite.
Classification means the appropriate classification code, which is applicable to the excisable goods in question under
the First Schedule to Central Excise Tariff Act, 1985. There are Section Notes and Chapter Notes, in the Tariff which are
helpful in determining the appropriate classification. In case of difficulties, there are Interpretative Rules in the said
Act.
Valuation
Where rate of duty is dependent on the value of goods (ad valorem duty), value has to be determined, in accor-
dance with the provisions of Central Excise Act, 1944, as follows :
(i) Value under section 4based on transaction value or determined in terms of valuation Rule,
(ii) Value based on retail sale price under section 4A,
(iii) Tariff value fixed under section 3.
Self Assessment
As per Rule 6 of the Central Excise Rules, 2002 a Central Excise assessee is himself (self-assessment) required to deter-
mine 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 (where duty is advalorem) on the quantities being removed by him and
indicate the same in the invoice. However, in case assessee manufacturing cigarettes, the Superintendent or Inspec-
tor of Central Excise has to assess the duty payable before removal by the assessee.
Provisional Assessment
Provisional Assessment is resorted to, in the event the duty cannot be determined at the point of clearance of the
goods.
Guidelines and Procedure for Provisional Assessment
Rule 7 of the Central Excise Rules lays down that where the assessee is unable to determine the value of excisable
goods or determine the rate of duty applicable there to, they may request the Assistant Commissioner of Central Ex-
cise or the Deputy Commissioner of Central Excise, as the case may be, indicating:
i. Specific grounds and reasons and the documents or informations, for want of which final assessment cannot
be made.
ii. Period for which Provisional Assessment is required.
iii. The rate of duty or the value or both, as the case may be, proposed to be applied by the assessee, for Provi-
sional Assessment.
iv. The assessee under takes to appear before the Assistant Commissioner or Deputy Commissioner of Central
Excise with in 7 days or such date fixed by him, and furnish all relevant information and documents with in the
time specified by the Assistant or Deputy Commissioner of Central Excise in his order, so as to enable the proper
officer to finalize the provisional assessment.
Rule 7 further provides that the payment of duty on provision albas is may be allowed, if the assessee executes a bond
in the form prescribed by notification by the Board with such surety or security in such amount as the Assistant Com-
missioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, deem fit, binding the
assessee for payment of difference between the amount of duty as may be finally assessed and the amount of duty
provisionally assessed.
Ac or Dc of central excise, as the case may be, shall pass order for final assessment, assoonas may be, after the rel-
evant information, as may be required for finalizing the assessment, is available, but with in a period not exceeding six
months from the date of the communication of the order issued under sub-rule (1);
Provided that the period specified in this sub-rule may, on sufficient cause beings how nand the reason to be recorded
in writing, be extended by the Principal Commissioner or Commissioner of Central Excise for a further period not ex-
ceeding six months and by the Principal Chief Commissioner or Chief Commissioner of Central Excise for such further
period as he may deemed fit.
Payment of Duty Under Protest
Some times it happens that the classification of goods done by excise authorities, Assessable Value determined by the
excise authorities in adjudication proceedings, etc. are not agreeable or acceptable to the assessee. In such cases,
the assessee can file an appealand in the mean while he can pay duty under protest (If no stay is obtained from Ap-
pellate Authorities).
Budget and Central Excise
Every year, taxation proposals are introduced at the time of annual budget which is presented usually on last day of
February every year, by way of a Finance Bill. Major changes in excise, customs and service tax duties are announced
on budget day.
Increased rates become effective immediately - Normally, any provision of legislation, takes effect only after it is
passed by the Parliament and assented by President. However, in case of excise and customs provisions,this might
create complications.
Provisional Collection of Taxes Act - Section 4 of Provisional Collection of Taxes Act, 1931 provides that budget provi-
sions in respect of imposition or increase in duty of excise and customs will take effect immediately if a declaration is
inserted in the Bill that it is expedient in Public interest to have immediate effect to the provisions of the Bill.
This provision is not applicable for reduction in duty.
Once this declaration is given, the new rates become effective on the expiry of the day when the billis introduced.
Accordingly, every year, the declaration is given and budget provisions come into effect immediately. Such declara-
tion is valid only for 75 days or the date when the Finance Billis passed, which ever is earlier.
Thus, if budget is presented on last day of February [28 or 29 as the case may be], new rates will be come effective
on 1st March itself.
If rates are reduced when the billis passed, refund will be granted of excess duty collected [subject to provisions of
refund of Unjust Enrichment of section 11B (2) of CEA].
Duty liability of Pre-budget Stock
Some goods in stock on the budget day are cleared subsequent to presentation of budget. The rate applicable at
the time of clearance from the factory will be applicable for payment of excise duty.
2.18 PROCEDURAL ASPECTS UNDER CENTRAL EXCISE DUTY

2.18 PROCEDURAL ASPECTS UNDER CENTRAL EXCISE DUTY
Registration under Central Excise Law:

A manufacturer has to compulsorily get registered under the central excise law if he manufactures dutiable goods.
Aside of manufacturers, the following persons are required to get registered under central excise law:
First Stage Dealer,
Second Stage Dealer,
Importer, and
Central Excise
Person who stores dutiable goods in the specified area or in a warehouse before exports.
The following manufacturers are exempt from registration and consequently payment of excise duty:
Manufacturer of dutiable goods who claims exemption under SSI notification
Manufacturer in a unit of 100% Export Oriented Units (EOUs) and Software Technology Park are exempted from
the registration provided they do not procure and sell the goods in the Domestic Tariff Area.
First Stage Dealer means a dealer who purchases the goods directly from the manufacturer under the cover of
an invoice issued in terms of the provisions of the Central Excise Rules, 2002.
Second Stage Dealer means a dealer who purchases goods from a first stage dealer. Dealer of any subsequent
stage after second stage cannot issue Cenvatable Invoice.
w.e.f. 01.04.2014, an importer who issues an invoice on which CENVAT credit can be taken is also required to
obtain such registration.
Thus, such importer will have to obtain registration as a registered importer with the central excise authorities to pass
on the credit on the imported goods.
Exemption from Registration
Persons who manufacture the excisable goods, which are chargeable to nil rate of excise duty or are fully ex-
empt from duty by a notification;
Small scale units availing the exemption based on value of clearances under a notification. However, such units
will be required to give a declaration once the value of their clearances crosses ` 90 lakhs for a financial year;
Persons manufacturing excisable goods by following the warehousing procedure under the Customs Act, 1962
subject to certain conditions;
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);
Persons who use excisable goods for any purpose other than for processing or manufacture of goods availing
benefit of concessional duty exemption notification. (Notification 36/2001 - C.E. (N.T.), dated 26-6-2001)
Procedure for Obtaining Central Excise Registration
i. Fill up Form A-1 in full and have it duly signed. If the applicant is a manufacturer/producer/dealer/ warehouse
in charge/importer.
ii. Submit copy of PAN card issued by the Income Tax Department.
iii. The Inspector in the office of Assistant Commissioner/Deputy Commissioner will scrutinize the A-1 form and if
found in order it shall be fed into computer through System for Allotment of Central Excise Registration (SAC-
ER).
iv. A 15 digit PAN based registration number (ECC) will be allotted to the assessee on the spot; otherwise the same
will be delivered to him with in the next working day.
v. Registration under Central Excise can be granted in the name of minor, provided a legal guardian under takes
to conduct the business.
vi. Normally separate registrations are required if factories are located in different locations. Similarly if the ware-
house is at a significant distance from the factory these must be registered separately. A single registration can
be allowed by the Principal Commissioner or Commissioner of Central Excise for factories located in adjoining
premises, or premises separated by road; railway, etc can if the facts and circumstance facilitates to do so.
Example 50: A manufacturer has place of business in the Factory in one location and in the warehouse at another
location. If these locations are bifurcated by road, railway etc then with the permission of Pincipal Commissioner or
Commissioner of Central Excise the assessee can availasingle registration for these two locations. Otherwise each
location has to be registered separately. In that case each factory of the manufacturer is considered a separate
registration.
Centralized registration: Every mine engaged in the production/manufacture of specified goods is exempt from ob-
taining registration where the producer/manufacturer of such goods has a centralized billing / accounting system
inrespect of such goods produced by different mines and opts for registering only the premises or office from where
such centralized billing or accounting is done (Notification No. 10/2011 - CE dt. 24-3-2011).
vii. If the assessee ceases to carry on operations for which he is registered his registration certificate can be can-
celled. This is called de-registration.
Sometimes registration certificate can also be revoked by registering authority. Registration certificate can be
revoked in the following cases.
(a) If the manufacturer manufactures prevented goods. (like arms, explosive devise without license).
(b) Manufacturer carries higher risk (evasion of duty continuously, repeatedly producing the malafide evi-
dences etc).
Provisions Relating to Non Registration
As per Rule 25 of the Central Excise Rules, 2002, where registration under Central Exciseis required for a manufacturer
but not registered then, all such goods shall be liable to confiscation. Such manufacturer is supposed to face the
punishment and penalty. This provision is also applicable to an importer who issues an invoice on which Cenvat credit
can be taken. (w.e.f.01.03.15)
Punishment: (Section 9 of the Central Excise Act, 1944)
i. if the duty leviable on the excisable goods exceeds ` 50,00,000 (w.e.f. 28-5-2012)
(a) imprisonment upto seven years and fine without any upper limit.
(b) 6 months minimum imprisonment unless there are special and a dequate reasons for granting lesser pun-
ishment.
ii. if the duty leviable on the excisable goods is less than or equal to ` 50,00,000 (w.e.f 28-5-2012)
(a) Imprisonment upto three years or fine or both can be imposed
(b) 6 months minimum imprisonment unless there are special and adequate reasons for granting lesser pun-
ishment
Penalty
The penalty for non-registration is amount of duty of con travening goods or w.e.f 14-5-2015 ` 5,000 whichever is higher.
[Rule 25(1)(c) of the Central Excise Rules]
Daily Stock Account (DSA)
Every assessee registered under Central Excise should maintain the Daily Stock Account (DSA) [Rule 10(1) of Central
Excise Rules, 2002]
There is no specific format for Daily Stock Account. The following information should be captured in the DSA
i. Description of goods manufactured
Central Excise
ii. Opening balance of goods manufactured

iii. Quantity manufactured
iv, Inventory of goods (closing stock)
v. Goods removed fromthe place of removal (quantity)
vi. Assessable value of goods removed
vii. Amount of duty payable to the department
viii. Particulars with regardto the amount of duty actually paid.
The first page and the last page of the DSA shall be duly authenticated by the manufacturer or his authorized person.
The DSA shall be preserved for five years immediately after the financial year to which such records pertain.
The records under this rule may be preserved in electronic form and every page of the records opreserved shall be
authenticated by means of a digital signature. The Board may, by notification, specify the conditions, safe guards and
procedure to be followed by an assessee preserving digitally signed records.
Penalty upto the amount of duty payable canbe imposed and the offending goods canbe confiscated if DSA is not
maintained by the manufacturer. [Rule 25(1)(b) of Central Excise Rules]
2.19 REFUND & OTHER IMPORTANT PROVISIONS
Other important provisions are summarized below.

Refund of Excise Duty
i. Assessee can claim refund of duty before the expiry of one year from relevant date u/s 11B, in form R.
ii. Refund is subject to doctrine of unjust enrichment, i.e. refund will be available only if the amount was not recov-
ered from buyer. These are overriding provisions.
iii. Doctrine of unjust enrichment appliest ocaptive consumption, provisional assessment and also when duty was
paid under protest.
iv. If refundis delayed beyond three months, interest is payable @ 6% p.a.
Exemption from Duty
Goods exported under bond are not Exempted Goods
Rule 19(1) of Central Excise Rules states that any excisable goods may be exported without payment of duty from
factory of producer or manufacturer, as may be approved by the Commissioner or notified by the board.. Thus, the
goods are cleared without payment of duty. They are not exempt goods. Ministry of Law Advice dated 29.10.1974
confirmed and circulated vide CBE & C circular No. 278/112/96 - CX dated 11.12.1996, states as follows, Under Central
Excise, exemption means exemption by notification under section 5A of CEA [earlier rule 8]. Thus, goods exported
under bond are not exempt from duty. These goods also cannot betermedas chargeable to Nil rate of duty, as
infact, the goods are dutiable.
i. Section 5A(1) of Central Excise Act and section 25(1) of Customs Act empower Central government to exempt
any excisable goods from duty, by issuing notification in Official Gazette.
ii. Such exemption may be partial or full, conditional or unconditional.
iii. Absolute i.e. unconditional exemption is compulsory, while conditional notification is at option of assessee.
iv. Central Government can also grant exemptionsin exceptional cases u/s 5A(2).
v. An exemption notification should be strictly construed, but purposeful construction is permissible.
vi. Principle of promissory estoppel can apply to an exemption notification.
Remission of Duty for Goods Lost, Destroyed or unfit for Consumption or Marketing
i. Rule 21 of the Central Excise Rules, 2002 provides for remission of duty if the assessee can provet othe satisfac-
tion of the Commissioner of Central Excise that the goods have been lost or destroyed by natural cause or by
unavoidable accident or the manufacturer claims them a sunfit for consumption or for marketing, before their
clearance. In such cases Pincipal Commissioner or Commissioner can remitthe duty on such goods subject to
such conditions as may be imposed by him or ordered in writing. Power of remission given to various officers
have been increased in 2007. The assessee should apply for destruction and remission in duplicate. Credit taken
for inputs of the goods so lost or destroyed need not be reversed as such loss cannot be equated to exemption
to goods - 2007 (208) E.L.T. 336 (Tri.-LB) - Grasim Industries v. CCE. But as per new sub-rule (5C) of Rule 3 of Cenvat
Credit Rules, 2004, such credit on input requires reversal. No remission is allowable if goods are lost due to theft
or dacoity - 2008 (232) E.L.T. 796 (Tri.-LB) - Gupta Metal Sheets v.CCE.
ii. But no remission of duty is grantable for any loss or destruction or deterioration of any goods taking place after
the goods have been cleared for home consumption on payment of duty or incases of theft.
iii. For duty upto ` 10,000, Super intendent of Central Excise has been empowered to grant remission. Deputy/As-
sistant Commissioner can grantremission of duty exceeding ` 10,000 and upto ` 1l akh. Additional / Joint Com-
missioner will have the power to remitduty exceeding ` 1 lakh and upto ` 5 lakhs. No limit has been prescribed
for Principal Commissioner or Commissioner in this regard.
iv. Remissions have to be claimed by the assessee and the burdent of urnishadequate evidence oflossisontheas-
sessee.Remissionwhengrantedissubjecttoconditionsasmayreasonably beimposedbytheofficer,suchasirretrieva
bled estruction under official supervision of goods claimed to be unfit for consumption or for marketing.
Compounded Levy Schemes
i. As per Rule 15, the Central Government may by notification specify the goods in respect of which the assessee
shall have the option to pay excise duty on the basis of such factors as may be relevant to production of such
goods and at such rate as may be notified in this respect. The Central Government has, therefore, notified the
Compounded Levy Scheme for Stainless Steel pattis/pattas, aluminium circles, subject to the process of cold
rolling. - Notification No. 17/2007 - C.E., dated 1-3-2007. These units have to pay Education Cess and SHE Ces-
salso over and above the compounded levy rates as per C.B.E.&c. Letter F. No. 27/16/2008 - CX. 1, dated 25-8-
2008[2008 (230) E.L.T. T19].
ii. Section 3A has been inserted by Finance Act, 2008, empowering the Central Government to charge excise
duty on the basis of capacity of production in respect of notified goods and to notify the procedure for the
same. Accordingly, pan masala and pan masala containing tobacco commonly known as gutkha manufac-
tured with the aid of packing machine and packed in pouches have been notified for this purpose with effect
from 1-7-2008. Pan masala with betel nut content not exceeding 15% is not covered. Detailed procedures
and other matters like filing of specified declaration/intimation, payment of duty at notified rates, abatement
in case of non-production, requirement of declaration of retail sale price on packages, bar on Cenvat credit
availment, addition or removal of packing machines, penalty and confiscation for contravention and the like
are provided in Pan Masala Packing Machines (Capacity Determination And Collection of Duty) Rules, 2008.
New procedure for End-Use Exemption (erstwhile Chapter X procedure) - A new procedure for End-Use Exemp-
tion has been notified in Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of
Excisable Goods) Rules, 2001.
The new Rules contemplate that procurement of goods for end-use under concessional (including fully ex-
emted) rate of duty.
iii. Goods received duty free can be removed to another eligible manufacturer under the new end-use exemp-
tion procedure. Pincipal Commissioner or Commissioner can also allow sending goods outside the factory for
test, repair, reconditioning etc. and return thereof under their supplemental instruction power under Central
Excise Rule 31.
Removal of Goods from FTZ, EOU and SEZ to Domestic Tariff Area (DTA)
i. As per Rule 17 of Central Excise Rules, 2002, removal of goods from FTZ and EOU to the domestic tariff area shall
be made under an invoice and on payment of appropriate duty by 5th of the following month except March,
like other units in DTA. Such unit shall maintain proper account relating to production, description of goods,
quantity removed, duty paid and each removal made on an invoice. Unit shall also submit a monthly Return to
the Superintendent, Central Excise within ten days from the close of the month to which the return relates. The
Return shall be submitted in form ER-2
ii. For the period prior to 11-5-2001 when Section 3 of the Act was amended to substitute the words allowed to
be sold with the words brought to any other place, clearances from EOUs if not allowed to be sold into India
Central Excise
shall continue to be chargeable to duty under main Section 3(1) of Central Excise Act, 1944 as such units are
also situated in India.
iii. SEZ having been given the status of foreign territory, imports there from to DTA will be governed by the provisions
of the Special Economic Zones Act, 2005. Removal of semi-finished goods or finished goods for further process-
ing, or testing has been permitted under Rules 16B and 16C, broadly on the pattern of old Rule 56B.
Return of Duty paid Goods for Repairs etc. Credit of Duty
i. As per Rule16 of the Central Excise Rules, 2002 where any duty paid goods (whether originally manufactured in
the same or another factory) are subsequently returned to the factory for being remade, refined, reconditioned
or for any other reason, the assessee shall record the particulars of such returned goods in his record and take
Cenvat Credit of the duty paid on such goods as if they are inputs and shall utilize this credit according to the
Cenvat Credit Rules, 2004. But the goods received must be eventually returned.
ii. When the process to which there turned goods are subjected, does not amount to manufacture, the assessee
shall pay the amount equal to Cenvat credit taken in respect to such returned goods. In other cases there
turned goods after processing shall be removed on payment of duty according to the value and rate of duty
applicable as on the date of removal.
iii. As per sub-rule (3) of Rule 16, where it is difficult to follow the provisions of sub-rule (1) and sub-rule (2) of Rule 16,
the assessee can receive the goods subject to such conditions as may be specified by the Principal Commis-
sioner or Commissioner of Central Excise. Thus, in case where it is not possible to know the amount of the duty
paid on returned goods as they may have been removed originally long back and the original invoice may not
be available, in such or similar cases the return of goods shall be subject to the general or specific orders of the
Pincipal Commissioner or Commissioner of Central Excise and there will be no credit and no payment of duty.
iv. According to one school of thought, under the Rules there are now no restrictions on return, re- entry, reten-
tion and re-issue of duty paid goods if no credit is desired and taken. But presence of the retuned goods in the
factory may cause accounting and surprise stock checking problems unless there turned goods are clearly
identifiable as such and are stored and accounted for (in private accounts) separately It has been held that
restrictions for re-entry apply only to identical or similar to those manufactured in the factory and not to other
goods - 2004 (168) E.L.T. 53 (Tri.)- Varsha Engineeringv.C.C.E.
Removal of Excisable Goods on Payment of Duty
i. As per Rule 4, no excisable goods on which duty is payable shall be removed without payment of duty from
any place where they have been produced, manufactured or warehoused, unless otherwise provided. Duty,
however is payable as specifiedin Rule 8.
ii. As per Rule 4(2), where molasses are produced in a khandsari sugar factory, the person who procures such mo-
lasses, whether directly from such factory or otherwise, for use in the manufacture of any commodity (whether
or not excisable) shall pay the duty payable on such molasses as if it is produced by him.
iii. By virtue of Rule 12A A excise duty can be paid either by the principle jewellery manufacturer or by his job-
worker.
iv. Full amount collected from the customer by way of duty should be shown distinctly in the invoice and paid to
the credit of the Government.
Storage of Non-Duty paid goods outside the Factory
As per Rule 4(4) of the Central Excise Rules, 2002, the storage of non-duty paid goods outside the factory can be per-
mitted by the Principal Commissioner or Commissioner of Central Excise subject to such safeguards as he may specify.
Such storage outside the factory premises is permissible in exceptional circumstances having regard to the nature
of the goods and shortage of storage space in the factory. No merchant overtime charges would be recovered for
supervision over such storage.
Manner of Payment of Duty Monthly
(i) Rule 8 provides the manner of payment of duty. Duty for this purpose includes the amount payable in terms
of the Cenvat Credit Rules, 2004. This rule allows payment of duty on monthly basis by 6th day of the succeeding
month bye-payment through internet banking except for the month of March when duty is to be paid by 31st
March.
Provided that the Assistant Commissioner or the Deputy Commissioner of Central Excise for reasons tobe re-
corded in writing, allow or assessee payment of duty by any mode other than internet bank.
(ii) The buyers of the goods cleared by manufacturers would be allowed to avail credit in respect of the duty pay-
able on such goods immediately on receipt of the goods by them.
(iii) Every assessee shall electronically pay duty through internet banking.
Provided that the Assistant Commissioner or the Deputy Commissioner of Central Excise, for reason to be re-
corded in writing, allow an asessee payment of duty by any mode other than internet banking.
Action in Case of Default
As per Rules 8(3) Central Excise Rules, 2002, if the assessee fails to pay the amount of duty by the due date, he shall be
liable to pay the outstanding amount alongwith interest at the rate (at present, 18%) specified by the Central Govern-
ment vide notification under section 11AA of the 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.
As per Rule 8(3A), if the assessee fails to pay the duty declared as payable by him in there turn within a period of 1
month from the due date, then the assessee is liable to pay the penalty at the rate of 1% on such amount of the
duty not paid, for each month or part thereof calculated from the due date, for the period during which such failure
continues.
2.20 OTHER PROCEDURES IN CENTRAL EXCISE
Some procedures are basic, which every assessee is required to follow. Besides, some procedures are required to be
followed as and when required.
Basic Procedures
(i) Every person who produces or manufactures excisable goods, is required to get registered, unless exempted.
[Rule 9 of Central Excise Rules]. If there is any change in information supplied in Form A-1, the same should be
supplied in Form A-1.
(ii) Manufacturer is required to maintain Daily Stock Account (DSA) of goods manufactured, cleared and in stock.
[Rule 10 of Central Excise Rules]
(iii) Goods must be cleared under invoice of assessee, duly authenticated by the owner or his authorised agent. In
case of cigarettes, invoice should be countersigned by Excise officer. [Rule 11 of Central Excise Rules]
(iv) Due dates of payment of Excise Duty
Central Excise
w.e.f. 1-3-2016, Quarterly duty payable by an assesse, engaged in the manufacture or production of articles of
jewellery, other than articles of silver jewellery but inclusive of articles of silver jewellery studded with diamond,
ruby, emerald or sapphire having turnover up to Rs 12 crore.
Interest for delay payment of Excise Duty Sec. 11AA of CEA, 1944 @18% p.a. is payable as interest on delayed
payment w.e.f. 1-4-2016 the interest rate is 15% p.a. (earlier @18% p.a.) payable as interest on delayed pay-
ment
No interest shall be payable under sec. 11AA of C.Ex. Act, 1944
where,
(a) the duty becomes payable consequent to the issue of an order, instruction or direction by the Board
under section 37B; and
(b) such amount of duty is voluntarily paid in full, within forty-five days from the date of issue of such order,
instruction or direction
(c) without reserving any right to appeal against the said payment at any subsequent stage of such pay-
ment.
(v) Monthly return in form ER-1 should be filed by 10th of following month. SSI units have to file quarterly return inform
ER-3. [Rule 12 of Central Excise Rules] EOU/STP units to file monthly return inform ER-2 see rule 1 7(3) of CE
Rules.
(vi) Assessees paying duty of ` 1crore or more per annum through PLA are required to submit Annual Financial Infor-
mation Statement for each financial year by 30th November of succeeding year in prescribed form ER-4 [Rule
12(2) of Central Excise Rules].
(vii) Specified assessees are required to submit Information relating to Principal Inputs every year before 30th April
inform ER-5, to Superintendent of Central Excise. Return for 2004-05 was required to be submitted by 31-12-2004
[rule 9A(1) to Cenvat Credit rules inserted w.e.f. 25-11-2004]. Any alteration in principal inputs is also required to
be submitted to Superintendent of Central Excise inform ER-5 within 15 days [rule 9A(2) to Cenvat Credit Rules
inserted w.e.f. 25-11-2004]. Only assessees manufacturing goods under specified tariff heading are required to
submit there turn. The specified tariff headings are 22, 28 to 30, 32, 34, 38 to 40, 48, 72 to 74, 76, 84, 85, 87, 90
and 94; 54.02, 54.03, 55.01, 55.02, 55.03, 55.04. Even in case of assessees manufacturing those products, only
assessees paying duty of ` 1crore or more through PLA (current account) are required to submit there turn.
(viii) Assessee who is required to submit ER-5 is also required to submit monthly return of receipt and consumption of
each of Principal Inputs inform ER-6 to Superintendent of Central Excise by tenth of following month [rule 9A(3)
to Cenvat Credit rules inserted w.e.f. 25-11-2004]. Only those assessees who are required to submit ER-5 return
are required to submit ER-6 return.
(ix) Every assessee is required to submit a list in duplicate of records maintained in respect of transactions of receipt,
purchase, sales or delivery of goods including inputs and capital goods, input services and financial records
and statements including trial balance [Rule 22(2)].
(x) Inform change in boundary of premises, address, name of authorised person, change in name of partners, di-
rectors or Managing Director in form A-1.
These are core procedures which each assessee has to follow.
Periodic Returns under Central Excise
Mandatorye-filing of Central Excise Returns in ACES w.e.f. 1-10-2011 (vide CBEC Circular No. 955/16/2011 - CX dt.15-9-
2011). It means all assesses are required to filere turns mandatorily throughe-filing, irrespective of the payment of excise
duty. Penalty for delayed submission of return can extend upto ` 5,000 and with confiscation of the goods in respect
of which the offence is committed. [Rule 27 of Central Excise Rules]
Form of return Description Assessee Time Limit

ER-1 Monthly Manufacturer 10th of the following month from
the end of the relevant month.
ER-2 Monthly EOU 10th of the following month from
the end of the relevant month.
ER-3 Quarterly SSI 10th of the following month from
the end of relevant quarter
w.e.f.1.4.2010
Annexure13B Quarterly First Stage Dealer (or) Second Stage 15th of the following month from
Dealer the end of the relevant quarter.
ER-4 Annual Financial Infor- Duty paid including CENVAT Credit Annually by 30th November of
mation Statement (A `100 lakhs in the previous year. next year.
F I)
ER-5 Information relating to Duty paid including CENVAT Credit Annually by 30th April for the cur-
principal inputs `100 lakhs in the previous year. rent year.
ER-6 monthly input and out- ER-5 10th of the following month from
put the end of the relevant month.
ER-7 Annual Installed Ca- by every assessee* 30th April of the succeeding Finan-
pacity Statement cial Year
ER-8 Quarterly An assessee is availing the exemption 10th of the following month from
under N.T.1/2011 dt. 1-3-2011 namely the end of relevant quarter. For
paying duty @1% or 2% as the case the year end quarter 31st March.
may be and does not manufacture
any other products.
*Exempted from filing Annual Installed Capacity Statement (i.e. ER-7)
w.e.f. 1-3-2016, ER 7 return has been omitted.
w.e.f. 1-3-2016, Name of Annual Financial Information (AFI) has been changed to Annual Return
w.e.f. 1-3-2016, On the lines of Service Tax, an assesse under Central Excise submit a revised ER 1 return by the end of
the calendar month in which the original return is filed. This is permissible only if original return was filed in time.
Similarly ER 2 return filed by EOU can be revised by end of calendar month in which original return was filed.
The assessee covered under jewellery sector and paying duty @1% would be permitted to file simplified return quar-
terly in the ER-8.
Relevant date for demand in such cases is the date of filing of revised return.
Penalty for delayed submission of return can extend upto ` 5,000 [Rule 27 of Central Excise Rules]
w.e.f. 1-3-2015, Late Fee:
Delay in filing of such return will now attract a late fee of ` 100 per day for each day of default subject to a maximum
of ` 20,000 [New sub-rule (6) of rule 12 & new sub-rule (6) of rule 17 of C.Ex. Rules, 2002]
The following manufacturers are exempted from filing Annual Installed Capacity Statement, vide Notification No.
26/2009- CE - (NT), dated 18.11.2009, namely:
biris manufactured without the aid of machines falling under tariff item 2403 10 31.
matches manufactured without the aid of power falling under heading 3605.
reinforced cement concrete pipes falling under heading 6810.
The Following Assessees are Exempted From E-Filing (Nt 21 & 22/2011 W.E.F. 1.10.2011:
(a) Exempted goods are cleared from the state of Uttaranchal or Himachal Pradesh
(b) Units located in the Industrial Growth Centre or
(c) Industrial development centre
(d) Industrial Infrastructure Development centre
(e) Export promotion industrial park
Automation of Central Excise and Service Tax (ACES)
Central Excise
The Central Board of Excise & Customs (CBE&C) has developed a new software application called Automation of
Central Excise and Service Tax (ACES), which aims at improving tax-payer services, transparency, account ability and
efficiency in indirect tax administration.
It is a centralized, web based software application which automates various processes of Central Excise and Service
Tax for Assessees and Department, and gives completeend to end solution. Any Assessee can register with Depart-
ment using ACES application, can file tax return, claims & intimations, track its status and get online messages.
Benefits to the Assessees
i. Reduce Physical Interface with the Department
ii. Save Time
iii. Reduce Paper Work
iv. Online Registration and Amendment of Registration Details
v. Electronic filing of all documents such as applications for registration, returns [On-line and off- line download-
able versions of ER 1, 2, 3, 4, 5, 6, Dealer Return, and ST3], claims, permissions and intimations; provisional assess-
ment request, export-related documents, refund request
vi. System-generated e-acknowledgement
vii. Online tracking of the status of selected documents
viii. Online view facility to see selected documents
ix. Internal messaging system on business-related matters
Salient features of ACES homepage
i. ACES home page is an interface for users / Assesses to access the Central Excise and ServiceTax applications.
ii. The website also enables users to make online payment throug he-payment option, download the Returns of
fline utilities through Download option.
iii. The website also keeps track on latest updates of the ACES application and gives links to various other sites
under CBEC.
Certified Facilitation Centre (CFC)
CFC stand for Certified Facilitation Centre under ACES project of CBEC and is a ne-facility, which may be set-up and
operated by a Cost Accountant / Chartered Accountant / Company Secretary or aproprietary concern / firm of Cost
Accountants or Chartered Accountants or Company Secretaries in practice to whom a certificate isissued under the
ACES project, where the assessees of Central Excise and Service Tax can avail this facility to file the irreturns and other
documents electronically along with associated facilitation on payment of specified fees.
There are other Procedures Which are not Routine
Non-core procedures -The non-core procedures are as follows: -
(a) Export without payment of duty or under claim of rebate [Rules 18 and 19 of Central Excise Rules].
(b) Receipt of goods for repairs / reconditioning [Rule 16 of Central Excise Rules].
(c) Receipt of Goods at concessional rate of duty for manufacture of ExcisableGoods.
(d) Payment of duty under Compounded Levy Scheme.
(e) Provisional Assessment [Rule 7 of Central Excise Rules].
(f) Warehousing of goods.
(g) Appeals and settlement.
Invoice for Removal of Final Products
Rule 11(1) of Central Excise Rules provides that excisable goods can be removed from factory or warehouse only
under an Invoice signed by owner or his authorised agent. In case of cigarettes, invoice shall be counter-signed
by Inspector. Invoice should bear serial number and should be in triplicate. As per Rule 11(2) of Central Excise Rules,
Invoice shall contain
(a) Registration Number,
(b) Address of jurisdictional Central Excise Division,
(c) Name of consignee,
(d) Description and classification of goods,
(e) Time and date of removal,
(f) Mode of transport and vehicle registration number,
(g) Rate of duty,
(h) Quantity and Value of goods,
(i) Duty payable on the goods.
Export Procedures
Exports are free from taxes and duties.
i. Goods can be exported without payment of excise duty under bond under rule 19 or under claim of rebate of
duty under rule 18.
ii. Excisable Goods should be exported under cover of Invoice and ARE-1 form.
iii. Merchant exporter has to execute a bond and issue CT-1 so that goods can be cleared without payment of
duty. Manufacturer has to issue Letter of Undertaking.
iv. Export to Nepal /(except Bhutan) is like export toany other country.
v. EOU has to issue CT-3 certificate for obtaining inputs without payment of excise duty.
List of forms used in the case of export of Goods
Bonds under Central Excise
Surety Bond
Surety Bond means another person stands as surety to guarantee the performance on the part of the obligor. Such a
surety must be for the full value of the Bond and the person standing as surety should be solvent.
Security Bond
Security Bond means where some sort of security in the form of Post Office Savings Deposit; National Saving Certificate;
RBI Bonds etc is offered. Such a security may also be in the form of cash deposit by way of GAR-7 challan. Interest
accruing on such deposit can be given to the person who makes such deposit. However; no interest on cash deposit
can be allowed.
Different Nature of Bonds
B-1 BOND Excisable goods removed without payment of duty

B-2 BOND For Provisional assessment
B-3 BOND For due dispatch of excisable goods removed for re-warehousing and export therefrom without
payment of duty
B-4 BOND Removal of confiscated goods.
B-11 BOND -Do-
B-17 BOND Executed by EOU; 100% EOU; EHTP
Bringing goods for repairs, re-making etc.
i. Duty paid goods can be brought in factory for being re-made, refined, reconditioned or for any other reason
under rule 16.
ii. The goods need not have been manufactured by assessee himself.
iii. Cenvat credit of duty paid on such goods can be taken, on basis of duty paying documents of such goods.
iv. After processing / repairs, if the process amounts to manufacture, excise duty based on assessable value is
payable.
Central Excise
v. If process does not amount to manufacture, an amount equal to Cenvat credit availed should be paid [rule
16(2)].
vi. If some self manufactured components are used, duty will have to be paid on such components
vii. Buyer / recipient of such goods can avail Cenvat credit of such amount/duty.
viii. If the above procedure cannot be followed, permission of Principal Commissioner or Commissioner is required
[rule 16(3)].
Receipt of Goods at Concessional Rate of Duty
Some users of excisable goods can obtain goods at nil or lower rate of duty, subject to certain conditions. In other
words, the exemption is based on end use. If the buyer is entitled to obtain excisable goods at nil or concessional
rate of duty, he is required to follow prescribed procedure. The provisions are contained in Central Excise (Removal of
Goods at Concessional Rate for Manufacture of Excisable Goods) Rules, 2001.
Payment of Duty through Personal Ledger Account (PLA)
The Personal Ledger Account (PLA) is a running account through which the manufacturer can avail the credit the
excise duty credit, pay the shortfall, if any, or carryforward the surplus if any.
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 Acccount Number (PAN). Once the
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
Form specified in Annexure - 8.
Each credit and debit entry should be made on separate lines and assigned a running serial number for the finan-
cial year. The PLA is credited when duty is deposited in the bank by GAR-7 challan. The PLA is debited with the duty
required to be paid on manufacture 2.20
of goods
OTHEon monthly basis. PLA and CENVAT credit should be used only for pay-
ment of excise duty and not other payments like fines, penalties etc.
The PLA must be prepared in triplicate by writing with in delible pencil and using double-sided carbon - original. Du-
plicate copies of the PLA should be detached by the manufacturers and sent to the central Excise Officer incharge
along with the monthly/quarterly periodical returnin form E.R 1 or E.R 3.
2.21 EXCISE AUDIT

2.21 EXCISE AUDIT
Goods are removed by the assessee under a system of self-removal. Returns are filed by the assessee without verifica-
tion by the Excise department. Hence there is a need for audit by the Excise department to protect the interests of
the government i.e. to check that there are no revenue leakages. A series of audits under the Central Excise Law is
contemplated.
Types of Audits
Three types of audit are contemplated under Central Excise Law.
(1) Central Excise Revenue Audit (known as CERA Audit) conducted by the office of the Comptroller and Auditor
General of India. (C & AG)
(2) Internal audit conducted by the Excise Department (known as Excise Audit 2000)
(3) Special audit conducted by Cost Accountant/Chartered Accountant.
(1) Central Excise Revenue Audit
The key points relatingto this audit are as under:
(i) Conducted by the Comptroller and Auditor General of India (C&AG) it is called Central Excise Revenue
Audit (CERA).
(ii) This is an audit of the Central Excise Departments functioning and is carried out at the office of the Cen-
tral Excise Department.
(iii) This is not an audit of the assessee.
(iv) The audit focuses on ascer taining revenue leakage and is assessed on the basis of the periodicalre turns
filed by the assessee, the execution of various bonds, and other relevant information such as cost audit
reports, and income-tax audit reports of the assessee.
(v) The CERA audit or has the right to visit the office of the assessee though the audit is not of the assessee.
(vi) There is no defined frequency for the carrying out of this audit.
(vii) C & AG submits the report to the President of India, who causes these to be laid before each House of
Parliament.
(2) Central Excise Audit 2000
However, effective from 1st January 2002, the Central Board of Excise and Customs (CBEC) has instructed that
all audits would be conducted only under the Central Excise Audit 2000 system. This is an audit of the assessee
and is conducted by the Central Excise Department officials.
Salient Features of Excise Audit 2000
(i) Selection of Assessee: The choice of the unit for audit is based on risk factors. This means that such of the
assessee who have a bad trackrecord (i.e. have duty evasion cases and major audit objections against
them, past duty due setc.) are taken up for audit as opposed to those who enjoy a clean track record.
(ii) Frequency of Audit: The frequency of audit is based on annual excise duty payment
Excise duty Frequency Duration of audit

< 50 lakhs 10%of units 5 working days
> 50 lakhs # 100 lakhs Once in 5years 7 working days
> 100 lakhs # 300 lakhs Once in 2years 7 working days
> 300 lakhs Yearly 70 working days
About 25% of EOUs will be audited every year.
(iii) Preliminary or Desk Review: Desk Review is carried out by a practicing cost accountant/ chartered ac-
countant. The following points need to be borne in mind:
(a) The entire process can be done by the Cost Accountants / Chartered Accountants without inter-
acting with the assessee; hence it is called Desk Review.
(b) There view is carried out at the office of the Excise Department.
(c) The desk review is a part of the internal audit procedure and the services of the professionals are
taken to help the department.
(d) The normal scope of work for the professional is to ascertain:
Evasion of duty
Under Valuation of excisable goods
CENVAT Credit misuse
Execution of Bonds and its misuse
Evasion of interest, penalty, if any
Facts produced by the assessee is in order or not and soon.
(e) This will help the Central Excise department to assess the risk of the assessee and prepare a suitable
audit plan.
(f) The audit team would collect data/records required for preliminary review such as:
all information available about the unit or assessee,
its operations,
reasons for selection for audit
possible issues that canbe identified at this stage
assessee profile
annual report, Cost audit report, Tax audit report and other Excise records.
Central Excise
(g) The audit should be completed in 5-7 working days.

(iv) Gathering and Documenting Assessee Information: With the help of desk review the central excise audi-
tors would identify certain areas, which warrant closer examination. For this the Department may write to
the assessee or send him a questionnaire to obtain then ecessary information.
(v) Touring of the Premises: The audit or visits the factory of the assessee and togather information about
the production process,
the marketing process
the system of accounting,
the inventory management system, and to verify
duty payment details
existence of physical stock
correctness of stock records.
(vi) Evaluation of Internal Control System: Internal controls form a basis for reliability of the companys ac-
counting records. The evaluation of internal controls is necessary for determination of the scope and
extent of audit checks required for the assessee. One of the ways of evaluating internal controlis to do
a walk through of a transaction from beginning to end. For example, to assess there liability of internal
control in respect of procurement system all the related documents and accounting records starting
from indent to posting in the posting in the stores ledger of a particular item of purchase is studied care-
fully.
(vii) Preparation of Audit Plan: The audit plan should be documented in the working papers. It should be
consistent with complexity of the unit, materiality, problems and risk factors identified upto this point and
reasons for selection of the unit for audit in the first place. The draft Audit Plan should be submitted for
approval of Additional or Joint Commissioner (Audit) and the audit should be under taken only after such
approval. Once the Audit Plan is approved, the auditor should stick to the audit plan in the conduct of
audit.
(viii) Preparation of Audit Report: This step involves putting together all of the audit findings in one place to
be placed in the audit file. Where necessary, important objections and findings must be reviewed with
the immediate supervisor before discussing them with the assessee. It is expected that the auditor should
inform the assessee of all the objections before preparing a draft audit report. The assessee must have
the opportunity to know the objections and to offer clarifications with supporting documents. This process
will resolve potential disputes early and avoid unnecessary disputes.
(ix) Audit Follow up: After the submission of the Audit Report along with the working papers, the Super inten-
dentin charge of the audit team should discuss the major audit points with Assistant / Deputy Commis-
sioner of audit.
The Audit Report should be submitted for evaluation to the Audit Monitoring Cell. This Cell, headed by
the Principal Commissioner or Commissioner, during its monthly meetings should review the Audit Reports
for final acceptance(ornon-acceptance) of the audit points. There after the draft Audit Report would be
finalized. The Audit cell should update the Assessee Master file based on the information available in the
Audit Report.
(x) Notice: A minimum of 15 days notice should be given to the assessee before commencing the audit.
(3) Special Audit (i.e. one with a restricted narrow scope to conform with a government agencys regulatory re-
quirements) by Cost Accountant or Chartered Accountant
Special audit consists of:
Valuation Audit (Section 14A of Central Excise Act.)
CENVAT Credit Audit (section 1 4AA of Central Excise Act.)
Duty payment is correct only when the valuation is correct. Hence valuation is critical. Valuation Audit can be
ordered only with the prior approval of the Principal Chief Commissioner of Central Excise or Chief Commis-
sioner of Central Excise.
CENVAT credit is allowed to the manufacturers to avoid cascading effect of tax. Hence, the department would
like to ensure that only the correct amount has been taken credit of. In this connection the Principal Commis-
sioner of Central Excise or Commissioner of Central Excise may order the CENVAT Credit Audit, if he believes
that the CENVAT credit utilized is not within the normal limits.
Valuation Audit (Section 14A of Central Excise Act)
(i) Deputy Commissioner of Central Excise or Assistant Commissioner with prior approval of the Principal Chief
Commissioner of Central Excise or Chief Commissioner can order theValuation of AssessableValue.
(ii) Audit has to be done by a qualified Cost Accountant or Chartered Accountant.
(iii) The Cost Accountant has to be nominated by the Principal Chief Commissioner of Central Excise or Chief Com-
missioner of Central Excise.
(iv) The maximum time limit for submission of such cost audit report is180 days from the date of receipt of cost audit
order by the manufacturer.
(v) The expenses and audit fees shall be paid by excise department to the cost auditor.
(vi) The auditor is required to find:
(a) Whether the assessable value of goods manufactured by the assessee is correct Whether classification of goods
has been done correctly
(b) Where ver certification is required and whether such certification has been obtained.
(c) Whether the cost of production shown in the cost sheet is in accordance with the Cost Accounting Standard 4
issued by the Institute of Cost and Works Accountants of India.
Whether raw material shown in the purchase book matches with the purchase invoice.
CENVAT Credit Audit (Section 14AA of Central Excise Act)
(i) The authority for ordering the CENVAT Credit Audit is the Principal Chief Commissioner of Central Excise or Com-
missioner of Central Excise.
(ii) Only a practicing Cost Accountant or Chartered Accountant can carry out the audit.
(iii) The Cost Accountant or Chartered Accountant has to be nominated by the Principal Commissioner Central of
Excise or Commissioner of Central Excise.
(iv) The Cost Accountant or Chartered Accountant has to submit his audit report within the time specified by the
Principal Commissioner of Central Excise or Commissioner of Central Excise.
(v) The expenses and fees for conducting the audit shall be paid by the Excise department to the Cost auditor.
Note: Finance Act 2009, amendment of Section 14A and 14AA, for the words cost accountant,, the words cost ac-
countant or chartered accountant shall be substituted.
Departmental Verification
(a) The assessee has to submit periodic returns to Superintendent of Central Excise and date stamped acknowl-
edgement for the same should be obtained.
(b) In general the Superintendent and Inspectors of Central Excise may visit factories of the assessee to verify the
records, stock taking and soon. Stock taking can be done for finished goods and CENVAT goods.
(c) Some times road checks are carried out by the department authorities to check whether all goods moving are
accompanied by duty paying documents or not.
(d) Moreover, each Commissionerate has a preventive section to have surprise checks and raids when evasion is
suspected. Directorate of Central Excise Intelligence under Central Board of Excise and Customsgathers infor-
mation from various sources about the duty evasion and initiate suitable action against them.
In short, in addition to the audit, the Central Excise Department is empowered to carryout verification at ANY
Central Excise
point in time.
Submission of Records and Books (vide NT 22/2012 C.Ex. dt. 30-3-201 2)
As per Rule 22(3) of the Central Excise Rules, 2002, every assesse, and an importer who issues an invoice on which
Cenvat credit canbe taken and first stage and second stage dealer, on demand make available to the officer em-
powered by the Principal Commissioner or Commissioner or the audit party deputed by the Principal Commissioner
or Commissioner or Comptroller and Auditor General of India, ora Cost Accountant or Chartered Accountant nomi-
nated under section 14A or section 14AA of the Act,
(i) the records maintained or prepared by the assesse.
(ii) the cost audit reports, if any under section 148 of the Companies Act, 2013.
(iii) the income-tax audit report, if any under section 44 AB of the Income-tax Act, 1961.
for the scrutiny of the officer or the audit party or the Cost Accountant or Chartered Accountant, as the case
may be.
2.22 WAREHOUSING
2.22 WAREHOUSING
Warehousing
Facility of warehousing of excisable goods without payment of duty has been provided in respect of the specified
commodities by Notification No. 47/2002 - CE (NT), dated 26th June, 2001. The Central Board of Excise and Customs
has also specified detailed procedure including the conditions, limitations and safe guards for removal of excisable
goods under Rule 20(2) of the Central Excise Rules, 2002 and in the Central Excise Manual, 2001.
Place of Registration of Warehouse
The Principal Commissioner or Commissioner of Central Excise will specify the places under his jurisdiction where ware-
house 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.
Failure to Receive a Warehousing Certificate
(a) The consignor should receive the duplicate copy of the warehousing certificate, duly endorsed by the con-
signee, within ninety days of the removal of the goods. If the warehousing certificate is not received with in
ninety days of the removal or such extended period as the Principal Commissioner or Commissioner may allow,
the consignor shall pay appropriate duty leviable on such goods.
(b) If the Superintended-in-charge of the consignor of the excisable goods does not receive the original ware-
housing certificate, duly endorsed by the consignee and counter signed 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.
Warehouse to Store Goods belonging to the Registered Person
(a) A warehouse shall be used solely for storing excisable goods belonging to the registered person of the ware-
house alone. He shall not admit or retain in the warehouse any excisable goods on which duty has been paid.
(b) The Principal Commissioner or Commissioner of Central Excise having jurisdiction over the warehouse may per-
mit storage of excisable goods along with the excisable goods belonging to another manufacturer.
(c) The Principal Commissioner or Commissioner of Central Excise having jurisdiction over the warehouse may per-
mit 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.
Export Warehousing
In pursuance of Rule 20(1) of the Central Excise Rules, the Board had issued Notification No. 46/2001 - Central Excise
(N.T.), dated 26th June, 2001 which has come into for mon 1st July, 2001, where by 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 placesas may be specified by the Board and export there from.
In pursuance of the above-mentioned notification the Board has also specified by Circular N. 581/18/2001 - CX, dated
29th June, 2001 the places and class of persons to whom the provisions of the Notification No. 46/2001 - Central Excise
(N.T.), dated 26th June, 2001 shall apply. In the same Circular, the Board has specified the conditions (including inter-
est), limitations, safeguards and procedures.
2.23 EXPORT BENEFITS AND PROCEDURES
Export Benefits and Incentives

In order to boost exports from India various in centives and benefits have been allowed interalia under the Excise and
Customs Law. A brief account of the same is given below:
(i) Rebate of duty on export goods and material used in manufacture of such goods: Rule18 of the Central Ex-
cise Rules, 2002 provides for grant of rebate of duty paid on goods exported or duty paid on the material used
in the manufacture of export goods, subject to such conditions, limitations and procedures as specified in the
Notifications Nos. 40/2001-CE(NT) and 41/2001-CE(NT), both dated 26-6-2001.
(ii) Export of goods without payment of excise duty under Bond: As per Rule 19, any excisable goods can be ex-
ported or inputs for manufacture of such goods can be removed without payment of duty from the factory
or warehouse or any other premises as may be approved by the Principal Commissioner or Commissioner
under Bond subject to the conditions safe guards and procedures notified by CBEC vide the Notifications Nos.
42/2001- CE (NT) to 45/2001-CE (NT), all dated 26-6- 2001.
Further, to facilitate export under Bond, export warehouses have been allowed to be setup, from where goods
can also be exported directly. Goods can also be cleared directly from the job workers premises to export
warehouses of even merchant exporters for export.
(iii) Cenvat credit of input excise duty provided draw back for the same is not taken: Where goods are exported
under bond, the input credit taken on account of export can be utilized for paying duty on similar products
cleared for home consumption. Assessee may also obtain cashre fund. However, cashre fund of input credit is
not admissible for deemed exports to FTZ units and 100% EOUs.
(iv) Setting up of units in FTZ/EPZ/ETP and Jewellery Complexes and 100% EOU/SEZ: All required inputs and capital
goods, whether in digenous or imported, are made available to these units free of customs and excise duties
under bond. Forgetting indigenous / imported inputs, CT-3 book-lets / Procurement Certificate is issued to them
by the Range Officer. These are customs bonded units setup under section 65 of the Customs Act, 1962 but with
a much relaxed control and in accordance with the EXIM Policy for manufacture of articles fo rexport out of
India or for production or packaging or jobwork for export of goods or services out of India.
Inter-unit transfers for valid reasons are freely allowed among EPZ/EOU/SEZ units themselves. The warehousing
licence for that would be valid for 5 years.
100% EOUs have been given the facility of sending the Customs bonded goods to such contractors in DTA for
jobwork and EOUs / EPZ units have also been allowed to carryout jobwork for DTA units. Capital goods canbe
sent to DTA for repairs and return under the Range Superintendents permission. All EOUs and units having an
investment of ` 5 crores or above, inplant and machinery, have to show positive value addition only.
(v) Drawback of Customs and Central Excise Duties in respect of Inputs, both Indigenous and Imported: An AllI
ndustry Rate Schedule is laiddown and published for this purpose within 3 months of presentation of each Bud-
get. If an exporters goods do not figure there in or if he finds the all Industry rate too low (less than four-fifth soft
he input duties paid by him), he can apply for fixation of brand rate(s) for his goods. Anti-dumping duty, if actu-
ally paid on inputs, can only be claimed by way of brand rate. It is a Simplified Brand Rate Fixation Scheme un-
der which all applicant exporters canbe allowed aprovisional brand rate within15 days without pre-verification
of data submitted by them. Exporters should send the data duly verified by the mand accompanied by original
duty paying documents (bills of entry and invoices) direct to the Ministry of Finance (Revenue Department),
Joint Secretary (Drawback), Jeevan Deep Building 10, Parliament Street, New Delhi 110001.
DTA exporters are also eligible for grant of drawback at brand rate only in respect of duties suffered on their
inputs which are processed by EOU/EPZ units. Sanctions for brand rate are normally valid for one year but for
Central Excise
brand rates having all Industry Rate linkage, validity is upto notification of the next AIR Schedule.
Drawback for inputs is permissible not only in case of manufacture but also for processing or other operations
for export of goods.
(vi) Drawback of 98% customs duty (including anti-dumping duty): If imported goods are re-exported as such,
drawback of 98% customs duty is permitted. Re-export canbe through any port and to any party (not necessar-
ily the original supplier of the goods).
(vii) Duty free Replenishment Scheme: The scheme allows duty free replenishment on post-export basis for import of
inputs on the basis of input-output norms where such norms exist and on condition of uniform value addition of
33%. The duty exemption is only for basic customs duty, surcharge and SAD. There would be no exemption for
anti-dumping duty or safe guard duty or CVD. But Cenvat credit of CVD canbe taken.
(viii) DEEC Scheme: For imported inputs against Advance Licence (Quantity Based only) Duty Entitlement Export
Certificate has to be taken subject to bond executed with customs authorities under taking to exports tipulated
quantity/value of specified finished goods. These licences are not transferable. However, imports agains tthese
licenses have been exempted from payment of all kinds of duties like basic, additional Customs duty, special
customs duty, anti-dumping/safe guard duty.
(ix) DEPB Scheme: Duty entitlement passbook scheme patterned on the credit-debit system of Central Excise CEN-
VAT scheme was scheduled to phase out by March 31, 2002 but is being continued till VAT comes in to force.
This scheme has been abolished w.e.f. 01.10.2011as it was said to be non- complaint of WTO requirement.
(x) Imports for repair, jobbing, etc. free of duties (both basic and additional): Such imports are made subject to
bond for their re-export with10% value addition. No CCP is required now. Jobbing operations would be carried
out in accordance with the Customs (Import of Capital Goods at Concessional Rate for Manufacture of Excis-
able Goods) Rules, 1996 and not in Customs Bond under section 65. Such export should be completed within 6
months.
(xi) Import of capital goods at 5% concessional rate under EPCG Scheme: Such imports are subject to export obli-
gation and are applicable to all sectors and to all capital goods without any thres hold limit. No payment of ad-
ditional Customs duty (e.v.d.) and special additional duty (SAD) applies. The scheme has also been extended
to identified service sectors. The export obligationis to be completed in eight years. However, for the following
categories, export obligation period will be 12 years :
1. EPCG licenses of ` 100 crores or more;
2. Units in agri-export zones; and
3. Companies under the revival plan of the BIFR.
Further, supplies under deemed exports are eligible to counting for discharge of export obligation.
(xii) Duty Free Entitlement Credit Certificate to Status holders: Who show incremental growth of more than 25% in
exports, such certificate would be equal to10% of the incremental growth achieved during 2002-2003 subject to
a maximum turn over of ` 25 crores. Imports under it would be exempt from basic customs duty, CVD and SAD.
Actual user condition would apply to certificate and the goods imported there under [Notificatio No. 53/2003-
Cus]
(xiii) Duty Free Entitlement Credit Certificate to Service Providers: It would be equal to10% (5% in the case of hotels)
of average for exearnings of the preceding three years subject to a maximum earning of ` 10 lakhs. Extent of
exemption and all conditions shall be same as in case of status holders. Service providers should register them-
selves with FIEO. [Notification No. 54/2003 - Cus]
(xiv) Special Economic Zones: By new notifications 22, 23, 24, 25/2003 - CE & 51-52/2003 - Cus. Special incentives
have been provided for the special economic zones setup on Chinese model at Mumbai, Kandla, Cochin and
other locations by converting the existing EPZs into SEZ, which would be treated as under outside territory of
India.
Export Without Payment of Duty
The Rule 19 of the Central excise Rules, 2002, which corresponds to Rule 13 of the Central excise Rules. 1944 provides
that:
i. Any excisable goods may be exported without payment of duty from a factory of the producer or the manu-
facturer or the warehouse or any other premises, as may be approved by the Principal Commissioner or Com-
missioner.
ii. 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 Principal Commissioner or Commissioner.
iii. The export under sub-rule (1) or sub-rule (2) shall be subject to such conditions, safe guards and procedure as
may be specified by notification by the Board.
Categories of Exports
There are two categories of export without payment of duty
(i) Export of finished goods without payment of duty under bond or undertaking.
(ii) Export of manufactured/processed goods after procuring rawmaterial without payment of duty under bond.
Simplified Export Procedure For Exempted Units
Units, which are fully exempted from payment of duty by a notification granting exemption based on value of clear-
ances for home consumption, may be exempted from filing ARE. 1 and Bond till they remain within the full exemption
limit. The following simplified export procedure, as detailed out in the Central Excise Manual, 2001, shall be followed in
this regard by such units:
Filing of Declaration
Manufacturers exempted for payment of duty will not be required to take Central Excise Registration. They shall how-
ever, file a declaration in terms of Para 2 of Notification No. 36 / 2001 - CE (NT), dated 26-6- 2001, and obtainde clarant
code number [not with standing they are exempted from declaration], but for this procedure.
Documentation
The clearance document will be as follows:
(i) Such manufacturers are permitted to use invoices or other similar documents bearing printed Serial Numbers
beginning from 1st day of a financial year for the purpose of clearances for home consumption as well as for
exports. (The printing of Serial Numbers canbe done by use of franking machine). The invoicesmeant for use dur-
ing a month shall be pre-authenticated by the owner or partner or Director/ Managing Director of a Company
or other authorized person.
(ii) The declarants Code Number should be mentioned on all clearance documents.
(iii) Such declarants document should contain particulars of the description of goods, name and address of the
buyer, destination, value, [progressive total of total value of excisable goods cleared for home consumptions
ince beginning of the financial year], vehicle number, date and time of there moval of the goods.
(iv) The clearance document will be signed by the manufacturer or his authorized agent at the time of clear-
ance.
(v) In case of export through merchant exporters, the manufacturer will also mention on the top EXPORT THROUGH
MERCHANT EXPORTERS and will mention the Export-Import Code No. of such merchant exporters.
(vi) In case of direct export by the manufacturer-exporters, he will mention on the top FOREXPORT and his own
Export-Import Code No., if any.
2.24 EXCISE
2.24 EXCISE ON
ON SMALL
SMALL SCALE
SCALE INDUSTRIES
INDUSTRIES
Small Scale Industries

The contribution of Small Scale Sector in the industrial growth of the Indian economy and to the Gross Domestic Prod-
uct is significant, besides the potential for employment generation. Keeping this into consideration, special provisions
of Central Excise are applicable to small-scale units.
Exemption to SSI
Central Excise
SSI are eligible for exemption from duty under Notification No. 8/2003 - CE dated 1-3-2003. The SSI unit need not
be registered with any authority.
Broadly, items generally manufactured by SSI (except in tobacco, matches and textile sector) are eligible for
SSI exemption. Some items like pan masala, matches, watches, tobacco products, Power driven pumps for
water not confirming to BIS, products covered under compounded levy scheme etc. are specifically excluded,
even when these can be manufactured by SSI. Some items like automobiles, primary iron and steel etc. are not
eligible for SSI exemption, but anyway, these are beyond capacity of SSI unit to manufacture.
Unit whose turnover was less than or equal to ` 400 lakhs in previous year are entitled to full exemption upto
` 150 lakhs in current financial year.
SSI units manufacturing goods with brand name of others are not eligible for exemption, unless the goods are
manufactured in rural area.
Turnover of all units belonging to a manufacturer will be clubbed for calculating SSI exemption limit.
Clubbing is also possible if two units are sham or bog us or if there is unity of interest and practically they are one.
While calculating limit of ` 400/150 lakhs -
Turnover of Exports, deemed exports, turnover of non-excisable goods, goods manufactured with others brand
name and cleared on full payment of duty, jobwork done under notification No. 214/86-CE, 83/94-CE and 84/94
- CE, processing not amounting to manufacture, strips of plastics used within factory is to be excluded.
Value of intermediate products (when final product is exempt under notification other than SSI exemption no-
tification), branded goods manufactured in rural area and cleared without payment of duty, export to Nepal
and Bhutan and goods cleared on payment of duty is to be included.
Value of turnover of goods exempted under notification (other than SSI exemption notification or jobwork ex-
emption notification) is to be included for purpose of limit of ` 400 lakhs, but excluded for limit of ` 150 lakhs.
Distinction between mode of calculations of ` (150/400) lakhs
Generally, provisions for calculation of turnover for ` 150 lakhs and ` 400 lakhs are similar. Major distinction is thatif
goods are exemptundera notification other than SSI exemption notification or job work exemption notification, that
turnover is included for calculating ` 400 lakhs limit but not for ` 150 lakhs limit. If final product is exempt under jobwork
exemption notification, it is not to be considered either for ` 150 lakhs or for ` 400 lakhs.
Clearances of goods exempted under any other notification to be excluded for ` 150 lakhs but includible for ` 400
lakhs - Some goods maybe exempt under some other notification, i.e. other than SSI exemption notification. In some
cases, duty may not be payable on such goods for some other reason. Turnover of such goods is not to be considered
for calculating exemption limit of ` 150 lakhs. However, this turnover (except clearances to EOU, SEZ, STP, EHTP, UN
etc. and jobwork under notifications 214/86 - CE, 83/94 - CE and 84/94 - CE) will have to be considered for calculating
exemption limit of `400 lakhs.
If some intermediate product gets produced during manufacture of exempted final product, its turnover will be held
as includible for calculating exemption limit of ` 150 lakhs, if such intermediate product is dutiable.
The SSI exemption for such jewellery manufacturers would be upto ` 6 crore in a year with an eligibility limit of ` 12 crore
in the preceding year for such jewellery manufacturers. Thus, a jewellery manufacturer will be eligible for exemption
from excise duty on first clearances upto ` 6 crore during a financial year, if his aggregate domestic clearances during
preceding financial year did not exceed ` 12 crore [Notification No. 8/2016 CE dated 01.03.2016].
Example 51: A Ltd. is having a manufacturing unit at Faridabad. In the financial year 2016-17 the value of total clear-
ances from the unit was ` 750 lakhs as per the following details: (i) Exports to USA - ` 100 lakhs; to Nepal - ` 50 lakhs (ii)
Clearances to a 100% export oriented unit - ` 75 lakhs (iii) Clearances as loan licensee of goods carrying the brand
name of another upon fullpayment of duty - ` 200 lakhs (iv) Clearances exempted vide Notification No. 214/86 - C.E.
dated 25-3-86 - ` 125 lakhs. (v) Balance clearances of goods in the normal course: ` 200 lakhs. You are required to
state with reasons whether the unitis entitled to the benefit of exemption under Notification No. 8/2003 - C.E. dated
1-3-2003 as a mended in the financial year 2009-10.
Answer:
Following is includible for calculating limit of ` 400 lakhs : (i) Exports to Nepal- ` 50 lakhs (ii) Normal clearances ` 200
lakhs. Total ` 250 lakhs. Since the turnover is less than ` 400 lakhs, A Ltd. is entitled to SSI concession in the assessment
year 2017-18.
Example 52: Z Associates is a Small Scale unit located in a rural area and is availing the benefit of Small Scale exemp-
tion under Notification No. 8/2003 - C.E. in the year 2016-17. Determine the value of the first clearance and duty liability
on the basis of data given below: (i) Total value of clearances of goods with own brand name - ` 75,00,000, (ii) Total
value of clearances of goods with brand name of other parties - ` 90,00,000, (iii) Clearances of goods which are totally
exempt under another notification (other than an exemption based on quantity or value of clearances) ` 35,00,000.
Normal rate of Excise duty @12.5%. Calculations should be supported with appropriate notes. It may be assumed that
the unit is eligible for exemption under Notification No. 8/2003.
Answer:
While calculating SSI exemption limit of ` 150 lakhs, goods cleared under brand name in rural area are to be included,
since goods manufactured in rural area with brand name of others are entitled for SSI exemption. However, goods
which are exempted from duty under notification other than exemption based on quantity or value of clearances is
not required to be considered. Thus, for purpose of SSI exemption, the value of turnover is ` 165 lakhs. His first turnover
of ` 150 lakhs is exempt. Thus, he is liable to pay excise duty on ` 15 lakhs.
Hence, Excise duty @ 12.5% is ` 1,87,500.
Example 53: S & Co., a small scale unit, had cleared goods of the value of ` 750 lakhs during the financial year 2015-
16. Records show that the following clearances were included in the total turnover of ` 750 lakhs: (i) Total exports
during the year - ` 200 lakhs (30% of total exports were to Nepal), (ii) Job-work in terms of Notification No. 214/86 - `
50 lakhs, (iii) Job-work interms of Notification No. 83/94 - E - 50 lakhs, (iv) Clearances of excisable goods without pay-
ment of duty to a 100% E.O.U. ` 20 lakhs, (v) Goods manufactured in rural are a with others brand - ` 100 lakhs. Find
out whether the unit is eligible to avail concession for the year 2016-17, under Notification No. 8/2003 - CE dated 1st
March, 2003, giving reasons for your answer.
Answer:
Turnover not to be considered for `400 lakhs - (i) `140 lakhs, (ii) `50 lakhs, (iii) `50 lakhs, (iv) ` 20 lakhs. Excluding this
turnover, his turnover during 2013-14 was ` 490 lakhs. Since it is more than ` 400 lakhs, he is not eligible for SSI exemp-
tion in 2016-17.
Example 54: The clearances of Dreams Ltd. were ` 400 lakh during the financial year 2015-16. The following are includ-
ed in the said clearances: (i) Exports to Nepal and Bhutan - ` 1,20,00,000, (ii) Exports to countries other than Nepal and
Bhutan - ` 1,00,00,000 (iii) Jobwork exempted from duty under Notification No. 214/86 - ` 90,00,000, (iv) Sales to 100%
EOU against Form CT - 3 - ` 50,00,000. The company is of the view that it is not liable to pay any duty on its clearances
in the financial year 2016-17 as per Notification No. 8/2003 dated 1st March, 2003. Do you agree with the company?
Give reasons for your answer.
Answer:
SSI exemption is available upto first clearances of ` 150 lakhs. While calculating limit of ` 150 lakhs, exports to countries
other than Nepal and Bhutan, jobwork under notification No. 214/86 - CE and supplies to EOU (deemed exports) are
not required to be considered. However, supplies to Nepal and Bhutan are required to be considered. If these are
excluded, the turnover of the assessee for purpose of calculation of limit of ` 150 lakhs is ` 160 lakhs [(= ` 400 ` 100 `
90 ` 50)lakhs]. Thus, the assessee can avail exemption of ` 150 lakhs and will have to pay duty on ` 10 lakhs.
Example 55: A Small Scale Unit (SSI) has effected clearances of goods of the value of ` 460 lakhs during the financial
year 2015-16. The said clearances include the following: (i) Clearance of excisable goods without payment of Excise
duty to a100% EOU unit - ` 40 lakhs. (ii) Export to Nepal and Bhutan - ` 50 lakhs, (iii) Job-work in terms of Notification
No. 214/86 C.E., which is exempt from duty - ` 60 lakhs. (iv) Goods manufactured in rural area with the brand name
of others - ` 70 lakhs. Write a brief note with reference to the Notifications governing SSI under the Central Excise Act
whether the benefit of exemption would be available to the unit for the financial year 2016-17.
Answer:
Turnover in respect of sale to EOU (` 40 lakhs) and jobwork under notification No. 214/86 - CE (` 60 lakhs) is required to
be excluded for purpose of SSI exemption limit of ` 400 lakhs. Turnover of SSI excluding these sales is ` 360 lakhs (` 460 - `
40 - ` 60 lakhs). Hence, the SSI unit will be entitled to exemption in 2016-17 upto first turnover of ` 150 lakhs.
Example 56: A SSI unit has effected clearances of goods of the value of ` 475 lacs during the Financial Year 2015-16.
The said clearances include the following: (i) Clearance of excisable goods without payment of excise duty to a 100%
EOU unit ` 120 lacs, (ii) Jobwork in terms of notification no. 214/86 CE, which is exempt from duty - ` 75 lacs, (iii) Export
to Nepal and Bhutan - ` 50 lacs, (iv) Goods manufactured in rural area with the brand name of the others ` 90 lacs.
Central Excise
Examine with reference to the notification governing SSI, under theCentral Excise Act whether the benefit of exemp-
tion would be available to the unit for the Financial Year, 2016-17.
Answer:
While calculating the turnover of ` 400 lakhs, following are not required to be considered -
(a) Deemed exports i.e. supplies to100% EOU ( ` 120 lakhs);
(b) Jobwork that amounts to manufacture done under notifications No. 214/86 - CE, 83/94 - CE and 84/94 - CE ( `
75 lakhs).
Turnover in respect of sale to EOU (` 120 lakhs) and jobwork under notification No. 214/86 - CE (` 75 lakhs) is required
to be excluded for purpose of SSI exemption limit of ` 400 lakhs. Turnover of SSI excluding these sales is ` 280 lakhs (`
475 - ` 120 - ` 75 lakhs). Hence, the SSI unit will be entitled to exemption in 2016-17 upto first turnovers of ` 150 lakhs.
Goods not Eligible for SSI Concession

Many of goods manufactured by SSI are eligible for the concession. However, some items are not eligible (some of
the items not eligible for SSI exemption are eligible for exemption under different notifications. Some are not exempt
at all). Thus, SSI exemption is available only if the item is covered in this notification.
Broadly, items generally manufactured by SSI (except in tobacco, matches and textile sector) are eligible for SSI ex-
emption. Some items like pan masala, matches, watches, tobacco products, Power driven pumps for water not con-
firming to BIS, products covered under compounded levy scheme etc. are specifically excluded, even when these
canbe manufactured by SSI. Some items like automobiles, primary iron and steel etc. are not eligible for SSI exemption,
but anyway, these are beyond capacity of SSI unit to manufacture.
Goods with others brand name not eligible, but packing material with others brand name eligible - Goods manufac-
tured by an SSI unit with brand name of others are not eligible for SSI concession, unless goods are manufacture d in a
rural area. However, SSI exemption will be available to all packing materials meant for use as packing material by or
on behalf of the person whose brand name they bear.
Other Provisions in respect of Concession to SSI

Other provisions for concession to SSI are as follows:
Value for calculating SSI exemption limit
Value for purpose of calculating the SSI exemption limit of ` 150 and ` 400 lakhs is the Assessable Value as per section
4, i.e. transaction value.
However, when goods are assessed on basis of MRP (Maximum Retail Price), the value will be as determined under
section 4A.
SSI exemption available in respect of goods exported to Nepal & Bhutan.
The SSI exemption is available for home consumption, i.e. for consumption with in India. However, explanations to SSI
exemption notifications make it clear that clearances for home consumption shall also include clearances for export
to Bhutan & Nepal. Thus, exports to Nepal & Bhutan will qualify for SSI exemption, whether the Indian exporter receives
payment in Indian Rupees or foreign exchange.
Question 57: Small and company a small scale industry provides the following details. Determine the eligibility for ex-
emption based on value of clearances for the Financial year 2015-16 in terms of Notfn. No. 8/2003 - CE dated 1.3.2003
as: (I) Total value of clearances during the financial Year 2014-15 (including VAT ` 50 lakhs) ` 870 lakhs, (II) Total exports
(including for Nepal and Bhutan ` 200 lakhs) ` 500 lakhs, (III) Clearances of excisable goods without payment of duty
to a Unit in software technology park ` 20 lakhs, (IV) Jobwork under Notfn. No. 84/94 - CE dated 11.4.1994 ` 50 lakhs.
Jobwork under Notfn. No. 214 / 86 - CE dated 25.3.1986 ` 50 lakhs (v) Clearances of excisable goods bearing brand
name of Khadi and Village Industries board ` 200 lakhs. Make suitable as sumptions and provide brief reasons for your
answers where necessary.
Answer:
` in Lakhs
Total turnover 870.00
Less: Value of clearances including VAT 50.00
Total Exports excluding Nepal & Bhutan (500-200) 300.00
Clearance for STP jobs 20.00
Clearance for job work 100.00
Turnover (for calculating limit of crores) 400.00

Goods bearing brand name of Khadi and Village Board are eligible for SSI exemption. Hence, its turnover cannot be
excluded for calculating limit of ` 4 crores.
Thus, his turnover for purpose of SSI exemption limit is ` 400 lakhs. The requirement is that turnover should not exceed
` 400 lakhs.
Since it is not exceeding ` 400 lakhs, the company will be entitled to avail exemption upto first ` 150 lakhs in financial
year 2015-16.
Question 58: M/s Punctual Ltd., (manufacturing watches) has cleared goods of the value of ` 120 lakhs during the
financial year 2015-16 exclusive of duties and taxes. The goods attract 12.5% advalorem Excise Duty. Determine the
Excise Duty liability when the assesseeopts for CENVAT facility and also in the case when the assessee decides not to
avail CENVAT benefit. The turnover of the assessee in the previous year 2014-15 was ` 100 lakhs.
Answer:
Watches are not eligible for SSI exemption. Hence, the assessee has to pay excise duty on entire turnover of ` 120 lakhs
@ 12.5%. Thus, total duty payable is ` 15 lakh.
Question 59: Mahesh Ltd., which is engaged in manufacturing of excisable goods, started its business on1st June,2014.
It availed SSI exemption during the financial year 2015-16. The following are the details available to you:
(i) 12,500 Kg of inputs purchased @ ` 1,190.64 per Kg (Inclusive of Central excise duty @ 12.5%) ` 1,48,83,000;
(ii) Capital goods purchased on 31.5.2015 (Inclusive of Excise duty @12.5%) ` 80,09,400;
(iii) Finished goods sold (at uniform transaction value through out the year) ` 3,00,00,000.
You are required to calculate the amount of excise duty payable by M/s Mahesh Ltd. in cash, if any, during the year
2016-17. Rate of duty on finished goods sold may be taken @12.5% for the year and you may assume the selling price
exclusive of central excise duty.
There is neither any processing lossn or any inventory of input and output.
Central Excise
Answer:
Statement showing Excise duty liability of M/s Mahesh Ltd for the financial year 2015-16
Particulars Value (`) Cenvat credit (`)

Cost of Purchases [i.e. ` 1,48,83,000 100/112.5] 1,32,29,333 16,53,667
Cost of Capital goods [i.e. ` 80,09,400100/112.5]
CENVAT credit on capital goods ` 8,89,933 (i.e. ` 80,09,400 - ` 71,19,467) 71,19,467 8,89,933
Total CENVAT credit 25,43,600
Value of Finished goods 3,00,00,000
Less: Exemption limit 1,50,00,000
Value of Finished goods attract excise duty 1,50,00,000
Excise duty @12.5% on ` 1,50,00,000 18,75,000
Less: CENVAT credit (Note 1)
on input goods (note 1) (8,26,834)
on capital goods (8,89,933)
Net Excess Excise Duty C/F 1,58,233
Working Note:
(i) Output value = ` 3,00,00,000
Input value = ` 1,50,00,000
Eligible Cenvat credit on input goods used for manufacture of finished goods beyond ` 150 lakhs is ` 8,26,834
(i.e. 16,53,667 ` 150 : ` 300).
(ii) For SSI unit, Excise duty is nil, upto ` 1,50,00,000 of Finished Goods.
(iii) Rule 2(a) of the CENVAT Credit Rules, 2004
CENVAT credit on Capital Goods allowed upto 100% in the year of receipt of such goods for SSI units (w.e.f.
01.04.2010).
Question 60: An SSI unit (manufacturing goods eligible for benefits of SSI exemption notification) has cleared goods of
the value of ` 60 lakhs during the financial year 2015-16. The effective rate of Central Excise Duty on the goods manu-
factured by it is 12.5% Advalorem. What is the correct amount of duty which the unit should have paid on the above
clearances for 2015-16?
Answer:
(a) If unit intends to avail Cenvat credit on inputs, duty payable is normal duty i.e. 12.5% of ` 60 lakhs, i.e. ` 7,50,000.
(b) If unit doesnot intend to avail Cenvat crediton inputs, duty payable is Nil.
Question 61: The value of excisable goods viz. Iron and Steel articles manufactured by M/s. Alpha Ltd. was ` 120 lakhs
during the financial year 2015-16, net of taxes and duties. The goods attract 12.5% ad-valorem basic duty. Determine
the excise duty liability when the assessee opts for CENVAT and opts for not to avail CENVAT under SSI exemption
notification respectively.
Answer:
M/s Alpha Ltd has no option to opt for SSI exemption benefit since Iron and Steel are in eligible industries for availing
the said benefit.
Hence, the duty liability can be calculated is as follows:
Basic excise duty = ` 120 Lakhs 12.5% = ` 15Lakhs
Therefore the total excise duty payable is ` 15 Lakhs
Question 62: A small scale manufacturer had achieved sales of ` 86 lakhs in 2014-15. Turn over achieved during 2015-
16 was ` 1.52 crores. Normal duty payable on the product is 12.5%. Find the total excise duty paid by the manufacturer
during 2015-16 (a) If the unit has availed Cenvat credit, (b) If the unit has not availed Cenvat credit. [The turnover is
without taxes and duties].
Answer:
(a) If the unit has availed Cenvat credit, it has to pay full duty on entire turnover. Hence, duty payable is12.5% of `
1.52 crores i.e. ` 19 lakhs.
(b) If the SSI unit has not availed Cenvat, the duty payable is as follows: (i) On first ` 150 lakhs: Nil (ii) On subsequent
sales-Normal duty of 12.5%. Thus, duty on remaining ` 2 lakhs will be ` 25,000. Thus, excise duty paid is ` 25,000.
Question 63: Z Ltd. is a small-scale industrial unit manufacturing a product X. The Annual report for the year 2015-16 of
the unit shows a gross sale turnover of ` 1,91,40,000, which includes excise duty and sales tax. The product at tract-
edan excise duty rate of 12.5% as BED, Sales Tax 10%. Determine the duty liability under Notification No. 8/2003 - CE, if
SSI unit hada vailed SSI exemption and then paid duty. On the other hand, if SSI had availed Cenvat Credit on all its
inputs, what would be the excise duty liability?
Answer:
Duty liability of Z Ltd. in each case is as follows -
(a) In respect of first net turnover of ` 150 lakhs (` 1,50,00,000), excise duty is Nil. Sales tax @ 10% is payable on net-
turnover on ` 1,50,00,000. Hence, sales tax @ 10% is ` 15,00,000. Thus, gross sale turnover in respect of first net
turnover of ` 150 lakhs (where excise duty is not paid) is ` 1,65,00,000.
Therefore, balance gross sale turnover is ` 26,40,000 (` 1,91,40,000 - ` 1,65,00,000). This includes excise duty at
12.5% and sales tax @ 10%.
Excise Duty = [(` 26,40,000 100/110) 12.5/112.5] = ` 2,66,667 Sales Tax = ` 26,40,000 10/110 = 2,40,000
(b) If SSI unit intends to avail Cenvat credit on all its inputs, it has to pay full 12.50% duty on its entire turnover is as
follows: Excise duty = [(` 1,91,40,000 x 100/110) x 12.5/112.5] = ` 19,33,333 Sales tax = ` 1,91,40,000 x 10/110 = `
17,40,000.
Example 64: A small scale manufacturer produces a product P. Some of the production bears his own brand name,
while some productions bears brand name of his customer. The customer purchases the goods from the small scale
unit and sales himself by adding 20% margin over his purchase cost ` 3,53,00,000. He achieved clearances SSI unit in
2015-16 was ` 445 lakhs.
The following break up [These clearances are without considering excise duty and sales tax] are
Clearances with his own brand name- ` 80 lakhs,(ii)Clearances of product bearing his customers brand name -` 365
lakhs. Normal excise duty of his product is 12.5%. The SSI unit intends to avail Cenvat benefit on inputs on goods sup-
plied to the brand name owner but intends to avail SSI exemptionon his own clearances.
(A) Find the total duty paid by the manufacturer in 2015-16, if (i) Inputs are common but SSI unitis able to maintain
separate records of inputs in respect of final products under his brand name and those with others brand name
(ii) The inputs are common and SSI unit is not able to maintain separate records on inputs used in final products
manufactured under his brand name and with others brand name.
(B) What will be the rate of excise duty payable by him in April 2016 (i) on product bearing his own brand name
and (ii) on product bearing his customers brand name.
(C) Will there be any difference in duty payable in April 2016 if all his clearances of ` 445 lakhs in 2015-16 were of
product under his own brand name?
Answer:
(A) SSI unit can avail Cenvat on final products cleared under others brand name and avail SSI exemption in re-
spect of his own production.
(i) In the first case, he has to pay duty @ 12.5% on ` 365 lakhs, i.e. ` 45.63 lakhs. He cannot avail Cenvat
credit in respect of inputs used to manufacture product under his own brand name.
(ii) Inthe second case, since he is unable to maintain separate record of inputs, he will have topay 6% on
Central Excise
` 80 lakhs as per rule 6(3)(i) of Cenvat Credit Rules. Thus, he has to pay duty of ` 45.63 lakhs, plus an
amount of ` 4.80 lakhs. He can avail Cenvat on all the inputs.Note that in respect of goods bearing
customers brand name, duty is payable on his selling price to the customer even if customer sells them
subsequently at higher price.
The assessee has to carefully do his costing and decide (i) whether to avail Cenvat on all inputs, payfull
duty on all final products and 6% on final products cleared under his own brand name or (ii) Not avail
Cenvat at all and avail exemption from duty on his own production with his brand name.
(B) The turnover of SSI during 2015-16 was not exceeds ` 4 crores. However, for purposes of calculating the upper
limit of ` 4 crores, clearances with others brand name are not to be considered. Hence, from 1st April 2016, he
can clear goods bearing his own brand name upto ` 150 lakhs without payment of duty, if he does not avail
Cenvat credit on inputs used in such products. If he is unable to maintain separate records, he will have to pay
6% amount on goods manufactured under his own brand name.
(C) If total turnover of ` 4.45 crores in 2015-16 was under his own brand name, the manufacturer is not eligible for
any Small Scale industry concession in April 2016, and he will have to pay duty at normal rates on his total clear-
ances in April 2016.
Example 65: The value of clearances from four units of M/s X Ltd. during 2015-16 are as follows:
Units situated at Value of clearances (` in lakh)

Guwahati 120
Patna 100
Delhi 130
Chennai 170
M/s X Ltd. seeks your advice as a consultant whether benefit under Notification No. 8/2003 shall be available to M/s X
Ltd. during 2016-17. You are required to indicate your advice in this context.
Answer:
In the given case M/s X Ltd. total turnover for the year 2015-16 is ` 520 Lakh (i.e. ` 120 + ` 100 + ` 130 + ` 170). Hence,
the benefit of exemption Notification No. 8/2003 shall not be available to M/s X Ltd. in the year 2016-17.
Example 66: Determine the amount CENVAT Credit available to M/s Y Ltd. in respect of following items procured by
them in the month of October 2016:
(i) If the aggregate value of clearances of M/s Y Ltd. for the financial year 2015-16 is ` 450 lakhs;
(ii) If the aggregate value of clearances of M/s Y Ltd. for the financial year 2015 -16 is ` 350 lakhs and in the current
year opted to claim the benefit of the SSI exemption from payment of duty.
Items Excise duty paid (`)

Raw materials 52,000
Capital goods used for generation of electricity for captive use with in the factory 1,00,000
Motor spirit 40,000
Inputs used for construction of a building 1,00,000
Dairy and bakery products consumed by the employees 5,000
Motor vehicle (not capital goods) 4,50,000
Aggregate clearance of dutiable goods for the month of October 2015 is ` 180 lakhs.
Answer:
Statement showing CENVAT Credit allowed or not allowed:
Items Excise dutypaid (`) Remarks

Raw materials 52,000 100% CENVAT Credit allowed
Capital goods used for generation of 1,00,000 For SSI Units 100% CENVAT Credit allowed. For other
electricity for captive use with in the than SSI Units upto 50% in the 1st year of receipt of
factory capital goods and balance in subsequent years
Motor spirit Nil CENVAT Credit not allowed
Inputs used for construction of a build- Nil CENVAT Credit not allowed
ing
Dairy and bakery products consumed Nil CENVAT Credit not allowed
by the employees
Motor vehicle Nil CENVAT Credit not allowed

Statement showing CENVAT Credit allowed amount:
Description CENVAT Credite ligible for the month of October, 2015 (`)
(i) The aggregate value of clearances of M/s Y Ltd. for 1,02,000 (i.e. 52,000 + [1,00,000 50%])
the financial year 2014-15 is ` 450 lakhs.
(vi) The aggregate value of clearances of M/s Y Ltd. for CENVAT Credit on input goods 8,667
the financial year 2014-15 is ` 350 lakhs.
(i.e. ` 52,000 x 30 lakhs/180lakhs) 1,00,000
CENVAT on Capital goods
Therefore, total CENVAT Credit 1,08,667

Example 67: XYZ & Co., a SSI unit manufactures different products and the value of the clearances for the financial
year 2015-16 is given below:
Products ( ` lakhs)
A1 A2 A3
(i) Clearance for home consumption 55 40 60
(ii) Captive consumption in the manufacture of excisable goods 100 80 60
(iii) Export to U.S.A. 90 80 Nil
(iv) Exportto Nepal 50 40 39
(v) Jobwork done under Notification 214/86-C.E. 55 30 60
(vi) Goods manufactured in rural area with brand name of others 45 35 35
The unit seeks your advice as to whether they are eligible for SSI unit exemption for the year 2015-16. Explain the basis
for your conclusions.
Answer:
Statement showing aggregate clearance in the financial year 2014-15 (` in lakhs)
Central Excise
Sl. No. Particulars Product Product Product Total Remarks

A1 A2 A3
(i) Clearance for home con- 55 40 60 155
sumption
(ii) Captive consumption in the -- -- -- -- This turnover not addable, since it is
manufacture of excisable forming part of finished goods
goods
(iii) Export to U.S.A. -- -- -- -- Export turnover excluded
(iv) Export to Nepal 50 40 39 129 Not considered as export turnover.
(v) Job work done under Notifi- -- -- -- -- Not addable, because it is exempted
cation 214/86-C.E. from duty in the hands of job worker
(vi) Goods manufactured in ru- 45 35 35 115
ral area with brand name of
others
Total 150 115 134 399
Note: Option to claim SSI exemption benefit is applicable only when the previous year turnover is less than ` 400 lakhs.
For current year 2015-16 XYZ & Co. is eligible to avail the SSI exemption since, during the previous year the aggregate
clearance is ` 399 lakhs.
2.25 DEMANDS AND PENALTIES
Demands of Excise Duty

If duty is short paid or not paid or erroneouslyre funded, show cause notice canbe issued u/s 11 A (1) of CEA with
in one year from relevantdate.
In case of all egation of suppr ession off acts, will fulmis statement, fraudorcollusion, the show cause notice
canbe issued with in five years.
Show cause notice is to be issued by authority who is empowered to adjudicate the case.
Adjudicating authority is required to follow principles of natural justice. He has to passorders with reasons.
In case of delay in payment of duty, interest @15% is payable u/s 11AA(1) of CEA.
Property of person to whom show cause notice has been issued canbe attached provisionally during adjudica-
tion, to protect interest of revenue.
Adjudication Powers:
Authority Remission of duty (upto ` ) Demand of Duty (upto `)
The Superintendent 10,000 1,00,000
The Deputy/Assistant Commissioner 1,00,000 5,00,000
The Joint/Additional Commissioner 5,00,000 50,00,000
Principal Commissioner or Commissioner without any upper limit with out any upper limit
Note:
1. Demand of duty or differential duty may be relating to *determination of valuation and/or classification or *
Cenvat credit cases or * duty short paid or not paid or erron eouslyre funded for any reason. Such demand may
or may not contain for all egation of fraud, suppression of fact setc. (in other words, whether or not there is all
egation offraud/suppression off act setc., the monetary limit of adjudication remains same.
2. As per CBE & C circular No. 809/6/2005 - CX dated 1-3-2005, in case of refund claim, AC/DC can pass order
without any monetary limit. However, claims of ` 5 lakhs and above will be subject to pre-audit at level of juris-
dictional Principal Commissioner or Commissioner
3. It has been clarified that value of goods/conveyance, plants, machinery, land, building etc. liable to confisca-
tion will not alter the powers of adjudication as the powers solely depend upon the amount of duty/Cenvat
credit involved on the offending goods.
Who can issues how cause notice-Show cause notice should be approved and signed by officer empowered
to adjudicate the case.
2.26 APPEALS
Excise and Customs Law empower excise/customs officers to pass adjudication orders demanding duty and intere-
stand imposing penalty and confiscation of goods.
Excise and Customs Act have made elabo rate provisions for appeals against adjudication orders passed byexcise/
customs authorities. There is only one appealin case of orders of Principal Commissioner or Commissioner, while in case
of other orders (i.e. orders of Super intendent, Assistant Commissioner, Dy. Commissioner, Jt. Commissioner, and Addi-
tional Commissioner), first appeal is with Commissioner (Appeals) and other with Tribunal. In some matters, revision ap-
plication lies with Government against order of Principal Commissioner or Commissioner and Commissioner (Appeals).
Tribunal is final fact finding authority and no further appeallies against facts as found by Tribunal (CESTAT). In case of
order of Tribunal relating to classification or valuation, appeallies with Supreme Court. In other matters, appeal can be
made to High Court only if substantial question of law is involved.
Deposit of certain percentage of duty demanded or penalty imposed before filling appeal section 35F
The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal,
(i) under sub-section (1) of section 35, unless the appellan thas deposited seven and a half percent, of the duty
demanded or penalty imposed or both, in pursuance of adecision or an order passed by an officer of Central
Excise lower in rank than the Commissioner of Central Excise;
(ii) against the decision or order referred to inclause (a) of sub-section (1) of section 35B, unless the appellan thas
deposited seven and a half percent, of the duty demanded or penalty imposed or both, inpursuance of the
decision or order appealed against;
(iii) against the decision or order referred to inclause (b) of sub-section (1) of section 35B, unless the appellant has
deposited ten percent, of the duty demanded or penalty imposed or both, in pursuance of the decision or
order appealed against:
Provided that the amount required to be deposited under this section shall not exceed rupees ten crores:
Provided further that the provisions of this section shall not apply to the stay applications and appeals pending
before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.
Explanation. For the purposes of this section duty demanded shall include,
(i) amount determined under section 11D;
(ii) amount of erroneous Cenvat credit taken;
(iii) amount payable under rule 6 of the Cenvat Credit Rules, 2001 or the Cenvat Credit Rules, 2002 or the
Cenvat Credit Rules, 2004.
Central Excise
2.27 IMPORTANT PROVISIONS OF CENTRAL EXCISE ACT, 1944
Section No. Brief Contents

2(d) Excisable Goods means goods specified in the Schedule to Central Excise Tariff Act, 1985 as being
subject to a duty of excise and includes salt. Explanation - 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
2(e) 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 manufac-
turing process connected with production of these goods is being carried on or is ordinarily carried
on.
2(f) Manufacture includes any process - (i ) incidental or ancillary to the completion of manufactured
product; (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 goods specified in Third Schedule to the CEA, involves packing or repacking of such goods in a
unit container or labelling or re-labelling of containers or declaration or alteration of retail sale price
or any other treatment to render the product marketable to consumer; and the word manufac-
turer 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.
[Clauses (ii) and (iii) are called deemed manufacture]. The definition of manufacture is inclusive
and not exhaustive.
2(h) Sale and purchase with their grammatical variations and cognate expressions, means any trans-
fer of possession of goods by one person to another in the ordinary course of trade or business for
cash or deferred payment or other valuation consideration.
3(1)(a) This section is the charging section of basic excise duty and Reads as follows - There shall be
levied and collected in such manner as may be prescribed duties on all excisable goods (exclud-
ing goods produced or manufactured in special economic zones) which are produced or manu-
factured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act,
1985.
3(2) Central Government can fix tariff values for purpose of levying excise duty. Once tariff value is fixed,
valuation section 4 will not apply, as made clear in section 4(2).
3A On goods to be notified by Central Government, duty will be payable on the basis of annual ca-
pacity of production. The production capacity will be determined by Assistant/Deputy Commis-
sioner on the basis of rules. The provision will not apply to goods manufactured by EOU.
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 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 trans-
action 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 to Price actually paid to assessee (less sales tax and other taxes) will be price-cum-duty and shall be
section 4(1) deemed to include the duty payable on such goods.
4(3)(b) Persons shall be deemed to be related if (i) They are inter-connected undertakings; (ii) They are
relatives; (iii) Amongst them, buyer is a relative and a distributor of assessee, or a sub-distributor of
such distributor or, (iv) They are so associated that they have interest, directly or indirectly, in the
business of each other.
4(3)(c) Place of removal means - (i) a factory or any other place or premises of production or manufac-
ture of the excisable goods from where such goods are removed; (ii) A warehouse or any other
place or premises wherein the excisable goods have been permitted to be deposited without pay-
ment of duty from where such goods are removed; (iii) A depot, premises of a consignment agent
or any other place or premises from where excisable goods are to be sold after their clearance from
factory; from where such goods are removed.
4(3)(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.
4(3)(d) Transaction value means the price actually paid or payable for the goods, when sold, and in-
cludes 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 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, 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.
4A Section 4A of CEA empowers Central Government to specify goods on which duty will be payable
based on retail sale price. The provisions for valuation on MRP basis are as follows -
(a) The goods should be covered under provisions of Legal Metrology Act, 2009, W.e.f. 1-8-2011
(earlier Standards of Weights and Measures Act, 1976) [section 4A(1)].
(b) Central Government has to issue a notification in Official Gazette specifying the commodities
to which the provision is applicable and the abatements permissible. Central Government
can permit reasonable abatement (deductions) from the retail sale price [section 4A(2)].
(c) While allowing such abatement, Central Government shall take into account excise duty,
sales tax and other taxes payable on the goods [section 4A(3)].
(d) The retail sale price should be the maximum price at which excisable goods in packaged
forms are sold to ultimate consumer. It includes all taxes, freight, transport charges, commis-
sion payable to dealers and all charges towards advertisement, delivery, packing, forwarding
charges etc. If under certain law, MRP is required to be without taxes and duties, that price
can be the retail sale price [Explanation 1 section 4A].
(e) If more than one retail sale price is printed on the same packing, the maximum of such retail
price will be considered [Explanation 2(a) to section 4A]. If different MRP are printed on dif-
ferent packages for different areas, each such price will be retail sale price for purpose of
valuation [Explanation 2(c) to section 4A].
(f) Removing excisable goods without MRP or wrong MRP or tampering, altering or removing
MRP declared on a package is an offence and goods are liable to confiscation [section
4A(4)] If price is altered, such increased price will be the retail sale price for purpose of valu-
ation [Explanation 2(b) to section 4A].
5(1) Government can provide for remission of duty of excise payable on excisable goods, which due to
any natural cause, are found to be deficient in quantity.
5A This section is being amended so as to omit the requirement of publishing and offering for sale any
notification issued by the Directorate of Publicity and Public Relations of CBEC.
5A(1) Central Government can exempt any excisable goods, (a) generally (b) either absolutely or subject
to such conditions (to be fulfilled before or after removal), (c) from whole or any part of excise duty
leviable. Such exemption should be in public interest and it should be by way of a notification pub-
lished in Official Gazette.
Proviso to The exemption notification issued u/s 5A is not applicable in respect of DTA clearances by EOU
section 5A(1) unit, unless specifically provided in the notification.
5A(1A) Absolute i.e. unconditional exemption is compulsory.
Central Excise
5A(2) Central Government can grant exemption, in public interest, in exceptional circumstances by a
special order (This is ad hoc exemption and can be granted even retrospectively)
5A(2A) Central Government, for the purpose of clarifying the scope or applicability of exemption notifica-
tion or exemption order, may insert an explanation to the exemption notification or order within one
year of such notification or order. Such Explanation to an exemption
5A(3) Notification will have retrospective effect from date of exemption notification.
Partial exemption under section 5A(1) or 5A(2) can be granted by providing exemption from duty
at a rate expressed in form or method different from which statutory duty is leviable. However, the
duty prescribed by an exemption notification can never exceed the Statutory Duty.
6 Registration is required to be obtained by any prescribed person who is engaged in (a) the pro-
duction / manufacture or any process of production/manufacture of any goods specified in First
or Second Schedule to Central Excise Tariff Act and (b) wholesale purchase or sale (whether on his
own account or as broker or commission agent) or storage of any specified goods included in First
or Second Schedule to Central Excise Tariff Act Rule 9 makes provisions in respect of registration.
9(1) Following are offences punishable with imprisonment and fine -
(a) Contravening provisions of restrictions of possession of goods in excess of prescribed
quantity as prescribed under section 8.
(b) Evading payment of duty payable under CEA.
(c) Removing excisable goods or concerning himself with such removal, in contravention of pro-
visions of Central Excise Act and Rules.
(d) Acquiring or in any way concerning himself with transporting, depositing, concealing, selling,
purchasing or otherwise dealing with excisable goods where he knows or has reason to be-
lieve that the goods are liable to confiscation under Central Excise Act or Rules.
(e) Contravening any provision of Central Excise Act or rules in relation to Cenvat credit.
(f) Failure to supply information or knowingly supplying false information.
(g) Attempting to commit or abetting commission of an offence regarding evasion of duty or
transit of goods or restriction on storage of goods or non-registration of a unit.
Punishment imposable in the case of an offence relating to any excisable goods, the duty leviable
thereon under this Act exceeds fifty lakh of rupees, with imprisonment for a term which may extend
to seven years and with fine :
Provided that 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 a term of less than six months.
9(1A) Section 9A is being amended to make an offence cognizable and non-bailable when the duty
liability exceeds ` 50 lakh and punishable under clause (b) or clause (bbbb) of Sub-section (1) of
Section 9.
9C & Mens rea (culpable mental state) shall be presumed by Court. Accused can prove that he had
9C(1) no culpable mental state.
11(1) Excise authorities can recover excise duty by any of the following means
Adjusting against money payable to the person (e.g. if refund is due to him)
By attachment and sale of excisable goods belonging to the assessee.
As Arrears of Land Revenue, by issuing certificate to District Collector of Revenue, who is em-
powered to recover the amount as arrears of land revenue.
Proviso to If a person transfers his business or trade or disposes of his business to a third person, any duty or
Section 11 any other sum due from predecessor can be recovered from successor in trade or business, by
attaching all goods, materials, preparations, plants, machineries, vessels, utensils, implements and
articles which was transferred to the successor.
Section 11 of Central Excise Act, 1944/142(d) of Customs Act, 1962 is being amended/ inserted so as
to provide for (i) recovery of money due to the government from any person other than from whom
money is due after giving a proper notice, if that other person holds money for or an account of the
first person;
(ii) the other person to whom such notice has been issued is bound to comply and
(iii) if the other person to whom the notice is served fails to comply, he shall face all the consequenc-
es under this Act.
11A This section is being amended so as to Increase the period of limitation from one year to two years
in cases not involving fraud, suppression of facts, willful mis-statement, etc.
11A(1)(a) Central Excise Officer can, within one year from relevant date, serve show cause notice on person
chargeable to duty, if (a) duty of excise has not been levied or paid or (b) short levied or paid or
(c) erroneously refunded. The show cause notice should ask the person why he should not pay the
amount specified in the notice.
11A(1)(b) The person chargeable with duty may, before service of notice under clause (a), pay on the basis
of,-
(i) his own ascertainment of such duty; or
(ii) duty ascertained by the Central Excise Officer, the amount of duty along with interest payable
thereon under section 11AA.
11A(2) The person, who has paid the duty under clause (b) of sub-section (1), shall inform the Central Excise
Officer of such payment in writing, who, on receipt of such information, shall not serve any notice
under clause (a) of that sub-section in respect of the duty so paid or any penalty leviable under.
11A(4) In case of fraud, collusion, wilful mis-statement and suppression of facts, or contravention of any
provision of Central Excise Act or rules with intent to evade payment of duty, demand for duty can
be raised within 5 years
Explanation The relevant date will be one of the following :
1(b) to 11A (i) 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, and no periodical return as required by the provisions of this
Act has been filed, the last date on which such return is required to be filed under this Act and
the rules made thereunder;
(ii) 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 and the return has been filed, the date on which such return
has been filed;
(iii) in any other case, the date on which duty of excise is required to be paid under this Act or the
rules made there under;
(iv) in a case where duty of excise is provisionally assessed under this Act or the rules made there
under, the date of adjustment of duty after the final assessment thereof;
(v) in the case of excisable goods on which duty of excise has been erroneously refunded, the
date of such refund;
(vi) in the case where only interest is to be recovered, the date of payment of duty to which such
interest relates.
11A(7A) Service of a statement containing details of duty not paid, short levied or erroneously refunded shall
be deemed to be a service of notice under Sub-section (1) or (3) or (4) or (5) of this section, subject
to the condition that the grounds relied upon for the subsequent period are the same as are men-
tioned in the earlier notice or notices.
11AA(1) If duty is not paid when it ought to have been paid, interest is payable at the rates specified by
& (2) Central Government by notification in Official Gazette (present rate is 18%). The interest is payable
from the first day of the month following the month in which the duty ought to have been paid, till
the date of payment.
Central Excise
11AC (1)(a) Nature of contravention: any duty of excise has not been levied or paid or short- levied or short paid
or erroneously refunded, for any reason other than the reason of fraud or collusion or any wilful mis-
statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules
made there under with intent to evade payment of duty.
Amount of penalty: An amount of 5,000 or 10% of duty liable, whichever is higher.
Proviso to Nature of contravention: duty along with interest is paid before issue of Show Cause Notice (SCN)
11AC(1)(a) or within 30 days from the date of issue of SCN
Amount of penalty: no penalty in respect of such SCN shall be deemed to be concluded.
11AC(1)(b) Nature of contravention: duty along with interest is paid within 30 days of communication of order,
subject to the condition that the penalty is also paid within 30 days of communication. [applicable
to cases not involving fraud etc]
Amount of penalty: 25% of the penalty imposed.
11AC(1)(c) Nature of contravention: any duty of excise has not been levied or paid or short- levied or short paid
or erroneously refunded, by reason of fraud or collusion or any wilful misstatement or suppression of
facts, or contravention of any of the provisions of this Act or of the rules made there under with intent
to evade payment of duty
Amount of penalty: penalty equal to duty demanded.
11AC(1)(d) Nature of contravention: duty along with interest is paid within 30 days of communication of Notice,
subject to the condition that the reduced penalty is also paid within 30 days of communication.
[applicable to cases involving fraud etc.]
Amount of penalty: 15% of the duty demanded. Proceedings shall be deemed to be concluded.
11AC(1)(e) A Nature of contravention: duty along with interest is paid within 30 days of communication of order,
subject to the condition that the reduced penalty is also paid within 30 days of communication.
[applicable to cases involving fraud etc.]
Amount of penalty: 15% of the duty demanded. Proceedings shall be deemed to be concluded.
11B(1) Person claiming refund of excise duty and interest, if any, paid on such duty, to make application
within one year of relevant date to AC/DC. The limitation of one year shall not apply if duty was
paid under protest.
11B(2) Doctrine of unjust enrichment Refund, after sanction, to be credited to Consumer Welfare Fund.
Proviso to Refund will be paid to assessee only in following cases
section11B(2) Rebate of excisable goods exported out of India (if he had exported on section 11 B(2) pay-
ment of duty;
Rebate of excise on excisable materials used in manufacture of goods exported out of India
(if he has not availed Cenvat credit);
Refund of duty paid on inputs (if payable according to any rule or notification);
To Manufacturer, if he has not passed on incidence of the duty to another person;
To Buyer, if he has borne the duty and if he has not passed on incidence of the duty to another
person;
To any other class of applicant if borne by any such class of applicants, as may be notified
by Government of India, if the incidence of duty has not been passed on to any other person
(not specified so far).
Unspent advance deposits lying in balance in the applicants account current maintained
with the principle Commissioner of Central Excise or Commissioner of Central Excise.
11B(3) Section 11 B(2) to have overriding effect over any judgment or rule
Explanation B Relevant date for purpose calculation of period of one year for filing refund claim is as under :
to section 11B (a) In case of exports (i) when the ships or aircraft leaves India (ii) if the goods are exported by
land, the date on which the goods leave Indian frontier (iii) if export is by post, date of dis-
patch of goods by post office to a place outside India.
(b) If Compound levy scheme is applicable, if assessee pays the full duty and if rate is subse-
quently reduced by Government, then date on which notification regarding reduction of rate
is published.
(c) In case of refund claim filed by purchaser, date of purchase of the goods
(d) If duty is exempted by a special order under section 5A(2), the date of issue of such order
(e) If duty was paid on provisional basis, the date of adjustment of duty after final assessment of
duty.
(f) Where duty becomes refundable as a consequence of judgment, decree, order or direction
of appellate authority, CESTAT or any Court, date of such judgment, decree, order or direc-
tion (This clause inserted by Finance Act, 2007 w.e.f. 11-5-2007)
(g) In other cases, date of payment of duty
11BB Interest on delayed refund if not paid within three months from date of receipt of application u/s
11B(1), at rate notified (Presently, 6% w.e.f. 12-9-2003). As per explanation, order for refund by Com-
missioner (Appeals), Tribunal or Court, refund is also deemed to be an order passed u/s 11 B(2).
11C Exemption if duty not paid as per past general practice - If (a) there was a generally prevalent prac-
tice of levy or non-levy of any excisable goods and (b) such goods were actually liable for duty at
higher rates; Central Government may, by notification in Official Gazette, direct that such excess
duty payable, need not be paid.
11D(1) Duty collected from buyer must be paid - Every person, who is liable to pay duty under Central
Excise Act and Rules and has collected from buyer any amount in excess of the duty assessed or
determined and paid on any excisable goods under CE Act or rules, representing as duty of excise;
must pay the amount immediately (forthwith) to the credit of Central Government
11D(1A) Every person who has collected from buyer any amount in excess of the duty assessed or deter-
mined and paid on any excisable goods under CE Act or rules, representing as duty of excise on
any excisable goods which are wholly exempt or chargeable to nil rate of duty from any person in
any manner, must pay the amount immediately (forthwith) to the credit of Central Government.
11DD If excess amount becomes payable under section 11D, interest @ 15% is payable from the first day
of the month succeeding the month in which the amount ought to have been paid under this Act.
11DDA (1) Where, during the pendency of any proceedings under section 11A or section 11D, the Central
Excise Officer is of the opinion that for the purpose of protecting the interest of revenue, it is neces-
sary so to do, he may, with the previous approval of the Commissioner of Central Excise, by order in
writing, attach provisionally any property belonging to the person on whom notice is served under
sub-section (1) of section 11A or sub-section (2) of section 11D, as the case may be, in accordance
with the rules made in this behalf under section 142 of the Customs Act, 1962 (52 of 1962).
(2) Every such provisional attachment shall cease to have effect after the expiry of a period of six
months from the date of the order made under sub-section (1).
12 Central Government can apply provisions of Customs Act regarding levy, exemption, drawback,
warehousing, offences, penalties, confiscation and procedure relating to offences and appeal to
Central Excise, making suitable modifications and alterations to adapt them to circumstances.
12A Every person liable to pay duty of excise, shall prominently indicate in all documents relating to as-
sessment, sales invoice and other like documents, the amount of duty, which forms part of the price
at which such goods are sold.
12B Every person who had paid duty shall be deemed to have passed on the burden to buyer of the
goods.
12C Constitution of Consumer Welfare Fund - Section 12D provides that the fund should be utilised for
welfare of consumers.
Central Excise
12E(1) Central Excise Officer can exercise powers and discharge duties conferred on CE officer subordi-
nate to him.
13 Any Central Excise Officer not below the rank of Inspector of Central Excise may, with prior approval
of the Principal Commissioner or Commissioner of Central Excise, arrest any person whom he has
reason to believe to be liable to punishment under this Act or the rules made there under.
14(1) Powers to issue summons to a person to attend and give evidence or produce document.
14A Special audit by Cost Accountant or Chartered accountant in case the value has not been cor-
rectly declared or determined.
14AA Special audit by Cost Accountant or Chartered accountant in cases where credit of duty availed
or utilised is not within the normal limits, etc.
2.28 IMPORTANT PROVISIONS OF CENTRAL EXCISE RULES, 2002
2(b) Assessment includes self-assessment of duty made by the assessee and provisional assessment
made under rule 7.
2(c) Assessee means any person who is liable for payment of duty assessed or a producer or manufac-
turer 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.
2(ea) Large tax payer means a person who, -
(i) has one or more registered premises under the Central Excise Act, 1944 (1 of 1944);
or
(ii) has one or more registered premises under Chapter V of the Finance Act, 1994 (32 of 1994);
and is an assessee under the Income-Tax Act, 1961 (43 of 1961), who holds a Permanent Account
Number issued under section 139A of the said Act, and satisfies the conditions and observes the
procedures as notified by the Central Government in this regard.
5 Duty will be payable at rate and valuation as applicable at the time of actual removal from factory
or warehouse, except in case of khandsari molasses [rule 5(1)]. Rate of duty applicable in case of
khandsari molasses shall be the rate in force on date of receipt of such molasses in the factory of the
procurer of such molasses [Rule 5(2)].
6 Assessee shall himself assess the duty payable on excisable goods, except that in case of cigarettes,
the Superintendent or Inspector of Central Excise shall assess the duty payable before removal of
goods.
7 Provisional assessment can be requested by the assessee. Department cannot itself order provision-
al assessment. Final assessment will be made later by Assistant / Deputy Commissioner after getting
the required details.
7(5) Where the assessee is entitled to a refund consequent to an order of final assessment under sub-rule
(3), then, subject to sub-rule (6), there shall be paid an interest on such refund as provided under
section 11BB of the Act.
8 Duty is payable by 5th of following month (6th in case of e-payment). In case of goods removed
during the month of March, the duty shall be paid by the 31st day of March.
SSI units availing SSI exemption, the duty on goods cleared during a quarter of the financial year
shall be paid by the 6th day of the month following that quarter, if the duty is paid electronically
through internet banking and in any other case, by the 5th day of the month following that quarter,
except in case of goods removed during the last quarter, starting from the 1st day of January and
ending on the 31st day of March, for which the duty shall be paid by the 31st day of March.
8(2) Duty is deemed to have been paid for purpose of availment of Cenvat credit by the buyer.
8(3) If duty is not paid fully on due date, assessee is liable to pay the outstanding amount along with
interest on unpaid amount at the rate specified under section 11AA. If part of duty is paid, the provi-
sion of interest will apply to that part of duty which is not paid [present rate of interest is 18%]
8(3A) If the assessee fails to pay the duty declared as payable by him in the return within a period of one
month from the due date, then the assessee is liable to pay the penalty at the rate of 1% on such
amount of the duty not paid, for each month or part thereof calculated from the due date, for the
period during which such failure continues.
9(1) Every person who produces, manufactures, carries on trade, holds private store-room or warehouse
or otherwise uses excisable goods or an importer who issues an invoice on which CENVAT Credit can
be taken shall get registered.
9(2) Board is authorised to issue notifications (a) specifying conditions and procedures for registration
and (b) granting exemption to person or class of persons from provisions of registration.
10(1) Daily Stock Account of manufactured goods - A daily stock of goods manufactured or produced
has to be maintained by every assessee.
10(2) and The first page and last page of such account book shall be duly authenticated by the producer
10(3) or manufacturer or his authorised agent [rule 10(2)]. All such records shall be preserved for 5 years
immediately after the financial year to which such records pertain [rule 10(3)].
11(1) Goods should be removed from a factory or warehouse only under an invoice signed by owner or
his authorised agent. In case of cigarettes, invoice shall be countersigned by Inspector or Suprint-
endant of Central Excise.
11(2) Invoice shall contain Registration Number, Address of jurisdictional Central Excise Division (added
w.e.f. 1-4-2007), Name of consignee, Description and classification of goods, Time and date of re-
moval, Mode of transport and vehicle registration number, Rate of duty, Quantity and Value of
goods and Duty payable on the goods.
11(3) Invoice should be in triplicate and should be marked as follows (i) Original shall be marked ORIGI-
NAL FOR BUYER, (ii) Duplicate copy shall be marked DUPLICATE FOR TRANSPORTER, (iii) Triplicate
shall be marked TRIPLICATE FOR ASSESSEE.
11(4) Only one copy of invoice book at a time, unless otherwise allowed by AC/DC.
11(6) Before making use of the invoice book, serial numbers shall be intimated to Range Superintendent
of Central Excise having jurisdiction.
11(7) Provisions of rule 11 shall apply mutatis mutandis to goods supplied by an importer who issues invoice
on which Cenvat credit can be taken or a first stage dealer or a second stage dealer.
Proviso to If a first stage or second stage dealer receives goods under an invoice which mentions that
rule 11(7) Cenvat credit of the special CVD paid u/s 3(5) of Customs Tariff Act is not admissible, he should
make similar endorsement in his invoice to buyer.
12(1) A monthly return is to be submitted by every assessee to Superintendent of Central Excise, of pro-
duction and removal of goods, and Cenvat credit availed, by 10th of the following month in form
ER-1. SSI unit availing concession on basis of annual turnover have to file return on quarterly basis
within 10 days from close of quarter in form ER-3.
12(2) Assessees paying duty of Rupees One crore or more per annum through PLA are required to submit
Annual Financial Information Statement for each financial year by 30th November of succeeding
year in prescribed form ER-4.
12(3) The Range Officer will scrutinise the monthly/quarterly return. He can call for documents from the
assessee as he considers necessary.
Central Excise
12(4) It will be responsibility of assessee to provide necessary records as and when required by excise of-
ficer.
12AA Procedure for job work in articles of Jewellery or other articles of precious metals.
12BB Procedures and facilities by LTU [Large Taxpayer Unit]
15 Central Government can notify scheme for payment of duty under Compounded Levy Scheme.
16 Duty paid goods can be brought in factory for being re-made, refined, reconditioned or for any
other reason under rule 16(1). After processing/repairs, if the process amounts to manufacture,
excise duty based on assessable value is payable. If process does not amount to manufacture, an
amount equal to Cenvat credit availed should be paid. [rule 16(2)]. If the above procedure can-
not be followed, permission of Principal Commissioner or Commissioner is required [rule 16(3)].
16C A manufacturer can, with specific permission of Principal Commissioner or Commissioner, remove
excisable goods manufactured in his factory for carrying out tests or any other process not amount-
ing to manufacture, to some other premises, without payment of duty. The provision does not apply
to prototype which are sent out for trial or development test. Conditions as specified in permission
of Principal Commissioner or Commissioner of CE will have to be followed [The rule is useful in cases
where Cenvat provisions do not apply].
2.29 IMPOTANT RULES OF CENTRAL EXCISE VALUATION RULES, 2000
2(b) Normal transaction value means the transaction value at which the greatest aggregate
quantity of goods are sold.
5 Some times, goods may be sold at place other than the place of removal e.g. in case of FOR de-
livery contract. In such cases, actual cost of transportation from place of removal upto place of
delivery of the excisable goods will be allowable as deduction. Cost of transportation can be either
on actual basis or on equalized basis.
6 If price is not the sole consideration for sale, the Assessable Value will be the price charged by as-
sessee, plus money value of the additional consideration received.
The buyer may supply any of the following directly or indirectly, free or at reduced cost.
(a) Materials, components, parts and similar items
(b) Tools, dies, moulds, drawings, blue prints, technical maps and charts and similar items used
(c) Material consumed, including packaging materials
(d) Engineering, development, art work, design work and plans and sketches undertaken elsewhere
than in the factory of production and necessary for the production of the goods
Explanation 2 Where an assessee receives any advance payment from the buyer against delivery of any
to Rule 6 excisable goods, no notional interest on such advance shall be added to the value unless the Cen-
tral 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.
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 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.
8 Where whole or part of the excisable goods are not sold by the assessee but are used for consump-
tion by him or on his behalf in the production or manufacture of other articles, the value of such
goods that are consumed shall be one hundred and ten per cent of the cost of production or
manufacture of such goods.
9 Where whole or part of the excisable goods are sold to related person other than inter- connected
undertakings, the assessable value will be normal transaction value at which the related person
sells the goods to unrelated buyers.
Proviso to If assessee sales goods to related person, but related person uses them in captive
rule 9 consumption (and not sell them), valuation will be done on basis of cost of production plus 10%, as
per rule 8.
10 Where whole or part of the excisable goods are sold to related person who are inter- connected
undertakings, the assessable value will be as follows (a) If they are related person as defined in
other clauses or is a holding or subsidiary company of assessee, normal transaction value at which
the related person sells the goods to unrelated buyers (b) In other cases, the value will be as if they
are not related person
10A Where the excisable goods are produced or manufactured by a job-worker, on behalf of principal
manufacturer, then, -
(i) in a case where the goods are sold by the principal manufacturer for delivery at the time of re-
moval of goods from the factory of job-worker, where the principal manufacturer and the buyer
of the goods are not related and the price is the sole consideration for the sale, the value of the
excisable goods shall be the transaction value of the said goods sold by the principal manufac-
turer;
(ii) in a case where the goods are not sold by the principal manufacturer at the time of removal of
goods from the factory of the job-worker, but are transferred to some other place from where
the said goods are to be sold after their clearance from the factory of job-worker and where the
principal manufacturer and buyer of the goods are not related and the price is the sole consid-
eration for the sale, the value of the excisable goods 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 said goods from
the factory of job-worker;
(iii) in a case not covered under clause (i) or (ii), the provisions of foregoing rules, wherever appli-
cable, shall mutatis mutandis apply for determination of the value of the excisable goods :
Provided that the cost of transportation, if any, from the premises, wherefrom the goods are sold, to
the place of delivery shall not be included in the value of excisable goods.
Job worker means a person engaged in manufacture or production of goods on behalf of a prin-
cipal manufacturer, from any inputs or capital goods supplied by the said principal manufacturer or
by any other person authorised by him.
11 Residuary method - If value cannot be determined under any of the foregoing rules, value shall be
determined using reasonable means consistent with the principles and general provisions of section
4 and Valuation Rules.
2.30 RULES OF CLASSIFICATION
General Rules for Interpretation of Schedule to Central Excise Tariff and Customs Tariff are given in First Schedule to
the Tariff. The rules are same for excise and customs. The highlights of rules are given below.
Rule Brief contents
1 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
other provisions of the rules
First part of Any reference to complete goods also includes incomplete or un-finished goods, if such
rule 2(a) incomplete or un-finished goods have the essential characteristic of finished goods.
Second part Heading will also include finished goods removed un-assembled or disassembled i.e. in SKD or
of rule 2(a) CKD packs.
Central Excise
2(b) Any reference in heading to material or substance will also include the reference to mixture or com-
bination of that material or substance with other materials or substance. The classification of goods
consisting of more than one material or substance shall be according to the principles contained in
rule 3.
3 When by application of sub-rule (b) of rule 2 or for any other reason, goods are, prima facie, classifi-
able under two or more headings, classification shall be effected as given in rule 3(a), 3(b) or 3(c).
3(a) The heading which provides most specific description shall be preferred to heading providing a
general description.
3(b) If Mixture and Composite goods consisting of different materials or different components cannot be
classified based on above rule i.e. rule 3(a), it should be classified as if they consisted of the material
or component which gives it their essential character.
3(C) If two or more headings seem equally possible and the dispute cannot be resolved by any of the
aforesaid rules, if both the headings appear equally specific, the heading which occurs last in nu-
merical order is to be preferred (i.e. latter the better).
4 If the classification is not possible by any of the aforesaid rules 1, 2 and 3, then it should be classified
under the heading appropriate to goods to which they are most akin. [This is only a last resort and a
desperate remedy to resolve the classification issue]
5 Cases for camera, musical instruments, drawing instruments, necklaces etc. specially shaped for
that article, suitable for long term use will be classified along with that article, if such articles are
normally sold along with such cases. Further, packing materials and containers are also to be clas-
sified with the goods except when the packing is for repetitive use (This provision is obviously made
to ensure that the packing and the goods are charged at same rate of duty).
6 Classification of goods in sub-headings shall be determined in terms of those sub- headings. Only
sub-headings at the same level are comparable.
PRACTICAL PROBLEMS
Example 68: M/s XYZ. are in the business of supplying Turbo-alternators to various customers. They manufacture
steam turbines in the factory, which are removed to the customers site on payment of Central Excise Duty. They
purchase duty paid alternators from the market which are delivered at the customers site. M/s XYZ assemble both
the items and fix them permanently on a platform at the site. Department demands central excise duty payable on
Turbo-alternator when it comes into existence after being assembled on the platform embedded to the earth. Is the
view taken by the department correct. Discuss with the help of case laws, if any.
Answer:
In the present case two issues are involved
(i) Whether assembly of steam turbines and duty paid alternators amounts to manufacture of turbo alternators,
and
(ii) Whether such assembly results in manufacture of excisable goods.
The facts of the case are similar to the case of Triveni Engineering and Industries Ltd. v C. CEX, 2000 (120) El,T 273 (SC)
In the present case, the Appellants were, according to specified designs, combining steam turbine and alternator
by fixing them on a platform and aligning them. As a result of this activity of the Appellants, an new product, turbo
alternator, came into existence, which has a distinctive name and use different from its components. Therefore, the
process involved in fixing steam turbine and alternator and in coupling and aligning them in a specified manner to
form a turbo alternator, a new commodity, is nothing but a manufacturing process.
Though the process of assembling results into a new commodity and therefore is a process amounting to manufac-
ture, yet the turbo alternator set (known in the market as such) comes into existence only when a steam turbine and
alternator with all their accessories are fixed at the site. Further, in order to be brought in the market the turbo would
not remain turbo alternator. Thus, its is obvious that without fixing to the ground the turbo alternator does not come
into being. The installation or erection of turbo
alternator on the platform specially constructed on the land cannot be treated as a common base, therefore, such
alternator would be immovable property. Accordingly, such activity could not be considered as excisable goods.
Example 69: Snow White Ltd. Manufactures paper and in the course of such manufacture, waste paper is produced
(paper being the main product and dutiable goods). The Central Excise Tariff Act, 1985 (CET) was amended w.e.f. 1-3-
1995, so as to include waste paper. White Ltd. was issued a show cause notice by the Central Excise Officer, demand-
ing duty of ` 2 lakhs on waste paper produced during October, 1994 to February, 1995, but cleared during April-May,
1995. A reply is due to be filed immediately to the notice. As Counsel of Snow White Ltd. you we required to advise
the company about
(i) The legality and validity of the proposed levy and collection of duty on waste paper for the period prior to 1-3-
1995; and
(ii) State (with the help of decided cases) the reasons for your advice/opinion.
Answer:
The issue involve in the given case is determination of taxable event for the purpose of levy of excise duty.
As per section 3 of the Central Excise Act, 1944, the taxable event for levy of Central Excise is manufacture of excis-
able goods. The date for determination for rate of duty and tariff valuation is the date of actual removal of the goods
from the factory or warehouse.
However, there must be a levy of duty of excise at the time of manufacture and only then, the duty can be collected
at the time of removal as has already been held in Vazir Sultan Tobacco Industrys case 1996 (83) ELT 3(SC).
Therefore, the waste paper produced prior to the levy will not be chargeable to duty of excise even though it has
been cleared after such levy and the proposed show cause notice demanding ` 2 lakhs of excise duty on such waste
paper is invalid and illegal and liable to be quashed.
Example 70: Kagaz Karkhana Ltd., manufactures paper in the year 2012-13, it embarked on a major expansion pro-
gramme, and for the purpose, fabricated at site, 75% of the portion of papermaking machine and procured (paying
excise duty) the remaining parts of the papermaking machine from other suppliers. Having done so, it assembled
all the parts together into a paper-making machine at site. The erection and installation was completed during No-
vember, 2012 and the machine was firmly fastened to the earth, with the help of bolts, nuts and grouting material on
a concrete bed, to prevent rattling and ensure wobble-free operation and presently the machine is functional and
operating. During July, 2015, the Central Excise authorities served the company a show cause demanding excise duty
of ` 5 crores, on the paper-making machine, alleging that the activity resulted in manufacture of excisable goods,
falling under chapter 84 of CETA. The company engages you as counsel to represent them and desires to contest
the case on the grounds :
(i) That the activity of erection and installation was not manufacture,
(ii) That the activity resulted in immovable property emanating at site and
(iii) That the demand is time-barred
You are required to discuss the tenability or otherwise of the contentions of the notice client and advice them drawing
support from the judicial decision.
Answer:
There are three issues involved in the present case:
(i) Whether the activity of erection and installation was not manufacture,
(ii) Whether the activity resulted in immovable property emanating at site and
(iii) Whether the demand is time-barred
In respect of the first issue, it is to be noted that the excise duty is levied on the excisable goods manufactured in India,
and hence it will not be attracted where goods are not produced from the manufacturing process.
A commodity is said to be manufactured if by application of the process its identity is changed and it is known in the
market as a separate and distinct commodity having separate name, character and use.
The assembly of parts results in paper-making machine which has distinct identity, name and character and use and
hence such assembly amounts to manufacture.
Central Excise
The second issue is whether erection and installation of such machine on a concrete base results in a immovable
property. The Supreme Court, in Sirpur Paper Mills v C.C.Ex., Hyderabad 1998(97) ELT 3 (SC), has held that papermaking
machine if assembled and erected at site and embedded in concrete base to ensure wobble free operation will not
become an immovable property. The machine can be dismantled from its base and sold in parts. Hence, the asses-
sees first two contentions are untenable and incorrect as the activity has resulted in the manufacture of goods and
there is no immovable property brought into existence and assembly operations are liable to duty of excise.
The third issue is whether the demand notice is time barred. Under section 11A of the Central Excise Act, 1944, the
extended period of limitation can be invoked only when there is a fraud, collusion, willful misstatement, suppression
of facts or contravention of the provisions of the Act with an intent to evade the payment of duty of excise. If the
manufacturing activity of paper-making machine was known to the department then the department cannot invoke
the extended period of limitation. Hence, the contention of the assessee is an arguable point and the same is legally
tenable.
Example 71: Regarding the applicability of excise duty, Computers are covered under Heading no 84.71 of the First
schedule to the Central Excise Tariff Act, 1985 which describes computers as automatic data processing machines.
XYZ Ltd. has undertaken upgradation of its computers both in terms of storage capacity and processing speed by in-
creasing the hard disc capacity, RAM, changing of processor chip from 386 to 486 and in certain cases from Pentium
III to Pentium IV. The Departments contention is that new goods with a different name character and use have come
into existence and the upgraded products are chargeable to excise duty. Discuss in the light of provision of section
2(f) of the Central Excise Act, 1944 relating to manufacture whether this stand of the Department is justified.
Answer:
The computers covered under heading No. 84.71 of the Schedule to the Central Excise Tariff Act, 1985 are described
as automatic data processing machines. An automatic data processing machine will be known by this name, irre-
spective of its capacity of storage and processing, which may be enhanced by increasing the hard disk capacity.
RAM or by changing the mother board or the processor chip. However, it cannot be said that new goods with a dif-
ferent name, character and use have come into existence, which can be subjected to duty again.
Accordingly, upgrading of old and used computer systems would not amount to manufacture, in so far as the upgra-
dation does not bring into existence goods with a distinct new name, character and use.
Example 72: Full exemption is granted by exercising Central Excise Notification which e xplains all products of printing
industry including newspapers and printed periodicals. A manufacturer, who is manufacturing cardboard cartons
and subsequently doing varied printing on them, claims benefit of the said exemption notification on the ground that
every material on which printing is done becomes a product of the printing industry. Is the claim of the manufacturer
justified? Give reasons for your view.
Answer:
The cited Central Excise exemption notification grants full exemption to all products of printing industry including
newspapers and printed periodicals. The products in respect of which exemption is claimed are cardboard, cartons
although subsequently varied printing is done on them. These products relate to the packaging industry. The mere
fact that printing is done on these products will not render these products as the products of the printing industry.
Accordingly, the products of the packaging industry shall not be entitled to the exemption granted to all products
of printing industry including newspapers and printed periodicals.The case in support is Rollatainiers Ltd. v UOI (1994)
72 ELT 793(SC).
Example 73: How would you arrive at the assessable value for the purpose of levy of excise duty from the following
particulars-Cum-Duty selling price exclusive of sales Tax ` 10,000, Rate of excise duty applicable to the product - 12.5%
(including education cess), Trade discount allowed ` 1,200, Freight ` 750 from factory to buyer place.
Answer:
In computation of assessable value for the purpose of levy of excise duty, trade discount and freight are allowed as
deductions.
Thus,
Net price = Selling Price (Trade Discount + Freight)
=
` 10,000 (1,200 + 750)
=
` 8,050
Since the price is inclusive of excise duty @12.5%,
Therefore,
Assessable Value = ` 8,050 x 100/112.5
=
` 7,156
Excise Duty will be ` 8,050 ` 7,156 = ` 894
Check : 12.5% of ` 7,156 is ` 894
Example 74: X Ltd. is engaged in the manufacture of paracetamol tablets that has an MRP of ` 9 per strip. The com-
pany cleared 1,00,000 tablets and distributed as physicians samples. The goods are not covered by MRP, but the MRP
includes 12.5% Excise Duty and 2% CST. If the cost of production of the tablet is 40 paise per tablet, determine the total
duty payable.
Answer:
If the product is not covered under MRP provisions, valuation provisions under section 4A do not apply. In that case,
valuation is required to be done as per Central Excise Valuation Rules.
As per the CBECs circular, any physicians samples or other samples distributed free of cost are to be valued under
Rule 11 read with Rule 8 of Central Excise Valuation Rules, 2000.
As per Rule 8, such samples are to be valued at 110% of cost of production or manufacture. The given cost of produc-
tion is 40 Paise, Assessable Value will be 44 Paise. Therefore, duty payable @ 12.5% on 44 paise = 12.5% 0.44 = 0.055
paise per tablet.
Example 75: M/s. A.U.L. avail of CENVAT credit of the duty paid on the inputs namely, steel sheets. The scrap gener-
ated during the manufacture of their final product was cleared by them without payment of duty. Subsequently the
Department raised a demand of Excise duty on waste and scrap. M/s.
A.U.L. accepted the duty liability, but contended that the price at which waste and scrap had been sold should be
considered to be cum-duty price and assessable value should be determined after deducting the element of excise
duty. The contention of the Department is that as no central Excise duty was paid by them while clearing the scrap,
no deduction on account of excise duty is available to M/s. A.U.L.
Answer:
The facts of the given case are similar to those decided by the Supreme Court in C.C.Ex. v Maruti Udyog Ltd. (2002)
141 ELT 3 (SC) in the said case, the department raised duty demand on waste and scrap and the price realized by
the assessee was taken as the assessable value. The assessee contended that the price of such waste and scrap was
includive of excise duty. The Supreme Court decided the issue in favour of the assessee. Accordingly, in the given
case, as the Department has raised duty demand on waste and scrap, the price collected by M/s. A.U.L. will be con-
sidered as the Cum-Duty price and it shall be deemed that the element of excise duty is already included in such
price. The manufacturer will therefore be entitled for deduction on account of such price. Thus the assessable value
will be worker out as under
Assessable value = (Cum-Duty Price Permissible Deduction) 100
100 + Rate of Duty
Example 76: State whether the following elements are to be included or not as part of the Transaction value under
section 4 of the Central Excise Act, 1944.
(i) Erection and commissioning charges
(ii) System software etched in the computer system
(iii) Cylinder holding charges
(iv) After-sales warranty charges
Answer:
(i) Any payment made by buyer to assessee is includible in assessable value only if it is in connection with sale. In
case of erection and commissioning charges for erecting machinery at site, these are incurred after goods are
removed from the factory. These may be in relation to sales but are not in connection with sales as there is
no cause and effect relationship between the two. Hence these are not includable in assessable value. This is
Central Excise
also confirmed vide CBE&C Circular No. 643/34/2002-CX, dated 1-7-2002.

(ii) A computer manufacturer loads bought out computer software on computer while selling. Thus, the system
software is loaded on computer while computer is cleared from the factory. Computer software as such is ex-
empt from duty. Department had earlier clarified that value of computer software etched or loaded on com-
puter will be includible. However, if computer software is supplied separately on floppy disc or tapes, its value
will not be includible. [However, as per CBE&C circular dated 28-2-2003, value of computer software will not be
includible in assessable value of computer].
(iii) In case of durable and returnable containers, the container is returnable after the gas or other material inside
is used. Often, manufacturing companies take some deposit and charge some rent for the container. These
are cylinder holding charges. CBE&C, vide its Circular No. 643/34/2002- CX, dated 1-7-2002, has clarified that
rental charges or cost of maintenance of reusable metal containers like cylinders etc. are to be included in
assessable value. This view is correct as such rental charges and the sale of gas are so intrinsically connected
that there can be no sale without such charges.
(iv) Compulsory after sales warranty charges are includible as the sale goods and such charges are inseparable.
However, optional service charges are not includable as there is no connection between the sale of goods
and the optional service charges.
Example 77: A Ltd., a manufacturer to tyres was extending a warranty discount on any tyres that, were defective. The
scheme of warranty discount operated thus, the customers lodged their claim with regard to any defects in the tyres.
Such claims were then scrutinized by a Technical Committee of A Ltd., which would decide the amount of refund due
to the customer on the basis of the reduction in the normal life of tyre attributable to the defect. This refund was to
be given by the Technical Committee. This practice was being followed by A Ltd. for the last 15 years. A Ltd. claimed
the warranty discount as a Trade discount which is deductible in computing the assessable value of the tyres. Is this
correct? Discuss in the light of the provisions under Section 4 of the Central Excise Act, 1944.
Answer:
According to section 4 of the Central Excise Act, 1944, regarding discounts, transaction value does not make a direct
reference. Now actually the excise duty is paid/payable on the net price of the goods after deduction of discounts. If
in any transaction discount is allowed in accordance with normal practice of trade and it is passed on to the buyer, till
inclusion of such discount is not justified. However, the said amount to be allowed as deduction must be in the nature
of discount.
From the facts of the above case, the manufacturer was extending warranty discount on any tyres that were defec-
tive. Though this was known as discounts, but it was only a compensation for defects in tyres, which was given to the
customers. Hence, it will not be allowed as deduction from the transaction value as was held in GOI v MRF (1995) 77
ELT 433(SC).
Example 78: How would you arrive at the assessable value for the purpose of levy of excise duty from the following
particulars :
i. Cum-duty selling price exclusive of sales tax ` 20,000
ii. Rate of excise duty applicable to the product 12.5%
iii. Trade discount allowed ` 2,400
iv. Freight ` 1,500
Answer:
Trade discount of ` 2,400 and freight of ` 1,500 are allowed as deductions. Hence, net price will be ` 16,100 [` 20,000
` 2,400 ` 1,500].
Since the price is inclusive of excise duty of 12.5%, Excise Duty will be ` 1,788.89 (` 16,100 12.5)/112.5) and Assessable
Value will be ` 14,311.11 [`16,100 `1,788.89]
Example 79: M/s U.T.A. manufacture welding electrodes which are put first in Polythene bags and then packed to-
gether in cardboard cartons. They sell electrodes at the factory gate packed in cardboard cartons whereas such
electrodes are also packed in wooden boxes when sold to their customers located at outstations. 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.
Answer:
The new Section 4 of the Central Excise Act, 1944, does not make any specific reference to packing charges. In nor-
mal commercial transactions the price of goods charged includes the cost of packing charges. The charges that are
recovered on account of packing are obviously the charges in relation to sale of goods under assessment and will
form the part of transaction value. Whatever be the nature of packing that is whether the packing is primary or sec-
ondary or special or packing for the purpose of transportation, the cost of such packing shall be includible.
In light of the new Section 4, the earlier case laws hold no significance now.
Example 80: A1 Ltd., manufactures three soft drinks namely Coke, Pep, and Maaza. Coke was sold only to A2 Ltd., a
subsidiary company of A1 Ltd. Pep was sold to A3 Ltd., where the Managing Director of A1 Ltd., is a Manager. Maaza
was sold to A Ltd, who is sole distributor of A1 Ltd., and was coming under same management of A1 Ltd.
Determine the assessable value of the three products in the hands of A1 Ltd. on the basis of the following informa-
tion:
Price of A1 Ltd to A2 Ltd. is ` 1,00,000
Price of A1 Ltd. to A3 Ltd. is ` 50,000
Price of A1 Ltd. to A Ltd. is ` 20,000
Price of A2 Ltd. to Consumer is ` 1,20,000
Price of A3 Ltd. to Consumer is ` 60,000
Price of A Ltd. to consumer is ` 30,000
Note: sale prices are exclusive of duties and taxes.
Answer: (Rule 10)
Statement showing computation of Assessable value for A1Ltd.
Particulars Assessable Relation ship Applicable Rule Remarks
value (`)
Coke sold 1,20,000 Relative Rule 10 of the Valuation Price at which relative buyer, sells goods
to A2 Ltd. Rules, 2000 in the open market to unrelated buyer
Pep sold 50,000 Unrelated -- Relation ship will come into exist onl
to A3 Ltd. when there is holding and subsidiary
concept persist.
Maaza sold 20,000 Non relative -- Relation ship will come into exist onl
to A Ltd. when there is holding and subsidiary
concept persist.
Total 1,90,000
Example 81: M/s R.M.T. Industries manufactures cigarettes which are sold in wholesale, exfactory, at cum-duty price to
wholesale dealers. The price charged to all the dealers from the cigarettes is the same. However, the dealers who pur-
chase on credit are required to deposit interest free security with M/s R.M.T. The department has demanded duty from
M/s R.M.T. contending that they had earned notional interest in the security deposit received from the dealers which
should be included in the assessable value of the cigarettes being the additional consideration. Duty on cigarettes is
being charged on advalorem basis. Discuss the stand taken by the department with decided case laws, if any.
Answer:
The facts of this case are similar to the case of VST Industries Ltd. v C.C.Ex. (1998) 97 ELT 395 (SC).
In the instant case the interest free deposit scheme was introduced by the assessee because of commercial consid-
eration of covering the risk of credit sales, no special consideration flowing form the assessee to the buyer keeping tile
deposit, the Supreme Court held that the notional interest cannot be included in the assessable value.
Example 82: Determine the value on which Excise duty is payable in the following instances. Quote the relevant sec-
tion/rules of Central Excise Law.
Central Excise
(a) A. Ltd. sold goods to B Ltd., at a value of ` 100 per unit in turn, B Ltd. sold the same to C Ltd. at a value of ` 110
per unit. A Ltd. and B Ltd. are related, whereas B Ltd. and C Ltd. are unrelated.
(b) A Ltd. and B. Ltd. are inter-connected undertakings, under section 2(g) of MRTP Act. A Ltd. sells goods to B Ltd.
at a value of ` 100 per unit and to C Ltd. at ` 110 per unit, who is an independent buyer.
(c) A Ltd. sells goods to B Ltd. at a value of ` 100 per unit. The said goods are captively consumed by B Ltd. in its
factory. A Ltd. and B Ltd. are unrelated. The cost of production of the goods to A Ltd. is ` 120 per unit.
(d) A Ltd. sells motor spirit to B Ltd. at a value of ` 31 per litre. But motor spirit has administered price of ` 30 per litre,
fixed by the Central Government.
(e) A Ltd. sells to B Ltd. at a value of ` 100 per unit. B Ltd. sells the goods in retail market at a value of ` 120 per unit.
The sale price of ` 100 per unit is wholesale price of A Ltd. Also, A Ltd. and B Ltd. are related.
(f) Depot price of a company are -
Place of removal Price at depot Price at depot Actual sale price at
on 1-1-2016 on 31-1-2016 depot on 1-2-2016
Amritsar Depot ` 110 per unit ` 105 per unit ` 115 per unit
Bhopal Depot ` 120 per unit ` 115 per unit ` 125 per unit
Cuttack Depot ` 130 per unit ` 125 per unit ` 135 per unit
Additional information : (i) Quantity cleared to Amritsar Depot 100 units, (ii) Quantity cleared to Bhopal Depot 200
units, (iii) Quantity cleared to Cuttack Depot 200 units, (iv) The goods were cleared to respective depots on 1-1-2016
and actually sold at the depots on 1-2-2016.
Answer:
(a) Transaction value ` 110 per unit (Rule 9 of Valuation value Rules). [Sale to unrelated party].
(b) Transaction value ` 100 per unit for sale to B and ` 110 for sale to C Rule 10 read with Rule 4 [Note that inter
connected undertaking will be treated as related persons for purpose of excise valuation only if they are
holding and subsidiary or are related person as per any other part of the definition of related person. Note
that A is selling directly to C as per the question, and not through B Ltd].
(c) Transaction value will be ` 100. section 4(1)Incase of sale to unrelated person, question of cost of production
does not arise.
(d) Transaction value ` 31. section 4. Since the goods are actually sold at this price, administered price is not
considered.
(e) Transaction value ` 120 per unit Rule 9 read with section 4 of Central Excise Act. Sale to an unrelated buyer.
[Under new rules, there is no concept of wholesale price and retail price]
(f) Under Rule 7, the price prevailing at the Depot on the date of clearance from the factory will be the relevant
value to pay Excise duty.
Therefore
(i) Clearance to Amritsar depot will attract duty based on the price as on 1-1-2016. Transaction value ` 110x 100
units = ` 11,000
(ii) Clearance to Bhopal depot, so depot price on 1-1-2016. Therefore, transaction value ` 120 200 units = `
24,000
(iii) Clearance to Cuttack Depot, depot price on 1-1-2016. Transaction value ` 130x120 units = ` 26,000. Note the
relevant date is 1-1-2016, since the goods were cleared to the depots on that date. No additional duty is pay-
able even if goods are later sold from depot at higher price.
Example 83: Having regard to the provisions of section 4 of the Central Excise Act, 1944, compute/derive the assess-
able value of excisable goods, for levy of duty of excise, given the following information :

Cum-duty wholesale price including sales tax of ` 2,500 ` 15,000
Normal secondary packing cost ` 1,000
Cost of special secondary packing ` 1,500
Cost of durable and returnable packing ` 1,500
Freight ` 1,250
Insurance on freight ` 200
Trade discount (normal practice) ` 1,500
Rate of C.E. duty as per C.E. Tariff 12.5% Advalorem
State in the footnote to your answer, reasons for the admissibility or otherwise of the Deductions.
Answer:
The assessable value from cum-duty price can be worked out by the under-mentioned formula
(Cum-Duty Price Permissible Deduction) 100
Assessable Value = ------------------------------------------------------------------------------
100 + Rate of Duty
Computation of Assessable Value
` `
Cum-duty price 15,000
Less : Deductions (See Notes)
Sales tax 2,500
Durable & returnable-packing 1,500
Freight 1,250
Insurance 200
Trade-Discount 1,500 6,950
8,050
Less: Central Excise Duty thereon @ 12.5%
8,050 12.5/112.5 894.44
Assessable value 7,155.56
Notes :
1. The transaction value does not include Excise duty, Sales tax and other taxes.
2. The Excise duty is to be charged on the net price, hence trade discount is allowed as deduction.
3. With regards to packing, all kinds of packing except durable and returnable packing is included in the assess-
able value. The durable and returnable packing is not included as the such packing is not sold and is durable
in nature.
4. Freight and insurance on freight will be allowed as deduction only if the amount charged is actual and it is
shown separately in the invoice as per Rule 5 of the Central Excise Valuation Rules, 2000.
Example 84: Explain whether the following items can be included in/excluded from the transaction value under sec-
tion 4 of the Central Excise Act, 1944.
(1) Collection expenses incurred in respect of empty bottles for filling aerated waters from the premises of buyers
to the manufacturers.
(2) Delivery and collection charges of gas cylinders and collection of empty cylinders.
(3) Interest notional or real accruing on deposits for sale/return of gas cylinders as well as rentals.
Central Excise
(4) Cash discount known at the time of clearance of goods but not availed by the customer.
(5) Value of system software in case of computers.
Answer:
(1) Transaction value includes any amount charged in addition to the price of the goods by reason of or in con-
nection with the sale. Since collection expenses are incurred by reason of or in connection with the sale, it would be
included in the transaction value.
(2) CBEC has vide Circular No. 643/34/2002, dated 1-7-2002 clarified that delivery and collection charges of gas cyl-
inders are by reason of or in connection with the sale of goods and therefore, the same would be included in the
transaction value.
(3) The interest on advances taken from the customers would not be included in the assessable value, unless the re-
ceipt of such advance had no effect of depressing the wholesale price.
In VST Industries Ltd. v C.C.Ex, Hyderabad 1998 (97) ELT 395(SC), where interest free deposits were taken be-
cause of commercial consideration of covering the risk of credit sales, no special consideration flowing from the
assessee to the buyer keeping the deposit was found and the Supreme Court held that notional interest cannot be
included in the assessable value.
(4) However, in such case, the burden of proof lies on the Department to prove a nexus between the fact of advance
taken and the depression in the value.
(5) The transaction value is the price actually paid or payable for the goods. In the given situation, as the case of cash
discount has not been passed on to tile customer, it will not be allowed as deduction.
As per tile CBEC & Circular No. 644/35/2002-CX, dated 12-7-2002 the Software can be of the following types Systems
software/Operating software which is designed to control the operation of the computer system.
Application software Which is developed for specific applications only.
Valuation of goods is done in the form in which it is cleared. Therefore, computer systems will be valued by including
the value of the software loaded on the hard disc. No distinction is to be made between an operating software and
an application software.
Example 85: Thunder TV Ltd is engaged in the manufacture of colour television sets having its factories at Bangalore
and Pune. At Bangalore the company manufactures picture tube; which are stock transferred to Pune factory where
it is consumed to produce television sets. Determine the Excise duty liability of the captively consumed picture tubes
from the following information:
Direct material cost (per unit) ` 600
Indirect material ` 50
Direct Labour ` 100
Indirect Labour ` 50
Direct Expenses ` 100
Indirect Expenses ` 50
Administrative overheads ` 50
Selling and Distribution overheads ` 100
Additional Information:
Profit margin as per the Annual Report for the company for 2014-2015 was 15% before income tax.
(i) Material cost includes Excise duty paid ` 100.
(ii) Excise duty rate applicable is 12.5%.
Answer:
As per Rule 8 of The Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, the valuation of

captively consumed goods is 110% of the cost of production. The cost of production of goods would include cost of
material, labour cost and overheads including administration cost and depreciation etc.
The cost of material would be net of excise duty if CENVAT credit is availed in respect of such inputs.
Accordingly, the assessable value will be determined as follows :
Raw materials Cost (net of excise duty) ` 500

Indirect material ` 50
Direct Labour ` 100
Indirect Labour ` 50
Direct Expenses ` 100
Indirect Expenses ` 50
Administrative overheads (assumed related to production activity) ` 50
Total cost of production ` 900
Assessable value ` 990
(i.e. 110% of the cost of production)
Total Duty Liability = ` 990 x 12.5/100 = ` 123.75
The raw material cost has been taken at ` 500 after deducting the duty element assuming that the CENVAT credit has
been availed.
Example 86: Mrs. E fails to pay Excise Duty of ` 60,000 on the goods cleared in February by 5th March of 2016. The as-
sessee, Mrs. E, is owner of a SSI unit. What is the interest payable under Rule 8 of Central excise Rules, 2002 if the duty
was actually paid on 10th May of 2016.
Answer:
Interest = ` 60,000 x 18/100 x 40 days /365 days = ` 1,184
Note: w.e.f. 1-4-2011 rate of interest is @18% p.a. simple interest
Example 87: From the following data, determine the CENVAT allowable if the goods are produced or manufactured
in a FTZ or by a 100% EOU and used in any other place in India.
Assessable value : ` 770 per unit,
Quantity cleared 77,770 units,
BCD 10%,
CVD 12.5%
Answer:
As per Rule 3 of CENVAT Credit Rules, 2002 the following formula is to be used if a unit in DTA purchases goods from
EOU
Assessable value = ` 770
Add: 50% on BCD 10% = ` 38.50 (10% x 50%= 5% on ` 770)
Balance = ` 808.5
Add: CVD 12.5% = ` 101.06 ( 12.5% on ` 808.50)
CENVAT Credit allowed to the extent of CVD. Therefore, ` 101.06 per unit for 77,770 units is ` 78,59,436.

Central Excise
Multiple Choice Questions

(1) In order to attract excise duty under the Central Excise Act, 1944, goods must be
(A) Movable
(B) Movable or immovable
(C) Immovable
(D) None of the above
Ans. (A) Movable
(2) The selling price of VINTEX LTD. inclusive of basic Excise duty @ 12.5% and CST @ 2% is ` 3,600. What would be
the assessable value of the product per unit under the Central Excise Act?
(A) ` 3325.94
(B) ` 3137.25
(C) ` 3065.10
(D) None of (A), (B) & (C)
Ans. (B) ` 3137.25
Fill in the Blanks-
(i) In case of transfer of business, the successor in business is liable (liable/not liable) for the excise dues of the pre-
decessor.
(ii) Waste and scrap can be subjected to excise duty if they are marketable.
(iii) Goods can be cleared from DTA (Domestic Tariff Area) to EOUISEZ without payment of excise duty and the DTA
unit has to file bill of export (bill of export / invoice).
(iv) A manufacturer producing both exempt as well as non-exempt goods, not maintaining separate accounts
would pay excise duty at 6%. Education cess is not payable (payable/not payable) on the same.
(v) For units paying duty of more than Rs. 3 crore EA 2000 applicable every year (every year / once in 2 years / once
is 5 years).
(vi) While determining the assessable value under central excise laws, equalized freight is allowable as deduction if
there is sale (sale/removal) of excisable goods at factory gate.
(vii) Rule 2(b) of the Central Excise Rules, 2002 provides for self assessment of duty.
(viii) Where an assessee has opted provisional assessment of central excise duty, if differential duty is found to be
payable on finalization of assessment, the rate of interest chargeable under Section 11AA 18%. The time limit for
finalization or provisional assessment is 6 months. The said time limit for finalization of provision assessment can
be extended for a further period of 6 months.
(ix) Show cause notice issued by an officer beyond his power will be invalid.
(x) An assessee can claim refund of excise duty within 1 year from relevant date u/s 11 B of Central Exercise Act,
1994
(xi) SSI units can make the excise duty payments once in quarter.
(xii) SSI units are required to submit quarterly return in Form No. ER-3.
(xiii) An Assessee eligible for SSI concession (even if it does not avail the concession) is required under rule 12 (1) of
Central Excise Rules to file quarterly return in the prescribed format ER 3 (ER 3/ER 8) by 10th of next month of the
quarter
(xiv) Asstt./Deputy/Joint Commissioner is required to scrutinize filed by the assessee who is paying duty of more than
rupees five crores per annum through PLA under Central Excise Law in every twelve (six/twelve) months and
send a report to Commissioner.
(xv) Captive consumption means goods consumed in the factory of the manufacture.

(xvi) A fixing brand name, labeling or re-labeling and repacking from bulk pack to small pack of readymade gar-
ment is (is/is not) manufacture.
(xvii) Processing can amount to manufacture if a new (new/existing) and identifiable (identifiable/similar) product
known in the market emerges.
(xviii) Where goods are not marketable and movable excise Duty cannot be charge.
(xix) Cost of Designing & Engineering incurred for the purpose of manufacture of excisable goods has to be included
(to be included/not to be included) in assessable value under Central Excise Act.
(xx) In Central Excise Code No. AACPB6245KJXMIO95, as to whether the assessee is a manufacturer or dealer is
denoted by the characters XM for manufacturer and XD for dealer.
(xxi) Goods manufactured in notified designated area in the continental shelf and Exclusive Economic Zone of
India is liable (liable/not liable) to excise duty
True and False / Correct and Incorrect
Ques.: Waste and scrap are always treated as excisable goods.
Ans. False. Waste and scrap are treated as excisable goods if they are covered by CETA and they are marketable.
Note: It is clarified that the bagasse, aluminium/zinc dross and other such products termed as waste, residue or refuse
which arise during the course of manufacture and are eatable of being sold for consideration would be excis-
able goods and chargeable to payment of excise duty.
Ques.: Parts used for repair or replacement during warranty period are excisable.
Ans. True. The Supreme Court in the case of ECE Industries Ltd. -vs.- CCEx. 2004 (164) ELT 236 (SC) has held that parts
used for repair, replacement during the warranty period are excisable. If some spare parts are supplied as free
replacements for defective parts, excise duty is payable on such spare parts.
Ques.: Capital consumption goods need certification.
Ans. False, capital consumption goods does not need certification
Ques.: There is provision for payment of Central Excise Duty under protest.
Ans. True. There is no legal provision with regard to payment under protest in Central Excise Act, 1944. However the
reference of payment under protest is given only under the Refund Section 11 B of the Central Excise Act, 1944.
The proviso to the said section provides that the time limit prescribed under the said sections is not applicable
in case where such payment was made under protest.
Ques.: Excise Department cannot challenge the reasonability of MRP printed on the package.
Ans. True, Excise Department cannot challenge the reasonability of MRP printed on the package.
Ques.: Excise duty drawback rate is fixed by the Central Government
Ans. False, Jurisdictional Commissioner fixes the drawback rate.
Short Question & Answers
Ques.: State distinction between taxable event in Central Excise and State VAT (sales tax).
Ans. In case of Central Excise, excisable goods produced or manufactured in India is the taxable event. In case of
State Vat, Sale or purchase of goods within the State is the taxable event.
Ques.: Explain distinction between goods and excisable goods.
Ans. Explanation to sec. 2(d) [which defines excisable goods] provides that 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.
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. Hence, excise duty is leviable on those
goods, which are mentioned in Central Excise Tariff Act (CETA), 1985.
Ques.: Examine whether the following amounts to manufacture under the Central Excise Act, 1944:

Central Excise
(i) Cutting or sizing;

(ii) Repairing, reconditioning;
(iii) Remelting;
(iv) Mixing of metals.
Ans.
(i) Cutting and sizing does not constitute manufacture as no new product is found.
(ii) Repairing and reconditioning do not bring any new product, hence the same shall not be considered as manu-
facture.
(iii) in remelting, original article may lose its character, hence it may be considered as manufacture. However, if the
same product is produced by remolding, then it shall not be considered as manufacture.
(iv) Mixing of metal shall be considered as manufacture as a .new article with different character is produced.
Ques.: Who are the persons liable to pay Central excise duty?
Ans. Following person shall be liable to pay excise duty:
(a) A person, who manufactures any excisable goods;
(b) A person, who stores excisable goods in warehouse;
(c) In case of molasses, the person who procures it;
(d) In case goods are manufactured on job work, the person on whose account goods are manufactured or
produced by the job worker.
Ques.: What is the significance of taxable event in central excise?
Ans. Excise duty is leviable on all excisable goods, which are produced or manufactured in India. Manufacture or
production of excisable goods in India is a taxable event for Central Excise. It becomes immaterial that duty
is levied and collected at the time of removal of goods.
Ques.: State with reason whether the following would amount to manufacture under the Central Excise Act, 1944:
(i) Printing of Colour Logo on glass bottle.
Ans. A bottle is a bottle. Printing on it or colouring it does not make it into something other than a bottle. Hence ex-
cise duty cannot be levied on printed or coloured bottles separately from plain bottles [Union of India -vs.- J G
Glass Industries Ltd. (SC)]
(ii) Assembly and filling of different parts into one article.
Ans. Assembly of various parts and components may amount to manufacture if new product emerges, which is
movable and marketable.
Ques.: Determine the assessable value for purpose of Excise Duty under the Central Excise Act, 1944 in the fallowing
cases:
(i) An assessee sells his excisable goods for ` 120 per piece and does not charge any duty of excise in his invoice.
Subsequently, it was found that the goods were not exempted from excise duty, but were liable at 12.5% ad
valorem.
Ans. Duty liability is on manufacturer, though he fails to collect it from the buyer. Thus, ` 120 shall be considered as
cum-duty value.
Assessable Value ` 120/112.5% = ` 106.67
(ii) Certain excisable goods were sold for `120 per piece and 12.5% ad valorem is the rate of excise duty. Subse-
quently, it was found that the price cum duty was in fact `140 per piece as the assessee had collected ` 20 per
piece separately.
Ans. Assessable Value = Rs.140/112.5% = ` 124.44
(iii) The cum duty price per piece `120 and the assessee had paid duty at 12.36% ad valorem. Subsequently, it

was found that the rate of duty was 12.5% ad valorem and the assessee had not collected anything over, and
above ` 120 per piece.
Ans. Assessable Value = ` 120/112.5% = ` 106.67
Ques.: Explain the validity of the Statements with reference to the provision of the Central Excise Act, 1994 with suit-
able reasons.
Specific duty is payable by the assessee on excisable goods based on the value of goods.
Ans. Invalid statement. Specific duty is based on physical characteristic like unit, length, etc. of the excisable
Ques.: State significance of single dash and double dash in classification of goods under Central Excise Tariff.
Ans. Single dash (-) in the schedule indicates sub-classification of the heading whereas double dash (- -) indicates
sub-classification of the immediately preceding sub-heading (i.e. sub-sub-classification of heading.)
Ques.: In Central Excise Tariff, how many digits are used to indicate a Tariff Item?
Ans. 8 digits are used to indicate a Tariff Item.
Ques.: Specific duty leviable under the Central Excise Act is based on the value of article / goods being assessed.
Ans. False Specific duty is the duty payable on the basis of certain unit like weight, length, volume, thickness etc.
Ques.: Explain provisions in respect of valuation for excise duty purpose is determined when sales are generally through
a related person.
Ans. Meaning of Related Person [Sec. 4(3)(b)] Following persons shall be deemed to be related if
1. They are inter-connected undertakings;
2. They are relatives;
3. Amongst them buyer is relative and a distributor of the assessee or a sub-distributor of such distributor;
4. They are so associated that they have interest directly or indirectly) in the business of each other.
Ques.: Discuss the essential requirements for application of transaction value for the determination of assessable
value.
Ans. The essential conditions for application of a Transaction value are:
(a) The goods are sold at the time of removal from the factory or warehouse.
(b) The transaction is between unrelated parties, i.e., the assessee and the buyer are not related parties.
(c) The price is the sole consideration for the sale
Ques.: State briefly whether remission of duty shall be granted or not under the Central Excise Rules, 2002 in a case
where Duty paid goods were damaged due to breakage in handling.
Ans. Rule 21 provides for remission of duty if the assessee can prove to the satisfaction of the Commissioner of
Central Excise that the goods have been lost or destroyed by natural cause or by unavoidable accident or
the manufacturer claims them as unfit for consumption or for marketing, before their clearance. In such cases
Commissioner can remit the duty on such goods subject to such conditions as may be imposed by him or or-
dered in writing. However, provision is not applicable where duty paid goods are damaged due to breakage
in handling.
Ques.: An assessee is selling 20% of his production through related persons and 80% is being sold to unrelated persons.
How the goods sold to related persons should be assessed?
Ans. As per Rule 9, Central Excise Valuation (Determination of Price of Excisable goods) Rules, 2000 where whole or
part of the excisable goods are sold by the assessee to or through a person who is related person (except inter-
connected undertakings), the value of such goods shall be the normal transaction value at which these are
sold by the related person at the time of 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.
Where such related person captively consumed the transferred goods (instead of selling), then value shall be
based on Rules 8.

Central Excise
Ques.: A manufacturer is manufacturing steel patta which is an item covered under Compounded Levy scheme of
Central Excise. He does not want to avail that scheme. He intends to pay excise duty under normal scheme of
payment of excise duty. Advise him.
Ans. He can pay excise duty under normal scheme of payment of excise duty, as compounded levy scheme is op-
tional.
Ques.: A manufacturer cleared some goods of assessabIe value of ` 10 lakhs, on payment of appropriate excise duty,
which was 12.36%. The goods were rejected by customer and were returned to the manufacturer. The manu-
facturer carried out re-work. After re-work, he cleared the goods. At the time of sale, the applicable excise duty
on that product was 12.50%. Discuss liability of the manufacturer in following situations:
(1) The process of re-work was not manufacture. He sold the goods from factory to another buyer for ` 11
Iakhs.
(2) The re-work carried out by the manufacturer was manufacture within the provisions of Central Excise
Act. He sold the goods from factory to another buyer for ` 9 Iakhs.
(3) He could not do re-work and the returned goods were sold as scrap for ` 30,000.
Ans. The manufacturer can take Cenvat credit of ` 1,23,600 when rejected goods are returned, as excise duty paid
by him Was ` 1,23,600. Further, in case;
(1) He is required to pay amount of ` 1,23,600 while clearing goods from factory
(2) He is required to pay excise duty @ 12.5% of ` 9 lakhs i.e. ` 1,12,500
(3) He is required to reverse the Cenvat credit of ` 1,23,600.
Ques.: Who can conduct Special audit under sections 14A and I4AA of the Central Excise Act, 1944.
Ans. Special audit under sections 14A and 14AA of the Central Excise Act, 1944 can be done by Cost Accountant or
Chartered Accountant.
Ques.: Explain provisions relating to ER-4 return.
Ans. Annual Financial Information Statement (ER-4): Every assessee paying duty (including paid through CENVAT
Credit) of 1crore or more in the previous year shall submit to the superintendent of Central Excise, an Annual
Financial Information Statement for the preceding financial year to which the statement relates in ER-4 form by
30th day of November of the succeeding year.
Ques.: State when invoice is required to be issued if goods are manufactured and captively consumed within fac-
tory.
Ans. Execise duty is payable on intermediate product, if no excise duty is payable on final product. In that case,
invoice is required to be issued. One invoice is required to be issued every day.
Ques.: Write short note on Exemption to Small Scale industry Units.
Ans. SSI is eligible for exemption from duty under Notification No. 8/2003-CE dated 1-3-2003. The SSI unit need not
be registered with any authority. Unit whose turnover was less that Rs. 4 crores in previous year are entitled to
full exemption upto Rs. 150 lakhs in current financial year. SSI unit can avail Cenvat credit on inputs and input
services only after it starts paying duty. However, Cenvat credit of capital goods can be availed even if these
were received during period of exemption. Goods manufactured by an SSI unit with brand name of others are
not eligible for SSI concession, unless goods are manufactured in a rural area.
Ques.: Will the quantum of goods manufactured relating to printed laminated rolls with brand name, be considered
for SSI exemption limit?
Ans. Notification No. 9/2009CE dated 7th July, 2009 specifically provides exemption in this regards. Hence, manu-
facturing of printed laminated rolls with brand name is covered under the SSI exemption.
Ques.: How should Value be calculated for determining SSI for Central Excise purposes?
Ans. For the purpose of calculating value for determining SSI, value as per sec. 4 (Transaction Value) I Sec. 4(2)
(Tariff Value) / Sec. 4A (MRP), as applicable shall be followed.
Ques.: An SSI unit has cleared goods of the value of ` 70 Lakhs during the last financial year. The effective rate of excise
duty was 12.5% ad valorem. What is the duty liability of the unit for above clearances during the year?
Ans. In respect of SSI units, clearance upto `150 Lakhs is exempt from payment of duty. Thus, duty payable is NIL.
Ques.: Excise duty is normally payable by manufacturer, but there are some exceptions. State the exceptions.
Ans. Following are the exceptions to basic provision that duty liability is of manufacturer:
(a) In case of goods stored in warehouse under rule 20, duty liability is of person who stores the goods.
(b) The procurer of molasses produced in khandsari sugar factory is liable
(c) In case of job work under Notification No. 214/86-CE. the raw material supplier undertakes liability of duty.
Ques.: Explain admissibility of remission of exercise duty in following cases:
(a) Finished Goods stored in store room were found to be stolen;
(b) Finished Goods were cleared from factory by preparing excise invoice and during transit to place of cus-
tomer, the goods were damaged due to road accident.
Ans.
(a) Remission not eligible as good must have been used somewhere else.
(b) Once goods are cleared from factory, there is no provision to obtain remission of excise duty.
Ques.: State situations where a manufacturer can claim remission of excise duty on manufactured goods. Whether
such remission is admissible before goods are removed from the factory or after removal of goods from the fac-
tory or in both the cases?
Ans. Rule 21 of the Central Excise Rules, 2002 provides for remission of duty if the assessee can prove to the satisfac-
tion of the relevant authority that:
the goods have been lost or destroyed by natural cause or by unavoidable accident or
the manufacturer claims them as unfit for consumption or for marketing, before their clearance.
In such cases Principal Commissioner or Commissioner can remit the duty on such goods subject to such condi-
tions as may be imposed by him or ordered in writing. But no remission of duty is grantable for any loss or destruc-
tion or deterioration of any goods taking place after the goods have been cleared for home consumption on
payment of duty or in cases of theft.
Ques.: A manufacturer in India is exporting goods to Nepal. He is getting payment from the Nepalese customer in
Indian Rupees. Value of goods is ` 2,00.000. the excise duty rate is 12.5%. How much excise duty is pay able by
the manufacturer?
Ans. Excise duty is not payable on goods being exported to Nepal, even if payment is received in Indian rupees.
Ques.: X Ltd manufactures excisable goods i.e. goods whose name appears in the Tariff. Excise duty is as follows.
At the time of manufacture of goods Nil
At the time of removal of goods 12.5%
(a) What will be the appropriate rate of Excise duty?
(b) What will be the appropriate rate of Excise duty if at the time of removal rate of duty is still Nil?
(c) Rework if the goods were not excisable goods on the date of manufacture. That is, these goods did not
appear in the Tariff.
Ans.
(a) The appropriate rate in this case is the rate on the date of removal namely 12.5%.
(b) The appropriate rate of duty is the rate of duty which prevails on the date of removal. Therefore, the
Excise duty is Nil.
(c) No excise duty is payable on the production before goods came on the tariff list.
Ques.: Briefly explain the following with reference to the provisions of the Central Excise Act, 1944:
(i) Manufacture and processing

Central Excise
(ii) Labelling and branding activities.

Ans.
(i) Manufacture and processing:
Manufacture Processing
Manufacture involves a series of processes Process is one of the activities undertaken for
manufacture of a product from input materials
Manufacture is the cumulative effect of various processes Each step towards the finished product would
to whch raw materials are subjected constitute processing in relation to
manufacture.
(ii) Labelling and branding activities are normally treated in commercial parlance as the one and the same and
consequently mere labelling of fully manufactured products does not constitute manufacture in law. However,
the legislature has specifically provided in section 2(f)(iii) of the Central Excise Act, 1944 that in respect of goods
specified in the Third Schedule of the Central Excise Act, 1944, labelling or re-labelling inter alia amounts to
manufacture (i.e. Deemed Manufacture).
As regards branding, it has been held in numerous decisions that this would not amount to manufacture.
Ques.: Briefly explain the provisions of the Central Excise Act, 1944 pertaining to Related persons.
Ans. As per Section 4(3)(b) of the Central Excise Act, 1944, the assessee and the buyer shall be deemed to be related
persons under the following circumstances if,
(i) they are inter-connected undertakings (holding not less than 1/4th of Shareholding or controlling interest)
(ii) they are relatives
Relative means (as defined in the Companies Act, 2013):
Section 2(77) of the Companies Act, 2013 read with Rule 4 of Companies (Specification of definitions details)
Rules, 2014 defines RELATIVE w.e.f. 1-4-2014:
The list is as follows:
1. Members of HUF
2. Husband & Wife
3. Father (Provided that the term Father includes step-father)
4. Mother (Provided that the term Mother includes the step-mother)
5. Son (Provided that the term Son includes the step-son)
6. Sons wife.
7. Daughter.
8. Daughters husband.
9. Brother (Provided that the term Brother includes the step-brother)
10. Sister (Provided that the term Sister includes the step-sister)
Ques.: M/s Akash Ltd. manufactured an Intermediate Product A using the raw material X on 28th Feb 2013. Product
A is movable, marketable and excisable. Intermediate Product A is issued for captive consumption to manu-
facture Product B on dt. 2-3-2013. Product B was manufactured on dated 5-3-2013 and is exempt from duty.
The value of product A is ` 15 lakhs and product B is ` 18 lakhs. The rate of excise duty on product A on
dated 28-2-2013, dated 2-3-2013 and on dated 5-3-2013 was 5%, 6% and 10% respectively. Explain in detail:
(i) Whether any Excise Duty is payable by M/s Akash Ltd.? If yes, on which product?
(ii) Is it required to issue invoice for intermediate product A
(iii) Is there any VAT applicable on Captive Consumption?
(iv) What is the date of removal of intermediate product A for Captive Consumption?
(v) What is the excise duty payable?
Ans.
(i) Yes. Excise duty is payable by M/s Akash Ltd., on product A.
(ii) As per Rule 11 of the Central Excise Rules (CER), 2002, when the excisable goods are removed from the factory
then only excise invoice needs to be prepared. From the wording of this Rule, it is very clear that the issuing
document is acceptable for accounting the quantity issued and no excise invoice needs to be prepared for
the product A.
(iii) No. VAT does not attract for Captive Consumption. VAT attracts only when there is a sale.
(iv) As per Rule 5 of the CER 2002, on Date for determination of duty and tariff valuation states that : 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. In the given case, date of removal of intermediate product A for
captive consumption is 2-3-2013.
(v) Statement showing Excise Duty for the product A
The value of product A = ` 15.00 lakhs
Assessable value = ` 15.00 lakhs
Total Excise Duty @6% on ` 15.00 lakhs = ` 0.90 lakhs
Note: it is assumed that the given value of ` 15 lakhs is inclusive of 10% profit margin.
Ques.: ABC, an assessee availing the SSI exemption scheme, paid central excise duty of ` 10,000 for the goods cleared
in the month of May 2015 on 15th JULY 2016. Discuss whether any interest will be charged from ABC for late pay-
ment of duty. If yes, what will be the interest liability?
Ans: Interest = ` 1,759/-
Due date = 6th July 2015
Duty paid = 15th July 2016
Rate of interest u/s 11AA = 18% p.a (upto 31-3-2016)
Rate of interest u/s 11AA = 15% p.a. (w.e.f. 1-4-2016)
No. of days delay for which rate of interest @18%p.a. = 269 days
(from 7th July 2015 to 31st Mar 2016)
No. of days delay for which rate of interest @15%p.a. = 106 days
(from 1st April 2016 to 15th July 2016)
` 10,000 x 18% x 269/366 = ` 1,323
` 10,000 x 15% x 106/365 = ` 436
Total = ` 1,759
Problem: Delhi Ltd., supplies raw material to a job worker Mumbai Ltd. After completing the job-work, the finished
products of ` 10,000 packets are returned to Chennai Ltd. Putting the retail sale price as ` 40 on each packet
The product in the packet is covered under MRP provisions and 40% abatement is available on it Determine the
assessable value under Central Excise law from the following details:
`
Cost of raw material supplied 60,000
Job workers charges including profit 20,000
Transportation charges for sending the raw material to the 6,000
Transportation charges for returning the finished packets to 6,000
Ans. Computation of assessable value:

Central Excise
Particulars Amount
Retail Sale Price 20 ` 40
Less: Abatement @ 40% ` 16
Assessable Value per unit 12 ` 24
Total Assessable Value [Rs. 24 x 10,000) ` 240,000

Problem: Compute assessable value and excise duty payable under Central Excise Act, 1944 in respect of following
transactions during March 2016:
(i) Opening stock - Nil. Production - 1,000 units in March, 2016
(ii) Quantity sold - 225 units @ Rs. 100 per unit on 4.3..2016 and 325 units @ Rs. 95 per unit on 21.03..2016 (ex-
clusive of excise duty. and Vat)
(iii) Free Samples cleared on 23.3.2016 - 15 units
(iv) Balance in stock on 31.3.2016 - 425 units
(v) Cost of production ` 50 per unit.
General rate of excise duty is applicable without any exemption. What is due date of payment of excise duty?
Ans. Computation of excise duty
Particulars Amount
Quantity Sold
- 225 units x ` 100 22,500
- 325 units x ` 95 30,875
Free Sample [15 units x ` 95] 1,425
Assessable Value 54,800
Excise duty on above ` 54,800 x ` 12.50%] 6,850
Problem: Compute assessable value of excisable goods for levy of Central Excise and excise duty payable, on basis
of following information:
Gross Price excluding Vat of ` 5,000, but including applicable excise duty ` 50,000
Packing cost (charged separately in invoice but included in aforesaid gross price) ` 5,000
Cost of durable and returnable packing used or transporting goods upto destination (not charged in invoice)-
` 6,000
Outward freight arranged at request of customer and charged separately in invoice (included in afore-
said gross price) - ` 4,500
Trade discount (given as deduction from aforesaid gross price) - ` 3,000
Rate of excise duty ` 12.50%.
Ans. Computation of assessable value
Particulars Amount Amount

Gross Price 50,000
Less: --
Packing cost --
Cost of durable and returnable packing (as the same is not included)
Outward freight 4,500
Trade discount 3,000 7,500
Less: Excise Duty [(Rs. 42,500 /112.50)*12.50] 42,500
4722

Problem: Following information are available in respect of manufacture of an Engine which has been used for captive
consumption within the factory. Calculate assessable value on which excise duty is payable.
Particulars `
Cost of direct materials (inclusive of excise duty of ` 3,090) 33,090
Cost of direct employees 24,600
Consumable stores and repairs 16,800
Quality Control Cost 8,600
Research and Development cost 5,400
Production Overheads 6,000
Administrative Overheads 3,000
Selling and distribution cost 7,200
Scrap value realized 3,000

Ans.
Computation of assessable value
Particulars `
Cost of direct materials (exclusive of excise duty 30,000
Cost of direct employees 24,600
Consumable stores and repairs 16,800
Quality Control Cost 8,600
Research and Development cost 5,400
Production Overheads 6,000
91,400
Less : Scrap value realized 3,000
88,400
Add : 10% 8,840
Alternatively, Administrative Overheads can also be considered as a part of production activity.
Problem: Mulund Ltd., a manufacturer (not eligible for SSI exemption) cleared 200 pieces from his factory at Mumbai
and sent to his Chandigarh depot on 1.1.2015. The net price of that product (excluding duties and taxes on
1.1.2015) was as follows:
(1) Sale from factory ` 180 per piece
(2) Sale from Chandigarh Depot ` 200 per piece. The excise duty rate was 12%. The goods were sold from
Chandigarh Depot on 5.3.2016. On that day the net prices were as follows:
(I) Sale from factory ` 190 per piece
(II) Sale from Chennai Depot ` 210 per piece.
The excise duty rate was 12.5%.
(A) Calculate excise duty payable.
(B) State the due date for payment of excise duty on this transaction.
Ans. (A) The excise duty payable in on basis of price at Chandigarh depot as on date of clearance from his fac-
tory.

Central Excise
Thus,
Assessable value = 100 x ` 200 = ` 20,000
Excise duty payable @ 12% = ` 2,400.
Any subsequent change in duty rate of price at Chandigarh does not affect the excise duty payable.
(B) The excise duty is required to be paid electronically by 6-2-2015.
Ques.: Udyog Ltd. is a registered SSI unit. For the year ended 31.3.2016, the assessable value of goods cleared from
the unit is ` 2.4 crores. Cenvat credit on raw materials purchased is ` 15,96,000 Machinery of ` 3,20,000 was pur-
chased on 11.2.2016, including Rs.30,500 as excise duty. Compute the excise duty liability of the assessee for the
year ended 31.03.2016, where it wants to avail the Cenvat credit. Rate of excise duty 12.5%
Ans. Computation of duty payable
Excise duty on Turnover in excess of ` 150 lakh 11,25,000
[(`2.4 crore -`1 .5 crore) x 12.5%]
Less: CENVAT Credit
`15,96,000 ` 90 lakh
- Credit on inputs 5,98,500
` 240 lakh
- On Capital Goods 30,500 6,29,000

Duty Payable 4,96,000
Problem: Bhopal and co., a manufacturing SSI unit has effected clearances of goods of the value of ` 545 lacs during
the Financial Year 2015-16. The said clearances include the following:
(1) Clearance of excisable goods without payment of excise duty to an EOU unit -` 65 lacs
(2) Job work in terms of notification no. 2 14/86-CE dated 25th March, 1986 ` 75 lacs
(3) Export to Bhutan ` 40 lacs
(4) Export to USA ` 10 lacs
(5) Goods manufactured in rural area with the brand name of the others ` 50 lac Is the unit eligible for
excise exemption during 2016-17?
Ans.
Computation ` In Lakh
Total clearance 545
Less:
Clearances to 100% EOU 65
Clearances exempted vide Notification No. 214/86-C.E. dated 25th March, 1986 75
Exports to USA 10
Exports to Bhutan -- 150
Goods manufactured in rural area with the brand name of the others --
Turnover 395
Since turnover for the Financial Year 2015-16 does not exceed ` 400 lakhs, hence assessee is eligible for SSI Exemption
for the Financial Year 2016-17.

Study Note - 3
CENVAT CREDIT

3.1 Background of Cenvat Credit
3.2 Highlights of Cenvat Credit Scheme
3.3 Utilization of Cenvat Credit
3.4 Reversal of Cenvat Credit
3.5 Refund of Cenvat Credit
3.6 Obligation of a Manufacturer or Producer of Final Products and a Provider of Taxable Services
3.7 Input Service Distributor
3.8 Documents and Accounts
3.9 Other Provisions
3.1 BACKGROUND OF CENVAT CREDIT
The CENVAT Credit Rules, 2004 introduced by the Honorable Union Finance Minister Mr. P Chidambaram based on the
recommendations made by the Kelkar Committee in July 2004 and the Service Tax Credit Rules, 2002 are now merged
with Cenvat Credit Rules, 2004, w.e.f. 10th September, 2004.
Excise and Service tax are central taxes, expected to be consumption based taxes to the extent practicable. Till the
goods or service is finally consumed, the burden of excise duty and service tax is passed on to next buyer, who gets
credit of the tax and excise duty paid by the supplier/ service provider. Thus, effectively, tax is paid on value added
at each stage, as illustrated in following example. It means to say that CENVAT Credit eliminates cascading effect of
tax.
Cascading effect of tax: it means goods suffered tax suffering again and again in addition to tax on taxes, whereas
CENVAT Credit eliminates the cascading effect of tax.
Example 1:
Transaction without VAT Transaction With VAT
Details A B A B
(`) (`) (`) (`)
Purchases 110 100
Value 100 40 100 40
Added
Sub-Total 100 150 100 140
Add Tax 10% 10 15 10 14
Total 110 165 110 154
B is purchasing goods from A. In second case i.e. under Vat, his purchase price is ` 100 as he is entitled to Cenvat
credit of ` 10 i.e. tax paid on purchases. His invoice shows tax paid as ` 14. However, since he has got credit of ` 10,
effectively he is paying only ` 4 as tax, which is 10% of ` 40, i.e. 10% of value added by him. Cenvat (Central Value
Added Tax) scheme is used to achieve the aim of levying tax only on value added at each stage.

Cenvat Credit
Example 2:
Particulars Value
Goods Purshased by Mr. Y by paying 200.00 Total excise duty payable = ` 35.00
` 224 from Mr. X out of which ` 24 towards Less: CENVAT Credit = ` 24.00
towards excise duty which is not Net excise duty payable = ` 11.00
considered as cost Value Added Tax is ` 11.00
Add: Value Addition 80.00
Taxable Turnover 280.00
Add: CENVAT @ 12.5% 35.00
Sales Inclusive of Excise Duty 315.00
3.2 HIGHLIGHTS OF CENVAT CREDIT SCHEME
CENVAT Credit is an integration of excise duty and service tax. It means while paying excise duty service tax can claim
as Cenvat credit and while paying service tax excise duty can claim as Cenvat credit. The same has been explained
in the following example:
Example 3:
M/s X Ltd. (not a SSI unit) is a manufacturer produced dutiable finished goods in the month of December 2015 for `
20,00,000, exclusive of excise duty payable is @12.5%. Input goods (i.e. raw material) purchased for ` 5,61,800 inclusive
of excise duty @ 12.5%. Capital goods purchased in the same month for ` 10,00,0000 (exclusive of excise duty 12.5%).
Input services used from a consultant for ` 2,00,000 (exclusive of service tax 15%). Finished goods removed from the
factory in the month of December 2015. Find the net excise duty payable by M/s X Ltd., and due date of payment of
excise duty?
Answer:
(Amount in `)
Particulars Excise Duty Workings
( `)
Finished Goods 2,50,000 ` 20 L 12.5%
Less: CENVAT CREDIT on (62,422) 5,61,800 x 12.5/112.5 = ` 62,422
input goods
Less: CENVAT CREDIT on (62,500) ` 10,00,000 12.5% = ` 1,25,000 Up to 50% allowed as
capital goods CENVAT credit in the first year of receipt of capital
goods and balance allowed in the subsequent
year or years
Less: CENVAT CREDIT on (30,000) ` 2,00,000 x 15% = ` 30,000
input services
Net excise duty payable 95,078 Due date of payment of excise duty is on or before
6th January 2016
Credit Rules, 2004

Rule 1: Title, extent and commencement:
These rules called as CENVAT Credit Rules, 2004. They extended to the whole of India. However, these rules not appli-
cable to the State of Jammu and Kashmir with regard to availment and utilization of credit of service tax.

Definitions under Cenvat Credit Rules, 2004
Rule 2: Definitions:
Rule 2(a): capital goods:
The term Capital goods under CENVAT Rules is Different from capital goods as understood in accounting or in
income-tax. Items like spare parts, tools, dies, tubes fittings etc. are never capitalized in accounts for income-tax pur-
poses but are defined as capital goods for CENVAT.
(A) Capital goods are
(i) All goods falling under Chapters 82, 84, 85, 90, heading number 6805, grinding wheels and the like parts
thereof falling under heading 6804 of the First Schedule to Central Excise Tariff Act, 1 985.Tools, hand tools
Chapter 82: Tools, Implements, Cutlery etc.
Chapter 84: Nuclear Reactors, Boilers, Machinery and Mechanical appliances parts thereof Chapter 85:
Electrical Machinery & Equipment & parts thereof, sound recorders, and parts and accessories of such ar-
ticles
Chapter 90: Optical, photographic, medical & surgical instruments and apparatus parts and accessories
thereof.
(ia) Outside the factory of the manufacturer of the final products for generation of electricity for captive use
within the factory;
(ii) Pollution control equipment;
(iii) Components, spares and accessories of goods specified at (i) and (ii) above;
(iv) Moulds and dies, jigs and fixtures;
(v) Refractories and refractory materials;
(vi) Tubes, pipes and fittings thereof, used in the factory;
(vii) Storage tank and
(viii) Motor vehicles other than those falling under tariff heading 8702, 8703, 8704, 8711 and their chassis, (but
including dumpers and trippers)
Used
(1) in the factory of the manufacturer of the final products, but does not include any equipment or appli-
ance used in an office; or
(2) For providing output service;
(B) Motor vehicle designed for transportation of goods including their chassis registered in the name of the service
provider, when used for
(i) providing an output service of renting of such motor vehicle; or
(ii) transportation of inputs and capital goods used for providing an output service; or
(iii) providing an output service of courier agency
(C) Motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of
service, when used for providing output service of
(i) transportation of passengers; or
(ii) renting of such motor vehicle; or
(iii) imparting motor driving skills.
(D) components, spares and accessories of motor vehicles which are capital goods for the assessee;
CHANGES IN CENVAT CREDIT RULES BY UNION BUDGET 2016-17
AMENDMENTS IN THE CENVAT CREDIT RULES, 2004

Cenvat Credit
Related to Capital Goods
Wagons of sub heading 8606 92 included in the definition of capital goods
The Capital goods used in office located within factory is also eligible for Cenvat Credit.
CENVAT credit on inputs and capital goods used for pumping of water, for captive use in the factory, is being
allowed even where such capital goods are installed outside the factory.
All capital goods having value upto `10,000/- per piece are being included in the definition of inputs.
Conditions for availing Credit on Capital Goods
(1) Central Excise duty should be paid on capital goods (Actual payment of duty by the buyer cum-manufacturer
may not be required)
(2) Depreciation under section 32 of the Income-tax Act, 1961 should not have been claimed on the excise portion
of the Capital Goods.
(3) If the capital goods are sent for job work these should be brought back within 180 days from the date of dis-
patch. (this condition is now not applicable in the case of Service provider)
(4) Capital goods must be used in the factory of the manufacturer (it is not applicable in case of service provid-
er).
(5) Final product produced by the manufacturer with the help of capital goods must have suffered duty [however,
CENVAT credit not allowed in respect of exempted final products or final products on which duty paid is Nil and
the goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE, dated 1-3-2011 is
availed i.e. goods on which 1% or 2% (w.e.f. 1-3-2011) excise duty has been paid]
If all the above conditions are satisfied then up to 50% of the input duty paid on capital goods is allowed as
CENVAT credit in the first year of receipt of capital goods and the balance is allowed in the subsequent year or
years.
(6) As per Rule 4(2)(a) of the CENVAT Credit Rules, 2004, CENVAT credit on Capital Goods allowed up-to 100%
in the year of receipt of such goods for SSI units w.e.f. 1-4-2010. (Notification No. 06/2010-CE (NT) dated 27-2-
2010)
Let us assume that a capital asset was purchased on 21-5-2015 for ` 11,60,000 (inclusive of ` 1,60,000 Excise
duty), The assessee can claim the CENVAT credit of 50% of ` 1,60,000 that is ` 80,000 on or before 31st March,
2016 and the remaining 50% in the next financial year that is on or after 1-4-2016.
Again assume that a capital asset was purchased by Small Scale Industrial (SSI) unit on 21-5-2015 for ` 11,60,000
(inclusive of ` 1,60,000 Excise duty), The assessee can claim the CENVAT credit of 100% of ` 1,60,000 that is
` 1,60,000 on or before 31st March, 2016.
Rule 2(b): Customs Tariff Act means the Customs Tariff Act, 1975;
Rule 2(c): Excise Act means Central Excise Act, 1944;
Rule2(d): As per Rule 2(d) of Cenvat Credit Rules, 2004, exempted goods (i.e. non-dutiable goods) means goods
which is exempt from whole of duty of excise leviable thereon, and includes goods which are chargeable to Nil rate
of duty goods in respect of which the benefit of an exemption under Notification No. 1/2011-CE dated 1-3-2011 or
under entries at serial numbers 67 and 128 of Notification No. 12/2012CE, dated the 17th March, 2012 is availed.
Rule 2(e): As per Rule 2(e) of Cenvat Credit Rules, 2004, exempted services means taxable services which is exempt
from the whole of the service tax leviable thereon, or includes services on which no service tax is leviable under sec-
tion 66B of the Finance Act, 1994 or taxable services whose part of value is exempted on the condition that no credit
of inputs and input services, used for providing such taxable service, shall be taken. For removal of doubts, it is hereby
clarified that exempted services includes trading (w.e.f. 1-4-2011).

Trading goods: A manufacturer or service provider may also be trading in goods. For example authorized service sta-
tion of automobiles is also selling spare parts of motor car. For the purpose of valuation, the value of exempted service
shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted
accounting principles without including the expenses incurred towards the purchases) or 10%of the cost of goods sold,
whichever is higher (vide Notification No. 13/2011-CE dated 31-3-2011).
Taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for
providing such taxable service, shall be taken, but shall not include a service which is exported in terms of rule 6A of
the Service Tax Rules, 1994.
Rule 2(f): Excise Tariff Act means the Central Excise Tariff Act, 1985
Rule 2(g): Finance Act means the Finance Act, 1994
Rule 2(h): Rule 2(h) of CENVAT Credit Rules defines final products under Central Excise to mean those goods that are
excisable and have come into existence from manufacturing activity making use of inputs or by using input services.
Here final products mean only excisable goods i.e. those goods which are liable for excise duty which may be at nil
rate or a rate higher than zero. Assessees are generally under the misconceived notion that only goods which suffer
duty at a rate higher than zero percent are excisable goods whereas that is not the case. This definition of exempted
goods is vital as there are certain restrictions as to availability of CENVAT credit. However the goods against which
there is no rate prescribed in the CET may not be said to be excisable goods.
Rule 2(ij): First Stage Dealer means
(i) A dealer, who purchases the goods directly from the manufacturer under the cover of an invoice in terms of
the provisions 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 who sells goods imported by him under the cover of an invoice on which CENVAT credit may
be taken and such invoice shall include an invoice issued from his depot or the premises of his consignment
agent;
Example 4: Mr. D purchased dutiable goods from M/s X Ltd by paying excise duty and the same sold to M/s Y Ltd. In
the given case Mr. D (registered under Central Excise as registered dealer) is competent to pass the excise duty as
CENVAT Credit from M/s X Ltd to M/s Y Ltd. The same has been explained in the following diagram:

Cenvat Credit
C.C. = CENVAT CREDIT

Rule 2(k): Input means
(i) all goods used in the factory by the manufacturer of the final product; or
(ii) any goods including accessories, cleared along with the final product, the value of which is included in the
value of the final product and goods used for providing free warranty for final products; or
(iii) all goods used for generation of electricity or steam for captive use; or
(iv) all goods used for providing any output service;
but excludes
(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;
(B) any goods used for
(a) construction or execution of works contract of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods,
except for the provision of service portion in the execution of a works contract or construction service as listed
under clause (b) of section 66E of the Act;
(C) capital goods except when used as parts or components in the manufacture of a final product;
(D) Motor vehicles;
(E) any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and
clinical establishment, when such goods are used primarily for personal use or consumption of any employee;
and
(F) any goods which have no relationship whatsoever with the manufacture of a final product.
Explanation:- For the purpose of this clause, free warranty means a warranty provided by the manufac-
turer, the value of which is included in the price of the final product and is not charged separately from the
customer;
What is Input
Any input
which is used in the manufacture or
which is used in relation to manufacture
which is not defined as capital goods will be eligible as inputs.
All goods (except High Speed Diesel, Light Diesel Oil and Petrol) used in or in relation to the manufacture of the final
product, directly or indirectly and whether contained in the final product or not, and includes (i) Lubricating oils, (ii)
Greases, (iii) cutting oils, (iv) accessories of the final products, (v) goods used as paints, as packing material, as fuel or
for generation of electricity or steam used for manufacture of final products are eligible for CENVAT.
Example 5: X Ltd. removed cookers along with packing material from factory but used for packing at depot had to be
considered as have been used in or in relation to the manufacture of final products and credit of duty paid on such
master cartons (i.e. packing material) could not have been denied. The entire packing material is to be considered
as has been used in or in relation to the manufacture of the final product. Accordingly they are entitled to avail the
credit of duty paid on the packing material Hawkins Cookers Ltd. (2010) (HC).
Construction service is not an input service to any
manufacturer or service provider w.e.f. 1-4-2011
Example 6: Laboratory, test or quality check is always in relation to the manufacture of finished goods. It is immaterial
whether or not the input is physically present in the final finished product as such; therefore, the laboratory test in rela-
tion to the manufacture of final product is a part of manufacture. Hence Cenvat Credit is available on raw material
destroyed in laboratory test. Tata Engineering & Locomotive Co. Ltd. 2010 (HC).

What is not input?
(a) Any input which is used as facilitation to the manufacture is not considered as an eligible Input.
(b) Input like steel, cement, angles, channels, CTD (Cold Twisted Deformed) or TMT (thermo mechanically
treated) bar, other material used for following purpose is not eligible for credit
Construction of building or civil structure or part thereof
Laying of foundation or making of structures for support of Capital goods
Conditions one should satisfy to avail CENVAT Credit:
Cenvat Credit can be claimed only in respect of eligible inputs subject to the following conditions.
Condition 1: The input should be used in factory (Material sent for job work is acceptable provided these are
brought back within 180 days from the date of dispatch). This condition is not applicable to the
service provider.
Condition 2: Central Excise duty should be paid on inputs (Actual payment of duty by the buyer cum- manu-
facturer may not be required)
Condition 3: Final product must be dutiable goods.
Rule 2(l): Input Service (w.e.f. 1-4-2011), input service means any service,
(i) used by a provider of output service for providing an output service; or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products
and clearance of final products, upto the place of removal, and includes
(a) services used in relation to modernization, renovation or repairs of a factory, premises of provider of out-
put service or an office relating to such factory or premises,
(b) advertisement or sales promotion,
(c) market research,
(d) storage upto the place of removal,
(e) procurement of inputs,
(f) accounting,
(g) auditing,
(h) financing,
(i) recruitment and quality control,
(j) coaching and training,
(k) computer networking,
(l) credit rating,
(m) share registry,
(n) security,
(o) business exhibition,
(p) legal services,
(q) inward transportation of inputs or capital goods and
(r) outward transportation upto the place of removal;
but excludes
(A) Service portion in the execution of a works contract and construction services including service listed under
clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they used
for
Cenvat Credit
a. Construction or execution of works contract of a building or a civil structure or a part thereof; or
b. Laying of foundation or making of structures for support of capital goods, except for the provision of one
or more of the specified services; or
(B) Services provided by way of renting of a motor cycle in so far as they relate to a motor vehicle which is not a
capital goods; or
(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor
vehicle which is not a capital goods, except when used by-
(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or
(b) an insurance company in respect of a motor vehicle insured or reinsured by a such person; or
(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic
surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits
extended to employees on vacation such as Leave or Home Travel Concession, when such services are used
primarily for personal use or consumption of any employee.
Sales commission w.e.f. 1-3-2016:
Services by way of sale of dutiable goods on commission basis in sales promotion and thus, an eligible, input ser-
vices [Rule 2(l)]
Commissioner v. Ambica Overseas 2012(25)STR Commissioner v. M/s. Cadila Healthcare Ltd. 2013(4) STR 3 (Guj.)
348 (P&H):
Decision : Honble High Court held that commission agent is di-
Decision : Honble High Court held that credit rectly concerned with the sales rather than sales promotion and
would be allowed on sales commission. as such.
w.e.f. 1-3-2016: In order to settle the controversy, an explanation has been inserted in the definition of input service
under rule 2(l) vide Notification No. 2/2016 CE (NT) dated 03.02.2016 to clarify that sales promotion includes services
by way of sale of dutiable goods on commission basis.
Rule 2(m): Input Service Distributor means 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 purchase 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.
Input Service Distributor means

an office of the manufacturer or producer of final products or provider of output service,
which receives invoices issued under rule 4A of STR, 1994 towards purchase 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 or w.e.f. 1-4-2016, an outsourced manufacturing unit as the case
may be.
Rule 2(na): Large tax payer shall have the meaning assigned to it in the Central Excise Rules, 2002;
A LTU is one who meets ANY ONE of the following conditions:
excise duty in cash (account current) of ` 5 crore or more; or
service tax in cash (account current) of ` 5 crore or more; or
advance (income) tax/corporation tax of ` 10 crore or more.
Rule 2(naa): Manufacturer or Producer
(i) in relation to articles of jewellery or other articles of precious metals falling under heading 7113 or 7114, as the
case may be, of the First Schedule to the 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;
(ii) in relation to goods falling under Chapter 61, 62 or 63 of the First Schedule to the Excise Tariff Act, includes a
person who is liable to pay duty of excise leviable on such goods under sub-rule (1A) of rule 4 of the Central
Excise Rules, 2002.
Rule 2(o): Notification means the notification published in the Official Gazette;
Rule 2(p): Output Service means any service provided by a provider of service located in the taxable territory but
shall not include a service
(i) specified in section 66D of the Finance Act, or
(ii) where the whole of service tax is liable to be paid by the recipient of service.
Rule 2(q): 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.
Rule 2(qa): Place of Removal means
(i) a factory or any other place or premises of production or manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be depos-
ited without payment of duty;
(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,
from where such goods are removed;
Rule 2(r): Provider of Taxable Service include a person liable for paying service tax.
Rule 2(s): Second Stage Dealer means a dealer who purchases the goods from a first stage dealer.
Rule 2(t): words and expressions used in these rules and not defined but defined in the Excise Act or the Finance Act
shall have the meaning respectively assigned to them in those Acts.
Clarifications from the CBE&C (Circular No. 943/04/201 1-CX, dated 29-4-2011) with regard to input and input ser-
vices
Since, definition of input, and input service has been changed w.e.f. 1-4-2011, the Central Board of Excise and Cus-
toms has been issued clarifications in this regard vide CBE&C No. 943/04/2011 -CX., dated 29-4-2011, the same were
explained with the help of examples;

Cenvat Credit
Sl. Issue Clarification Examples

No.
Can credit of capital goods As per Rule 6(4) of the CENVAT credit (1) M/s. X Ltd. is a manufacturer of
1
be availed of when used Rules, 2004, no credit can be availed Mathematical boxes, geometry box-
in manufacture of dutiable on capital goods used exclusively in es and colour boxes, pencil sharpen-
goods on which benefit un- manufacture of exempted goods ers. These goods are subject to excise
der Notification 1/2011- CE or in providing exempted service. duty @2% (w.e.f. 1-4-2012). Machin-
is availed or in provision of a Goods in respect of which the benefit ery purchased for ` 1,12,500 (inclusive
service whose part of value is of an exemption (i.e. Excise duty @1% of excise duty @12.50%) to produce
exempted on the condition is paid) under notification No. 1/2011- aforesaid final products. Hence, M/s.
that no credit of inputs and CE, dated the 1st March, 2011(or X Ltd. is not eligible to claim CENVAT
input services is taken? excise duty 2% w.e.f 17- 3-2012) is credit of duty paid on capital goods.
availed are exempted goods [Rule (2) M/s. CDS Builders provided con-
2(d)]. Taxable services, whose part of struction of commercial contract ser-
value is exempted on the condition vices. While executing construction
that no credit of inputs and input ser- contract, service provider purchased
vices, used for providing such taxable Drilling Machine
service, shall be taken, are exempt- (i.e. Capital Goods) for ` 2,25,000 (in-
ed services [Rule 2(e)]. Hence credit clusive of excise duty @12.50%). Ser-
of capital goods used exclusively in vice tax was paid by service provider
manufacture of such goods or in pro- after claiming abatement
viding such service is not allowed. @67%. Hence, M/s. CDS Builders are
not eligible to claim CENVAT credit of
duty paid on capital goods.
2 Is the credit of only specified The list is only illustrative. The principle M/s. A Ltd. is a manufacturing com-
goods and services listed in is that cenvat credit is not allowed pany regularly providing lunch to
the definition of inputs and when any goods and services are their employees. For this purpose M/s.
input services not allowed used primarily for personal use or con- A Ltd. received outdoor catering
such as goods used in a club, sumption of employees. service from Mr. B. Since, this service
outdoor catering etc, or is the Illustrative list : meant primarily for the personal use
list only illustrative? Outdoor catering, or consumption of employees will not
Beauty treatment, constitute an input service. Therefore,
Health services, service tax paid on outdoor cater-
Cosmetic and plastic surgery, ing service is not allowed as CENVAT
Membership of a club, credit.
Health and fitness centre, However, outdoor catering service
Life insurance, should be considered as input service
Health insurance and travel if used for sales promotion, training,
benefits extended to employees auditing (i.e. lunch to auditors), legal
on vacation such as Leave or services, security or to directors who
Home Travel Concession etc. are not employees.
How is the no relationship Credit of all goods used in the fac- (1) M/s. Ram Ltd. purchased Steel,
3 cement and other material used for
whatsoever with the manu- tory is allowed except in so far as it
facture of a final product to is specifically denied. The expression construction of factory building is not
no relationship whatsoever with the eligible as input goods.
be determined?
manufacture of a final product must (2) Part of inputs goes in process loss,
be interpreted and applied strictly may not be reflected in final product.
and not loosely. However, CENVAT credit is available
The expression does not include any on entire quantity of inputs. Since, in-
goods used in or in relation to the puts are used in the manufacture of
manufacture of final products wheth- final product.
er directly or indirectly and whether (3) Goods such as furniture and sta-
contained in the final product or not. tionary used in an office within the
Only credit of goods used in the fac- factory are goods used in the factory
tory but having absolutely no rela- and are used in relation to the manu-
tionship with the manufacture of final facturing business and hence the
product is not allowed. credit of same is allowed.

No.
4 Is the credit of input services Credit of input services used for repair M/s. X Ltd. paid `1,10,437 (inclusive of
used for repair or renovation or renovation of factory or office is al- service tax @12.50%) to a provider of
of factory or office avail- lowed. taxable services towards renovation
able? of factory and office relating to such
Services used in relation to renova- factory.
tion or repairs of a factory, premises of M/s. X Ltd. is allowed to claim CEN-
provider of output service or an office VAT credit on input services (i.e. ren-
relating to such factory or premises, ovation and repairs of a factory) as
are specifically provided for in the in- per Rule 2(l) of CEVNAT Credit Rules,
clusive part of the definition of input 2004 (w.e.f. 1-4-2011).
services.
Is the credit of Business Auxil- The definition of input services allows Mr. X is a commission agent of M/s Y
5 iary Service (BAS) on account all credit on services used for clear- Ltd., manufacturer of furniture. A sum
of sales commission now dis- ance of final products upto the place of ` 11,044 (inclusive of service tax)
allowed after the deletion of of removal as per the Rule 2(1)(ii) of has been paid by M/s Y Ltd., towards
expression activities related the CENVAT Credit Rules, 2004 (w.e.f. commission to Mr. X.
to business? 1-4-2011).
Service tax paid on input service
Moreover activity of sale promotion (Business Auxiliary Service) is allowed
is specifically allowed and on many as CENVAT credit.
occasions the remuneration for same
is linked to actual sale. Reading the
provisions harmoniously it is clarified
that credit is admissible on the servic-
es of sale of dutiable goods on com-
mission basis.
6 Can the credit of input or in- Trading is an exempted service. An assessee is a dealer of Air
put services used exclusively Hence the credit of any inputs or in- Condition Machines. These goods
in trading, be availed? put services used exclusively in trad- are purchased from a manufacturer
ing cannot be availed. by paying value of goods as well as
excise duty. However, excise duty is
not allowed as CENVAT credit.
Are the taxes and year end Generally accepted accounting Value of trading:
7 principles need to be followed in this
discounts to be included in selling price of a product is ` 250 and
the sale price and cost of regard. All taxes for which set off or
the purchase price is ` 200, the differ-
goods sold while calculating credit is available or are refundable/
ence is ` 50 or ` 20 (i.e. ` 200 x 10%)
the value of trading? refunded may not be included. Dis-
whichever is higher will be considered
counts are to be included.
as value of exempted service for the
purpose of payment of amount @6%
or for proportionate reversal of cred-
it.
Selling price includes discounts but
excludes taxes and duties for which
credit is allowed.
8 Does the expression in The definition of input is given in
or in relation used in Rule 6 Rule 2(k) and Rule 6 only intends to
override the definition of in- segregate the credits of inputs used
put under Rule 2(k) for deter- towards dutiable goods and exempt-
mining the eligibility of Cen- ed goods. While applying Rule 6, the
vat credit? expression in or in relation must be
read harmoniously with the definition
of inputs.

Cenvat Credit

No.
9 Sub-rules 3B and 3C of rule 6 The sub-rules 6(3B) and 6(3C) im-
apply to whole entity or inde- pose obligation on the entities provid-
pendently in respect of each ing banking and financial services (in
registration? case of a bank and a financial insti-
tution including a non-banking finan-
cial company) or life insurance ser-
vices or management of investment
under ULIP service. The obligation is
applicable independently in respect
of each registration. When such a
concern is exclusively rendering any
other service from a registered prem-
ise, the said rules do not apply. In ad-
dition to BoFS and life insurance ser-
vices if any other service is rendered
from the same registered premises,
the said rules will apply and due re-
versals need to be done.
10 Is the credit available on ser- The credit on such service shall be rent-a-cab service
vices received before 1.4.11 available if its provision had been
on which credit is not allowed completed before 1.4.2011.
now?
For easy understanding we have presented the entire concept so far explained in the following diagram:
Types of CENVAT Credit

In terms of Rule 3 of CENVAT Credit Rules, credit is available to the manufacturer of excisable goods which either may
be dutiable or non dutiable and the provider of taxable service. CENVAT credit is not available to the dealer as the
dealer does not engage himself in any processing amounting to manufacture as defined under law which would
entitle him to CENVAT credits and therefore, merely passes on the CENVAT benefit which is equal to the duty per unit
of the final product, paid by the manufacturer on clearances effected by him. The following duties paid on inputs are
eligible as CENVAT Credit for the manufacturer of Excisable goods:
(i) Basic duty of excise specified under First Schedule to Central Excise Tariff Act.
(ii) Special duty of excise specified under Second Schedule to Central Excise Tariff Act.
(iii) The additional duty of excise under Section 3 of Additional duties of excise (Textile and Textile Articles) Act, 1978
and wherein restrictions are provided as to utilization i.e. it can be utilized only towards payment of excise duty
leviable under additional duties of excise (T & TA) Act 1978.
(iv) The additional duty of excise leviable under section 3 of Additional duties of excise (Goods of special impor-
tance) Act, 1957 (58 of 1957) and it can be utilized towards payment of either basic or special excise duty.
(v) The National Calamity Contingent duty leviable under section 136 of Finance Act, 2001 (14 of 2001) and this
duty can be utilized for payment of NCCD.
(vi) Education Cess on excisable goods or on taxable services leviable under section 91 read with section 93 of
Finance Act, 2004 and this is to be utilized only towards the payment of education cess either on goods or tax-
able output services.
(vii) Secondary and Higher education cess on inputs and input services leviable under section 136 read with section
138 of Finance Act. 2007 and it can be utilized only towards payment of secondary and higher education cess
either on excisable goods or on taxable output service.
(viii) The additional duty leviable under section 3(5) of the Customs Tariff Act, No restrictions are provided for its utili-
zation but however the duty leviable under this section cannot be availed by service providers.
(ix) The additional duty of excise leviable under section 157 of the Finance Act and this can be utilized towards
payment of additional duty of excise under section 157.
(x) Additional duty of excise equivalent to duty of excise leviable under section 3 of Customs Tariff Act to offset the
effect of Central Excise Duty on locally manufactured goods. This is known as CVD
(xi) Service tax leviable under section 66, 66A (import of services under erstwhile service tax law) or Section 66B
(charging section under negative list based taxation). No restrictions as to utilization is provided and this credit
can be utilized towards payment of either excise duty or for paying service tax.
(xii) Additional duty of excise leviable under section 85 of the Finance Act and this is to be utilized towards payment
of additional duty of excise leviable under section 85 of the Finance Act.
However duty paid at the rate of 1% in terms of Notification No. 1/2011-CE dated 1-3-201 1 cannot be availed as
Credit. It is also set out in proviso to Rule 3(I)(v/7) that credits upto 85% of additional duty of Customs under section 3(1)
of Customs Tariff Act, 1975, on ships, boats and other structures for breaking up can be allowed.
CENVAT Credit is available either to the manufacturer or producer of excisable products or provider of taxable ser-
vices on:
(a) Inputs received in the factory of manufacture of final products on or after 10th September 2004.
(b) Capital goods received in the factory of manufacture of final products (except in case capital goods installed
outside the factory for generation of electricity for captive use) on or after 10th September, 2004.
(c) Input services received by the manufacturer of final product on or after 10th September, 2004.
(d) Any inputs or input services used in the manufacture of intermediate products by a job worker and received by
the manufacturer for further use in relation to manufacture.
Transitional Credit
Rule 3(2) provides for availment of credit on inputs when the assessee enters into the tax net for the first time, as in the
normal course the manufacturer would have stock in hand (raw materials, consumables, packing materials) as on
that date. The removals from that date would suffer duty; therefore credit on the inputs contained in finished goods
and work in progress is available and on the other hand any assessee who opts out of CENVAT scheme should also
reverse the credit contained in the raw material, finished goods and work in progress. For availing the transitional
credit, the inputs must satisfy all the conditions as to definition of inputs under Central Excise Law. This provision is mainly
invoked by SME units availing the benefit of Notification No. 8/2003-CE as they are required to pay duty on crossing
Cenvat Credit
` 150 lacs and avail credit while at the end of the year they are required to reverse the credit on excising the option
available under Notification No. 8/2003-CE.
3.3 UTILIZATION OF CENVAT CREDIT
Rule 3: Cenvat Credit allowed or may be utilized for various types of duties and taxes explained under the sub rules
of rule 3.
Cenvat Credit allowed or may be utilized for various types of duties and taxes explained under the sub rules
of rule 3.
As per Rule 3(4) of CENVAT Credit Rules 2004, credit may be utilized for payment of
(a) any duty of excise on any final products or
(b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being
partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as
such; or
an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002 (it means if the process to which the
goods are subjected before being removed does not amount to manufacture, the manufacturer shall
pay an amount equal to the CENVAT credit taken) service tax on any output service.
The following table will provide clear picture in respect of claiming of credit.
Particulars BED Remarks
Finished Goods XXXX
OUTPUT SERVICE XXXX
AMOUNT XX AMOUNT DOES NOT
ATTRACT CESS
LESS: C.C. ON I.G. (XX)
LESS: C.C. ON I.S. (XX)
LESS: C.C. ON C.G. (XX) UPTO 50% 1ST YEAR
LESS: C.V.D. (XX) Equal to B.E.D.
LESS: SPL. CVD (XX) Equal to VAT / CST
NET PAYABLE XX
C.C. ON I.G = cenvat credit on input goods
C.C. ON I.S = cenvat credit on input services
C.C. ON C.G = cenvat credit on capital goods
C.V.D. = countervailing duty (also called as additional customs duty)
SPL. CVD = special countervailing duty (also called as special additional customs duty)
Swachh Bharat Cess cannot be paid by utilizing CENVAT credit of any other duty (w.e.f. 03.02.2016):
The CENVAT credit of any duty specified in rule 3(1) will not be utilised for payment of the Swachh Bharat Cess.
w.e.f. 1-4-2016: CENVAT credit of only NCCD to be utilised for payment of the NCCD payable on all goods [Rule
3(4)]:
Rule 3(4) of Cenvat Credit Rules, 2004, allows credit of only NCCD to be utilised for payment of the NCCD pay-
able on tariff items 8517 12 10 and 8517 12 90 [i.e. mobile phones]. Thus, there was no restriction on utilization
of credit of other duties allowable under rule 3(1) for payment of NCCD levied on other goods, namely, pan
masala, tobacco products, crude petroleum, and motor vehicles.
However, with effect from 01.03.2016, rule 3(4) of Cenvat Credit Rules, 2004, has been amended to provide that
CENVAT credit of any duty specified in sub-rule (1), except NCCD, cannot be utilized for payment of NCCD
leviable under section 136 of the Finance Act, 2001 on any product.
Infrastructure Cess: Infrastructure Cess has been imposed under clause 159 (1) of Finance Bill, 2016 on all prod-
ucts covered under chapter heading 8703 (motor cars and motor vehicles for transport of persons).
The rate for the infrastructure cess is @4% of value w.e.f. 1-3-2016. However, partial exemption is available as per
Notification No. 1/2016 Infrastructure Cess dated 1-3-2016, as follows:
Infrastructure cess is not payable on ambulances, registered as taxi, electrically operated motor vehicles, hy-
brid motor vehicles, three wheeled vehicles and hydrogen vehicles.
Motor vehicles of length not exceeding 4000 mm, but run on petrol, LPG or CNG, the rate of infrastructure cess
is 1%.
LPG = Liquefied petroleum gas; CNG = Compressed natural gas
Motor vehicles of length not exceeding 4000 mm, but run on diesel, the rate of infrastructure cess is 2.5%.
On other motor vehicles, the rate of infrastructure cess is 4%.
Note: No CENVAT credit can be utilized for payment of this infrastructure cess.
Clean Energy Cess (w.e.f. 1-3-2016): Clean energy cess now called as Clean Environment Cess. This cess would
be levied and collected as a duty of excise from coal mines. This cess also applies for imported coal as CVD.
However, while paying this cess, no CENVAT credit is allowed. This means to say that this cess is to be paid fully
without utilization of CENVAT credit.
Effective rate of Clean Environment Cess:
(i) The clean environment cess ` 400 per metric tonne w.e.f. 1-3-2016.
(ii) The effective rate was ` 200 per metric tonne w.e.f. 1-3-2015.
(iii) During 11-7-2014 to 1-3-2015 the Rate was ` 100.
Notes: As per CENVAT Credit Rule 3(4), CENVAT Credit available as on the last day of the month can be utilized for
payment of duty even if duty is payable by 5th or 6th of the following month. Thus, CENVAT Credit in respect of
inputs/capital goods/input services received after end of the month cannot be utilized while paying duty on
5th/6th as the case may be. The credit can be utilized in subsequent month only.
Exemption granted to EC and SHEC w.e.f. 30-4-2015: Pursuant to the Exemption granted to EC and SHEC (w.e.f.
1-3-2015), a manufacturer has been allowed to utilise the following credits of EC and SHEC for the payment of
basic excise duty:
(i) credit of EC and SHEC paid on inputs or capital goods received in the factory of manufacture of final product
on/after the 1st day of March, 2015.
(ii) credit of balance 50% EC and SHEC paid on capital goods received in the factory of manufacture of final prod-
uct in the financial year 2014-15.
(iii) credit of EC and SHEC paid on input services received by the manufacturer of final product on or after the 1st
day of March, 2015.
Credit of Cess can be used for payment of Service Tax
w.e.f. 1st June, 2015 service tax rate has been increased from 12.36% to 14% (subsuming Education Cess and
Secondary & Higher Education Cess, collectively termed as cess). In light of rule 3(4) of CENVAT Credit Rules,
2004; this amendment has raised questions regarding fate of cess for service providers, majorly, in following
cases:
1 Closing balance of cess as on 31st May, 2015;
2 Cess in respect of inputs and capital goods received in F.Y. 2014-15 but CENVAT Credit is omitted to be
availed;
3 Cess in respect of input services, invoice received till 31st May, 2015, but CENVAT Credit is omitted to be
availed;

Cenvat Credit
4 Deferred cess of Capital Goods received in F.Y. 2014-15;

5 Cess in respect of Capital Goods received prior to F.Y. 2014-15;
6 Cess in respect of inputs and capital goods received on or after 1st June, 2015; and
7 Cess in respect of input services, invoice received on or after 1st June, 2015.
Recently, Central Government has issued Notification No. 22/2015-CE (NT) dated 29th October, 2015 to provide
provisions for utilisation of CENVAT Credit of cess for the purpose of payment of Service Tax in following cases:
Cess paid on inputs or capital goods received on or after 1st June, 2015;
Deferred cess in respect of capital goods received in F.Y. 2014-15;
Cess on input services, invoice received on or after 1st June, 2015.
Therefore, though Central Government has allowed to utilise CENVAT Credit of cess in three cases (point no. 4,
6 and 7); fate of cess in respect of point no. 1, 2, 3, and 5 is still full of doubts.
Rule 3(1)(i): Additional Customs Duty (i.e. CVD) Imported Goods
Ships, boats and other structures imported for breaking up which will attract excise duty falling under 8909 00 00, be-
cause various items like washing machine, furniture, air condition machine and so on will come out. Therefore, CVD
paid on account of import of ships, boats allowed as cenvat credit only to the extent of 85% (w.e.f 1.3.2011) while
paying excise duty on products extracted from ships, boats or other structures.
Rule 3(2):Ceases to be exempted
Manufacture is allowed to take cenvat credit lying in stock or in process (work in progress) or inputs contained in the
final goods lying as stock on the date on which any goods manufactured by the said manufacturer ceases to be ex-
empted goods (i.e. goods become dutiable). The same provision is also applicable for service provider rule 3(3).
3.4 REVERSAL OF CENVAT CREDIT
Rule 3(5) Removal of Goods as such

When 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, as the
case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such
removal shall be made under the cover of an invoice referred to in rule 9 of the Cenvat Credit Rules, 2004.
It is provided that if the manufacturer of goods or the provide of output service fails to pay the amount payable under
sub-rules (5), (5A) and (5B) of Rule 3 (Payment on removal of Inputs/Capital goods as such or after use and write off
of Inputs/Capital goods), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT Credit
wrongly taken.
Exceptions:
(a) Cenvat credit not required to be reversed if input goods or capital goods removed outside the premises of the
provider of output service for providing the output service;
(b) Cenvat credit shall not be required to be reversed where any inputs are removed outside the factory for provid-
ing free warranty for final products.
Rule 3(5A) Removal of Capital goods after use (w.e.f. 1-4 -2012)
If the capital goods, on which CENVAT credit has been taken, are removed after being used, whether as capital
goods or as scrap or waste, the manufacturer or provider of output services, shall pay
(a) an amount equal to the CENVAT Credit taken on the said capital goods reduce by the percentage points
calculated by straight line method as specified below for each quarter of a year or part thereof from the date
of taking the CENVAT Credit, namely:
(i) for computer and computer peripherals:
for each quarter in the first year @10%
for each quarter in the second year @ 8%
for each quarter in the third year @ 5%
for each quarter in the fourth and fifth year @1%
(ii) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter.
Provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction
value, the amount to be paid shall be equal to the duty leviable on transaction value.
(b) If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty
leviable on transaction value.
REMOVAL OF CAPITAL
GOODS AFTER USE
Rule 3(5A) of CCR
PRIOR TO PRIOR TO ON OR AFTER

13.11.2007 27.02.2010 27.02.2010
C. C. NOT REQUIRED C.C. ON C.G. = XXXX Other than Computers

TO REVERSED Less : REDUCTION Computers & &
@2.5% p.q. OR PART Peripherals Peripherals
THEREOFF from the
date of taking C.G.
upto the date of
Removal = (XX) C.C. ON C.G. = XXXX
Less : REDUCTION
Amount to be paid = XXXX
1 Year 10% p.q. for 4 querters = (XX)
2 year 8% p.q. for 4 querters = (XX)
Amount to be paid = XX
(a) Amount to be paid

WHICHEVER IS
(OR)
HIGHER
(b) Excise Duty on transaction value
Rule 3(6): Cenvat credit available of the amount paid under sub-rule 5 & 5A
The 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).
Rule 3(5B): CENVAT credit to be reversed/paid
Any inputs or capital goods before being put to use, on which CENVAT Credit has been taken is written off fully or par-
tially or any provision is made in books of account to write off fully or partially, the manufacturer or service provider is
required to pay an amount equal to CENVAT credit taken in respect of such inputs or capital goods (w.e.f. 1-3-2011).
Provided that if the said inputs or capital goods is subsequently used in the manufacture of final products or the provi-
sion of output services, the manufacturer or output service provider, as the case may be, shall be entitled to take the
credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules.
Rule 3(5C): Damage/Destruction of Finished goods
Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted
under rule 21 of the Central Excise Rules, 2002, the CENVAT credit taken on the inputs used in the manufacture or
production of said goods and the CENVAT credit taken on inputs services used in or in relation to the manufacture or

Cenvat Credit
production of said goods shall be reversed.

Explanation 1- The amount payable under sub-rules (5), (5A), (5B) and (5C), unless specified otherwise, shall be paid
by the manufacturer of goods or the provider of output service by debiting the CENVAT credit or otherwise on or be-
fore the 5th or 6th day of the following month except for the month of March, where such payment shall be made on
or before the 31st day of the month of March.
Explanation 2- If the manufacturer of goods or the provider of output service fails to pay the amount payable under
sub-rules (5), (5A), (5B) and (5C), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT
credit wrongly taken and utilized.
Example 7: Y Ltd. manufactured cars which have been destroyed by fire within the factory. If Y Ltd. obtained remission
of duty on finished goods, then duty on input goods had availed as CENVAT credit should be reversed.
Rule 3(7): CENVAT Credit on purchases from EOU/EHTP/STP
Goods removed from a 100% Export Oriented Unit or from a unit in an Electronic Hardware Technology park or from a
Software Technology Park to Domestic Tariff Area are liable to pay excise duty. As per Rule 17 of Central Excise Rules,
2002 goods shall be removed from a 100% Export Oriented Unit to Domestic Tariff Area under an invoice by following
the procedure specified in rule 11 of CENVAT Credit Rules, 2004, and the duty leviable on such goods shall be paid by
utilizing the CENVAT credit or by crediting the duty payable to the account of the Central Government in the manner
specified in rule 8 of the Central Excise Rules, 2002 [CCEx. & Cus. v Suresh Synthetics (2007) (SC)].
As per present law, duty on clearances of goods to DTA from 100% EOU will be equal to 50% of basic customs duty,
countervailing duty under section 3(1) of the Customs Tariff Act, 1975 plus special additional duty under section 3(5)
of Customs Tariff Act, 1975, if applicable (i.e. VAT exempted), and cess as applicable.
Example 8 : M/s X Ltd (a unit of 100% EOU) sold goods to M/s A Ltd. for ` 20 lac. BCD @10%, CVD 12.5% and Spl. CVD
@4% (VAT exempted) are applicable.
Find the total duty of excise. How much Cenvat Credit allowed to M/s A Ltd.
Answer:
Particulars Value in ` Workings
Assessable value 20,00,000
Add: Basic Customs Duty 10% 1,00,000 20,00,000 10% 50%
Balance 21,00,000
Add: CVD @12.5% 2,62,500 21,00,000 12.5%
Balance 23,62,500
Add: 2% CESS on (` 1,00,000 + ` 2,62,500) 7,250 3,62,500 2%
Add: 1% SAH CESS on (` 1,00,000 + ` 2,62,500) 3,625 3,62,500 1%
Balance 23,73,375
Add: SPL. CVD 4% 94,935 23,73,375 4%
Value of import 24,68,310
Cenvat Credit allowed is ` 3,57,435 (i.e. CVD + Spl. CVD)

Rule 4: Conditions for allowing CENVAT Credit
In all taxation laws, the benefit is always available with some Conditions and the conditions for utilizing the CENVAT
credits are provided in Rule 4 of CENVAT Credit Rules 2004:
1. The CENVAT Credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the
manufacture or in the premises of the provider of output service. In respect of final products falling under chap-
ter 7113, the CENVAT on inputs may be taken immediately on receipt of inputs in the registered premises of the
person who gets the final products manufactured on his behalf on job work basis subject to the condition that
inputs are used by the job worker for manufacturing such final product.

Further CENVAT credit in respect of inputs may be taken by the provider of output service when the inputs are
delivered to such provider, subject to maintenance of documentary evidence of delivery and location of the
inputs.
Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after six
months of the date of issue of any of the documents specified in sub-rule (1) of rule 9.
2. The CENVAT Credit in respect of capital goods received in a factory at any point in a given financial year shall
be taken only to the extent of 50% of the duty paid. [Manufacturer eligible for SSI exemption would be eligible
to avail 100% in the 1st year]
Further CENVAT credit in respect of capital goods may be taken by the provider of output service when the
capital goods are delivered to such provider, subject to maintenance of documentary evidence of delivery
and location of the capital goods.
3. Rule 4(2)(a)) which provides for availing credits on receipt of capital goods into factory, is amended w.e.f. 1-4-
2011, to state that the CENVAT credit would be allowed even on capital goods which is received outside the
factory and used for generation of electricity for captive used in factory.
4. However if the capital goods are cleared as such in the same financial year, whole of the duty paid shall be
taken as CENVAT. Availment of Credit upto 50% in the year of receipt is not applicable to additional duty of
excise levied under section 3(5) of Customs Tariff Act. Similar to what is stated in the aforesaid clause, physical
receipt is important for availment of CENVAT credit. Facility has been provided to SSI units that are eligible to
avail the benefit of Notification No. 8/2003-CE to take the full CENVAT credit on capital goods in one installment
in the year of receipt of goods.
5. The balance of CENVAT credit may be taken in any financial year subsequently only if the capital goods are
in the possession of the manufacturer and in case the manufacturer has not availed duty of excise in the year
of procurement, then entire credit would be available in the next year. This requirement as to possession in the
subsequent year would not apply to components, spares and accessories, moulds, tools and dies and refrac-
tories and refractory materials.
6. The manufacturer is not expected to own the capital goods for the purpose of availment, relaxations are pro-
vided in Rule 4(3) allowing credit in respect of capital goods even if the capital goods are acquired either on
lease, hire or loan agreement from a financing company.
7. Rule 4(4) provides that CENVAT credit in respect of capital goods shall not be allowed on such value of capital
goods representing duty when the manufacturer has claimed depreciation under section 32 of Income Tax
Act on the said amount of duty. In other words, the manufacturer or the service provider cannot claim CENVAT
credit and again include the CENVAT amount in the cost of the capital goods for the purpose of claiming de-
preciation.
8. Rule 4(5)(b) has been amended during 2010 budget changes to provide that CENVAT credit shall be allowed
in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to another manufacturer for
production of goods or to a job worker for the production of goods on his behalf. Therefore, these items can
also be sent to another manufacturer for manufacture of goods as per his specifications.
Manufacturer of final products is being allowed to take CENVAT credit on tools of Chapter 82 of the Central
Excise Tariff in addition to credit on jigs, fixtures, moulds & dies, when intended to be used in the premises of
job-worker or another manufacturer who manufactures the goods as per specification of manufacturer of final
products.
It is also being provided that a manufacturer can send jigs, fixtures, moulds & dies goods directly to such other
manufacturer or job-worker without bringing the same to his premises.
The permission given by an Assistant Commissioner or Deputy Commissioner to a manufacturer of the final prod-
ucts for sending Inputs or partially processed inputs can be send outside factory to a job-worker and clearance
there from on payment of duty is valid for 3 financial years.
CENVAT Credit Eligibility
Radio Frequency Spectrum, Mines etc.: CENVAT credit of Service Tax paid on amount charged for assignment
Cenvat Credit
by Government or any other person of a natural resource such as radio-frequency spectrum, mines etc. shall
be spread over the period of time for which the rights have been assigned.
Where the manufacturer of goods or provider of output service further assigns such right to use assigned to
him by the Government or any other person, in any financial year, to another person against a consideration,
balance CENVAT credit not exceeding the service tax payable on the consideration charged by him for such
further assignment, shall be allowed in the same financial year. It is also being provided that CENVAT credit
of annual or monthly user charges payable in respect of such assignment shall be allowed in the
same financial year.
Infrastructure Cess: Cenvat credit cannot be utilised for payment of Infrastructure Cess. Further, no credit of this
Cess would be available under the Credit Rules.
Rule 4(7): CENVAT credit in respect of Input service
The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the
case may be, challan referred to in rule 9 is received.
Provided that in respect of input service where whole of the service tax is liable to be paid by the recipient of service,
credit shall be allowed after the service tax is paid.
Provided further that in respect of an input service, where the service recipient is liable to pay a part of service tax
and the service provider is liable to pay the remaining part, the CENVAT credit in respect of such input service shall
be allowed on or after the day on which payment is made of the value of input service and the service tax paid or
payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9.
New Return for Service Provider
Now Provider of Output Services Also requires to file an Annual Return for each financial year, by the 30th day
of November of the succeeding year in the form as specified by a notification by the Board.
Provided also that in case the payment of the value of input service and the service tax paid or payable as
indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, except in respect of input ser-
vice where the whole of the service tax is liable to be paid by the recipient of service, is not made within three
months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider
who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such
input service and in case the said payment is made, the manufacturer or output service provider, as the case
may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject
to the other provisions of these rules.
Provided also that if any payment or part thereof, made towards an input service is refunded or a credit note is
received by the manufacturer or the service provider who has taken credit on such input service, he shall pay
an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited.
Provided also that CENVAT credit in respect of an invoice, bill or, as the case may be, challan referred to in rule
9, issued before the 1st day of April, 2011 shall be allowed, on or after the day on which payment is made of the
value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be,
challan referred to in rule 9.
Provided also that the manufacturer or the provider of output service shall not take CENVAT credit after one
year of the date of issue of any of the documents specified in sub-rule (1) of rule 9.
3.5 REFUND OF CENVAT CREDIT
Rule 5: Refund of Cenvat Credit

Following the amendment in Rule 5, the Government has issued a fresh Notification No. 27/2012 CE (N.T.) dated 18
June 2012 (the Notification) which has superseded earlier Notification in this regard i.e. Notification No. 5/2006 CE
(N.T.) dated 14 March 2006. The Notification prescribes new procedures, safeguards, conditions and limitations with
respect to the manner in which the refund would be claimed by the exporter of goods / services.
The key changes are as under:
(a) In case of person exporting goods and services simultaneously, option has been provided to submit two refund
claims, one in respect of export of goods and the other in respect of export of services;
(b) Option to submit monthly claims under certain circumstances has been withdrawn. Therefore, every person will
now have to file the refund claim on a quarterly basis;
(c) In addition to the maximum cap provided in Rule 5 (to the extent of export turnover / total turnover), the No-
tification further provides for a restriction, wherein the amount of refund claim can neither exceed the closing
balance of credit lying at the end of quarter to which the refund claim relates nor the balance of credit lying
at the time of filing of refund claim;
(d) The amount of refund would have to be debited to CENVAT credit amount at the time of filing of such claim.
However, if the sanctioned amount of refund is less than the amount of refund filed, the difference may be
taken back as credit by the claimant;
(e) Credit is being allowed on motor vehicles (except those of heading nos. 8702, 8703, 8704, 8711 and their chas-
sis).
The Credit of tax paid on the supply of such vehicles on rent, insurance and repair shall also be allowed; (f )
Credit of insurance and service station service is being allowed to
(i) Insurance companies in respect of motor vehicles insured and re-insured by them; and
(ii) Manufacturers in respect of motor vehicles manufactured by them.
(g) At present, credit on goods can be taken only after they are brought to the premises of the service provider.
Rule 4(1) and 4(2) are being amended to allow a service provider to take credit of inputs or capital goods
whenever the goods are delivered to him, subject to specified conditions.
(h) Rule 7 for input service distributors is being amended to provide that credit of service tax attributable to service
used wholly in a unit shall be distributed only to that unit and that the credit of service tax attributable to service
used in more than one unit shall be distributed prorate on the basis of the turnover of the concerned unit to the
sum total of the turnover of all the units to which the service relates.
(i) Rule 9(1) (e) is being amended to allow availment of credit on the tax payment challan in case of payment of
service tax by the service receiver on reverse charge basis.
W.e.f 1.4.2012 Simplified scheme introduced for exporter and service providers who are exported goods and
services.
EXPORT TURNOVER OF GOODS & SERVICE

REFUND AMOUNT = Net CENVAT CREDIT
TOTAL TURNOVER
EXPORT TURNOVER VALUE (`)

DUTIABLE F.G. EXPORTED DURING
THE RELEVANT PERIOD XXXX
INTERMEDIATE PRODUCTS CLEARED

FOR EXPORT DURING RELEVANT
PERIOD XXXX
TOTAL XXXX
EXEMPTED GOODS EXPORTED REMAINS

CALLED AS EXEMPTED GOODS ONLY

Cenvat Credit
Export Turnover of Service Value (`)

Payments received during the relevant period for export service XXXX
Export services whose provision has been completed for which payment had been
received in advance XXXX
Less: Advance received for export of services for which services not completed during
the relevant period XXXX
Total XXXX
Total Turnover Amount (`)

Dutiable goods cleared during relevant period for export as well as for D.T.A XXXX
Exempted goods cleared during relevant period for export as well as for D.T.A XXXX
Export of services and services provided in D.T.A XXXX
Input goods and capital goods removed as such against an invoice for the relevant period - rule 3(5) XXXX
Total XXXX
Net Cenvat Credit Amount (`)

Total cenvat credit on input goods and input services XXXX
Less: Amount reversed for the relevant period as per rule 3(5c) of CCR (XXX)
Total XXXX
Example 9: Export of dutiable goods = ` 60,000

Domestic turnover = ` 30,000
Cenvat Credit = ` 4,500
Excise duty Liability = ` 3,708
Answer:
Refund is ` 792
(` 60,000/ ` 90,000) x ` 4,500 = ` 3,000
Or
Cenvat Credit balance = ` 792 (i.e. 4500 3708)
Whichever is less.
Refund claim should be after paying excise duty liability.
Note: Time limit for claiming refund is ONE year from the date of provision of the services.
Rule 5B: Refund of CENVAT credit to service providers providing services taxed on reverse charge basis. - A provider
of service providing services notified under sub-section (2) of section 68 of the Finance Act and being unable to utilise
the CENVAT credit availed on inputs and input services for payment of service tax on such output services, shall be
allowed refund of such unutilised CENVAT credit subject to procedure, safeguards, conditions and limitations, as may
be specified by the Board by notification in the Official Gazette.
Example 10: Mr. A is service provider and service tax on services provided by him is payable on partial reverse charge.
40% of service tax on services provided by Mr. A is payable by service recipient and balance tax is paid by him. The
total service tax on services provided by him is `2,00,000 out of which his liability is ` 1,20,000. He receives inputs and

input services on which credit of ` 2,20,000 is available. Discuss whether he can claim refund under Rule 5B ? What will
be your answer, if 100% of the service tax is payable by the receiver of service.
Answer:
The two situations are discussed below
Case I - Partial Reverse charge: If Mr. A is liable to pay 60% of service tax, which amounts to `1,20,000, then, such ser-
vice will amount to output service and, hence, he can taken credit of `2,20,000; utilise it for payment of service tax of
`1,20,000 and balance `1,00,000 of credit can be claimed as refund under Rule 5B.
Case II - 100% reverse charge: If whole of service tax on services provided by Mr. A is payable by recipient of services,
then, such service is not output service under Rule 2(p) for Mr. A. Hence, he cannot take credit. When credit cannot
be taken, there is no question of refund under Rule 5B.
As per Notification No.12/2014 dated 3rd March, 2014, the refund of CENVAT credit shall be allowed to a provider of
services notified under sub-section (2) of section 68 of the Finance Act,1994, subject to the procedures, safeguards,
conditions and limitations, as specified below, namely:-
1. Safeguards, conditions and limitations.
(a) the refund shall be claimed of unutilised CENVAT credit taken on inputs and input services during the half
year for which refund is claimed, for providing following output services namely:-
(i) renting of a motor vehicle designed to carry passengers on non abated value, to any person who is not
engaged in a similar business;
(iii) service portion in the execution of a works contract; (hereinafter the above mentioned services will be
termed as partial reverse charge services).
Explanation:- For the purpose of this notification,-
Unutilised CENVAT credit taken on inputs and input
services during the half year for providing partial = (A) (B)
reverse charge services
Where,
Turnover of output service under partial reverse charge during

CENVAT credit taken on inputs and the half year
A= input services during the half year
Total turnover of goods and services during the half year

B = Service tax paid by the service provider for such partial reverse charge services during the half year;
(b) the refund of unutilised CENVAT credit shall not exceed an amount of service tax liability paid or payable by the
recipient of service with respect to the partial reverse charge services provided during the period of half year
for which refund is claimed;
(c) the amount claimed as refund shall be debited by the claimant from his CENVAT credit account at the time of
making the claim;
(d) in case the amount of refund sanctioned is less than the amount of refund claimed, then the claimant may take
back the credit of the difference between the amount claimed and the amount sanctioned;
(e) the claimant shall submit not more than one claim of refund under this notification for every half year;
(f) the refund claim shall be filed after filing of service tax return as prescribed under rule 7 of the Service Tax Rules
for the period for which refund is claimed;
(g) no refund shall be admissible for the CENVAT credit taken on input or input services received prior to the 1st day
of July,2012;

Cenvat Credit
Explanation. For the purposes of this notification, half year means a period of six consecutive months with the first half
year beginning from the 1st day of April every year and second half year from the 1st day of October of every year.
2. Procedure for filing the refund claim.
(a) the provider of output service, shall submit an application in Form A annexed hereto, along with the docu-
ments and enclosures specified therein, to the jurisdictional Assistant Commissioner of Central Excise or
Deputy Commissioner of Central Excise, as the case may be, before the expiry of one year from the due
date of filing of return for the half year:
Provided that the last date of filing of application in Form A, for the period starting from the 1st day of July,
2012 to the 30th day of September,2012, shall be the 30th day of June,2014;
(b) if more than one return is required to be filed for the half year, then the time limit of one year shall be cal-
culated from the due date of filing of the return for the later period;
(c) the applicant shall file the refund claim along with copies of the return (s) filed for the half year for which
the refund is claimed;
(d) the Assistant Commissioner or Deputy Commissioner to whom the application for refund is made may call
for any document in case he has reason to believe that information provided in the refund claim is incor-
rect or insufficient and further enquiry needs to be caused before the sanction of refund claim;
(e) at the time of sanctioning the refund claim, the Assistant Commissioner or Deputy Commissioner shall satisfy
himself or herself in respect of the correctness of the refund claim and that the refund claim is complete in
every respect.
3.6 OBLIGATION OF A MANUFACTURER OR PRODUCER OF FINAL PRODUCTS AND A PROVIDER OF TAXABLE SERVICES
Rule 6: Obligation of a manufacturer or producer of final products and a provider of taxable service
Option 1: As per rule 6(2) of the CENVAT Credit Rules, 2004 (w.e.f. 1-4-2011).
If separate accounts maintained for the receipt, consumption and inventory of inputs, then the assessee shall take
CENVAT credit on inputs which are used:-
in or in relation to the manufacture of dutiable final products excluding exempted goods; and for the provision of
output services excluding exempted services.
If separate accounts maintained for the receipt and use of input services, then the assessee shall take CENVAT credit
on input services which are used:-
in or in relation to the manufacture of dutiable
final products, excluding exempted goods, and
their clearance upto the place of removal; and
If the capital goods used by the manufacturer or
for the provision of output services excluding- service provided for dutiable as well as non-duti-
exempted services able goods and for taxable services as well as ex-
Cenvat reversal of non-excisable goods under Rule 6 empted services then the available Cenvat Credit
of the Cenvat Credit Rules, 2004 [Explanation 1] [w.e.f can be claimed fully (i.e. upto 50% in the first year of
01.03.2015]: For the purpose of this rule, exempted receipt and the balance in the subsequent years).
goods or final products shall include non-excisable
goods cleared for a consideration from the factory.
Valuation of non-excisable goods [Explanation 2]: Value of non-excisable goods
Invoice value;
if invoice value is not available, such value shall be determined by using reasonable means consistent with the
principles of valuation contained in the Excise Act and the rules made thereunder.
If separate accounts are not maintained
In this case the manufacturer or service provider has following three options:
Option 2: As per rule 6(3)(i) of the Cenvat Credit Rules, 2004, pay an amount:
The manufacturer of goods shall pay an amount equal to 6% of value of exempted goods (w.e.f. 1-4-2012)
and the provider of output services shall pay an amount equal to 7% (w.e.f. 01-06- 2015) of value of the exempted
services [notification no. 14/2015 - Central Excise (N.T.)].
(Or)
Option 3: As per rule 6(3) (ii) of the Cenvat Credit Rules, 2004, pay an amount proportionately attributable to CENVAT
credit utilized for exempted final product and exempted output services as provided in rule 6(3A) of the Cenvat Credit
Rules, 2004.
Option 4: As per rule 6(3)(iii) of the Cenvat Credit Rules, 2004, maintain separate account for inputs and pay amount
as determined under rule 6(3A) in respect of input services (w.e.f. 1-4-2011).
Goods Exported under bond are not exempted goods: Final products (dutiable goods) are exported under bond with-
out payment of duty. They are not exempted goods. Hence, an amount @6% is not required to be paid. At the same
time proportionate reversal of CENVAT credit is also not required as per rule 6(6)(v) of the Cenvat Credit Rules, 2004.
Exported goods are considered as dutiable goods for the purpose of calculation of formulae as per rule 6(3A).
Rule 6(6A): the provisions of rule 6(1), 6(2), 6(3) and 6(4) shall not be applicable in case the taxable services are pro-
vided, without payment of service tax, to a unit in a Special Economic Zone or to a Developer of a Special Economic
Zone for their authorized operations.
Important points with regard to Rule 6:
(i) Pay an Amount to the department without charging Education Cess and Secondary and Higher Education
Cess.
(ii) The buyer of exempted product is not eligible to get the CENVAT credit. Hence, the buyer of such exempted
goods will not be eligible to avail CENVAT credit of amount paid to the manufacturer or service provider (CBE
& C circular No. 870/08/2008-C.Ex., dated 16-5-2008).
(iii) At the end of the year, assessee should calculate the ratios on actual basis and make fresh calculations and
pay difference if any on or before 30th June. If any excess is paid, such an excess amount can be adjusted in
CENVAT credit.
(iv) Delay in payment of shortfall amount will attract interest @ 24% per annum after the due date (i.e. 30th June.)
till the date of payment of short amount.
(v) If assessee opts to pay amount on exempted services under 6(3)(i) of Cenvat credit Rules, 2004, the amount
will be calculated on the value so exempted under abatement scheme. For example Mr. Raj provider of com-
mercial construction services opted abatement 67%. Gross value of contract is ` 100 lakhs. Exempted services
are ` 67 lakhs and taxable services are ` 33 lakhs. Hence, he is liable to pay service tax on ` 33 lakhs and
amount @7% on ` 67 lakhs.
(vi) Value for purpose of Rule 6(3) and 6(3A) of the Cenvat Credit Rules, 2004 (w.e.f, 1-4-2011): Assessee has to ei-
ther pay amount on value of exempted goods or services as per rule 6(3) or opt for proportionate reversal of
credit as per rule 6(3A). As per rule 6(3D) of the Cenvat Credit Rules, 2004, ` Value in both the cases will be as
follows:
(a) Gross amount of works contract is ` 1,00,000 were service provider opted for composition scheme (i.e.
@4.8%). Service tax will be ` 4,800. Hence, value of exempted services is ` 40,000 (i.e. 1: 4,800 x 100/12).
(b) Provider of commercial construction services opted abatement 67%. Gross value of contract is ` 100 lakhs.
Exempted services are ` 67 lakhs and taxable services are ` 33 lakhs. Hence, he is liable to pay service tax
on ` 33 lakhs and amount @7% on ` 67 lakhs. That is value of exempted services is ` 67 lakhs.
(c) In case of trading goods, selling price of a product is ` 250 and the purchase price is ` 200, the difference
is ` 50 or ` 20 (i.e. ` 200 x 10%) whichever is higher will be considered as value of exempted service for the
purpose of payment of amount @7% or for proportionate reversal of credit.
Rule 6(3B): Bank or NBFC services
A substantial part of the income of a bank is from investment or by way of interest in which a number of inputs and
input services are used (i.e. exempted as well as taxable). Hence, a banking company or a financial institution includ-
ing NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit
availed on inputs and input services as per rule 6(3B) of the Cenvat Credit Rules, 2004, w.e.f. 1-4-2011. Therefore, other

Cenvat Credit
options of payment of amount under Rule 6 shall not be available for this service provider.
Rule 6(3C): Insurance Company services: A substantial part of the income of an insurance company is from invest-
ment or by way of interest in which a number of inputs and input services are used (i.e. exempted as well as taxable),
Therefore, general insurance services and life insurance services or management of ULIPs, amount payable is equal
to 20% of Cenvat credit availed on inputs and input services in the month as per rule 6(3C) of the Cenvat Credit Rules,
2004, w.e.f, 1-4-2011. Therefore, other options of payment of amount under Rule 6 shall not be available for this service
provider. However, Rule 6(30 has been withdrawn w.e f 1.4.2012. It means Insurance companies now can avail full
cenvat credit.
Rule 6(4): No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of ex-
empted goods or in providing exempted services, other than the final products which are exempt from the whole of
the duty of excise leviable thereon under Notification No, 8/2003 namely SMALL SCALE UNITs exemption notification.
Rule 6(6): Goods sold to EOU, SEZ, EHTP, STP, UN Agencies: Dutiable goods removed without payment of duty to Export
Oriented Units (EOUs), Special Economic Zone (SEZ units), Electronic Hardware Technology Park (EHTP), Software Tech-
nology Park (STP), United Nations (UN) agencies as per rule 6(6) of Cenvat Credit Rules, 2004, then the Cenvat credit
on inputs/capital goods / input services used in the manufacture of such final products shall be allowed. It means CEN-
VAT Credit need not required to be reversed or pay an amount. It means these goods are not exempted goods.
Exempted goods cannot be exported under bond & benefit of rule 6(6) of Cenvat Credit Rules, 2004 is not available.
i.e. Manufacturer is not eligible to take Cenvat credit of Inputs/capital goods/input services used in such goods. It
means these good are to be considered as exempted goods only.
Rule 6(8): A service provided or agreed to be provided shall not be an exempted service when:-
(a) the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the
service is to be received in convertible foreign currency; and
(b) such payment has not been received for a period of six months or such extended period as may be allowed
from time-to-time by the Reserve Bank of India, from the date of provision.
Provided that if such payment is received after the specified or extended period allowed by the Reserve Bank of India
but within one year from such period, the service provider shall be entitled to take the credit of the amount equiva-
lent to the CENVAT credit paid earlier in terms of sub-rule (3) to the extent it relates to such payment, on the basis of
documentary evidence of the payment so received.
Amendment in Rule 6
Rule 6(1): The existing principle that CENVAT credit shall not be allowed on such quantity of input and input
services as is used in or in relation to manufacture of exempted goods and exempted service. The procedure
for calculation of credit not allowed is provided in sub-rules (2) and (3), for two different situations.
Rule 6(2): A manufacturer who exclusively manufactures exempted goods for their clearance up to the place
of removal or a service provider who exclusively provides exempted services shall pay (i.e. reverse) the entire
credit and effectively not be eligible for credit of any inputs and input services used.
Rule 6(3) When a manufacturer manufactures two classes of goods for clearance upto the place of removal,
namely, exempted goods and final products excluding exempted goods or when a provider of output services
provides two classes of services, namely exempted services and output services excluding exempted services,
then the manufacturer or the provider of the output service shall exercise one of the two options, namely,
(a) pay an amount equal to 6% of value of the exempted goods and 7% of value of the exempted services,
subject to a maximum of the total credit taken or
(b) pay an amount as determined under sub-rule (3A).
Rule 6 (3A) : The procedure and conditions for calculation of credit allowed and credit not allowed and such
credit not allowed shall be paid, provisionally for each month. Intimation in writing to the Superintendent of
Central Excise is necessary. The four key steps for calculating the credit required to be paid are :-

No credit of inputs or input services used exclusively in manufacture of exempted goods or for provision
of exempted services shall be available ;
Full credit of input or input services used exclusively in final products excluding exempted goods or out-
put services excluding exempted services shall be available;
Credit left thereafter is common credit and shall be attributed towards exempted goods and exempted
services by multiplying the common credit with the ratio of value of exempted goods manufactured
or exempted services provided to the total turnover of exempted and non-exempted goods and ex-
empted and non-exempted services in the previous financial year;
Final reconciliation and adjustments are provided for after close of financial year by 30th June of the
succeeding financial year, as provided in the existing rule.
New sub-rule (3AA): A manufacturer or a provider of output service who has failed to follow the procedure of
giving prior intimation, may be allowed by a Central Excise officer, competent to adjudicate such case, to fol-
low the procedure and pay the amount prescribed subject to payment of interest calculated at the rate of 15%
p.a.
New sub-rule (3AB) (transitional provision) The existing rule 6 of CCR would continue to be in operation upto
30.06.2016, for the units who are required to discharge the obligation in respect of financial year 2015-16.
Rule 6(3B) Allow banks and other financial institutions to reverse credit in respect of exempted services on ac-
tual basis in addition to the option of 50% reversal.
Explanations 3 and 4 are being inserted in rule 6, sub-rule (1) so as provide for reversal of CENVAT Credit on in-
puts/input services which have been commonly used in providing taxable output service and an activity which
is not a service under the Finance Act, 1994.
Rule 6(4): No CENVAT credit shall be allowed on capital goods if the same are used for the manufacture of ex-
empted goods or provision of exempted service for two years from the date of commencement of commercial
production or provision of service.
Rule 6(7) Credit taken on inputs and input services used in providing a service by way of transportation of
goods by a vessel from customs station of clearance in India to a place outside India shall not be required to
be reversed by the shipping lines.
3.7 INPUT SERVICE DISTRIBUTOR
Rule 7: Manner of distribution of credit by input service distributor (w.e.f. 1-4-2012):

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 conditions, namely:-
(a) The Input service distributor must ensure that such a distribution should not exceed the service tax paid.
(b) In case an input service is attributable to service use by one or more units exclusively engaged in manufacture
of exempted goods or exempted services, then such credit of service tax shall not be distributed.
(c) Credit of service tax attributable to service used wholly by a unit shall be distributed only to that unit; and
(d) Credit of service tax attributable to service used by more than one unit shall be distributed prorata on the basis
of the turnover of such unit to the total of the turnover of all the units, which are operational in the current year,
during the said relevant period.
w.e.f. 1-4-2016 the benefit of distribution of CENVAT credit to an OUTSOURCED MANUFACTURING UNIT also.
Prior to 01-04-2016, credit of service tax attributable to service used by more than one unit shall be distributed
pro rata, based on turnover, to all the units. Now (w.e.f. 1-4-2016), the proposition has been changed. Under
amended scenario, an Input Service Distributor shall distribute CENVAT credit in respect of service tax paid on
the input services to its manufacturing units or units providing output service or to outsourced manufacturing
units subject to, inter alia, the following conditions:
credit attributable to a particular unit shall be attributed to that unit only.

Cenvat Credit
Credit attributable to more than one unit but not all shall be to attributed to those units only and not to all
units.
Credit attributable to all units shall be attributed to all the units.
Credit shall be distributed pro rata on the basis of turnover as is done previously.
Further, it is important to note that units availing the CENVAT credit distributed by Input Service Distributor shall
be required to follow the procedure laid down in Rule 6 of CENVAT Credit Rules, 2004 relating to reversal of
credit. Accordingly, responsibility of Input Service Distributor is limited to distribution of Cenvat credit only.
Illustration: An ISD has a common input service credit of ` 1,40,000 (Bill Dated 10-4-2016). The ISD has 4 units namely
A, B, C and D which are operational in the current year and one outsourced manufacturing unit manufacturing
goods under job work basis.
UNIT Turnover in the previous year (in `)
A (Manufacturing excisable goods) 25,00,000
B (Manufacturing excisable and exempted goods) 30,00,000
C (providing exclusively exempted service) 15,00,000
D (providing taxable and exempted service) 20,00,000
Outsourced Manufacturing Unit 10,00,000
TOTAL 1,00,00,000
Find the solution in the following independent cases:
(a) The common input service relates to units A and B. How will the credit be distributed in the month of April
2016?
(b) The common input service relates to unit A, B as well as outsourced manufacturing unit. How will the credit
be distributed in the month of April 2016?
Answer:
(a) The distribution of credit will be as under: `
(i) Distribution to A
= 1,40,000 * 25,00,000/55,00,000 = 63,636
(ii) Distribution to B
= 1,40,000 * 30,00,000/55,00,000 = 76,364
(b) The distribution of credit will be as under: `
(i) Distribution to A
= 1,40,000 * 25,00,000/65,00,000 = 53,846
(ii) Distribution to B
= 1,40,000 * 30,00,000/65,00,000 = 64,615
(iii) Distribution to Outsourced manufacturer
= 1,40,000 * 10,00,000/65,00,000 = 21,539
Rule 7A: Distribution of credit on inputs by the office or any other premises of output service provider:
Cenvat credit on input goods and capital goods can be distributed by the service provider only if such person regis-
tered as first stage dealer or a second stage dealer.
Rule 8: Storage of input outside the factory of the manufacturer: In exceptional cases, AC/DC may permit the manu-
facturer considering the nature of goods and shortage of space to store the inputs on which CENVAT credit has been
availed, outside the factory premises. Condition may be prescribed to safeguard revenue. This relaxation is available
only to inputs and not capital goods.
Amendments related to Input Service Distributor (ISD)
Definition of Input Service Distributor has been changed by including the Outsourced Manufacturing Unit to
which such distributor can transfer Cenvat Credit.
The outsourced Mfg. unit shall maintain separate account for input service credit received from each ISDs.
These amendments will come in effect from 01-04-2016. Therefore Cenvat credit upto 31-03-2016 would not be
transferred to outsourced Mfg. unit.
New Rule 7B: Manufacturers with multiple manufacturing units can maintain a common warehouse for inputs
and distribute inputs with credits to the individual manufacturing units. Further manufacturer having one or
more factories allowed to take credit on inputs received under the cover of an invoice issued by a warehouse
of the said manufacture
3.8 DOCUMENTS AND ACCOUNTS
Rule 9: Documents and accounts

CENVAT CREDIT can be taken based on the following any documents:
invoice
Excess duty paid by the seller is eligible
supplementary invoice for claiming refund, on the basis of the
debit note issued by the buyer [Techno
bill or challan
Rubber Industries Pvt. 2011 (Kar)]
debit note/credit note
The above documents if does not contain full information then deputy commissioner or the assistant commis-
sioner of central excise is satisfied that the said goods have been accounted for in the books of the assessee he
may allow the Cenvat credit.
w.e.f. 27-8-2014, Rule 9 of CCR, 2004 has been amended to prescribe Service Tax Certificate for Transportation
of Goods by Rail (STTG Certificate) issued by the Indian Railways, along with the photocopies of the railway re-
ceipts mentioned in the STTG Certificate, as documents on the basis of which CENVAT Credit can be taken by
a manufacturer or provider of output service or input service distributor.
w.e.f. 1-3-2015 Provisions applicable to first/second stage dealer regarding maintenance of records to be able
to pass on the credit, to apply to an importer issuing CENVATable invoice [Rule 9(4)]
Presently, an invoice issued by a manufacturer for clearance of inputs or capital goods is a valid document
for availing CENVAT credit. w.e.f. 1-4-2016, It is being provided that an invoice issued by a service provider for
clearance of inputs or capital goods shall also be a valid document for availing CENVAT credit.
w.e.f. 21-12-2015:
Certificate issued by an Appraiser of Customs to be a valid document under rule 9 for goods imported through
authorised courier [Rule 9(1)(d)]:
Prior to 31.12.2015, certificate issued by an appraiser of customs was a valid document for availing credit in
respect of goods imported through a Foreign Post Office in terms of rule 9(1)(d).
Clause (d) of sub-rule (1) of rule 9 has been amended vide Notification No. 27/2015 CE (NT) dated 31.12.2015 to
provide that a certificate issued by an appraiser of customs will also be a valid document for availing CENVAT
credit in respect of goods imported through an authorized courier registered with the Principal Commissioner of
Customs or the Commissioner of Customs in-charge of the customs airport.
Rule 9A: Annual return w.e.f 1-4-2016:

Cenvat Credit
w.e.f. 1-4-2016 Rule 9A amended to provide filing of an annual return by a manufacturer of final product or
provider of output services for each financial year, by the 30th day of November of the succeeding year in the
form as specified by a notification by the Board.
Information relating to Principal Inputs (omitted w.e.f. 1-4-2016)
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.
Raw material Value ` % of the total cost of raw material Remarks
Rm1 20 lakhs 67% Principal input
Rm2 2 lakhs 7% Not principal input
Rm3 8 lakhs 27% Principal input
Total cost 30 lakhs
Rule 9(4): Purchases from first stage or second stage dealer
Rule 9(4) provides that CENVAT credit in respect of inputs and capital goods shall be allowed only if the dealer has
maintained proper records and should indicate that the goods are cleared from the duty paid stock. CENVAT Credit
shall be allowed only if the duty portion is expressly provided on the invoice i.e. on pro rata basis. The dealer should
ensure that he has proper stock records to take care of this issue.
Rule 9(5): Admissibility of CENVAT Credit
Rule 9(5) of CENVAT Credit Rules provides that it is the duty of the manufacturer to prove the admissibility of credit and
the manufacturer shall maintain proper records for receipt, disposal, consumption and inventory of input and capital
goods. The manufacturer shall also maintain a statement presenting the information as to value, availment and uti-
lization of CENVAT credit and the name of the manufacturer or dealer from whom the inputs or capital goods were
procured. In short the burden of proving the admissibility is on the person availing the CENVAT.
Return of CENVAT Credit
The manufacturers availing CENVAT benefits are required to file a CENVAT credit return along with monthly return
within ten days from the close of the month. The due date for filing of quarterly returns for SSI units is changed wherein
it has to be filed within 10 days from the end of the quarter instead of
20 days from the end of the quarter. The dates are aligned with the date for Non-SSI units so that all the returns are
required to be filed by 10th of the month following the said month for non SSIs and 10th of the month following the
quarter for SSI units.
Rule 10: Transfer of CENVAT Credit
In terms of Rule 10 of CENVAT Credit Rules, relaxations in the form of transfer of credit is available to manufacturer
of final products when the manufacturer shifts his factory to another location or transfers his business on account of
change in ownership or on sale, merger, amalgamation, lease or transfers his property to a joint venture with the
specific provision for transfer of liabilities, and only then the manufacturer shall be allowed to transfer the unutilized
CENVAT credit to the transferee.
The transfer of unutilized credit is allowable only if the stock of inputs or inputs in process or capital goods is also trans-
ferred along with the factory and it should be duly accounted to the satisfaction of ACCE or DCCE.
Rule 10A: Inter-unit transfer of Additional CVD
A new Rule 10A is introduced wherein if manufacturer has more than one registered premises, it provides for transfer
of CENVAT Credit of additional CVD (additional duty leviable under sub-section (5) of section 3 of the Customs Tariff
Act) from one unit to another unit, such credit lying in balance at the end of quarter.
The credit can be transferred as follows:
(i) making an entry for such transfer in the documents maintained for CENVAT Credit;
(ii) issuing a transfer challan containing registration number, name and address of the registered premises transfer-
ring the credit and receiving such credit, the amount of credit transferred and the particulars of such entry as
mentioned in clause (/) above,

(iii) based on such transfer challan, the recipient premises may take CENVAT credit
The above benefit is restricted if the transferring unit is the benefit of following notification:
(a) 32/99- CE -Goods produced in specified areas like north-east, J&K, Uttarakhand, Himachal Pradesh, Sikkim and
Kutch (Gujarat)
(b) 33/99-CE specified goods of factories in North-East (Assam, Tripura, Meghalaya, Meghalaya, Mizoram, Manipur,
Nagaland or Arunachal Pradesh)
(c) 39/2001-CE - Exemption to excisable goods cleared from units in Kutch (Gujarat)
(d) 56/2002-CE - Exemption to all goods produced (except cigars, tobacco and its products, soft drinks and their
concentrates) produced in Jammu & Kashmir by units located in Industrial Growth Centre, IIDC, EPIP or industrial
Estate.
(e) 57/2002-CE - exemption to specified goods produced by units in Jammu & Kashmir
(f) 56/2003-CE - exemption to specified goods cleared from new units in Sikkim
(g) 71/2003-CE - Exemption to all goods produced(except cigars, tobacco and its products, Specified Carry bags,
mineral oils, branded aerated beverages, pollution causing paper and paper products) Cleared from specified
areas of Sikkim by unit in Industrial Growth Centre, IIDC,
EPIP or industrial Estate from excise duty other than duty paid on account of Cenvat credit
(h) 20/2007-CE Exemption to north East including Sikkim on all goods (except as specified) cleared from Assam,
Tripura, Meghalaya, Mizoram, Manipur, Nagaland or Arunachal Pradesh or Sikkim from duty Paid other than by
utilization of Cenvat credit.
(i) 1/2010-CE - exemption to all goods except cigarettes, cigars, tobacco products and soft drinks or their concen-
trates cleared from new units (established/expanded after 6-2-2010) in J&K.
3.9 OTHER PROVISIONS
Rule 11: Transitional provision:

Final product fully exempted from Excise Duty due to any one of the following reasons:
(a) As per Rule 11(2) of the CENVAT Credit Rules, 2004, a manufacturer claiming CENVAT credit on inputs or input
services, subsequently opt for full exemption from excise duty under Notification No. 8/2003 (i.e. Small Scale
Industrial (SSI) exemption).
(b) As per Rule 11(3) of the CENVAT Credit Rules, 2004, a manufacturer of final product opts for full exemption
from excise duty, if the said final products are exempted absolutely under section 5A of the Central Excise Act,
1944.
(c) As per Rule 11(4) of the CENVAT Credit Rules, 2004, a service provider opts for full exemption from payment of
tax on his output service.
In such cases, an amount is payable equivalent to CENVAT credit taken on such
inputs lying in stock or
inputs lying in process or
inputs contained in final products or
input services.
The said amount can be paid by utilizing the CENVAT credit receivable account. The balance CENVAT credit, if any,
receivable will lapse.
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 where a manufacturer has cleared

Cenvat Credit
any inputs or capital goods, in terms of notifications of the Govt. of India, the cenvat credit on such inputs or capital
goods shall be admissible as if no portion of the duty paid on such inputs or capital goods was exempted under any
of the said notifications.
Rule 12A: Large Tax payer Unit (LTU) Special Enabling provisions
Large tax payer means any person, engaged in the manufacture or production of goods, except the goods falling
under chapter 24 or Pan Masala falling under chapter 21 of the First schedule of the Central Excise Tariff Act, 1985 and
has remitted during the financial year preceding the year under consideration:
(i) Duties of excise of more than rupees five hundred lakhs in cash or through account current; or
(ii) Advance tax of more than rupees ten hundred lakhs, under the Income Tax Act, 1961.
Rule 12A facilitates the large tax payer to remove CENVATABLE inputs or capital goods except petrol, diesel and LDO
without payment of duty under CENVAT Credit Rules either under the cover of an invoice or challan to another prem-
ise for further use in the manufacture of final products in the recipient premises provided that:
The goods are manufactured using the said transferred inputs and are cleared on payment of duty or exported
under bond or letter of undertaking within a time span of six months from the receipt of such inputs.
Any other conditions that are prescribed by the Principal Commissioner or Commissioner of Central Excise would
have to be followed.
Explanation is provided prescribing the requirements that the transfer challan shall be serially numbered con-
taining registration number, name, address of the transferor unit, description, classification, time and date of
removal, mode of transport and vehicle registration number, quantity of goods and registration number and
name of the consignee.
If default is made in following the above mentioned procedure or conditions stipulated by the Principal Commissioner
or Commissioner of Central Excise or the inputs are cleared as such, then the large tax payer shall pay an amount
equal to the credit taken in respect of such inputs along with interest specified under Rule 14 of the CENVAT Credit
Rules.
Yet another proviso is added to recover CENVAT credit availed on capital goods by the LTU, when the capital goods
are exclusively used in manufacture of exempted goods or such goods are cleared from recipient premises. However
in this case too recovery is made from the recipients premises along with interest specified under Rule 14 of CENVAT
Credit Rules.
The above conditions shall not be applicable if the recipient is availing either the benefits under Notifications provided
below or the unit is an export oriented unit or a unit located in electronic hardware technology park (EHTP) or software
technology park (STP).
No 32/99, dt. 8-7-1999 33/99 dt. 8-7-1999 39/2001 dt. 31-7-2001
56/2002, dt. 14-11-2002 57/2002 dt. 14-11-2002 56/2003 dt. 25-6-2003
71/2003, dt. 9-9-2003 20/2007 dt. 25-4-2007 01/2010-CE dt. 6-2-2010
The other salient features of this Rule are provided below:
The first recipient premise may avail the benefit of CENVAT credit of the amount paid under the proviso dis-
cussed above as if the duty is discharged by the sender premises and the document should expressly provide
duty details.
The CENVAT credit of any specified duties availed under Rule 3 of CENVAT Credit Rules shall neither be denied
or varied in respect of input or capital goods if removed as such under Rule 12(1) and cannot be treated as re-
moved without payment of duty under Rule 3(5) of the CENVAT Credit Rules or the said inputs or capital goods
arc used in the manufacture of intermediate goods which are removed without payment of duty under Rule
12BB of Central Excise Rules.
The large tax payer unit (LTU) shall submit a monthly return for each of the registered premises.
Rule 12A (4): Transfer of Credits within units
A large taxpayer may transfer, CENVAT credit taken on or before the 10th July, 2014, by one of his registered manu-
facturing premises or premises providing taxable service to his other such registered premises by
(i) making an entry for such transfer in the record maintained under rule 9;
(ii) issuing a transfer challan containing registration number, name and address of the registered premises transfer-
ring the credit as well as receiving such credit, the amount of credit transferred and the particulars of such entry
as mentioned in clause (i), and such recipient premises can take CENVAT credit on the basis of such transfer
challan as mentioned in clause (ii),
Provided that such transfer or utilization of CENVAT credit shall be subject to the limitations prescribed under
clause (b) of sub-rule (7) of rule 3.
Rule 12AAA: Power to impose restrictions in certain types of cases
Where the Central Government, having regard to the extent of misuse of CENVAT credit, nature and type of such
misuse and such other factors as may be relevant, is of the opinion that in order to prevent the misuse of the provision
of CENVAT credit as specified in these rules, it is necessary in the public interest to provide for certain measures includ-
ing restrictions on a manufacturer, first stage and second stage dealer, provider of taxable service or an exporter or a
registered importer may by notification in the Official Gazette specify the nature of restrictions on utilization of CENVAT
credit and suspension of registration in case of a dealer and type of facilities to be withdrawn and procedure for issue
of such order by the Chief Commissioner of Central Excise.
Notification No. 16/2014 dated 21st March, 2014:
In pursuance of rule 12CCC of the Central Excise Rules, 2002, and rule 12AAA of the CENVAT Credit Rules, 2004 and
in supersession of the notification of the Government of India in the Ministry of Finance, Department of Revenue, No.
05/2012-Central Excise (N.T.), dated the 12th March, 2012, published in the Gazette of India, Extraordinary, Part II,
Section 3, Sub-section (i) vide number G.S.R. 140(E), dated the 12th March, 2012, except as respects things done or
omitted to be done before such supersession, the Central Government hereby declares that where a manufacturer,
first stage or second stage dealer, or an exporter including a merchant exporter or a registered importer is prima facie
found to be knowingly involved in any of the following :-
(a) removal of goods without the cover of an invoice and without payment of duty;
(b) removal of goods without declaring the correct value for payment of duty, where a portion of sale price, in
excess of invoice price, is received by him or on his behalf but not accounted for in the books of account;
(c) taking of CENVAT Credit without the receipt of goods specified in the document based on which the said credit
has been taken;
(d) taking of CENVAT Credit on invoices or other documents which a person has reasons to believe as not genu-
ine;
(e) issuing duty of excise invoice without delivery of goods specified in the said invoice;
(f) claiming of refund or rebate based on the duty of excise paid invoice or other documents which a person has
reason to believe as not genuine;
(g) removal of inputs as such on which Cenvat credit has been taken, without paying an amount equal to credit
availed on such inputs in terms of sub-rule (5) of rule 3 of the Cenvat Credit Rules, 2004, the Chief Commissioner
of Central Excise may order for withdrawal of facilities or impose the restrictions as specified in para 2 of this
notification.
2. Facilities to be withdrawn and imposition of restrictions.-
(1) Where a manufacturer is prima facie found to be knowingly involved in committing the offences speci-
fied in para 1, the Chief Commissioner of Central Excise may impose following restrictions on the facilities,
namely:-
(i) the monthly payment of duty of excise may be withdrawn and the assessee shall be required to pay
duty of excise for each consignment at the time of removal of goods;
(ii) payment of duty of excise by utilisation of CENVAT credit may be restricted and the assessee shall be
required to pay duty of excise without utilising the CENVAT credit;
(iii) the assessee may be required to maintain records of receipt, disposal, consumption and inventory of
the principal inputs on which CENVAT credit has not been taken;
(iv) the assessee may be required to intimate the Superintendent of Central Excise regarding receipt of
principal inputs in the factory on which CENVAT credit has or has not been taken, within a period spec-
ified in the order and the said inputs shall be made available for verification upto the period specified
in the order.
Cenvat Credit
Provided that where a person is found to be knowingly involved in committing any one or more type
of offences as specified in para 1 subsequently, every removal of goods from his factory may be or-
dered to be under an invoice which shall be countersigned by the Inspector of Central Excise or the
Superintendent of Central Excise before the said goods are removed from the factory or warehouse.
Explanation.- For the purposes of this paragraph, it is clarified that-
(i) a person against whom the order under sub-para (2) of para 4 has been passed may continue to take
CENVAT credit, however, he would not be able to utilize the credit for payment of duty during the
period specified in the said order.
(ii) 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.
(iii) if the assessee commits any offence specified in para 1 for the first time, the period of imposition of
restrictions may not be more than 6 months.
(iv) if the assessee commits any offence specified in para 1 subsequently, the period of imposition of re-
strictions shall not be more than 1 year.
(2) Where a first stage or second stage dealer is found to be knowingly involved in committing the type of of-
fence specified at clauses (d) or (e) of para 1, the Chief Commissioner of Central Excise may order suspen-
sion of the registration granted under rule 9 of the Central Excise Rules, 2002 for a specified period.
(3) During the period of suspension, the said dealer shall not issue any Central Excise Invoice.
Provided that he may continue his business and issue sales invoices without showing duty of excise in the
invoice and no CENVAT credit shall be admissible to the recipient of goods under such invoice.
(4) Where a merchant exporter is found to be knowingly involved in committing the type of offence specified
in clause (f) of para 1, the Chief Commissioner of Central Excise may order withdrawal of the self sealing
facility for export consignment and each export consignment shall be examined and sealed by the juris-
dictional Central Excise Officer:
(5) If a manufacturer, first stage dealer or second stage dealer or an exporter or an registered importer does
anything specified in clause (f) of para 1, the Chief Commissioner of Central Excise may order withdrawal
of the other facility available to them.
3. Monetary limit.- The provisions of this notification shall be applicable only in a case where the duty of excise or
CENVAT Credit alleged to be involved in anything specified in para 1 exceeds rupees ten lakhs.
4. Procedure.-
(1) The Commissioner of Central Excise or Additional Director General of Central Excise Intelligence, as the
case may be, after examination of records and other evidence, and after satisfying himself that the person
has knowingly committed the offence as specified in para 1, may forward a proposal to the Chief Com-
missioner of Central Excise, to withdraw the facilities and impose restriction during or for such period, within
30 days of the detection of the case, as far as possible.
(2) The Chief Commissioner of Central Excise shall examine the said proposal and after satisfying himself that
the records and evidence relied upon in the said proposal are sufficient to form a reasonable belief that
the person has knowingly done or contravened anything specified in para 1, may issue an order specifying
the type of facilities to be withdrawn or type of restrictions to be imposed, along with the period for which
the said facilities will not be available or the period for which the restrictions shall be operative:
Provided that the Chief Commissioner of Central Excise, before issuing the order, shall give an opportunity
of being heard to the person against whom the proceedings have been initiated and shall take into ac-
count any representation made by such person before he issues the order.
5. Proposals which are pending before the officer authorized by the Central Board of Excise and Customs or the
Director General of Central Excise Intelligence in terms of notification no. 05/2012-Central Excise (N.T.), dated
the 12th March, 2012, on the date of coming into force of this notification, shall be transferred to the Chief
Commissioner of Central Excise, who shall decide the same in accordance with the procedure specified in
paragraph 4 and the proposals pending before the Chief Commissioner of Central Excise shall also be decided
accordingly.
Rule 13: Power of Central Government to notify goods for deemed CENVAT credit
The Central Govt. may, by notification, declare the input or input service on which the duties of excise, or additional
duties of customs or service tax paid, shall be deemed to have been paid at such rate or equivalent to such amount
as may be specified in that notification and allow CENVAT CREDIT of such duty or tax deemed to have been paid in
such manner and subject to such conditions as may be specified in that notification even if, in the case of input, the
declared input, or in the case of input service, the declared input service, as the case may be, by the provider of
taxable service, declared in that notification, but contained in the said final products, or as the case may be, used in
providing the taxable service.
Rule 14: Recovery of CENVAT credit wrongly taken or erroneously refunded (w.e.f 1-4-2012)
Where the CENVAT Credit has been taken and utilized wrongly or has been erroneously refunded, the same alone
with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sec-
tions 11A and 11AA of the Excise Act, or section 73 and 75 of the Finance Act, shall apply mutatis mutandis for effect-
ing such recoveries.
Cenvat Utilization Steps
Rule 14 (2) omitted. There was a procedure based on FIFO method for determining whether a particular credit
has been utilized.
Rule 15: Confiscation and penalty in case of wrongly or in contravention of any provisions of these rules
If any person, takes or utilizes CENVAT Credit in respect of input or capital goods or input services, wrongly or in contra-
vention of any of provisions of these rules, then, all such goods shall be liable to confiscation and such person shall be
liable to a penalty: ` 2,000 or duty / service tax on such goods or services whichever is higher is the penalty.
Rule 15A: General penalty
Whoever contravenes the provisions of these rules for which no penalty has been provided in the rules, he shall be
liable to a penalty which may extend to ` 5,000.
Rule 16: Supplementary provisions (i.e. any notification, circular, instruction, standing order, trade notices or other
orders issued under the CENVAT Credit Rules, 2002 or the Service Tax Credit Rules, 2002 by the Central Govt., shall be
deemed to be valid under CENVAT Credit Rules, 2004.
PRACTICAL PROBLEMS WITH ANSWERS
Payment of Excise Duty after Adjusting Cenvat Credit
Example 11: An assessee cleared various manufactured final products during June 2016. The duty payable for June
2016 on his final products was as follows:
Basic Excise duty ` 2,00,000.
During June he received various inputs on which total duty paid by suppliers of inputs was as follows: Basic Excise Duty
` 50,000.
Excise duty paid on capital goods received during the month was as follows: Basic Excise Duty ` 12,000.
Service Tax paid on input services was as follows:
Service Tax ` 10,000.
Due date of payment of duty is 6th July 2016. He receives some inputs on 4th July, 2016 on which the excise duty paid
is ` 1,000. Compute the amount of excise duty payable by him for the month of June 2016?
Answer :
Excise duty liability for the month of June 2016
Cenvat Credit
Particulars BED ST
(`) (`)
On final product:
Duty payable 2, 00,000
Input tax credit 50,000
On other than capital goods
On capital goods 6,000 -
On input services - 10,000
CENVAT Credit 56,000 10,000
Net duty payable (`) 1,34,000
Note: Input tax credit ` 1,000 received during the month of July 2015 can be adjusted against the duty liability due as
on 31st July, 2015.
Example 12: A manufacturer purchased certain inputs from Z. The, assessable value was ` 20,000 and the Central Ex-
cise duty was calculated at ` 3,296 making a total amount of invoice at ` 23,296. However, the buyer manufacturer
paid only ` 20,800 to Z in full settlement of this bill. How much CENVAT credit can be availed by the manufacturer and
why?
Answer :
CENVAT credit that can be availed by the manufacturer is ` 3,296.
CENVAT credit cannot be reversed just because the supplier of inputs has given some reduction in price after removal
of goods or the buyer manufacturer paid only reduced amount than that of invoice [unless supplier of inputs claims
and get refund of excise duty paid by him].
[CCE v Trinetra Texturisers 2004 (CESTAT].
Example 13: Prepare a CENVAT account in the books of A Ltd., and determine the balance as on 31.3.2016 from the
following data:-
(i) Opening balance as on 1.8.2015 ` 47,000
(ii) Inputs received on 15.8.2015 involving excise duty paid ` 14,747
(iii) Purchased a Lathe for ` 1,10,300 (excise duty @12.5% inclusive) on 5.10.2015 and received the Lathe into factory
on 1.4.2016.
(iv) On 6.10.2015 paid excise duty on final products @12.5% through CENVAT credit account (cum duty price of the
goods ` 3,52,960).
(v) Inputs worth ` 2,00,000 (excise duty @12.5%) cleared as such to a job worker on 1.7.2015, these goods were
received back on 1.4.2016.
(vi) Common inputs were used for manufacture of dutiable and exempted final products. Manufacturer opted to
pay 6% as an amount on exempted final products. These goods (1,000 units) are cleared from the factory on
1.12.2015 at a price of ` 100 per unit inclusive of VAT ` 20 per unit.
(vii) On 15.3.2016 duty paid on input amounting to ` 17,867 was taken credit for in the CENVAT account as
` 17,687.

Answer :
In the books of A Ltd.
Dr. CENVAT Credit Receivable Account for the Year 2015-16 Cr.
Date Particulars Amount Date Particulars Amount
(`) (`)
1.8.2015 To Opening bal. b/d 47,000 6.10.2015 By Excise duty payable 39,218
15.8.2015 To Bank 14,747 1.12.2015 By Profit and Loss A/c (6% on
final goods exempted from duty) 4,800
15.3.2016 To Bank 17,687 28.12.2015 By Profit and Loss A/c (reversal
of CENVAT credit on 181 days) 25,000
31.3.2016 To Bank 180 31.3.2016 By Balance c/d 10,596
TOTAL 79,614 TOTAL 79,614
1.4.2016 To Opening bal. b/d 10,596
Note:
(1) Purchased a lathe (i.e. Capital goods) for ` 1,10,300 (excise duty @12.5% inclusive) on 5.10.2015 and received
the lathe into factory on 1.4.2016.
Excise duty = ` 12,256 (i.e. ` 1,10,300 x 12.5/112.5).
Up to 50% of ` 12,256 is allowed in the year of receipt of capital goods and balance will be allowed in the sub-
sequent year or years. However, lathe received into factory on 1.4.2016, and hence,
` 6,128 can be allowed as CENVAT credit in the year 2016-17 and balance in the subsequent year. Thereby, no
CENVAT credit is allowed for the year ended 31st March, 2016.
(2) On 6.10.2015 paid excise duty on final products @10.30% through CENVAT credit account (cum duty price of
the goods ` 3,52,960).
Excise duty on final goods = ` 39,218 (i.e. ` 3,52,960 x 12.5 /112.5)
(3) Inputs worth ` 2,00,000 (excise duty @12.5%) cleared as such to a job worker on 1.7.2015, these goods were
received back on 1.4.2016.
In case goods sent for job work are not returned within 180 days from the date of dispatch, then the input tax
credit on those goods need to reverse or pay the amount equal to input tax credit availed. Therefore, on 28th
Dec 2015 CENVAT credit of ` 25,000 has been reversed (i.e. on 18 if day).
However, CENVAT credit is allowed only when these goods were returned to factory. In the given case
these goods are returned into factory on 1.4.2016, and hence, the manufacturer is eligible to take credit on
1.4.2016.
(4) Common inputs were used for manufacture of dutiable and exempted final products. Manufacturer opted to
pay 6% as an amount on exempted final products. These goods are cleared from the factory on 1.12.2015 at a
price of ` 100 per unit inclusive of VAT ` 20 per unit.
Assessable value = ` 80 per unit (i.e.` 100 ` 20) An Amount = ` 4,800 (i.e. 1,000 units x ` 80 x 6%)
Example 13: M/s X & Co. Ltd. have cleared their goods manufactured final products during April, 2016 and the duty
payable is ` 2,40,000 plus. Given below are the details of excise duty payable by them during the month at the time
of purchase of goods.

Cenvat Credit
`
(i) On inputs (RM) 1,00,000 (Invoice for excise duty of ` 20,000 paid
was received by the assessee on 4.5.2016)
(ii) On input service 20,000
(iii) On welding electrodes for repairs and maintenance of 5,000
capital goods
(iv) Fuel (excluding HSD/Petrol) 6,000
(v) Storage tank 8,000
(vi) Tubes and Pipes (used in the factory) 14,000
(vii) Air Conditioner for the office of the Factory Manager 12,000
Note: Find the total duty payable by the assessee for the month of April, 2016 after taking into account the Cenvat
credit available.
Answer :
Cenvat Credit receivable as on 30th April 2016: (value in `)
Sl. No. Particulars Basic Excise Service Remarks Workings

Duty (`) Tax (`)
(i) Input Goods 80,000 -- ` 20,000 allowed as Cenvat cred- `1,00,000 - `
it in the month of May 2015 20,000 = ` 80,000
(ii) Input services -- 20,000 It is assumed that input service
tax was paid
(iii) On welding electrodes for 2,500 Considered as capital goods as ` 5,000 x 50% =
repairs and maintenance of per the Supreme Court judgment 2,500
capital goods in case of Hindustan Zinc Ltd.
(iv) Fuel (excluding HSD/ Petrol) 6,000 Considered as inputs
(v) Storage tank 4,000 Capital goods ` 8,000 x 50% = `
4,000
(vi) Tubes and Pipes (used in the 7,000 Capital goods `14,000 x 50% = `
factory) 7,000
(vii) Air Conditioner for the office -- -- Not considered goods as input
of the Factory Manager
CENVAT Credit Receivable 99,500 20,000
at the end of April 2014
Excise duty payable for the month of April, 2016; (Value in `)
Sl. No. Particulars Basic Excise Duty (`) Service Tax (`) Remarks Workings
(i) Output 2,40,000 --
Total 2,40,000 --
Statement showing total duty payable by the assessee for the month of April 2016: (Value in `)
Sl. No. Particulars Basic Excise Duty Service Tax Remarks Workings
(`) (`)
(i) Output 2,40,000 --
(ii) CENVAT Credit Receivable 1,19,500 -- ` 99500 + ` 20,000 = ` 1,19,500
(iii) Excise Duty liability after 1,20,500 --
CENVAT Credit

Eligibility of CENVAT Credit
Example 14: C Limited is engaged in manufacturing water pipes. Compute the CENVAT credit admissible to C Ltd. The
excise duty paid at the time of purchase of following goods is:
(Value in `)
Raw Steel 12,000
Water pipe making machine 25,000
Lubricating oil 2,000
Equipments used in the office 10,000
Petrol 15,000
Pollution control equipment 22,000
Components, spares and accessories used in machinery 12,000
Answer :
Calculation of Cenvat Credit admissible to C Ltd.
Particulars Nature of goods Value Eligibility Cenvat

(`) Credit (`)
Raw Steel Other than capital goods 12,000 100% 12,000
Water pipe making machine Capital goods 25,000 50% 12,000
Lubricating oil Other than capital goods 2,000 100% 2,000
Equipment used in office Capital goods 10,000 Not eligible --
Petrol Other than capital goods 15,000 Not eligible --
Pollution control equipment Capital goods 22,000 50% 11,000
Components, spares and accessories used in ma- Capital goods 12,000 50% 6,000
chinery
Total Cenvat Credit admissible 43,500

Example 15: Following transactions took place in the factory of A Ltd.:
(i) An imported consignment of raw materials was received vide Bill of Entry dated 2.12.15 showing the following
customs duty payments: Basic Customs duty ` 25,000; Additional duty (CVD) ` 20,000; Special Additional duty
` 5,800.
(ii) A consignment of 1,000 kgs of inputs was received. The Excise duty paid as per the invoice was ` 10,000. While
the input was being unloaded 50 kgs were damaged and were found to be not usable.
(iii) A vehicle containing machinery was received. The machinery was purchased through a dealer and not from
the manufacturer. The dealers Invoice No. 925, dated 3.9.15 marked original for buyer certified that the excise
duty paid by the manufacturer of machinery was ` 24,000. The dealer is registered with the Central Excise Au-
thorities.
(iv) Some inputs for final products were received. These were accompanied by a certified Xerox copy (photo copy)
of Invoice No. 286 dated 15.1.2016 indicating that Excise duty of ` 6,400, has been paid on inputs. The original or
duplicate copies of invoice are not traceable.
Indicate the eligibility of CENVAT Credit in each case under the CENVAT Credit Rules, 2004 with explanations
where necessary.

Cenvat Credit
Answer :
(i) CENVAT credit available for the following: Additional duty (CVD) ` 20,000;
Special Additional duty ` 5, 800
(ii) CENVAT credit available for 950 Kgs
Eligible CENVAT credit = ` 10,000 x 950/1000 = ` 9,500.
(iii) CENVAT credit can be availed if the goods are purchased from a first or second stage dealer. The eligible CEN-
VAT credit for the first year = ` 24,000 x 50% = ` 12,000.
The balance CENVAT credit for the second and subsequent years
(iv) CENVAT credit is not available based on the certified Xerox copy of invoice. CENVAT credit can be availed only
when any one of the following invoices available:
(a) Original for buyer
(b) Duplicate for transporter
(c) Triplicate for seller.
However, It is pertinent to note that the High Court held that Cenvat Credit could be taken on the strength of private
challans (i.e. other than prescribed documents) as the same were not found fake and there was proper certification
that duty has been paid (CCEx. v Stelko Strips Ltd. 2010 (255) E.L.T. 397 (P&H)).
Therefore in the given case Xerox copy of invoice can be considered as a valid document for taking CENVAT credit.
Removal of Capital Goods after use
Example 16: X Ltd received capital goods on 15-12-2013 for ` 9,00,000 (Excise Duty @ 10.30%). The said machinery was
sold for ` 5,50,000 from the factory after being used in the manufacture of dutiable goods on 1st July 2016. Excise duty
attributable for said machine at the time of removal @12.5%. You are required to compute the amount of CENVAT
credit to be reversed.
Answer :
Year No. of quarters Workings

2013 1 October to December
2014 4 January to December
2015 4 January to December
2016 3 January to September
Total 12
Statement Showing CENVAT Credit to be Reversed:
Particulars Amount (`) workings

Cenvat credit taken on capital goods 92,700 9,00,000 x 10.30%
Less: Reduction @2.5% per quarter or part thereof from the Up to 50% taken on 15-12-2012 (2012-
date of taking Cenvat credit up to the date of removal 2013) Balance 50% taken on 1-4-2013
46,350 x 2.5% x 12 quarters = ` 13,905 (2013-14)
(25,493)
46,350 x 2.5% x 10 quarters = ` 11,588
Amount to be paid 67,207
Or
Excise duty on transaction value 68,750 5,50,000 12.5%
Amount payable or credit to be reversed under Rule 3(5A) of 68,750 Whichever is higher is required to pay
Cenvat Credit Rules, 2004 as an AMOUNT

Fill in the Blanks
(i) Cenvat credit can (can/can not) be utilized for payment of service tax on output service.
(ii) Job work done under Cenvat provisions is (is / is not) exempt from service tax.
(iii) Where the input are sent under Cenvat provision or under notification No. 214186-CE, dated 25.03.1986 raw
material supplier (raw material supplier / job worker) will be liable for excise duty under central excise law.
(iv) Input Service Distributor has to file half yearly return in prescribed format ST-3 within One month (One month / 25
days) from the end of the half year under rule 9(10) of the Cenvat Credit Rules 2004.
(v) The unutilized Cenvat Credit can be carried forward up to any number of years.
(vi) Cenvat credit cannot (can/cannot) be availed by a service provider in respect of special CVD paid u/s 3(5) of
Customs Tariff Act.
(vii) CENVAT credit is (is/is not) available if there is loss of input due to leakage in storage tank during Process.
(i) Materials used for maintaining factory building are eligible for cenvat credit.
Ans. False. According to Rule 2(k) [w.e.f. 01-04-2011], the term input amongst other things, means all goods used in
the factory of the final product. Materials used for maintaining factory building only facilitate manufacture and
are not integrally used in the manufacture of final products. Hence, it is not eligible for cenvat credit.
(ii) Subsidy given by government to manufacturers to compensate cost of production will form part of sale price.
Ans. False. Subsidy received from Government does not form part of sale price.
(iii) Tooling supplied by seller along with machinery is not regarded as capital goods for claiming Cenvat credit.
Ans. False. Spares and tools supplied along with machinery is considered as capital goods.
(iv) For taking Cenvat Credit, capital Goods need not be brought to the premises of the Service Provider
Ans. True, in respect of service provider, CENVAT credit is available even though Capital Goods is not brought to the
premises of the Service Provider.
Explain
Ques.: A manufacturer utilized 2000 Kg of inputs on which excise duty of ` 2,00,000 was paid to supplier of those goods.
He manufactured 1900 Kg of final product out of input goods used and balance 100 Kg was process loss. How
much Cenvat credit can be availed by the manufacturer?
Ans. Entire ` 2,00,000 is available as Cenvat credit.
Ques.: An auditor has provided auditing services to a company. He has issued invoice and charged service tax. Can
the company avail the Cenvat credit of service tax charged by the auditors?
Ans. Auditing services have been specifically included in the definition of input service and hence company can
avail the Cenvat Credit.
Ques.: A manufacturer took Cenvat credit of service tax paid by him on consultancy services of `10,000 on 20.5.2015,
on the basis of invoice of the consultant dated 15.5.2015. He made payment of the bill to the consultant on
27.12.2015. Advise the manufacturer if any action is required on the part of manufacturer.
Ans. In case the payment of the value of input service and the service tax paid or payable as indicated in the in-
voice, bill or, as the case may be, challan referred in rule 9, except in respect of input service where the whole
of the service tax is liable to be paid by the recipient of service, is not made within 3 months of the date of the
invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on
such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case
the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled
to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of
these rules.
Ques.: State whether following are eligible as inputs for Cenvat
(i) Safety appliances used by workmen;

Cenvat Credit
(ii) Light Diesel Oil (LDO) used in manufacture;

(iii) Dies
(iv) Parts used to manufacture capital goods within the factory.
Ans.
(i) Safety appliances used by workmen: Yes
(ii) Light Diesel Oil (LDO) used in manufacture: No
(iii) Dies: No, as it is considered as capital goods
(iv) Parts used to manufacture capital goods within the factory: Yes.
Ques.: An assessee cleared some goods on payment of excise duty, considering value as ` 20,000. Later, he found
that actual value was ` 24,000. Which document he should prepare to pay the differential duty so that buyer
can avail Cenvat credit?
Ans. He should prepare supplementary invoice.
Ques.: A company has factory in Kanpur and HO in Delhi. It pays audit fees from Delhi, for auditing its annual accounts.
The Auditor charged service tax in his Invoice. Can the company avail Cenvat credit of that service tax?
Ans. Yes. The company avail CENVAT Credit of service tax charged in his invoice.
Ques.: 1000 litres were received on which duty paid was ` 18,000. These were issued to production. Out of these, 940
litres of final products were manufactured. 60 litres of inputs were lost in process. Discuss eligibility of Cenvat
credit in the above cases.
Ans. Where inputs are lost in the process of manufacturing, Cenvat credit cannot be denied. Hence, credit of
` 18,000 is available.
Ques.: State whether Cenvat credit can be availed on the following input services
(I) Works contract service relating to construction of factory building;
(ii) Goods transport service for inputs;
(iii) Sales promotion expense;
(iv) Rent-a-cab service utilized to carry employees from home to factory and back.
Ans.
(i) No
(ii) Yes
(iii) Yes
(iv) No
Ques.: A manufacturer had sent his inputs for job work under rule 4 (5)(a) of Cenvat Credit Rules. What is the time limit
within which the goods should be returned to factory after job work? Explain the consequences if good are not
returned with the specified period.
Ans. The inputs must be returned to the factory after job work, within 180 days. If the inputs are not so returned, the
manufacturer is required to reverse the Cenvat credit on those inputs. Later, when the inputs are returned after
job work, he can take back the Cenvat credit which he had reversed.
Ques.: State the purpose of constituting Large Taxpayer Unit (LTU).
Ans. LTU (Large Taxpayers Unit) is a self-contained office to provide single window facilitation to taxpayers who pay
direct and indirect taxes above a threshold limit. That office would deal with Central Excise! Service Tax I In-
come Tax I Corporation Tax issues of all units holding a single PAN. It also provides certain tangible advantages
(such as duty free movement of goods across the different units! premises of a PAN holder, transfer of credit
amount from one such premises to other); to ensure time bound disposal of refund claims and dispute settle-
ments; and to follow single set of simple procedures for all units. The underlying commitment is of providing bet-
ter service to the taxpayer, through personalized attention, quality of service, transparency in transactions and
cordial atmosphere. It will reduce tax compliance cost, reduce delays and ensure uniformity in the matters of
tax/ duty determination. Eligible taxpayers may opt to avail the facility of assessment under LTU, which would
be especially beneficial to those taxpayers with multi-locational operations.
Ques.: A manufacturer availed Cenvat credit on 31.3.2015. What is the time limit within which he must utilize that Cen-
vat credit, otherwise it Iapses?
Ans. There is no such time-limit.
Ques.: A manufacturer purchased 2,000 units of Cenvatable raw material and availed Cenvat credit of ` 2,00,000.
Out of the 2,000 units, 1,500 units were issued to production and were in shop floor. Balance 500 units were in
stores. Due to accidental fire, all 2,000 units were destroyed. Discuss eligibility of Cenvat credit of duty paid on
the raw material.
Ans. The manufacturer is required to reverse Cenvat credit of 50,000 as the inputs are not used in manufacturing
process. Rule 21 of Central Excise Rules, 2002 along with the Rule 3(5C) of the Cenvat Credit Rules allows the
remission of duty in damaged goods on the pre-condition that the Cenvat credit of inputs as attributable to
such goods must be reversed or paid.
Ques.: Briefly explain, whether Jeevan Deep Ltd., a manufacturer can avail cenvat credit in following cases:
(i) Inputs used in Trial runs.
Ans. Inputs used in trial runs during the production or commissioning of plant are eligible for CENVAT credit as they
are considered to have been used in the factory by the manufacturer of final product. [Rule 2(k)]
(ii) Materials used in expenses on modernization and repair of factory building.
Ans. Expenses on modernization and repair of factory building are eligible for CENVAT credit as they are specifically
included in the definition of the input service. [Rule 2(l)]
(iii) Goods for personal use of employees.
Ans. When such goods are used primarily for personal use or consumption of any employee; it is not eligible for cen-
vat credit as it is specifically excluded in the definition of input.
(iv) Expenses on market research.
Ans. Expenses on market research are eligible for CENVAT credit as they are specifically included in the definition of
the input service. [Rule 2(I)].
Problem: Star Car Components, a manufacturer, cleared manufactured products, during March, 2015. Duty payable
was as follows Basic excise duty Rs. 112,000, National Calamity Contingent Duty (NCCD) Rs. 4,000. The
manufacturer received inputs on which duty paid was as follows Basic duty Rs. 100,000. He also received
various input services, on which tax paid was as follows Service tax Rs. 20,000. There was no opening balance
in his Personal Ledger Account.
State the duty payable by him for March 2015. What is the due date of payment of duty? What the manufac-
turer can do with that excess Cenvat credit?
Ans. Computation of Excise Duty Payable
Particulars Amount Basic NCCD

Duty Payable 1,12,000 4,000
Less: Cenvat Credit -- --
- Inputs 1,00,000 -- --
- Input Services 20,000 -- --
1,20,000 -- --
(1,12,000)
Credit to be carried forward 8,000 8,000 --
Net duty payable 4,000 -- 4,000
Note : Credit of NCCD can be utilised only for payment of NCCD payable on final products or on inputs removed as
such or on partially processed inputs. Besides this, credit of other duties cannot be utilised for payment of NCCD.
[Notification No. 13/2016 CD (NT), dated 01.03.2016 w.e.f. 01.03.2016]

Customs Law
Study Note - 4
CUSTOMS LAW

SECTION A
4.1 Introduction
4.2 Types of Custom Duty
4.3 Valuation in Customs
4.4 Methods of Valuation
4.5 Export Goods- Valuation for Assessment
4.6 Self Assessment on Basis of Risk Management System (RMS)
4.7 Procedures for Import
4.8 Procedures for Export
4.9 Transit and Transhipment of Goods
4.10 Exemptions and Remission
4.11 Refund of Customs Duty
4.12 Appointment of Officers of Customs
4.13 Appointment of Customs Station, Warehousing Stations etc.
4.14 Central Government Power of Prohibition, Detection of Illegally Imported and Export Goods
4.15 Warehousing in Customs
4.16 Provisional Assessment of Duty (Section 18)
4.17 Baggage and Postal Articles
4.18 Drawback
4.19 Other Provisions in Customs
4.20 Project Imports
4.21 Offences, Power and Penalties under Customs
SECTION B
4.22 Anti-Dumping Duty-An Overview
4.1 INTRODUCTION
Customs duty is on imports into India and export out of India. The power to levy customs duty is derived from Entry 83
of Union List of the Seventh Schedule to the Constitution of India, which reads as, Duty of Customs including export
duties.
Thus, the power to make laws in respect of Customs duty vests with the Central Government. The tax receipts on ac-
count of customs duty-are solely enjoyed by the Union.
Section 12 of Customs Act, often called charging section, provides that duties of customs shall be levied at such rates
as may be specified under The Customs Tariff Act, 1975, or any other law for the time being in force, on goods im-
ported into, or exported from, India.

The body of the Customs Law comprises of -
(1) The Customs Act, 1962 This is a consolidating enactment providing levy of import and export duties
of customs on goods imported into or exported from India through sea, air or
land.
It provides for the provisions of levy and collection of duty, importation or ex-
portation, transit and transhipment, prohibition on importation or exportation
of goods, warehousing, duty drawback, appeals, settlement commission, ad-
vance rulings, offences and penalties etc.
(2) The Customs Tariff Act, 1975 The Act contains various types of custom duties to be levied on the importa-
tion and exportation of the articles. It contains two Schedules - Schedule I
known as, Import Tariff and Schedule II known as, Export Tariff.
Import Tariff consists of 98 Chapters grouped under 21 Sections. This
Schedule refers to goods liable to import duty of customs.
Export Tariff refers to goods liable to export duty of customs.
(3) Rules Section 156 of the Customs Act, 1962 empowers the Central Government to
make rules consistent with this Act. Such rules may provide for matters relating
to the manner of determining the price of imported goods, duty drawback,
baggage, detention and confiscation of goods etc.
(4) Regulations Section 157 of the customs Act, 1962 empowers the Central Board of Excise
and Customs to make regulations consistent with the Act and the rules, gener-
ally to carry out the purposes of the Act.
For example, Import Manifest Vessels Regulation, Boat Note Regulations, Ex-
port Manifest Vessel Regulations have been framed in this regard.
(5) Notification under Customs Act Notification, as per Article 13(3)(a) of the Constitution of India, means a writ-
ten or printed matter that give notice.
Central Government has been empowered to issue notifications under various
sections of the Customs act, 1962.
i. There are many common provisions in Central Excise and Customs Law.
ii. In case of imports, taxable event occurs when goods mix with landmass of India - Kiran Spinning Mills v. CC
1999(113) ELT 753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench).
iii. In case of warehoused goods, the goods continue to be in customs bond. Hence, import takes place only
when goods are cleared from the warehouse - confirmed in UOI v. Apar P Ltd. 1999 AIR SCW 2676 = 112 ELT3 =
1999(6) SCC 118 = AIR 1999 SC 2515 (SC 3 member bench).-followed in Kiran Spinning Mills v. CC 1999(113) ELT
753 = AIR 2000 SC 3448 = 2000 AIR SCW 2090 (SC 3 member bench).
iv. In case of exports, taxable event occurs when goods cross territorial waters of India UOI v. Rajindra Dyeing and
Printing Mills 2005 (180) ELT 433 (SC)
v. Territorial waters of India extend upto 12 nautical miles inside sea from baseline on coast of India and include
any bay, gulf, harbour, creek or tidal river.
(1 nautical mile = 1.1515 miles = 1.853 Kms).
Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space
over the waters.
vi. Indian Customs waters extend upto 12 nautical miles beyond territorial waters. Powers of customs officers ex-
tend upto 12 nautical miles beyond territorial waters.
vii. Exclusive economic zone extends to 200 nautical miles from the base-line.
Common Aspects of Customs and Central Excise
i. There are many common links between Customs and Central Excise.
ii. Both are Central Acts and derive power of levy from list I - Union List - of the Seventh Schedule to Constitution.
Customs Law
iii. Both are under administrative control of one Board (Central Board of Excise and Customs) under Ministry of
Finance.
iv. Organizational hierarchy is same from top upto Assistant Commissioner level. Transfers from customs to excise
and vice versa are not uncommon.
v. Principal Chief Commissioner or Chief Commissioner in charge of each Zone is same for excise and customs at
many places.
vi. In the interior areas, Excise officers also work as customs officers.
vii. Classification Tariffs of both acts are based on HSN and principles of classification are identical.
viii. Principles of deciding Assessable Value have some similarities i.e. both are principally based on transaction
value. Concept of Related Person appears in Customs as well as Excise valuation.
ix. Provisions of refund, including principle of Unjust Enrichment are similar. Provisions for interest for delayed pay-
ment are also identical.
x. Provisions of raising demand for short levy, non-levy or erroneous refund are similar. Provisions in respect of re-
covery, mandatory penalties etc. are also similar.
xi. Provisions for granting exemptions from duty - partial or full, conditional or unconditional are identical.
xii. Powers of search, confiscations etc. are quite similar in many respects. In fact, some of provisions of Customs Act
have been made applicable to Central Excise with suitable modifications.
xiii. Provisions in respect of Settlement Commission and Authority for Advance Ruling are identical.
xiv. Appeal provisions are identical.
xv. Appellate Tribunal (CESTAT) is same. Hence, procedures of appeal to Tribunal are identical.
Definitions Under Customs Act, 1962
1) Adjudicating Authority [Section 2(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 (CBE&C),
Commissioner of Customs (Appeals) or
Customs, Excise and Service Tax Appellate Tribunal (CESTAT)
2) Assessment [Section 2(2)]: Assessment means process of determining the tax liability in accordance with the
provisions of the Act, which includes provisional assessment, self assessment, reassessment and any assessment
in which the duty assessed is nil.
3) Appellate Tribunal [Section 2(1B)]: Appellate Tribunal means the Customs, Excise and Service Tax Appellate
Tribunal constitute under section 129.
4) Baggage [Section 2(3)]: Baggage includes unaccompanied baggage but does not include motor vehicles.
5) Bill of Entry [Section 2(4)]: Bill of Entry means a bill of entry referred to in section 46. Bill of entry is the basic docu-
ment for assessment of custom duty. The importer has to present bill of entry for clearance of imported goods.
6) Board [Section 2(6)]: Board means the Central Board of Excise and Customs constituted under the Central
Board of Revenue Act, 1963.
7) Bill of Export [Section 2(5)]: The exporter of any goods shall make entry thereof by presenting to the proper of-
ficer in the case of goods to be exported by land, a bill of export in the prescribed form.
8) Customs Airport [Section 2(10)]: Customs airport means,-
Any airport appointed under section 7(a) to be a customs airport, and
Includes a place appointed u/s 7(aa) to be an air freight station.
9) Conveyance [Section 2(9)]: Conveyance includes a Vessel, an Aircraft and a Vehicle. The specific terms are
vessel (by sea), aircraft (by air) and vehicle (by land).

10) Coastal Goods [Section 2(7)]: The term coastal goods means goods, other than imported goods, transported in
a vessel from one port in India to another.
Under section 7(1)(d) of the Customs Act, 1962, the Central Board of Excise and Customs (CBE&C), may by noti-
fication in the Official Gazette, appoint the ports which alone shall be 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.
11) Customs Area [Section 2(11)]: Customs area means the area of a customs station and includes any area in
which imported goods or exported goods are ordinarily kept before clearance by Customs Authorities.
12) Customs Port [Section 2(12)]: Customs port means any port appointed under section 7(a) of the Customs Act,
to be a customs port and includes a place appointed under section 7(aa) of the Customs Act, to be an inland
container depot (ICD).
13) Customs Station [Section 2(13)]: Customs station means any customs port, customs airport or land customs sta-
tion.
As per Section 8 of the Customs Act, 1962, the Principal Commissioner or Commissioner of Customs may (i) ap-
prove proper places in any customs port or customs airport or coastal port for the unloading of goods or for any
class of goods; (ii) specify the limits of any customs area.
As per Section 141 of the Customs Act, 1962, all conveyances and goods in customs area are subject to control
of officers of customs for enforcing the provisions of the Customs Act, 1962. The receipt/storage/delivery/dis-
patch/any other handling of goods (import/export) in the Customs area shall be in the prescribed manner and
the responsibility thereon lies on the persons engaged in such activities (i.e. Custodian of the said goods).
14) Customs Act, 1962 and Customs Tariff Act, 1975 have been extended to whole of Exclusive Economic Zone (EEZ)
and Continental Shelf of India for the purpose of (i) processing for extraction or production of mineral oils and
(ii) Supply of any goods in connection with processing for extraction or production of mineral oils.
Say for example, Goods imported by the assessee for consumption on oil rigs which are situated in Continental
Shelf/Exclusive Economic Zones of India, are deemed to be a part of Indian Territory. Therefore, the supply of
imported spares or goods or equipments to the rigs by a ship will attract import duty [Aban Lloyd Chilies Offshore
Ltd. v UOI (2008) 227 ELT24 (SC)].
15) Dutiable Goods [Section 2(14)]: The term is defined to mean any goods which are chargeable to duty and on
which duty has not been paid. It means to say that the name of the product or goods should find a mention in
the Customs Tariff Act.
16) Domestic Tariff Area means the whole of India (including the territorial waters and continental shelf) but does
not include the areas of the Special Economic Zones (Section 2(i) of Special Economic Zones Act, 2005), 100%
Export Oriented Units (EOUs)/Electronic Hardware Technology Park (EHTP)/ Software Technology Park (STP)/ Bio
Technology Park (BTP).
17) Exclusive Economic Zone: Exclusive Economic Zone extends to 200 nautical miles from the base line. In this zone,
the coastal State has exclusive rights to exploit it for economic purpose like constructing artificial islands for oil
exploration, power generation and so on.
(Note: one nautical mile = 1.1515 miles or 1.853kms.)
18) Examination [Section 2(17)]: Examination in relation to any goods, includes measurement and weighment
thereof.
19) Exporter [Section 2(20)]: Exporter 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.
20) Entry As per section 2(16)]: Entry in relation to goods means an entry made in bill of entry, shipping bill or bill of
export and includes in the case of goods imported or to be exported by post, the entry referred to in section 82
or the entry made under the regulations made under section 84 of the Customs Act.
21) Export [Section 2(18)]: The term export means taking out of India to a place outside India.
22) Exported Goods [Section 2(19)]: The term exported goods means any goods, which are to be taken out of India
to a place outside India.
Example: The vessel sunk within territorial waters of India and therefore there is no export. Accordingly, no duty
drawback shall be available in this case. [Union of India v Rajindra Dyeing & Printing Mills Ltd. 2005 (180) ELT 433
Customs Law
(SC)]. The territorial waters extend to 12 nautical miles into the sea from the base line.
23) Fund [Section 2(21A)]: Fund means the Consumer Welfare Fund established under section 12C of the Central
Excise Act, 1944.
24) Foreign going Vessel or Aircraft [Section 2(21)]: The foreign going vessel or aircraft means any vessel or aircraft
for the time being 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 or airport in India or not. The following are also
included in the definition:
A foreign naval vessel doing naval exercises in Indian waters
A vessel engaged in fishing or any other operation (like oil drilling by domestic vessel or foreign vessel)
outside territorial waters
A vessel going to a place outside India for any purpose whatsoever.
Example 1: A ONGC vessel and a vessel owned by A Ltd. of USA are drilling oil beyond 12 nautical miles in the
sea. Hence, both the vessels are called as foreign going vessels.
25) Goods [Section 2(22)]: The term goods includes
(a) Vessels, aircrafts and vehicles
(b) stores
(c) baggage
(d) currency and negotiable instruments and
(e) any other kind of movable property.
26) High Seas: An area beyond 200 nautical miles from the base line is called High Seas. All countries have equal
rights in this area.
27) Import [Section 2(23)]: The term import means bringing into India from a place outside India.
28) Imported Goods [Section 2(25)]: The term imported goods means any goods brought into India from a place
outside India but does not include goods which have been cleared for home consumption.
29) Importer [Section 2(26)]: The term importer means in relation to any goods at any time between their importa-
tion and the time when they are cleared for home consumption, includes any owner or any person holding
himself out to be the importer.
30) India (i.e. Territorial Waters) [Section 2(27)]: The term India is an inclusive definition and includes not only the land
mass of India but also Territorial Waters of India. The territorial waters extend to 12 nautical miles into the sea from
the base line. Therefore, a vessel not intended to deliver goods should not enter these waters.
31) Indian Customs Waters [Section 2(28)]: The term 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, Ex-
clusive Economic Zone and other Maritime Zone Act, 1976 and includes any bay, gulf, harbour, creek or tidal
river.
Continental Shelf means the area of relatively shallow seabed between the shore of a continent and deeper
ocean
Indian Customs Waters extend up to 24 nautical miles from the base line. Thereby, Indian Customs Waters cover
both the Indian Territorial Waters and Contiguous Zone as well. Indian Territorial Waters extend up to 12 nautical
miles from the base line whereas Contiguous Zone extended to a further 12 nautical miles from the outer limit of
territorial waters.
Example 2: The proper officer of customs has reason to believe that any vessel in Indian Customs waters is being
used in the smuggling of any goods, he may at any time stop any such vessel and examine and search any
goods in the vessel (Section 106(1)(b) of the Customs Act, 1962).
32) Import Report [Section 2(24)]: The person-in-charge of a vehicle carrying imported goods or any other person
as may be notified by the Central Government shall, in the case of a vehicle, deliver to the proper officer an
import report within twelve hours after its arrival in the customs station, in the prescribed form.

33) Import General Manifest (IGM) [Section 2(24)]: IGM is a document to be filed in prescribed form with the cus-
toms by the carriers of the goods i.e. the steamer Agent or airlines in terms of Sec 30 of Customs Act, 1962. This
document indicates the details of all the goods to be transshipped, private property of the crew and arms and
ammunitions, gold and silver should also be cleared separately irrespective of whether for landing, for trans-
shipment or for being carried as same bottom cargo. The IGM has to be filed within 24 hours after arrival of the
ship/ aircraft. However, in the case of vessel (ship) the manifest maybe delivered even before the arrival of the
vessel. This is known as prior entry import general manifest. This system enables the importer to file Bills of Entry
and get them assessed and pay duty so that the goods can be taken delivery soon after the unloading.
Section 30 in being provide for electronic filing of import manifest and also provide that the commission of
customs may, in cases where it is not feasible to deliver the import manifest by presenting electronically, all the
same to be delivered in any other manner.
34) Market Price [Section 2(30)]: Market price in relation to any goods means the wholesale price of the goods in
the ordinary course of trade in India.
35) Person-in-Charge [Section 2(31)]: means
1) Vessel Master
2) Aircraft Commander or Pilot in Charge
3) Train Conductor or Guard
4) Vehicle Driver
5) Other Conveyance Person in Charge
36) Prohibited goods [Section 2(33)]: Means 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 com-
plied with.
Say for example, Pornographic and obscene materials, Maps and literature where Indian external boundar-
ies have been shown incorrectly, Narcotic Drugs and Psychotropic Substances, Counterfeit goods and goods
violating any of the legally enforceable intellectual property right, Chemicals mentioned in Schedule 1 to the
Chemical Weapons Convention of U.N. 1993, Wild life products, Specified Live birds and animals, Wild animals,
their parts and products, Exotic birds except a few specified ones, Beef, tallow, fat/oil of animal origin, Specified
Sea-shells, Human skeleton.
37) Shipping Bill [Section 2(39)]: Shipping bills means a shipping bill referred to in section 50. Shipping bill is the basic
document for assessment of export duty. The exporter has to present shipping bill for clearance of export goods
through vessel or aircraft.
38) Smuggling [Section 2(39)]: Smuggling, in relation to any goods, means any act or omission which will render
such goods liable to confiscation under section 111 (improper importation) or section 113 (improper exporta-
tion).
39) Stores [Section 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.
40) Tariff value [Section 2(40)]: Tariff value in relation to any goods, means the tariff value fixed in respect thereof
under section 14(2) of the Act. The CBEC has the power to fix tariff values for any class of imported goods or
exported goods. Fixing the tariff value for any class of imported goods or exported goods means the duty shall
be chargeable with reference to such tariff value. (For example, please refer the duty based on the % of tariff
value under Central Excise).
41) Value [Section 2(41)]: Value in relation to any goods, means the value thereof determined in accordance
with the provisions of Section 14(1)(2) of the Act.
42) Vehicle [Section 2(42)]: Vehicle means conveyance of any kind used on land and includes a railway vehicle.
43) Warehoused [Section 2(43)]: Warehouse means a public warehouse appointed under section 57 or a private
warehouse licensed under section 58.
44) Warehouse Goods [Section 2(44)]: Warehouse Goods means goods deposited in a warehouse.

Customs Law
45) Warehouse Station [Section 2(45)]: Warehouse Station means a place declared as a warehousing station
under section 9.
Significance of Indian Customs Water under Custom Act, 1962
The significance of Indian Customs Waters is as under-
(i) Any person who has landed from/ about to board/ is on board any vessel within Indian Customs water and
who has secreted about his person, any goods liable to confiscation or any documents relating thereto may be
searched [Section 100];
(ii) Any person within Indian Customs waters, who has committed an offence punishable under section 132 or 133
or 135 or 135A or 136, may be arrested [Section 104];
(iii) Any vessel within Indian custom water, which has been, is being, or is about to be, used in the smuggling of any
goods or in carriage of any smuggling goods, may be stopped [Section 106];
(iv) Any goods which are brought within the Indian customs waters for the purpose of being imported from a place
outside India, contrary to any prohibition imposed by or under this Act or any other law for the time being in
force, shall be liable to confiscation [Section 111(d)]; and
(v) Any vessel which is or has been within Indian customs waters is constructed, adapted, altered or fitted in any
manner for concealing for concealing goods shall be liable to confiscation [Section 115(1)(a)].
The primary concept has been explained in the following diagram
First IGM submitted to Custom officer can India can be en- HIGH
custom officer to get exercise their juris- gaged in eco-
Bill of Entry SEA
diction for the pur- nomic explata-
for watehousing Entry Inward
pose of confiscation tion.
1. Import or export 1. IGM before 24 hours of smuggle goods.
code or 12 hours
2. Import invoice no. &
2. Entry inward is cru-
date
cial for determining the
3. Description of goods rate of duty
& custom tariff heading
4. Quantity of goods
5. Value of goods
6. Others
Inner Boundary Outer Boundary 12 NM 24 NM 200 NM

1. Bill of Entry Indian Territatial Waters Indian customs Exclusive Economic
2. Bill of Lading Waters Zone
3. Import Invoice Commencement
4. Certificate of origin of Import
5. Import license or
6. Other documents Completion of Export
Circumstances of Levy
Section 12: Imported or Exported goods into or out of India is the taxable event for payment of the duty of customs. Lot
of problems was faced in determining the point at which the importation or exportation takes place. The root cause
of the problem was the definition of India.
The Supreme Court of India has given the landmark judgments in cases of Union of India v Apar Industries Ltd (1999)
and further in the case of Garden Silk Mills Ltd v Union of India (1999). The 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, and the taxable event being reached at the time when goods reach the Customs barriers and Bill of Entry
for home consumption is filed.
(A) Taxable event for Imported Goods
In the case of Kiran Spinning Mills (1999) the Honble Supreme Court of India held that import is completed only when
goods cross the customs barrier. The taxable event is the day of crossing of customs barrier and not on the date when
goods landed in India or had entered territorial waters of India. Crossing customs barrier:
when goods are imported into India even after the goods are unloaded from the ship, and even after the goods are
assessed to duty subsequent to the filing of a bill of entry, the goods cannot be regarded as having crossed the cus-
toms barrier until the duty is paid and the goods are brought out of the limits of the customs station.
Hence, taxable event in case of imported goods can be summed up in the following lines:
The taxable event occur in the course of imports under the customs law with reference to the principles laid down by
the Supreme Court in the cases of Garden Silk Mills Ltd. v Union of India; and Kiran Spinning Mills v CC:
i. Unloading of imported goods at the Customs Port is not a taxable event
ii. Date of entry into Indian Territorial Watersis not a taxable event
iii. Date on which the goods cross the customs barrier - is a taxable event
iv. Date of presentation of bill of entryis not a taxable event
No time limit for submission of bill of entry after the delivery of Import General Manifest (IGM):
As per Section 46(3) of the Customs Act, 1962 a bill of entry may be presented at any time after the delivery of
import manifest or import report. Therefore, no time limit has been fixed for submission of bill of entry. Hence, no
penalty can be imposed if there is delay in submission of Bill of Entry. However, cargo should be cleared from the
wharf within 30 days of unloading.
Note: Bill of Entry can also be filed up to 30 days before the arrival of the goods in India. The classification, valuation
and duty can be checked and verified beforehand so that when the consignment arrives it can be cleared immedi-
ately.
Provided that a bill of entry may be presented even before the delivery of such manifest or report, if the vessel or the
aircraft or vehicle by which the goods have been shipped for importation into India is expected to arrive within thirty
days from the date of such presentation. In case the vessel or aircraft or vehicle do not arrive within 30 days of presen-
tation of the bill of entry, the bill of entry so presented shall stand cancelled.
(B) Taxable event for Warehoused Goods
The taxable event in case of warehoused goods is when goods are cleared from customs bonded warehouse, by
submitting EX-bond bill of entry. As per Section 1 5(1)(b) of the Customs Act, 1962, when goods have been deposited
into a warehouse, and they are removed there from for home consumption, the relevant date for determination of
rate of duty is the date of presentation of ex-bond bill of entry (i.e. Sub-bill of Entry) for home consumption.
(C) Taxable event for Exported Goods
As per section 16(1) of the Customs Act, 1962, taxable event arises only when proper officer makes an order permitting
clearance (i.e. entry outwards) granted Esajee Tayabally Kapasi (1995)(SC) and loading of the goods for exporta-
tion took place under Section 51 of the Customs Act, 1962. In the case of any other goods, on the date of payment
of duty.
Therefore, export duty rate prevailing as on the date of entry outwards granted to the vessel by the Customs Officer
is relevant.
Example 3: An assessee submitted the shipping bill on 1st January 2016. At that time the export duty was nil (i.e. duty
free). Let export order (i.e. entry outwards) was granted on 5th January 2016. However, due to some problems goods
could not be loaded into ship. On 25th March 2016, the shipping bills were voluntarily resubmitted by the assessee
Customs Law
with the request to permit the shipment by a different vessel. Subsequently, on 27th March 2016, let export order was
granted. However, in the mean time the duty at the rate of 10% ad valorem was levied with effect from 1st March
2016. Examine, whether exporter is liable to pay duty?
Answer:
In the given case actual export took place only after revised shipping bill was submitted on 25th March 2016, for which
entry outwards granted on 27th March, 2016. Hence, the rate prevalent as on the date of entry outwards granted to
the vessel is relevant for determination of rate of duty. Therefore, assessee is liable to pay exportduty @10%.
Note: Export duties do not carry any cess.
(D) Entry inwards to the vessel
The Master of the vessel is not to permit the unloading of any imported goods until an order has been given by the
proper officer granting Entry Inwards of such vessel. Normally, Entry Inwards is granted only after the import manifest
has been delivered. This entry inward date is crucial for determining the rate of duty, as provided in section 15 of the
Customs Act, 1962. Unloading of certain items like accompanied baggage, mail bags, animals, perishables and haz-
ardous goods are exempted from this stipulation.
(E) Entry outwards to the vessel
The vessel should be granted Entry Outward . Loading can start only after entry outward is granted under section 39
of Customs Act, 1962. Steamer Agents can file application for entry outwards 14 days in advance so that intending
exporters can start submitting Shipping Bills. This ensures that formalities are completed as quickly as possible and
loading in ship starts quickly.
If the shipping bill has been presented before the date of entry outwards of the vessel by which the goods are to be
exported, the shipping bill shall be deemed to have been presented on the date of such entry outwards. The provi-
sions of this section shall not apply to baggage and goods exported by post.
(F) Date of determination of Rate of duty and tariff valuation for Imported Goods
Date for determining the rate of duty and tariff valuation of imported goods will depend upon the imported goods
entered for home consumption and cleared from warehouse. The determination of appropriate rate of duty and tariff
valuation can be explained with the help of the following example:
Imported goods
Clearance for home consumption Clearance from warehousing
Bill of entry is Presented Bill of entry is presented The rate of duty and tariff valuation
Before the entry Inwards after the entry inwards of prevailing on the date on which a
of the vessel Or arrival of the vessel or aircraft bill of entry for home consumption is
aircraft or vehicle presented will be applicable.
The rate of duty and tariff The rate of duty and tariff
valuation prevailing on the valuation prevailing on the
date of the entry Inwards date on which the bill of entry
of the vessel Or the date of in respect such clearance is
arrival of aircraft or vehicl presented will be applicable.
Note: The applicable exchange rate is the rate declared by the CBEC on the date of submission of Bill of Entry. If more
than one exchange of CEBC is available then consider the exchange rate which was prevailed as on the date of
submission of Bill of Entry.
(G) Date of determination of rate of duty and tariff valuation of export goods [Section 16]: According to section 16
of the Customs Act, 1962, the provision relating to date for determination of rate of duty and tariff valuation of export
goods are as under
(a) in the case of goods entered for export under section 50, the date on which the proper officer makes an order
permitting clearance and loading of the goods for exportation under section 51.
(b) in the case of any other goods, the date of payment of duty.
The provision of section 16 shall not apply to baggage and goods exported by post.
(H) Clearance of goods from DTA to SEZ
In the case of Advait steel Rolling Mills Pvt. Ltd. vs. UOI [2012] 286 ELT 535(Mad), it is held that the clearance of goods
from DTA to Special Economic Zone are not chargeable to export duty either under the SEZ Act, 2005 or under the
Customs Act, 1962 on the basis of the following observations
The charging section needs to be construed strictly. If a person is not expressly brought within the scope of the
charging section, he cannot be taxed at all.
SEZ Act does not contain any provision for levy and collection of export duty on goods supplied by a DTA unit
to a unit in a Special Economic Zone for its authorized operations. Since there is no charging provision in the SEZ
Act providing for the levy of customs duty on such goods, export duty cannot be levied on the DTA supplier.
Reading section 12(1) of the Customs Act, 1962 makes it apparent that Customs duty can be levied only on
goods imported into or exported beyond the territorial water of India.
Since both the SEZ unit and the DTA unit are located within the territorial waters of India, supplies from DTA to SEZ would
not attract Section 12(1).
(I) Determination of duty where goods consist of articles liable to different rates of duty [Section 19] : Except as oth-
erwise 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 as per quantity.
(b) articles liable to duty with reference to value shall be chargeable to duty as under,-
if such articles are liable with the same rate of duty then duty shall be levied at that rate;
if the articles in the set are liable to duty at different rates then duty shall be calculated at the highest of
those rates.
(c) articles not liable to duty, then they shall also be chargeable to duty at the highest of the rates specified in (b)
above.
Duty where evidence of separate value of articles is available : If the importer produces evidence to the sat-
isfaction of the proper officer or the evidence is available 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.
(J) Rate of Duty applicable to accessories, etc. supplied with imported article [Accessories (Condition) Rules,
1963] : Certain accessories are sometimes compulsorily supplied with the main equipment. It may be difficult
to value such accessories and to assess them separately or to charge duty on them when no additional con-
sideration is involved in normal course. In such case, if any accessories of, spare parts and maintenance imple-
ments for, any article are imported along with that article, then such accessories/spare parts and maintenance
implements 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,-
(a) such accessories, parts and implements are compulsorily supplied with that article; and
(b) no separate charge is made for such supply, their price being included in the price of that article.
(K) Circumstance under which no duty will be levied
(i) No duty will be levied on pilfered goods under section 13 of the Customs Act. 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 ware house, then the importer shall not be liable to pay the duty levi-
able on such goods.
(ii) No duty will be levied when the goods are damaged or deteriorated before or during the course of their
unloading, where it is shown to the satisfaction of the Assistant or Deputy Commissioner of Customs (Sec-
Customs Law
tion 22).
(iii) No duty will be levied in case of warehoused goods, when the goods are damaged before their actual
clearance from such warehouse, where it is shown to the satisfaction of the Assistant or Deputy Commis-
sioner of Customs (Section 22).
(iv) No duty will be levied in case of goods lost or destroyed due to natural causes like fire, flood, etc. such
loss may take place at any time before the clearance of goods for home consumption. The loss may be
at the warehouse (Section 22).
(v) No duty will be levied in case of goods abandoned by importers. Sometimes it may so happen that im-
porter is unwilling or unable to take delivery of the imported goods due to the following reasons:
the said goods may not be according to the specification,
the goods may have been damaged during voyage,
there might have been breach of contract.
In all the above cases the importer has to relinquish his title to the goods unconditionally and abandon
them. The relinquishment is done by endorsing the document of title to the goods in favour of the Princi-
pal Commissioner or Commissioner of Customs along with invoice.
(vi) No duty will be levied, if the Central Government is satisfied that it is necessary in the public interest not
to levy import duty by issuing the notification in the Official Gazette.
(L) Self-assessment of Customs Duty (Section 17 of the Customs Act, 1962, w.e.f. 8-4-2011)
The importer or exporter shall self-assess the duty leviable on imported or exported goods respectively (except where
goods are to be cleared as stores for supply to vessels or aircrafts without payment of duty and without assessment
under section 85 of Customs Act, 1962) as per section 17(1) of the Customs Act, 1962. The procedure of self assessment
is same for imports and exports. Importer importing goods is required to submit Bill of Entry under section 46 of Customs
Act, 1962. Exporter is required to submit shipping bill at the time of export under section 50 of Customs Act, 1962. Bill of
Entry and Shipping Bill must be submitted electronically, unless manual submission is specifically permitted by Principal
Commissioner or Commissioner of Customs.
Verification by proper officer
The self assessment may be verified by proper officer by examining or testing the goods [section 17(2) of Customs
Act 1962, w.e.f. 8-4-2011]. For verification of self assessment, Proper Officer may ask importer, exporter or any other
person (i.e. Customs House Agent or person who has purchased goods on high seas sale basis) to produce any con-
tract, brokers note, insurance policy, catalogue or other documents whereby duty payable can be ascertained and
to furnish further information for ascertainment.
Re-assessment
The proper officer can ask for only those documents which are within the powers of importer or exporter or other
person to furnish [section 17(3) of Customs Act 1962, w.e.f. 8-4-2011]. On Such verification, proper officer may re-
assess the Bill of entry. Such re-assessment would be without prejudice to any other action which may be taken under
Customs Act [section 17(4) of Customs Act, 1962, w.e.f. 8-4-2011]. If the importer or exporter accepts in writing the
reassessment made by proper officer about classification or valuation or exemption or concession, then no question
of issuing any formal order arises.
Speaking order
Where the importer or exporter does not accept the re-assessment in writing, the proper officer shall pass a speaking
order within 15 days from the date of re-assessment of Bill of Entry [section 17(5) of Customs Act, 1962 w.e.f. 8-4-
2011].
Audit by proper officer at his office or premises of importer or exporter
If the goods are not taken for verification of self assessment, the goods will be allowed to be cleared from customs.
However, later, proper officer may audit the assessment of duty. Such audit can be done either in the office of proper
officer or at the premises of importer, as may be expedient [section 17(6) of Customs Act, 1962 w.e.f. 8-4-2011]. Sub-
sequent to such audit, demand for differential duty and interest can be made under section 28 of Custom Act 1962.
This section also makes provisions in respect of penalty for such short payment.

General provisions
Assessment includes provisional assessment, self-assessment, re-assessment and any assessment in which the duty as-
sessed is Nil [section 2(2) of Customs Act, 1962 as substituted w.e.f. 8-4-2011].
As per section 2(34) of Customs Act, proper officer in relation to any function under Customs Act, the officer of cus-
toms who is assigned those functions by Board (CBE & C) or Principal Commissioner or Commissioner of Customs.
4.2 TYPES OF CUSTOM DUTY
Type of custom duty
Basic Custom Duty Additional Duty of Additional Duty of Protective Safeguard Anti Dumping
Custom u/s 3(1) Custom u/s 3(5) Duties Duty Duty
Counter Veiling [Special additional when the

Duty (CVD) duty] goods are
Imported in
Same as excise duty huge quantity
If goods manufacture
In India i.e., equivalent When the goods
to Basic Excise Duty. are export by
exporter lower the rate from his
indigenous market rate.
Standard Preferential China ` 500
rate of duty rate of duty India `100
National
Calamity
Contingent
Duty (NCCD)
Basic customs duty is levied under section 12 of Customs Act. Normally, it is levied as a percentage of value as deter-
mined under section 14(1). The basic customs duty are 5%, 7.5%, and 10%. Highest rate of basic customs duty is 10% for
non-agricultural items, with some exceptions.
Assessable Value = CIF value of imported goods converted into Rupees at exchange rate specified in notification is-
sued by CBE&C plus landing charges 1% (plus some additions often arbitrarily and whimsically made by customs).
Section 2 of the Customs Tariff Act, 1975 provides the rate of duty to be applied on the value of goods. Basically sec-
tion 2 of the Customs Tariff Act, 1975 provides following:-
First Schedule - Goods liable for import duty
Second Schedule - Goods liable for export duty
Basic Customs Duty levied u/s 12 of Customs Act.
(i) The rate of basic customs duty is specified in Customs Tariff Act, read with relevant exemption notification. Gen-
erally, Basic Customs Duty is 10% of Non-Agricultural Goods.
(ii) CVD equal to excise duty is payable on imported goods u/s 3(1) of Customs Tariff Act. General excise duty rate
is 12.5%. Consider only basic excise duty as CVD. It means CVD is equal to Basic Excise Duty(w.e.f 01-03-2015).
(iii) Special CVD (SAD) is payable @4% on imported goods u/s 3(5) of Customs Tariff Act. This is in lieu of Vat/Sales
tax to provide level playing field to Indian goods.
(iv) Education Cess of customs @ 2% and SAH Education Cess of 1% is payable.
(v) NCCD has been imposed on a few articles. In addition, on certain goods, Anti-Dumping Duty, Safeguard Duty,
Protective Duty etc. can be imposed.

Customs Law
Calculated of customs duty payable is as follows, w.e.f. 01.03.2015

Seq. Duty Description Duty % Amount Total Duty
(A) Assessment Value ` 20,000.00
(B) Basic Customs Duty 10 2,000.00 2,000.00
(C) Sub-Total for calculating CVD (A+B) 22,000.00
(D) CVD C x excise duty rate 12.5 2,750.00 2,750.00
(E) Sub-total for edu cess on customs B+D 4,750.00
(F) Edu Cess of Customs 2% of E 2 95.00 95.00
(G) SAH Education Cess of Customs 1% of E 1 47.50 47.50
(H) Sub-total for Spl CVD C+D+F+G 24,892.50
(I) Special CVD u/s 3(5) 4% of H 4 995.70 995.70
(J) Total Duty 5,888.20
(K) Total duty rounded to ` 5,888.00
Notes- Buyer, who is manufacturer, is eligible to avail Cenvat Credit of D and I above. A buyer, who is service provider,
is eligible to avail Cenvat Credit of D above. A trader who sells imported goods in India after charging Vat/sales tax
can get refund of Special CVD of 4% i.e. I above.
Additional Customs Duty U/S 3(1) (CVD)
i. CVD (Countervailing Duty) is payable on imported goods u/s 3(1) of Customs Tariff Act to counter balance
impact of excise duty on indigenous manufactures, to ensure level paying field.
ii. CVD is payable equal to Excise Duty payable on like articles if produced in India. It is payable at effective rate
of Excise Duty, which is generally 12.5%. It means CVD is equal to Basic Excise Duty (w.e.f 01-03-2015).
iii. CVD is payable on assessable value plus basic customs duty. In case of products covered under MRP provisions,
CV duty is payable on MRP basis as per section 4A of Central Excise.
iv. CVD can be levied only if there is manufacture.
v. CVD is neither Excise Duty nor Basic Customs Duty levied under Customs Act. However, all provisions of Customs
Act apply to CVD. Calculation of duty payable is as follows -
Example 4: An importer imported some goods for subsequent sale in India at $12,000 on CIF basis. Relevant exchange
rate as notified by the Central Government and RBI was ` 45 and ` 45.50 respectively. The item imported attracts basic
duty at 10%. If similar goods were manufactured in India, Excise Duty payable as per Tariff is 14%. Arrive at the Assess-
able value and the total duty payable thereon.
Answer:
Assessable Value = ` 5,45,400
Add: Basic Customs Duty 10% x 5,45,400 = ` 54,540
Balance = ` 5,99,940
Add: CVD 14% on ` 5,99,940 = ` 83,992
Add: Education Cess 2% on 54,540 + 83,992 = ` 2,771
Add: SAH 1% on 54,540 + 83,992 = ` 1,385
Total value of imported goods = ` 6,88,088
Working Note:
CIF Value = 12,000 US$
Total CIF in` @ 45.00 per US $ = ` 5,40,000
Add: Landing Charges @1% of CIF = ` 5,400
Assessable value = ` 5,45,400

Additional Duty Under Section 3(5) (Special CVD - SAD)
Section 3(5) of Customs Tariff Act empowers Central Government to impose additional duty. This is in addition to Ad-
ditional Duty leviable u/s 3(1). Provision for this duty has been made w.e.f. 1-3-2005. Purpose of the Additional Duty is
to counter balance Sales Tax, VAT, Local Tax or Other charges leviable on articles on its sale, purchase or transaction
in India.
The obvious intention is to provide level playing field to manufacturers in India who are manufacturing similar goods.
Hence, it is termed as Special CVD or SAD(Special Additional Duty).
Exemption from SAD - Some categories of imports have been exempted from this special CVD (SAD), vide customs
notification No. 20/2006-Custom dated 1-3-2006. The main among these are: Articles of jewellery attracts a lower rate
of special CVD at 1%.
Departmental clarifications - Department has clarified as follows, vide MF (DR) circular No. 1 8/2006-Cus dated 5-6-
2006
i. Special CVD of 4% is not leviable in case of imports under advance authorisation, EOU, EPCZ and SEZ schemes
ii. In case of Export Promotion Schemes like DEPB, target plus, service from India, DFCE and Vishesh Krishi and
Gram Udyog Yojana, 4% Special CVD is required to be debited to the duty scrip/entitlement certificate.
iii. In case of DFRC scheme, 4% special CVD is payable.
iv. Duty debited through DEPB, DFCE, target plus scheme etc. will be eligible for Cenvat Credit or duty draw-
back.
Safeguard Duty under the Custom Tariff Act, 1975
In order to ensure that goods imported in increased quantity do not cause or threaten to cause serious injury to
domestic industry, there are provisions for levy of safeguard duty on import of such articles into India. It can provide
adequate protection to the indigenous industry against competition from the world players. The safeguard duty on
imported goods is leviable under Section 8B of the Customs Tariff Act, 1975 read with the Customs Tariff (Identification
and Assessment of Safeguard Duty) Rules, 1997.
(i) Imposition: Safeguard Duty can be imposed if the Central Government on enquiry finds that the imports in
increased quantity - (a) have caused serious injury to Domestic Industry or, (b) is threatening to cause serious
injury to Domestic industry. It can be imposed irrespective of origin of imported goods.
Serious injury means an injury causing significant overall impairment in the position of a domestic industry.
Threat of serious injury means a clear and imminent danger of serious injury.
(ii) No Safeguard Duty on Articles Originating from Developing Countries: In case of articles originating from a De-
veloping Country (i.e. a country notified by the Government of India for purpose of levy of such duty), this duty
cannot be imposed under following circumstances -
(a) If the imports of such article from that developing country does not exceed three percent of the total
imports of that article into India.
(b) Where the article is originating from more than one developing countries (each with less than three
percent import share), then the aggregate of imports from all such countries taken together does not
exceed nine percent of the total imports of that article into India.
(iii) Provisional Safeguard Duty Pending Enquiry: Section 8B(2) enables the Central Government to impose a provi-
sional Safeguard Duty in appropriate cases, pending the determination of the issues as to whether the import of
the concerned article to India would cause or threaten to cause serious injury to the domestic industry. The duty
so collected, shall be refunded if, on a final determination, the Central Government is of the opinion that neither
any injury has been caused to the Domestic Industry, nor there is any such threat to cause serious injury.
The Provisional safeguard Duty cannot remain in force for more than 200 days from the date when it was first
imposed.
(iv) Duration: The Safeguard Duty shall, unless it is revoked earlier, be in force till the expiry of 4 years from the date of
its imposition. However, the Central Government reserves the right for its extension but total period of imposition
cannot be beyond 10 years from the date of its imposition.
(v) No Safeguard Duty in certain cases: Unless specifically provided, the safeguard duty shall not be imposed on
Customs Law
goods imported by a 100% EOU or unit located in Free Trade Zone/ Special Economic Zone.
(vi) Provision of custom Act, 1962 to apply: The provision of custom Act, 1962 and the rules and regulations made
there under, including those relating to the date for determination of rate of duty, assessment, non-levy, short
levy, refunds, interest, appeals, offences and penalties shall, as far as may be, apply to the duty chargeable
under this section as they apply in relation to duty leviable under that act.
Refund of Special CVD of Customs to Traders
Traders selling imported goods in India after charging sales tax/Vat can claim refund of special CVD of 4% from Cus-
toms Department Notification No. 102/2007-Cus dated 14-9-2007. The dealer (trader) (if he is registered with Central
Excise and is issuing Cenvatable Invoice) selling such imported goods must mention in his invoice that the buyer will
not be able to avail Cenvat credit of such duty. This is required if he is claiming refund of the special CVD. If he is not
claiming refund, obviously, such remark is not required. A manufacturer using these goods in his manufacture can
avail Cenvat credit of this duty. Thus, he gets credit through central excise route.
Example 5: An importer imported some goods for subsequent sale in India at $ 20,000 on CIF basis. Relevant exchange
rate as notified by the Central Government ` 45. The item imported attracts basic duty at 10% and education Cess as
applicable. If similar goods were manufactured in India, Excise Duty payable as per Tariff is 12.5%. Special Additional
Customs Duty is 4%. Find the total duty payable.
Answer:
Answer: (`)
CIF value USD 20,000 X 45 = 9,00,000
Add: Loading and unloading @1% = 9,000
Assessable Value = 9,09,000
Add: Basic Customs Duty @10% on `9,09,000 = 90,900
= 9,99,900
Add: Additional Customs Duty [@12.5% x `9,99,900] = 1,24,988
11,24,888
Add: Education Cess 2% on (`90,900 + `1,24,988) = 4,318
Add: SAH @1% on (`90,900 + `1,24,988) = 2,159
= 11,31,365
Add: Special Additional Customs Duty [@4% `11,31,365] = 45,255
Total value of imported goods = 11,76,620
Therefore total duty payable is ` 2,67,620.
Valid points:
(i) While calculating CVD we should not take into account NCCD of excise.
(ii) CVD can also be imposed even if there is exemption from Basic Customs Duty.
(iii) Imported goods contain more than one classification and the importer is unable to give the breakup of each
item with value then the highest rate of duty among them will be considered.
(iv) CVD can be levied only when the importer imported manufactured goods. It means CVD can be levied only if
goods are obtained by a process of manufacture Hyderabad Industries Ltd v Union of India (1995) (SC).
(v) If the importer is the manufacturer, he can claim the CENVAT credit of CVD.
(vi) No CVD on Anti Dumping Duty, Safeguard Duty, Protective Duty or Countervailing Duty on Subsidized articles.
Example 6: Mr. X imported the coal from USA. Exporter in USA exported the coal after washing coal to reduce its ash
content. Hence, no CVD on coal, because the imported product was not manufactured and the same imported into
India.

If the importer is the manufacturer availing the benefit of SSI Exemption benefit under Notification No.8/2003 under
Central Excise. Thereby he is not paying excise duty on his final product manufactured by him in India. Such a manu-
facturer is not liable to pay CVD (equivalent of Excise Duty) on his imports, even if he is not liable to pay any duty under
Central Excise Act, 1944.
Anti-Dumping Duty
i. Anti dumping duty is leviable u/s 9A of Customs Tariff Act when foreign exporter exports his goods at low prices
compared to prices normally prevalent in the exporting country.
ii. Dumping is unfair trade practice and the anti-dumping duty is levied to protect Indian manufacturers from un-
fair competition.
iii. Margin of dumping is the difference between normal value (i.e. his sale price in his country) and export price
(price at which he is exporting the goods).
iv. Price of similar products in India is not relevant to determine margin of dumping.
v. Injury Margin means difference between fair selling price of domestic industry and landed cost of imported
products. Dumping duty will be lower of dumping margin or injury margin.
vi. Benefits accruing to local industry due to availability of cheap foreign inputs are not considered. This is a draw-
back.
vii. CVD is not payable on anti-dumping duty. Education Cess and SAH education Cess is not payable on anti-
dumping duty In case of imports from WTO countries, anti-dumping duty can be imposed only if it causes
material injury to domestic industry in India.
viii. Dumping duty is decided by Designated Authority after enquiry and imposed by Central Government by noti-
fication. Provisional antidumping duty can be imposed.
ix. Appeal against antidumping duty can be made to CESTAT.
Example 7: Mr. X an importer imported certain goods CIF value was US $20,000 and quantity 1,000 Kgs. Exchange
rate was 1 US $ = ` 50 on date of presentation of Bill of Entry. Customs Duty rates are (i) Basic Customs Duty 10%, (ii)
Education Cess 2%, (iii) SAH Education Cess 1%. There is no excise duty payable on these goods if manufactured in
India. As per Notification issued by the Government of India, anti- dumping duty has been imposed on these goods.
The anti-dumping duty will be equal to difference between amount calculated @ US $30 per kg and landed value
of goods. Compute Customs Duty liability and anti-dumping liability.
Answer:
Part I Amount in `
Total CIF Price US $ 20,000 x ` 50 10,00,000
Add: Landing charges @ 1% x `10,00,000 10,000
Assessable Value 10,10,000
Basic duty @ 10% 1,01,000
Sub total 11,11,000
Add: Education cess 2% on ` 1, 01,000 2,020
Add: Secondary and Higher Education Cess 1,010
[@1% on ` 1,01,000]
Value of imported goods 11,14,030
Total Customs Duty payable is ` 1,04,030.
Part II
Rate as per Anti Dumping Notification is ` 15,00,000 [US $ 30 per kg x 1,000 Kgs x ` 50]
Part III
Computation of anti-dumping duty
Rate as per Anti Dumping Notification 15,00,000
Less: Value of imported goods as computed above (11,14,030)
Anti Dumping Duty payable 3,85,970
Customs Law
(i) Anti Dumping Duty on Dumped Articles

Often, large manufacturer from abroad may export goods at very low prices compared to prices normally
prevalent in export market. Such dumping may be with intention to cripple domestic industry or to dispose
of their excess stock. This is called Dumping and is an unfair trade practice. In order to avoid such dumping
and to protect domestic industry, Central Government can impose, under section 9A of Customs Tariff Act,
anti-dumping duty, if the goods are being sold at less than its normal value. Levy of such anti-dumping duty is
permissible as per WTO agreement. Anti dumping action can be taken only when there is an Indian industry
producing like articles. In Shenyang Mastusushita v. Exide Batteries 2005 (181) ELT 320 (SC 3 member bench),
it was observed, Principle behind anti-dumping laws is to protect the domestic industry from being adversely
affected by import of goods at export prices which are below the normal value of the goods in the domestic
market of the exporter. The duty is calculated on the margin of dumping which is the difference between the
export price and the normal value.
In SS Enterprise v. Designated Authority AIR 2005 SC 1527 = 181 ELT 375 (SC 3 member bench), it was held that
purpose being imposition of anti-dumping duty is to curb unfair trade practices resorted to by exporters of a
particular country of flooding the domestic markets at rates which are lower than the rate at which the export-
ers normally sell the same or like goods in their own countries, so as to cause or be likely to cause injury to the
domestic market. The levy of dumping duty is a method recognized by GATT (should be WTO) which seeks to
remedy the injury and at the same time balances the rights of exporters from other countries to sell their prod-
ucts within the country with the interest of domestic markets. Thus the factors to constitute dumping is (i) an
import at prices which are lower than the normal value of goods in exporting country, (ii) the exports must be
sufficient to cause injury to domestic industry.
However, negligible quantity of imports would not be sufficient to cause such injury.
Presently, countries like China, Taiwan are said to be involved in dumping. Even Indian steel exporters are facing
charges of dumping goods in USA.
(ii) Provisional Anti-Dumping Duty
Pending determination of margin of dumping, duty can be imposed on provisional basis. After dumping duty is
finally determined, Central Government can reduce such duty and refund duty extra collected than that finally
calculated. Such duty can be imposed upto 90 days prior to date of notification, if there is history of dumping
which importer was aware or where serious injury is caused due to dumping.
(iii) No CVD on Anti-Dumping Duty
Anti Dumping Duty and Safeguard Duty is not required to be considered while calculating CVD view con-
firmed in Tonira Pharma v. CCE (2007) 208 ELT 38(CESTAT 2 v. 1 order).
(iv) No Education Cess and SAHE Cess on Anti-Dumping Duty Education Cess and SAH Education Cess is not pay-
able on anti-dumping duty.
(v) No Anti-Dumping Duty in Case of Imports by EOU and SEZ Anti-dumping duty is not applicable for imports by
EOU or SEZ units, unless it is specifically made applicable in the notification imposing anti- dumping duty. [sec-
tion 9A(2A) of Customs Tariff Act]
(vi) Margin of Dumping
Margin of dumping means the difference between normal value and export price (i.e. the price at which
these goods are exported). [Section 9A(1)(a)].
Normal Value means comparable price in ordinary course in trade, for like article, when destined for con-
sumption in the exporting country or territory. If such price is not available or not comparable(a) comparable
representative price of like article exported from exporting country or territory to appropriate third country or
(b) cost of production plus reasonable profit, can be considered [section 9A(1)(c) of Customs Tariff Act]. The
normal value is to be determined as per rules.
In Reliance Industries Ltd. v. Designated Authority 2006 (202) ELT 23 (SC), it was held that normal value a are not
exporter specific but exporting country specific. Once dumping of specific goods from country is established,
dumping duty can be imposed on all exports of those goods from that country in India, irrespective of the ex-
porter. Rate of duty may vary from exporter to exporter depending upon the export price.
Export Price means the price at which goods are exported. If the export price is unreliable due to association

or compensatory arrangement between exporter and importer or a third party, export price can be construct-
ed (revised) on the basis of price at which the imported articles are first sold to independent buyer or according
to rules made for determining margin of dumping. [Section 9A(1) (b)].
Margin of dumping is determined on basis of weighted average of normal value and the export price of
product under consideration.
(vii) Quantum of Dumping Duty
The anti-dumping duty will be dumping margin or injury margin, whichever is lower. Injury margin means differ-
ence between fair selling price of domestic industry and landed cost of imported product. The landed cost will
include landing charges of 1% and basic customs duty. Thus, only anti-dumping duty enough to remove injury
to domestic industry can be levied.
For example, if normal value in exporting country is ` 11 and export price is ` 8, dumping margin is ` 3. If landed
cost is ` 9 and fair selling price of domestic industry is ` 10, then injury margin is ` 1. Hence, anti-dumping duty of
only Re 1 can be imposed.
In Reliance Industries Ltd. v. Designated Authority 2006 (202) ELT 23 (SC), it was held that non- injurious price (NIP)
has to be calculated for domestic industry as a whole and not in respect of any particular company or enter-
prise. [Hence, even if product is captively consumed by Indian manufacturer, transfer price (market value) of
inputs is to be considered and not actual cost of captive consumption]. It was observed that there has to be a
single NIP for a product and not several NIP for the same product. NIP is not exporter specific.
In Alkali Manufacturers Association of India v. Designated Authority 2006 (194) ELT 161 (CESTAT). Designated
Authority had calculated domestic price on basis of profit of 22% of investment. It was held that this is reason-
able.
(viii) Dumping Duty for WTO Countries
Section 9B of Customs Tariff Act provides restrictions on imposing dumping duties in case of imports from WTO
countries or countries given Most Favored Nation by an agreement. Dumping duty can be levied on import
from such countries, only if Central Government declares that import of such articles in India causes material
injury to industry established in India or materially retards establishment of industry in India.
[WTO agreement permits levy of anti-dumping duty when it causes injury to domestic industry as a result of spe-
cific unfair trade practice by foreign producer, by selling below normal value].
Injury to domestic industry will be considered on basis of volume effect and price effect on Indian industry.
There must be a casual link between material injury being suffered by dumped articles and the dumped im-
ports.
(ix) Rules for Deciding Subsidy or Dumping Margin
Central Government has been empowered to make rules for determining (a) subsidy or bounty in case of
bounty fed goods (b) the normal value and export price to determine margin of dumping in case of dumping.
Accordingly, Customs Tariff (Identification, Assessment and Collection of Anti- dumping duty
on Dumped Articles and for determination of Injury) Rules, 1995 [Customs Notification No. 2/95 (N.T.) dated 1-1-
95] provide detailed procedure for determining the injury in case of dumped articles.
(x) Procedure for Fixing Anti Dumping Duty
After the designated authority is satisfied about prima facie case, he will give notice to Governments of ex-
porting countries. Opportunity to inspection of documents and making representations will be given to inter-
ested parties who are likely to be affected. Designated Authority will first give preliminary finding and then final
finding within one year. Provisional duty can be imposed on basis of preliminary finding which can continue
upto 6 months, extendable to 9 months. Additional duty may be imposed on basis of the final finding.
As per rule 18 of Anti-Dumping Duty Rules, Central Government has to issue a notification fixing anti- dumping
duty within three months from date of notification issued by designated authority.
(xi) Appeal against Order Determining Dumping Duty
Appeal against the order determining the duty can be made to CESTAT. The appeal will be heard by at least
three members bench consisting of President, one judicial member and one technical member [section 9C of
Customs Tariff Act].
Customs Law
(xii) No Appeal against Order of Tribunal

Section 9C does not provide for statutory appeal against order of Tribunal. Hence, only remedy is either writ in
High Court or SLP in Supreme Court.
(xiii) High Court should not Exercise Writ Jurisdiction
In view of appeal provisions, High Court should not entertain writ petitions and grant interim relief. Otherwise,
the provisions of appeal would be rendered otiose Association of Synthetic Fibre Industry v. J K Industries 2006
(199) ELT 196 (SC) * Nitco Tiles v. Gujarat Ceramic Floor Tiles Mfg Association 2006 (199) ELT 198 (SC).
(xiv) Mid-Term Review
Mid-term review of Anti-Dumping Duty is permissible under rule 23 of Anti-Dumping Duty Rules. In Rishiroop Poly-
mers v. Designated Authority 2006 (196) ELT 385 (SC), it was held that scope of review enquiry by Designated
Authority is limited to the satisfaction as to whether there is justification for continuing imposition of Anti-Dumping
Duty. The inquiry is limited to change in various parameters like normal value, export value, dumping margin,
fixation of non-injury price and injury to domestic industry. Only changed parameters should be considered.
(xv) New Shipper Review
After imposing of Anti-Dumping Duty, a new exporter may want to export same goods to India. As per rule 22, if
he had not exported earlier, he can ask for review of Anti-Dumping Duty. During the period of review, Govern-
ment may resort to provisional assessment and may allow imports on submission of guarantee, pending review.
If anti-dumping duty is determined, it will be payable retrospectively from date of initiation of review. Such re-
view is termed as new Shipper Review.
(xvi) Discontinuation of Anti-Dumping Duty i.e. Sunset Review
Anti dumping duty ceases on the expiry of five years from date of imposition. However, Central Government
can extend the anti-dumping duty, if it is of the opinion that cessation is likely to lead to continuation or recur-
rence of dumping and injury.
Example 8: An importer imported some goods. Description of goods: Mulberry Raw Silk (not thrown) (HS Code 5002
00) from Peoples Republic of China. CIF value was US $ 20,000 and quantity 1,000 Kgs. Exchange rate was US $ =` 44
on date of presentation of Bill of Entry. Customs Duty rates are (i) Basic Customs Duty 10%, (ii) Education Cess 2%, (iii)
SAH Education Cess - 1%. There is no excise duty payable on these goods if manufactured in India. As per Notifica-
tion No. 106/2003-Cus dated 10-7-2003, anti- dumping duty has been imposed on these goods imported from China,
manufactured by any producer in People s Republic of China. The anti-dumping duty will be equal to difference
between amount calculated @ US $31.69 per Kg and Landed value of goods. Compute Customs Duty liability &
anti- dumping liability.
Answer:
(a) Computation of Customs Duty :
Total CIF Price US $ 20,000
CIF @ ` 44 per 1 US $ ` 8,80,000.00
Add Landing charges @ 1% ` 8,800.00
Assessable Value ` 8,88,800.00
Basic duty @ 10% ` 88,880.00
Education Cess @ 2% on 88,880.00 ` 1,777.60
SAH education Cess 1% ` 888.80
Total Customs Duty payable (Basic + Education Cess) ` 91,546.40
Rounded off ` 91,546.00
(b) Computation of landed value
Assessable Value Under Customs Act ` 8,88,800.00
Add: All Duties of Customs ` 91,546.40

Landed Value as per Anti-Dumping Notification ` 9,80,346.40
(c) Computation of anti-dumping duty
Rate of Silk Yarn as per Anti-Dumping Notification
(US $ 31.69 per kg) 1000 kgs = US $ 31,690
Value @ ` 44 per US $ = (31,690$ x ` 44) ` 13,94,360
Less : Landed value as per Anti-Dumping = ` 9,80,346
Anti-Dumping Duty Payable ` 4,14,014
4.3 VALUATION IN CUSTOMS
Customs duty is payable as a percentage of Value often called Assessable Value or Customs Value. The Value
may be either (a) Value as defined in section 14(1) of Customs Act or (b) Tariff value prescribed under section 14(2)
of Customs Act. The provisions relating to customs valuation have been completely revamped by introducing new
section 14 w.e.f. 10-10-2007.
Tariff Value -
i. Tariff Value can be fixed by CBE&C (Board) for any class of imported goods or export goods. CBE&C should
consider trend of value of such or like goods while fixing tariff value. Once so fixed, duty is payable as percent-
age of this value. (The percentage applicable is as prescribed in Customs Tariff Act). Fixing tariff value is not
permitted under GATT convention. However, the provision of fixing tariff values has been retained.
ii. Tariff value for crude palm oil, RBD Palmolein, palm oil, crude soya-bean oil and brass scrap has been fixed by
notification No. 36/200 1 -Cus (NT) dated 3-8-2001.
iii. Transaction value at the time and place of importation or exportation, when price is sole consideration and
buyer and sellers are unrelated is the basic criteria for value u/s 14(1) of Customs Act. Thus, CIF value in case
of imports and FOB value in case of exports is relevant.
iv. In case of high sea sale, price charged by importer to assessee would form the assessable value and not the
invoice issued to the importer by foreign supplier. National Wire v. CC 2000(122) ELT 810 (CEGAT) * Godavari
Fertilizers v. CC (1996) 81 ELT 535 (CEGAT).
v. Rate of exchange will be as determined by CBE&C or ascertained in manner determined by CBE&C.
vi. Valuation for customs is required to be done as per provisions of Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007
vii. CIF value of goods plus 1% landing charges is the basis for deciding Assessable Value.
viii. Commission to local agents, packing cost, value of goods and tooling supplied by buyer, royalty relating to
imported goods are addible.
ix. Interest on deferred payment, demurrage and value of computer software loaded is not to be added.
x. Old machinery and old cars are often valued on basis of depreciated value, though such method has no sanc-
tion of law.
Additions to Customs Value
Rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 [Rule 9 upto 10-10-2007] provide
that following cost and services are to be added, if these are not already included in the invoice price.
i. Commission and brokerage, except buying Commission, if not already included in the invoice price [rule 10(1)
(a)(i)].
ii. Cost of container which are treated as being one with the goods for customs purposes, if not already included
in the invoice price [rule 10(1)(a)(ii)]. Cost of packing whether labour or materials, if not already included in the
invoice price [rule 10(1)(a)(iii)].
iii. Materials, components, tools, dies, moulds, and consumables used in production of imported goods, supplied

Customs Law
by buyer directly or indirectly, free of charge or at reduced cost, to the extent not already included in price [rule
10(1)(b)(i), (ii) and (iii)]
iv. Engineering, development, art work, design work, plans and sketches undertaken elsewhere than in India and
necessary for production of imported goods, to the extent not already included in price [rule 10(1)(b)(iv)].
v. Royalties and license fees relating to imported goods that buyer is required to pay, directly or indirectly, as a
condition of sale of goods being valued [rule 10(1)(c)]
vi. Value of proceeds of subsequent resale, disposal or use of goods that accrues directly or indirectly to seller (i.e.
to foreign exporter) [rule 10(1)(d)]
vii. All other payments made as condition of sale of goods being valued made directly or to third party to satisfy
obligation of seller, to the extent not included in the price [rule 10(1)(e)]
viii. Cost of transport upto place of importation [rule 10(2)(a)]
ix. Loading, unloading and handling charges associated with delivery of imported goods at place of importation
[These are termed as landing charges and are to be taken as 1%] [ru le 10(2)(b)]
x. Cost of insurance [rule 10(2) (c)]
The additions should be on the basis of objective and quantifiable data [rule 10(3) of Customs Valuation (Determina-
tion of Value of Imported Goods) Rules, 2007 (earlier rule 9(3)].
Services / Documents / Technical Know-How Supplied by Buyer
Cost of engineering, development, art work, design work and plans and sketches undertaken by buyer which is
necessary for production of imported goods is includible, only if such work is undertaken outside India. [Rule 10(1)(b)
(iv) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9)] The addition should
be done on objective and quantifiable data. Data available with importer should be used as far as possible. If the
services are purchased or leased by importer, such purchase/lease cost should be added. If the importer has himself
done the work abroad, its cost should be added on basis of structure and management practices of importer and
his accounting methods (in other words, if development work, plans, sketches etc. is done by importer himself outside
India, its cost should be calculated based on normal accounting practices - like apportionment of overheads, ap-
portionment over various jobs if the same development work, design work etc. is used for more than one jobs etc.)
[Interpretative Note to rule 10(1)(b)(iv) of Customs Valuation Rules].
Technical Know How Related to Imported Machinery
In CC v. Essar Gujarat Ltd. (1997) 9 SCC 738 = 88 ELT 609 = 17 RLT 588 (SC 3 member bench), it was held that payment
of license fee and transfer of technology, without which the imported plant could not function, will have to be added
to the value of imported plant. However, training charges cannot be included. wrongly followed in CC v. Himson
Textile Engg. Ltd. 1997(93) ELT 301 (CEGAT).
Royalties and License Fee
Royalties and license fees related to imported goods that the buyer is required to pay, directly or indirectly, as a condi-
tion of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually
paid or payable, are required to be added in assessable value. [Rule 10(1)(c) of Customs Valuation (Determination of
Value of Imported Goods) Rules, 2007 (earlier rule 9)].
Royalty Payment Un-connected with Imported Goods not to be Added
Often, a lump-sum payment of royalty is made to foreign collaborators for technical know-how. In addition, compo-
nents / parts/ CKD packs are procured from foreign collaborators. Customs department normally holds that the price
of parts/CKD packs should be loaded, on assumption that the part of price of component parts/CKD packs has been
paid as royalty payment.
Charges for Reproduction of Goods in India not to be Added
Interpretative Note to rule 10(1)(c) of Customs Valuation Rules makes it clear that charges for right to reproduce the
imported goods in India shall not be added.
Barge/ Lighterage Charges includible
In some cases, the ship is not brought upto jetty. Goods are discharged at outer anchorage. This may be for vari-
ous reasons, e.g. (a) deep draught at port, (b) Ports are busy, (c) Odd dimensional or heavy lifts or hazardous cargo
discharged at anchorage. Charges for brining the goods from outer anchorage are known as barging/ lighterage
charges.
As per explanation to rule 10(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 [in-
serted w.e.f. 10-10-2007], ship demurrage charges on chartered vessels, lighterage or barge charges are includible.
Mode of computation of freight of time chartered/daughter vessel has been specified in MF(DR) circular No. 4/2006-
Cus dated 12-1-2006.
Landing Charges to be added
Cost of unloading and handling associated with delivery of imported goods in port(called landing charges) shall be
added. These will be calculated @ 1% of CIF value, i.e. FOB price plus freight plus insurance. [Rule 10(2)(b) of Customs
Valuation (Determination of Value of Imported Goods) Rules, 2007 earlier rule 9].
Cost of Transport upto Port should be added
Cost of transport from exporting country to India is to be added in Assessable Value. [Rule 10(2)(a) of Customs Valu-
ation (Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9).] In other words, CIF value is the basis for
valuation. If the goods are imported by air, the air freight will be very high. Hence, in case air freight is higher than 20%
of FOB price of goods, only 20% of FOB price will be added for Customs Valuation purposes.
If cost of transport is not ascertainable, it will be taken as 20% of FOB value of goods. However, cost of transport within
India is not to be considered.
Freight
Air Other than air

Freight cant exceed 20% of FOB value Actual freight If actual freight is unknown
[if actual is less than 20% of FOB value, Freight=20% of FOB value.
then take actual freight]
Insurance Cost should be added
Insurance charges on goods are to be added. [Rule 10(2)(c) of Customs Valuation (Determination of Value of Im-
ported Goods) Rules, 2007]. If these are not ascertainable, these will be calculated @ 1.125% of FOB Value of goods.
Insurance
Actual Amount If actual is unknown

Insurance 1.125% of FOB value.
Exclusions from Assessable Value
Interpretative Note to rule 3 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007provide that
following charges shall be excluded:
(a) Charges for construction, erection, assembly, maintenance or technical assistance undertaken after importa-
tion of plant, machinery or equipment
(b) Cost of transport after importation
(c) Duties and taxes in India
Other payments from buyer to seller that do not relate to imported goods are not part of the customs value. Demur-
rage charges payable to port trust authorities for delay in clearing goods are not to be added. - Dee pak Fertilisers v.

Customs Law
CC 1989(41) ELT 550 (CEGAT) * Hindustan Lever v. UOI 2002(142) ELT 33 (Cal HC). [However, ship demurrage is includ-
ible w.e.f. 10-10-2007].
Ship demurrage includible w.e.f. 10-10-2007 - explanation to rule 10(2)
Essential Ingredients of Valuation (section 14)
The essential ingredients of section 14 may be analyzed as under:
a) Section 14 would be applicable only when customs duty is chargeable on goods based on their value either
under the Customs Tariff Act, 1975 or under any other law for the time being in force.
b) The value of goods under section 14(1) is deemed value.
c) The assessable value will be price at which like goods are ordinarily sold.
d) Where there is no sale price, the value shall be the price at which such or like goods are ordinarily offered for
sale.
e) The terms of the price should be for delivery at the time and place of importation or exportation, as the case
may be.
f) The sale or offer for sale should be in the course of international trade.
g) There should be no mutuality of interest between the seller and the buyer.
h) Price should be the sole consideration for sale or offer for sale.
Analysis in the Light of Judicial Decisions
The above ingredients may be further explained with the help of judicial rulings as under:
(a) Assessable Value is Deemed Value
Section 14(1)(a) brings about the concept of deemed value, which is a fictional value that relates to the con-
cept of intrinsic value of goods, which it may fetch in the international market.
In the case of Union of India v Glaxo Laboratories Ltd., the Court observed that the assessable value as per sec-
tion 14(1), need not as a matter of fact, be the invoice price or the price that is agreed between the parties. It
may be deemed value.
(b) Price
In N Gulabair D Parekh v Union of India, it was observed that the invoice price based on the prevailing price list,
should be accepted in terms of section 14(1) (a) of the Customs Act.
A declared price list can be used for the purpose or arriving at the value but there is no hard and fast rule and
the invoice may supersede the price list as held by the Supreme Courtin Mirah Exprots Pvt. Ltd. v CC.
In Rajkumar Knitting Mills P Ltd. v CC, a three member bench of Supreme Court held that for valuation purposes,
ordinary price at the time of importation is relevant and not the price prevalent on the date of contract.
(c) At which such or like goods Are Ordinarily Sold
In Chander Prakash & Co v Collector of Customs, it was held that when the invoice price was very low and when
the prices of comparable goods were available, it would not be appropriate to adopt the invoice price.
(d) Where there is no sale price, the Offer for Sale price will be applicable
In case a sale price is not available, the offer for sale price may be construed as the basis determining the as-
sessable value. For example, in case a price list is available, such price list is the quotation as well.
(e) Ordinarily Sold
In Collector of Customs, Bombay v Maruti Udyog Limited (1987), Maruti Udyog Limited, which had collaboration
with Suzuke Motor Co. Limited, was the only buyer of Suzuki SKD/CKD packs and complete vehicles. A contro-
versy arose so to whether the price charges by Suzuki could be considered as one at which goods were ordinar-
ily sold or offered for sale. In this case, the court held that the price charged by the Suzuki was a commercial
price. Also, it was held that there was nothing to prove that the transaction between the two companies were
not at arms length.

(f) In the course of International Trade
In Satellite Engineering Limited v Union of India (1983), the assessee, who was manufacturers of fluorescent
starter switches imported lead glass tubing at rate of 0.15 pounds per kg. However, the customs department
which was of the opinion that the value was low obtained two more quotations which were 0.430 pounds per
kg. And 0.429 pounds per kg. respectively. It was held that the prices indicated in the two quotations were in
the course of international trade and hence that rate will form the basis for determining the assessable value.
(g) Price being the Sole Consideration
In Sanjay Chandiram v Collector of Customs, the court held that as there is no proof of comparable goods be-
ing imported at a higher rate and as it cannot be shown that the importer had paid to the supplier, an amount
more than that required to be paid, there is no ground for rejection of the transaction value.
Relevant Date for Rate and Valuation of Import Duty
Section 15 of Customs Act prescribes that rate of duty and tariff valuation applicable to imported goods shall be the
rate and valuation in force at one of the following dates (a) if the goods are entered for home consumption, the date
on which bill of entry is presented (b) in case of warehoused goods, when Bill of Entry for home consumption is pre-
sented u/s 68 for clearance from warehouse and (c) in other cases, date of payment of duty.
4.4 METHODS OF VALUATION
The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, based on WTO Valuation Agreement
(earlier GATT Valuation Code), consist of rules providing six methods of valuation.
i. The methods of valuation for customs methods are as follows
ii. Transaction Value of Imported goods [Section 14(1) and Rule 3(1)]
iii. Transaction Value of Identical Goods [Rule 4]
iv. Transaction Value of Similar Goods [Rule 5]
v. Deductive Value which is based on identical or similar imported goods sold in India [Rule 7]
vi. Computed value which is based on cost of manufacture of goods plus profits [Rule 8]
vii. Residual method based on reasonable means and data available [Rule 9]
Methods to be applied Sequentially
These methods are to be applied in sequential order, i.e. if method one cannot be applied, then method two comes
into force and when method two also cannot be applied, method three should be used and so on. The only excep-
tion is that the Computed value method may be used before deductive value method, if the importer requests
and Assessing Officer permits.
Rejection of Value
Importer has to declare value of goods. If the assessing officer has reason to doubt about truth or accuracy of the
value declared by the importer, he can ask the importer to submit further information and evidence. If the customs
officer still has reasonable doubt, he can reject the value as declared by the importer. [Rule 12(1) w.e.f. 10-10-2007
earlier rule 10A(1) of Customs Valuation Rules added w.e.f. 19-2-1 998]. If the importer requests, the assessing officer
has to give reasons for doubting the truth or accuracy of value declared by importer [Rule 12(2) of Customs Valuation
(Determination of Value of Imported Goods) Rules, 2007 earlier rule 10A(2) of Customs Valuation Rules upto 10-10-
2007].
Rule 12 is only Mechanism to Reject the Declared Value
As per explanation (1)(i) to Rule 12, the Rule 12 does not provide any method for determination of value. It only pro-
vides mechanism to reject declared value, where there is reasonable doubt. If transaction value is rejected, valua-
tion has to be done as per Rule 4 to 9 [Explanation (1)(i) to Rule 12 of Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007].

Customs Law
Transaction Value of Imported Goods [Section 14(1) and Rule 3(1)]

As per rule 3(1), value of imported goods shall be transaction value adjusted in accordance with provisions of rule 10
[Rules effective from 10.10.2007].
As per rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, various additions like
sales commission, cost of containers, cost of packing; cost of materials, components etc. or services supplied by
buyer; royalties payable, transport charges, insurance etc. are includible, if these do not already form part of transac-
tion value (as mentioned above).
Rule 3(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 is subject to rule 12, which
means that provisions of rule 12 overrides provisions of rule 3. As per rule 12 of Customs Valuation (Determination of
Value of Imported Goods) Rules, 2007, the value as declared by importer can be rejected by Assessing Officer, if he
has doubts about truth or accuracy of the value as declared. However, the Assessing Officer has to give reasons for
his doubts in writing and provide opportunity of personal hearing. Thus, it is not obligatory on customs officer to accept
the transaction value if he has reasons to doubt the truth or accuracy of the same.
Transaction value can be rejected either for special circumstances as per section 14(1) or conditions as specified in
rule 3(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
(A) Special circumstances as per Section 14(1) - The special circumstances in section 14(1) are (a) Buyer and
seller should not be related and (b) Price should be the sole consideration for the sale. If these special circumstances
are not satisfied, transaction value can be rejected. Any other special circumstances cannot be considered.
(B) Conditions as per Rule 3(2) - As per rule 3(2) of Customs Valuation (Determination of Value of Imported Goods)
Rules, 2007 [Earlier rule 4(2) of Customs Valuation Rules], transaction value can be accepted only if following require-
ments are satisfied
(C) No restriction on Buyer for Disposal of Goods - There are no restriction on buyer on disposition or use of goods
except the following: (a) restrictions prescribed by public authorities in India (b) restriction on geographical area within
which goods may be resold e.g. goods should not be sold outside particular State or outside India or (c) restriction that
does not materially affect value of goods - e.g. exporter puts a condition to importer of automobile that car should
not be exhibited before a particular date illustration given in Interpretative Note to rule 3(2) (a) (iii). [rule 3(2) (a)].
(D) Sale not subject to conditions of which value cannot be determined - The sale or price should not be subject
to a condition or consideration for which value cannot be determined. Examples given in interpretative note to rule
3(2) (b) are (a) Price is subject to condition that buyer buys some other goods in specified quantities from seller (b)
price is dependent on price at which buyer of imported goods sells other goods to seller (c) Price is based on form of
payment extraneous the imported goods. However, (i) buyer furnishing engineering and plans undertaken in India to
seller (ii) Buyer undertaking activities of marketing of imported goods in India will not form part of value of imported
goods [rule 3(2) (b)].
(E) No further consideration to Seller of which adjustment cannot be made - Seller should not be entitled to further
consideration like part of subsequent resale, disposal or use of goods by the buyer will accrue directly or indirectly
to seller, unless proper adjustment in value terms can be made as per rule 10 e.g. if the importer is a trader and the
condition is that after he sells the goods in India, the foreign exporter will get a fixed amount after the sale, that extra
amount can be added for Customs Valuation [rule 3(2) (c)].
(F) Unrelated Buyer and Seller, Except when price acceptable under Rule 3(3) - Buyer and seller are not be related,
unless the transaction value is acceptable under rule 3(3) [rule 3(2)(d)] [earlier ru le 4(2)(h) upto 10-10-2007]. If any of
the aforesaid requirements is not satisfied, transaction value cannot be accepted for valuation purposes.
Related person under Customs Valuations Provisions
Rule 2(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 and Rule 2(2) of Customs Valu-
ation (Determination of Value of Export Goods) Rules, 2007 define that persons shall be deemed to be related only
if one of the conditions is satisfied:
they are officers or directors of one others businesses [Rule 2(2)(i)]
they are legally recognised partners in business [Rule 2(2)(ii)]
they are employer and employee [Rule 2(2)(iii)]
any person directly or indirectly owns, controls or holds 5% or more of shares of both of them [Rule 2(2)(iv)]

one of them controls other directly or indirectly [Rule 2(2)(v)]
both of them are controlled - directly or indirectly - by third person [Rule 2(2)(vi)]
together they control a third person - directly or indirectly [Rule 2(2)(vii)]
they are members of same family [Rule 2(2)(viii)]. (what is family is not defined).
Person includes legal person i.e. Company, partnership firm, trust etc. [Explanation I to Rule 2(2)].
If a person is sold agent or sole distributor or sole concessionaire of other, he will be deemed to be related, if he falls
within the criteria of rule 2(2) [Explanation II to Rule 2(2)]. Thus, sole selling agent or sole distributor or sole concession-
aire will be related person only if he falls within the criteria as specified in rule 2(2). A sole selling agent or sole distribu-
tor or sole concessionaire is not automatically deemed as related person in all the cases.
Interpretative Note to rule 2 clarify that for purpose of rule 2(2 )(v), one person is deemed to control other if he is legally
or operationally in a position to exercise restraint or direction over the other. Thus, control need not be only legal - even
operational control is enough.
In CC v. East African Traders 2000(115) ELT 613 (SC), it was held that authorities can pierce the corporate veil to ascer-
tain whether the buyer and seller are indeed related persons within the meaning of the rule. [Piercing corporate veil
means looking behind the facade to see the persons who are in real control]. [The Tribunal had held that even if MD
of supplier company is brother of importing firm, supplier and importer cannot be treated as related person. However,
Supreme Court has said that they can be treated so by piercing the corporate veil].
However, merely because two parties are related to each other will not amount to under valuation per se. It will de-
pend on facts and circumstances of each individual case - CC v. Variant (India) Ltd. (2007) 210 ELT 481 (SC).
In Siemens Ltd v. CC2000(126) ELT 1134 (CEGAT), it was held that even if buyer is a subsidiary company, invoice price
should be accepted if the relationship has not affected the invoice price and price is same as the price sold to other
independent buyers.
Transaction Value of Identical Goods
Rule 4(l) (a) of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 of Customs Valuation Rules
provide that if valuation on the basis of transaction value is not possible, the Assessable value will be decided on
basis of transaction value of identical goods sold for export to India and imported at or about the same time.
Rule 4(1)(b) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 provides that transaction
value of identical goods at the same commercial level and in substantially same quantity as the goods being valued
shall be used to determine value of imported goods.
If transaction value at different commercial level or in different quantities or both is available, suitable adjustments can
be made to take into account the difference.
Identical goods are defined under Rule 2(1)(d) of Custom Valuation (Determination of value of Imported Goods)
Rules, 2007 as those goods which fulfill all following conditions i.e. (i) the goods should be same in all respects, including
physical characteristics, quality and reputation; except for minor differences in appearance that do not affect value
of goods, (ii) the goods should have been produced in the same country in which the goods being valued were pro-
duced, (iii) they should be produced by same manufacturer who has manufactured goods under valuation - if price
of such goods are not available, price of goods produced by another manufacturer in the same country. However,
if engineering, development work, art work, design work, plan or sketch undertaken in India were completed by the
buyer on these imported goods free of charge or at reduced rate for use in connection with the production and sale
for export of these imported goods, these will not be identical goods.
Summary of valuation of Identical Goods
i. Contemporaneous imported goods,
ii. Same in all respect,
iii. Minor difference in appearance like Nokia 6265 (steel gray) & Nokia 6265 (Black colour),
iv. Produced in same country at same commercial level, substantially same quantity Lowest value to be taken,
v. 1st preference same manufacturer,
vi. 2nd preference only if same manufacturer not available them different manufacturer,

Customs Law
Adjustments to be made
Price of identical goods should be compared at same commercial level and in substantially same quantity of goods
[rule 4(1)(b) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007] - noted in Elite Packaging
Industries v. CC-1992 (60) ELT 311 (SC).
If transaction value at different commercial level or in different quantities or both is available, suitable adjustments
can be made to take into account the difference. It should be on demonstrated evidence which clearly establishes
reasonableness and accuracy of adjustments [rule 4(1)(c) of Customs Valuation (Determination of Value of Imported
Goods) Rules, 2007].
As per interpretative note to rule 4 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, if
price of identical goods at same commercial level and in substantially the same quantities as the goods being valued
is not available, customs officer can use any of the following price of identical goods - (a) sale at same commercial
level but in different quantities (b) sale at different commercial levels but in substantially the same quantities or (c) sale
at different commercial level and in different quantities. Such price can be only transaction value which has already
been accepted under rule 3. After such sale is found, adjustment will be made for (a) quantity factor only (b) com-
mercial level factors only or (c) both commercial level and quantity factors.
Such adjustment can be only on basis of demonstrative evidence e.g. valid price lists containing prices referring to dif-
ferent levels or different quantities. For example, assume that import is for 10 units, while transaction value of identical
goods is available for 500 units. If the seller is known to be giving quantity discounts and if sellers price list for 10 units
and 500 units is available, adjustment can be made based on sellers price list. In such case, price of identical goods
made in 10 units need not be available. Such adjustment can be only on objective measure on bona fide evidence
and not arbitrary.
Adjustment for distances and transport costs - If valuation of identical goods was made after adding costs and ser-
vices as per rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, differences arising
due to differences in distances and means of transport should be considered, while arriving at Assessable Value of
goods under valuation. This will be required if value of identical goods manufactured by different manufacturer and/
or at different place is being taken as basis for valuation [Rule 4(2).
Transaction Value of Similar Goods
If first method of transaction value of the goods or second method of transaction value of identical goods cannot be
used, rule 5 (earlier rule 6) provide for valuation on basis of Transaction value of similar goods imported at or about
the same time.
What are Similar goods - Rule 2(1)(f) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007
[earlier rule 2(1)(e) upto 10-10-2007] define similar goods as (a) alike in all respects, have like characteristics and like
components and perform same functions. These should be commercially inter-changeable with goods being valued
as regards quality, reputation and trade mark. (b) the goods should have been produced in the same country in
which the goods being valued were produced.
(c) they should be produced by same manufacturer who has manufactured goods undervaluation - if price of such
goods are not available, price of goods produced by another manufacturer in the same country can be considered.
. However, if engineering, development work, art work, design work, plan or sketch undertaken in India were complet-
ed by the buyer on these imported goods free of charge or at reduced rate for use in connection with the production
and sale for export of these imported goods, these will not be similar goods.
As per rule 5(2) and interpretative note to rule 5 of Customs Valuation (Determination of Value of Imported Goods)
Rules, 2007, the adjustments that can be made are same as can be done in respect of identical goods under rule 4
i.e. (a) Adjustments for commercial level and/or quantity can be made (b) if valuation of similar goods is made after
adding costs and services as per rule 10, differences arising due to differences in distances and means of transport
should be considered, (c) if more than one value is available, lowest of such values should be taken.
Distinction between identical goods and similar goods
The major distinction between identical goods and similar goods is that the identical goods should be same in
all respects, except for minor differences in appearance, while in case of similar goods, it is enough if they have like
characteristics and like components and perform same functions. In both the cases, (a) quality and reputation (includ-
ing trade mark reputation) should be same (b) Goods should be from same country, (c) Goods produced by another
manufacturer can be considered if price of goods produced by same manufacturer are not available. However,
brand reputation and quality of other manufacturer should be comparable (d) If engineering, development work, art
work, design work, plan or sketch undertaken in India were completed by the buyer on these imported goods free of
charge or at reduced rate for use in connection with the production and sale for export of these imported goods, the
price cannot be considered.
Similar does not mean identical but means corresponding to or resembling to in many respects. - Vishrut Industries
v. CCE 2001(130) ELT 225 (CEGAT).
Goods produced in Japan and goods produced in France cannot be termed as similar goods for purpose of these
rules - Nitisodya Diamond Tools v. CC - 1994 (74) ELT 49 (CEGAT)
Summary of valuation of Similar Goods
i. Contemporaneous imported goods,
ii. Not like in all respect,
iii. Like characteristics and component materials,
iv. Perform same functions,
v. Commercially inter changeable w.r.t. quality, reputation & trademark,
vi. Produced in same country,
vii. 1st preference same manufacturer,
viii. 2nd preference only if same manufacturer not available then different manufacturer.
Deductive Value Method
Rule 7 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 provide for the next i.e. fourth
alternative method, which is called deductive method.
If the importer requests and the Customs Officer approves, computed value method as given in rule 8 can be used
before the method of deductive value [proviso to Rule 6 of Customs Valuation (Determination of Value of Imported
This method should be applied if transaction value of identical goods or similar goods is not available; but these prod-
ucts are sold in India. The assumption made in this method is that identical or similar imported goods are sold in India
and its selling price in India is available. The sale should be in the same condition as they are imported. Assessable
Value is calculated by reducing post-importation costs and expenses from this selling price. This is called deductive
value because assessable value has to be arrived at by method of deduction (deduction means arrive at by infer-
ence i.e. by making suitable additions/subtractions from a known price to arrive at required Customs Value).
Price at or about the time of valuation - Price at or about the time at which goods in question are being valued should
be considered. However, rule 7(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 pro-
vide that if such price is not available, price at the date after importation but within 90 days can be considered. Thus,
if price prevalent prior to date of import of goods under-valuation is not available, even price subsequent to import of
the goods can be considered under this rule.
Such sale should be in sufficient quantity to establish unit price.
Price after processing - If price of identical or similar goods in India is not available, but price in India is available after
the imported goods are processed, such price can be considered after deducting processing cost. Such deduction
should be on objective and quantifiable data. This method is not normally applicable if the imported goods lose iden-
tity after processing, unless value of imported component can be determined accurately without difficulty even after
such conversion. This method also should not be applied if after processing, imported goods form a minor part of the
processed goods. In such cases, reducing costs of other materials and processing costs from selling price of processed
goods may not give reliable results [rule 7(3) of Customs Valuation (Determination of Value of Imported Goods) Rules,
2007].
The method may be used when goods are extracted on High Seas (e.g. minerals, crude oil etc.) and brought into
India for sale. It will be import and dutiable. In other cases, chances of using this method of valuation are indeed
very rare.
Subtractions from selling price in India - Following subtractions should be made from selling price of imported goods
in India, (a) Selling commission, general (selling) expenses and selling profits made in connection with sale of imported
goods in India. General expenses includes direct and indirect cost of marketing the goods in question in India, (b)
Customs Law
transport, insurance and associated costs within India (c) customs duties, sales tax and other taxes levied in India.
Seller in India of imported goods will incur all these expenses and hence, if is clear that CIF Value can be arrived at
i.e. deduced only after all these expenses are reduced from selling price of identical or similar goods sold in India. In
other words, all (estimated) expenses incurred after importation of goods should be subtracted from selling price in
India to arrive at CIF Price of goods.
Unit price sold in greatest numbers - Rule 7 of Customs Valuation (Determination of Value of Imported Goods) Rules,
2007 specify that while considering selling price of imported goods in India, unit price at which greatest aggregate
quantity of identical or similar goods are sold to unrelated persons in India should be the basis. Interpretative Note to
rule 7 of Customs Valuation Rules gives some illustrations - e.g. if 65 units are sold @ `100, 55 units are sold @ `95 and
80 units are sold @ `90; then greatest aggregate quantity is 80 which is sold @ `90 per unit, which will be the basis for
valuation. Another example given in the Interpretative Note is that if 500 units are sold at price of `95 and 400 units are
sold at `90, then greatest quantity is 500 and hence price of `95 should be considered.
Summary of valuation of Deductive value method
i. Transaction value of imported goods or identical or similar goods is not ascertainable,
ii. Goods one sold in India after importation,
iii. Sale in India in same condition,
iv. Goods sold after further processing shall be considered,
v. Sale to unrelated person,
vi. Sales are made at or about the time (within a maximum 90 days after import),
vii. Unit price at which greatest number of unit it sold at the first commercial level after importation,
Computed Value Method
If valuation is not possible by deductive method, the same can be done by computing the value under rule 8 of Cus-
toms Valuation (Determination of Value of Imported Goods) Rules, 2007 [earlier rule 7A upto 10-10-2007], which is the
fifth method. If the importer requests and the Customs Officer approves, this computed value method can be used
before the method of deductive value [proviso to Rule 6 of Customs Valuation (Determination of Value of Imported
In this method, value is the sum of (a) Cost of value of materials and fabrication or other processing employed in pro-
ducing the imported goods (b) an amount for profit and general expenses equal to that usually reflected in sale of
goods of the same class or kind, which are made in the country of exportation for export to India, (c) The cost or value
of all other expenses under rule 10(2) i.e. transport, insurance, loading, unloading and handling charges.
Method suitable when producer prepared to give costing - Generally, valuation should be done on basis of informa-
tion available in India. Thus, this method is normally possible when the importer in India and foreign exporter are closely
associated and the foreign exporter is willing to give necessary costing and to provide for subsequent verification,
which may be necessary.
In Rabindra Chandra Paul v. CC(2007) 209 ELT 326 (SC), it was observed that this rule may be involved in agro process-
ing, processing of seeds, refined oil from crude oil etc, where raw material has a crucial role to play in the method of
costing.
How to calculate cost and profit - Interpretative Note to rule 8 [earlier rule 7A upto 10-10-2007] of Customs Valuation
Rules explains how cost or value and profit should be calculated.
The Cost and Value should be on the basis of information supplied by or on behalf of the producer. The information
should be on basis of commercial accounts based on generally accepted accounting practices. Cost of commission
and brokerage and packing cost has to be added. Similarly, cost of material supplied free, tooling cost, development
and engineering charges, design work cost etc. have also to be added. No cost should be counted twice.
How to calculate profit - The amount of profit and general expenses should be taken as a whole. A low profit and
higher general expenses may occur in cases where for valid commercial reasons, the prices have been kept low e.g.
(a) producers have to sale at lower profit due to unforeseen drop in demand (b) Goods are sold to complement a
range of goods produced in India and low price is accepted to maintain competitiveness. However, if the data of
producer is not consistent with those generally reflected in sale of goods of same class sold in India, amount of profit
and general expenses may be based on other relevant information.
What are General Expenses - General Expenses means direct and indirect cost of producing and selling goods for
export, other than those already covered above. [In costing terminology, these are termed as overheads.]
Same class or kind of goods - If data of profit and general expenses of another producer is considered, the goods
should be of same class or kind. This should be within very narrow range of group of goods. It must be from same coun-
try and not from another country.
Summary of valuation of Computed Value Method
i. When the producer is willing to give necessary costing data and subsequent clarification,
ii. Sum total of the production / processing cost of imported goods and,
iii. Add the usual profit and general expenses and,
iv. Add costs and charges as per Rule 10(2).
Residual Method
The sixth and the last method is called residual method. It is also often termed as fallback method. This is similar to
best judgment method of the Central Excise, Income Tax and Sales Tax. This method is used in cases where Assess-
able Value cannot be determined by any of the preceding methods. While deciding Assessable Value under this
method, reasonable means consistent with general provisions of these rules should be the basis and valuation should
be on basis of data available in India. [Rule 9(1) of Customs Valuation (Determination of Value of Imported Goods)
Rules, 2007].
The value cannot exceed normal price - The value so determined cannot be more than the normal price i.e. price
at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation in
course of International Trade, when seller and buyer have no interest in the business of each other or one of them has
no interest in the other and price should be sole consideration for sale or offer for sale [proviso to rule 9(1). There was
no parallel proviso in earlier rule 8(1)].
Summary of valuation of Residual Value Method
i. Value to be determined,
ii. Using reasonable means and section 14 & data available,
iii. Value so determined shall not exceeds the price at which such or like goods are ordinary sold at the time and
place of importation in the course of international trade,
iv. Buyer or seller are not interest in business of other,
v. Selling price in India of goods produced in India cant take.
Inclusions/Exclusions in Customs Value
i. Valuation for customs is required to be done as per provisions of Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007.
ii. CIF value of goods plus 1% landing charges is the basis for deciding Assessable Value.
iii. Commission to local agents, packing cost, value of goods and tooling supplied by user, royalty relating to im-
ported goods are to be added.
iv. Interest on deferred payment, demurrage at port is not required to be added.
v. Value of computer software loaded on machine is to be added to value of machinery.
vi. Old machinery and old cars are valued on basis of depreciated value, though such method has no sanction of
law.
No other additions - No other addition shall be made to price paid or payable, except as provided for in rule 10 [rule
10(4) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (earlier rule 9(4)]. Interpretative
Note to rule 3 (earlier rule 4) also clarifies that activities undertaken by buyer other than those for which adjustments
are provided in rule 10 are not to be added, even though it may be regarded as benefit to the seller.

Customs Law
High Sea Sales
It is the responsibility of the importer to prove that the high seas sales transactions constituted transfer of goods. He has
to establish a link between the first International transfer of goods to the last transaction.
Custom Valuation Rules, 1988, determination of assessable value for goods sold on high seas- In case the actual high
sea sale contract price is more than the CIF value plus 2%, then the actual contract price paid by the last buyer
is being taken as the value for the purpose of assessment. In some of the custom Houses, however, audit has raised
objection stating that if, in a particular transaction, there were about three/ four high-sea-sales, then high-sea-sales
service charges @ 2% has to be added to the CIF value, for each such transaction.
Green Channel Procedure for Clearance of Imported Goods
Green Channel procedure has been introduced in major Custom Houses on experimental basis to expedite clear-
ance of imported goods. This procedure is applied only in respect of certain specified imports.
Some of such imports identified are:-
a) Goods imported by Government departments and public sector undertakings, which do not require physical
identification for the purpose of either ITC classification/ restrictions or Customs classification.
b) Imports under project Import Regulations.
c) Bulk imports sourced directly from reputed suppliers.
d) Consignments, which consist of single product of a well- known brand or specification, tested earlier and, cov-
ered by valid test report of an earlier import.
e) Imports by importers with proven identity and unblemished record of past conduct.
The Bills of Entry under this procedure are processed and assessed to duty under the second appraisement system
i.e., assessment and duty collection is done first and then consignment examined. In such cases the Assessing Officer
indicates on the reverse of the duplicate Bill of Entry to the Appraiser in charge of examination to Inspect the lot and
check marks and numbers on the packages. After inspection of the lot and marks and numbers of the packages with
reference to the declaration in the Bill of Entry and other connection documents, the Docks Appraiser gives passed
Out of Customs order. The Docks Appraiser, in the presence of Assistant Commissioner may examine the goods in
exceptional cases.
Practical Problems of Computing Customs Value
BCD, CVD & Spl. CVD
Example 9: D Ltd., an actual user imports certain goods from USA, at Chennai port, at cost of $1,00,000 FOB. The other
details are as follows:
(i) Packing charges: $22,000.
(ii) Sea freight to Indian port: $28,000.
(iii) Transit insurance: $10,000.
(iv) Design and development charges paid to a consultant in USA by importer: $9,000.
(v) Selling commission to be paid by the Indian importer:` 5,000.
(vi) Rate of exchange announced by RBI:` 40.60/$.
(vii) Rate of exchange notified by the Central Board of Excise and Customs:` 40.70/$.
Rate of basic custom duty: 15%.
Compute the assessable value of the imported goods and the basic customs duty payable.
Answer :
Statement showing Assessable value of the imported goods and customs duty payable
Particulars Value (in US$) Remarks Workings
FOB 1,00,000
Add: Packing charges 22,000 Included into the
Assessable value
Add: sea freight 28,000 -Do- No restriction on sea freight.
Add: insurance 10,000 -do-
Add: Design and development charges 9,000 -do-
Add: Selling Commission 122.8501 -do- ` 5,000/` 40.70
CIF value 1,69,122.8501
Add: 1% loading and unloading on CIF 1,691 .2285 $ 1,69,122.8501 x 1%
Assessable Value 1,70,814.0786
Particulars Value in ` Remarks Workings
Assessable Value 69,52,133 USD 1,70,814.0786 x ` 40.70
Add: Basic Customs Duty 10,42,820 ` 69,52,133 x 15%
Add: 2% Education cess 20,856 ` 10,42,820 x 2%
Add: 1% SAH Education cess 10,428 `10,42,820 x 1%
Landed value 80,26,237
Example 10: The following information is furnished by Mr. K on 8th June 2016, in respect of articles of jewellery imported
from USA in the month of April 2016.
FOB value $20,000
Exchange rate $1 = `44
Air freight $4,500
Insurance charges Not known
Loading Charges ` 1,000
Basic customs duty 10%
Excise duty chargeable on similar goods in India as per tariff rate 12.5%
Additional duty of customs u/s 3(5) of the Customs Tariff Act, 1975 As applicable.
Calculate the total customs duty payable by Mr. K.

Customs Law
Answer :
Statement showing customs duties payable by Mr. K.
Particulars USD ($) Remarks Workings
FOB 20,000
Add: Air freight 4,000 Air freight should not 20,000$x20%=4,000
exceed 20% on FOB
Add: Insurance 225 1.125% on FOB
CIF value 24,225
Add: 1% loading and unloading 242.25 24,225 x 1%
Assessable value 24,467.25
Value in `
Assessable value 10,76,559 USD24,467.25 x ` 44
Sub-total 11,84,215
Add: CVD 12.5% 1,48,027 ` 11,84,215 x 12.5%
Sub-total 13,32,242
Add: 2% education cess 5,114 2% calculated on
BCD plus CVD ` 2,55,683 x 2%
Add:1% SAH education cess 2,557 1% calculated on.
BCD plus CVD ` 2,97,130 x 1%
Sub-total 13,39,913
Add: Spl . CVD u/s 3(5) of the Customs
Tariff Act, 1975 53,597 Spl. CVD is equal to 4% ` 13,39,913 x 4%
Total Customs Duty ` 3,16,951
Example 11: A consignment is imported by air. CIF price is 2,000 Euro. Air freight is 550 Euro and insurance cost is Euro
50. Exchange rate announced by CBE&C as per customs notification is 1 Euro = ` 54.15. Basic customs duty payable
is 10%. Excise duty on similar goods produced in India is 12.5%. Find value for customs purpose and total customs duty
payable. How much Cenvat can be availed by importer, if he is manufacturer?
Answer :
Particulars Value in EURO () Remarks Workings
CIF price 2,000
Less: Air freight 550
Less: Insurance 50
FOB price 1,400
Add: Air freight 280 Restricted to 20% on FOB EURO 1,400 20%
Add: Insurance 50
CIF (corrected value) 1,730
Add: 1% unloading on CIF value 17.30 EURO 1,730 1%

Assessable Value 1747.30
Value in `
Assessable value 94,616 Relevant exchange
rate is ` 54.15 per EURO EURO 1,747.30 54.15
Add; Basic Customs Duty 9,462 Relevant rate 10% ` 94,616 10%
Sub-total 1,04,078
Add: CVD 13,010 Relevant rate 12.5% ` 1,04,078 x 12.5%
Sub-total 1,17,088
Add: 2% Education Cess 449 ` 22,472 2%
Add: 1%SAH education cess 225 ` 22,472 1%
Sub-total 1,17,762
Add: Spl . CVD 4,710 ` 1,17,762 4%
Total value of imported goods 1,22,472
Total Customs Duty 27,856
Importer, if he is manufacturer can avail the following duties as Cenvat credit under Cenvat Credit Rules, 2004 is as
follows:
CVD = ` 13,010 & Spl. CVD = ` 4,710
Example 12: M/s. Premium Industries Ltd., has imported a machine from Japan at an F.O.B. cost of 1,00,000 yen (Japa-
nese). The other expenses incurred were as follows: (i) Freight from Japan to Indian port 10,000 yen; (ii) insurance paid
to insurer in India ` 5,000; (iii) Designing charges paid to consultancy ifrm in Japan 15,000 yen; (iv) M/s Premium Indus-
tries Ltd. spent ` 50,000 in India for development work connected with the machine; (v) Transportation cost from Indian
port to factory ` 15,000; (vi) Central Government has announced exchange rate prevailing in the market was 1 yen
= ` 0.40 by notification under section 14(3). However the exchange rate prevailing in the market was 1 yen = ` 0.4052
(vii) M/s Premium Industries Ltd. made payment to the bank based on exchange rate of 1 yen = ` 0.4150,
(viii) The commission payable to the agent in India was @5% of F.O.B. price in Indian rupees. The rate is BCD @10%.
Similar goods are subject to 12.5% excise in India. Education cess and special CVD is as applicable. Find the customs
duty and other duties payable. How much CENVAT can be availed by importer, if he is manufacturer?
Answer :
Particulars Japanese Yen

FOB 1,00,000
Add: Freight 10,000
Add: Designing charges 15,000
Sub-total 1,25,000
Value in `
Sub- total (1,25,000 YEN x `0.40) 50,000
Add: Insurance 5,000
Add: Commission (1,00,000 YEN x 5% x `0.40) 2,000
CIF Value 57,000
Add: 1% unloading on CIF 570


Customs Law
Calculate of Custom Duty payable:

@10%BCD is ` 5,757, CVD @12.5% is ` 7,916, Education Cess is ` 273, SAH Education Cess is ` 137 and Special CVD @4%
is ` 2,866. Total Customs Duty payable is ` 16,949.
Cenvat credit of ` 7,916 (CVD) can be availed up to 50% in the first year and balance in the subsequent years. How-
ever, with regard to Special CVD is ` 2,866 can be availed fully in the first year itself.
Example 13: Compute the Customs duty from the following data (i) Machinery imported from USA by Air (FOB) 8,000
US $, (ii) Accessories were compulsorily supplied with Machine (Electric Motor & others) (FOB) 2,000 US $, (iii) Air freight
3,000 US$ (iv) Insurance 100 US $, (v) Local agents commission to be paid in Indian Rupees is ` 4,500 (say equivalent to
US $ Dollars 100), (vi) The exchange rate is 1 US Dollars = Indian Rupees is ` 45, (vii) Customs duty on Machinery 10%
ad valorem, (viii) Customs Duty on Accessorynormal rate 20% ad valorem, (ix) CVD 24% (Effective Rate is 16% by a
notification), (x) Education Cess and special CVD is as applicable. How much Cenvat can be availed by importer, if
he is manufacturer?
Answer :
US $
FOB value of Machinery 8,000
FOB value of Accessories compulsorily supplied with machine 2,000
Total FOB value 10,000
Add: Air freight 20% on FOB is US$ 2,000 or US $ 3,000 2,000
(WHICHEVER IS LOWER)
Add: Insurance 100
Add: Commission 100
CIF Value 12,200
Add: 1% unloading charges on CIF value 122
== === ==
Assessable value (i.e. US $ 12,322 x` 45) Value in
` 5,54,490
Calculation Custom duties: BCD ` 55,449, CVD ` 97,590, EC ` 3,061, SHEC ` 1,530 and SPL. CVD ` 28,485 CENVAT credit
available to the importer being a manufacturer is ` 97,590 (CVD) and Special CVD is ` 28,485.
Cenvat Credit Amount in `
CVD (` 97,590 50%) 48,795
SPL. CVD (100% allowed as Cenvat Credit) 28,485
TOTAL 77,280
Note: CENVAT credit on CVD can be availed up to 50% in the 1st year and balance in the subsequent years.
Example 14: A import by air from USA a gear cutting machine complete with accessories and spares. Its HS classifica-
tion is 8461 40 10 and value US $ F.O.B. 20,000 other relevant date/ information: (1) At the request of the importer, US $
1,000 have been incurred for improving the design, etc. of machine, but is not reflected in the invoice, but will be paid
by the party, (2) Freight US $ 6,000, (3) Goods are insured but premium is not shown/ available in invoice, (4) Commis-
sion to be paid to local agent in India ` 4,500, (5) Freight and insurance from airport to factory is ` 4,500, (6) Exchange
rate is US $ 1 = ` 45, (7) Duties of customs: basic 10%, CVD 12.5% Education Cess on duty as applicable. Compute
(i) Assessable value (ii) customs duty. How much CENVAT can be availed by importer, if he is manufacturer?
Answer:
Assessable Value ` 11,51,021, BCD is ` 1,15,102, CVD @12.5% is ` 1,58,265, Education Cess is ` 5,467 and S&H Education
Cess is ` 2,734. Total Customs duty is ` 2,81,568.

Note: CENVAT credit is ` 1,51,935 (CVD). Up to 50% of CVD can be avail in the 1st year and the balance in the subse-
quent years. It is assumed that Spl. CVD is exempted.
Example 15: Compute the duty payable under the Customs Act, 1962 for an imported equipment based on the fol-
lowing information:
Assessable value of the imported equipment US $10,100.
Date of Bill of Entry 25.4.2015 basic customs duty on this date 20% and exchange rate notiifed by the Central Board
of Excise and Customs US $ 1 = ` 65.
Date of Entry inwards 21.4.2015 Basic customs duty on this date 12% and exchange rate notiifed by the Central Board
of Excise and Customs US $ 1 =` 50.
Additional duty payable under section 3(1) and (2) of the Customs Tariff Act, 1975: 12.5%. Additional duty under sec-
tion 3(5) of the Customs Tariff Act, 1975: 4%.
Educational cess @2% in terms of the Finance Act (No. 2), 2004 and secondary and higher educational Cess @ 1% in
terms of the Finance Act, 2007.
Make suitable assumptions where required and show the relevant workings and round off your answer to the nearest
Rupee.
Answer :
Value in `
A.V 6,56,500 (10,100 x 65)
ADD: BCD 20% on `6,56,500 1,31,300
Balance 7,87,800
ADD: CVD 12.5% on `7,87,800 98,475
Balance 8,86,275
ADD: 2% EDU. CESS 4,596 (2,29,775 x 2%)
ADD: 1% SAH EDU. CESS 2,298 (2,29,775 x 1%)
Balance 8,93,169
ADD: SPL. CVD (4% ON ` 8,93,169) 35,727
Value of Imported Goods 9,28,896
Customs Duty 2,72,396
BCD, CVD & Spl. CVD and CENVAT CREDIT:
Example 16: CIF value of imported goods is ` 10,00,000. Basic Customs duty payable is 10%. If the goods were pro-
duced in India, excise duty payable would have been 12.5%. Education Cess is 2% and SAH Education Cess is 1 %.
Special CVD is payable at appropriate rates. Find the Customs duty payable. What are the duty refunds /benefits
available if the importer is (a) manufacturer or, (b) service provider or, (c) trader?
Answer :
Statement showing assessable value and customs duties
Particulars Value in ` Workings
CIF value 10,00,000
Add: 1% unloading charges 10,000 ` 10,00,000 x 1%
Sub-total 11,11,000
Customs Law
Add: CVD @ 12.5% 1,38,875 ` 11,11,000 x 12.5%

Sub-total 12,49,875
Add: 2% Education cess 4,798 ` 2,39,875 x 2%
Add: 1% SAH Education cess 2,399 ` 2,39,875 x 1%
Sub-total 12,57,072
Add: Spl. CVD 50,283 ` 12,57,072 x 4%
The following import duties are allowed as CENVAT credit:
If the importer BCD CVD ` SPL.CVD ` Edu. CESS
Manufacturer CENVAT credit 1,38,875 50,283 CENVAT credit not
not allowed allowed
Service provider CENVAT credit 1,38,875 CENVAT credit not allowed CENVAT credit not
not allowed allowed
Dealer CENVAT credit CENVAT credit CENVAT credit not allowed. CENVAT credit not
not allowed not allowed However refund is allowed allowed
if VAT paid. (` 50,283)
Revised CIF Value:

Example 17: Robotics Private Limited imported some goods by air from ABC Inc. of US. Compute the value of the
goods for the purpose of levying the duty:-
Particulars Dollars($)
CIF value 5,000
Freight paid 1,500
Insurance cost 500
The banker realized the payment from importer at the exchange rate of ` 45 per US $.
Central Board of Excise and Customs notified the exchange rate as ` 44.50 per US $.
Basic Customs Duty @10% advalorem. There is no CVD and Special CVD. Find the total import duty.
Answer:
Particulars US $
CIF value 5,000
Less: Air Freight 1,500
Less: Insurance 500
FOB value 3,000
Add: Insurance 500
Add: Air Freight 20% on FOB 600
CIF value 4,100
Add: 1% unloading charges on CIF value 41
Assessable value 4,141
Assessable value in ` 1,84,275 (i.e.` 44.50 x US $ 4,141)
Total customs duty =` 18,980 (i.e.` 1,84,275 x 10.30%)

Import of MRP Products and Cenvat Credit
Example 18. Assessable value of certain goods imported from USA in ` 10,00,000. The packet contains 10,000 pieces
with maximum retail price ` 200 each. The goods are assessable under Section 4A of the Central Excise Act, 1944, af-
ter allowing an abatement of 40%. The excise duty rate is 8% advalorem. Calculate the amount of Additional duty of
Customs under Section 3(1) of the Customs Tariff Act, 1975; assuming basic customs duty@10% advalorem.
Answer :
MRP of imported goods = ` 20,00,000 (i.e. ` 200 x 10,000 pieces)
Less: abatement @ 40% = ` 8,00,000 (i.e. ` 20 lakhs x 40%)
Assessable for CVD purpose = ` 12,00,000
Additional Duty of Customs under Section 3(1) of the Customs Tariff Act, 1975 is ` 96,000. (i.e. ` 12 lakhs x 8%)
Valuation of Imported Goods (Rule 4)
Example 19: A consignment of 8,000 units of product X was imported from USA by a charitable organization in India
for free distribution to below poverty line citizens in a backward area. This being a special transaction, a nominal price
of US$ 50 per product was charged for the consignment to cover the freight and insurance charges. The Customs
House found out that at or about the time of import of this gift consignment, there were following imports of product
X from USA:
S. No. Quantity imported in metric tonnes Unit price in US $ (CIF)
1. 200 260
2. 1,000 220
3. 5,000 200
4. 9,000 175
5. 4,000 180
6. 7,800 160
The rate of exchange on the relevant date was 1 U S $ = ` 50.00 and the rate of basic customs duty was 10% ad va-
lorem. There is no countervailing duty or special additional duty. Calculate the amount of duty leviable on the con-
signment under the Customs Act, 1962 with appropriate assumptions and explanations where required.
Answer :
US$
CIF value = 160.00

Add: 1% unloading charges on CIF value = 1.60
Assessable value per unit = 161.60
Value in `
Assessable value for total import = 6,46,40,000 (i.e. 161.60 x 8,000 units x `50)
Add: Customs Duty = 66,57,920 (i.e. 6,46,40,000 x 10.30%)
Total value of imports = 7,12,97,920
Anti-Dumping Duty
Example 20: A commodity is imported into India from a country covered by a notification issued by the Central Gov-
ernment under section 9A of the Customs Tariff Act, 1975. Following particulars are made available:
CIF value of the consignment: US$25,000
Quantity imported: 500 kgs.
Exchange rate applicable:` 50= US$1
Customs Law
Basic customs duty: 20%

Education and secondary and higher Education Cess as applicable as per the Finance Act, 2008.
As per the notification, the anti-dumping duty will be equal to the difference between the costs of commodity calcu-
lated @US$70 per kg. and the landed value of the commodity as imported.
Appraise the liability on account of normal duties, Cess and the anti-dumping duty.
Assume that only Basic Customs Duty (BCD) and Education and Secondary and Higher Education Cess are pay-
able.
Answer : Statement showing land value of imported goods and anti-dumping duty:
Particulars US $
CIF value 25,000
Add: 1% unloading charges on CIF 250
Assessable value 25,250
Value in `
Assessable value (i.e. 25,250 x ` 50) 12,62,500
Add: Customs duty 20.60% on Assessable value 2,60,075
Landed value (or value of imported goods) 15,22,575
Market value of imported goods (500 kgs x ` 50 x US$70) 17,50,000
Anti-dumping duty (` 17,50,000 ` 15,22,575) 2,27,425
Total customs duty payable ` 4,87,500
4.5 EXPORT GOODS - VALUATION FOR ASSESSMENT
Customs value of export goods is to be determined under section 14 of Customs Act, read with Customs Valuation
(Determination of Value of Export Goods), Rules, 2007. Transaction value at the time and place of exportation, when
price is sole consideration and buyer and sellers are unrelated is the basic criteria If there is no sale or buyer or seller
are related or price is not the sole consideration, value of the goods will be determined as per Valuation Rules [Clause
(ii) of second proviso to section 14(1)].
Valuation when buyer and seller are related
Definition of related person as per rule 2(2) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007
is same as per definition of rule 2(2) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007.
As per rule 3(2) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007, the transaction value, the
transaction value will be accepted as value even if buyer and seller are related, if the relationship has not influ-
enced price.
Valuation if value cannot be determined on basis of transaction value
If valuation is not possible on basis of transaction value, valuation will be done by proceeding sequentially through
rules 4 to 6 [Rule 3(3) of Customs Valuation (Determination of Value of Export Goods) Rules, 2007].
The methods are - Export value by comparison on the basis of transaction value of goods of like kind and quality
exported at or about the same time to other buyers in same destination country [Rule 4}, Computed value on basis
of cost of production plus profit [Rule 5] and Residual method using reasonable means consistent with principles and
general provisions of rules [Rule 6].
Rejection of Value as Declared by Exporter
As per rule 7 of Customs Valuation (Determination of Value of Export Goods) Rules, 2007, the exporter has to file dec-
laration about full value of goods. If the assessing officer has doubts about the truth and accuracy of value as
declared, he can ask exporter to submit further information, details and documents. If the doubt persists, the assessing

officer can reject the value declared by importer. [rule 8(1) of Customs Valuation (Determination of Value of Export
Goods) Rules, 2007]. If the exporter requests, the assessing officer has to give reasons for doubting the value declared
by exporter [rule 8(2)].
Rule 8 is only Mechanism to Reject the Declared Value
As per explanation (1)(i) to rule 8, the Rule 8 does not provide any method for determination of value. It only provides
mechanism to reject declared value, where there is reasonable doubt.
Declared value shall be accepted if assessing officer is satisfied about truth and accuracy of the declared value [Ex-
planation (1)(ii) to rule 8 of Customs Valuation (Determination of Value of Export Goods) Rules, 2007].
4.6 SELF ASSESSMENT ON BASIS OF RISK MANAGEMENT SYSTEM(RMS)
One major step is being taken to move in the direction of implementing international best practices in customs clear-
ance. A Risk Management System for customs clearance of import and export cargo has been introduced. The
details of scheme are contained in MF (DR) circular No. 43/2005-Cus dated 24- 11-2005 see also CC, Bangalore-I PN
88/2006 dated 31-7-2006 (201 ELT T5). Initially, the scheme will be introduced in Air Cargo Complex, Sahar Mumbai
and then it will be introduced in other customs houses in phases. Under Risk Management System (RMS), only high risk
cargo is selected for examination. The system provides for special customs clearance for Accredited Clients having
good track record and meet specified criteria.
The scheme proposes to do away with existing system of routine assessments and concurrent audit. Goods will be
normally cleared on basis of self assessment of importer. Bill of Entry submitted electronically will be transmitted to
RMS. The RMS will process the data and produce an electronic output. This output will determine whether the Bill of
Entry will be taken up for appraisement/examination or be cleared after payment of duty without any assessment and
examination. Any change is system will require prior approval of Principal Commissioner or Commissioner of Customs
and after recording reasons. Focus will be on quality assessment, examination and post clearance audit of Bills of Entry
selected by the Risk Concurrent audit will be replaced by Post Clearance Audit on Bill of Entry selected by the Risk
Management System. Subsequently, demand can be raised even if goods have been cleared from customs.
No change in Custom Act and Rules
The scheme is being introduced without making any change in Customs Act or Rules, the basic procedures of sanc-
tions and approvals remain unaltered and hence is not similar to scheme of self- assessment under Central Excise,
where clearances are affected by assessee without supervision or presence of excise inspectors. Scope of the scheme
is also very limited.
Scheme open only to Accredited Clients
The scheme is limited to only Accredited Clients as defined in MF (DR) circular No. 42/2005-Cus dated 24-11-2005.
They should have imported goods valued at ` 10 crores in previous financial year or paid duty more than ` 1 crore.
In case of importers who are central excise, they should have paid at least ` 1 crore of duty through PLA in previous
financial year. They should have filed at least 25 Bills of Entry in the previous financial year.
4.7 PROCEDURES FOR IMPORT
Import Procedure has been explained as follows

Goods should arrive at customs port
Person in charge of conveyance is required to

submit import general Manifest/import report
Goods can be unloaded only after grant of entry inward
Importer has to submit Bill of Entry

Customs Law
Goods are assessed to duty
Goods can be cleared from port after

payment of Duty/cleared for warehousing
Out of customs charge order is issued

by customs officer after payment of duty.
Goods should arrive at Customs Port/Airport only
i. Person in charge of conveyance is required to submit Import Manifest or Export-Manifest,
ii. Goods can be unloaded only after grant of Entry Inwards,
iii. Importer has to submit Bill of Entry giving details of goods being imported, along with required documents. Elec-
tronic submission of documents is to be done in many ports,
iv. Goods are assessed to duty, examined and customs duty is paid. Bond is executed if required,
v. Goods can be cleared from port after Out of Customs Charge order is issued by customs officer,
vi. Self Assessment on basis of Risk Management System (RMS) has been introduced in some ports in respect of
specified goods and importers,
vii. Demurrage is payable if goods are not cleared within three days from port. Goods can be disposed of if not
cleared within 30 days.
Overview of Procedures for Import
The broad procedures to be followed for assessment and clearance of imported goods are as follows
i. Importer to submit Bill of Entry giving details of goods to be cleared from customs,
ii. Bill of Entry can be for home consumption (i.e. clearance after payment of duty) (white colour) or for warehous-
ing (keeping in warehouse without payment of duty and later clearing on payment of duty when required)
(yellow colour),
iii. Importer to submit other documents like Invoices, contracts, product literature, packing lists, import license etc.
So that customs officer can assess the imported goods under clearance,
iv. Noting of Bill of Entry by customs officer,
v. Examination of goods and assessment by customs officer (if first appraisement system) or assessment of goods
on basis of documents (if second appraisement system),
vi. Pre-audit by customs department,
vii. Customs Officer to approve assessment (valuation of goods) on the Bill of Entry and return to importer,
viii. Importer to execute bond if clearance at concessional rate of duty subject to some conditions or clearance is
under provisional assessment,
ix. Importer to pay duty, if clearance is for home consumption or execute bond, if clearance is for warehousing,
x. Inspection of goods (if assessment was under second appraisement system),
xi. Out of customs charge order by customs officer,
xii. Pay dues of port trust, pay demurrage (if applicable), pay other dues,
xiii. Transport the goods from customs.
These procedures are for import by ship/air/road. There is separate procedure for goods imported as a baggage or
by post.
Submission of Bill of Entry
Bill of Entry is a very vital and important document which every importer has to submit to customs officer in respect

of imported goods other than goods intended for transit or transhipment. Bill of Entry should be in prescribed form. It
can be either for home consumption or for warehousing [section 46(1)]. It should include all goods mentioned in Bill
of Lading or other receipt given by carrier to consignor [section 46(2)]. Importer has to declare that contents of Bill of
Entry are true [section 46(4)]
i. Bill of Entry is for home consumption. Imported goods are cleared on payment of customs duty.
ii. Bill of Entry is for warehousing. It is also termed as into bond Bill of Entry as bond is executed. Duty is not paid
and imported goods are transferred to warehouse where these are stored.
iii. Bill of Entry is for clearance from warehouse on payment of customs duty. It is for ex-bond clearance.
When should the Bill of Entry be filed ?
Bill of entry can normally be filed to clear the goods after the Import General Manifest (IGM) is presented to the Cus-
tom officers by the steamer Agents/Airlines as the case may be. Provided that a bill of entry may be presented even
before the delivery of such manifest or report, if the vessel or the aircraft or the vehicle by which the goods have been
shipped an importation into India is expected to arrive within thirty days from the date of such presentation. In addition
of the goods entered in the vessels manifest Bills of Entry are also required for the clearance of
(a) Ships stores if in considerable quantities.
(b) Ships Ballast such as stone, sand, Shingla etc.
(c) Salvaged goods
(d) Sweepings of import cargo.
Any imported goods should be cleared within 30 days from the date of unloading of goods at a customs station failing
which the goods maybe disposed of by way of auction.
Time limit to pay Duty once a Bill of Entry has been assessed:
Duty has to be paid within two days from the date on which the Bill of Entry is returned after assessment to the im-
porter / Agent for payment of duty. If duty is not paid within the stipulated time, simple interest @ 15% p.a presently on
amount of duty is payable (Section 47 of the Customs Act, 1962).
Documents to be submitted by Importer to Clear the Imported Goods for Home Consumption
Documents required by customs authorities are required to be submitted to enable them to (a) check the goods (b)
decide value and classification of goods and (c) to ensure that the import is legally permitted. The documents that
are essentially required are :
i. Copy of order/ contract.
ii. Suppliers invoice in four copies.
iii. Copy of the Letter of Credit.
iv. Import licence.
v. Bill of Lading (original and non-negotiable).
vi. Packing List (2 copies).
vii. Weight specification.
viii. Freight insurance memo.
ix. Manufacturers test certificate.
x. Exchange slip for purpose of exchange rate.
xi. Certificate of origin.
xii. Delivery order issued by Shipping company, its agent or carriers.
xiii. If spare parts are being imported, invoice should indicate unit price and extended total of each item.
xiv. If invoice is for FOB, freight charges and insurance premium amount certificate should be attached.
xv. OGL declaration.
Customs Law
xvi. No commission letter to be given by importer i.e., Agents commission, if any, has not been paid in India.
xvii. Customs declaration (4 copies)
xviii. Catalogue/write-up/ drawing for machinery items.
xix. Importer-Exporter Code Number.
xx. If second-hand machinery is being imported then Chartered Engineers certificate is necessary as per the Im-
port Export Policy.
xxi. If steel is being imported then analysis certificate from manufacturers.
xxii. In the case of chemicals and allied products like synthetic resin wax, literature showing chemical composition.
xxiii. Textile Principal Commissioner or commissioners endorsement in respect of textile items.
Electronic Submission under EDI system
Customs work at many ports has been computerized. In that case, the Bill of Entry has to be filed electronically, i.e.
through Customs EDI system through computerization of work. Procedure for the same has been prescribed vides Bill
of Entry (Electronic Declaration) Regulations, 1995.
i. The broad procedures to be followed for exports are as follows
ii. Submit Shipping Bill for export to customs authorities,
iii. Submit invoice, packing lists, contracts, export license (if applicable) and other related documents,
iv. Submit necessary declarations for export. Submit * GR/SDF/SOFTEX form as required under FEMA * Excise ARE-1-
form
v. Noting of Shipping Bill by customs officer
vi. Assessment i.e. valuation and classification of goods. Checking of Advance License, if applicable
vii. Custom check whether export is restricted/prohibited
viii. Examination of goods by customs officer
ix. Pay export duty, if applicable
x. Stuffing of container, if not already done
xi. Let export Order by customs officer
xii. Obtain ARE-1 form duly signed by customs officer. Obtain Bill of Lading from shipping company. Submit proof of
export to excise authorities.
Complete formalities relating to claim of duty drawback.
Prior Submission of Bill of Entry
After the goods are unloaded, these have to be cleared within stipulated time - usually three working days. If these
are not so removed, demurrage is charged by port trust/airport authorities, which is very high. Hence, importer wants
to complete as many formalities as possible before ship arrives. Proviso to section 46(3) of Customs Act allows importer
to present bill of entry upto 30 days before expected date of arrival of vessel. In such case, duty will be payable at
the rate applicable on the date on which Entry Inward is granted to vessel and not the date of presentation of Bill
of Entry, but rate of exchange will be as prevalent on date of submission of bill of entry. - confirmed in CC, New Delhi
circular No 64/96 dated 10.12.1996 and CBE&C circular No. 22/97-Cus dated 4.7.1997.
Department has clarified that if vessel does not arrive within 30 days, filing of fresh bill of entry will be necessary and in
such cases, date of filing fresh Bill of Entry will be considered for calculating rate of exchange.
Importer can Abandon the Imported Goods
He can abandon the imported goods at any time before the proper officer has given the order for clearance of the
goods for home consumption or for warehousing. However if any offence has been committed in respect of the said
goods, then the option to abandon the goods is not available.
Customs Recognized Brokers for the purposes of Customs Clearance who can be approved for clearance of Import

Every custom house has authorized Customs Brokers licensed by that particular custom house. Each Customs Brokers
has a license / registration no. and identity cards which can be verified from the nearest Custom House / Custom Sta-
tion.
An importer / exporter can file documents on his own account without the help of any Customs Brokers. But before this
he must get an authority / permission from the proper officer for self clearance. It is not mandatory to take the help
of the Customs Brokers in clearing consignment.
4.8 PROCEDURES FOR EXPORT
Export Procedure has been explained as follows

Submit shipping Bill for export to customs
Submit invoice, packing lists, contracts etc.
Submit Guarantee Receipt (GR), Statutory Declarations Form (SDF)
Noting Shipping bill by customs office
Valuation and classification of goods
Customs check whether export is restricted or prohibited
Examination of goods by customs officer
Stuffing of container if not already done
Let export order by customs officer
Claim the duty drawback or export incentives.
The broad procedures to be followed for exports are as follows
i. Submit Shipping Bill for export to customs authorities,
ii. Submit invoice, packing lists, contracts, exports authorization (if applicable) and other related documents,
iii. Submit necessary declarations for export. Submit* GG/SDF/SOFTEX form as required under FEMA* Excise ARE-1-
form,
iv. The Export Value Declaration should be in form given in Annexure A to MF(DR) circular No. 37/2007- Cus dated
9-10-2007,
Customs Law
v. Noting of Shipping Bill by customs officer,

vi. Assessment i.e. valuation and classification of goods. Checking of Advance Authorization, if applicable,
vii. Custom check whether export is restricted/prohibited,
viii. Examination of goods by customs officer,
ix. Pay export duty, if applicable,
x. Stuffing of container, if not already done,
xi. Let export Order by customs officer,
xii. Obtain ARE-1 form duly signed by customs officer. Obtain Bill of Landing from shipping company. Submit proof
of export to excise authorities,
xiii. Complete formalities relating to claim of duty drawback.
Every Exporter should take following initial steps
Obtain BIN (Business Identification Number) from DGFT. It is a PAN based number
Open current account with designated bank for credit of duty drawback claims
Register licenses/advance license/DEPB etc. at the customs station, if exports are under Export Promotion Schemes.
RCMC Certificate from Export Promotion Council
Various Export Promotion Councils have been set up to promote and develop exports (e.g. Engineering Export Pro-
motion Council, Apparel Export Promotion Council, etc.) Exporter has to become member of the concerned Export
Promotion Council and obtain RCMC - Registration cum membership Certificate. Exporter should apply for registration
with EPC that relates to his main line of business. However, exporter can take membership of any other EPC in addition
DGFT circular No. 2/2004-09 dated 6-10-2004.
Third Party Exports
Third party exports means exports made by an Exporter or Manufacturer on behalf of another exporter/s. The Shipping
Bill shall indicate the names of both the exporter and/or manufacturer. The BRC, GR declaration, export order and the
Invoice shall be in name of the third party exporter.
SEZ unit can export goods or software through a merchant exporter/status holder.
Merchant Exporter - Merchant Exporter means a person engaged in trading activity and exporting or intending to
export goods.
4.9 TRANSIT AND TRANSHIPMENT OF GOODS
of Goods (Section 53 of the Customs Act, 1962)

Any goods imported in any conveyance will be allowed to remain on the conveyance and to be transited without
payment of duty, to any place out of India or any customs station.
Example 21: A vessel Bhishma, sailing from U.S.A. to Australia via India. Bhishma carries various types of goods namely
A, B, C & D . A & B are destined to Mumbai Port and balance remains in the same vessel. Subsequently vessel
chartered to Australia.
Find the imported goods and transit goods?
Answer:
Imported Goods are A & B
Transit goods are C & D
Transhipment of Goods (Section 54 of the Customs Act, 1962)
Transhipment means transfer from one conveyance to another with or without payment of duty. It means to say that
goods originally imported from outside India into India, then transhipped to another vessel to a place within India or

outside India.
Transhipment of goods without payment of duty under Section 54(3)
Transhipment of goods without payment of import duty is permissible only if the following conditions satisfy:
i. Transhipment of goods with foreign destination.
ii. The goods find place as Transhipment Goods in the Import of General Manifest (IGM) or Import Report in case
of goods imported in a vehicle.
iii. Bill of Transhipment or Declaration of Transhipment filed.
iv. Goods must be transhipped to another vessel to place outside India.
Example 22: A vessel Bhishma, sailing from U.S.A to Australia via., India carries various types of products namely A, B,
C & D. A & Bare destined to Mumbai Port. On account of submission of bill of transhipment product A transshipped
to Chennai port as ultimate destination in India and product B transhipped to Srilanka.
Find the imported goods, Transhipment goods and transit goods?
Answer :
Product A is imported goods because its ultimate destination is in India.
Products A & B are called as Transhipment goods, since these goods are transshipped to another vessel, Product A
transhipped to Chennai attracts import duty whereas product B is destined to Srilanka without payment of duty.
Products C & D are transit goods since these goods remains in the same vessel Bhishma chartered to
Australia.
4.10 EXEMPTIONS AND REMISSION
Basic conditions of Exemption and Remission

i. Exemption can be granted by Government by issuing a notification.
ii. Capital goods and spares can be imported under project imports at concessional rate of customs duty.
iii. Remission can be obtained on goods lost/pilfered in port.
iv. Title of imported goods can be relinquished and then no customs duty will be payable.
v. Goods exported can be re-imported. Concessional customs duty is payable in most of such re- imports.
Pilferage: Section 13 of the Customs Act, 1962
i. Pilferage means loss arising out of theft.
ii. No duty is payable at all under section 13, if the goods are pilfered.
iii. Importer does not have to prove pilferage, however, the pilferage is to find before the goods cleared from the
customs.
iv. If the duty is paid before finding the pilferage, refund can be claimed if goods are found to be pilfered during
examination but before order for clearance are made.
v. Section 13 does not apply for the warehoused goods.
Abatement of duty on damaged or deteriorated goods [Section 22]: Where it is shown to the satisfaction of the Assis-
tant 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 will-
ful act, negligence or default of the importer, his employee or agent; or

Customs Law
(c) that any warehoused goods had been damaged at any time before clearance for home consumption on ac-
count of any accident not due to any willful act, negligence or default of the owner, his employee or agent,
then, such goods shall be chargeable to duty determined in the following manner
Duty leviable on such Duty chargeable on the goods before the Value of the damaged or
damaged or deferio- demage or deterionation deteriorated goods
rated goods =
X
Value of the goods before damage or
deterionation
Abatement of duty on Duty leviable on the Duty leviable on the

damaged or deterio- goods before damage goods after damage
rated goods
Valuation of damaged/deteriorated goods: The value of damaged or deteriorated goods may be ascertained by
either of the following methods (at the option of the owner),-
(1) The value of such goods may be ascertained by the proper officer; or
(2) Such goods may be sold by proper officer by public auction or by tender or with consent of owner in any other
manner and the gross sale proceeds shall be deemed to be the value of such goods.
Loss or destruction of goods: Section 23 of the Customs Act, 1962
i. Loss or destruction (including leakage if any) must be due to fire natural calamity (like earthquake or bad
weather).
ii. Section 23 applies only when there is no pilferage under section 13.
iii. Burden of proof is on importer to prove loss or destruction under section 23.
iv. Initially is duty levied under section 23 but the same is remitted by Assistant Commissioner of Customs. Once the
duty is paid the same can be claimed for refund only if the remission is granted by Customs Department.
v. Loss or destruction should be found before clearance of goods from the customs.
vi. Section 23 is applicable even for the goods warehoused.
Pilfered goods u/s 13 vs. Lost or destroyed goods u/s 23
Pilfered goods u/s 13 Lost or destroyed goods u/s 23
Pilferage refers to that in small quantities Lost or destroyed postulates loss or destroyed by
whatever reason whether theft, fire, accident etc.
In this case, the importer is not liable to pay duty The duty payable on lost goods is remitted by
leviable on such goods. Assistant/Deputy Commissioner.
In this case, if the pilfered goods are retrieved duty In this case, restoration is impossible if the goods one
becomes payable. destroyed.
The pilferage must have occurred after the unloading In this case, the goods must have been lost or destroyed
of the goods but before the proper officer has made at any time before their clearance for home
an order for clearance for home consumption under consumption. Thus, it also covers the cases where the
section 47 or deposit on a warehouse under section 60. goods are lost after the duty has been paid and order
for clearance has been given but before the goods
are actually cleared.
These provisions do not apply to warehoused goods. Section 23(i) is applicable to warehoused goods also.
The importer does not have to prove pilferage, as it is In this case, the burden is cast on the importer to satisfy
obvious at the time of examination by the proper the Assistant / Deputy Commissioner that the
officer. imported goods have been lost or destroyed at any
time before the physical clearance of the goods for
home consumption.

Goods derelict, wreck, etc. [Section 21] :
All goods derelict, jetsam, flotsam and wreck brought or coining into India, shall be dealt with as if they were imported
into India, unless it is shown to the satisfaction of the proper officer that they are entitled to be admitted duty-free
under this Act.
Power to make rules for 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. The Central Government has framed Denaturing of Spirit Rules, 1972 in this regard.
Duty Liability in Certain Special Circumstances
Goods are imported into India after exportation there from.
Imported goods have been originally exported to the overseas supplier for repairs.
Exported goods may come back for repairs and re-export.
Re-importation of goods [Section 20] : In case if any goods have been imported into India after exportation therefrom,
such goods shall be liable to duty and subject to such restrictions and conditions, if any, to which the goods of like kind
and value are liable or subject on the importation thereof.
Re-imports are entitled for following concessions as have been notified by the Government:
Condition -1:
Goods exported under claim of drawback or under bond without payment of duty or under claim for rebate and re-
imported within 3 years (or extended period, if any) without being re-manufactured/ re-processed.
Duty Liability: The amount of benefit availed on account of duty drawback and excise duty concessions/ rebate when
the goods were exported. [Notification No. 94/96-Cus., dated 16-12-1996).
Condition -2:
Goods exported for repairs abroad and reimported by the same person within 3 years (or extended period, if any) with-
out being re-manufactured/ re-processed, and also without change in ownership between export and re-import.
Duty leviable on a value = Fair cost of repairs carried out including cost of materials used in repairs (whether such
costs are actually incurred or not) + Insurance and freight charges, both ways. [Notification No. 94/96-Cus., dated
16-12-1996).
Condition -3:
Goods manufactured in India and re-imported into India -
(a) for repairs or re-conditioning within 3 years from the date of exportation (in case of Nepal, such re-importation
takes place within 10 years from date of exportation); or
(b) for reprocessing; or refining; or re-making; or other similar process within 1 year from the date of exportation.
Duty Liability: NIL, if -
(a) such goods are re-exported within 6 months from the date of their re-importation or such extended period not
exceeding a further period of six months as the Principal Commissioner or Commissioner of Customs may allow;
and
(b) the Assistant Commissioner of Customs is satisfied as regards identify of the goods; [Notification No. 158/95-Cus.,
dated 1411-1995].
4.11 REFUND OF CUSTOMS DUTY
Importer or Exporter actually paid the duty on import or export, which is not required to pay alone allowed as re-
fund.

Customs Law
Refund of Export Duty

As per Section 26 of the Customs Act, 1962, duty paid on exported goods can be claim for refund in the case of com-
bined reading of the following if:
i. The goods are returned to such person otherwise than by way of re-sale;
ii. The goods are re-imported within One year from the date of exportation and
iii. An application for refund of such duty is made before the expiry of six months from the date on which the Cus-
toms officer makes an order for importation.
Example 23: X Ltd. exported product P to Y Ltd of USA on 1.1.2016. The duty paid on export of product P for `
1,00,000. Y Ltd. returned product P to X Ltd., on 1.8.2016. The return is otherwise than by way of sale (i.e. it may be
sale return or rejected goods, goods sent on consignment returned by the overseas agent or goods sent for exhibition
coming back etc.). It means to say that Y Ltd. should not be sold P to X Ltd. Moreover, exported goods are returned
within One year from the date of exportation. Hence, X Ltd. can claim for refund of ` 1,00,000 within Six months from
Customs clearances order for imported goods (i.e. 1.8.2016).
Refund of Import Duty [Section 26A]
Duty paid on imported goods can be claim for refund on account of satisfying following conditions:
(a) Goods are found defective
The goods are found to be defective or otherwise not in conformity with the specifications agreed upon between the
importer and the supplier of goods:
Provided that the goods have not been worked, repaired or used after importation except where such use was indis-
pensable to discover the defects or non-conformity with the specifications;
(b) The goods have not been worked, repaired or used after importation except where such use was indispensable
to discover the defects or non-conformity with the specifications;
(c) Goods are easily identifiable as imported goods
The goods are identified to the satisfaction of the Assistant Commissioner of Customs or Deputy Commissioner of Cus-
toms as the goods which were imported;
(d) No drawback claim is made
The importer does not claim drawback under any other provisions of this Act; and
(e) Activities carried out after importation
The goods are exported; or
The importer relinquishes his title to the goods and abandons them to customs; or
Such goods are destroyed or rendered commercially valueless in the presence of the proper officer, in such
manner as may be prescribed and within a period not exceeding 30 days from the date on which the proper
officer makes an order for the clearance of imported goods for home consumption under section 47.
Note:
(i) However, the period of 30 days may, on sufficient cause be- Moreover, nothing contained in this section
ing shown, be extended by the Principal Commissioner or (Sec. 26A of the Customs Act, 1962) shall apply
Commissioner of Customs for a period not exceeding three to the goods regarding which an offence ap-
months. pears to have been committed under this Act
or any other law for the time being in force.
(ii) No refund under section 26 is allowed in respect of perishable
goods and goods which have exceeded their shelf life.
(f) Manner and time-limit of claiming refund
An application for refund of duty shall be made before the expiry of 6 months from the relevant date in prescribed
form and manner.

Relevant date:
Relevant date in case of filing refund claim may be any one of the following:
Let export order issued or
Date of abandonment or
Date of destruction of goods
(g) Exceptions to this Section
(i) Offending goods: This section shall not apply to the goods regarding which an offence appears to have been
committed under this Act or any other law for the time being in force.
(ii) Perishable goods or Expired goods : No refund shall be allowed in under this Section in respect of perishable
goods and goods which have exceeded their shelf life or their recommended storage- before-use period.
Claim for Refund of Duty (Section 27 of the Customs Act, 1962)
Section 27 of the Customs Act, 1962 deals with refund of duty paid on imported or exported goods in excess of what
was actually payable. 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, any excess interest has been paid by the
importer or exporter can also be claimed for refund.
Provided that if the amount of refund claimed is less than rupees hundered, the same shall not be refunded.
A refund claim can be made u/s 27 if the payment of higher duty and interest in ignorance of a notification which
allowed payment of duty at a concessional rate even if there was no assessment order and the payment u/s 27(i) has
not been made pursuant to an assessment order. Section 27(ii) covers those classes of cases where the duty is paid by
a person without an order of assessment. It means a refund claim can be filed under section 27 of the Customs Act,
1962 even if the payment of duty has not been made pursuant to an assessment order [Aman Medical Products Ltd.
v CCus., Delhi 2010 (250) ELT30 (Del.)].
Attested Xerox copy of the GAR-7 Challan sufficient for claiming refund.
Refund claim CAN NOT BE DENIED purely on a technical contention that the assessee had produced the attested
copy of GAR -7 (earlier TR-6) challan and not the original of the GAR-7 challan. Also as per clarification issued vide
F.No. 275/37/2K-CX. 8A dated 2-1-2002, a simple letter from the person who made the deposit, requesting for return of
the amount, along with the appellate order and attested Xerox copy of the Challan in Form GAR-7 would suffice for
processing the refund application. [Narayan Nambiar Meloths v CCus. 2010 (251) ELT57 (Ker)]
Time Limit for claiming refund:
Person claiming refund Time limit for claiming refund Remarks
Individual imported goods for his Application for refund can be made The application for refund in
personnel use, Government or Any before the expiry of ONE year from the duplicate has to be filed before
educational institutions or Any date of payment of duty and interest the Assistant Commissioner
research institutions or Charitable or Dy. Commissioner of Customs.
institutions or hospitals
Individual for business use Application for refund can be made The application for refund in
Companies or Firm etc. before the expiry of ONE year (w.e.f. duplicate has to file before the
8-4-2011) from the date of payment of Assistant Commissioner or Dy.
duty and interest Commissioner of Customs.
Interest on delayed refunds
As per section 27A of the Customs Act, 1962, if the refund ordered is not paid within 3 months from the date of receipt
of refund application by the Assistant Commissioner or Deputy Commissioner of Customs, then the department is li-
able to pay interest at the rate of 6% p.a. (i.e. interest is liable to be paid after expiry of three months from the date of
receipt of the application for refund).
Few differences between section 26 and section 27 of the Customs Act, 1962
Section 26 deals with refund of export duty whereas Section 27 deals with refund of any export duty, import duty inter-
est paid thereon.

Customs Law
Refund of duty under section 26 is allowed on account of satisfying certain conditions whereas refund under section
27 is allowed only when duty paid in excess of normal duty.
Refund is payable to the exporter who paid the duty under section 26 whereas refund is payable to the importer who
paid the duty or to the buyer by whom the duty was borne.
Chartered Accountant Certificate not sufficient to claim refund under section 27.
As per section 27 of the Customs Act, 1962 the importer to produce such documents or other evidence, while seeking
refund, to establish that the amount of duty in relation to which such refund is claimed, has not been passed on by
him to any other person.
However, if importer had not produced any document other than the certificate issued by the Chartered Accountant
to substantiate its refund claim.
In the given case Madras High Court held that, the certificate issued by the Chartered Accountant was merely a
piece of evidence acknowledging certain facts. It would not automatically entitle a person to refund in the absence
of any other evidence. Hence, the importer could not be granted refund merely on the basis of the said certificate
[CCus., Chennai v BPL Ltd. 2010 (259) ELT526 (Mad)].
The period of limitation of one year for the purpose of refund of duty under Sec. 27(1B) shall be computed in the fol-
lowing manner, namely:
(i) In the case of goods which are exempt from payment of duty by a special order issued under section 25(2) of
the Custom Act, the limitation of one year shall be computed from the date of issue of such order;
(ii) Where the duty becomes refundable as a consequence of any judgment, the limitation of one year shall be
computed from the date of such judgment.
(iii) Where any duty is paid provisionally under section 18, the limitation of one year shall be computed from the
date of adjustment of duty after the final assessment thereof or incase of re-assessment, from the date of such
re-assessment.
4.12 APPOINTMENT OF OFFICERS OF CUSTOMS
(1) Classes of officers of customs [Section 3]: The various classes of Officers of Customs, as given under section 3,
are: -
(a) Principal Chief Commissioner or Chief Commissioners of Customs;
(b) Principal Commissioner or Commissioners of Customs;
(c) Commissioners of Customs (Appeals);
(d) Joint Commissioners of Customs;
(e) Deputy Commissioners of Customs;
(f) Assistant Commissioners of Customs;
(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 following officers have been appointed:
(i) Appraisers of Customs, who do the assessment work of import and export goods, including classification, valu-
ation and examination of the goods; and
(ii) Preventive Officers of Customs, who do the executive duties Iike,
(a) Boarding and checking ships and aircrafts;
(b) Clearing passengers and crew and their baggage;
(c) Supervision and control over loading and unloading of cargo;
(d) Preventing smuggling by checking suspect;
(e) Interrogating suspects/witnesses and investigation.

(iiI) Ministerial Officers, who maintain records, keep accounts, etc.
(iv) Chemical Examiner, who tests samples of imported or export cargo for determination of true character of the
goods for proper classification and value, necessary for determination of customs duty.
(2) Appointment of officers of Customs [Section 4]: The Board may appoint such persons as it thinks fit to be officers
of customs. The Board may authorise a Principal Chief Commissioner or Chief Commissioner or Principal Com-
missioner or Commissioner or joint or Assistant or Deputy Commissioner of Customs to appoint officers of customs
below the rank of Assistant Commissioner of Customs.
(3) Powers of officers of customs [Section 5]:
(a) 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.
(b) 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.
Powers of Commissioner (Appeals): 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 and Section 108.
(4) Entrustment of functions of Board and customs officers on certain other officers [Section 6]: The Central Govern-
ment may entrust either conditionally or unconditionally to any officer of Central or State Government or local author-
ity any function of the Board or any officer of customs.
4.13 APPOINTMENT OF CUSTOMS STATION, WAREHOUSING STATIONS ETC.
(a) Power to approve landing places and specify limits of customs area [Section 8]: The Principal Commissioner or
Commissioner of Customs has the power to -
(i) approve proper places in any customs port or customs airport or coastal port for the unloading and Ioad-
ing of goods or for any class of goods;
(ii) specify the limits of any customs area.
(b) Power to declare places to be warehousing stations [Section 9]: The CBEC has the power to declare places to
be warehousing stations at which alone public warehouses may be appointed and private warehouses may
be licensed.
(c) Appointment of boarding stations [Section 10]: The Principal Commissioner or Commissioner of Customs has
power to appoint, in or near any customs port, a boarding station for the purpose of boarding of, or disembar-
kation from, vessels by officers of customs.
Appointment of customs ports, airports, etc. [Section 7]: The CBEC may, by notification in the Official Gazette, appoint
the following,
(a) ports and airports, which alone shall be customs ports or customs airport for the unloading of imported goods
and the loading of export goods or any class of such goods.
(b) places, which alone shall be inland container depots or air freight stations for the unloading of imported goods
and the Ioading of export goods or any class of such goods. [Bold portion amended by Finance Act, 2012 w.ef.
28-05-2012]
(c) places, which alone shall be land customs station for the clearance of goods imported or to be exported by
land or inland water or any class of such goods.
(d) routes by which alone goods or any class of goods specified in notification may pass by land or inland water
into or out of India, or to or from any Land Customs Station, or from or to any land frontier.
(e) ports which alone shall be 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.

Customs Law
4.14 CENTRAL GOVERNMENT POWER OF PROHIBITION, DETECTION OF ILLEGALLY IMPORTED AND EXPORT GOODS
Power to prohibit importation or exportation of goods [Section 11]: If the Central Government is satisfied that it is
necessary so to do for any of the purposes as specified, 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 notifica-
tion, the import or export of goods of any specified description.
Purposes of prohibition: The importation or exportation of goods may be prohibited for following purposes,
(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;
(i) the establishment of any industry;
(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;
(I) 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;
(q) the fulfillment 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 manufac-
tured in India;
(t) the prevention of dissemination of documents containing any matter which is likely to prejudicially affect friend-
ly 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.
(i) Detection of illegally imported goods and prevention of their disposal [Section 11A to 11G]:
Illegal import means the import of any goods in contravention of the provisions of this Act or any other law for
the time being in force.
Power of Central Government to notify goods: Goods of any class or description may be notified by Cen-
tral Government for the purpose of checking the illegal import of such goods or facilitating the detection
of such goods.
Persons possessing notified goods to intimate the place of storage, etc.: Every person who owns, pos-
sesses or controls, any notified goods, shall, within seven days from the notified date, deliver to the proper
officer a statement in relation to the notified goods specifying the place where such goods are to be
kept.

Persons possessing notified goods to maintain accounts: Such person shall maintain true and complete
account of such goods and also state the particulars of the person from whom such goods have been
acquired or sold. Such accounts shall be kept at the place where such specified goods are kept.
Precautions to be taken by persons acquiring notified goods: No person shall acquire any notified goods
except by way of gift or succession, from any individual in India, unless such goods are accompanied by
voucher or memorandum as specified in rules,
The restrictions as specified above does not apply to any notified goods which are:
(a) in personal use of the person by whom they are owned, possessed or controlled, or
(b) kept in the residential premises of a person for his personal use.
(ii) Prevention or detection of illegal export of goods [Section 11H to 11M]:
Illegal export means the export of any goods in contravention of the provisions of this Act or any other law for
the time being in force.
Power of Central Government to specify goods: Goods of any class or description may be specified by
the Central Government for the purpose of checking the illegal export of such goods or facilitating the
detection of goods which are likely to be illegally exported.
Persons possessing specified goods to intimate the place of storage, etc.: Every person who owns, pos-
sesses or controls, any specified goods, the market price of which exceeds? 15,000 shall, within seven
days from the specified date, deliver to the proper officer an intimation containing the particulars of the
place where such goods are kept within the specified area.
Persons possessing specified goods to maintain accounts: Such person shall maintain true and complete
account of such goods and also state the particulars of the person from whom such goods have been
acquired or sold. Such accounts shall be kept at the place where such specified goods are kept.
When the specified goods are lesser in quantity than the stock shown in accounts, then it shall be pre-
sumed, unless the contrary is proved, that shortfall has been illegally exported.
Transport of specified goods to be covered by vouchers: No specified goods shall be transported from,
into or within any specified area or loaded on any animal or conveyance in such area, unless they are
accompanied by a transport voucher (in such form and containing such particulars as may be speci-
fied by rules made in this behalf) prepared by the person owning, possessing, controlling or selling such
goods
Steps to be taken by persons selling or transferring any specified goods: Every person who sells or oth-
erwise transfers within any specified area, any specified goods (except where he receives payment by
cheque drawn by the purchaser), shall obtain, on his copy of the sale or transfer voucher, the signature
and full postal address of the person to whom such sale or transfer is made and take such other reason-
able steps as specified by rules. If on inquiry made by a proper officer, it is found that the purchaser or the
transferee, as the case may be, is not traceable or is a fictitious person, it shall be presumed, unless the
contrary is proved, that such goods have been illegally exported.
The restrictions as specified above shall not apply to petty sales of any specified goods if the aggregate market price
obtained by such petty sales, made in the course of a day, does not exceed ` 2,500.
Explanation: Petty sale means a sale at a price which does not exceed one thousand rupees.
Power to exempt [Section 11N]: 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 as may be
specified in the notification, goods of any class or description from all or any of the provisions from Section 11A to 11.
4.15 WAREHOUSING IN CUSTOMS
(1) Need for warehousing

If the imported goods are not required immediately, importer may like to store the goods in a warehouse without
payment of duty under a bond and then clear from warehouse when required on payment of duty. This will enable
him to defer payment of customs duty till goods are actually required by him. In such case, importer can keep goods
Customs Law
in warehouse without payment of customs duty. Goods are cleared from customs port under bond and kept in the
warehouse. The importer can clear goods from customs warehouse on payment of duty when he requires the goods
for use/consumption/sale.
This facility is available to traders as well as direct importers.
A trader can import goods and keep in warehouse. He can supply the goods to buyers from warehouse, after paying
customs duty. Thus, small importers, duty free shops etc. can procure goods from bonded warehouse without actually
importing the goods.
A manufacturer can import inputs without payment of customs duty for manufacture in bond. He will have to export
final product which was manufactured using imported duty free material.
Even duty free clearances can be made from bonded warehouse, if buyer is otherwise eligible for obtaining goods
duty free, as confirmed vide MF(DR) circular No. 79/2000- Cus dated 22-9-2000.
(a) Use of warehousing facility
The facility is useful to direct importers also, in following cases -
(a) Importer has to plan his purchases well in advance. He also has to maintain some stocks to ensure that there is
no loss of production if a shipment of imported raw materials is delayed. Thus, when the goods arrive in the port,
the importer may not immediately require the goods as he may be having stock.
(b) Importer would like to store the imported goods without payment of customs duty as far as possible and pay
duty only when goods are required for his immediate use, so that his funds are not blocked.
(c) The importer may be intending to clear the goods without payment of duty under Advance Licence or DEPB
scheme. However, the licence/DEPB may not be in hands when imported goods have arrived at the docks.
(d) The importer may not be having adequate ready funds to pay customs duty.
(e) Importer can avail facility of manufacture in bonded warehouse and then reexport the final products
Warehousing by traders - Foreign Trade Policy permits keeping imported goods in bonded warehouse without pay-
ment of duty. These can be cleared later on payment of duty. Even goods under negative list can be imported by
traders and kept in warehouse. These can later be supplied on payment of duty against specific licence.
Sale/transfer of warehoused goods - Imported goods kept in warehouse can be transferred to another person as per
section 50 of Customs Act. Sale of imported warehoused goods to Duty Exemption or duty concession licence holders
is also allowed. In such case, transferee can clear the goods on payment of customs duty, if any, and fulfilling other
licensing provisions - CBE&C Circular No. 473 /43/94-LCdated 22-9-1994. (The words if any, mean that if no duty is
payable,
Warehousing pending registration of project under project import - In Bharat Earth Movers v. CC2006 (201) ELT 60 (CES-
TAT), goods were kept in warehouse as contract for project import was yet to be registered. Goods were cleared from
warehouse after contract was registered.
Duty credit scrips can be used to clear goods from customs bonded warehouse -Duty Credit Scrips like SFIS, VKGUY,
FMS, FS, SHIS schemes can be used to clear goods from Customs Bonded warehouse under same procedure as ap-
plicable for DEPB scrip, subject to conditions and limitations mentioned in FTP - MF(DR) circular No. 50/2011-Cus dated
9-11-2011.
Warehouse to store imported goods without payment of duty - Provision of warehousing has been made in Customs
Act to enable importer to store goods in warehouse without payment of duty and clear goods from warehouse only
when these are actually required by him. Importer only has to pay warehousing charges. Thus, he can delay payment
of customs duty. Both public and private warehouses are available all over India where goods can be stored.
(b) Warehousing Bond
Since imported goods are kept in warehouse without payment of customs duty, importer has to execute a bond bind-
ing himself to (A) observe all provisions of Customs Act and rules/regulations in respect of the goods (B) pay on de-
mand the (i) duties, interest (ii) warehousing rent and charges with interest (C) pay all penalties leviable for violations
of provisions of Customs Act, rules and regulations. The bond amount is equal to twice the amount of duty assessed.
Generally, part of bond amount is secured by way of a bank guarantee. Bond will continue to be valid even if goods
are transferred to another person or removed to another warehouse [section 59].

Bond is cancelled and returned only when duty and all other dues are paid on goods cleared and goods are duly
accounted for (section 73).
Bonded warehouse - Since goods are kept in warehouse under a bond, the warehouse is termed as bonded ware-
house. It does not necessarily mean that the warehouse is physically bonded. For example, in case of manufacture
in warehouse, the manufacture is in bonded warehouse but there is no physical supervision of customs officer. How-
ever, in case of goods stored in warehouse and cleared from warehouse on payment of duty, the warehouse is under
physical control of customs officer and clearance can be only with his permission.
Warehousing of export goods
Goods removed for export can be kept in a warehouse pending export. These provisions are useful when exporter
would like to store the goods and export them as soon as export order is received.
(2) Public/Private Bonded warehouses
As per section 2(43) of Customs Act, warehouse means a public warehouse appointed u/s 57 or a private warehouse
licensed under section 58 of Customs Act. As per section 2(44), warehoused goods means goods deposited in a
warehouse.
Sections 57 and 58 of Customs Act provide that warehouse can be appointed or licensed only at a warehousing
station. As per section 2(45) of Customs Act, warehousing station means a place declared as a warehousing station
u/s 9 of Customs Act.
Warehouses can be public or private.
(a) Warehousing station - Section 9 of Customs Act authorises CBE&C (Board) to declare places as warehousing
stations. Public and private warehouses can be situated only at such approved warehousing stations. Board has is-
sued over 300 notifications prescribing various areas. Generally, cities and towns where imported goods are stored
for use or where there is Industrial Estate where imported raw material is required are declared as Warehousing Sta-
tions.
Power to declare a place as warehousing station under section 9 of Customs Act have been delegated to Principal
Chief Commissioner or Chief Commissioner - Chapter 9 Para 32 of CBE&Cs Customs Manual, 2011.
(b) Public or private Warehouses - Warehouses are of two types (A) Public warehouses appointed by Assistant
Commissioner of Customs under section 57 of Customs Act. (B) Private warehouses licensed by Assistant/Deputy Com-
missioner of Customs. The licence can be cancelled by giving one month notice. Licence can be cancelled if licensee
contravenes any provisions of Customs Act. In such cases, show cause notice has to be issued and pending enquiry,
licence can be suspended.
As the name suggests, goods can be stored in Public Warehouse by any importer, while goods can be stored in pri-
vate warehouse only by person who has been licensed.
Private warehouses are permitted quite liberally. Even private operators can be appointed as custodian for public
warehouse. CBE&C has clarified that permission for public or private warehouse can be given by Principal Commis-
sioner or Commissioner without making any reference to Board. Permission for storage of any category of goods can
be given if the applicant is financially sound, has good credibility and has not been involved in customs or excise duty
evasion in last five years. Premises of storage should be suitable and adequately secured. Services of Customs Officer
should be provided on cost recovery basis, or on payment of supervision charges - CBE&C Circular No. 68/95 dated
5-6- 1995.
For keeping sensitive goods in private as well as public bonded warehouse, bank guarantee equal to 25% of duty in
respect of sensitive goods should be taken - MF(DR) circular No. 18/2007-Cus dated 24- 4-2007.
PSUs shall be exempt from furnishing bank guarantee or other form of security for storing sensitive goods in the duty
free shop operated by them. However, double duty bond is required to be executed - MF(DR) circular No. 26/2012-
It is not necessary to obtain No objection certificate from public warehouse before granting license to private bond-
ed warehouse - CBE&C circular No. 1 /96-Cus dated 1-1-1996.
License to EOU by AC/DC - The license to EOU for warehouse (section 58) and permission to manufacture in ware-
house under bond (section 65) will be granted by Assistant/Deputy Commissioner - MF(DR) Circular No. 9/2008-Cus
dated 25-6-2008.

Customs Law
Warehousing charges even if goods detained by customs - Warehousing charges are payable in case of public ware-
house, even if goods are detained by customs - Monika Indiav. UOI(2010) 260 ELT 177 (P&H HC DB).
(c) Procedure for warehousing imported goods
Imported goods are cleared from seaport/airport on submission of Bill of Entry for warehousing. This Bill of Entry is
printed on yellow paper and often called Yellow Bill of Entry. Bond is executed for transfer of goods from port to
warehouse.
Space Availability Certificate - If the goods are to be despatched to public bonded warehouse, a Space Availability
Certificate is required, before movement of goods. However, in case of private warehouses, 100% EOU, STP, EHTP etc.,
such certificate is not necessary - CCCE Hyderabad PN 16/97 dated 12.2.1997.
Transit bond and insurance - The importer has to execute a bond for movement of goods from customs port to ware-
housing station. Bond should be with bank guarantee. He also has to take transit insurance to cover duty element
while the goods are in transit. However, EOU, STP & EHTP units do not have to give bank guarantee. They have to give
either bond or take transit insurance policy. - MF(DR) circular No. 41/97-Cus dated 19.9.1997, as amended vide circular
No. 38/98-Cus dated 21.5.1998.
When the warehouse is within the City or within 50 Kms within the jurisdiction of Principal Commissioner or Commissioner
of Customs, goods can be sent under escort. If the goods are outside city limits, transit bond in form of cash security
or bank guarantee should be taken. This should be 50% of duty involved for sensitive goods and 25% for non-sensitive
goods. -CBE&C circular No. 99/95-Cus dated 20-9-1995 amended vide CBE&C No. 47/99-Cus dated 27-7-1999.
The importer should submit re-warehousing certificate within 30 days from date of despatch of goods from seaport/
airport. Otherwise, duty is payable.
Waiver of warehousing at port of import - If goods are to be taken to a port in interior town, goods should be ware-
housed at the port of importation and then removed to another warehouse under bond u/s 67. Since this will involve
double handling of goods, Assistant Commissioner of Customs can grant waiver of physical warehousing at the port
of importation.
(3) Warehousing period under customs
Section 61 of Customs Act prescribes warehousing period. If goods are not removed within the prescribed period,
Customs Officer can sell the goods after notice to owner as much quantity as he deems fit.
(a) Normal warehousing for one year, extension can be granted - Section 61(l)(b) of Customs Act provides ware-
housing period as one year from the date of issue of order by Customs Officer permitting deposit of goods in a
warehouse. The period of one year can be reduced by Principal Commissioner or Commissioner if goods are likely to
deteriorate. This period can be increased by Principal Commissioner or Commissioner upto 6 months and by Principal
Chief Commissioner or Chief Commissioner of Customs without any limit of period.
In case of EOU, the normal warehousing period is three years for inputs, spares and consumables and five years for
capital goods, [section 61(1)]. This warehousing period can be extended by Principal Commissioner or Commissioner
without any upper time limit.
(b) Policy for granting extension - While considering requests for extension of warehousing period, concerned au-
thority should be satisfied about condition of goods and should ensure that the goods are not likely to deteriorate
during the extended period of warehousing. Whenever necessary, goods should be tested for quality before grant-
ing extension of warehousing period. Interest accrued should be paid before granting extension. This interest caji be
adjusted against final interest payable. A liberal approach may be adopted in following cases, if goods are in good
condition - (i) Ship stores/aircraft spares (ii) Goods supplied to diplomats (iii) Goods warehoused and sold through
duty free shops (iv) Goods imported by EOU (v) Goods used in units operating under manufacture-in-bond scheme
(vi) Machinery, equipments and raw materials imported for building and fitment in ships. Trade should file application
for extension 15 days prior to warehousing period. However, request for warehousing can be considered even after
expiry of warehousing period, after taking into consideration exceptional circumstances of the case. Though powers
for unlimited extension are with Principal Chief Commissioner or Chief Commissioner, the aforesaid guidelines should
be kept in mind. - CBE&C circular No. 47/2002- Cus dated 29-7-2002. [Earlier CBE&C circular No. 12/98-Cus dated 5-3-
1998 subsumed in this circular].
Principal Commissioner or Commissioner can grant extension upto 6 months, Beyond 6 months, Principal Chief Com-
missioner or Chief Commissioner can grant extension. Such extension by Principal Chief Commissioner or Chief Com-
missioner will normally be 3 months at a time. However, in respect of goods falling under categories (v) and (vi) of para

5 of Circular No. 47/2002-Cus dated 29-7-2002, extension can be granted for a period even greater than 3 months if
goods are not likely to deteriorate and interest is paid. The extension is subject to overall limit of warehousing permit-
ted under section 61 of Customs Act for relevant category of goods - MF(DR) Instruction No. 473/2/ 2011-LC dated
1-6-2011.
(c) Interest not payable at the time of granting extension - Interest is not payable at the time of granting extension.
Interest is payable only when it is due and if not waived - MF(DR) Instruction F No. 473/02/2011- LC dated 29-2-2012.
(d) If warehousing period reduced by law - If warehousing period is reduced by amendment to law, the reduced
period will not apply to goods warehoused prior to such amendment - Bangalore Wire Rod Mills v. UOI 1992(61) ELT 37
(Kar) - approved by SC - 83 ELT 251 (SC) - accepted by CBE&C vide MF(DR) circular No. 12/2007-Cus dated 9-2-2007.
(e) EOU should consume inputs etc. within the warehousing period - In case of EOU units, the whole factory is treat-
ed as a bonded warehouse. Hence, bonding period of three years means inputs, consumables and spares should be
consumed for manufacture of export product within that warehousing period. If not, application for extension should
be made. - - However, interest will be payable on the basis of duty payable at the time of clearance (and not duty
assessed when goods were warehoused), [section 61(2)(i)].
(f) Five years warehousing for capital goods for EOU - The warehousing period can be upto five years in case of
capital goods intended for use in EOU unit, as per section 61(1)(a) of Customs Act. This period can be reduced by
Principal Commissioner or Commissioner if goods are likely to deteriorate. The period can be extended without any
upper limit.
However, if goods are stored beyond a period of five years, interest is payable for storing goods beyond the period
of five years in the warehouse. The interest is payable on the basis of duty payable at the time of clearance (and not
duty assessed when goods were warehoused), [section 61(2)(i)].
Extension in respect of capital goods obtained by EOU units will be granted at the time of renewal of license of EOU,
even if five years of those capital goods are not over -MF(DR) circular No. 7/2005-Cus dated 14-2-2005.
(g) Interest payable beyond prescribed period
In case of goods allowed to be warehoused, interest is payable at prescribed rate. In case of normal warehousing
(other than EOU), interest is payable if goods are warehoused beyond 90 days, [section 61(2)(ii)].
Presently, the interest rate is 15% [Notification No. 18/2003-Customs (NT) dated 1-3-2003]. Earlier, the interest rate was
24%. In case of EOU, interest is payable if warehousing is beyond three years in case of inputs/ consumables/spares
and five years in case of capital goods.
(h) Interest if goods cleared after warehousing period is over - Interest is payable even if goods are cleared after
warehousing period is over, till date of clearance. Interest is payable even if notice demanding interest is not issued -
Suresh Chand v. UOI (201 0)254 ELT (Bom HC DB).
(i) Interest for warehousing beyond 90 days - Even if goods are permitted to be stored for one year (plus extension
if permitted), interest is payable for storing goods beyond a period of 90 days in the warehouse. The interest is payable
on the basis of duty payable at the time of clearance (and not duty assessed when goods were warehoused) [section
61(2)(ii)].
(j) Interest if goods provisionally assessed were stored in warehouse - If goods provisionally assessed were stored
in the warehouse, assessee cannot file Bill of Entry for ex-bond clearance. Hence, interest will be payable only after
the provisional assessment is finalized by department. Importer cannot suffer for delay by department - Nirma Ltd. v.
CC(2011) 263 ELT 261 (CESTAT)
(k) Policy for granting waiver of interest - In following cases, application for waiver of interest should be considered,
as charging of interest would enhance costs unnecessarily - (i) Ship stores/aircraft spares (ii) Goods supplied to dip-
lomats (iii) Goods warehoused and sold through duty free shops (iv) Goods imported by EOU (v) Goods used in units
operating under manufacture-in-bond scheme (vi) Machinery, equipments and raw materials imported for building
and fitment in ships (vii) Petroleum products (viii) Plant and machinery imported for projects (ix) Machinery, equip-
ments and raw materials imported for manufacture and installation of power generation units (x) goods imported
under OGL and warehoused for subsequent clearance under advance authorisation/ DEPB etc. (xi) Goods imported
in bulk by canalising agencies (xii) Imports under EPCG scheme (xiii) Import of capital goods by PSU [MF(DR) circular
No. 10/2006-Cus dated 14-2-2006]. It is also clarified that when no duty is payable, interest payment is not necessary.
Demand of interest should be raised when due, but it should not be enforced. On fulfilment of purpose of import,
waiver of interest should be decided within 6 months - MF(DR) circular No. 10/2006-Cus dated 14-2-2006.
Customs Law
(l) Interest not payable when no customs duty payable - In some cases, no customs duty is payable on goods
warehoused as they are exempt from duty on date of clearance. This may happen when goods are stored in ware-
house as advance licence is not available in hand. In such cases, goods are assessed at normal rates of customs
duty and kept in warehouse. Subsequently, these are cleared after receipt of advance licence without payment of
duty. In such cases, is interest payable beyond the period allowed for free warehousing? There were conflicting views.
Finally, in Pratibha Processors v. UOI1996 AIR SCW 4299 = AIR 1997 SC 138 = 1996(11) SCC 101 = 88 ELT 12 (SC) it has
been held that if no customs duty is payable at the time of clearance of goods from warehouse, no interest is payable.
Interest is a mere accessory to principal and if principal is not payable, interest is also not payable - view accepted
by CBE&C vide circular No. 10/2006-Cus dated 14-2-2006 - reiterated in MF(DR) circular No. 26/2007-Cus dated 20-7-
2007.
(m) Waiver of interest - Provision of interest @ 15% after just 90 days has made the provision of warehousing slightly
unattractive. [Now, warehousing will be beneficial only when goods can be cleared later without payment of duty
against advance license etc.]
Waiver of interest can be granted by Principal Chief Commissioner or Chief Commissioner upto ` two crores and by
CBE&C above that.
(n) No interest if duty paid after warehousing period but before SCN? - In CC v. Stilbene Chemicals (2009) 236 ELT 78
(CESTAT), it was held that if duty is paid after warehousing period is over (but before issue of notice), interest is not pay-
able - relying on Ghanshyam Das Suresh Chand v. UOI(2004) 165 ELT 514 (Del).
Summary of applicability of interest on warehouse goods
Warehouse
Assessee (Other than EOU) Assessee - EOU Unit

Warehousing Warehousing In case of inputs In case of Capital
Period 90 days Period > 90 days spares & Consumables goods

No Interest Interest @ 15%
is payable p.a. is payable

warehousing warehousing warehousing warehousing
period 3 period > 3 period 5 period > 5
years years years years

No Interest is Interest @ No interest is Interest @ 15%
payable 15% p.a. is payable payable p.a. is payable
(4) Manufacture in customs bonded warehouse [Section 65]
Manufacturing or other operations can be carried out in the warehouse with sanction of Assistant Commissioner (sec-
tion 65 of Customs Act). The facility is useful if final products are to be exported after manufacture (though final prod-
ucts can be cleared for home consumption too). After manufacture, the produced goods may either be exported
without payment of customs duty or cleared for home consumption on payment of duty.
These provisions are applicable to EOU, STP, EHTP or BTP units who have to manufacture goods under customs bond.
They have to obtain license from customs.
Facility for manufacture in warehouse under bond is also available for goods imported for repairs, reconditioning, re-
engineering etc. The goods can be imported without payment of customs duty and can be re-exported after repairs,
reconditioning etc. Such re-export must be within three years from date of import. [Notification No. 134/94 - Cus dated
22-6-94]
Permission for in-bond manufacture facility can be given by Principal Commissioner or Commissioner. Permission can
be given after scrutinising credibility and financial soundness of applicant - CBE&C circular No. 132/95-Cus dated 22-
12-1995.
Permission by AC/DC in case of EOU - The license to EOU for warehouse (section 58) and permission for manufacture
in warehouse under bond (section 65) will be granted by Assistant/Deputy Commissioner - MF(DR) Circular No. 9/2008-
(a) Removal of waste or refuse arising during manufacture - If waste or refuse is generated during manufacturing
operations, the provisions are as follows - (a) If the final product is exported, import duty on quantity of warehoused
goods contained in such waste or refuse will be remitted if 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 the form of waste or scrap (b) If final product is cleared for
home consumption, import duty will be payable on quantity of warehoused goods contained in such waste or refuse
[section 65(2) of Customs Act].
In view of section 65(2)(b) of Customs Act, import duty is payable on the quantity of the imported goods contained in
the waste and not only on scrap value - Cochin Shipyards v. CC (2011) 267 ELT 387 (CESTAT).
(b) Conditions for manufacture in bonded warehouse
Board has framed Manufacture and Other Operations in Warehouse Regulations, 1966 prescribing procedures. Pro-
cedures for manufacture under bond have now been considerably simplified. Physical control and supervision of
customs officer on the bonded warehouse has been done away with, since July 1998. - MF(DR) circular No. 88/ 98-
Cusdated2-12-1998.
Owner has to make application giving full details regarding process to be carried out, imported and other goods
used, plan and description of warehouse and volume of manufacture anticipated. On obtaining permission, neces-
sary bond has to be executed undertaking to observe all regulations and maintaining accounts etc. Manufacture will
not be under supervision of Customs Officers. However, customs officers can visit warehouse and control and super-
vise manufacturing process or imported and other goods. Detailed accounts are required to be maintained of raw
materials, stock, WIP and production. Input-output norms should be fixed wherever considered necessary.
Manufacturer can suspend or discontinue manufacture with one month notice. Sanction for manufacture in ware-
house can be withdrawn if conditions of Act or regulations are violated.
Procedures have been prescribed under Central Excise Law for bringing goods manufactured in India without pay-
ment of excise duty.
Special audit of accounts of the warehouse can be ordered by Principal Chief Commissioner or Chief Commissioner
of Customs. He can appoint a cost accountant to conduct audit of accounts of warehouse, office, stores, godowns,
factory, depot of the manufacturer. This provision has been made in July 1998, as physical control of customs officer
has been removed.
(c) Goods manufactured in bonded warehouse are not made in India and are liable to customs duty? - In Mustan
Teherbhai v. CC2003 (154) ELT 472 (CEGAT), it has been held that customs duty is payable on goods manufactured in
customs bonded warehouse. Thus, goods manufactured in customs bonded warehouse are not made in India. The
reason given is that section 66 of Customs Act makes mention of rate of duty leviable on goods manufactured. Such
duty can only be customs duty.
(5) Clearance from bonded warehouse
Section 71 allows clearance for (a) home consumption, (b) re-exportation or (c) removal to another warehouse.
(a) Removal for home consumption
Under section 68, goods stored in warehouse can be removed on payment of duty. Procedure is summarised in Chap-
ter 9 Para 19 of Customs Manual, 2011.
(b) Procedure for removal of goods - Importer has to submit bill of entry in prescribed form for removal of goods
from warehouse for home consumption, this Bill of Entry is called Into Bond Bill of Entry as bond is executed for transfer
of goods in warehouse without payment of duty. The Bill of Entry is assessed by customs officer in charge of warehouse.
Duty, penalties, rent and interest is payable as per rules. Goods are then allowed to be cleared by Customs Officer.
Customs Law
(c) No interest if duty not paid within 2 days on return of Bill of Entry - The provision for payment of duty within 2
working days after return of Bill of entry, as provided in section 47(2) of Customs Act applies to clearance from customs
port and not to clearance from customs warehouse. Thus, no interest is payable so long as clearance is made within
period allowable for interest free warehousing - CC v. Acalmar Oils (2009) 240 ELT 440 (CESTAT).
(d) Rate of duty as applicable on date of removal - As per section 15(l)(fc), rate of duty as prevalent on date of
presentation of Bill of Entry for home consumption for clearance from warehouse is applicable and not rate prevalent
when goods were removed from customs port.
(e) Rate of exchange in case of warehoused goods - Relevant exchange rate for valuation is as in force on date
on which bill of entry is presented u/s 46. Bill of Entry is presented u/s 46 of Customs Act either for home consumption
or for warehousing. Hence, in case of warehoused goods, exchange rate prevailing on the date on which Bill of Entry
is presented u/s 46 and not when Bill of Entry is presented u/s 68 for clearance from customs warehouse.
(f) No Anti dumping duty on goods warehoused prior to levy of anti-dumping duty - Antidumping duty is leviable
on date of importation. Hence, if goods are already warehoused prior to imposition of anti-dumping duty, anti-dump-
ing duty will not be leviable on warehoused goods, even if cleared subsequent to imposition of anti-dumping duty.
Section 15( 1 )(b) of Customs Act does not apply to anti-dumping duty u/s 9A of Customs Tariff Act. - CCv. Suja Rubber
Industries 2002(142) ELT 586 (CEGAT).
Same principle will apply to protective duty and safeguard duty also.
(g) Duty payable only on quantity cleared from warehouse - In Mangalore Refinery v. CCE 2002(141) ELT 247 (CE-
GAT), it was held that taxable event is when goods are cleared from warehouse. Hence, customs duty is payable only
on the quantity which is cleared from warehouse and not the quantity which had entered the territorial waters.
(h) Duty payable if warehousing period is not extended - Goods which are not removed within the permissible pe-
riod, are deemed to be improperly removed on the day it should have been removed. Thus, duty applicable on such
date (i.e. last date on which the goods should have been removed) is applicable, and not the date on which goods
were actually removed.
Sometimes, goods are not cleared even after warehousing period is over and extension has not been obtained or
granted. In such cases, the relevant date for determination of rate of duty is as follows - (a) If importer does not remove
the goods even after expiry of warehousing period, customs officer can issue notice u/s 72 demanding duty. In such
case, the last date on which goods should have been removed is deemed date of removal and duty applicable
on that date is payable, (b) If importer submits bill of entry and obtains clearance u/s 68, the relevant date is the date
on which Bill of Entry for home consumption is submitted u/s 68 (That time it was date of payment of duty) - Raymond
Synthetics Ltd. v. CC 2000(119) ELT 205 (CEGAT 5 member bench). - civil appeal admitted by SC on 3.9.2001 - (2001)
134 ELT A166.
(i) Title can be relinquished even after warehousing period is over - In RPG Cables v. CC (2007) 212 ELT 538 (CES-
TAT), it was held that importer can relinquish title even after warehousing period is over, since title can be relinquished
anytime before clearance for home consumption - same view in Macmillan Indiav. CC(2008) 223 ELT 449 (CESTAT)
- same view in JK Cement Works v. CCE (2008) 223 ELT 138 (Raj HC DB), where it was also held that even after relin-
quishment, rent, interest etc. is required to be paid. It was also held that acceptance of option of relinquishment is not
subject to discretion of proper officer, but only for fulfilment of conditions prescribed in proviso to section 68 of Customs
Act.
(j) Interest if goods cleared after warehousing period is over - Interest is payable even if goods are cleared after
warehousing period is over, till date of clearance. Interest is payable even if notice demanding interest is not issued -
Suresh Chand v. t/O/(2010) 254 ELT (Bom HC DB).
(k) Re-export can be permitted even after bonding period has expired - Importer may be allowed to re-export
goods even after the period of warehousing has expired and demand notice is issued. Before granting the permission,
warehousing period should be extended, so that importer can re-export the goods within such extended warehousing
period.
(l)Interest not payable even if duty paid after five days from return of ex-bond bill of entry -As per section 47(2) of
Customs Act, if duty is not paid within five working days from date of return of Bill of Entry to importer. This section is
applicable for clearance from port and not for clearance from warehouse, for which separate provisions have been
made under section 68 of Customs Act. This is self contained provision. Hence, in case of warehoused goods, interest
is not payable even if duty is paid beyond period of five days from return of ex-bond bill of entry. However, interest as
provided in section 61 (2) would be payable - MF(DR) Circular No. 15/2009-Cus dated 12-5-2009.

(m) Sales Tax and octroi/entry tax on warehoused goods - Sales tax is payable when goods are sold from bonded
warehouse. State sales tax is also payable when goods are supplied to foreign going vessel. However, sales tax should
not be payable in following - (A) Goods exported from bonded warehouse (B) Goods sold by transfer of documents
when goods are within the bonded warehouse.
Octroi/Entry Tax can be levied on warehoused goods for which Value can include customs duty payable on such
goods, even if not paid at the time of warehousing. However, in case of EOU/SEZ, since they do not have to pay cus-
toms duty, the custom duty will not be includible in value for purpose of octroi payment.
(n) Sale of goods when goods are in bonded warehouse is sale in the course of import
ln Kiran Spinning Mills v. CC1999(U3)ELT753 =2000 AIRSCW2090 = AIR2000 SC 3448 (SC 3 member bench), it has been
held that goods continue to be in customs barrier when they are in customs bonded warehouse. Import would be
completed only when goods cross customs barrier and not when they land in India or enter territorial waters.
Thus, if documents are transferred when goods are in customs bonded warehouse, it will be treated as transfer of
documents before goods cross customs barrier.
(o) Transfer to other bonded warehouse
Section 67 of Customs Act permit removal to other warehouse under bond. Transit bond for customs duty involved
backed by bank guarantee/security should be furnished. In the case of EOU, bank guarantee for transfer of goods is
not required -Chapter 9 Para 18 of CBE&Cs Customs Manual, 2011.
In case of inter-city transfer of goods from one warehouse to another warehouse, bank guarantee is not required in
case of Central and State Public Sector Undertakings (PSU). However, transit bond should be executed - MF(DR) cir-
cular No. 42/2007-Cus dated 30-11-2007.
(p) Clearance for export
Customs warehoused goods can be exported without payment of duty, vide section 69(1) of Customs Act. A shipping
bill or bill of export or label or declaration (in case of export by post) has to be presented. Export duty, penalties, rent,
interest etc. is payable as applicable and then goods are allowed to be exported.
If warehoused goods are re-exported without payment of duty, no interest is payable -MF(DR) circular No. 38/2005-
(6) Other provisions of customs warehousing
Other provisions in respect of warehousing are as follows.
(a) Relinquishing of title after warehousing - The owner of warehoused goods can relinquish the title of goods any
time before order for home clearance is made. He will be required to pay rent, interest, other charges and penalties
that may be payable, but duty will not be payable [proviso to section 68 inserted w.e.f. 14-5-2003]. The word interest
is not clear and is likely to lead to litigation. It has been consistently held that when duty is not payable, question of
payment of duty does not arise.
Relinquishment of title of goods will not be permissible if offence appears to have been committed in respect of such
goods under Customs Act or any other law [second proviso to section 68 of Customs Act inserted w.e.f. 18-4-2006].
(b) Repurchase of goods after relinquishing - The goods relinquished are normally auctioned. In that case, the per-
son who has relinquished the goods can repurchase the goods as the goods are no more imported goods - Aabhas
Spinners v. UOI(20\0) 260 ELT 554 (P&H HC DB).
(c) Remission of duty permissible - If goods are damaged in warehouse, the damage is covered u/s 23 and hence
no duty is payable, since clearance from port to the warehouse is not clearance for home consumption.
(d) Remission if Loss of inputs in stores or during process of EOU - If inputs are lost due to fire, after they are issued for
production and are is in work in progress, no duty is payable on imported and indigenous inputs received duty free.
Remission of duty is required to be granted - Sarni Labs v. CC(2007) 216 ELT 59 (CESTAT).
Remission can be obtained by EOU if goods deteriorated when in the factory (as it is a warehouse) - Sandoz P Ltd. v.
CCE (2012) 278 ELT 259 (CESTAT) * CC v. Next Fashion Creators (2012) 280 ELT 374 (Karn HC DB).
(e) No remission after warehousing period is over - In CCE v. Decorative Laminates (2010) 257 ELT 61 (Kar HC DB),
it was held that remission cannot be granted after expiry of warehousing period [reversing Decorative Laminates v.
CC (2006) 195 ELT 175 (CESTAT), where it was held that application for remission can be made even after expiry of

Customs Law
warehousing period but before clearance from warehouse for home consumption.
(f) Control over bonded warehouse - The warehouse is subject to control of Customs Officer, who has powers to
enter warehouse and examine the goods.
(g) Transfer to another person - Goods in warehouse can be transferred to another person u/s 59(3). Sale of ware-
housed goods to holder of duty concession license is also permissible.
(h) Rent and warehouse charges - Rent and warehouse charges are payable by importer. If not paid, the ware-
house keeper can sell the goods after giving notice to importer and with permission of Customs Officer (section 63).
(i) Owners rights to deal in goods in warehouse - With the permission of Customs Officer and on payment of pre-
scribed fees, owner can deal with warehoused goods as follows (A) inspect the goods (B) separate damaged or de-
teriorated goods (C) sort the goods or change containers for preservation, sale, export or disposal of goods (D) show
the goods for sale (E) take samples of goods - the samples can be removed without payment of duty with permission
of Customs Officer, but if these are not brought back, customs duty is payable (section 64).
(j) No remission if there is theft in warehouse - Remission cannot be granted if there was theft in warehouse -
Maneesh Exports (EOU), In re (2011) 273 ELT 466 (GOI).
Goods not accounted for - If goods are removed in contravention of rules or if goods are not properly accounted for,
full duty is payable on such goods together with penalty, interest, rent etc. If duty, penalty etc. is not paid, goods in
warehouse can be sold by Customs Officer after giving notice to importer. Besides, bond or bank guarantee executed
by importer can be encashed [section 72(1)(d)].
(k) Goods improperly removed from warehouse
As per section 72(1), following goods are goods improperly removed from warehouse, etc
(a) Warehoused goods removed in contravention of provisions of section 71 are goods improperly removed [sec-
tion 72(1)(a)]. [Section 71 allows clearance for home consumption on payment of duty, re-exportation or re-
moval to another warehouse].
(b) Warehoused goods not removed at the expiration of warehousing period as specified in section 61 (unless ex-
tension is obtained)
(c) Taking samples from warehouse without payment of duty and not returning them
(d) Goods entered into warehousing under bond u/s 59 are not duly accounted for [section 72(1) (d)].
In such case, full duty, along with interest, penalty, rent and other charges can be demanded. If these are not paid,
the warehoused goods can be sold by customs officer, besides other action that can be taken under customs law
[section 72(2)].
(l) Reassessment cannot be made at warehouse
The department has clarified as follows - Insofar as value for assessment of duty is concerned, it is not required to be
re-determined and it is the original value as determined at the time of filing of Into Bond Bill of Entry and assessments
before warehousing. - Chapter 9 Para 19.3 of CBE&Cs Customs Manual, 2001.
(7) Storage in warehouse pending clearance
Normally, imported goods are kept in customs bonded warehouse after goods are assessed to duty. However, occa-
sionally, it may happen that assessment of duty may take time for want of some clarification/reports etc. In such cases,
goods lying in docks may incur heavy demurrage. There is a provision that Customs department can issue detention
certificate and on the basis of such certificate, port trust authorities may remit demurrage. However, chances of pil-
ferage or loss are high if goods lie at docks.
Hence, if assessment is likely to be delayed, section 49 of Customs Act allows that goods can be stored in public ware-
house for period upto 30 days. However, such goods are not to be treated as warehoused goods for purposes of
Customs Act as the goods are not assessed. Hence, it is called storage without warehousing or warehousing without
warehousing. The goods are cleared from the warehouse after duty is assessed and paid [The limit of 30 days was put
w.e.f. 10th May, 2013]
The storage period is 30 days. The period can be extended by Principal Commissioner or Commissioner of Customs by
30 days at a time - [proviso to section 49 of Customs Act, inserted w.e.f. 10th May, 2013].

PRACTICAL PROBLEMS
Example 24: An importer imported some goods in February, 2016 and the goods were cleared from Mumbai port
for warehousing on 8th February, 2016 after assessment. Assessable value was ` 4,86,000 (US $ 10,000 at the rate of
exchange ` 48.60 per US $). The rate of duty on that date was 20% (assume that no additional duty is payable). The
goods were warehoused at Pune and were cleared from Pune warehouse on 4th March, 2016, when rate of duty was
15% and exchange rate was ` 48.75 = 1 US $. What is the duty payable while removing the goods from Pune on 4th
March, 2016?
Answer: Amount in `
The rate of exchange will be ` 48.60 per USD Assessable value 4, 86,000
(i.e. US$ 10,000 at ` 48.60 per US$) Rate of duty @15%.
Basic Customs Duty payable 72,900
Education Cess 2% on ` 72,900 1,458
SAH @1% on ` 72,900 729
Total Duty payable 75,087
Example 25: Certain goods were imported in February 2016. Into bond bill of entry was presented on 14th February,
2016 and goods were cleared from the port for warehousing. Assessable value was $5,00,000. Customs officer issued
the order under section 60 permitting the deposit of the goods in warehouse on 21st February, 2016 for 3 months.
Goods were not cleared even after warehousing period was over, i.e., 21st May, 2016 and extension of time was
also not obtained. Customs officer issued notice under section 72 demanding duty and other charges. Goods were
cleared by importer on 28th June, 2016. What is the amount of duty payable while removing the goods? Compute on
the basis of following information (assume that no additional duty or special additional duty payable).
14.02.2016 21.05.2016 28.06.2016
Rate of Exchange per USD ` 48.30 ` 48.40 ` 48.50
Basic customs duty 35% 30% 25%
Answer:
Rate of duty applicable @30%
Exchange rate ` 48.30
Assessable value ` 2,41,50,000
Customs Duty @30% x ` 2,41,50,000 ` 72,45,000
Education cess 2% x ` 72, 45,000 ` 1,44,900
SAH @ 1% x ` 72, 45,000 ` 72,450
Total Customs duty payable ` 74,62,350
Note: Goods not removed from the warehouse within the permissible period, is considered as deemed to be removed
improperly on the due date, even though, the goods actually removed at a later date. The rate of duty prevailing on
the date on which the goods should have been removed is to be considered i.e. 30% (21-5-2016) [Kesoram Rayon v
Commissioner of Customs (1996)]
Example 26: An importer imported some goods on 1st January, 2015 and the goods were cleared from Mumbai port
for warehousing on 8th January, 2015 by submitting Bill of Entry, exchange rate was ` 50 per US $. FOB value US $ 10,000.
The rate of duty on 8th January, 2015 was 20%. The goods were warehoused at Pune and were cleared from Pune
warehouse on 31st May, 2015, when rate of basic customs duty was 15% and exchange rate was ` 48.75 per 1 US $.
What is the duty payable while removing the goods from Pune on 31st May, 2015? CVD @10% and Special CVD 4%
are applicable.
You are required to find:
(a) The total Customs duty payable?

Customs Law
(b) The interest if any payable?

Answer:
(US $)
FOB 10,000
ADD: 20% Freight on FOB 2,000
ADD: 1.125% Insurance on FOB 112.50
CIF 12,112.50
ADD: 1% on CIF 121.13
ASSESSABLE VALUE 12,233.63
(`)
ASSESSABLE VALUE 6,11,681.50 (i.e. 12,233.63 x `50)
Add: BCD 15% 91,752.23 (I.e. 6,11,681.50 x 15%)
Balance 7,03,433.73
Add: CVD 10% 70,343.37 (i.e. 703,433.73 x 10%)
Balance 7,73,777.10
Add: 2% Ed. Cess 3,241.91 (i.e. 1,62,095.60 x 2%)
Add: 1%SAH Ed. Cess 1,620.96 (i.e. 1,62,095.60 x 1%)
Balance 7,78,639.97
Add: Spl. CVD 4% 31,145.60 (i.e. 7,78,639.97 x 4%)
Value of import 8,09,785.57
Amount of Customs duties 1,98,104.07 or 1,98,104
Interest:
(i.e. `1,98,104 x 15% x 54/365) 4,396.28
Jan 24 days + Feb 28 days + Mar 31 + April 30 days + May 31 days = 144 days
144 days 90 days = 54 days.
4.16 PROVISIONAL ASSESSMENT OF DUTY (SECTION 18)
Provisional assessment [Section 18]: The provisional assessment can be directed by proper officer in the following
circumstances,-
(a) where the importer or exporter is unable to make self-assessment under section 17(1) and makes a request in
writing to the proper officer for assessment; or
(b) where the proper officer deems it necessary to subject any imported goods or export goods to any chemical
or other test; or
(c) where the importer or exporter has produced all the necessary documents and furnished full information but
the proper officer deems it necessary to make further enquiry; or
(d) where necessary documents have not been produced or information has not been furnished and the proper
officer deems it necessary to make further enquiry.
Furnishing of security: The proper officer may direct provisional assessment 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 defi-

ciency, if any, between the duty as may be finally assessed or re-assessed (as the case may be), and the
duty provisionally assessed.
Importer required to file bill of entry in case of provisional assessment also: The provisions of section 18
apply without prejudice to the provisions of Section 46. Hence, the bill of entry is required to be presented
in accordance with the provisions of Section 46 even for the purposes of provisional assessment as well.
Finalisation of assessment: When the duty leviable on such goods is assessed finally or re-assessed by the
proper officer in accordance with the provisions of this Act, then -
(a) If the goods are cleared for home consumption or exportation, the amount paid shall be adjusted
against the duty finally assessed or re-assessed. In case the amount so paid falls short or is in excess
of duty finally assessed or re-assessed, the importer or the exporter of the goods shall pay the defi-
ciency or is entitled to a refund.
(b) If the goods are warehoused and the duty finally assessed or re-assessed is in excess of the provi-
sional duty, the customs officer may require the importer to execute a bond binding himself in a
sum equal to twice the amount of the excess duty.
Interest of demand: The importer or exporter shall be liable to pay interest, on any amount payable to
Central Government, consequent to the final assessment order or reassessment order, at the rate speci-
fied in Section 28AA of the Customs Act, 1962 (i.e. @ 18% p.a.) from the first day of the month in which the
duty is provisionally assessed till the date of payment thereof.
Interest on delayed refund: If any amount refundable is not refunded within three months from the date
of assessment of duty finally or reassessment of duty, as the case may be, there shall be paid an interest
on such amount at the rate specified in section 27A of the customs Act, 1962 (i.e @6% p.a) till the fund of
refund of such amount.
Circumstances under which refund can be granted: The amount of duty and the interest shall be cred-
ited to Customer Welfare Fund. However, instead of being credited to Consumer Welfare Fund in the
following cases it shall be paid to the importer or the exporter, if such amount is related to,-
(a) 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;
(b) duty and interest (If any, paid on such duty) on imports made by an individual for his personal
use;
(c) the duty and interest (if any, paid on such duty) borne by the buyer, if he had not passed on the
incidence of such duty and interest, to any other person;
(d) the export duty as specified in section 26;
(e) drawback of duty payable under section 74 and 75.
4.17 BAGGAGE AND POSTAL ARTICLES
The term Baggage means luggage of the passenger if they travel by Air or Sea from one country to another country.
Sometimes this baggage amounts to import thereby import duty may be levied. It is essential for us to know the provi-
sions relating to levy, exemption and non-levy of duty on baggage.
Baggage
General Meaning: Baggage means all dutiable goods imported by a passenger or a member of a crew in his bag-
gage.
Statutory Meaning u/s 2(3) of Customs Act: Baggage includes:
(a) unaccompanied baggage (i.e., baggage not carried by passenger at the time of his arrival, but sent
before or after arrival of passenger).
(b) but does not include motor vehicles.

Customs Law
Baggage can be classified as follows:

Baggage
Applicable goods Not applicable goods

All dutiable goods Motor Alcoholic Goods
Vehicles drinks import
through
courier
Green Channel means if a person does not have any dutiable goods, he can go through green channel without un-
dergoing any check along with baggage.
Red Channel means if carrying dutiable goods he should pass through red channel and should submit the declaration
and his baggage can be inspected by the customs authorities.
Section 77: Declaration by owner of baggage: The owner of any baggage shall make a declaration of its contents to
the proper officer for the purpose of clearing it.
Section 78: Determination by rate of duty and tariff valuation in respect of baggage: The rate of duty and tariff valu-
ation, if any, applicable to baggage shall be the rate and valuation in force on the date on which a declaration is
made in respect of such baggage under section 77.
Rate of Duty on Baggage is @ 35% plus 2% education cess plus 1% secondary and higher education cess. [Notification
No. 136/90-Cus., dated 20.03.1990]
Additional Customs Duty u/s 3(1) or 3(5) (Special CVD) Nil [Notification No. 183/86-Cus and Notification No. 21/2012-
Cus]
Exemption to 1 Laptop: The Central Government has exempted one laptop computer (note book computer) when
imported into India by a passenger of the age of 18 years or above (other than member of crew) from whole of the
BCD [Notification No. 11/2004-Cus]
Section 80: Temporary Detention of Baggage:
The proper officer may detain the baggage of a passenger which contains any article which is dutiable or the
import of which is prohibited and in respect which a true declaration has been made under section 77.
The proper officer may do so, at the request of the passenger for the purpose of being returned to the passen-
ger either:
o At the time of his leaving India or
o Through any other passenger authorized by him and leaving India or
o As a cargo consigned in his name.
Section 79: Bona fide baggage exempted from duty:
The proper office may, subject to rules made under this section, 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 said officer is satisfied that it is for the
use of the passenger or his family or is a bona fide 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 rules.
[By exercising the power vested on the Central Government under this section, the Central Government framed The
Baggage Rules, 1998].

The Baggage Rules, 1998
The provisions relating to baggage rules can be classified into two categories as to provisions relating to persons who
are coming into India and Goods that are brought into India. These categories can be further sub-classified as follows:
*NBMC Nepal, Bhutan, Myanmar and China

General Free Allowances for Passengers Rule 3 & Rule 4
PARTICULARS AGE - LESS THAN 10 YEARS AGE - 10 OR MORE YEARS OF AGE

Period of Stay in abroad
<= 3 days > 3 days <= 3 days > 3 day
Passenger returning from any country other than Upto ` 3,000 Upto ` 15,000 Upto ` 15,000 Upto ` 35,000
NBMC except by land route as mentioned in An- w.e.f w.e.f w.e.f
nexure IV - Rule 3 11-7-2014 11-7-2014 11-7-2014
` 17,500 Upto ` 15,000 45,000
Passenger returning from any country other than Nil Upto ` 1,500 Nil Upto ` 6,000
NBMC by land route as mentioned in Annexure
IV - Rule 3
Passenger returning from NBMC other than by

land route as mentioned in Annexure IV- Rule 4

Customs Law
Note:
The above exemption limit is not applicable to articles which are mentioned in Annexure 1 to the Baggage
Rules. The articles which are mentioned in Annexure 1 are:
o Fire Arms, Cartridges of fire arms exceeding 50
o Cigarettes exceeding 200 or cigars exceeding 50 or tobacco exceeding 250 gms
o Alcoholic liquor or wines in excess of two litres
o Gold or Silver, in any form, other than ornaments.
o w.e.f 26-08-2013 Import of LCD/LED/Plasma TV.
The free allowance under these rules shall not be allowed to be pooled with the free allowance of any other
passenger.
The used personal effects, excluding jewellery required for satisfying daily necessities of life are not taxable
Land routes as mentioned in Annexure IV:
o Amristar Amristar Railway Station, Attari Road, Attari Railway Station, Kharla
o Baroda Assara Naka, Khavda Naka, Lakhpat, Santha Naka, suigam Naka
o Delhi Delhi railway Station
o Ferozpur District : Hussainiwala
o Jodhpur Barmer Railway Station, Munabao Railway Station
o Baramullah District Adoosa
General Free Allowance (GFA) w.e.f. 1-4-2016:
Passengers GFA
Passengers (i.e. Indian resident or a foreigner residing in India or a tour- GFA will be allowed without payment of
ist of Indian origin (but not infant) arriving from countries other than duty for bonafide baggage (i.e. used per-
Nepal, Bhutan or Myanmar. sonal effects) upto ` 50,000/- per persons.
Indian resident coming from Nepal, Bhutan or Myanmar, if the pas- GFA will be allowed without payment of
senger come by air craft. Note: if the passenger come by road, there duty for bonafide baggage (i.e. used per-
is no free allowance. sonal effects) upto ` 15,000/- per persons.
A tourist of foreign origin (but not infant), arriving from any country -do-
other than Nepal, Bhutan or Myanmar
Passengers (i.e. Indian resident or a foreigner residing in India or a
tourist of Indian origin (but not infant) arriving from Nepal, Bhutan and
Myanmar.
Note: if the passenger come by road, there is no free allowance -do-
Important note:
(1) for infant, only used personal effects shall be allowed duty free.
(2) the free allowance cannot be allowed to be pooled with the free allowance of any other passenger.
(3) Bona fide baggage means used personal effects, travel souvenirs and articles other than those men-
tioned in Annexure I.
(4) Annexure I includes:
(i) Fire arms.
(ii) Cartridges of firearms exceeding 50.

(iii) Cigarettes exceeding 100 sticks or cigars exceeding 25 or tobacco exceeding 125 gms.
(iv) Alcoholic liquor or wines in excess of two litres.
(v) Gold or silver in any form other than ornaments.
(vi) Flat Panel (Liquid Crystal Display/Light-Emitting Diode/ Plasma) television.
Duty Free Allowance (w.e.f. 1-4-2016):
Eligible Passenger Origin Country Duty Free Allowance

Passengers of Indian origin and foreigners residing Other than Nepal, ` 50,000
in India, excluding infants Bhutan, Myanmar
Tourists of foreign origin, excluding infants Other than Nepal, ` 15,000
Bhutan, Myanmar
Passengars of Indian origin and foreigners residing Nepal, Bhutan ` 15,000 (by Air) NIL (By Land)
in India, excluding infants AND Tourists of foreign and Myanmar
origin, excluding infants
Indian passenger who has been residing abroad Anywhere Gold Jewellery Gentleman-20 gms. with a
for over one year value cap of ` 50,000 Lady - 40 gms with a
value cap of ` 1,00,000
All passengers Anywhere Alcohol liquor or wine: 2 litres
All passengers Anywhere Cigarettes: 100 numbers or Cigars upto 25
or Tobacco 125 grams
Passenger of 18 years and above Anywhere One laptop computer (notebook computer)

Customs Law
No restriction on age and minimum period of stay (w.e.f. 1-4-2016):

Restrictions on age and minimum period of stay abroad have been withdrawn.
Free baggage allowances are same for all passengers irrespective of their age and period of stay.
Professionals returning to India Rule 5
An Indian passenger who was engaged in his profession abroad is allowed clearance free of duty upto the fol-
lowing limits:
Particulars Used Household articles Professional Equipment

Indian Passenger returning after at least 3 months ` 12,000 ` 20,000
Indian Passenger returning after at least 6 months ` 40,000
Indian Passenger returning after a stay of minimum 365 Used Household articles and personal effects,
days during the preceding 2 years on termination of his which have been in the possession and use
work and Who has not availed this concession in the pre- abroad of the passenger or his family for at least
ceding 3 years 6 months and which are not mentioned in Annex-
ure I, II or III upto an aggregate value of ` 75,000
The above allowance is in addition to the allowances given under Rule 3 or Rule 4 as the case may be.
For the purpose of these rules, Family includes all persons who are residing in the same house and form part
of the same domestic establishment Rule 2(iv)
Professional Equipment means:
o such portable equipments, instruments, apparatus and appliances as are required in his profession
o by a carpenter, a plumber, a welder, a mason and the like and
o shall not include items of common use such cameras, cassette recorders, Dictaphones, personal com-
puters, typewriters, and other similar articles
List of Articles mentioned in Annexure I Same as discussed in Rule 3 & Rule 4
List of Articles mentioned in Annexure II:
o Color Television or Monochrome Television, Digital Video Disc Player, Video Home Theater System, Music
System
o Dish washer, Airconditioner, Domestic refrigerators of capacity above 300 litres with one or more of the
following goods, namely Television Receiver, Sound Recording or reproducing apparatus and Video re-
producing apparatus
o Word Processing Machine, Fax machine, portable photocopying machine
o Vessel, Aircraft
o Cinematographic films of 35mm and above
o Gold or Silver, in any form, other than ornaments
List of Articles mentioned in Annexure III:
o Video Cassette Recorder or Video Cassette Player or Video Television Receiver or Video Cassette Disk
Player
o Washing Machine
o Electrical or Liquefied Petroleum Gas Cooking Range
o Personal Computer (Desktop Computer), Laptop Computer (Note book Computer)

o Domestic Refrigerators of capacity upto 300 litres or its equivalent.
Note: No restriction on age and minimum period of stay (w.e.f. 1-4-2016).
TOURIST Duty Free Allowance Rule 7
A tourist arriving in India shall be allowed clearance free of duty articles in his bona fide baggage to the extent of
following:
Case Duty Free Allowance

(a) Tourists of Indian origin coming to India other than (i) Used personal effects and travel souvenirs, if-
tourists of Indian origin coming by land routes as (a) These goods are for personal use of the tourist, and
specified in Annexure IV; (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 under rule 3 or rule 4.
(b) Tourists of foreign origin, other than those of Paki- (i) Used personal effects
stani origin coming from Pakistan, coming to India (ii) Articles other than those mentioned in Annexure I upto
by air. a value of ` 8,000 for personal use of the tourist or as
gifts and travel souvenirs if these are carried on the per-
son or in the accompanied baggage of the passenger.
(c) Tourists (i) Used personal effects
(i) of Pakistani coming from Pakistan other than (ii) Articles other than those mentioned in Annexure I upto
by land routes; value of ` 6,000 for personal use of the tourist or as gifts
(ii) of Pakistani origin or foreign tourists coming and travel souvenirs if these are carried on the person
by land routes as specified in Annexure IV; or in the accompanied baggage of the passenger.
(iii) of Indian origin coming by land routes as
specified in Annexure IV.
Meaning of tourist [Rule 2(iii)]: Tourist means

Not normally resident in India
Who enters India for a stay of not more than 6 months in the course of any 12 months period
For legitimate non-immigrant purposes, such as touring, recreation, sports, health, family reasons, study, reli-
gious pilgrimage or business
Customs Declaration Form:
International passengers, when coming to India, need not fill Customs Declaration Form if they are not carrying duti-
able goods as part of their baggage w.e.f 1-4-2016.
Jewellery - Duty Free Allowance - Rule 6
A passenger returning to India having resided abroad for more than a year shall be allowed clearance free of duty
jewellery in his bona fide baggage to the extent of the following:
Person Prior to 01.03.2013 w.e.f. 01.03.2013
Gentleman passenger ` 10,000 ` 50,000
Lady Passenger ` 20,000 ` 1,00,000
Duty Free Jewellery (w.e.f. 1-4-2016):
Coming to India by an Indian Passenger after stay abroad more than one year
(i) Jewellery upto a weight, of 20 grams with a value cap of ` 50,000 if brought by a gentleman passenger
(ii) Jewellery upto a weight, of 40 grams with a value cap of ` 1,00,000 if brought by a lady passenger.
Transferring residence to India (Rule 8)

Customs Law
a person who is transferring his residence to India shall be allowed clearance free of duty, in addition to what he
is allowed under rule 3 or 4 as the case may be, articles in his bona fide baggage to the extent of the following:
Articles allowed free of duty

Used personal and household articles, other than those listed in Annexure I and Annexure II, but including
the article listed in Annexure III and
Jewellery to the extent mentioned in Rule 6
Conditions Relaxation that may be considered
Minimum stay of 2 years abroad, immediately Shortfall of upto 2 months in stay abroad can be con-
preceding the date of his arrival on Transfer of doned by Assistant Commissioner or Deputy Commission-
Residence er of customs, if the early return is on account of:
Terminal leave or vacation being availed of by the
passenger, or
Any other special circumstances
Total stay in India on short visit during the 2 pre- Commissioner of Customs may condone short visits in
ceding years should not exceed 6 months excess of 6 months in deserving cases
Passenger has not availed this concession in the No relaxation
preceding three years
To the extent of satisfaction of the Assistant commissioner of customs, Jewellery brought back which was
taken out earlier by the passenger or by a member of his family from India shall be allowed clearance free
of duty.
Transfer of residence w.e.f. 1-4-2016:
A person, who is engaged in a profession abroad, or is transferring his residence to India can bring, used household
items as below:
Passengers who have stayed abroad GFA for personal household items upto
3-6 months ` 60,000
6-12 months ` 1,00,000
1-2 years ` 2,00,000
Above 2 years ` 5,00,000
Unaccompanied Baggage Rule 9
1. These rules apply to unaccompanied baggage as well: Provisions of these rules are also extended to unaccom-
panied baggage except where they have been specifically excluded
2. time Limit Baggage received after arrival of passenger: The unaccompanied baggage:
(a) had been in the possession abroad of the passenger and
(b) is dispatched within one month of his arrival in India or within such further period as Assistant or Deputy
Commissioner of Customs may allow.
3. Time Limit Baggage received before arrival of passenger: The unaccompanied baggage may land in India
(a) Upto 2 months before the arrival of the passenger or
(b) Within such period, not exceeding one year, as the Assistant or Deputy Commissioner of customs may
allow, for reasons to be recorded, if he is satisfied that:
(i) The passenger was prevented from arriving in India within the period of two months.
(ii) Due to circumstances beyond his control such as sudden illness of the passenger or a member of his
family, or natural calamities or disturbed conditions or disruption of the transport or travel arrange-
ment in the country or countries concerned or any other reasons, which necessitate a change in the
travel schedule of the passenger?

Application of these rules to members of the crew [Rule 10]
1. Crew member of a foreign going vessel: The provisions of these rules shall apply in respect of members of the
crew engaged in a foreign going vessel for importation of their baggage at the time of final pay off on termina-
tion of their engagement
However, except as specified above, a crew member of a vessel 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 ` 1,500 (before 01.03.2013, it was ` 600)
2. Crew Member of an aircraft: Notwithstanding anything contained in these rules a crew member of an aircraft
shall be allowed to bring gift items like chocolates, cheese, cosmetics and other petty gift items at the time of
the returning of the aircraft from foreign journey for their personal or family use which shall not exceed value of
` 1,500 (before 01.03.2013 ` 600).
Postal Articles
As per sections 82 to 84 of the Customs Act, 1962, goods can be cleared by post. Any label or declaration accompa-
nying the goods showing the description, quantity and value thereof, shall be treated as an entry for import under
the Customs Act.
The rate of duty and tariff value applicable to goods imported by post shall be the rate and valuation in force on the
date on which the postal authorities present to the proper officer a list containing the particulars of such goods for the
purpose of assessment of duty.
The procedure for clearance:
(i) Post parcels are allowed to pass from port/airport to Foreign Parcel Department of Government Post Offices
without payment of customs duty.
(ii) The Postmaster hands over to Principal Appraiser of Customs the memo showing
Total number of parcels from each country of origin,
Parcel bills or senders declaration,
Customs declaration and dispatch notes, and
Other information that may be required.
(iii) The mail bags are opened and scrutinized by Postmaster under supervision of Principal Postal Appraiser of Cus-
toms.
(iv) Packets suspected of containing dutiable goods are separated and presented to Customs Appraiser with letter
mail bill and assessment memos.
(v) The Customs Appraiser marks the parcels which are required to be detained if
necessary particulars are not available, or
misdeclaration or undervaluation is suspected or
goods are prohibited for import.
Appraiser has the power to examine any parcel. After inspection, the parcels are sealed with a distinctive seal. Any
misdeclaration or undervaluation is noted or goods are prohibited goods for imports these be detained and the same
intimated to Commissioner of Customs.
If everything is in order after verification, goods will be handed over to Post Master, who will hand over the same to the
addressee on receipt of customs duty.
Import of Samples
In the International trade it is considered often necessary that samples of the goods manufactured in one country be
sent to another country for being shown or demonstrated for Customer appreciation. There are duty free imports of
genuine commercial samples into the country for smooth flow of trade.

Customs Law
The commercial samples are basically specimens of goods that may be imported by the traders or representatives of
manufacturers. However, goods which are prohibited under Foreign Trade (Development and Regulation) Act, 1992
are not allowed to be imported as samples (i.e. wild animals, wild birds and parts of wild animals, arms and ammuni-
tions and so on).
Samples can be imported by the traders, industry, individuals, research institutes and so on. These samples can also be
brought by the persons as part of their personal baggage or through port or in courier.
The current limit of ` 1 lakh per annum for duty free import of samples in terms of NT 154/94 Customs, dated 13.7.1994
is enhanced to ` 3 lakh per annum (w.e.f. 27.2.2010).
Baggage Rules, 2016
[Notification No. 30/2016-Customs (N.T.) dated 1.3.2016 as amended by Notification No. 43/2016-Customs (N.T) dated
31.3.2016 read with corrigendum dated. 1.4.2016]
In exercise of the powers conferred by section 79 of the Customs Act, 1962 (52 of 1962), and in supersession of the
Baggage Rules, 1998, except as respects things done or omitted to be done before such supersession, the Central
Government hereby makes the following rules, namely:-
1. Short title and commencement.
(1) These rules may be called the Baggage Rules, 2016.
(2) They shall come into force on the 1st day of April, 2016.
2. Definitions. (1) In these rules, unless the context otherwise requires, -
(i) Annexure means Annexure appended to these rules;
(ii) family includes all persons who are residing in the same house and form part of the same domestic
establishment;
(iii) infant means a child not more than two years of age;
(iv) resident means a person holding a valid passport issued under the Passports Act, 1967 (15 of 1967) and
normally residing in India;
(v) tourist means a person not normally resident in India, who enters India for a stay of not more than six
months in the course of any twelve months period for legitimate non-immigrant purposes;
(vi) personal effects means things required for satisfying daily necessities but does not include jewellery.
(2) Words and expression used and not defined in these rules but defined in the Customs Act, 1962 (52 of 1962) shall
have the same meaning respectively assigned to them in the said Act.
3. Passenger arriving from countries other than Nepal, Bhutan or Myanmar.- An Indian resident or a foreigner residing in
India or a tourist of Indian origin, not being an infant arriving from any country other than Nepal, Bhutan or Myanmar,
shall be allowed clearance free of duty articles in his bona fide baggage, that is to say, -
(a) used personal effects and travel souvenirs; and
(b) articles other than those mentioned in Annexure-I, upto the value of fifty thousand rupees if these are carried on
the person or in the accompanied baggage of the passenger:
Provided that a tourist of foreign origin, not being an infant, shall be allowed clearance free of duty articles in his bona
fide baggage, that is to say,
(b) articles other than those mentioned in Annexure- I, upto the value of fifteen thousand rupees if these are carried
on the person or in the accompanied baggage of the passenger:
Provided further that where the passenger is an infant, only used personal effects shall be allowed duty free.
Explanation - The free allowance of a passenger under this rule shall not be allowed to pool with the free allowance
of any other passenger.

4. Passenger arriving from Nepal, Bhutan or Myanmar.- An Indian resident or a foreigner residing in India or a tourist, not
being an infant arriving from Nepal, Bhutan or Myanmar, shall be allowed clearance free of duty articles in his bona
fide baggage, that is to say,
(b) articles other than those mentioned in Annexure -I up to the value of fifteen thousand rupees if these are carried
on the person or in the accompanied baggage of the passenger:
Provided that where the passenger is an infant, only used personal effects shall be allowed duty free:
Provided further that where the passenger is arriving by land, only used personal effects shall be allowed duty free.
Explanation- The free allowance of a passenger under this rule shall not be allowed to pool with the free allowance
of any other passenger.
5. Jewellery - A passenger residing abroad for more than one year, on return to India, shall be allowed clearance
free of duty in his bona fide baggage of jewellery upto a weight, of twenty grams with a value cap of fifty thousand
rupees if brought by a gentleman passenger, or forty grams with a value cap of one lakh rupees if brought by a lady
passenger.
6. Transfer of residence
(1) A person, who is engaged in a profession abroad, or is transferring his residence to India, shall, on return, be allowed
clearance free of duty in addition to what he is allowed under rule 3 or, as the case may be, under rule 4, articles in
his bonafide baggage to the extent mentioned in column (2) of the Appendix below, subject to the conditions, if any,
mentioned in the corresponding entry in column (3) of the said Appendix.
(2) The conditions mentioned in column (3) of the said Appendix may be relaxed to the extent mentioned in column
(4) of the said Appendix.
APPENDIX
Duration of stay Articles allowed free of duty (2) Conditions (3) Relaxation (4)
abroad (1)
From three Personal and household articles, other Indian passenger
months upto six than those mentioned in Annexure I or
months Annexure II but including articles men-
tioned in Annexure III upto an aggre-
gate value of sixty thousand rupees.
From six months Personal and household articles, other Indian passenger
upto one year than those mentioned in Annexure I
or Annexure II but including articles
mentioned in Annexure III, upto an ag-
gregate value of one lakh rupees.
Minimum stay Personal and household articles, other The Indian pas-
of one year than those mentioned in Annexure I senger should not
during the or Annexure II but including articles have availed this
preceding two mentioned in Annexure III upto an ag- concession in the
years gregate value of two lakh rupees. preceding three
years.

Customs Law
Minimum stay Personal and house household articles, (i) Minimum stay of (a) For condition (i), shortfall of
of two years or other than those listed at Annexure two years abroad, upto two months in stay abroad
more. I or Annexure II but including articles immediately pre- can be condoned by Deputy
mentioned in Annexure III upto an ag- ceding the date of Commissioner of Customs or As-
gregate value of five lakh rupees. his arrival on trans- sistant Commissioner of Customs
fer of residence; if the early return is on account
of:- (i) terminal leave or vacation
being availed of by the passenger;
or (ii) any other special circum-
stances for reasons to be recorded
in writing.
(ii) Total stay in (b) For condition (ii), the Princi-

India on short pal Commissioner of Customs or
visit during the two Commissioner of Customs may
preceding years condone short visits in excess of six
should not exceed months in special circumstances
six months; and for reasons to be recorded in writ-
ing.
(iii) Passenger has No relaxation.

not availed this
concession in the
preceding three
years.
7. Currency - The import and export of currency under these rules shall be governed in accordance with the provi-
sions of the Foreign Exchange Management (Export and Import of Currency) Regulations, 2015, and the notifications
issued thereunder.
8. Provisions regarding unaccompanied baggage - (1) These rules shall apply to unaccompanied baggage except
where they have been specifically excluded:
Provided that the said unaccompanied baggage had been in the possession, abroad, of the passenger and is dis-
patched within one month of his arrival in India or within such further period as the Deputy Commissioner of Customs
or Assistant Commissioner of Customs may allow:
Provided further that the said unaccompanied baggage may land in India upto two months before the arrival of the
passenger or within such period, not exceeding one year, as the Deputy Commissioner of Customs or Assistant Com-
missioner of Customs may allow, for reasons to be recorded, if he is satisfied that the passenger was prevented from
arriving in India within the period of two months due to circumstances beyond his control, such as sudden illness of
the passenger or a member of his family, or natural calamities or disturbed conditions or disruption of the transport or
travel arrangements in the country or countries concerned or any other reasons, which necessitated a change in the
travel schedule of the passenger.
9. Application of these rules to members of the crew - (1)These rules shall also apply to the members of the crew en-
gaged in a foreign going conveyance for importation of their baggage at the time of final pay off on termination of
their engagement.
(2) Notwithstanding anything contained in sub-rule (1), a member of crew of a vessel or an aircraft other than those
referred to in sub-rule(1), shall be allowed to bring articles like chocolates, cheese, cosmetics and other petty gift items
for their personal or family use which shall not exceed the value of one thousand and five hundred rupees.

ANNEXUREI
(See rule 3, 4 and 6)
1. Fire arms.
2. Cartridges of fire arms exceeding 50.
3. Cigarettes exceeding 100 sticks or cigars exceeding 25 or tobacco exceeding 125 gms.
4. Alcoholic liquor or wines in excess of two litres.
5. Gold or silver in any form other than ornaments.
6. Flat Panel (Liquid Crystal Display/Light-Emitting Diode/ Plasma) television.
ANNEXURE II
(See rule 6)
1. Colour Television.
2. Video Home Theatre System.
3. Dish Washer.
4. Domestic Refrigerators of capacity above 300 litres or its equivalent.
5. Deep Freezer.
6. Video camera or the combination of any such Video camera with one or more of the following goods, name-
ly:-
(a) television receiver;
(b) sound recording or reproducing apparatus;
(c) video reproducing apparatus.
7. Cinematographic films of 35mm and above. 8. Gold or Silver, in any form, other than ornaments.
ANNEXURE III
(See rule 6)
1. Video Cassette Recorder or Video Cassette Player or Video Television Receiver or Video Cassette Disk Player.
2. Digital Video Disc player.
3. Music System.
4. Air-Conditioner.
5. Microwave Oven.
6. Word Processing Machine.
7. Fax Machine.
8. Portable Photocopying Machine.
9. Washing Machine.
10. Electrical or Liquefied Petroleum Gas Cooking Range
11. Personal Computer (Desktop Computer)
12. Laptop Computer (Note book Computer)
13. Domestic Refrigerators of capacity up to 300 litres or its equivalent.

Customs Law
Example 27: Mrs. & Mr. Kapoor visited Germany and brought following goods while returning to India after 2 days stay
abroad on 8th April 2016.
(i) Their personal effects like clothes, etc., valued at ` 35,000.
(ii) A personal computer bought for ` 1,36,000.
(iii) A laptop computer bought for ` 95,000.
(iv) Two litres of liquor bought for ` 1,600.
(v) A new camera bought for ` 87,400.
What is the amount of customs duty payable?
Answer:
Their personal effects like clothes, etc., = exempt
A personal computer bought for = ` 1,36,000
A laptop computer bought for = exempt
Two litres of liquor bought for = ` 1,600
A new camera bought = ` 87,400
------------------
Total = ` 2,25,000
Less: General Free Allowance ` 50,000 + ` 50,000 = ` 1,00,000
-----------------
Baggage taxable = ` 1,25,000
------------------
Customs Duty is ` 45,062.50 (i.e. 1,25,000 x 36.05%) payable by Mrs. & Mr. Kapoor
Note: GFA w.e.f 1-4-2016 is ` 50,000 for each individual.
Example 28: After visiting USA, Mrs. & Mr. X brought to India a laptop computer valued at ` 80,000 personal effects
valued at ` 90,000 and a personal computer for ` 52,000. What is the customs Duty payable?
Answer: Duty payable on baggage = ` (52,000 50,000) x 36.05% = ` 721/-
Example 29: Mr. X an Indian resident, aged 45 years, returned to India after visiting USA on 10/04/2016. He had gone
to USA on 13/04/2016. On his way back to India he brought following goods with him
(a) His personal effects like clothes etc. valued at ` 90,000:
(b) 2 litre of Wine worth ` 1,000;
(c) A video camera worth ` 21,000;
(d) A watch worth ` 23,000.
Find the customs duty payable by Mr. X
Answer:
2 ltrs of wine = ` 1,000
Video camera = ` 21,000
Watch = ` 23,000

Total = ` 45,000

Less: GFA = ` 50,000

Customs duty is nil.
Note: No restriction on age and minimum period of stay (w.e.f. 1-4-2016)
Example 30: Amarnath, an IT professional and a person of Indian origin, is residing in Denmark for the last 14 months. He
wishes to bring a used microwave oven (costing approximately ` 54,200 and weighing 15 kg) with him while transfer-
ring his residence to India. He purchased the oven in Denmark 6 months back and he has been using that oven for his
personal use in his kitchen. He is not aware of Indian customs rules. Could you please provide him some advice in this
regard?
Answer:
Transfer of residence w.e.f 1-4-2016:
A person, who is engaged in a profession abroad, or is transferring his residence to India can bring, used household
items as below:
Passengers who have stayed abroad GFA for personal household items upto `
3-6 months ` 60,000
6-12 months ` 1,00,000
1-2 years ` 2,00,000
Above 2 years ` 5,00,000
In the given example Amarnath brings the used household articles worth ` 54,200 which is free of duty. As per the rule
5 of the Baggage Rules, 1998 he is not liable to pay any duty.
Example 31: Mr. C is a Chartered Accountant, Indian resident, brought with him the following items on his return to
India from USA.
Personal effects like clothes etc. of ` 5,50,000;
Jewellery of ` 25,000
A Camera for ` 50,000
Household articles of ` 30,000
Professional equipments like electronic diary, calculator and other items worth ` 40,000
A Laptop worth for ` 3,00,000
Compute the duty payable by Mr. C
Answer: `
Jewellery = 25,000
Camera = 50,000
Household articles = 30,000
Professional equipments = 40,000

Subtotal = 1,45,000
Less: GFA = 50,000

Balance subject to duty = 95,000

Basic Customs Duty ` 34,248 (i.e. ` 95,000 x 36.05%)
Example 32: Mr. Narayan is a Cost Accountant (aged 40 years) an Indian resident goes to Nepal on tour. He pur-
chased one computer for ` 50,000, one laptop computer for ` 1,50,000 and hair dryer of ` 2,000 in a duty free shop in
Nepal and brings the same to India. What is the duty payable?

Customs Law
(i) If he returns on 3rd day by air
(ii) If he returns on 3rd day by land route
(iii) If he returns on 15th day by air
(iv) If he returns on 15th day by land route
Answer:
(i) If he returns on 3rd day by air:
Value of Computer and hair dryer is taxable @36.05%
One laptop is exempt from duty
General Free Allowance ` 15,000 allowed w.e.f. 1-4-2016
Customs Duty = ` 13,339 [(i.e. 52,000-15,000) x 36.05%]
(ii) If he returns on 3rd day by land route:
General Free Allowance not allowed
Customs Duty = ` 18,746 (i.e. ` 52,000 x 36.05%)
(iii) If he returns on 15th day by air (i.e. after 3 days of stay):
General Free Allowance ` 15,000 allowed w.e.f. 1-4-2016
Customs Duty = ` 13,339 [i.e. (` 52,000 ` 15,000) x 36.05%]
(iv) If he returns on 15th day by land route:
General Free Allowance not allowed
Customs Duty = ` 18,746 (i.e. ` 52,000 x 36.05%)
4.18 DRAWBACKK
BASIC CONCEPT
Basic Concept
In duty drawback , the excise duty and customs duty paid on inputs and service tax paid on input services is given
back to the exporter of finished product by way of duty drawback.
It may be noted that duty drawback under section 75 is granted when imported materials are used in the manufac-
ture of goods which are then exported, while duty drawback under section 74 is applicable when imported goods are
re-exported as it is, and article is easily identifiable.
Duty drawback rates are of following types - (a) All Industry Rate (b) Brand Rate and (c) Special Brand Rate. Duty
drawback rates can be fixed with retrospective effect [rule 5(2) of Drawback Rules, 1995].
Comparison of the provision of section 74 and 75 is as follows:
Drawback allowable on re-export of duty paid goods Drawback on material used in the manufacture of ex-
(Sec. 74) ported goods (sec. 75)
(i) Drawback, in relation to any goods exported out of Drawback in relation to any goods manufactured in
India, means refund of duty paid on importation of India and exported, means the rebate of duty or fact as
such goods in terms of section 74. Thus, drawback is the case may be, chargeable on cay imported materi-
allowed only if import duties of customs. als or excisable materials used or taxable services used
as input services in the manufacture of such goods.
(ii) The identity of the goods exported should be estab- The goods exported under this section one different
lished as the one, which was imported on payment from the inputs as the inputs are manufactured, pro-
of duty. cessed or any operations are carried on then before
their export.
(iii) Drawback under this section is available on all Drawback under this section is available only on notified
goods (Identification is the only criterion) goods.
(iv) The exported goods should have been imported The goods to be exported may be manufactured or pro-
and customs duty by paid thereon. cessed from imported or indigenous inputs or by utilizing
input services.
(v) The rate of drawback is 98% in case the goods are Drawback is allowed at All Industry Rate or Brand Rate or
exported without use. Special Brand Rate, as is applicable.
The rate of drawback on goods taken into use is
separately notified depending upon the period of
use, depreciation in value and other relevant fac-
tors.
(vi) The goods should be exported within two years (or No such restrictions.
extended period) from the date of payment of duty
or such extended time as the board may allow.
(vii) There is no criterion of minimum value addition, It has been specifically provided that there should not
which is to be fulfilled before export for claim of be negative value addition and in case where minimum
drawback. value addition is specified the same should be achieved
for claim of drawback.
(viii) No provision for recovery of export sale proceeds The sale-proceeds in respect of such goods on which
the drawback has been allowed, have to be received
by the exporter or by any person on his behalf with the
period as specified by RBI, except in exceptional circum-
stances
(ix) The drawbacks is governed by the Re-export of Im- The drawback, in this case, is governed by the Customs,
ported Goods (Drawback of Customs Duties) Rules, Central Excise Duties and Service Tax drawback Rules,
1995. 1995. The rules cover customs duty, central excise duty
and service tax.
Duty Drawback on Re-Export Section 74 of Customs Act, 1962 provide for drawback if the goods are re-exported as
such or after use. This may happen in case like import for exhibitions, goods rejected or wrong shipment etc. The re-ex-
ported goods should be identifiable as having been imported and should be re-exported within two years from date
of payment of duty when they were imported. This period (of two years) can be extended by CBE&C on sufficient
cause being shown. These should be declared and inspected by Customs Officer. Original shipping bill under which
the goods were imported should be produced. The goods can be exported as cargo by air or sea, or as baggage or
by post. After inspection, export and submission of application with full details, 98% of the customs duty paid while im-
porting the goods is repaid as drawback. @98% of import duty is allowed as Duty Drawback if re- exported without use.

Customs Law
Duty draw back in case of goods used after importation, allowed based on period of usage:
Period between date of clearance for home consumption and date to when goods are % of DDB on import duty
placed under customs control for export
3M 95%
> 3M 6M 85%
> 6M 9M 75%
> 9M 12M 70%
> 12M 15M 65%
> 15M 18M 60%
> 18M NIL

Summary of duty drawback on re-export has been explained as follows
Duty Drawback (DDB)
(with respect to import)
Goods are imported Goods are imported

for business purpose for personal purpose
Exported after use Exported without use Exported within 2 years from Exported within 2
the date of import years but less than
or equal to 4 years
from the date of
within 18 After 18 within 2 other 2 import
months months years years
DDB based No DDB DDB No DDB DDB allowed withou DDB allowed with
on period @98% permission from CBEC permission from CBEC
of use
Qtr DDB (%) Qtr DDB(%)
Yr-1 I 96 Yr-3 I 69.5
3 M 95% II 92 II 67
> 3 M 6 M 85% III 88 III 64.5
> 6 M 9 M 75% IV 84 IV 62
> 9 M 12 M 70%
> 12 M 15 M 65% Yr-2 I 81 Yr-4 I 60
> 15 M 18 M 60% II 78 II 58
> 18 M NIL II 75 III 56
IV 72 IV 54
All Industry Drawback Rates All Industry Drawback rates are fixed by Directorate of Drawback, Dept. of Revenue,
Ministry of Finance, Govt. of India, Jeevan Deep, Parliament Street, New Delhi-110001. The rates are periodically re-
vised-normally on 1st June every year. The All Industry Drawback Rate is fixed under rule 3 of Drawback Rules by con-
sidering average quantity and value of each class of inputs imported or manufactured in India.
Duty drawback rate shall not exceed 33% of market price of export goods (Rule 8A of the Customs, Central Excise
Duties and Service Tax Drawback Rules w.e.f. 15-2-2006).
Brand Rate of Duty Drawback It is possible to fix All Industry Rate only for some standard products. It cannot be fixed
for special type of products. In such cases, brand rate is fixed under rule 6 by furnishing the prescribed data within 3
months from the relevant date for determination of rate of duty and tariff valuation under section 16 or 83, to the Prin-
cipal Commissioner or Commissioner of Central Excise and Customs stating all relevant facts including the proportion
in which the materials or components or input services are used in the production or manufacture of goods and the
duties paid on such materials or components or service tax paid on such input services.
Special Brand Rate of duty drawback In case if the duty drawback as per all industry rate is less than 80% of the du-
ties or taxes paid on the materials or components or input services, then the manufacturer or exporter, except where
a claim for drawback under rule 3 or rule 4 has been made, can apply for special brand rate to the Principal Com-
missioner or Commissioner of Central Excise and Customs by furnishing the prescribed data within 3 months from the
relevant date for determination of rate of duty and tariff valuation under section 16 or 83.
Practical Problems Related to Customs Duty
Example 33: Calculate the amount of duty drawback allowable under section 74 of the Customs Act, 1962 in follow-
ing cases:
(a) Salman imported a motor car for his personal use and paid ` 5,00,000 as import duty. The car is re-exported after
6 months and 20 days.
(b) Nisha imported wearing apparel and paid ` 50,000 as import duty. As she did not like the apparel, these are
re-exported after 20 days.
(c) Super Tech Ltd. imported 10 computer systems paying customs duty of ` 50 lakh. Due to some technical prob-
lems, the computer systems were returned to foreign supplier after 2 months without using them at all.
Answer :
(a) The amount of duty drawback is ` 4,40,000 (i.e. ` 5,00,000 x 88%), since these goods used in India.
(b) Duty drawback is not allowed on wearing apparel.
(c) Duty drawback is ` 49,00,000 (i.e. ` 50,00,000 x 98%), since these goods are re-exported without being used.
Example 34: Computation of duty drawback: A exported a consignment under drawback claim consisting of the
following items
Particulars Chapter Heading FOB value (`) Drawback rate

200 pieces of pressure stoves mainly 74.04 16,000 4% of FOB
made of beans @ ` 80/piece
200 Kgs. Brass utensils @` 200 per Kg. 74.13 40,000 ` 24/Kg.
200 Kg. Artware of brass @` 300 per Kg. 74.22 60,000 17.50% of FOB subject to a maximum
of ` 38 per Kg.
On examination in docks, weight of brass Artware was found to be 190 Kgs. and was recorded on shipping bill. Com-
pute the drawback on each item and total drawback admissible to the party.
Answer:
The drawback on each item and total drawback admissible to the party shall be-
Particulars FOB value (`) Drawback rate Drawback Amount (`)

200 pcs, pressure stoves made of brass 16,000 4% of FOB 640
200 Kgs. Brass utensils 40,000 ` 24 per Kg. 4,800
200 kgs. Artware of brass, whose actual 60,000 17.50% of FOB subject to maxi- 7,220
weight was 190 Kgs. only. mum of ` 38 per Kg. (` 9,975 or `
7,220 whichever is less)
Total Drawback admissible (in `) 12,660

Customs Law
Example 35: X Ltd has exported following goods: Product P, FOB value worth ` 1,00,000 and the rate of duty drawback
on such export of goods is 0.75%. FOB value of product Q worth ` 10,000 and the rate of duty drawback on such
export of goods is 1%. Will X Ltd be entitled to any duty drawback?
Answer:
Duty drawback on product P allowed is ` 750 (i.e. 1,00,000 x 0.75%), since amount is more than ` 500.
Duty drawback on product Q is allowed, because the amount of duty drawback ` 100 (which is more than ` 50).
Example 36: Y Ltd has been exported following goods to USA. Discuss whether any duty drawback is admissible under
section 75 of the Customs Act, 1962.
Product FOB Value of Exported goods (`) Market Price of goods (`) Duty drawback rate
A 2,50,000 1,80,000 30% of FOB
B 1,00,000 50,000 0.75% of FOB
C 8,00,000 8,50,000 3.50% of FOB
D 2,000 2,100 1.50% of FOB
Note: Imported value of product C is ` 9,50,000.
Answer :
Duty draw back amount for all the products are as follows:
Product A:
Drawback amount = 2,50,000 x 30% = ` 75,000 or ` 1,80,000 x 1/3 = ` 60,000
Allowable duty draw back does not exceed 1/3 of the market value.
Hence, the amount of duty drawback allowed is ` 60,000
Product B:
Drawback amount allowed is ` 750 (i.e. ` 1,00,000 x .0.75%). Since, the amount is more than ` 500 even though the
rate is less than 1%.
Product C:
No duty drawback is allowed, since the value of export is less than the value of import (i.e. negative sale)
Product D:
No duty drawback is allowed, since the duty drawback amount is ` 30 (which is less than ` 50). Though rate of duty
drawback is more than 1%, no duty drawback is allowed.
4.19 OTHER PROVISIONS IN CUSTOMS
Person who had received any Show Cause Notice in Last Three Financial Years is Ineligible
In order to ensure that scope of the scheme remains limited (and the scheme fails), it is provided that no case should
be pending against them. Even show cause notice invoking penal provisions should not have been issued against
them is last three financial years. Such importers can be probably counted on fingers. If this condition is insisted upon,
the scheme is stillborn and will be a non-starter.
Application for Getting Accreditation
Importers desirous of availing the facility of Accredited Client has to make application for registration in form given in
MF (DR) circular No. 42/2005-Cus dated 24-11-2005. Application has to be accompanied by a CA certificate that the
accounting system of applicant is as per accounting standards prescribed by ICAI.
Decision regarding ACP status within 30 days
In case of status holders, Customs will communicate decision on conferring ACP status (Accredited Client under Risk
Management System of customs clearance, within 30 days from receipt of application by customs.
Risk Management Division in Systems Directorate
A risk management division has been created in Systems Directorate. Risk Management Committees will be consti-
tuted at National level and Local level MF(DR) circular No. 23/2007-Cus dated 28-6-2007.
4.20 PROJECT IMPORTS
Basic Concept
Project imports status is being granted to the green houses set up for protected cultivation of horticulture and floricul-
ture product. As such, these projects would attract concessional rate of basic customs duty of 5%.
Salient Features of Project Imports
(i) Project Imports is an Indian innovation to facilitate setting up of and expansion of industrial projects. Normally,
imported goods are classified separately under different tariff headings and assessed to applicable Customs
duty, but as a variety of goods are imported for setting up an industrial project their separate classification and
valuation for assessment to duty becomes cumbersome. Further, the suppliers of a contracted project, do not
value each and every item or parts of machinery which are supplied in stages. Hence, ascertaining values for
different items delays assessment leading to demurrage and time and cost overruns for the project. Therefore,
to facilitate smooth and quick assessment by a simplified process of classification and valuation, the goods im-
ported under Project Import Scheme are placed under a single Tariff Heading 98.01 in the Customs Tariff Act,
1975. The Central Government has formulated the Project import Regulation, 1986 prescribing the procedure
for effecting imports under this scheme.
(ii) The Project Import Scheme seeks to achieve the objective of simplifying the assessment in respect of import
of capital goods and related items required for setting up of a project by classifying all goods under heading
98.01 of the Customs Tariff Act, 1975 and prescribing a uniform Customs duty rate for them even though other
headings may cover these goods more specifically.
(iii) The different projects to which heading 98.01 applies are; irrigation project, power project, mining project,
oil/mineral exploration projects, etc. Such an assessment is also available for an indus1nal plants used in the
process of manufacture of a commodity. The Central Government can also notify projects in public interest
keeping in view the economic development of the country to which this facility will apply. Thus, a number of
notifications have been issued notifying a large number of projects for assessment under Tariff Heading 98.01.
However, this benefit is not available to hotels, hospitals, photographic studios. Photographic film processing
laboratories, photocopying studio, laundries, garages and workshops. This benefit is also not available to a
single or composite machine.
(iv) Goods that can be imported under Project Import Scheme are machinery, prime movers, instruments, appa-
ratus, appliances, control gear, transmission equipment, auxiliary equipment, equipment required for research
and development purposes, equipment for testing and quality control, components, raw materials for the man-
ufacture of these items, etc. In addition, raw material, spare parts, semi-finished material, consumables up to
10%, of the assessable value or goods can also be imported.
(v) The purposes for which such goods can be imported under the Project Import Scheme are for Initial setting up
or for Substantial expansion of a unit of the project. The unit is any self contained portion of the project hav-
ing an independent function in the project. A project would fall under the category of substantial expansion
if the installed capacity of the unit is increased by not less than 25%. as per the Project Import Regulations.
Registration of Contracts
(i) In terms of Regulation 4 of the Project Import Regulations. 1986 (PIR) the basic requirement for availing the
benefit of assessment under Tariff Heading No. 98.01 is that the importer should have entered into one or more
contracts with the suppliers of the goods for setting up a project. Such contracts should be registered prior to
clearance in the Customs House through which the goods are expected to be Imported The importer shall ap-
ply for such registration in writing to the proper officer of Customs.
(ii) Regulation 5 provides in the manner of registering contracts as follows:-
(a) Before any order is made by the proper officer of customs permitting the clearance of the goods for
home consumption;

Customs Law
(b) In the case of goods cleared for home consumption without payment of duty subject to re- export in
respect of fairs, exhibitions, demonstrations, seminars, congress and conferences, duly sponsored or ap-
proved by the Government of India or Trade Fair Authority of India, as the case may be, before the date
of payment of duty.
(iii) To expedite registration, the importers are advised to submit the following documents along with the applica-
tion for registration:-
(a) Original deed of contract together with true copy thereof.
(b) Industrial License and letter of intent, SSI Certificate granted by the appropriate authority with a copy
thereof.
(c) Original Import license, if any, with a list of items showing the dimensions, specifications, quantity, quality,
value of each item duly attested by the Licensing Authority and a copy thereof.
(d) Recommendatory letter for duty concession from the concerned Sponsoring Authority, showing the de-
scription, quantity, specification, quality, dimension of each item and indicating whether the recom-
mendatory letter is for initial set up or substantial expansion, giving the installed capacity and proposed
addition thereto.
(e) Continuity Bond with Cash Security Deposit equivalent to the 2% of CIF value of contract sought to be
registered subject to the maximum of ` 50,00,000/- and the balance amount by Bank Guarantee backed
by an undertaking to renew the same till the finalisation of the contract. The said continuity bond should
be made out for an amount equal to the CIF value of the contract sought to be registered.
(f) Process flow chart, plant layout, drawings showing the arrangement of imported machines along with an
attested copy of the Project Report submitted to the Sponsoring authorities, Financial Institution, etc.
(g) Write up, drawings, catalogues and literature of the items under import.
(h) Two attested copies of foreign collaboration agreement, technical agreement, know-how, basic/de-
tailed engineering agreement, equipment supply agreement, service agreement, or any other agree-
ment with foreign collaborators/suppliers/persons including the details of payment actually made or to
be made.
(i) Such other particulars, as may be considered necessary by proper officer for the purpose of assessment
under Heading No. 9801.
(iv) After satisfying that goods are eligible for project imports benefit and importer has submitted all the required
documents, the contract is registered by the Custom House and as a token of registration the provisional duty
bond is accepted by the Assistant/ Deputy Commissioner of Customs, Project Import Group. The details of the
contracts are entered in the register kept for the purpose and a Project Contract Registration Number is as-
signed and communicated to the importer. The importer is required to refer to this number in all subsequent
correspondence.
Clearance of Goods after Registrations
On every Bill of Entry filed for clearance of goods under the Project Import Scheme, the importer I CHA is required to
indicate the Project Contract Registration Number allotted to it. After noting, the Bill of Entry is sent to the Project import
Group, which is required to check the description, value and quantity of the goods imported vis-a-vis the description,
value and quantity registered. In case these particulars are found in order, the Bill of Entry is assessed provisionally and
handed over to the importer or his agent for payment of duty. The Project Import Group keeps a note of the descrip-
tion of the goods and their value in the Project Contract Register and in the file maintained in the Group for each
project.
Finalisation of Contract
(i) Under Regulation 7 of the PIR, 1986 the importer is required to submit, within three months from the date of
clearance of the last consignment or within such extended time as the proper officer may allow, the following
documents for the purpose of finalisation of the assessment:-
(a) A reconciliation statement i.e. a statement showing the description, quantity and value of goods im-
ported along with a certificate from a registered Chartered Engineer certifying the installation of each of
the imported items of machinery;

(b) Copies of the Bills of Entry, invoices, and final payment certificate. The final payment certificate is insisted
upon only in cases where the contract provides that the amount of the transaction will be finally settled
after completion of the supplies.
(ii) To ensure that the imported goods have actually been used for the projects for which these were imported,
plant site verification may be done in cases where value of the project contract exceeds ` 1 crore. In other
cases plant site verification is normally done selectively.
(iii) In the normal course, after submission of the reconciliation statement and other documents by the importers,
the provisional assessments are finalized within a period of three months where plant site verification is not re-
quired and within six months where plant site verification is required. In cases where a demand has been issued
and confirmed on such finalization and importer has not paid the duly demanded, steps are taken as per law
to realise the amount.
Benefit available in the absence of Restrictions of Registration before Warehousing:
Registration of contracts before an order is made permitting clearance for home consumption or before the deposit
in warehouse to avail benefit of concessional rate of duty. Goods imported were warehoused awaiting registration
cleared for home consumption only after registration. Restrictions of registration before warehousing being absent in
present Regulations benefit is available. Regulations 4 and 5 of Project Import Regulations, 1986. [Paras 2, 3, 4)-Bharat
Earth Movers Limited u. Commissioner of Customs, Mysore 2006 (201) ELT 60 (Tri.-Bang)
Project Imports benefit not to be denied merely because goods cleared before Registration of contract. Project
Imports benefit available to expansion of computer software plant.-Collector v. DPS India (P) Ltd. 1997 (92) ELT A130
(SC)
No Replacement Imports form part of the Original Import:
Contract covering all the imports registered, all the formalities under the Project Imports Regulations fulfilled - Appel-
lants submitted certain reasons for not getting free replacements from original supplier - Secretary to Government of
Kerala, sponsoring authority of the project, issued the essentiality certificate for the replacements stating that items
imported are entitled for concessional duty under Project Import
Regulations- Lower authorities reasoning that since replacements are not free, therefore, project import benefit can-
not be given has no legal basis - Damaged parts having been exported and no indication that Project Import Regula-
tions have been misused by appellants - Appellants entitled for benefit of project import - Regulations 4, 5, 6 of Project
Import Regulations, 1986. [Para 7)---BSES Kerala Power Limited v. Commissioner of Customs, Cochin 2006 (196) ELT 246
(Tri.-Bang)
Import of spares be considered under Project Imports:
Original assessment claimed on merits under respective headings - Assessee entitled to claim assessment as project
import under Heading 98.01 of Customs Tariff when assessment is reopened- Import of spares to be considered under
Project Imports.-Tata Hydro Electric Power Supply Co. Ltd. v. C.C., Mumbai 1999
(114) ELT 171 (Tri.-Bom)
Exemption from Customs duty under other notifications not deniable to Project Imports:
Exemption from Customs duty under other notifications is not deniable to Project Imports - Horological machinery
imported without specifying the Tariff Heading but treated as Project Import under Chapter 98 - Notification dated
28-2-1985, exempts Horological machinery from duty in excess of 10% without specifying the Tariff Heading - HELD:
Horological machines eligible to the benefit of notification dated 28-2-1985 even if cleared under Heading 98.01 of
Customs Tariff since project import notification clearly specifies that exemption under other notifications will not be
effected by it and moreover the exemption notification, dated 28-2-1985 did not specify the Heading for the goods
exempted under it. -Abrol Watches Put. Ltd. u. Collector of Customs, Bombay 1997 (092) ELT 311 (SC)
No industrial license is necessary from the DGTD before the benefit of Heading 84.66 could be given to an importer:
There is nothing in the Project Imports (Registration of Contract) Regulations, 1965 [sub-regulations 3(a) and 3(c)] to
indicate that there must be an industrial license necessarily from the DGTD before the benefit of Heading 84.66 could
be given to an importer.-Collector of Customs u. Kodagu Coffee Growers Co-Op. Society Ltd. 1992 (61) ELT 300 (Tri.-
Del)- This case was Approved in 1997 (94) ELT 476 (SC)
Project Import Regulations cannot be held as excessive delegated legislation to declare them invalid.
Project Imports Regulations, 1986 defined industrial plant so as to exclude service establishments like photographic

Customs Law
studios from project import benefit. Note (2) to Chapter 98 of Customs Tariff Act, 1975 does not amount to excessive
delegation - Section 157 of Customs Act, 1962. We are, therefore, of the considered opinion that Chapter Note (2)
cannot be faulted as an instance of excessive delegation of essential legislative function nor can the Project Imports
Regulations be faulted on the ground of travelling beyond the purview of the statute. [1967 (3) S.C.R. 557, 1979 (1)
SCR 845 and 1981 (2) SCR 742 followed].
Project Imports Regulations, 1986 are relatable not only to Section 157 of Customs Act, 1962 but also to express power
conferred by Note (2) to Chapter 98 of Customs Tariff Act, 1975. Any alleged practice to the contrary is irrelevant. -
Subhash Photographics v. Union of lndia 1993 (66) ELT 3 (SC)
Captive power plant a part of Project Imports
Zuari Industries Ltd v. CCE & C 2007-T/OL-55-SC-CUS (Dated: March 29, 2007)
Captive power plant - Part of project imports eligible for exemption - Heading 98.01 is a specific entry - Once an essen-
tiality certificate was issued by the sponsoring authority, it was mandatory for the Revenue to register the contract.
4.21 OFFENCES, POWER AND PENALTIES UNDER CUSTOMS
Offences under Customs

The term Offence means a violation or breach of a law, like evasion of duty and breaking prohibitions under the Cus-
toms Act, 1962. However, offence not defined under Customs Act, 1962. Thereby, Offence as any act or omission
made punishable by any law for the time being in force.
There are basically two types of punishments namely civil penalty and criminal penalty. Civil penalty for violation of
statutory provisions involving a penalty and confiscation of goods and can be exercised by the Department of Cus-
toms. Criminal punishment is of imprisonment and fine, which can be granted only in a criminal court after prosecu-
tion.
Evasion of duty or prohibition under section 135(1) of the Customs Act, 1962
If a person has nexus with misdeclaration of value or evasion of duty or handling in any manner goods liable for con-
fiscation under section 111 (i.e. Confiscation of improperly imported goods) or section 113 (i.e. Export goods liable for
confiscation), he shall be punishable in the following manner:
Imprisonment upto SEVEN years and FINE for the following four kinds of offences
i. Market value of offending goods exceeds ` 1 Crore
ii. Value of evasion of duty exceeds ` 30 lakhs
iii. Offence pertains to prohibited goods notified by Central Government of India
iv. Value of fraudulent availment of drawback/exemption exceeds ` 30 lakhs
For all other kind of offences imprisonment is upto THREE years or fine or both.
For repeat conviction, the imprisonment can be SEVEN years and FINE and in absences of special and adequate
reasons, the punishment shall not be less than ONE year.
Cognizable and Non-cognizable Offence
Cognizable offence means an offence for which a police officer may arrest without warrant (i.e. without the order of a
Magistrate). Non-cognizable offence means offences under Customs were a police officer cannot investigate cases
without the order of a Magistrate.
Cognizance of Offences
As per Section 137(1) of the Customs Act, 1962, Court cannot take cognizance of offences under the Customs Act,
1962 in the following cases without previous sanction of the Principal Commissioner or Commissioner of Customs:
i. False declaration or documents (Section 132)
ii. Obstruction (i.e. stop the progress) of Officers of Customs (Section 133)
iii. Refusal to be X-rayed (Section 134)

iv. Evasion of duty or prohibitions (Section 135)
v. Preparation to do clandestine export (i.e. improper export) (Section 135A)
As per Section 137(2) of the Customs Act, 1962, for taking cognizance of an offence committed by a Customs officer
under section 136 the Court needs previous sanction of the Central Government in respect of officers of the rank of
Assistant or Deputy Commissioner and above and previous sanction of the Principal Commissioner or Commissioner of
Customs in respect of officers lower in rank than Assistant or Deputy Commissioner.
Section 136 of the Customs Act deals with offences by Officers of Customs:
i. An officer of customs facilitated to do fraudulent export.
ii. Search of persons without reason to believe in the secreting of goods on them.
iii. Arrest of person without reason to believe that they are guilty.
iv. These are called vexatious actions of department officers.
Power
Section 100
i. Power to search suspected persons entering or leaving India.
ii. Search of person for any goods liable for confiscation by the proper officer in and around customs area.
iii. Burden of proof on department (section 123).
Section 101
i. Power to search suspected person in certain other cases.
ii. Search is conducted by the officer of customs empowered by the Principal Commissioner or Commissioner.
iii. Search of person for notified goods which are liable for confiscation order by Principal Commissioner or Com-
missioner anywhere in India.
iv. Burden of proof, that goods not smuggled, or importer.
Section 105
i. Power to search premises.
ii. Search of place for goods liable for confiscation & documents useful for any proceeding under the Act.
iii. If notified goods, burden of proof that goods are not smuggled on importer.
Section 106
i. Power to stop and search conveyance.
ii. Stop and search conveyance for any smuggled goods.
iii. Refer section 115.
Section 110
i. Seizure of goods, documents & things.
ii. Seizure of goods & documents are liable to confiscation.
iii. Notice must be made by proper officer for confiscation of goods within 6 months.
Section 100, 101 & 105
i. For prohibited goods may give option to redemption fire (Except arms, RDX etc).
ii. For other goods must give an option.
iii. In both the above case, goods are smuggled goods.
Penalties under Custom Act
i. Smuggling in relation to goods is an act or omission which will make the goods liable to confiscation.
Customs Law
ii. Penalty can be imposed for improper import as well as attempt to improperly export goods. Improper means
without the knowledge of the customs officers.
iii. Monetary penalty upto value of goods or ` 5,000 whichever is higher can be imposed.
iv. Goods can be confiscated. Permission can be granted for re-export of offending goods.
v. In case of goods covered under section 123 of Customs Act, burden of proof that the goods are not smuggled
goods is on the accused.
Following monetary penalties prescribed under section 112 of the customs Act, with regard to improper importation:
Imported Goods (A) Value in (`) (B) Minimum Penalty Minimum Penalty in
in (`) (C) (`) (B) or (C)
Prohibited Goods Value of prohibited goods ` 5,000 Whichever is higher
Dutiable goods (Other Duty sought to be evaded on such goods x ` 5,000 Whichever is higher
than prohibited goods) 10%
Misdeclaration of value Value declared - Actual value = ` XXXX ` 5,000 Whichever is higher
Prohibited goods plus mis- Value of prohibited goods or Value declared ` 5,000 Whichever is higher
declaration value Actual value whichever is higher
Dut iable goods plus mis- Duty sought to be evaded or Value declared ` 5,000 Whichever is higher
declaration of value Actual value whichever is higher
Export Goods Liable for Confiscation (Section 113)
These are goods attempted to be improperly exported under clause of section 113.
(a) Goods attempted to be exported by Sea or Air from place other than customs port or customs airport.
(b) Goods attempted to be exported by land or inland water through unspecified route.
(c) Goods brought near land frontier or coast of India or near any bay, gulf, creek or tidal river for exporting from
place other than customs port or customs station.
(d) Goods attempted to be exported contrary to prohibition under custom Act or any other law
(e) Goods concealed in any conveyance brought within limits of customs area for exportation.
(f) Goods loaded or attempted to be loaded for eventual export out of India, without permission of proper officer,
in contravention of section 33 and 34 of the customs Act, 1962.
(g) Goods stored at un-approved place or loaded without supervision of customs officer.
(h) Goods not mentioned or found excess of those mentioned in shipping Bill or declaration in respect of baggage

(i) Any goods entered for exportation not corresponding in respect of value or any other particulars in ship-
ping Bill or declaration of contents of baggage
(ii) Goods entered for Export under claim for duty drawback which do not correspond in any material par-
ticular with any information provided for fixation of duty drawback.
(i) Goods imported without duty but being re-exported under claim for duty drawback.
(j) Goods cleared for exportation which are not loaded on account of willful act, negligence or default, or goods
unloaded after loading for exportation, without permission.
(k) Provision in respect of specified goods are contravened.

SECTION - B
4.22 ANTI-DUMPING DUTY - AN OVERVIEW
Trade Protection Measures under WTO

Under the WTO regime, international trade has been liberalized allowing free movement of goods and services be-
tween member countries by eliminating tariff and non-tariff barriers to a large extent. The liberalization has further
being extended in cross-border transactions at regional levels by entering into various regional preferential trade
agreements.
With the present low rate of import duty, a small deviation from fair trade practice on the part of the exporter or sub-
sidy offered by exporting country will make it difficult for domestic industries to compete with imported products which
are like products to the products manufactured by domestic industry.
The WTO agreements as an exceptional measure, depending upon the situation permit product specific imposition
of Anti-dumping duty, safeguards duty and countervailing duty as the case may be for the protection of domestic
industry from the injury caused by imported goods.
These three duties are exceptional in nature and are imposed on three different mutually exclusive conditions.
Basis of dis- Anti-Dumping Duty Countervailing Duty Safeguard Duty

tinction
Applicability Export Price < Price normal- Exporting Government is giv- In a situation, when there is a sud-
ly charged in domestic/ ing subsidy to exporter in that den and sharp increase in imports
home market foreign land for the purpose of as a result of unforeseen develop-
exporting ments causing injury to domestic
industry
Act of conflict Alleged foul play on the An alleged foul play on the Imposed purely for the protection
that leads to part of the exporter part of the exporting country of domestic industry on a no fault
imposition principle where domestic industry is
temporarily unable to compete with
imported products on account of
these unforeseen developments.
Product-specific and ex- Product-specific duty imposed
porter specific duty against imports coming from
all sources irrespective of the
exporter and country of origin
Tenure of ap- It can continue as long as It can also continue forever as It can continue only for a temporary
plicability dumping continues long as subsidy continues period not exceeding 10 years.

Anti-Dumping
Dumping means export of goods by exporters of one country/territory to the market of another country/ territory at
a price lower than the price prevailing in the country of export and the difference in such price is called margin of
dumping. This is an unfair trade practice which can have a distortive effect on international trade and needs to be
condemned under WTO law.
Anti-dumping is a measure to rectify the trade distortive effect of dumping and re-establish fair trade, which is achieved
by imposition of a duty on dumped imports, not exceeding the margin of dumping.
The Salient Features
i. It is an instrument for ensuring fair trade and is not a measure of protection per se for the domestic industry
ii. It provides relief to the domestic industry against the injury caused by dumping and gives domestic industry a
level playing field.
iii. The duty is imposed as a deterrent effect to discourage dumped imports, so that users can buy material from
domestic industry from whom they were not buying earlier on account of availability of cheap dumped im-
ports.

Customs Law
iv. The idea is to levy and collect extra tax, rather to take the landed value of imports to a level where domestic
industry can fairly compete with imports and sell the product in the domestic market.
Application of Anti-Dumping
i. The Anti-dumping duty is levied and collected as a duty of Customs and charged over and above the National
Customs Duty chargeable on the import of the item.
ii. Anti-dumping duty is not creditable
iii. It will be charged as an extra cost on dumped imports.
Authority for Anti-dumping Action against Unfair Trade Practices
i. Anti-dumping measure in India are administered by the Directorate General of Anti-dumping and Allied Duties
(DGAD) functioning in the Department of Commerce, Ministry of Commerce and Industry, which is headed by
the Designated Authority.
ii. The Designated Authoritys function is to conduct the Anti-dumping investigation and make recommendation
to the Government for imposition of Anti-dumping duty.
iii. Such duty is finally imposed/levied by a Notification of the Ministry of Finance.
Termination of Investigation under Anti-Dumping
The Designated Authority may suspend or terminate the investigation under Anti-dumping in the following cases:
(1) If there is a request in writing from the domestic industry at whose instance the investigation was initiated
(2) When there is no sufficient evidence of dumping or injury
(3) If the margin of dumping is less than 2% of the export price
(4) The volume of dumped imports from a country is less than 3% of the total imports of the like article imported into
India, unless the volume of dumped imports collectively from all such countries who individually account for less
than 3%, is not more than 7% of total imports
(5) If injury is negligible.
Terminologies Used
1. Designated Authority: It is the authority appointed by the Government of India to investigate the existence,
degree and effect of any alleged dumping in relation to any import of any article.
2. Period of Investigation (POI): It refers to the specific period, during which there is an action and application of
dumping, injury and there exists a casual link between such dumping and injury. It is a period of not less than six
months and not more than eighteen months.
3. Interested Party: A party/exporter, which is going to be affected if duties are imposed after investigation and
those who has an interest in the investigation, is called interested party. Basically, they are the stakeholders.
4. The Product under Consideration (PUC) or Article under Investigation: It refers to that imported product which is
alleged to have been imported at dumped price and on which Anti-dumping duty is proposed to be levied.
5. Like Product: It is a product, which is identical, i.e. alike in all respects with reference to the product under con-
sideration or in the absence of such a product, another product which, although not alike in all respects, has
characteristics closely resembling those of the product under consideration.
6. Domestic Industry: It refers to the domestic producers as a whole of the like products or those producers whose
collective output of the like products constitutes a major proportion of the total domestic production of like
products.
7. Normal Value: It is the price of the product under consideration, in the ordinary course of trade, when destined
for consumption in the exporting country market. Example: Product A is being imported from Country Z. The
import price is `100 (without any element of duty, freight, insurance, etc) while the price of this product if sold in
Country Z is `60. So, the normal value of the goods is `60, i.e. the price at which it would have been sold in the
exporting country.
8. Export Price: The export price is the transaction price/value at which the foreign producer sells the product to
an importer in the importing country. As per the example given in earlier paragraph, the export Price is `100.
9. Dumping Margin/ Margin of Dumping (DM): In reference to an article, it means the difference between the
normal value and its export price. Example: if the normal value is `60 and the export price is `100. The Margin of
Dumping = Export Price (-) Normal Value = ` (100 60) = `40.
10. Non-market Economies (NME): The economies, where the government has a complete or substantial monopo-
ly of its trade or government has a significant role in fixation of domestic prices of inputs and finished goods, are
called non-market economies.
11. Non Injurious Price (NIP): It is the sale price which is constructed ( i.e. arrived at/ ascertained) for the domestic
industry, which will give a reasonable return on investment and if Domestic Industry is able to sale its product at
that price it will claim no injury.
12. Landed value of imports: This refers to cost of the goods imported including all the expenses incurred during the
course of importation upto the port including non-creditable duties of customs.
13. Injury Margin (IM): This represents the difference between Non Injurious Price (NIP) and Landed Value of Im-
ports.
14. Price Undercutting (by imports): Sale value of domestic industry at factory gate (net of taxes) [-] landed value
of imports.
Example 37: Sale value of domestic industry at factory gate `120 (net of taxes). Landed Value of imports `90. Hence,
Price under cutting = `120 (-) `90 = `30. This is positive undercutting. It creates pressure on domestic industry from im-
ports, as the imported goods are sold at `90, which is less than the price charged by domestic industry.
On the contrary, if the Sale value of domestic industry at factory gate ( net of taxes) is `100 and the Landed value of
imports `115, then, Price under cutting = `100 (-) `115 = `(15). This is negative undercutting. The domestic industry is in
a comfortable position, as the price of imports is more than the price charged by the domestic industry.
15. Price Underselling (by exporters): Non Injurious Price (NIP)of Domestic Industry (-) Landed Value of Imports.
Example 38: Let NIP `150, Landed value of imports `120. Then, the price underselling by exporters = `150 `120 = `
30.
A positive price underselling shows the inability of the domestic industry to sell its product at a price which is non-
injurious to it on account of pressure from imports coming into the country
On the contrary, if the NIP is `120 and the Landed value of imports `140, then the price underselling by exporters =
`120 (-) `140 = `(20). This negative price underselling represents a comfortable position for the domestic industry, as
the price of its products is lower than imported goods.
16. Provisional Duty: It is the duty which is levied/ imposed by the Central Government by a notification based on
preliminary findings of Designated Authority, in a case, where a full-fledged investigation is pending.
17. Final Duty: It is the duty of Anti-dumping imposed by Central Government by a notification after completion of
investigation.
18. Circumvention of Duty: When Anti-dumping Duty imposed on a product is being bypassed by exporters or im-
porters by some malpractices like changing the description of product or by import of the product in an unas-
sembled or disassembled form or by changing the country of origin of the product, it is construed that there is
a circumvention of duty. In simple words, this is an act of evasion of duty by unfair trade practices.
19. De-minimis margin of dumping: Any exporter whose margin of dumping is less than 2% of the export price shall
be excluded from the purview of anti-dumping duties. Example: Landed Value of Imports `100. Sale Price of like
products in domestic market ` 101.50. Now, there is a margin of dumping to the extent of ` 1.50 (= ` 101.50 `
100). Since the margin of dumping ` 1.50 as a percentage on Landed value of imports (` 100) is measured to be
1.5%, hence the rule of de-minimis margin of dumping is applicable, and as the tolerance/deviation is less than
2%. Hence, this is not a case to be reviewed under Anti-dumping laws in India.
20. De-minimus imports: If the volume of dumped imports, actual or potential, from a particular country accounts
for less than 3% of the total imports of the like products, then investigation under Anti- dumping laws should be
suspended. However, in such a case, the cumulative imports of the like product from all these countries who
individually account for less than 3% should not exceed 7% of the import of the like product.
Principles Governing the Determination of Normal Value, Export Price and Margin of Dumping
The designated authority while determining the normal value, export price and margin of dumping shall take into
Customs Law
account inter alia, the following principles-

(1) The elements of costs referred to in the context of determination of normal value shall normally be determined
on the basis of records kept by the exporter or producer under investigation, provided such records are in ac-
cordance with the generally accepted accounting principles of the exporting country, and such records rea-
sonably reflect the cost associated with production and sale of the article under consideration.
(2) Sales of the like product in the domestic market of The exporting country, or sales to a third country at prices
below per unit(fixed and variable) costs of production plus administrative, selling and general costs may be
treated as not being in the ordinary course of trade by reason of price. The designated authority may disregard
these sales, in determining normal value provided it has determined that:
(i) such sales are made within a reasonable period of time (not less than six months) in substantial quanti-
ties, i.e. when the weighted average selling price of the article is below the weighted average per unit
costs or when the volume of the sales below per unit costs represents not less than twenty per cent of the
volume sold in transactions under consideration, and
(ii) such sales are at prices which do not provided for the recovery of all costs within a reasonable period of
time.
(3) The said prices will be considered to provide for recovery of costs within a reasonable period of time if they are
above weighted average per unit costs for the period of investigation, even though they might have been
below per unit costs at the time of sale.
(i) The said authority in the course of investigation shall consider all available evidence on the proper al-
location of costs, including that which is made available by the exporter or producer provided that such
allocation has been historically utilized by the exporter or producer, in relation to establishing appropriate
amortization and depreciation periods and allowances for capital expenditure and other development
costs.
(ii) unless already reflected in allocation of costs referred to in clause(1) and sub-clause(i) above, the des-
ignated authority, will also make appropriate adjustments for those non-recurring items of cost which
benefits further and/or current production, or for circumstances in which costs during the period of inves-
tigation are affected by start-up operation.
(4) The amounts for administrative, selling and general costs and for profits as referred to in sub-section(1) of section
9A of the Act, shall be based on actual data pertaining to production and sales in the ordinary course of trade,
of the like article by the exporter or producer under investigation. When such amounts cannot be determined
on this basis, the amounts may be determined on the basis of:
(i) the actual amount incurred and realise by the exporter or producer in question, in respect of production
and sales in the domestic market of the country of origin of the same general category of article;
(ii) the weighted average of the actual amounts incurred and realized by other exporters or producers sub-
ject to investigation in respect of production and sales of the like article in the domestic market of the
country of origin; or
(iii) any other reasonable method, provided that the amount for profit so established shall not exceed the
profit normally realized by the exporters or producers on sales of products of the same general category
in the domestic market of the country of origin.
(5) The designated authority, while arriving at a Constructed export price, shall give due allowance for costs includ-
ing duties and taxes, incurred between importation and resale and for profits.
(6) (i) While arriving at margin of dumping the designated authority shall make a fair comparison between the
export price and the normal value. The comparison shall be made at the same level of trade, normally at
the ex- factory level, and in respect of sales made at as nearly as possible the same time. Due allowance
shall be made in each case, on its merits, for differences which affect price comparability, including dif-
ferences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and
any other differences which are demonstrated to affect price comparability.
(ii) In the cases where export price is a constructed price, the comparison shall be made only after establish-
ing the normal value at equivalent level of trade.
(iii) When the comparison under this para requires a conversion of currencies, such conversion should be

made by using the rate of exchange on the date of sale, provided that when a sale on foreign currency
on forward markets is directly linked to the export sale involved the rate of exchange in the forward sale
shall be used. Fluctuations in exchange rates shall be ignored and in an investigation the exporters shall
be given at least sixty days to have adjusted their export prices to reflect sustained movements in ex-
change rates during the period of investigation.
(iv) Subject to the provisions governing comparison in this paragraph, the existence of margin of dumping
during the investigation phase shall normally be established on the basis of a comparison of a weighted
average normal value and export prices on a transaction-to- transaction basis. A normal value estab-
lished on a weighted average basis may be compared to prices of individual export transactions if it is
found that a pattern of export prices which differ significantly among different purchasers, regions or
time period and if an explanation is provided as to why such differences cannot be taken into account
appropriately by the use of a weighted average-to -weighted average or transaction-to-transaction
comparison.
(7) In case of imports from non-market economy countries, normal value shall be determined on the basis of the
price or constructed value in a market economy third country, or the price from such a third country to other
countries, including India, or where it is not possible, on any other reasonable basis, including the price actually
paid or payable in India for the like product, duly adjusted if necessary, to include a reasonable profit margin.
An appropriate market economy third country shall be selected by the designated authority in a reasonable
manner and due account shall be taken of any reliable information made available at the time of the selec-
tion. Account shall also be taken within time limits; where appropriate, of the investigation if any made in similar
matter in respect of any other market economy third country. The parties to the investigation shall be informed
without unreasonable delay the aforesaid selection of the market economy third country and shall be given a
reasonable period of time to offer their comments.
Principles governing investigations
(1) The designated authority shall, after it has decided to initiate investigation to determine the existence, degree
and effect of any alleged dumping of any article, issue a public notice notifying its decision and such public
notice shall, inter alia, contain adequate information on the following :-
(i) the name of the exporting country or countries and the article involved
(ii) the date of initiation of the investigation;
(iii) the basis on which dumping is alleged in the application;
(iv) a summary of the factors on which the allegation of injury is based;
(v) the address to which representations by interested parties should be directed; and
(vi) the time-limits allowed to interested parties for making their views known.
(2) A copy of the public notice shall be forwarded by the designated authority to the known exporters of the article
alleged to have been dumped, the Governments of the exporting countries concerned and other interested
parties.
(3) The designated authority shall also provide a copy of the application referred to in sub-rule (1) of Rule 5 to -
(i) the known exporters or to the concerned trade association where the number of exporters is large, and
(ii) the governments of the exporting countries : Provided that the designated authority shall also make
available a copy of the application to any other interested party who makes a request therefore in writ-
ing.
(4) The designated authority may issue a notice calling for any information, in such form as may be specified by it,
from the exporters, foreign producers and other interested parties and such information shall be furnished by
such persons in writing within thirty days from the date of receipt of the notice or within such extended period
as the designated authority may allow on sufficient cause being shown.
Explanation:
For the purpose of this sub-rule, the notice calling for information and other documents shall be deemed to
have been received one week from the date on which it was sent by the designated authority or transmitted

Customs Law
to the appropriate diplomatic representative of the exporting country.

(5) The designated authority shall also provide opportunity to the industrial users of the article under investigation,
and to representative consumer organizations in cases where the article is commonly sold at the retail level,
to furnish information which is relevant to the investigation regarding dumping, injury where applicable, and
causality.
(6) The designated authority may allow an interested party or its representative to present the information relevant
to the investigation orally but such oral information shall be taken into consideration by the designated author-
ity only when it is subsequently reproduced in writing.
(7) The designated authority shall make available the evidence presented to it by one interested party to the other
interested parties, participating in the investigation.
(8) In a case where an interested party refuses access to, or otherwise does not provide necessary information
within a reasonable period, or significantly impedes the investigation, the designated authority may record its
findings on the basis of the facts available to it and make such recommendations to the Central Government
as it deems fit under such circumstances.
Principles for determination of non-injurious price [Rule 17(1)]
(1) The designated authority is required under sub-rule (1) of rule 17 to recommend the amount of anti-dumping
duty which, if levied, would remove the injury where applicable to the domestic industry.
(2) For the purpose of making recommendation under clause (1), the designated authority shall determine the
fair selling (notional) price or non-injurious price of the like domestic product taking into account the principles
specified herein under.
(3) The non-injurious price is required to be determined by considering the information or data relating to cost of
production for the period of investigation in respect of the producers constituting domestic industry. Detailed
analysis or examination and reconciliation of the financial and cost records maintained by the constituents of
the domestic industry are to be carried out for this purpose.
(4) The following elements of cost of production are required to be examined for working out the noninjurious price,
namely:
(i) The best utilisation of raw materials by the constituents of domestic industry, over the past three years
period and the period of investigation, and at period of investigation rates may be considered to nullify
injury, if any, caused to the domestic industry by inefficient utilisation of raw materials.
(ii) The best utilisation of utilities by the constituents of domestic industry, over the past three years period
and period of investigation, and at period of investigation rates may be considered to nullify injury, if any,
caused to the domestic industry by inefficient utilization of utilities.
(iii) The best utilisation of production capacities, over the past three years period and period of investigation,
and at period of investigation rates may be considered to nullify injury, if any, caused to the domestic
industry by inefficient utilization of production capacities.
(iv) The Propriety of all expenses, grouped and charged to the cost of production may be examined and
any extra-ordinary or non-recurring expenses shall not be charged to the cost of production and salary
and wages paid per employee and per month may also be reviewed and reconciled with the financial
and cost records of the company.
(v) To ensure the reasonableness of amount of depreciation charged to cost of production, it may be exam-
ined that no charge has been made for facilities not deployed on the production of the subject goods,
particularly in respect of multi-product companies and the depreciation of re-valued assets, if any, may
be identified and excluded while arriving at reasonable cost of production.
(vi) The expenses to the extent identified to the product are to be directly allocated and common expenses
or overheads classified under factory, administrative and selling overheads may be apportioned on
reasonable and scientific basis such as machine hours, vessel occupancy hours, direct labour hours, pro-
duction quantity, sales value, etc., as applied consistently by domestic producers and the reasonable-
ness and justification of various expenses claimed for the period of investigation may be examined and
scrutinised by comparing with the corresponding amounts in the immediate preceding year.
(vii) The expenses, which shall not to be considered while assessing non-injurious price include,
a) research and development Provisions (unless claimed and substantiated as related to the product
specific research);
b) since non-injurious price is determined at ex-factory level, the post manufacturing expenses such
as commission, discount, freight- outward etc. at ex-factory level;
c) excise duty, sales tax and other tax levies on sales;
d) expenses on job work done for other units;
e) royalty, unless it is related to technical know-how for the product;
f) trading activity of product under consideration; or
g) other non-cost items like bad debts, donations, loss on sale of assets, loss due to fire, flood, etc.
(viii) A reasonable return (pre-tax) on average capital employed for the product may be allowed for recov-
ery of interest, corporate tax and profit. The average capital employed is the sum of net fixed assets and
net working capital which shall be taken on the basis of average of the same as on the beginning and at
the end of period of investigation. For assessment of reasonable level of working capital requirement, all
the elements of net working capital shall be scrutinized in detail. The impact of revaluation of fixed assets
shall not be considered in the calculation of capital employed. Interest is allowed as an item of cost of
sales and after deducting the interest, the balance amount of return is to be allowed as pre-tax profit to
arrive at the non- injurious price.
(ix) Reasonableness of interest cost may be examined to ensure that no abnormal expenditure on account
of interest has been incurred. Details of term loans, cash credit limits, short term loans, deposits and other
borrowings taken by the company and interest paid thereon may be examined in detail along with the
details of assets deployed.
(x) In case there is more than one domestic producer, the weighted averages of non-injurious price of in-
dividual domestic producers are to be considered. The respective share of domestic production of the
subject goods may be taken as basis for computation of weighted average non-injurious price for the
domestic industry as a whole.
Anti-dumping Application Proforma -

The following is an outline of application proforma under Anti-dumping laws in India:-
Part Deals with

I Imported Product Information
II Indian Industry Profile
III Evidence of Dumping
1. Estimates of Normal Value
2. Estimates of Export Price
3. Estimates of Dumping Margin
IV Evidence of Injury
IVA Injury Information on Domestic Industry
IVB Country wise landed value
V Evidence of Casual link
VI Costing Information
Format A Statement of Raw Materials and Packing Materials Consumption and Reconciliation
Format B Statement of Raw Material Consumption
Format CI - Statement of Cost of Production
Format CII Allocation and Apportionment of Expenditure
Format D Statement of Consumption of Utilities
Format E Statement of Sales Relations
Format F Certificate

Customs Law
Example 39:
FORMAT CI - STATEMENT OF COST OF PRODUCTION
Name of the Company: XYZ Limited
Installed Capacity 1,00,000 units

Production in Installed capacity 65,000 units
Capacity Utilization (%) 65%
Production in Investigation Period 56,000 units
Capacity Utilisation in Investigation period 56%
Sales (quantity) 61,000 units 51,000 units
Particulars Previous Accounting Year Investigating Period

Qty Rate Value (`) Cost per Qty Rate (`) Value (`) Cost per
(`) unit (`) unit (`)
Manufacturing Expenses:
Raw Materials (specify the 10,000 100.00 10,00,000 15.38 8,000 120.00 9,60,000 17.14
major raw materials) (MT)
Utilities
Depreciation 2,00,000 3.08 1,90,000 3.39
Others (specify nature of ex- 1,95,000 3.00 1,75,000 3.13
penditure)
Administrative Expenses
Variable 1,30,000 2.00 1,12,000 2.00
Fixed 78,000 1.20 78,000 1.39
Selling & Distribution Expenses
Variable 61,000 1.00 56,000 1.10
Fixed 40,000 0.62 40,000 0.71
Financial Expenses
Variable 1,30,000 2.13 35,700 0.70
Fixed 21,000 0.32 21,000 0.38
Less: Miscellaneous Income (25,000) (20,000)
(from product concerned) -
Sale of Scrap raw materials
Total Cost to make and sell 18,30,000 28.15 16,47,700 29.42
Selling Price 35.00 32.00
Profit/Loss 6.85 2.58

Note: This Statement of Cost of Production is to be authenticated by a Cost Accountant in Practice

Example 40:
One of the major reasons for the decrease in the quantity of sales is identified to be import of like/similar goods by a
foreign company to India. The selling price of such goods, in Indian market, as fixed by the foreign counterpart is ` 23,
while the same goods are normally sold at that foreign country for ` 35. Landed Value of Imports ` 25. XYZ Ltd. being
deceived requested the competent authority to have a review. Ascertain the injury margin and suggest the measure
suitable to safeguard the Indian Industry.
Answer:
Particulars Amount (`)

Price of the Product under Consideration (PUC) or Article under Investigation from the Exporting 23.00
Country / Export Price
Normal Value of such product, when sold in the domestic market of the exporting country 35.00
Dumping Margin or Margin of Dumping (DM) = 35.00 25.00 10.00
Non Injurious Price (NIP) this is the constructed sale price of the domestic industry which will give a 30.00
reasonable return on investment and if the domestic industry is able to sale its product at that price, it
(say)
will not claim any injury
Landed Value of Imports (including all the expenses incurred during the course of importation upto the 25.00
port including the non-creditable duties of customs
Injury Margin (IM) = Non Injurious Price (-) Landed Value of Imports = 30.00 (-) 25.00 5.00
Thus, for XYZ Ltd. the Injury Margin is ascertained at ` 5 per unit. Accordingly, the Authorities shall cause to initiate
necessary proceedings to levy additional duty of customs (under the aegis of Anti-dumping Laws) to safeguard the
domestic industry.

Customs Law
Fill in the Blanks

(i) Exclusive economic zone extends to 200 (200/300) nautical miles from the base line of the coast. Beyond 200
(100/200) nautical miles is High Seas.
(ii) Indian customs waters extend upto 24 nautical miles beyond territorial water.
(iii) White (White/Green) bill of entry is used when goods cleared for home consumption
(iv) Article having eight digit code where customs duty rate is specified in the customs tariff is termed as tariff
item.
(v) Additional duty of customs (special CVD) payable on non-exempt items is 4%.
(vi) Bonafide Samples and prototypes up to ` 5,000 (` 10,000 / ` 5,000) are exempt from customs duty if imported by
post or in Air Craft or by Courier Service
(vii) Boat notes under Customs act are used for transferring small cargo from ship to shore, from shore to ship without
(with/without) berthing the ship.
(viii) Post Shipment Charges are not considered for Assessable Value under the Customs Act
(ix) Yellow Bill of Entry is required for warehousing.
(x) Green (Green/Yellow) bill of entry is for clearance from warehouse on payment of customs day
(xi) A passenger returning to India after stay in Germany for one week is entitled to bring goods up to ` 45,000 with-
out payment of any Custom duty.
(xii) Bonafide baggage including used (used, unused, damaged) personal effects is exempt from customs duty.
(xiii) EOU can sell a portion of their production in Domestic Tariff are (DTA) up to 50 % of their FOB value of exports in
earlier years
(xiv) EOU has to issue CT- 3 certificate for obtaining inputs without payment of excise duty.
(xv) An EOU Unit is required to execute B-17 Bond.
(xvi) Remand means sending the case back to lower authorities for decision
(xvii) In Customs and Excise law, the commitment of offence beyond reasonable doubt has to be proved by depart-
ment.
True and False/Correct and Incorrect
(i) The peak rate of basic customs duty on non-agricultural products is 15%.
Ans. False. The peak rate of basic customs duty on non-agricultural products is reduced to 10%.
(ii) Since the Government wants to encourage export, there is export (customs) duty on very few items.
Ans. True. Since the Government wants to encourage export, only few items (being covered under Second Sched-
ule to Customs Tariff) are liable to customs duty.
(iii) Countervailing duty (CVD) is payable on assessable value plus basic customs duty plus anti-dumping duty.
Ans. Incorrect. Countervailing duty (CVD) is not payable on anti-dumping duty. Countervailing duty (CVD) is pay-
able on assessable value plus basic customs duty excluding cess.
(iv) Buying Commission is always includible in Customs Value.
Ans. False, Buying Commission is not required to be included in Customs Value.
(v) There is no provision under the Customs Act for remission of customs duty on goods lost, damaged pilfered.
Ans. False Customs Act specifically contained provisions for remission of customs duty on goods lost, damaged or
pilfered.
(vi) Customs officer should pass adjudication order in all situations where an assessment is done more than the
claim of importer/exporter.
Ans. False. If the assessee accepts in writing the assessment, a speaking adjudication is not required.

(vii) Second hand goods imported are not chargeable to customs duty.
Ans. False. Second hand goods are restricted for imports under Foreign Trade Policy, may be imported only under
licence. Value for customs will normally be transaction value)
(viii) Importers can store imported goods without payment of duty in public warehouse or private warehouse.
Ans. True. Importer can store imported goods without payment of duty in public warehouse or private warehouse.
(ix) If goods are pilfered in port before clearance, customs duty is still payable by the importer.
Ans. False. If goods are pilfered in port after unloading thereof but before clearance, importer is not liable to pay
customs duty.
(x) The proper officer is not authorized to lock any warehouse with the lock of customs department.
Ans. False as per sec. 62(3), proper officer is authorized to lock any warehouse with the lock of customs depart-
ment.
(xi) There are common provisions in Customs / Central Excise/ST.
Ans. True. Many provisions like appeal, principles of valuation, classification, Administrative Control Board are com-
mon.
(xii) Customs duty is not paid by an importer and it was found that such non-payment was on account of fraud
committed by him. In such case, there is no time limit for issue of show cause notice demanding duty and pen-
alty.
Ans. False. In such case notice can be issued within 5 years.
(xiii) Customs Officer should pass an adjudication order in all situations where the assessment is done contrary to the
claim of importer/exporter.
Ans. False. A speaking order is required where assessee do not agree with the assessment. However, if the assessee
accepts in writing the assessment, a speaking order is not required.
(xiv) No anti-dumping duty is payable by EOUs under the Customs Act, 1962, even where the goods imported are
used for manufacture of goods sold in India.
Ans. False. Anti-dumping duty is not applicable for imports by EOU or SEZ units, unless it is specifically made appli-
cable in the notification imposing anti-dumping duty. [Sec. 9A (2A) of Customs Tariff Act] However, such unit
sold goods in DTA, anti-dumping duty is applicable.
Short Question and Answers
(i) What is meant by Indian customs water under section 2(28) of Customs Act, 1962?
Ans. Indian Customs Waters [Sec. 2(28)]: It means the water extending into the sea upto the limit of contiguous zone
of India u/s 5 of the Territorial Water, Continental Shelf, Exclusive Economic Zone and Other Maritime Zone Act,
1976 and includes any bay, gulf, harbour, creek or tidal river.
Contiguous zone of India extends to 12 nautical miles into sea beyond territorial water of India. That means -
Indian customs water extends to 24 nautical miles from base line; and
Contiguous zone of India is the area beyond 12 nautical miles from base line and upto 24 nautical miles
from base line.
(ii) Is currency goods for purpose of Customs Act? Comment.
Ans. Yes as goods defined u/s 2(22) of the Customs Act specifically includes currency.
(iii) Excise duty payable on an article is 12% as per Central Excise Tariff. However, as per an exemption notification,
the excise duty payable is 6%. If such goods are imported, at what rate additional customs duty will be payable
under section 3 (1) of Customs Tariff Act?
Ans. The additional customs duty (CVD) will be payable @ 6%
(iv) State definition of margin of dumping.
Ans. Margin of dumping means the difference between normal value and export price (i.e., the price at which

Customs Law
these goods are exported). [Sec. 9A(1)(a) of the Customs Tariff Act].
(v) State purpose of levying additional duty (special additional duty) under section 3(5) of Customs Tariff Act.
Ans. Additional duty (also known as Special Countervailing duty) is charged to counter balance the impact of sales
tax, value added tax, local tax or any other charges for the time being leviable on a like article on its sale, pur-
chase or transportation in India.
(vi) Explain injury margin in provisions relating to anti dumping duty.
Ans. Injury Margin means difference between fair selling price of domestic industry and landed cost of imported
products. Dumping duty will be lower of dumping margin or injury margins.
(vii) Star power Ltd. is registered under Project Import Regulations 1986 in order to import a gas turbine and gen-
erator (Power Equipments) at concessional rate to implement a project for setting up of a power plant and
accordingly imported the above equipments, but before they could reach the project site, they were Iost /
destroyed in the sea within India.
The Department denied project import concession under the heading 9801 and demanded full duty as the
goods were not used in the project. Discuss the light of decided case law, whether the demand made by the
Department is tenable in law.
Ans. In CCEx. -vs.- Lanco Kondapalli Power Pvt. Ltd. [2011] 268 ELT A76, the Apex Court has held that Project import
concessions are not deniable when goods lost in sea before reaching project site.
In the case, the assessee was registered under Project Import Regulations, 1986 for import of power equip-
ments at concessional rate to implement a project for setting up a power plant. It imported a gas turbine &
generator under the Project Import Regulations, but before they could reach the project site, they were lost)
destroyed in the sea within India. The department denied Project Import Concession & demanded full duty, as
the goods were not used in the project.
It was held that the goods were irretrievably lost & were not available for the purpose for which they were
imported viz, installation in the power plant project. The goods had not been found in the case to have been
diverted for any other use. Merely because the goods were not destroyed in the presence of the Customs Of-
ficers, that would not disentitle the goods from the project import rate duty under heading 9801 of the customs
Tariff.
(viii) Shipping Bill was presented electronically on 26.02.2016, when foreign exchange rate was ` 59 = One US Dollar.
Let Export Order was passed by Customs Officer on 3.3.201 6, when exchange rate was ` 59.50 = One US dollar.
The ship crossed territorial waters of India on 10.3.2016 when exchange rate was ` 59.75 = One US dollar. Which
exchange rate should be considered for valuation of export goods?
Ans. The relevant exchange rate is ` 59 = One US Dollar, as per third proviso to sec. 14(1) of Customs Act.
(ix) Discuss relevance of customs valuation in transfer pricing mechanism.
Ans. In Coastal Energy vs.-ACIT, it was held that the valuation made by the customs authorities is not an arbitrary
exercise. But on the other hand, it depends upon large volume of international data classified according to in-
ternationally accepted protocol. Therefore, it is not possible to say that the credibility of the price rate furnished
by customs authorities needs to be discounted. It is always possible for an assessee to establish its case for a dif-
ferent price other than the customs price provided the assessee has produced acceptable materials to support
its proposition.
In the present case, except its own internationally generated price, the assessee has not furnished any com-
parable data. Therefore, the assessee has no locus standi to question the credibility of the customs data relied
upon by the TPO
(x) Bill of Entry for clearance for home consumption was presented on 3rd May, 2016. The ship was granted entry
inwards on 15th May 2016, Customs duty was assessed on 17th May, 2016, Customs duty was paid on 20th May,
2016 and goods were cleared from customs on 22nd May, 2016. Which is date relevant for rate of customs duty
and valuation?
Ans. Section 15 of Customs Act prescribes that rate of duty and tariff valuation applicable to imported goods shall
be the rate and valuation in force at one of the following dates
(a) if the goods are entered for home consumption, the date on which bill of entry is presented

(b) in case of warehoused goods, when Bill of Entry for home consumption is presented u/s 68 for clearance
from warehouse and
(c) in other cases, date of payment of duty.
Further, it is also provided that, if a Bill of entry is presented before the date of entry inwards of the vessel by
which the goods are imported, the rate of duty shall be rate in force on the date of entry inwards of the vessel.
Hence, relevant date is 15-05-2016
(xi) An Importer imported a novel and new article. He was unable to classify his goods under any of the tariff head-
ing or sub-heading and none matched with the goods under import. Even rules 1 to 3 of classification Rules
could not find solution. Hence, no customs duty is payable on such product. Comment
Ans. As per Rule 4 of Classification Rules, when goods cannot be classified in accordance with rules 1, 2, & 3, then
they are to be classified in a heading of a product which is most akin to the goods in question.
(xii) Live Exporters exported 2,000 Kg of metal of FOB value of ` 4,00,000. The rate of duty draw back on such exports
is Rs.180 per Kg. Market price of the goods is Rs.1,60,000. Calculate the duty draw back receivable by Live Ex-
ports.
Ans. Duty drawback eligibility is ` 3,60,000 (2,000 Kg. x 180 per Kg). However, as per sec. 76(1)(b) of the Customs Act,
duty drawback shall not be allowed in respect of any goods, the market price of which is less than the amount
of drawback due thereon. Hence the exporter is not entitled to get any duty drawback
(xiii) Distinguish between transit and transhipment under the Custom Act.
Ans. Goods in transit and transhipment of goods All goods carried on by a conveyance may not have same
destination. Such goods have different destination at different ports of India or any foreign port(s). In this case
there are two possibilities
Transit The goods will continue to be carried by that conveyance and delivered at different port.
Transhipment Such conveyance shall unload the goods at the particular port and thereafter the goods shall
be loaded on and carried on by different conveyance for its destination.
(xiv) Distinguish between yellow bill of entry and green bill of entry under Customs Act.
Ans. Yellow Bill of Entry is for warehousing. It is also termed as into bond Bill of Entry as bond is executed. Duty is not
paid and imported goods are transferred to warehouse where these are stored. Green Bill of Entry is for clear-
ance from warehouse on payment of customs duty. It is for ex-bond clearance.
(xv) What do you mean by project import under customs Act?
Which projects are eligible for benefit of custom duty?
What to do to get such benefit?
Ans.
(I) Project import means, import of machineries required for initial set up of project and also includes raw materi-
als, consumables and spare parts, (10% value of machinery) is allowed to import at concessional or nil rate of
duty. Heavy customs duty on imported machinery for project makes project cost very high and may become
unviable. The goods are classified under heading 9801, so that the clearance of goods become faster.
(II) Eligible projects are:
(a) Industrial plant
(b) irrigation Project
(c) Power Project
(d) Mining Project
(e) Project for Oil and Mineral Exploration
(f) Other Project specified by the Central Govt.
(III) To get benefit under Project Import, the Contract for import has to be registered with Customs. Application is
required to be made before importation and contract must be registered before order for clearance of goods

Customs Law
is made from Customs. The contract can be amended if required. After completion of Project and submission
documents assessment shall be finalized within 60 days. MF (OR) Circular No. 22/2011-CUS dt. 04 May, 2011]
(xvi) Explain briefly when pilferage should have occurred for purpose of eligibility for remission from duty of customs
under section 13 of the Customs Act, 1962.
Ans. 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 except where such goods are re-stored to the importer after pilferage - [Sec. 13].
(xvii) When an exporter can apply for Special Brand Rate of duty drawback?
Ans. The conditions of eligibility are:
a) The All Industry Rate fixed should be less than 80% of the duties paid by him;
b) Rate should not be less than 1% of FOB value of product except when amount of drawback per shipment
is more than `500.
c) Export value is not less than the value of imported material used in them i.e., there should not be nega-
tive value addition
(xviii) Name the methods of Valuation of export goods.
Ans. Following the methods of Valuation of export goods:
(a) Transaction Value
(b) export value by comparison
(c) Computed value method
(d) Residual Method
(xix) An importer submitted Bill of Entry electronically on 22.08.2015. Bill of Entry was returned from customs on 29.8.20
15 for payment of customs duty of Rs.100000. Customs office was closed on 30.8.2015 and 31.8.2015 due to
Saturday and Sunday. The importer paid customs duty on 10.9.2015. He cleared the goods from customs on
13.9.2015 after obtaining Out of customs charge order from customs authorities. How much interest is payable
by the importer?
Ans. The importer is required to pay customs duty within 2 working days after Bill of entry is returned to him. Thus he
has required to pay customs duty before 02.09.2015. Since he paid customs duty on 10.09.2015, he is required
to pay interest @18% for 8 days. Hence interest payable (`1,00,000 x 18% x 8/365) = ` 394.52
(xx) A vessel MV Ganges sailing from Hongkong to London via India was carrying various goods. Name Alpha, Beta
and Gama. Goods Alpha and Beta were unloaded at Kolkata port while goods Gama were carried further
without unloading. Whether goods Gama are imported goods, export goods, transit goods or transhipped
goods?
Ans. Goods Gama is transit goods.
(xxi) State the various purposes for which goods warehoused in customs warehouse.
Ans. Section 71 of Customs Act allows clearance of goods from customs warehouse for following purposes (a)
home consumption, (b) re-exportation or (c) removal to another warehouse.
(xxii) An importer kept imported goods in customs bonded warehouse on 15.7.2015 and cleared the goods from
customs on 13.12.2015 on payment of customs duty. Is he liable to pay interest? State reason.
Ans. 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 pay-
able 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.
(xxiii) Cat Ltd. imported machinery which was kept in warehouse on 1.4.2015. Ex-bond Bill of Entry for home consump-
tion was presented on 1.11.2015. It was assessed and returned to Cat Ltd. on 3.11.2015. Cat Ltd. paid customs
duty payable Rs.5,00,000 on 14.11.2015 and cleared the goods from the warehouse. Calculate the interest pay-
able by Cat Ltd.

Ans. Imported goods can be kept in customs bonded warehouse for 90 days. Interest is payable uls 61(2) of Customs
Act for delay beyond 90 days. Interest should be payable upto and including the date of payment of duty. In
the given case, period of 90 days expired on 30-06-2015. Thus, the company is liable to pay interest @ 15% for
137 days (being period starting from 01-07-2015 to 14-11-2015) on duty amount. Thus, interest of ` 28,150.68 is
payable i.e. (` 5,00,000 x 15% x 137 / 365).
(xxiv) Mr.G. Raju and his wife Mrs.Laxmi Raju visited England as tourist and brought a personal computer for ` 74000
and a laptop computer for ` 66,000 while returning to India, besides their personal effects valued at ` 1,50,000.
What is the customs duty payable, if duty on baggage is 35% plus cess
Ans. A laptop computer and goods of personal effect are duty free. Further, baggage upto ` 45,000 per passen-
ger is covered under General Free Allowance. However, General Free Allowance of two passengers cannot
be pooled. Thus, Mr.G. Raju and his wife Mrs.Laxmi Raju are required to pay duty on ` 29,000 [i.e., ` 74,000
` 45,000] @ 35% + education cess and SHEC @ 3%. Total duty payable: ` 10,455.00
(xxv) Doctrine of unjust enrichment in case of refunds under Central Excise and Customs.
Ans. Central Excise duty is an indirect tax, as the incidence of the duty is not borne by the payer, as he passes on the
incidence of duty to the buyer of the goods. Normally the refund sanctioned to be payer and he does not pass
on the benefit to the buyer/consumer but he retains the benefit of refund thus enriching himself. Generally the
presumption is that the duty incidence has been passed on to the buyer/consumer. The presumption is to be
rebutted by the person claiming the refund. In any refund claim, if amount is held to be refundable, if it is not
established by the claimant that the incidence of duty was not passed on to the buyer / consumer, then such
a refundable amount will be credited to the Consumer Welfare Fund.
(xxvi) Is it possible for a Trader to claim refund of special CVD from customs department? State your views.
Ans. Yes. A dealer who imports goods and sales them in India after paying Vat/sales tax can claim refund of special
CVD [Notification No. 102/2007-Cus dated 14-9-2007].
(xxvii) State in brief provisions relating to refund of special CVD of 4% paid while importing goods.
Ans. Traders selling imported goods in. India after charging sales tax/Vat can claim refund of special CVD of 4% from
Customs Department Notification No. 102/2007-Cus dated 14-9-2007. The dealer (trader) (if he is registered
with Central Excise and is issuing Cenvatable Invoice) selling such imported goods must mention in his invoice
that the buyer will not be able to avail Cenvat credit of such duty. This is required if he is claiming refund of
the special CVD. If he is not claiming refund, obviously, such remark is not required. A manufacturer using the
e goods in his manufacture can avail Cenvat credit of this duty. Thus, he gets credit through central excise
route.
(xxviii) Briefly outline the procedure for fixing anti-dumping duty.
Ans. Procedure for fixing anti dumping duty
After the designated authorities satisfied about prima fade case, he will give notice to Governments of export-
ing countries. Opportunity to inspection of documents and making representations will be given to interested
parties who are likely to be affected. Designated Authority will first give preliminary finding and then final finding
within one year.
Provisional duty can be imposed on basis of preliminary finding which can continue upto 6 months, extendable
to 9 months. Additional duty may be imposed on basis of the final finding.
As per rule 18 of Anti-Dumping Duty Rules, Central Government has to issue a notification fixing antidumping
duty within three months from date of notification issued by designated authority
(xxix) Are goods manufactured in Special Economic Zone (SEZ) excisable goods? Is supply made by DTA unit to SEZ
unit export for purpose of Central Excise?
Ans. Excise duty shall be levied and collected on all excisable goods produced or manufactured in India exclud-
ing goods produced or manufactured in special economic zone. SEZ having been given the status of foreign
terntory, imports there from to DTA will be governed by the provisions of the Special Economic Zones Act, 2005.
Supplies from the DTA to SEZ units will be regarded as deemed exports.
(xxx) What are coastal goods?
Ans. As per sec. 2(7) of the Customs Act, coastal goods means goods, other than imported goods, transported in a

Customs Law
vessel from one port in India to another port in India.

Practical Problems
(i) Assessee imported certain items from USA and the CIF value is ` 70,000. The imported items are in a package
containing 500 individual packages with RSP (Retail Sale Price) of ` 200 per package. The items of import are
subject to valuation under section 4A of Central Excise Act, 1944 based on RSP with an abatement of 30% on
the RSP for purpose of duty. The rate of excise duty is 12.5% ad valorem. The items are subject to basic cus-
toms duty at 10%. Calculate the additional duty of customs (CVD) under section 3(1) of the Customs Tariff Act,
1975,
Ans. Computation of additional duty of customs (CVD)

Retail price (500 ` 200) 1,00,000
Less: Abatement [30%] 30,000
CVD on above @ 12.5% 8,750
(ii) An EOU unit is selling goods to Indian customer. He is using wholly indigenous raw materials for manufacturing
those goods. He is selling the goods at 200 per piece. Customs duty rate is 10% and excise duty rate is 12.5% How
much duty is payable by the EOU unit?
Ans. Excise duty is payable if goods are manufactured wholly with indigenous raw materials. Hence, excise duty
payable @ 12.5% is Rs. 24 per piece.
(iii) Compute the Assessable Value of a machine imported from UK by IPL Ltd., under Customs Act, 1962
(a) FOB Value of Machine 29,955 US dollars;
(b) Air freight paid 6,000 US dollars;
(c) Insurance for transit of machine not ascertainable;
(d) Cost of design work of the machine done in India ` 50,000;
(e) Indian Local Agents Commission ` 18,000;
(f) Cost of transport of goods from port to factory in India ` 6,000.
Exchange rate is One US dollar = ` 65
Ans. Computation of Assessable Value
Particulars Amount
FOB Value of Machine 29,955 US Dollars
Add: Insurance @ 1.125% of FOB value 337 US Dollars
Add: Air freight (restricted to 20% of FOB value) 5,991 US Dollars
Total value 36,283 US Dollars
Value in Indian Rupees @ ` 65 ` 23,58,395
Add: Local Agents Commission ` 18,000
CIF Value in Rupees ` 23,76,395
Add: Landing charges @ 1% ` 23,764
Assessable value for customs purposes ` 24,00,159
(iv) Calculate customs duty payable on basis of following information
(1) Assessable value of goods as per section 14 of Customs Act ` 2,00,000
(2) Basic customs duty 10%
(3) Excise duty rate 12.50%
(4) Education cess and secondary higher education cess on excise duty is exempt by way of notification
(5) The product is covered under MRP valuation provisions. The imported goods contained 1,200 packages.
MRP printed on each package is ` 250. The abatement available on MRP is 40%.
Ans. Computation of Customs Duty Payable
Particulars Details Amount (`)

Assessable Value under Customs 2,00,000
Add: Basis Customs Duty [10% of ` 2,00,000] 20,000 20,000
Add: CVD [See Note) 22,500
Customs Duty Payable [Before Cess] 42,500
Add: Education Cess [` 42,500 * 2%] 850
Add: SHEC [` 42,500 * 1%] 425
Total Customs Duty Payable (Rounded off) 43,775
N.g: If imported goods are similar to goods covered under section 4A of the Central Excise Act, 1944, CVD is payable
on basis of MRP printed on the packing less abatement as permissible.
Maximum retail sale price (1200*`250) 3,00,000
Less: Abatement @ 40% 1,20,000
CVD 12.50% of `1,80,000 22,500
(v) Mrs. Kajari and Mr. Pannalal, Indian residents, after visiting Dubai for seven days, returned to India on 03.03.2016.
They brought following goods
(1) Personal effects like cloths, etc. ` 1,52,000
(2) Two laptop computers valued at ` 75,000 and ` 90,000
(3) One personal computer ` 42,000
(4) Two litres of liquor ` 4,000
(5) One specialized new camera with invoice in name of Mrs. Kajari ` 93,500 Compute the customs duty pay-
able.
Ans. Computation of Customs Duty Payable by Mr. Pannalal

Personal effects (exempt) --
Personal Computer 42,000
One Laptop Computer (exempt) --
Two litres of liquor 4,000
Total Value of dutiable goods 46,000
Less: General Free Allowance (GFA) 45,000
Taxable Value 1,000
Customs Duty payable @ 36.05% 361

Customs Law
Computation of Customs Duty Payable by Mrs. Kajari

One Laptop Computer (exempt) --
New Camera 93,500
Total Value of dutiable goods 93,500
Less: General Free Allowance (GFA) 45,000
Taxable Value 48,500
Customs Duty payable @ 36.05% 17,484
Note: (1) There is no Customs duty on personal effects.
(2) One laptop computer imported by any passenger (other than a member of crew) of 18 years or above as
part of the baggage has been exempted from the whole of customs duty.
(3) General Free Allowance (GFA) cannot be pooled with another person. Hence, Mr. Pannalal and Mrs. Kajari
will be separately accounted for the GFA.
(vi) Following particulars are available in respect of certain goods imported into India by air FOB Price US$
60,0.00. Exchange rate notified by RBl USD = ` 59.40. Exchange rate notified by CBE&C-1 USD = ` 59.70. Compute
the assessable value of goods as per Customs Act, 1962. The importer is unable to give details of freight and
insurance expenses.
Ans. Computation of Assessable Value and duty payable

FOB Value 60,000.00
Add: Freight [20% of FOB) 12,000.00
Add: Insurance Charges [1.125% of FOB] 675.00
Total CIF 72,675.00
In INR [$ 72,675.00 X ` 59.70] 43,38,697.50
Add: Landing Charges [1% of ` 43,38,697.50] 43,386.98
Assessable Value 43,82,084.48
43,82,084.00 (Say)
(vii) Mr. Barry imported certain goods weighing 800 kgs. With C I F value US $ 55,000. Exchanging rate was 1 US $ =
` 51 on the date of presentation of bill of entry. Basic customs duty is chargeable @ 10% and education cess
applicable. There is no excise duty payable on these goods, if manufactured in India.
As per notification issued by the Government of India, anti-dumping duty has been imposed in these goods.
The anti-dumping duty will be equal to difference between amounts calculated @ US $ 62 per kg. and landed
value of goods. You are required to compute Customs duty and anti-dumping duty payable by Mr. Barry.
Ans. Computation of duty:

CIF Value (in Indian `) (USD 55,000 ` 51) ` 28,05,000
Add: Landing Charges [1% of ` 28,05,000] ` 28,050
Assessable Value ` 28,33,050
Add: Customs Duty [ ` 28,33,050 x 10.3%] ` 2,91,804
Value of Imported Goods ` 31,24,854
Market Value of imported goods [800 KG x US 62 x INR 51] ` 25,29,600
Anti Dumping Duty [ ` 31,24,854 ` 25,29,600] ` 5,95,254

Distinctions:
(i) What is the difference between short levy and short payment?
Ans. Short levy arises when the charge itself is done at a lower rate. It may arise out of wrong classification.
Short payment arises out of a short levy or short payment of a correct levy. It is a case of less payment of duty
than what is due.
(ii) State distinction between Indian Customs Water and Territorial Waters, so far as Coverage of area is con-
cerned.
Ans. Indian Customs waters extend upto 12 nautical miles beyond territorial waters. Territorial waters of India extend
upto 12 nautical miles inside sea from baseline on coast of India and include any bay, gulf, harbour, creek or
tidal river.
Annexure 1:
Amendments in Customs:
Following amendment are being made in the Customs Act, 1962 (the Customs Act) and the Customs Tariff
Act, 1975 (the Customs Tariff Act) are as under:
Reduction in Customs duty on certain goods:
Refrigerated containers from 10% to 5%;
Mineral fuels and Mineral oils:
Coal; briquettes, ovoids and similar solid fuels manufactured from coal from 2.5%/10% to 2.5%
Lignite, whether or not agglomerated, excluding jet from 10% to 2.5%
Peat (including peat litter), whether or not agglomerated from 10% to 2.5%
Coke and semi-coke of coal, of lignite or of peat, whether or not agglomerated; retort carbon from 5%/10% to
5%
Coal gas, water gas, producer gas and similar gases, other than petroleum gases and other gaseous hydrocar-
bons from 10% to 5%
Tar distilled from coal, from lignite or from peat and other mineral tars, whether or not dehydrated or partially
distilled, including reconstituted tars from 10% to 5%
Oils and other products of the distillation of high temperature coal tar similar products in which the weight of the
aromatic constituents exceeds that of the non-aromatic constituents from 2.5%/5%/10% to 2.5%
Pitch and pitch coke, obtained from coal tar or from other mineral tars from 5%/10% to 5%
Chemicals & Petrochemicals:
All acyclic hydrocarbons and all cyclic hydrocarbons [other than para- xylene which attracts Nil Basic Customs
Duty and styrene which attracts 2% Basic Customs Duty] from 5%/2.5% to 2.5%
Denatured ethyl alcohol (Ethanol), from 5% to 2.5%, subject to actual user condition
Electrolysers, membranes and their parts required by caustic soda/ potash unit using membrane cell technol-
ogy exempted from 2.5% to Nil
Wood in chips or particles for manufacture of paper, paperboard and news print from 5% to Nil;
Textiles:
Specified fibres and yarns from 5% to 2.5%
Import of specified fabrics [for manufacture of textile garments for export] of value equivalent to 1% of FOB
value of exports in the preceding financial year exempted from Applicable Rate to Nil, subject to the specified
conditions
Electronics/ Hardware:
Polypropylene granules/resins for the manufacture of capacitor grade plastic films from 7.5% to Nil
Customs Law
Parts of E-readers from Applicable Rate to 5%

Magnetron of capacity of 1 KW to 1.5 KW for use in manufacture of domestic microwave ovens, subject to
actual user condition, from 10% to Nil.
Specified capital goods and inputs for use in manufacture of Micro fuses, Sub-miniature fuses, Resettable fuses
and Thermal fuses from Applicable Rate to Nil;
Neodymium Magnet (before Magnetization) and Magnet Resin (Strontium Ferrite compound/before formed,
before magnetization) for manufacture of BLDC motors, from Applicable Rate to 2.5%, subject to actual user
condition;
Increase in Customs Duty on certain goods:
Natural latex rubber made balloons from 10% to 20%;
Imitation jewellery from 10% to 15%;
Metals:
Primary aluminium from 5% to 7.5%
Other aluminium products from 7.5% to 10%
Zinc alloys from 5% to 7.5%
Industrial solar water heater from 7.5% to 10%;
Full exemption on solar tempered glass/solar tempered (anti-reflective coated) glass withdrawn and 5% con-
cessional Basic Customs Duty imposed, subject to actual user conditions;
Plans, drawings and designs from Nil to 10%;
Electronics/Hardware:
E-Readers from Nil to 7.5%
Preform of silica for manufacture of telecom grade optical fibre /cables from Nil to 10%;
Exemption on magnetic Heads (all types), Ceramic/Magnetic cartridges and stylus, Antennas, EHT cables,
Level meters/level indicators/ tuning indicators/ peak level meters/ battery meter/VC meters/Tape counters,
Tone arms, Electron guns withdrawn, from Nil to Applicable Rate of Basic Customs Duty;
Specified telecommunication equipment [Soft switches and Voice over Internet Protocol (VoIP) equipment
namely VoIP phones, media gateways, gateway Product/Switch (POTP/POTS), Optical controllers and ses-
sion border controllers, Optical Transport equipment; combination of one / more of Packet Optical Transport
Network(OTN) products, and IP Radios, Carrier Ethernet Switch, Packet Transport Node (PTN) products, Multipro-
tocol Label Switching- Transport Profile (MPLS-TP) products, Multiple Input / Multiple Output (MIMO) and Long
Term Evolution (LTE) Products on which 10% BCD was imposed in 2014-15 Budget] being excluded from the
purview of the other exemption also, now taxable from Nil to 10%;
Reduction in Special Additional Duty (SAD) on certain goods:
Orthoxylene, from 4% to 2%, for the manufacture of phthalic anhydride subject to actual user condition;
Exemption from SAD withdrawn fully or in some cases, imposed reduced SAD on certain goods:
Populated PCBs for manufacture of personal computers (laptop or desktop) from Nil to 4%;
Populated PCBs of mobile phone/tablet computer withdrawn. Concessional SAD on populated PCBs for manu-
facture of mobile phone/tablet computer imposed from Nil to 2%;
Miscellaneous:
Concessional Basic Customs Duty as presently available under project imports for cold storage, cold room (in-
cluding for farm level pre-cooling) also extended for cold chain including pre-cooling unit, pack houses, sorting
and grading lines and ripening chambers from 10% to 5%;
Machinery, electrical equipment, instrument and parts thereof (except populated PCBs) for semiconductor
wafer fabrication/LCD fabrication units exempted from Applicable Rate of Basic Customs Duty and SAD at
4%;

Machinery, electrical equipment, instrument and parts thereof (except populated PCBs) imported for Assem-
bly, Test, Marking and Packaging of semiconductor chips (ATMP) exempted from Applicable Rate of Basic
Customs Duty and SAD at 4%;
The exemption from Basic Customs Duty, Countervailing Duty, SAD on charger/adapter, battery and wired
headsets/speakers for manufacture of mobile phone is withdrawn, now Basic Customs Duty taxable at Appli-
cable Rate, Countervailing Duty at 12.5% and SAD at 4% on it;
Inputs, parts and components, subparts for manufacture of charger / adapter, battery and wired headsets /
speakers, of mobile phone, subject to actual user condition exempted from Applicable Rate of Basic Customs
Duty, Countervailing Duty and SAD;
Parts and components, subparts for manufacture of Routers, broadband Modems, Set-top boxes for gaining
access to internet, set top boxes for TV, digital video recorder (DVR)/network video recorder (NVR), CCTV cam-
era/IP camera, lithium ion battery [other than those for mobile handsets] exempted from Applicable Rate of
Basic Customs Duty, Countervailing Duty and SAD;
Changes in the Customs provisions and Rules made there under:
Sl. Amendment Clause of

No. the Finance
Bill, 2016
1 Subsection (43) of Section 2 is being amended so as to add a new class of warehouses for en- 113
abling storage of specific goods under physical control of the department, as control over the
other types of warehouses would be only record based.
2 Subsection (45) of Section 2 which defines warehousing station is being omitted. 113
3 Chapter heading of Chapter III is being amended to omit the word warehousing station. 114
4 Section 9 is being omitted. 115
5 Section 25 is being amended so as to omit the requirement of publishing and offering for sale any 116
notification issued, by the Directorate of Publicity and Public Relations of CBEC
6 Sections 28, 47, 51 and 156 are being amended so as to: 117
a) increase the period of limitation from one year to two years in cases not involving fraud, sup- 118
pression of facts, willful mis-statement, etc.
119
b) provide for deferred payment of customs duties for importers and exporters to certain class of
135
importers and exporters.
7 Section 53 is being amended so as to enable the Board to frame regulations for allowing transit 120
of certain goods and conveyance without payment of duty.
8 Sections 57 and 58 are being substituted to provide for licensing by the Principal Commissioner 121
or Commissioner, in place of Deputy/Assistant Commissioner, subject to such conditions as may
122
be prescribed.
9 New section 58A is being inserted to provide for a new class of warehouses which require contin- 122
ued physical control and will be licensed for storing goods, as may be specified.
10 New section 58B is being inserted so as to regulate the process of cancellation of licences which 122
is a necessary concomitant of licensing.
11 The existing section 59 governing warehousing bonds submitted by importers availing duty de- 123
ferred warehousing is being substituted so as to fix the bond amount at thrice the duty involved
and to furnish security as prescribed.
12 The existing section 60 is being substituted to define the date of removal of goods from a customs 124
station and deposit thereof in a warehouse.
13 The existing section 61 is being substituted to extend the period of warehousing to all goods used 125
by Export Oriented Undertakings, Units under Electronic Hardware Technology Parks, Software
Technology Parks, Ship Building Yards and other units manufacturing under bond; empower Prin-
cipal Commissioners and Commissioners to extend the warehousing period upto one year at a
time.

Customs Law
14 Section 62 relating to physical control over warehoused goods is being omitted since the condi- 126
tions for licensing different categories of warehouses and exercising control over the same are
being provided under sections 57, 58 and 58A.
15 Section 63 relating to payment of rent and warehouse charges is being omitted in view of the 126
privatization of services, and free market determination of rates, including those by facilities in
the public sector.
16 The existing section 64 relating to owners rights to deal with warehoused goods is being substi- 127
tuted so as to rationalize the facilities and rights extended under the section.
17 Section 65 is being amended to delete the payment of fees to Customs for supervision of manu- 128
facturing facilities under Bond; and empower Principal Commissioner or Commissioner of Cus-
toms to licence such facilities.
18 Section 68 is being amended to omit rent and other charges on account of omission of section 129
63.
19 Section 69 is being amended to omit rent and other charges on account of omission of section 130
63.
20 Section 71 is being amended so as to substitute the word exportation with the word export 131
to align with definition contained in sub section (18) of section 2.
21 Section 72 is being amended to delete clause (c) regarding improper removal of samples 132
22 Section 73 is being amended to provide for cancellation bond in case of transfer of ownership of 133
the goods, and is thus aligned with sub-section (5) of section 59.
23 New section 73A is being inserted so as to provide for custody of warehoused goods and respon- 134
sibilities including the liabilities of warehouse keepers.
Amendment in the Customs Tariff Act
Sl. Amendment Clause of the Finance

No. Bill, 2016
1 To omit Section 8C [Power of Central Government to impose transitional product spe- 137
cific safeguard duty on imports from Peoples Republic of China]
Amendment in the First Schedule to the Customs Tariff Act
Sl. Amendment Clause of

No. the Finance
Bill, 2016
Amendments not affecting rates of duty
1 Editorial changes in the Harmonized System of Nomenclature (HSN) in certain chapters are being 138(ii)
incorporated in the First Schedules, to be effective from 01.01.2017.
2 To: 1) Amend supplementary notes (e) and (f) Chapter 27 so as to change the reference:
a) from IS:1460:2000 to IS:1460:2005 for high speed diesel (HSD) and
b) from IS:1460 to IS: 15770:2008 for light diesel oil (LDO);
2) Substitute Tariff line 5801 39 10 with description Warp pile fabrics, uncut in place of tariff
line 5801 37 11 [with description Warp pile fabrics epingle uncut velvet] and 5801 37 19
[with description Warp pile fabrics epingle uncut other];
3) Prescribe separate tariff lines for laboratory created or laboratory grown or manmade or
cultured or synthetic diamonds;
4) Delete Tariff line 8525 50 50, relating to Wireless microphone. 138(i)

Summary of the Customs Tariff Notification:
Sl. Notifications No. Description

No
1 11/2016-Customs Exempt CVD on imported media with recorded Information Technology Software on so
much value as is equivalent to the value of the Information Technology Software record-
ed on the said media which is leviable to Service tax under Finance Act, 1994.
2 12/2016-Customs Notification No. 12/2012-Customs, dated the 17.03.2012 is being amended.
3 13/2016-Customs By making an amendment in Notification No. 171/93-Customs, dated the 16.09.1993, the
Exemption limit of the bona fide gifts imported by post or as air freight is being increased
from Rs. 10,000/- to Rs. 20,000/-.
4 14/2016-Customs By making an amendment in Notification No. 39/96-Customs, dated the 23.07.1996, the
exemption in respect of the Serial No. 9, 9A 10 and 10A is being withdrawn.
5 15/2016-Customs By making an amendment in Notification No. 27/2011-Customs, dated the 01.03.2011
hereby exempt duty of customs leviable under the Second Schedule, to the Customs
Tariff Act on items specified therein.
hereby exempt the additional duty of customs leviable under sub-section 3 (5) of Cus-
toms Tariff Act for items specified therein.
7 17/2016-Customs By making an amendment in Notification No. 25/1999-Customs, dated 28.02.1999 the
words sub-miniature fuses, micro fuses, resettable fuses and thermal fuses is being in-
serted. Now importation of these goods into India for use in the manufacture of the fin-
ished goods liable to nil rate of duty.
8 18/2016-Customs By making an amendment in Notification No. 25/2002-Customs, dated the 01.03.2002,
importation of Capital goods is being exempted from whole of the duty of Customs for
the manufacture of the following finished goods mentioned against the Serial No. 64:
Glass and ceramic cartridge fuses, blade fuses, automotive fuses, surface mount fuses,
sub-miniature fuses, micro fuses, resettable fuses and thermal fuses
against serial number 39, in column (3), after the words All goods, the words and brack-
ets except charger or adapter, battery, wired headsets and speakers of mobile hand-
sets including cellular phones and solar tempered glass or solar tempered (anti-reflective
coated) glass is being inserted.
against serial number 3H, in the entry under heading Name of the Plant or Project, for
the words, Cold storage, cold room (including for farm level pre-cooling), the words
and brackets, Cold storage, cold room (including for farm level pre-cooling), cold chain
including pre-cooling unit, packhouses, sorting and grading lines and ripening cham-
bers is being substituted.
11 21/2016-Customs By making an amendment in Notification No. 42/96-Customs, dated the 23.07.1996 for
the project specified against serial number 41 the words Cold storage, cold room (in-
cluding for farm level pre-cooling), the words and brackets Cold storage, cold room
(including for farm level pre-cooling), cold chain including pre-cooling unit, packhouses,
sorting and grading lines and ripening chambers is being substituted for assessment un-
der Heading 9801 of the first schedule to the Customs Tariff Act.
12 22/2016-Customs Seeks to further amend Notification No. 81/2005-Customs, dated the 08.09.2005 so as to
carry out Budgetary changes
13 23/2016-Customs Seeks to further amend Notification No. 72/1994-Customs, dated the 01.03.1994.

Customs Law
Summary of the Customs Non-Tariff Notification:
Sl. No. Notification No. Description

1 30/2016-Customs (NT) Seeks to notify Baggage Rules, 2016.
2 31/2016-Customs (NT) Seeks to further amend Customs Baggage Declaration (Amendment) Regulations,
2016.
3 32/2016-Customs (NT) Seeks to notify the Customs (Import of Goods at Concessional Rate of Duty for Man-
ufacture of Excisable Goods), Rules 2016.
4 33/2016-Customs (NT) Seeks to fix the rate of interest under section 28AA of the Customs Act, 1962 and
supersede notification No. 17/2011- Cus (N.T) dated 01.03.2011.

Study Note - 5
SERVICE TAX

5.1 Introduction
5.2 Registration under Service Tax
5.3 Reverse Charge
5.4 Brand Name of Another Person
5.5 Payment of Service Tax [Rule 6]
5.6 Rate of Service Tax
5.7 Invoices under Service Tax
5.8 Records to be Maintained
5.9 Automation of Central Excise and Service Tax (ACES)
5.10 Electronic Accounting System in Excise and Service Tax (EASIEST)
5.11 Negative List & Exempted Services
5.12 Point of Taxation
5.13 Taxable Event in Service Tax
5.14 Place of Provision of Service Rules
5.15 Valuation of Taxable Services (Section 67)
5.16 Important Issues under Service Tax Provisions
5.17 E-payment of Service Tax
5.18 Self Adjustment of Excess Tax Paid
5.19 Special Audit
5.20 Return
5.21 Penalties
5.22 Adjudication & Appeals
5.1 INTRODUCTION
There is no separate Act for Service Tax. The provisions of service tax are contained in Chapter V of the Finance Act,
1994 and administered by the Central Board of Excise & Customs (CBEC).
Service tax is being imposed by amending Finance Act, 1994 and the scope has been amended time to time.
The power to change service tax vests with the Central Government. This authority is granted to the Central Govern-
ment by Entry 92C (yet to be made effective) of the union list. However, currently, the service tax is collected under
the power of the Residuary Entry 97 of the Union List.
Service tax was introduced in the year 1994. No separate Act on Service Tax is in force as yet but it finds its enact-
ment in the Finance Act, 1994. Till date, the service tax amendments are being introduced by amending the Fi-
nance Act, 1994 from time to time. The taxable services are defined in section 65 of the Finance Act, 1994. Section
66 is the charging section of the said Act.
Statutes Governing the Levy of Service Tax
i. The Finance Act, 1994 Chapter V Sections 64 to 96-I. This chapter extends to the whole of India except the
State of Jammu and Kashmir.
ii. The Service Tax Rules, 1994. (Also referred to as Rules or STR, 1994).
iii. The CENVAT Credit Rules, 2004.

Service Tax
iv. The Place of Provision of Services Rules, 2012

v. The Service Tax (Registration of Special categories of persons) Rules, 2005.
vi. The Service Tax (Determination of Value) Rules, 2006 (with effect from 19th April, 2006)
vii. The Point of Taxation Rules, 2011
Sources of Service Tax Law
As you are aware there is no separate Act for the service tax. However, the sources of service tax law are:
i. Finance Act, 1994
ii. Various Rules on service tax
iii. Notifications on service tax
iv. Circulars/Instructions on service tax issued by CBEC time to time
v. Orders on service tax published by the CBEC (Rule 3) and the Central Government (Section 95) and
vi. Trade notices on service tax issued by Central Excise and Service tax commissionerates
Extent and scope of service tax [section 64 of the Finance Act, 1994]
Chapter V of the Finance Act, 1994 (i.e. the service tax law), which came into force from 1-7-1994, extends to the
whole of India except the state of Jammu and Kashmir. The various aspects relating to the extent of applicability of
the service tax law are as follows:
(1) India [Section 65B(27)]: India means,-
(a) the territory of the Union as referred to in clauses (2) and (3) of Article 1 of the Constitution i.e. the States and
Union Territories;
(b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Mari- time Zones Act, 1976;
(c) the seabed and the subsoil underlying the territorial waters;
(d) the air space above its territory and territorial waters; and
(e) the installations, structures and vessels located in the continental shelf of India and the exclusive economic
zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and
supply thereof.
(2) Service Tax extends to the Continental Shelf & Exclusive Economic Zone (CS & EEZ) of India [Notification No.
14/2010-S.T., dated 27-2-2010]: The Central Government has extended provisions of Chapter V of the Finance
Act, 1994, to the following areas in the continental shelf and exclusive economic zone of India for the following
purposes mentioned correspondingly
Area Purpose for which service tax law extended
(1) Whole of continental shelf economic zone of Any service provided for all activities pertaining to
India and exclusive construction of installations, structures and vessels
for the purposes of prospecting or extraction or pro-
duction of mineral oil and natural gas and supply
thereof.
(2) Installations, structures and the continental shelf Any service provided or to be provided by or to such
and vessels within the exclusive economic zone of installations, structures and vessels and for supply of
India, constructed for the purposes of prospecting any goods connected with the said activity.
or extraction or production of mineral oil and natu-
ral gas.
(3) Service tax doesnt extend to the State of Jammu and Kashmir: This means that the services provided (as per
the Place of provision of service rules, 2012) in the territorial jurisdiction of the State of Jammu and Kashmir are
not liable to service tax. The location of the service provider or the service recipient doesnt matter.

Salient features of levy of service tax
The salient features of levy of service tax are as under -
(i) Service defined: The word service has been defined under section 65B(44) of the Chapter V of Finance Act,
1994. It is an exhaustive definition and covers all the activities except those specifically excluded from the ambit
of service tax.
(ii) Scope: Section 66B is the charging section which provides that service tax shall be levied on all the services
provided or agreed to be provided in a taxable territory other than services specified in Negative Iist.
(iii) Negative list: Section 66D specifies services which are covered in negative list. The services so specified go out
of ambit of chargeability of service tax. In all, there are seventeen heads of services that have been specified
in the negative list.
(iv) Exempted Services: In addition to services specified in negative list, a mega exemption Notification No. 25/2012-
S.T., dated 20-06-2012 has been issued exempting many services from payment of service tax.
(v) While the services in the negative list are not taxable at all, the exempted services are those that are otherwise
taxable but exempt vide notification issued by the Central Government.
(vi) Declared services: To avoid disputes between sale of goods and services, Section 66E provides certain activi-
ties to be specifically treated as declared services. Nine activities have been specified in the said section which
is deemed to be declared service.
(vii) Taxable Territory: Since provision of service in taxable territory is an important ingredient of taxability, Section
66C empowers the Central Government to make rules for determination of place of provision of service. The
Central Government has notified Place of Provision of Service Rules, 2012 in this regard.
(viii) Principles of Interpretation: Principles of Interpretation have been laid down in Section 66F of the Act for inter-
pretation whenever services have to be treated differentially for any reason and also for determining the tax-
ability of bundled services.
(ix) Date of determination of rate of tax, value of taxable service & exchange rate: Section 67A has been inserted
w.e.f. 01-07-2012 which states that the rate of service tax, value of taxable service & exchange rate shall be the
rate in force or as applicable at the time when taxable service has been provided or agreed to be provided.
Point of taxation Rules, 2011 has been framed for this purpose.
As per newly inserted rule 11 of Service Tax Rules, 1994 dated 25.8.2014 vide Notification No. 19/2014-Service Tax
provides that the rate of exchange for determination of value of taxable service shall be the applicable rate
of exchange as per the generally accepted accounting principles on the date when point of taxation arises in
terms of the Point of Taxation Rules, 2011.
(x) Rate of service tax: The rate of service tax specified under section 66B is 14% of value of taxable services. Swa-
chh Bharat Cess has been levied u/s 119 of Finance Act, 2015 @ 0.5% w.e.f. 15-11- 2015 on value of taxable
services. Hence, effective rate of charge of service tax is 14.5% of value of taxable service. It seems, the rate is
slowly being increased and in Finance Bill 2016, the Finance Minister impose a Krishi Kalyan Cess on any or all
the taxable services at a rate of 0.5% on the value of any or all the taxable services. Hence, the effective rate of
service tax is now 15% w.e.f. 01.06.2016. Input tax credit of this cess will be available for payment of this cess.
(xi) Valuation of services: For the purpose of levy of service tax, the value of taxable service is to be determined in
accordance with Section 67 read with Service Tax (Determination of Value) Rules, 2006.
(xii) Payment of service tax: The liability for payment of service tax is affixed either on service provider or on recipient
of service (in case of reverse charge). With effect from 01-07-2012, a new scheme of taxation is brought into
effect where the liability of payment of service tax will be shared by service provider as well as service recipient
in specified services. This is called as partial reverse charge.
(xiii) Cenvat credit: The credit of service tax and excise duty across goods and services are available in accordance
with Cenvat Credit Rules, 2004.
(xiv) Procedural compliances: Provisions have been made for registration, assessment including self assessment,
rectification, special audit, appeals and penalties for non compliance of the provisions of the Act and Rules.
Concept of charge of service tax
Charge of service tax on and after Finance Act, 2016 [Section 66B]: There shall be levied service tax at the rate of 15%
Service Tax
on the value of all services, other than those services specified in the negative list, provided or agreed to be provided
in the taxable territory by one person to another and collected in such manner as may be prescribed.
Essentials for charge of service tax: Thus, important ingredients for charge of service tax are -
(i) The service should have been provided or agreed to be provided.
(ii) The service should be provided for a consideration.
(iii) The service should be provided by one person to another person.
(iv) The service should be provided in taxable territory (i.e. India excluding State of Jammu & Kashmir) as per Place
of Provision of Service Rules, 2012.
(v) Services must not be specified in the negative list.
(vi) Service tax is levied @ 14% (increased by Swachh Bharat Cess @ 0.5%) of value of taxable service. Hence, ef-
fective rate is 14.5% of value of taxable service.
Krishi Kalyan Cess @0.50% has been levied w.e.f. 1st June, 2016, hence, effective rate is 15%.
(vii) Service tax is collected in such manner as may be prescribed (i.e. in accordance with Service Tax Rules,
1994).
Nature of Service Tax
Service tax can be levied on the following:
(a) Taxable Service, and
(b) Value of Taxable Service.
Taxable Services
Service tax is levied on all services except negative list of services in the Finance Act, 1994. There are several services
which are taxable if service is provided by a service provider; any person to any person.
However, all taxable services are NOT subject to service tax.
This is because taxability is not only dependent on the nature of service but also on
(i) Who is the service provider,
(ii) Who is the service receiver.
Example 1:
X Ltd, an advertising company is not liable to collect and pay service tax on advertisement service rendered to the
Approved International Organisation in India, even though for the same service to another entity X Ltd will have to
collect and pay tax. (Who is the Service receiver principle)
Example 2:
Mr. A, a professional dealing in indirect tax gives consulting advice to the government of India, he is required to collect
service tax from the Government of India and remit the same to the Service Tax department. However, if the Reserve
Bank of India were to render the same service to the Government of India it is not required to collect and pay service
tax. (Who is the Service provider principle) such services are taxable services; RBI is not liable to pay the service tax.
Likewise any services provided by the service provider which are in the nature of statutory services, then service tax
cannot be levied.
Service [Section 65B(44)]: Service means -
any activity carried out by a person for another for consideration, and
includes a declared service,
but shall not include, -
(a) An activity which constitutes merely, -
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of
Article 366(29A) of the Constitution; or
(iii) A transaction in money or actionable claim;
(b) A provision of service by an employee to the employer in the course of or in relation to his employment;
(c) Fees taken in any Court or tribunal established under any law for the time being in force.
Explanation 1: For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to, -
(A) The functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats,
Members of Municipalities and Members of other local authorities who receive any consideration in performing
the functions of that office as such member; or
(B) The duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that
capacity; or
(C) The duties performed by any person as a Chairperson or a Member or a Director in a body established by the
Central Government or State Governments or local authority and who is not deemed as an employee before
the commencement of this section.
Explanation 2:
(i) For the purposes of this clause, transaction in money shall not include any activity relating to the use of money
or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, cur-
rency or denomination for which a separate consideration is charged.
(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or action-
able claim, including the activity carried out
(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or
facilitating in organising lottery of any kind, in any other manner;
(b) by a foreman of chit fund for conducting or organising a chit in any manner.
Explanation 3: For the purposes of this Chapter,-
(a) An unincorporated association or a body of persons, as the case may be, and a member thereof shall be
treated as distinct persons;
(b) An establishment of a person in the taxable territory and any of his other establishment in a non- taxable territory
shall be treated as establishments of distinct persons.
Explanation 4: A person carrying on a business through a branch or agency or representational office in any territory
shall be treated as having an establishment in that territory.
The following are the ingredients of service, -
(1) Service means any activity carried out by a person:
(a) The term Activity would include an act done, a work done, a deed done, an operation carried out,
execution of an act, provision of a facility etc. It is a term with very wide connotation.
(b) Activity could be active or passive and would also include forbearance to act. Agreeing to an obliga-
tion, to refrain from an act or to tolerate an act or a situation has been specifically listed as a declared
service under section 66E of the Act.
(2) The activity shall be carried out by one person for another person:
(a) Person [Section 65B(37)]: Person includes, -
an individual,
a Hindu undivided family,
a company,
a society,
a limited liability partnership,

Service Tax
a firm,
an association of persons or body of individuals, whether incorporated or not,
Government,
Government [Section 65B (26A), inserted by the Finance Act, 2015, w.e.f. 14.05.2015]: Government
means
(i) the Departments of the Central Government,
(ii) a State Government and its Departments and
(iii) a Union territory and its Departments, but shall not include any entity,
(A) whether created by a statute or otherwise,
(B) the accounts of which are not required to be kept in accordance with article 150 of the Constitution
or the rules made thereunder.
a local authority, or
every artificial juridical person, not falling within any of the preceding sub-clauses.
(b) Two separate persons are required for taxability: Service must be provided by one person to another i.e.
service provider and service receiver. Thus, self service is outside the purview of service tax. However the
following are its exceptions, -
Deemed Separate person: As per Explanation 3 of Section 65B(44) which are as under,-
(a) an establishment of a person located in taxable territory and another establishment of such
person located in non-taxable territory are treated as establishments of distinct persons.
(b) an unincorporated association or body of persons and members thereof are also treated as
distinct persons.
Implications of these deeming provisions: Thus, inter-se provision of services between such persons,
deemed to be separate persons, would be taxable. This provision is an exception to the principle of
mutuality.
Example 3:
(a) Services provided to the branch office in India of a multi-national company by the headquarters of the multi-
national company located outside India;
(b) Services provided by a club to its members, would be taxable provided other conditions relating to taxability of
service are satisfied.
(3) Activity must be carried out for a consideration:

(a) Consideration: Consideration means everything received or recoverable in return for a provision of service
which includes monetary consideration as well as non-monetary consideration.
Monetary consideration: Monetary consideration means any consideration received in the form of money.
Non-monetary consideration: Non-monetary consideration essentially means compensation in kind such as the
following:
Supply of goods and services in return for provision of service ;
Refraining or forbearing to do an act in return for provision of service ;
Tolerating an act or a situation in return for provision of a service;
Doing or agreeing to do an act in return for provision of service.
In case of non-monetary consideration, the money value of such consideration is to be determined in accor-
dance with Service Tax (Determination of Value) Rules, 2006.
(b) Activities carried out without consideration are outside the scope of service: Activity carried out without any
consideration like donations, gifts or free charities are, therefore, outside the ambit of service.
Example 4:
(i) Grants given for a research where the researcher is under no obligation to carry out a particular research
would not be a consideration for such research. Conditions in a grant stipulating merely proper usage of
funds and furnishing of account also will not result in making it a provision of service.
(ii) Donations to a charitable organization is not consideration unless charity is obligated to provide some-
thing in return e.g. display or advertise the name of the donor in a specified manner or such that it gives
a desired advantage to the donor. (Circular No. 127/09/2010-ST, dated 16-8-2010]
(c) Consideration need not only be paid by service receiver: Consideration may be paid by any person and not
necessarily receiver of service.
(d) Consideration must arise out of contractual reciprocity: An activity done without express or implied contractual
reciprocity of consideration would not be an activity for a consideration even if such activity may lead to ac-
crual of gains to the person carrying out such activity.
Example 5:
(i) Life time achievement award will not comprise an activity for a consideration.
(ii) Artist performing at street where viewers are under no obligation to pay any amount.
(iii) Provision for free tourism, access to free TV channels or governmental activities without charges will not
comprise an activity for a consideration.
(iv) Grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid
as alimony for divorce would be examples in this category.
However a reward given for an activity performed explicitly on the understanding that the winner will receive
the specified amount in reciprocity for a service to be rendered by the winner would be a consideration for
such service.
Thus amount paid in cases where people at large are invited to contribute to open software development (e.g.
Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consider-
ation.
(e) Fines and penalties which are legal consequences of persons actions are not in nature of activity for a consid-
eration.

Service Tax
(4) Certain instances:
Sl. A B
No. Nature of Payment Whether Consideration for service?
1 Amount received in set- It shall not be regarded as consideration unless it represents a portion of the con-
tlement of dispute sideration for an activity that has been carried out. If the dispute itself pertains to
consideration relating to service then it would be a part of consideration.
2 Amount received ad- Such advances are consideration for the agreement to perform a service.
vances for performance
of service
3 Deposits returned on Returned deposits are in the nature of a returned consideration. If tax has already
cancellation of an been paid the tax payer would be entitled to refund to the extent specified and
agreement to provide a subject to provisions of law in this regard.
service
4 Advances forfeited Since service becomes taxable on an agreement to provide a service such for-
for cancellation of an feited deposits would represent consideration for the agreement that was entered
agreement to provide a into for provision of service.
service
5 Security deposit that is Returnable deposit is in the nature of security and hence do not represent consider-
returnable on comple- ation for service. However if the deposit is in the nature of a colorable device where-
tion of provision of ser- in the interest on the deposit substitutes for the consideration for service provided
vice. or the interest earned has a perceptible impact on the consideration charged for
service then such interest would form part of gross amount received for the service.
Also security deposit should not be in lieu of advance payment for the service.
6 Security deposits forfeit- If the forfeited deposits relate to accidental damages due to unforeseen actions
ed for damages done not relatable to provision of service then such forfeited deposits shalI not be re-
by service receiver in the garded as consideration and the same is specifically excluded in the Valuation
course of receiving a ser- Rule, 2006.
vice.
7 Excess payment made If returned it is not consideration. If not returned and retained by the service pro-
as a result of a mistake. vider it becomes a part of the taxable value.
(5) Declared Services:
The definition of service includes declared service. Declared services are activities that have been specified in Sec-
tion 66E of the Act. When such activities are carried out by one person for another in the taxable territory for a con-
sideration, then such activities are taxable services. In fact, most of the declared services have been specified with
the intent of clarifying the distinction between the deemed sales and activities related thereto which are outside the
realm of deemed sales but qualify as a service.
Exclusions from the definition of Service / Activities not covered under Service -
(1) Sale/Deemed sale/Transaction only in money do not constitute service:
(a) Sale - Mere transfer in title of goods or immovable property: Mere transfer in title of goods or immovable
property by way of sale, gift or in any other manner for a consideration, does not constitute service.
(i) Goods [Section 65B(25)]: Goods means every kind of movable property other than actionable
claim and money; and includes securities, growing crops, grass, and things attached to or forming
part of the land which are agreed to be severed before sale or under the contract of sale.
(ii) Immovable property [Clause (26) of the General Clauses Act, 1897]: Immovable property to in-
clude land, benefits to arise out of land, and things attached to the earth, or permanently fas-
tened to anything attached to the earth.
(iii) Transfer of title: Transfer of title means change in ownership. Mere transfer of custody or posses-
sion over goods or immovable property where ownership is not transferred does not amount to
transfer of title. For example giving the property on rent or goods for use on lure would not involve
a transfer of fide, and will therefore, be charged to service tax.

(iv)
Composite transactions: A transaction which, in addition to a transfer of title in goods or immov-
able property, involves an element of another activity carried out or to be carried out by the per-
son transferring the tide would not be out rightly excluded from the definition of service.
(b) Deemed sales: Service shall not include an activity which constitutes merely transfer, delivery or sup-
ply of any goods which is deemed to be sales within the meaning of Article 366(29A) of the Constitution.
Deemed sales refer to those transactions which will be deemed as sales even if, as per the normal defi-
nition, these cannot be held as sales.
Though deemed sales are outside the purview of Service but activities related to deemed sales which
qualify as a service, has been declared as a service as per the provisions of Section 66E of the Finance
Act, 1994.
(c) A mere transaction in money or actionable claims: Any activity which constitutes merely a transaction in
money or actionable claim will not constitute service.
(i) Money [Section 65B(33)]: Money means legal tender, cheque, promissory note, bill of exchange,
Letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or
any such similar instrument but shall not include any currency that is held for its numismatic value.
(ii) Actionable Claim [Section 65B(1)]: Actionable claim shall have the meaning assigned to it in Sec-
tion 3 of the Transfer of Property Act, 1882. As per Section 3 of the Transfer of Property Act, 1882
Actionable claim means a claim to,-
(a) any debt, other than a debt secured by mortgage of immovable property or by hypotheca-
tion or pledge of movable property; or
(b) any beneficial interest in movable property not in the possession, either actual or construc-
tive, of the claimant, which the Civil Courts recognize as affording grounds for relief,
whether such debt or beneficial interest be existent, accruing, conditional or contingent
Examples of actionable claims are -
Unsecured debts;
Right to participate in the draw to be held in a lottery.
[Note: Only those debts which can be enforced through Court of Law can be said to be action-
able claims.]
(iii) Activities regarded as transaction only in money: The following are some of the activities which fall
under this category -
(a) principal amount of deposits in, or withdrawals from a bank;
(b) advancing or repayment of principal sum on loan to some one;
(c) conversion of, say Z 1,000 currency notes into one rupee coins (to the extent amount is re-
ceived in money form);
(d) actionable claims like transfer of unsecured debts.
Thus, transaction in money per-se would be outside the ambit of service.
Related activities covered: Any related activity for which separate consideration is charged would
not be treated as transaction in money and would be chargeable to service tax if other elements
of taxability are present.
For example: Making of a bank draft, where the bank charges a commission for the preparation
of the same is not transaction only in money and the commission charged shall be the value of
service provided.
(iv) Activities relating to use of money or its conversion into another form/ currency/ denomination for
consideration included in definition of service [Explanation 2]:
(A)
Activities relating -
to use of money; or

Service Tax
its conversion from one form, currency or denomination to another form, currency or denomi-
nation;
for which a separate consideration is charged; shall be included as service.
(B) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction
in money or actionable claim, including the activity carried out
(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising,
selling of lottery or facilitating in organising lottery of any kind, in any other manner;
(b) by a foreman of chit fund for conducting or organising a chit in any manner.
(2) Service by an employee to employer in course of employment do not constitute service:
Any service provided by an employee to his employer during the course of his employment is outside the ambit of
service. Therefore,-
Functions performed by MPs, MLAs, persons holding constitutional posts are not included in service [Explanation 1]:
As per explanation 1, the following functions/ duties will not be covered in service,-
(a) The functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats,
Members of Municipalities and Members of other local authorities who receive any consideration in performing
the functions of that office as such member; or
(b) The duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that
capacity; or
(c) The duties performed by any person as a Chairperson or a Member or a Director in a body established by the
Central Government or State Governments or local authority and who is not deemed as an employee before
the commencement of this section.
However, the following will be covered in scope of service -
(i) Services provided outside employment for a consideration -Taxable: Services provided outside employ-
ment for a consideration would be covered under the definition of service.
Example: If an employee provides his service on contract basis to an associate of the employer, it would
be covered under service.
(ii) Services provided on contract basis - Taxable: Services provided on contract basis i.e. principal to prin-
cipal basis are not services in course of employment and therefore come within the ambit of taxable
service.
(iii) Amounts received by an employee from the employer on premature termination of contract of employ-
ment - Not regarded as service: Such amounts paid by the employer to the employee for premature

termination of a contract of employment are treatable as amounts paid in relation to services provided
by the employee to the employer in the course of employment. Hence, amounts so paid would not be
chargeable to service tax.
(iv) Non competing fees - Taxable: Any amount paid for not joining a competing business would be liable to
be taxed being paid for providing the service of forbearance to act.
(d) Status of services provided by casual workers or contract labour:
If Then
Services provided by casual worker to employer These are services provided by the worker in the course of
who gives wages on daily basis to the worker employment
Casual worker are employed by a contractor, Service provided by the workers to the contractor are
like a building contractor or a security service services in the course of employment and hence not tax-
agency, who deploys them for execution of a able. However, services provided by the contractor to his
contract or for provision of security services to a client by deploying such workers would not be a service
client. provided by the workers to the client in the course of em-
ployment. The consideration received by the contractor
would therefore be taxable if other conditions of taxability
are present.
(3) Service of Court/Tribunal - Not covered:
Fees taken in any Court or tribunal established under any law for the time being in force is outside the coverage
of service
Extent and scope of levy of service tax on Composite contracts of sale and service
The power to levy tax on sale of goods is within the legislative competence of the states. A transaction which in addi-
tion to a transfer of title in goods or immovable property involves an element of another activity carried out or to be
carried out by the person transferring the title would not be outrightly excluded from the definition of service.
(1) If two transactions can be separable then service portion will be leviable to service tax: If two transactions, al-
though associated, are two discernibly separate transactions then each of the separate transactions would be
assessed independently. The service portion will only be Iiable for service tax.
Example 6: A builder carrying out an activity for a client wherein a flat is constructed by the builder for the client for
which payments are received in installments and on completion of the construction the title in the flat is transferred to
the client involves two elements namely provision of construction service and transfer of title in immovable property.
The two activities are discernibly separate. The activity of construction carried out by the builder would, therefore, be
a service and the activity of transfer of title in the flat would be outside the ambit of service.
(2) Composite contract for sale of goods & provision of services - Inseparable - Dominant Nature Test applicable:
Service is different from sale. The fact that some goods have been used in the course of providing service
doesnt make that transaction a sale.
The nature of the transaction depends on the intention of the parties. If the parties intended to enter into a
transaction of purchase and sale of goods, the transaction will be sale even though some services might
have been provided, which will be taxed separately. However, in case where goods have been used in provid-
ing services or in case where the sale of goods is incidental to the provision of services, the transaction would
primarily be that of service.
Therefore, if the predominant factor in a transaction is sale, the transaction would be classified as sale, how-
ever, if the predominant factor in a transaction is service, the transaction would be classified as service only.
This is commonly known as Dominant Nature Test. - Bharat Sanchar Nigain Ltd. v. i.IOI [2006] 2 STR 161 (SC)
(3) Exceptions to Dominant Nature Test - Transactions of deemed sales under Constitution [Article 366(29A)]: As
per Article 366(29A) of Constitution of India, sale includes some transactions which are regarded as deemed
sale. The dominant nature test doesnt apply to the aforesaid transactions of deemed sales, which are deemed
to divisible. The sale element, which is deemed to be divisible, cannot be subjected to service tax.
Further, the States can impose tax only on the sale element of these transactions; the States cannot impose
any tax on service element in these transactions, as the service element can be taxed only by Parliament/
Centre.

Service Tax
The present status as regards taxation of deemed sales is as under -
Sale Element Service Element

(1) Transfer, otherwise Transfer, otherwise than in pursuance of There is no service element
than in pursuance a contract, of property in any goods for
of a contract cash, deferred payment or other valu-
able consideration;
(2) Works Contract Transfer of property in goods (whether as Service portion in the execution of a works
goods or in some other form) involved in contract is a declared service under section
the execution of a works contract; 66E(h);
(3) Hire-purchase Delivery of goods on hire- purchase or Activities in relation to delivery of goods on
contract any system of payment by installments; hire purchase or any system of payment by in-
stallments is a declared service under section
66E(g);
(4) Lease contract Transfer of the right to use any goods for Transfer of goods by way of hiring, leasing, Li-
any purpose (whether or not for a speci- censing or in any such manner without transfer
fied period) for cash, deferred payment of right to use such goods is a declared service
or other valuable consideration; under section 66E(f);
(5) Supply of goods Supply of goods by any unincorporated According to section 65B(44) explanation 3(b),
by association to association or body of persons to a mem- An unincorporated association or a body of
its members ber thereof for cash, deferred payment persons, as the case may be, and a member
or other valuable consideration; thereof shall be treated as distinct persons and
provision of service between them is charge-
able to tax.
(6) Catering Contract Supply, by way of or as part of any service Service portion in an activity wherein goods,
or in any other manner whatsoever, of being food or any other article of human con-
goods, being food or any other article for sumption or any drink (whether or not intoxi-
human consumption or any drink (wheth- cating) is supplied in any manner as a part of
er or not intoxicating), where such supply the activity is a declared service under section
or service, is for cash, deferred payment 66E(i).
or other valuable consideration.
5.2 REGISTRATION UNDER SERVICE TAX
Any person liable to pay service tax has to register with the Superintendent of Central Excise (Section 69) within 30
days from the date of commencement of the business of providing taxable service (Rule 4 of Service Tax Rules, 1994).
Service Tax Registration is required if
i. the taxable turnover of the service provider during the previous year exceeds ` 9 lakhs, or
ii. the service provider is acting as an input service distributor irrespective of his turnover.
iii. Service provider provided services under the brand name of another person.
iv. the service receiver is liable to pay service tax being recipient of any services under Reverse Charge.
A service provider whose value of service exceeds ` 9 lakhs, in the year of providing the service or in any subsequent
year, when the value of service cross ` 9 lakh for the first time, would require registration, however such service provider
can avail exemption if the value of service does not exceed ` 10 Lakhs per annum.
Small Service Provider Exemption
Service tax provides for an exemption to small service providers who provide taxable services of a value not exceed-
ing the specified limit. The specified limit is now ` 10 lakhs. In other words where the value of taxable services provided
do not exceed ` 10 lakhs in the previous financial year, the concerned service provider would not be required to pay
service tax upto receipts of ` 10 lakhs in the current financial year. The exemption is through notification 6/2005 ST
dated 01.03.05 as amended from time to time.

Registration procedure under Service Tax
Step 1: Apply for registration in Form ST-1 to the Superintendent of Central Excise
Step 2: Submit along with Form ST-1 the following documents
Permanent Account Number (PAN)
Affidavit declaring the commencement of the services (prescribed Format)
Copy of passport or ration card or any other document as residential proof
Passport size photograph of the assessee in case of individual and of partners in the case of partnership
firm and of directors in the case of a company.
Partnership deed in case of firm
Memorandum and Articles of Association in case of company
Step 3: The Superintendent of Central Excise will grant a certificate of registration in Form ST-2 within 7 days of the
date of receipt of the application. If the registration is not granted within 7 days registration is deemed to be
granted. It means deeming provision in rule 4(5) is applicable to registration granted by the Superintendent
of Central Excise. However, no time stipulated on the Commissioner of Central Excise to grant centralized
centralised registration under rule 4(2), the provision of deemed registration is not attracted in case of grant
of centralised registration by the Commissioner [Karamchand Thapar & Bros. (Coal Sales) Ltd. v UOI 2010 (20)
STR 3 (Cal)].
Step 4: Certificate of Registration can be surrendered if the assessee ceases to provide the taxable services for
which he had been registered.
Where a service is rendered from different locations falling under different Dealers registration not available
Commissionerates, multiple registrations are required. However, even in this under service tax unlike First Stage
case a single registration is possible, with the permission from the Department, Dealer and Second stage Dealer
if the assessee maintains centralized billing or centralized accounting for mul- under Central Excise
tiple services provided from more than one premises.
Such permission can be granted by the Chief Commissioner of Central Excise or Commissioner of Central Excise if all

Service Tax
the premises are falling under the jurisdiction of one Chief Commissioner or Commissioner.
If the premises of the assessee are falling under the jurisdiction of more than one Chief Commissioner then the permis-
sion has to be got from the Director General of Service Tax (DGST).
Registration under service tax can also be done through online system namely ACES mode (i.e. Automation of Central
Excise and Service Tax).
Registration in case of Multiple Services
One application for registration is enough even though the service provider is providing or provides multiple services.
Registration is not granted service wise but assessee wise. All services can be mentioned in one ST-1 form and the same
can be submitted in the office of the Superintendent of Central Excise.
Example 7:
Mr. B is providing erection, commissioning and installation and mining services in addition to Mandap keeping ser-
vices. How many applications for registration under service tax provisions Mr. B need to apply?
Answer:
Single ST-1 Form is enough for all multiple services rendered by Mr. B.
Transfer of Business
If the assessee transferred his business to another person, the transferee shall obtain a fresh certificate of registration.
Certificate of registration is non-transferable.
Example 8:
Mr. Ram provider of interior decorating services since 2009, holds service tax registration under service tax provisions.
Mr. Ram subsequently sold the entire business to Mr. Y for ` 10 lacs. You are required to answer wether the registration
number of Mr. Ram will be the registration number of Mr. Y?
Answer:
No, the registration certificate under the service tax is non-transferable.
Amendments in Registration Certificate
Certain changes may require amendments in registration certificate. Whereas any change in constitution of the
business, new registration number is required to be obtained.
Changes in registration certificate:
In Case of
i. Service provider providing new taxable service other than that provided in the registration certificate.
ii. Change in the information supplied in form ST-1 e.g. change in name or address of the applicant, various prem-
ises exam which service is provided etc.
Service provider should furnish such additional information or details, in writing to the jurisdictional Assistant Commis-
sioner or Deputy Commissioner of Central Excise within 30 days of such change.
Hence, the revised registration certificate will be issued after cancelling the registration certificate issued earlier. How-
ever, no new registration number will be allotted.
Change of business constitution:
Where there in change in the constitution of business such as, a new registration certificate for the changed form of
business need to be obtained, like partnership firm converting into a private limited or public limited company, a pri-
vate limited company converted into public limited company and so on. In the case of change, the transferee needs
to obtain a fresh new registration certificate with a new number.
Salient Features of STC
Service Tax Registration number also known as Service Tax Code (STC) contains 15 digits PAN based number.
i. The first 10 digits of this number (i.e. STC) are the same as the PAN of such person.
ii. Next 2 digits are ST
iii. Next 3 digits are serial numbers indicating the number of registrations taken by the service taxpayer against a
common PAN. (for example 001 for one registration number, 002 for two registration numbers of such a person
having common PAN for such premises)
Premises Code
In addition to PAN based STC number, another number, namely, premises code is also given in the registration certifi-
cate (i.e. ST-2). This number indicates the code of the jurisdictional Commissionerate, division, range and serial number
within the range. This number is issued for easy identification of location of registration of the service tax payer.
Multiple Centralized Registration
A bank has its head office at Mumbai and regional offices at Chennai, Hyderabad and Cochin and the bank has cen-
tralized billing or centralized accounting facilities available at each of these regional offices, in addition to the Head
office. Such bank at its option can obtain multiple centralized registration for each regional offices for the purpose of
discharging the service tax liability.
Cancellation or Surrender of Registration Certificate
Once registration is granted it will be valid till such time it is surrendered. However, registration can be cancelled in the
following cases:
i. Service provider ceases to provide the taxable service
ii. Service provider deceased (in case of a sole proprietor)
iii. Service provider transferred his business in favour of others
Before cancellation of registration the Superintendent of Central Excise shall ensure that the assessee has paid all
monies due to the Central Government and then cancel the registration certificate.
Input Service Distributor (ISD)
In case of input service distributor registration under Service Tax provisions is compulsory irrespective of the turnover
limit.
Input service distributor means an office managing the business of manufacturer or producer of final products or pro-
vider of output services, which receives invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchase
of input services and issues invoice, bill or, as the case may be, challan for the purpose of distributing the credit of
service tax paid under said services to such manufacturer or producer or provider, as the case may be. [Rule 2(m) of
the CENVAT CREDIT RULES, 2004]
Manner of distribution of credit by input service distributor (Rule 7 of the CENVAT CREDIT RULES, 2004) (w.e.f. 1-4-
2012):
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 conditions, namely:-
(a) The Input service distributor must ensure that such a distribution should not exceed the service tax paid.
(b) In case an input service is attributable to service use in a unit exclusively engaged in manufacture of exempted
goods or exempted services, then such credit of service tax shall not be distributed.
(c) Credit of service tax attributable to service used wholly in a unit shall be distributed only to that unit; and
(d) Credit of service tax attributable to service used in more than one unit shall be distributed pro-rata on the basis
of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates.
Example 9:
X Ltd. has three units namely:
Place Nature Turnover for the April 2015 (`) Output

Chennai Factory 2,50,000 Dutiable goods
Bangalore Factory 1,50,000 Dutiable goods
Hyderabad Service unit 1,10,000 Taxable service
Total 5,10,000

Service Tax
M/s Mudra Pvt. Ltd an advertising agency provided services for ` 3,00,000 in the month July, 2016 by charging Service
Tax @15% to X Ltd. to promote products of Chennai and Bangalore factories. However, Hyderabad unit not received
input services from M/s Mudra Pvt. Ltd.
In the given case X Ltd can distribute the CENVAT CREDIT on input service to Chennai and Bangalore factory, in re-
spect of their turnover ratio. It means input service distributor should not distribute the CENVAT CREDIT on input service
to the Hyderabad unit. Since, this unit were not received any input service.
Penalty for late Registration
If there is delay, interest for delayed payment will have to be paid, which cannot be waived. Though there is no man-
datory penalty for delay in registration, penalty upto ` 10,000 can be imposed under section 77(1) of Finance Act, 1994
as amended w.e.f. 10th May, 2013.
If an assessee proves that there was reasonable cause for delay in registration or payment of service tax, the penalty
can be waived. However, interest under section 75 for late payment of service tax is automatic and it cannot be
waived.
5.3. REVERSE CHARGE
Every person providing a taxable service is required to pay service tax at the prescribed rate. However in certain cases
the service recipient is made liable to pay service tax on the services received. Since the person receiving services is
made liable to pay service tax, the mechanism of collection of such tax is called as reverse charge (RCM).
This concept is set out in service tax law by virtue of section 68(2) by empowering the Central Government to notify
services positively on which the said RCM would apply. To support this the person liable to pay service tax as defined
in rule 2(1)(d) of the Service Tax Rules, 1994 also includes service recipients.
The SSI exemption is not available for the service tax payable under reverse charge in Service tax, person receiving
the service covered under RC is liable to pay irrespective of quantum.
However, in addition to the concept of reverse charge a new concept of joint charge (recipient and provider of ser-
vices liable to pay tax) is also introduced.
Joint Charge Mechanism
Under the concept of joint charge, for one service the service provider as well as service receiver is made liable for
payment of service tax to the extent notified. This liability is independent of the other persons liability. In other words
the failure to comply with the provisions by one person on his part would not impact the compliance requirement of
other person and vice versa.
The notified taxable services are as follows:
(i) Insurance Services: General Insurance Services or Life Insurance Services provided by the insurance agents to
the insurance company. Hence, the insurance company being recipient of service is liable to pay service tax.
However, an option to pay service tax at a rate other than standard rate (i.e. 15%) is given an insurer carrying
on life insurance business. Life insurance company collects premium which covers risk plus savings has option
to pay service tax @ 3% 1ST YEAR AND SUBSEQUENTLY @1.5% on PREMIUM (w.e.f. 1-4-2012). Cenvat Credit Fully
Allowed on Inputs, Capital Goods and Input Services.
(i) However, such option shall not be available in cases where
(ii) the entire premium paid by the policy holder is only towards risk cover in life insurance; or
(iii) 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.
(ia) provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a
non-banking financial company.
w.e.f. 01-04-2016: Option available for payment of service tax in case of Single Premium Annuity Policies:
An insurance company carrying out life insurance business shall have an option to pay service tax @1.4% of
the total premium charged, in cases where the amount allocated for investment on savings on behalf of policy
holder is not intimated to the policy holder at the time of providing of such services.

(ii) Import of Services: Services imported from a country outside India, into India for business or commerce. Hence,
the importer being recipient of service is liable to pay service tax.
Example 10: X Ltd an Indian company, imported services from A Ltd of USA for the personal purposes. X Ltd liable to
pay service tax in India, since there is no personal service in the case of a body corporate.
(iii) GTA Services: As per the new rule, if the person liable for making payment of freight in a specified person then
he is liable to pay taxes otherwise GTA is liable to pay taxes. Goods Transport Agency means any person who
provides service in relation to transport of goods by road and issues consignment note.
RULE 4B: Issue of consignment note - 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 recipient of Service:
Provided that where any taxable service in relation to transport of goods by road in a goods carriage is wholly ex-
empted under section 93 of the Act, the goods transport agency shall not be required to issue the consignment note.
Explanation - For the purposes of this rule and the second proviso to rule 4A, 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 the names of the consignor and consignee, registration
number of the goods carriage in which the goods are transported, details of the goods transported, details of the
place of origin and destination, person liable for paying service tax whether consignor, consignees or the goods trans-
port agency.
Contents of Consignment Note:
(i) Name of the consignor or consignee
(ii) Registration number of the goods carriage (i.e. vehicle registration number)
(iii) Details of 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.
Exemption based on amount charged:
The gross amount charged on an individual consignment transported in a goods carriage does not exceed ` 750
(i.e. Freight collected for transporting small consignment for persons, who paid less than or equal to ` 750 for each
consignment) or
The gross amount charged on consignments transported in a goods carriage does not exceed ` 1,500 (i.e. Freight col-
lected for transporting goods in small vehicles for persons, who paid less than or equal to ` 1,500 per trip)
Note: (i) An individual consignment means all goods transported by a goods transport agency by road in a goods
carriage for a consignee.
(ii) S.T. is Payable afer Claiming an Abatement @ 75%
(iv) Sponsorship services to any body corporate or firm located in Taxable Territory: In case of sponsorship service pro-
vided to a body corporate or firm located in India, the body corporate or firm receiving such services will be liable to
pay service tax. However, if the recipient of sponsorship service is located outside India, service tax is required to be
paid by the service provider and not by the recipient of such sponsorship services.
Example 11:
Ferrari conducting the Formula 1 races by displaying logo or brand name of various companies. Hence, companies
receiving sponsorship services from Ferrari are liable to pay service tax.
Example 12:
Sponsorship services provided for events like Indian Premier League (IPL) cricket matches, golf and tennis etc., are
covered under reverse charge.
(iva)provided or agreed to be provided by a director of a company or a body corporate to the said company or the
body corporate.
(v) Services Provided by an Arbitral Tribunal to any business entity located in taxable territory then recipient of ser-

Service Tax
vice is liable to pay service tax (w.e.f. 1-7-2012)

(vi) Legal Consultancy Service: In case of Services provided by an individual advocate or a firm of advocates by
way of legal services to any business entity located in the taxable territory, the recipient of such services is liable
to pay service tax.
Any Services by Govt. or Local Authority (w.e.f. 1-4-2016):
Any services provided by Govt. or local authority to a business entity then the liability to pay S.T. is on the busi-
ness entity.
Any services includes:
Advertisement and promotion Service
Construction or Works contract
Security
Testing and analysis
Note: Renting of immovable property does not come under reverse charge.
(viii) Directors Remuneration (VIDE NT 45/2012 W.E.F. 7-8-2012): Services provided or agreed to be provided by a di-
rector of a company to the company, such company would be liable to pay service tax on remuneration paid
to such directors.
Note: No service tax is payable if the director is employee of the company.
List 1 - Service under Full Reverse Charge Mechanism:
Sl. Nature of Description of services Percentage Percentage

No. Service of Service tax of Service tax
payable by the payable by the
person provid- person receiving
ing service the service
(i) Goods trans- Transport of goods by road (If the person is specified Nil 100%
port Service person)
(ii) Sponsorship Sponsorship service Nil 100%
Service
(iii) Legal Ser- Legal Services by Individual advocate or a firm of ad- Nil 100%
vices vocate including arbitral services.
(iv) Legal Ser- Support services by Government or local authority (ex- Nil 100%
vices cluding renting of immovable property and certain
other specified services)
(v) Directors Fees Services provided or agreed to be provided by a Di- Nil 100%
rector of a company or a body corporate to the said
company or the body corporate.
(vi) Import of Any taxable service where the Service provider is lo- Nil 100%
Service cated in a non taxable territory and service recipient
located in a taxable territory
(vii) Recovery Services provided by Recovery Agents to Banks Finan- Nil 100%
Agents Ser- cial Institutions and NBFC.
vice
(viii) Insurance Service provided or agreed to be provided by an insur- Nil 100%
Business ance agent to any person carrying on insurance busi-
ness.
(ix) Any taxable Any taxable services provided or agreed to be pro- Nil 100%
service vided by any person who is located in a non-taxable
territory and received by any person located in the
taxable territory.
(x) Lottery Selling or marketing agent of lottery tickets Nil 100%
agents
(xi) Manpower/ Any individual/ HUF/ Firm/ LLP/ AOP located in taxable Nil [25% upto 100%
Security territory by way of
31.03.2015] [75% upto
supply of manpower for any purpose or,
31.03.2015]
security services
(xii) Mutual Fund Mutual Fund agent or distributor Nil 100%
agent
Note:
(1) W.e.f. 1-4-2016, taxable services provided or agreed to be provided by a mutual fund agent or distributor, to a
mutual fund or asset management company shall be paid by service provider of such services. It means omit-
ted from Reverse Charge.
(2) W.e.f. 1-4-2016, taxable services provided or agreed to be provided by a selling or marketing agent of lottery
tickets in relation to lottery in any manner to a lottery distributor or selling agent of the State Govt. under the
provisions of the Lottery (Regulations) Act, 1998.
(3) Taxable services provided or agreed to be provided by a person involving an aggregator in any manner.
Aggregator is to pay service tax under reverse charge [Rule 2(1)(d)(i)(AAA) of STR, 1994]
A new clause (AAA) has been inserted w.e.f. 1-3-2015 in the said rule to provide that in relation to service pro-
vided or agreed to be provided, by a person involving an aggregator in any manner, the aggregator of the
service would be the person liable for paying service tax.
Aggregator means a person, who owns and manages a web based software application, and by means of
the application and a communication device, enables a potential customer to connect with persons provid-
ing service of a particular kind under the brand name or trade name of the aggregator [Rule 2(1)(aa) of STR,
1994].
Aggregator refers to a web site or computer software that aggregates a specific type of information from
multiple online sources: Data aggregator, an organization involved in compiling information from detailed da-
tabases on individuals and selling that information to others.
Therefore, companies which act as aggregator for service providers like travel portals, food portals or cab ser-
vices will now be liable to pay service tax.
(ix) Partial Reverse Charge (w.e.f. 1-7-2012)
By the virtue of powers conferred under Sub-section (2) of Section 68 of the Act, the Central Govt. has issued
notification dated 1.7.2012 notification dated 1.7.2012 notifying the following below services which shall be
covered under the partial reverse charge mechanism.
Partial reverse charge is applicable in relation to service provided or agreed to be provided by way of renting
of a motor vehicle designed to carry passengers to any person who is not in the similar line of business or supply
of manpower for any purpose of service portion in execution of works contract by any individual, Hindu undi-
vided family or partnership firm whether registered or not, including association of person, located in the tax-
able territory to a business entity registered as body corporate, located in the taxable territory, both the service
provider and the service recipient to the extent notified under sub-section (2) of section 68 of the act, for each
respectively.
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 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.
The service provider and service recipient will pay the service tax in the following proportion as notified by the
Government:

Service Tax
List 2 - Service under Partial Reverse Charge Mechanism:
Sl. Nature of Service Description of services Percentage of Service Percentage of Service

No. tax payable by the per- tax payable by the per-
son providing service son receiving the service
(i) Rent-a-cab Service Hiring of a motor vehicle de-
signed to carry passengers
(a) With abatement (i.e. 60%) Nil 100%
(b) Without abatement 50% 50%
(ii) Works contract service Works contract service 50% 50%
Partial Reverse Charge is not Applicable in the following cases:
Service Provider Recipient of Service

Company or body corporate Individual or partnership firm or body corporate or any
other person
Renting of motor vehicle designed to carry passengers Any person who is in the same business of carry in pas-
by individual / firm / HUF/AOP sengers (i.e. sub-contract)
5.4 BRAND NAME OF ANOTHER PERSON
Service provider who is providing taxable services under the brand name of another person is not eligible for claim-
ing exemption limit of ` 10 lakhs and hence, is liable to pay service tax irrespective of the turnover.
Notification No. 8/2005-ST clearly provides that small scale service provider exemption will not be applicable to taxable
services provided by a person under a brand name or trade name, whether registered or not, of another person.
Example 13: Mr. Ram who markets his goods under the brand name of TATA Company. Therefore, it is very clear that
Mr. Ram is a provider of services under the brand name of the company and his services are taxable under Business
Auxiliary Services. Hence, he can not avail the benefit of ` Rs.10,00,000 exemption.
5.5 PAYMENT OF SERVICE TAX [RULE 6]
Service Tax on value of taxable services provided or received during the calendar month whichever is earlier should
be paid by the 6th of the following month. In case the assessee is an individual or proprietary firm or partnership firm
(other than HUF) or Limited Liability Partnership firm, the tax is payable on quarterly basis within 6 days from the end of
the quarter.
If the payment is made through any other mode, such payment can be made by the 5th of the following month or
following quarter as the case may be.
If the last day of payment and filing return is a public holiday, tax can be paid and return can be filed on the next
working day.
In case of individual and partnership firms whose aggregate value of taxable services provided from one or more
premises is fifty lakh rupees or less in the previous financial year, the service provider shall have the option to pay tax
on taxable services provided or agreed to be provided by him up to a total of rupee fifty lakhs in the current financial
year, by the dates specified in sub-rule (1) with respect to the month or quarter, as the case may be, in which pay-
ment is received.
Every assessee shall electronically pay the service tax payable by him, through internet banking. Provided that the
Assistant Commissioner or the Deputy Commissioner of Central Excise, as the case may be, having jurisdiction, may
for reasons to be recorded in writing, allow the assessee to deposit the service tax by any mode other than internet
banking.
Manual Payment of service tax may be either by cheque or cash depositing it through GAR-7 Challan with the bank
designated by the CBEC.
Delay in payment of service tax attracts the simple interest (as per Section 75 of the Finance Act, 1994) at the rate
as prescribed below and penalty. Notification No. 26/2004, dated 10-9-2004 has specified the rate. The table below
shows the rate of interest applicable at relevant period of time:
Interest on delayed payment of service tax - Section 75 of the Finance Act, 1994
Sl. No. Period Rate of Interest

(i) Till 11-5-2001 1.5% per month
(ii) 11-5-2001 to 11-5-2002 24% per annum
(iii) 11-5-2002 to 10-9-2004 15% per annum
(iv) From 10-9-2004 to 31-3-2011 13% per annum
(v) From 1-4-2011 15% per annum (whose annual turnover of taxable sevices during the previ-
ous year is ` 60 lakh).
(vi) From 1-10-2014 Extent of delay
up to 6 months 18%
From 6 months and upto 1 year 24%
More than one year 30%
Extent of delay for small assessees having annual turnover upto ` 60 lacks in
the previous year
up to 6 months 15% p.a.
From 6 months and upto 1 year 21% p.a.
More than one year 27% p.a.
(vii) From 14.05.2016 Interest rates delayed payment of duty/tax across all idirect taxes are being
rationalized and made uniform of 15%, except in case of Service Tax col-
lected but not deposited to the exchequer, in which case the rate of interest
will be 24% from the date on which the Service Tax payment became due.

In case of assessees, whose value of taxable services in the preceding year/
years covered by the notice is less than ` 60 lakh, the rate of interest on de-
layed payment of Service Tax will be 12%
5.6 RATE OF SERVICE TAX
The table below shows the rate of service tax applicable at the relevant period of time:
Sl. No. Period Rate of Service Tax Rate of Education Cess

(i) Till 13-5-2003 5% Nil
(ii) 14-5-2003 to 9-9-2004 8% Nil
(iii) 10-9-2004 10% 2% of the S.T.
(iv) 18-4-2006 onwards 12% 2% of the S.T. and 1% SAH w.e.f. 11th May 2007
(v) w.e.f. 24-2-2009 10% 2% plus 1% cess
(vi) w.e.f. 01 -04-2012 12% 2% plus 1% cess
(vii) w.e.f. 15 -11-2015 14.5% (including Swachh Bharat Cess)
(viii) w.e.f. 01.06.2016 15%(including Krishi Kalyan Cess)
Note: SAH means Secondary and Higher Education Cess.

Service Tax
5.7 INVOICES UNDER SERVICE TAX
RULE 4A: Taxable service to be provided or credit to be distributed on invoice, bill or challan
(1) Every person providing taxable service shall, not later than thirty days from the date of completion of such tax-
able service or receipt of any payment towards the value of such taxable service, whichever is earlier, issue an
invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him in respect
of such taxable service provided or agreed to be provided and such invoice, bill or, as the case may be, chal-
lan shall be serially 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 and value of taxable service provided or agreed to be provided; and
(iv) the service tax payable thereon.
Provided that in case the provider of taxable service is a banking company or a financial institution including a
non-banking financial company providing service to any person, an invoice, a bill or, as the case may be, chal-
lan shall include any document, by whatever name called, whether or not serially numbered, and whether or
not containing address of the person receiving taxable service but containing other information in such docu-
ments as required under this sub-rule:
Provided further that in case the provider of taxable service is a goods transport agency (GTA), providing ser-
vice to any person, in relation to transport of goods by road in a goods carriage, an invoice, a bill or, as the case
may be, a challan shall include any document, by whatever name called, which shall contain the details of
the consignment note number and date, gross weight of the consignment and also contain other information
as required under this sub-rule.
Provided also that in case of continuous supply of service, every person providing such taxable service shall is-
sue an invoice, bill or challan, as the case may be, within thirty days of the date when each event specified in
the contract, which requires the service receiver to make any payment to service provider, is completed.
Provided also that in case the provider of taxable service is a banking company or a financial institution includ-
ing a non-banking financial company providing service to any person, the period within which the invoice, bill
or challan, as the case may be, is to be issued, shall be forty-five days:
Provided also that in case the provider of taxable service is providing the service of transport of passenger, an
invoice, a bill or as the case may be, challan shall include ticket in any form by whatever name called and
whether or not containing registration number of the provider of service and address of the recipient of service
but containing other information in such documents as required under this sub-rule.
Provided also that wherever the provider of taxable service receives an amount upto rupees one thousand in
excess of the amount indicated in the invoice and the provider of taxable service has opted to determine the
point of taxation based on the option as given in Point of Taxation Rules, 2011, no invoice is required to be issued
to such extent.
(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;
(ill) the name and address of the recipient of the credit distributed;
(iv) the amount of the credit distributed.
Provided that in case the input service distributor is an office of a banking company or a financial institution
including a non-banking financial company providing service to any person an invoice, a bill or, as the case

may be, challan shall include any document, by whatever name called, whether or not serially numbered but
containing other information in such documents as required under sub-rule.
5.8 RECORDS TO BE MAINTAINED
Rule 5: Records
(1) The records including computerized data as maintained by an assessee in accordance with the various
laws in force from time to time shall be acceptable.
(2) Every assessee shall furnish to the superintendent of Central Excise at the time of filing of return for the first time
or the 31st day of January, 2008, whichever is later, a list in duplicate, of
(i) all the record prepared or maintained by the assessee for accounting of transactions in regard to,
(a) Providing of any service;
(b) receipt pr procurement of input services and payment for such input services;
(c) receipt, purchase, manufacture, storage, sale, or delivery, as the case may be, in regard of inputs
and capital goods;
(d) other activities, such as manufacture and sale of goods, if any.
(ii) all other financial records maintained by him in the normal course of business.;
(3) All such records shall be preserved at least for a period of five years immediately after the financial year to
which such records pertain.
Explanation For the purpose of this rule, registered premises includes all premises or offices from where an assessee
is providing taxable services.
5.9 AUTOMATION OF CENTRAL EXCISE AND SERVICE TAX (ACES)
The Central Board of Excise & Customs (CBE & C) has developed a new software application called Automation of
Central Excise and Service Tax (ACES), which aims at improving tax-payer services, transparency, accountability and
efficiency in indirect tax administration.
It is a centralized, web based software application which automates various processes of Central Excise and Service
Tax for Assessees and Department, and gives complete end to end solution.
In ACES, the various processes of Service Tax automated are
i. Registration,
ii. Returns,
iii. Refunds,
iv. ST-3A,
v. Dispute Resolution and
vi. Audit.
ACES can be used for:
i. Online registration and amendment of registration details
ii. Electronic filing of documents such as Returns, Claims, Intimations and permissions
iii. Online tracking of the status of applications, claims and permissions
iv. Online facility to view documents like Registration Certificate, Returns, Show Cause Notice, Order-In-Original etc.

Service Tax
Certified Facilitation Centre (CFC)

CFC stand for Certified Facilitation Centre under ACES project of CBEC and is an e-facility, which may be set-up and
operated by a Cost Accountant/Chartered Accountant/Company Secretary or a proprietary concern/firm of Cost
Accountants or Chartered Accountants or Company Secretary in practice to whom a certificate is issued under
the ACES project, where the assessees of Central Excise and Service Tax can avail this facility to file their returns and
other documents electronically along with associated facilitation on payment of specified fees.
5.10 ELECTRONIC ACCOUNTING SYSTEM IN EXCISE AND SERVICE TAX (EASIEST)
EASIEST has been developed to make payment of tax easy. An assessee paying service tax manually by filing GAR 7
challan one single copy of challan and its acknowledgement is sufficient. This facility is available with 28 banks across
the India.
Benefits of EASIEST:
(a) One copy of the challan has to be filled (earlier 4 copies were required to file):
(b) Facility of online verification of the status of tax payment using Challan Identification Number.
Registration
PRACTICAL PROBLEMS
Example 14: Sri R is a practicing Chartered Accountant. His Gross taxable services during the year 2016-17 are
` 9,50,000. Is Registration compulsory for him? If so in which year?
Answer:
Yes, Registration is compulsory in the year 2016-17 (i.e. exceeded ` 9,00,000).
Example 15: Mr. Hari, an engineer, renders the taxable services during the year 2015-16 for ` 4,00,000. During current
year 2016-17 he rendered the taxable services ` 9,00,010 up to the end of the 30th June 2016. Explain for him registra-
tion is compulsory? If so what the last date for registration?
Answer:
Yes, Registration is required in the year 2016-17 on or before 30th July 2016.
Example 16: Mr. X is a provider of taxable service under the brand name of others. He started his business in April, 2012.
Taxable turnover for the year 2016-17 is ` 5 lakh. Is Registration compulsory for him?
Answer:
Yes, Registration is compulsory for service provider irrespective of his turnover, if he provides service under the brand
name of others. For Mr. X registration is compulsory under the Finance Act, 1994.
Example 17: Mr. D is provider of taxable services from head office located at Hyderabad and from two branch offices
located at Chennai and Mumbai.
(a) Is centralized registration is permissible, if centralized billing and accounting carried out from Head Office?
(b) Who will be the competent authority to grant centralized registration?
(c) Rework (a) and (b) if his turnover is ` 8 lacs for the year 2015-16, but acting as input service distributor?
Answer:
(a) Yes, centralized registration is permissible
(b) DGST
(c) Registration is compulsory. Service provider should obtain multiple registrations to act as input service distributor.

Example 18: State briefly whether the following persons are liable to apply for registration under the Finance Act, 1994
and Service tax (Registration Special Category of Persons) Rules, 2005 and if so from which date:
(i) An input service distributor who starts his business with effect from 1st January, 2016.
(ii) A provider of taxable service under an unregistered brand name of another person. In both cases aggregate
value of taxable services was ` Rs.6,00,000 upto 31-3-2016.
Answer:
(i) In case of input service distributors registration is compulsory without any threshold limit. Such person has to ob-
tain the registration within 30 days from the date of commencing the business.
(ii) A Job worker or a person who renders taxable services under some other brand name, then such person is not
eligible to get the exemption limit. Therefore such a job worker is liable for registration within 30 days from the
date of under taking such activities.
Reverse Charge
Example 19: ABT transport providing goods transport services. A Ltd sold goods from Mumbai to B Ltd of Chennai.
Freight charged by ABT transport for transporting said goods is ` 1,00,000 (exclusive of ST) as per consignment note,
dated 1st July 2014. Freight paid by A Ltd on 15th September 2015.
You are required to answer:
(a) Name of provider of service and recipients of service?
(b) Who is liable to pay service tax and why?
(c) Due date of payment of service tax?
(d) Service Tax liability?
Answer :
(a) Service provider ABT transport services.
Service recipients Both A Ltd & B Ltd.
(b) Either A Ltd (or) B Ltd being the recipients of the services. However, in the given case A Ltd is liable to pay
service tax, since, freight paid by A Ltd.
(c) 6th October, 2014. In any other case 5th October, 2014.
(d) Service tax liability `
Total amount of freight paid 1,00,000
Less: Abatement of 75% on the value of freight (` 1,00,000 x 75%) (75,000)
Taxable Services 25,000
Service tax = ` 3,750 (i.e. ` 25,000 * 15/100)
Example 20: A Ltd. provided services valuing ` 8 lakhs during the financial year 2015-16. During 2016-2017 it has pro-
vided taxable services valuing ` 10 lakhs and has received payments towards payable services ` 8.5 lakhs. It has also
received services in the nature of transport of goods by road on 1-4-2016, valuing ` 50,000 (exclusive of service tax),

Service Tax
in respect of which it is the person liable to pay service tax. Freight has been paid on 10-6-2016. Compute the service
tax, if any, payable by A Ltd. for the financial year 2016-2017. It is given that goods transport service is exempt to the
extent of 75% of value thereof.
Answer :
Value of transport services received = ` 50,000
Less : abatement 75% on ` 50,000 = ` 37,500
Taxable services = ` 12,500
Service tax liability in the hands of A Ltd (2015-16) = ` 1,812,50 (i.e. ` 12,500 x 14.5/100)
Note:
(i) The company is eligible for small service provider exemption during the financial year 2016-17, as the value of
taxable services provided during financial year 2015-16 does not exceed ` Rs.10 lakhs.
(ii) For the value of taxable services provided during the financial year 2016-17, no tax liability would arise, as the
payments received or services provided do not exceed ` 10 lakhs. However, for goods transport agency ser-
vices received, in respect of which M/s. A Ltd. is the person liable to pay service tax, the company cannot claim
for small service provider exemption.
Interest
Example 21: Mr. X practicing Cost Accountant received ` 20,00,000 (exclusive of service tax)in the June 2016. He paid
service tax on 26th July 2016. Gross receipt in the year 2015-16 is `Rs. 25 lakhs.
You are required to calculate Interest on delay payment of service tax.
Answer :
Service tax @15% on ` 20,00,000 = ` 3,00,000.
Due date of payment of service tax = 6th July, 2016.
No. of days delay = 20 days
Interest = ` .2465.75 (i.e. ` 3,00,000 15/100 20/365) say ` 2466.00
5.11 NEGATIVE LIST & EXEMPTED SERVICES
Introduction
In terms of Section 66B of the Act, service tax will be leviable on all services provided in the taxable territory by a per-
son to another for a consideration other than the services specified in the negative list. The services specified in the
negative list therefore go out of the ambit of chargeability of service tax. The negative list of service is specified in the
Act itself in Section 66 D. In all, there are seventeen heads of services that have been specified in the negative list. The
scope and ambit of these is explained in paras below.
Services Inclusion in Negative list (it Exclusion from Nega- Remarks

means outside the scope tive list (it means taxable
of service tax) unless exempted from
service tax)
1) Services provided by All services provided by Speed post, Express Reverse charge applicable
Govt. or local Authority Govt., in terms of their sov- Parcel post, Life insurance in case of support services
ereign and agency services car- Examples: Adv. Service,
ried out on payment of Construction Works con-
right to business entities. commission tract, Renting of movable
Grant of mining licenses Services in relation to or immovable property, Se-
curity Testing and analysis.
Audit of Comptroller vessel or an aircraft
and Auditor General, etc. Transport of goods and
passengers
Support services.

(2) Services provided All type of services provided by Services provided to RBI. Services provided by
by RESERVE BANK RBI. banks to RBI taxable.
OF INDIA (RBI)
(3) Services Provid- All type of services. Nil. Service provided to a for-
ed by a foreign eign diplomatic mission
diplomatic mis- located in india is exempt
sion located in from service tax.
India
(4) Agriculture or Cultivation, harvesting, Potato Chips or Tomoto
agricultural pro- seed testing Ketchup
duce Supply of farm labour Grinding, sterilizing extrac-
Trimming, sorting etc., tion of packaging in retail
thereby marketable in packs of agricultural prod-
the primary market ucts.
Renting of agro machin-
ery loading, unloading,
packing, storage and
warehousing of agricul-
tural produce
Agricultural extention ser-
vices
Services by any agricul-
rual Produce marketing
committee
Commission on Sale or
Purchase of Agricultural
Produce
Cultivation Of Ornamen-
tal Flowers
Poultry Farm
(5) Trading of Forward contracts in com- Auxiliary services relating to

goods modities future contracts or commod-
ity futures provided by com-
Commodity futures.
modity exchanges, clearing
Sale or purchase of goods houses or agents.
Future contracts
(6) Process amount- Process for which Excise Process do not amounting to Exemptions:
ing to manufac- duty Exempted (i.e. Non- manufacture. Job work in relation to
ture or produc- dutiable goods). Alcoholic liquor for human con- agriculture, printing or
tion of goods Excisable goods for which sumption are also exempted textile processing
Central Excise Duty or from negative list. Cut and polished dia-
State Excise are leviable. monds, jewellery
E.D. paid by manu-
facturer
Job work charges
Upto ` 150 Lacs in rela-
tion to parts of cycles
or sewing machines
provided P.Y. ` 150
Lacs.

Service Tax
(7) Selling of space Selling of space for advertise- Sale of space for adv. on ra- Adv. Agencies relating to
or time slots for ment in print media dio or T.V. making or preparation of
advertisement adv. are taxable
Except advertise- Sale time slot by a broad-
ment broad-cast casting org., bill bonds pub-
by ratio or televi- lic places, cell phones, ATM,
sion. internet etc.
(8) Access to a road Toll charges collected to ac- The activity of toll collection out- Example:
or a bridge on cess to National Highways or sourced to any third party agen-
Intertoll India Consultants
payment of toll State Highways. cy who undertakes the work for
was under taken a sub-
charges consideration.
contract to collect toll
on commission basis from
Noida Toll Bridge Com-
pany
(i.e. agency authorized
to levy toll). Commission is
subject to S.T.
(9) Betting,gambling Betting, gambling or lottery Auxiliary services used for or- Services by selling/ mar-
or lottery ganising/ promoting betting keting agent of lottery
or gambling events tickets to a distributor or a
Discount earned by the lot- selling agent were exempt
tery distributors/ agents from service tax. Now, this
Service of promotion, mar- exemption has been with-
keting, organising etc. of lot- drawn. These services are
tery covered under 100% re-
Distributor or selling agent has verse charge and the dis-
option to pay S.T. at compo- tributor or selling agent of
sition scheme as per Rule lottery would be liable to
6(7C) of Service Tax Rules, pay service tax.
1994.
(10) admission to
entertainment
events or access
to amusement
facilities Not
in Negagive List
[Service Tax levi-
able subject to
exemptions]
(11) Transmission or Services provided by Charges collected by a devel-
distribution of oper or a housing society for
The Central Electricity Au-
electricity by an distribution of electricity within a
thority
Electricity trans- residential complex Installation of
mission or distri- A State Electricity Board gensets
bution utility
A State Transmission Utility
A Transmission licensee or distri-
bution licensee under the Elec-
tricity Act,

(12) Education ser- Services by way of Qualifications recognised by
vices a law of foreign country
I. Pre-school education and
education upto higher Services provided to educa-
secondary school (i.e. XII tional institutions
standard)
Private tuitions
II. Education as a part of a
Services by educational in-
curriculum for obtaining a
stitutions for campus recruit-
qualification recognised
ments
by any an Indian law
III. Vocational education Exemption from S.T:
course approved by Na-
Training relating to arts, cul-
tional Council for Voca-
ture or sports
tional Training (NCVT) or
[National Skill Develop- Auxiliary educational servic-
ment Corporation (NSDC) es
deleted from Negative list
w.e.f. 10-5-2013] and in-
cludes courses offered by
State/Central Govt. and
Local Authority w.e.f. 10-5-
2013:
IV. Courses offered by ITI/ITC af-
filiated to the State Coun-
cil of Vocational Training
covered under Negative
list.
(13)
Renting of Resi- I. Govt. Deptt. Allots hous- Residential house taken on
dential dwelling es to its employees and rent for commercial purpos-
for use as resi- charges a license fee es
dence II. Flats given on rent for resi- House is given on rent and
dential purposes the same is used as a hotel
or a lodge
Rooms in a hotel or a lodge
are let out
(14) Banking, financial I. Extending deposits, loans, or Interest portion of leasing or hire
and insurance advances in so far as the con- purchase after claiming an
services sideration is represented by abatement @90%.
way of interest or discount All other services of a banker or
II. Foreign currency exchange financial and insurance ser-
amongst banks or authorized vices
dealers Foreman of chit fund liable to
pay service tax without any
abatement.
(15) Services relating Services by Public transport
to transportation A stage carriage
predominantly for tourism
of passengers Railways in a class other than
by any mode of first class or AC coach Exemption:
conveyance Metro, monorail or tramway
Giving on hire of motor vehicles
Inland waterways
to State Transport, No S.T.
Public transport (other than
tourism purpose) in a ves-
sel between places locat-
ed in India and
Metered cabs or auto rick-
shaws
Service Tax
(16) Services relating I. By road (except GTA and Goods Transport Agency (GTA)
to transportation courier agency)
Courier Agency
of goods
II. By aircraft or vessel from a
place outside India up to
the customs station
III. By inland waterways
(17) Funeral, burial, All relevant services

crematorium or
mortuary services
including trans-
portation of the
deceased.
Chapter V of the Finance Act, 1994, is being amended vide Finance Act 2013:
(i) Definition of approved vocational education course provided in section 65B(11) is being amended: firstly the
word , or, State Council of Vocational Training (SCVT) is being inserted in (i), and secondly, entry at item serial
number(iii) is being omitted, for NSDC is not an affiliating body. After the proposed amendment takes effect, a
course run by an industrial training institute or an industrial training centre affiliated to the National Council for
vocational training or State Council for vocational training offering courses in designated trades notified under
the Apprentices Act, 1961.
(ii) Definition of process amounting to manufacture or Production of goods, in section 65B(40) being amended
to include processes on which duties of excise are leviable under the Medicinal and Toilet Preparations (Excise
Duties) Act, 1955, or Section 3 of Central Excise Act.
(iii) Maximum penalty imposable for failure to obtain registration will be ten thousand rupee only.
(iv) Section 78A is being introduced, to make provision for imposition of penalty on director, manager, secretary or
other officer of the company, who at the time of specified contravention was in charge of and responsible for
the conduct of business of company was knowingly concerned with such contravention.
(v) Section 89 is being amended; (i) in the case of an offence specified in clause (a), (b) and (c) of sub section (1)
where the amount exceeds fifty lakh rupees, punishment shall be for a term which may extend to three years,
but shall not, in any case, be less than six months; (ii) in the case of failure to pay service tax collected, to the
credit of Central Government within six months, an offence specified in section 89(1)(d), if such non-payment
exceeds fifty lakh rupees, punishment shall be imprisonment for a term which may extend upto seven years but
not less than six months; (iii) in the case of any other offence, the punishment shall be imprisonment for a term
which may extend to one year.
(vi) Retrospective exemption is being extended to the Indian Railways on the service tax leviable on various taxable
services provided by them during the period prior to the 1st day of July 2012, to the extend show cause notices
have been issued upto the 28th day of February 2013. Section 99 is being added for this purpose, in chapter V
of the Finance Act, 1994.
(vii) Rationalization of Abatement
At present taxable portion for service tax purpose is prescribed as 25% uniform for constructions where value
of land is included in the amount charged from the service recipient. This is being rationalized. Accordingly,
where the carpet area of residential unit is upto 2000 square feet or the amount charged is less than One Crore
Rupees, in the case Construction of complex, building or civil structure, or a part thereof, intended for sale to
a buyer, wholly or partly except where the entire consideration is received after issuance of completion certifi-
cate by the competent authority, taxable portion for service tax purpose will remain as 25%, in all other cases
taxable portion for service tax purpose will be 30% . This change will come into effect from the 1st day of March,
2013.

(A) The following exemption are being rationalized:
Rationalization of exemption limit prescribed for charitable organosations, provided service towards any other
object of general public utility. So far, the limit was 25 Lakh Rupees per annum. Now, they will be covered by
the threshold exemption.
Exemption provided to restaurant other than those having (i) air-conditioning and (ii) license to serve liquor, is
being rationalized; condition regarding license to serve liquor, is being omitted. Therefore, with effect from 1st
April 2013, service tax will be leviable on taxable service provided in restaurants with air-conditioning or central
air heating in any part of the establishment at any time during the year.
Rationalization of exemption to transport of goods by road and rail/vessel.
Exempted Services
The need for exemptions is not obviated with the introduction of negative list. While some existing exemptions have
been built into the negative list, others, wherever necessary, have been retained as exemptions. In addition some new
exemptions are also introduced. For ease of reference and simplicity most of the exemptions are now a part of one
single mega exemption notification 25/2012-ST dated 20/6/12. These exemptions have been explained below:
There are broadly two types of exemptions namely general exemptions and mega exemption from service tax levy.
(A) General Exemptions:
(i) Small service provider
A service provider whose previous year taxable services are less than or equal to ` 10 Lakhs, in the current year
such service provider is called as small service provider. A person who is newly started business or office for the
first time is also be called as small service provider if in the current year his taxable services does not exceeds
` 10 Lakhs.
The service provider should however satisfy certain conditions in order to avail the benefit of this exemption. The
conditions to be noted here are as follows
Taxable services provided by a person under a brand name or a trade name (whether registered or not)
of another person would NOT be eligible for this exemption
A receiver of services who is liable to pay service tax on the services he has received by virtue of section
68(2) cannot avail the benefit of this exemption with regard to such payments. More commonly this is rel-
evant for recipient of GTA Services or in case of import of services where no exemption is entitled.
Once an option is exercised in regard to this exemption during a financial year, it cannot be changed in
the same financial year. [This however does not mean that the claiming of the exemption makes it com-
pulsory to claim for the whole year. In between even without reaching `10 lakhs the option to pay can be
made.]
No cenvat credit can be availed on inputs or input services used in providing such output service for which
exemption is being claimed.
Cenvat credit cannot be availed on capital goods received in the premises of provider of such service
during the exemption period.
The service provider shall pay an amount equivalent to the cenvat credit taken by him in respect of inputs
lying in stock or in process on the date of availment of exemption. After paying such an amount, if there is
any balance of cenvat credit remaining unutilized, such balance would lapse.
The exemption shall apply in respect of the aggregate value of all taxable services provided by the service
provider (even if from more than one premises) and not individually.
Exempted services shall be outside the purview of the exemption of this notification. In other words, the
value for ascertaining the limit of ` 10 Lakhs would be that of taxable services alone on which service tax is
payable.
The aggregate value of such services provided in the preceding financial year should not exceed the
aforesaid exemption limit.
The Small Service Provider whose turnover of all taxable services from one or more premises does not exceeds

Service Tax
` 10,00,000 during the previous year, then no service tax in the current year upto ` 10,00,000.
How to compute aggregate value (i.e. exemption limit) of ` 10,00,000: W.e.f. 1-4-2012 it has been provided that
the exemption to the small service provider shall be on the basis of the value of invoice in a financial year and
not on the basis of payment received in that year.
As per the amendment, Aggregate value means the sum total of value of taxable services charged in the first
consecutive invoices issued or required to be issued, as the case may be, during a financial year but does not
include value charged in invoices issued towards such services which are exempt from whole of service tax
leviable thereon under section 66 of the Finance Act, 1994
Example 22: M/s X Pvt. Ltd is provider of taxable services namely Construction of Commercial Complexes. The tax-
able services in the financial year 2015-16 were ` 9,50,000. In the current financial year 2016-17 the following services
provided and also opted the small service provider exemption.
Invoice Dt. Particulars Value in (`) Abatement Small Service Remarks
(exclusive of Provider
service tax) Abatement Exemption limit
10-4-2016 Construction of 12,00,000 67% Applicable for Exemption limit of ` 10 lakhs
one shop the portion of applicable only for the portion of
` 3,96,000 invoice which is non-exempted
(i.e. ` 12 lakhs from service tax. Therefore
x 33%) 3,96,000 exempted from service
tax
Payment 9,50,000 Nil Not applicable Exemptioni to the small service
received provider shall be on the basis of
against the the value of invoice in a financial
previous year year and not on the basis of
bills (2015-16) payment received in that year.
15-4-2016 Advance 28,00,000 75% Applicable Exempted services, any how
received (i.e. (includes `18 for the portion exempted from service tax.
services to be lakhs services of ` 2,50,000 Therefore exempted services
provided in provided in Therefore, fully should not be adjusted against
May 2015) the state of exempt from exemption limit of `10 lakhs.
Jammu & Service Tax
Kashmir
30-4-2016 Construction 15,00,000 67% Applicable for Over and above ` 10 lakhs of
of super the portion of exemption limit is fully taxable @
market ` 3,54,000. 15% therefore service tax is
` 21,150
Exemption limit of ` 10,00,000 not applicable in the following cases
(a) Previous year taxable turnover of a service provider exceeds ` Rs.10 Lacs.
(b) Service recipient is liable to pay service tax (i.e. Reverse Charge).
(c) Provider of services under the brand name of others.
(ii) Services provided to United Nations or an International Organization
Services provided to the agencies of the United Nations and to the employees of the United Nations, whether
for official or personal purpose. Services rendered to an approved international organization, service tax is ex-
empted.
(iii) Special Economic Zone (SEZ)
(Vide Notification No. 17/2011-ST dt. 1-3-2011, w.e.f. 1-3-2011)
Taxable services provided to a unit of SEZ or a SEZ developer by the service provider is exempted from pay-
ment of service tax, if the services are wholly consumed within SEZ. If services are not consumed wholly within
SEZ, such services are taxable in the hands of service provider. However, the exemption is available by way of
refund of service tax paid on the specified services received for the authorized operations in a SEZ.
Wholly consumed within SEZ
Where the specified services has been received and used for authorized operation by a unit of Special Eco-
nomic Zones (or) SEZ developer will be exempt if the services are wholly consumed within SEZ, including ser-
vices liable to tax on reverse charge basis under Section 66A of the Finance Act, 1994.
It has also been specified that all services received by an entity in a SEZ, which does not have any other Do-
mestic Tariff Area (DTA) operations, will constitute wholly consumed services w.e.f. 1-3-2011. A service provider
shall provide the services wholly consumed within the SEZ, without payment of service tax on obtaining from
developer or the unit of SEZ for authorized operation the following documents
(a) List of taxable services for authorized operations approved by the approval committee (i.e. specified ser-
vices) of the concerned SEZ.
(b) A declaration, where applicable in Form No. A-1 duly verified by the specified officer of SEZ. Since, no ser-
vice tax has been paid by a unit of SEZ or SEZ developer, refund of service tax does not arise.
Meaning of Service wholly consumed within the SEZ
The concept of wholly consumed has been borrowed from the Export of Services Rules, 2005. The expression
wholly Consumed refer to following taxable services, received by a Developer or Unit of a SEZ, for the autho-
rized operations, namely:-
SEZ units providing taxable service to
(a) Services listed in Rule 3(1) (i) of the Export of Services Rules,
any person for consumption in Domestic
2005, in relation to an immovable property situated within
Tariff Area (DTA) is subject to service tax.
the SEZ; or
(b) Services listed in Rule 3(1)(ii) of the Export of Services Rules, 2005, as are wholly performed within the SEZ; or
Services listed in Rule 3(1)(iii) of the Export of Services Rules, 2005, provided to a Developer or Unit of SEZ,
who does not own or carry on any business other than the operations in the SEZ. Not wholly Consumed
within SEZ
Where the specified services are provided to a unit of Special Economic Zone (or) SEZ developer will be tax-
able in the hands of service provider, if the services are not wholly consumed within SEZ (i.e. shared between
authorized operations in SEZ unit and Domestic Tariff Area (DTA) unit). However, a unit of SEZ or SEZ developer
can claim refund of service tax paid on the specified services received for the authorized operations in a SEZ.
The refund shall be restricted to the extent of the ratio of export turnover to the total turnover for the given pe-
riod to which the claim relates.
(iv) Exemption to the extent of R & D Cess paid
The Government has exempted the taxable services provided by a consulting engineer to any person on trans-
fer of technology to the amount of Cess paid (i.e. 5%).
`
Service Tax Payable = XXXX
Less: 5% Cess Paid = (XXX)
Net Service Tax Liability = XXXX
Example 23: The value of service provided by a consulting engineer is ` 10,00,000. He has paid ` 50,000 as cess under
section 3 of the Research and Development Cess Act, 1986. What is the amount of service tax payable by him?
Answer:
Value of taxable services = ` 10,00,000
Service tax @ 15% = ` 1,50,000 less cess paid ` 50,000, Net service tax payable = ` 1,00,000
Mega Exemptions:
(1) Services provided to the United Nation or a specified international organization:

Service Tax
Services to only specified international organisations are exempt. Specified international organisation has
been defined in the notification and means an international organization 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.
Illustrative list of specified international organisations are as follows:
(a) International Civil Aviation Organisation
(b) World Health Organisation
(c) International Labor Organisation
(d) Food and Agriculture Organisation of the United Nations
(e) UN Educational, Scientific and Cultural Organisation (UNESCO)
(f) International Monetary Fund (IMF)
(g) International Bank for Reconstruction and Development
(h) Universal Postal Union
(i) International Telecommunication Union
(j) World Meteorological Organisation
(k) Permanent Central Opium Board
(l) International Hydrographic Bureau
(m) Commissioner for Indus Waters, Government of Pakistan and his advisers and assistants
(n) Asian African Legal Consultative Committee
(o) Commonwealth Asia Pacific Youth Development Centre, Chandigarh
(p) Delegation of Commission of European Community
(q) Customs Co-operation Council
(r) Asia Pacific Telecommunity
(s) International Centre of Public Enterprises in Developing Countries, Ljubljana (Yugoslavia)
(t) International Centre for Genetic Engineering and Biotechnology
(u) Asian Development Bank
(v) South Asian Association for Regional Co-operation
(w) International Jute Organisation, Dhaka, Bangladesh
Taxabiliy of transactions with certain International Organisations:
Services provided to Taxability

United Nations Childrens Fund (UNICEF) Exempted
International Finance Corporation (IFC) Exempted
UN Women Exempted
Asian Development Bank (ADB) Exempted
United Nations Development Programme (UNDP) Exempted
World Bank Exempted
Co-operative for Assistance and Relief Everywhere (CARE) TAXABLE SERVICE
(2) Health Care Services

Services in recognized systems of medicines in India are exempt. Health care services included:
(i) Health care services by a clinical establishment, an authorised medical practitioner or paramedics;
(ii) Services provided by way of transportation of a patient in an ambulance, other than those specified in (i)
above.
In terms of the Clause (h) of section 2 of the Clinical Establishments Act, 2010, the following systems of medicines
are recognized systems of medicines:
i. Allopathy
ii. Yoga
iii. Naturopathy
iv. Ayurveda
v. Homeopathy
vi. Siddha
vii. Unani
viii. Any other system of medicine that may be recognized by central government
Paramedic Services also exempted:
Services like nursing staff, physiotherapists, technicians, lab assistants etc are called as paramedic services
which are exempt from service tax. Services by them in a clinical establishment would be in the capacity of
employee and not provided in independent capacity and will thus be considered as services by such clinical
establishment. Similar services in independent capacity are also exempted.
However, the following services even if provided by Doctors or Hospitals shall be taxable:
(a) hair transplant or
(b) cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or function of
body affected due to congenital defects, developmental abnormalities, injury or trauma.
(2A) Services provided by cord blood banks by way of preservation of stem cells or any other service in relation to
such preservation.
(2B) Services provided by operators of the Common Bio-medical Waste Treatment Facility to a clinical establish-
ment by way of treatment by way of treatment or disposal of bio-medical waste or the processes incidental
thereto.
(3) Services by a Veterinary Clinic in relation to health care of animals or birds are exempted from service tax.
(4) Services by an entity registered under section 12AA of the Income tax Act, 1961by way of charitable activities:
service provider carry out one or more of the specified charitable activities are exempted from service tax.
Following are the specified charitable activities:-
(a) public health by way of
(I) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii)
persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence- forming substance
such as narcotics drugs or alcohol; or
(II) public awareness of preventive health, family planning or prevention of HIV infection;
(b) advancement of religion, spirituality or yoga.
(c) advancement of educational programmes or skill development relating to,-
(i) abandoned, orphaned or homeless children;
(ii) physically or mentally abused and traumatized persons;
(iii) prisoners; or
(iv) persons over the age of 65 years residing in a rural area;
(d) preservation of environment including watershed, forests and wildlife; or
Service Tax
(5) Renting of religious place or conducting religious ceremony:

Services by a person by way of
(a) renting of precincts of a religious place meant for general public or
(b) conduct of any religious ceremony is also exempted from service tax.
(5A) Services by a specified organization in respect of a religious pilgrimage facilitated by the Ministry of External af-
fairs of the Government of India, under bilateral arrangement.
(6) Services by an Arbitral Tribunal and Advocates:
Services provided by-
(a) an arbitral tribunal to -
(i) any person other than a business entity; or
(ii) a business entity with a turnover up to rupees ten lakh in the preceding financial year;
(b) an individual as an advocate or a partnership firm of advocates by way of legal services to,-
(i) an advocate or partnership firm of advocates providing legal services ;
(ii) any person other than a business entity; or
(iii) a business entity with a turnover up to rupees ten lakh in the preceding financial year; or
(c) a person represented on an arbitral tribunal to an arbitral tribunal;
However, in respect of services provided to business entities, with a turnover exceeding ` 10 lakh in the
preceding financial year, tax is required to be paid on reverse charge by the business entities. Business
entity is defined in section 65B of the Finance Act, 1994 as any person ordinarily carrying out any activity
relating to industry, commerce or any other business or profession. Thus it includes sole proprietors as well.
The business entity can, however, take input tax credit of such tax paid in terms of Cenvat Credit Rules,
2004, if otherwise eligible. The provisions relating to arbitral tribunal are also on similar lines.
w.e.f. 1-4-2016:
Service provided by
(a) an arbitral tribunal to
(i) any person other than a business entity; or
(ii) a business entity with a turnover up to ` 10 lakh in the preceding financial year;
(b) a partnership firm of advocates or an individual as an advocate other than a senior advocate, by way of
legal services to
(i) an advocate or partnership firm of advocates providing legal services;
(ii) any person other than a business entity; or
(iii) a business entity with a turnover up to ` 10 lakh in the preceding financial year; or
(c) a senior advocate by way of legal services to a person other than a person ordinarily carrying out any
activity relating to industry, commerce or any other business or profession; are exempted from service
tax.
w.e.f. 1-4-2016: withdrawal of exemption of services provided by senior advocate:
Service provided by a senior advocate to an advocate or partnership firm of advocates and a person repre-
sented on an arbitral tribunal to an Arbitral Tribunal attract service tax.
Legal services provided by a senior advocate shall not be be covered under the ambit of reverse charge
mechanism. In other words, in case of legal services provided by senior advocates, service tax shall be
payable by service provider w.e.f 1-4-2016.
As per Section 16 of Advocates Act, 1961 Senior advocate

(1) there shall be two classes of advocates, namely, senior advocates and other advocates.
(2) An advocate may, with his consent, be designated as senior advocate if the Supreme Court or a High
Court is of opinion that virtue of his ability standing at the Bar or special knowledge or experience in law
he is deserving of such distinction.
From 01/04/2016 onwards, exemption has been withdrawn in the following services, i.e.-
(1) Services provided by a senior advocate to an advocate or partnership firm of advocates;
(2) Services provided by a senior advocate as a person represented on an arbitral tribunal to an arbitral
tribunal, and
(3) Services provided by a senior advocate to a person ordinarily carrying out any activity relating to industry,
commerce or any other business or profession having turnover of upto ` 10 lakh in preceding financial
year
Service tax in the above instances would be levied under forward charge. Hence service provider (i.e.
Senior Advocate) shall be liable to service tax.
However, the existing dispensation (i.e. exemption) regarding legal services provided by a firm of advo-
cates or an advocate other than senior advocate is being continued.
(7) Exemption to clinical research organisation: [Omitted]
(8) Exemption for Recreational coaching or training:
There is exemption from service tax to training or coaching in recreational activities relating to arts, culture or
sports. The benefit is available to coaching or training relating to all forms of dance, music, painting, sculpture
making, theatre and sports etc.
(9) Exemption for services provided to or by an educational institution:
(a) by an educational institution to its students, faculty and staff;
(b) to an educational institution, by way of
(i) transportation of students, faculty and staff;
(ii) catering, including and mid-day meals scheme sponsored by the Government;
(iii) security or cleaning or housekeeping services performed in such educational institution;
(iv) services relating to admission to, or conduct of examination by, such institution.
(9A) Any services provided by
(i) the National Skill Development Council set up by the Government of India.
(ii) a Sector Skill Council approved by the National Skill Development Corporation;
(iii) an assessment agency approved by the Sector Skill Council or the National Skill Development Corpora-
tion;
(iv) a training partner approved by the National Skill Development Corporation or the Sector Skill Council;
In relation to (a)the National Skill Development Programme implemented by the National Skill Development
Corporation; or (b) a vocational skill development course under the National Skill
Certification and Monetary Reward Scheme; or (c) any other Scheme implemented by the National Skill De-
velopment Corporation.
(9B) Exemption to Services provided by Indian Institute of Management (IIM) w.e.f. 1-3-2016
Services provided by the Indian Institutes of Management, as per the guidelines of the Central Government,
to their students, by way of the following educational programmes, except Executive Development Pro-
gramme,
(a) Two year full time residential Post Graduate Programmes in Management for the Post Graduate Diploma
in Management, to which admissions are made on the basis of Common Admission Test (CAT), conduct-
ed by Indian Institute of Management;

Service Tax
(b) Fellow programe in Management

(c) Five year integrated programme in Management.
It may be mentioned that Section 66D (l): EDUCATION SERVICES already covered under Negative list. Therefore,
no liability to pay service tax in respect of afore said services for the past period also.
However, it is worth highlighting that services provided by the Indian Institute of Management by way of Execu-
tive Development Programme for shall not be exempted from service tax.
(9C) Exemption to assessing bodies empanelled centrally by Directorate General of Training, Ministry of Skill Devel-
opment and Entrepreneurship by way of assessments under Skill Development Initiative (SDI) Scheme w.e.f.
1-4-2016:
This exemption has been provided to assessing bodies who are empanelled by Directorate General of Training
and the entrepreneurship by way of assessments under Skill Development Scheme.
(9D) Exemption to certain training providers w.e.f. 1-4-2016
Services provided by training providers (Project implementation agencies) under Deen Dayal Upadhyaya
Grameen Kaushalya Yojana under the Ministry of Rural Development by way of offering skill or vocational train-
ing courses certified by National Council For Vocational Training.
The exemption is provided subject to the following conditions:
(a) Project implementing agency under Deen Dayal Upadhyaya Grameen Kaushalya Yojana under Ministry
of Rural Development
(b) The services shall be in the nature of skill or vocational training courses certified by National Council for
Vocational Training
The service provider may be Government Agency or any private agency but he should provide the services as
mentioned above.
(10) Services provided to recognised sports body: Services provided to a recognised sports body by-
(a) an individual as a player, referee, umpire, coach or team manager for participation in a sporting event
organized by a recognized sports body;
(b) another recognised sports body; are exempted from service tax. However, services by individuals such as
selectors, commentators, curators, technical experts are taxable.
Services of an individual as a player, umpire in a premier league is taxable. The service of a player to a
franchisee which is not a recognized sports body is taxable.
However, services of an individual as umpire, referee when provided directly to a recognized sports body
shall be exempt.
(11) Services in relation to sponsorship of sporting events organised : Services by way of sponsorship of sporting
events organised,-
(a) by a national sports federation, or its affiliated federations, where the participating teams or individuals
represent any district, state or zone or country;
(b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All
India Sports Council for the Deaf, Paralympic Committee of India or Special Olympics Bharat;
(c) by Central Civil Services Cultural and Sports Board;
(d) as part of national games, by Indian Olympic Association; or
(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme; are exempted from service tax.
(12) Services provided to the Government, a local authority or a governmental authority by way of construction,
erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration :
Exemption is available to the services by way of construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, or alteration of:

A. Omitted.
B. a historical monument, archaeological site or remains of national importance, archaeological excava-
tion, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958
C. Omitted.
D. canal, dam or other irrigation works
E. pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal
F. Omitted.
(13) Services provided by way of construction, erection, commissioning, etc, :
Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair,
maintenance, renovation, or alteration of,-
(a) A road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Ur-
ban Renewal Mission or Rajiv Awaas Yojana;
(ba) w.e.f. 1-3-2016 a civil structure or any other original works pertaining to the In-situ rehabilitation of existing
slum dwellers using land as a resource through private participation under the Housing for All (Urban)
Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers.
(bb) w.e.f. 1-3-2016 a civil structure or any other original works pertaining to the Beneficiary- led individual
house construction /enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yo-
jana;
(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961)
and meant predominantly for religious use by general public;
(d) a pollution control or effluent treatment plant, except located as a part of a factory; or
(e) a structure meant for funeral, burial or cremation of deceased are exempted from service tax.
(14) Services by way of construction, errection, commissioning or installation of original works:
Services by way of construction, erection, commissioning, or installation of original works are exempted if these
services pertaining to,-
(a) railways, including monorail or metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low- cost houses up to a carpet area of 60 square meters per house in a housing project approved by
competent authority empowered under the Scheme of Affordable Housing in Partnership framed by
the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(ca) w.e.f. 1-3-2016 low-cost houses up to a carpet area of 60 square metres per house in a housing project
approved by the competent authority under:
(i) the Affordable Housing in Parnership component of the Housing for All (Urban) Mission / Pradhan
Mantri Awas Yojana;
(ii) any housing scheme of a State Government
(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes;
or
(e) mechanised food grain handling system, machinery or equipment for units processing agricultural pro-
duce as food stuff excluding alcoholic beverages;
(15) Services in relation to temporary transfer or permitting the use or enjoyment of a copyright :
Temporary transfer of a copyright relating to original literary, dramatic, musical, artistic work or cinematographic
film (restricted to exhibition of cinematography films in a cinema hall or a cinema theatres) falling under clause
(a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957 is exempt.
Service Tax
Example 24: Mr. X a composer of a song having the copyright for his song. When he allow the recording of the song
on payment of some royalty by a music company for further distribution, if so Mr. X is required to pay service tax on the
royalty amount received from a music company?
Answer:
No, as the copyright relating to original work of composing song falls under clause (a) of subsection (1) of section 13
of the Indian Copyright Act, 1957 which is exempt from service tax.
Similarly an author having copy right of a book written by him would not be required to pay service tax on royalty
amount received from the publisher for publishing the book. A person having the copyright of a cinematographic
film would also not be required to pay service tax on the amount received from the film exhibitors for exhibiting the
cinematographic film in cinema theatres.
(16) Services by artist in relation to folk or classical art
The following services are exempted from service tax if provided by a performing artist in folk or classical art
forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassa-
dor; and if the consideration charged for such performance is not more than ` one lakh.
The activities by a performing artist in folk or classical art forms of music, dance, or theatre are not subjected
to service tax. All other activities by an artist in other art forms e.g. western music or dance, modern theatres,
performance of actors in films or television serials would be taxable. Similarly activities of artists in still art forms
e.g. painting, sculpture making etc. are taxable.
w.e.f. 1-4-2016
Exemption to services provided by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii)
theatre, will be limited only to such cases where amount charged is upto ` 1,50,000 for a performance.
Provided that the exemption shall not apply to service provided by such artist as a brand ambassador.
(17) Services in relation to collecting or providing of News
Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News
of India; are exempted from service tax.
(18) Services by a hotel, inn, guest house, club or campsite etc.
Services by a hotel, inn, guest house, club or campsite, by whatever name called, for residential or lodging pur-
poses, having declared tariff of a unit of accommodation below one thousand rupee per day or equivalent.
Declared tariff is includes charges for all amenities provided in the unit of accommodation like furniture, air-
conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published
charges for such unit. Its relevance is in determining the liability to pay service tax of a hotel, inn, guest house,
club, campsite or other commercial places meant for residential or lodging purposes as exemption is available
where declared tariff of a unit of accommodation is below rupees one thousand per day or equivalent. How-
ever, the tax will be liable to be paid on the amount actually charged i.e. declared tariff minus any discount
offered.
Thus if the declared tariff is ` 1,200, but actual room rent charged is ` 900, tax will be required to be paid on
` 900.
When the declared tariff is revised as per the tourist season, the liability to pay tax shall be only on the declared
tariff for the accommodation where the published/printed tariff is above Rupees 1000/-. However, the revision
in tariff should be made uniformly applicable to all customers and declared when such change takes place.
(19) Services provided by Restaurant
Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than
those having (i) the facility of air-conditioning or central air-heating in any part of the establishment, at any time
during the year, are exempted from service tax.
(19A)Services provided in relation to serving of food or beverages by a canteen maintained in a factory covered
under the Factories Act, 1948 having the facility of air-conditioning or central air-heating at any time during the
year.
(20) Exemption for transportation of certain goods, by rail or a vessel:
Services by way of transportation by rail or a vessel from one place in India to another of the following goods
are exempted from service tax; -
(b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap
(c) defence or military equipments;
(f) newspaper or magazines registered with the Registrar of Newspapers;
(g) railway equipments or materials;
(h) agricultural produce;
(i) milk, salt and food grain including flours, pulses and rice;
(j) chemical fertilizer, organic manure and oil cakes; or
(k) cotton, ginned or baled.
(21) Services by transport of essential goods etc by Goods Transport Agency (GTA) & Rail/vessel: Services provided
by a goods transport agency by way of transportation of -
(a) Agriculture produce;
(b) goods where gross amount charged for the transportation of goods on a consignment transported in a
single goods carriage does not exceed one thousand five hundred rupees; or
(c) goods, where gross amount charged for transportation of all such goods for a single consignee does not
exceed rupees seven hundred fifty;
(d) Milk, salt, food grain including flours, pulses and rice;
(e) Chemical fertilizer, organic manure and oil cakes;
(f) Newspaper or magazines registered with the registrar of newspapers;
(g) Relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap; or
(h) Defense or military equipments:
(i) cotton, ginned or baled
(22) Services by hiring of vehicle: Services by way of giving on hire -
(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or
(b) to a goods transport agency, a means of transportation of goods;
Giving on hire a bus to a state transport undertaking is exempt from service tax. If the bus is given on hire to a
person other than a state transport undertaking, it will be taxed.
Transport of passengers in a contract carriage for the transportation of passengers, for tourism, conducted tour,
charter or hire is taxable.
(23) Services of transport of passengers by different mode of transportation: Transport of passengers, with or without
accompanied belongings, by -
(a) air, embarking from or terminating in an airport located in the state of Arunachal Pradesh, Assam, Ma-
nipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in West Bengal;
(b) non-air conditioned contract carriage other than radio taxi for transportation of passengers, excluding
tourism, conducted tour, charter or hire; or
(c) ropeway, cable car or aerial tramway; are exempted from service tax.
(24) Specified services to Government, a local authority or a governmental authority: Services provided to Govern-
ment, a local authority or a governmental authority by way of -
(a) water supply, public health, sanitation conservancy, solid waste management or slum improvement
and upgradation; or
(b) repair or maintenance of a vessel.
(25) Services of General insurance Business under the specified scheme:
Services of general insurance business provided under following schemes are exempted from service tax:
Service Tax
(a) Hut Insurance Scheme;

(b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Develop-
ment Programme);
(c) Scheme for Insurance of Tribals;
(d) Janata Personal Accident Policy and Gramin Accident Policy;
(e) Group Personal Accident Policy for Self-Employed Women;
(f) Agricultural Pumpset and Failed Well Insurance;
(g) premia collected on export credit insurance;
(h) Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme ap-
proved by the Government of India and implemented by the Ministry of Agriculture;
(i) Jan Arogya Bima Policy;
(j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);
(k) Pilot Scheme on Seed Crop Insurance;
(l) Central Sector Scheme on Cattle Insurance;
(m) Universal Health Insurance Scheme;
(n) Rashtriya Swasthya Bima Yojana; or
(o) Coconut Palm Insurance Scheme;
(p) Pradhan Mantri Suraksha Bima Yojana.
(25A) Service of Life Insurance business provided under following schemes :
(a) Janashree Bima Yojana (JBY); or
(b) Aam Aadmi Bima Yojana (AABY).
(c) life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having
maximum amount of cover of fifty thousand rupees.
(d) Varishtha Pension Bima Yojana
(e) Pradhan Mantri Jeevan Jyoti Bima Yojana
(f) Pradhan Mantri Jan Dhan Yojana.
25B. Collection of contribution under Atal Pension Yojna (APY) exempted from service tax.
25C. Services of life insurance business provided by way of annuity under the National Pension System regulated by
Pension Fund Regulatory and Development Authority of India (PFRDA) under the Pension Fund Regulatory And
Development Authority Act, 2013 (23 of 2013)
(26) Services provided by an incubatee:
Services provided by an incubatee up to a total turnover of fifty lakh rupees in a financial year subject to the
following conditions, namely:-
(a) the total turnover had not exceeded fifty lakh rupees during the preceding financial year;and
(b) a period of three years has not been elapsed from the date of entering into an agreement as an incuba-
tee;
(27) Services by an Non-Profit Making Organisation/unincorporated body :
Service by an unincorporated body or a non- profit entity registered under any law for the time being in force,
to its own members by way of reimbursement of charges or share of contribution -
(a) as a trade union;
(b) for the provision of carrying out any activity which is exempt from the levy of service tax; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a
third person for the common use of its members in a housing society or a residential complex;
Where Residential Welfare Association (RWA) is working as a pure agent of its members for sourcing of goods or
services from a third person, amount collected by RWA from its members may be excluded from the value of
taxable service in terms of Rule 5(2) 0f Service Tax (Determination of Value) Rules, 2006 subject to compliance
with the specified conditions.
(28) Services by the specified persons in respective categories are exempted from service tax:
Services by the following persons in respective capacities -
(c) sub-broker or an authorised person to a stock broker;
(d) authorised person to a member of a commodity exchange;
(f) selling agent or a distributer of SIM cards or recharge coupon vouchers;
(g) business facilitator or a business correspondent to a banking company with respect to a Basic Savings
Bank Deposit Account covered by Pradhan Mantri Jan Dhan Yojana in the banking companys rural area
branch, by way of account opening, cash deposits, cash withdrawals, obtaining e-life certificate, Aadhar
seeding;
(ga) any person as an intermediary to a business facilitator or a business correspondent with respect to ser-
vices mentioned in (d) above;
(gb) business facilitator or a business correspondent to an insurance company in a rural area; or
(h) sub-contractor providing services by way of works contract to another contractor providing works con-
tract services which are exempt;
(29) Services by way of job work:
Carrying out an intermediate production process as job work exempted from service tax if these services are in
relation to -
(a) agriculture, printing or textile processing;
(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious
metals, falling under Chapter 71 of the Central Excise Tariff Act ,1 985 (5 of 1986);
(c) any goods excluding alcoholic liquors for human consumption on which appropriate duty is payable by
the principal manufacturer; or
(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including
spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines
upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh
rupees in a financial year subject to the condition that such aggregate value had not exceeded one
hundred and fifty lakh rupees during the preceding financial year;
(30) Services in relation to business exhibition:
Services by an organiser to any person in respect of a business exhibition held outside India are exempted from
service tax.
(31) Services by making telephone calls:
[Omitted w.e.f. 01.04.2015]
(32) Services by way of slaughtering of animals;
(33) Services by a person located in non-taxable territory:
Services received from a provider of service located in a non- taxable territory by-
(a) Government, a local authority, a governmental authority or an individual in relation to any purpose other
than commerce, industry or any other business or profession;
(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of pro-
viding charitable activities; or

Service Tax
(c) a person located in a non-taxable territory;

(34) Services by public libraries:
Services of public libraries by way of lending of books, publications or any other knowledge- enhancing content
or material; are exempted from service tax.
(35) Services by Employees State Insurance (ESI) Corporation:
Services by Employees State Insurance Corporation to persons governed under the Employees Insurance Act,
1948 (34 of 1948) are exempted from service tax.
(36) Services by way of transfer of a going concern:
Services by way of transfer of a going concern, as a whole or an independent part thereof; exempted from
service tax. Predominant transfer of activity comprising service is not covered under exemption.
(37) Services by way of public convenience:
Services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal
or toilets; are exempted from service tax.
(38) Services by a government or local authority:
Services by a governmental authority by way of any activity in relation to any function entrusted to a municipal-
ity under article 243 W of the Constitution exempted from service tax.
(39) Services by way of loading, unloading, packing, storage or warehousing of rice, cotton, ginned or baled.
(40) Services received by the Reserve Bank of India, from outside India in relation to management of foreign ex-
change reserves.
(41) Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India.
(42) Services by operator of Common Effluent Treatment Plant by way of treatment of effluent;
(43) Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and veg-
etables which do not change or alter the essential characteristics of the said fruits or vegetables;
(44) Services by way of admission to a museum, national park, wildlife sanctuary, tiger reserve or zoo;
(45) Service provided by way of exhibition of movie by an exhibitor to the distributor or an association of persons
consisting of the exhibitor as one of its members;
(46) Services by way of right to admission to,-
(i) exhibition of cinematographic film, circus, dance, or theatrical performance including drama or ballet;
(ii) recognised sporting event;
(iii) award function, concert, pageant, musical performance or any sporting event other than a recognised
sporting event, where the consideration for admission is not more than ` 500 per person.
w.e.f. 1-4-2016
(47) Services provided by Government or a local authority to a business entity with a turnover up to ` 10 lakh in the
preceding financial year exempted from service tax.
w.e.f. 1-4-2016
(48) Services provided by Employees Provident Fund Organisation (EPFO) to persons governed under the Employees
Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)
w.e.f. 1-4-2016
(49) Services provided by Insurance Regulatory and Development Authority of India (IRDA) to insurers under the
Insurance Regulatory and Development Authority of India Act, 1999 (41 of 1999)
w.e.f. 1-4-2016
(50) Services provided by Securities and Exchange Board of India (SEBI) set up under the Securities and Exchange
Board of India Act, 1992 (15 of 1992) by way of protecting the interests of investors in securities and to promote
the development of, and to regulate, the securities market
w.e.f. 1-4-2016
(51) Services provided by National Centre for Cold Chain Development under Ministry of Agriculture, Cooperation
and Farmers Welfare by way of cold chain knowledge dissemination;
w.e.f. 1-6-2016:
(52) Services by way of transportation of goods by an aircraft from a place outside India upto the customs station of
clearance in India.
The following definitions are useful to understand the various terms used in the above:
(a) Advocate has the meaning assigned to it in clause (a) of sub-section (1) of section 2 of the Advocates Act,
1961 ( 25 of 1961);
(b) appropriate duty means duty payable on manufacture or production under a Central Act or a State Act, but
shall not include Nil rate of duty or duty wholly exempt;
(c) arbitral tribunal has the meaning assigned to it in clause (d) of section 2 of the Arbitration and Conciliation
Act, 1996 (26 of 1996);
(d) authorised medical practitioner means a medical practitioner registered with any of the councils of the rec-
ognised system of medicines established or recognized by law in India and includes a medical professional
having the requisite qualification to practice in any recognised system of medicines in India as per any law for
the time being in force;
(e) authorised person means any person who is appointed as such either by a stock broker (including trad-
ing member) or by a member of a commodity exchange and who provides access to trading platform of a
stock exchange or a commodity exchange as an agent of such stock broker or member of a commodity ex-
change;
(f) [Omitted]
(g) banking company has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India
Act,1 934(2 of 1934);
(h) brand ambassador means a person engaged for promotion or marketing of a brand of goods, service, prop-
erty or actionable claim, event or endorsement of name, including a trade name, logo or house mark of any
person;
(i) business facilitator or business correspondent means an intermediary appointed under the business facilita-
tor model or the business correspondent model by a banking company or an insurance company under the
guidelines issued by Reserve Bank of India;
(j) clinical establishment means a hospital, nursing home, clinic, sanatorium or any other institution by, whatever
name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity,
abnormality or pregnancy in any recognised system of medicines in India, or a place established as an inde-
pendent entity or a part of an establishment to carry out diagnostic or investigative services of diseases;
(k) charitable activities means activities relating to
(i) public health by way of -
(a) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii)
persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence- forming substance
such as narcotics drugs or alcohol; or
(b) public awareness of preventive health, family planning or prevention of HIV infection;
(ii) advancement of religion or spirituality;
(iii) advancement of educational programmes or skill development relating to,-
(a) abandoned, orphaned or homeless children;
(b) physically or mentally abused and traumatized persons;

Service Tax
(c) prisoners; or
(d) persons over the age of 65 years residing in a rural area;
(iv) preservation of environment including watershed, forests and wildlife; or
(l) commodity exchange means an association as defined in section 2 (j) and recognized under section 6 of the
Forward Contracts (Regulation) Act,1 952 (74 of 1952);
(m) contract carriage has the meaning assigned to it in clause (7) of section 2 of the Motor Vehicles Act, 1988 (59
of 1988);
(n) declared tariff includes charges for all amenities provided in the unit of accommodation (given on rent for
stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount of-
fered on the published charges for such unit;
(o) distributor or selling agent has the meaning assigned to them in clause (c) of the rule 2 of the Lottery (Regula-
tion) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs, published in the Gazette of
India, Extraordinary, Part-II, Section 3, Sub-section (i), vide number G.S.R. 278(E), dated the 1st April, 2010 and
shall include distributor or selling agent authorised by the lottery- organising State;
(oa) educational Institution means an institution providing services specified in clause (l) of section 66D of the Fi-
nance Act, 1994.
(p) general insurance business has the meaning assigned to it in clause (g) of section 3 of General Insurance Busi-
ness (Nationalisation) Act, 1972 (57 of 1972);
(q) general public means the body of people at large sufficiently defined by some common quality of public or
impersonal nature;
(r) goods carriage has the meaning assigned to it in clause (14) of section 2 of the Motor Vehicles Act, 1988 (59
of 1988);
(s) Government authority means an authority or a board or any other body:
(i) set up by an Act of Parliament or a State Legislature; or
(ii) established by Government
with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality
under article 243W of the Constitution.
(t) health care services means any service by way of diagnosis or treatment or care for illness, injury, deformity,
abnormality or pregnancy in any recognised system of medicines in India and includes services by way of trans-
portation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic
or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected
due to congenital defects, developmental abnormalities, injury or trauma;
(u) incubatee means an entrepreneur located within the premises of a Technology Business Incubator (TBI) or
Science and Technology Entrepreneurship Park (STEP) recognised by the National Science and Technology
Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government
of India and who has entered into an agreement with the TBI or the STEP to enable himself to develop and pro-
duce hi-tech and innovative products;
(v) insurance company means a company carrying on life insurance business or general insurance business;
(w) legal service means any service provided in relation to advice, consultancy or assistance 230 I in any branch
of law, in any manner and includes representational services before any court, tribunal or authority;
(x) life insurance business has the meaning assigned to it in clause (11) of section 2 of the Insurance Act, 1938 (4
of 1938);
(xa) life micro-insurance product shall have the meaning assigned to it in clause (e) of regulation 2 of the Insur-
ance Regulatory and Development Authority (Micro-insurance) Regulations, 2005.
(xaa) national park has the meaning assigned to it in the clause (21) of the section 2 of The Wild Life (Protection) Act,
1972 (53 of 1972);
(y) original works means has the meaning assigned to it in Rule 2A of the Service Tax (Determination of Value)
Rules, 2006;
(z) principal manufacturer means any person who gets goods manufactured or processed on his account from
another person;
(za) radio taxi means a taxi including a radio cab, by whatever name called, which is in two- way radio commu-
nication with a central control office and is enable for tracking using Global Positioning System (GPS) or General
Packet Radio Service (GPRS).
(zaa) recognized sports body means - (i) the Indian Olympic Association, (ii) Sports Authority of India, (iii) a national
sports federation recognized by the Ministry of Sports and Youth Affairs of the Central Government, and its af-
filiate federations, (iv) national sports promotion organisations recognized by the Ministry of Sports and Youth
Affairs of the Central Government, (v) the International Olympic Association or a federation recognized by the
International Olympic Association or (vi) a federation or a body which regulates a sport at international level
and its affiliated federations or bodies regulating a sport in India;
(zab) recognised sporting event means any sporting event,-
(i) organised by a recognised sports body where the participating team or individual represent any district,
state, zone or country; (ii) covered under entry 11
(zb) religious place means a place which is primarily meant for conduct of prayers or worship pertaining to a reli-
gion, meditation, or spirituality;
(zc) residential complex means any complex comprising of a building or buildings, having more than one single
residential unit;
(zd) rural area means the area comprised in a village as defined in land revenue records, excluding the area
under any municipal committee, municipal corporation, town area committee, cantonment board or notified
area committee; or any area that may be notified as an urban area by the Central Government or a State
Government;
(ze) single residential unit means a self-contained residential unit which is designed for use, wholly or principally,
for residential purposes for one family;
(zf) specified international organization means an international organization declared by the Central Govern-
ment in pursuance of section 3 of the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), to which
the provisions of the Schedule to the said Act apply;
(zfa) specified organization shall mean
(a) Kumaon Mandal Vikas Nigam Limited, a Government of Uttarakhand Undertaking; or
(b) Committee or State Committee as defined in section 2 of the Haj Committee Act, 2002.
(zg) state transport undertaking has the meaning assigned to it in clause (42) of section 2 of the Motor Vehicles
Act, 1988 (59 of 1988);
(zh) sub-broker has the meaning assigned to it in sub-clause (gc) of clause 2 of the Securities and Exchange Board
of India (Stock Brokers and Sub-brokers) Regulations, 1992;
(zi) tiger reserve has the meaning assigned to it in clause (e) of section 38K of the Wild Life (Protection) Act, 1972
(53 of 1972);
(zj) trade union has the meaning assigned to it in clause (h) of section 2 of the Trade Unions Act, 1926 (16 of
1926).
(zk) wildlife sanctuary means sanctuary as defined in the clause (26) of the section 2 of The Wild Life (Protection)
Act, 1972 (53 of 1972);
(zl) zoo has the meaning assigned to it in the clause (39) of the section 2 of the Wild Life (Protection) Act, 1972 (53
of 1972).

Service Tax
Abatement Notification Notification No. 26/2012 [Changes in Abatement Vide Notification No. 8/2016-ST dt. 01.03.2016]
TABLE
Sl Description of taxable service Percen- Conditions
No. tage
taxable
sevice
payable
(1) (2) (3) (4)
1 Services in relation to financial leasing in- 10 Nil
cluding hire purchase
2 Transport of goods by rail 30 70% abatement is allowed, if Cenvat credit on
inputs, capital goods and input services,
used for providing the taxable service,
has not been taken under the Cenvat Credit Rules,
2004
4.2%
With input
3 Transport of passengers, with or without ac- 30 70% abatement is allowed, if Cenvat credit on
companied belongings by rail inputs, capital goods and input services,
used for providing the taxable service,
has not been taken under the Cenvat Credit Rules,
2004
4 Bundled service by way of supply of food 70 (i) CENVAT credit on any goods classifiable unde
or any other article of human consumption Chapters 1 to 22 of the Central Excise Tariff Act, 1985
or any drink, in a premises (including hotel, used for providing the taxable service, has not been
convention center, club, pandal, shamiana taken under the provisions of the CENVAT Credit
or any other place, specially arranged for or- Rules, 2004.
ganizing a function) together with renting of
such premises
5 Transport of passengers by air, with or without 40 CENVAT credit on inputs and capital goods, used for
accompanied belongings providing the taxable service, has not been taken
(i) Economy class under the provisions ot the CENVAT Credit Rules,
(ii) Other than economy class 2004.
60
6 Renting of hotels, inns, guest houses, clubs, 60 Same as above.
campsites or other commercial places meant
for residential or lodging purposes.
7 Services of goods transport agency in rela- 30 CENVAT credit on inputs, capital goods and input
tion to transportation of goods. services, used for providing the taxable service, has
not been taken by the service provider under the
provisions of the CENVAT Credit Rules, 2004.
8 Services provided in relation to chit
[withdrawn]
9 Renting of motor-cab 40 (i) CENVAT credit on inputs and capital goods,
used for providing the taxable service, has not
been taken under the provisions of the CENVAT
Credit Rules, 2004;
(ii) CENVAT credit on input service of renting of mo-
tor-cab has been taken under the provisions of
the CENVAT Credit Rules, 2004, in the following
manner:
(a) Full CENVAT credit of such input service received
from a person who is paying service tax on forty
per cent of the value; or
No. tage
taxable
sevice
payable
(1) (2) (3) (4)
(b) Up to forty per cent CENVAT credit of such input

service received from a person who is paying
service tax on full value;
(iii) CENVAT credit on input services other than
those specified in (ii) above, has not been taken
under the provisions of the CENVAT Credit Rules,
2004.
9A Transport of passengers, with or without ac- 40 CENVAT credit on inputs, capital goods and input
companied, belongings, by a contract car- services, used for providing the taxable service, has
riage other than motor- cab. not been taken under the provisions of the CENVAT
*With effect from a date to be notified fol- Credit Rules, 2004.
lowing Serial No. 9A shall be substituted for
the existing Serial No. 9A 9A. Transport of
passengers, with or without accompanied
belongings, by
(a) a contract carriage other than mo-
tor-cab.
(b) a radio taxi.
10 Transport of goods in a vessel 30 CENVAT credit on inputs, capital goods and input
services, used for providing the taxable service, has
not been taken under the provisions of the CENVAT
Credit Rules, 2004.
11 Services by a tour operator in relation to,- 25 (i) CENVAT credit on inputs, capital goods and
(i) a package tour input services other than the input service of a
tour operator, used for providing the taxable
service, has not been taken under the provi-
sions of the CENVAT Credit Rules, 2004.
(ii) The bill issued for this purpose indicates that it is
inclusive of charges for such a tour.
(ii) a tour, if the tour operator is providing 10 (i) CENVAT credit on inputs, capital goods and
services solely of arranging or booking input services other than the input service of a
accommodation for any person in rela- tour operator, used for providing the taxable
tion to a tour. service, has not been taken under the provi-
(ii) The invoice, bill or challan issued indicates that
it is towards the charges for such accommoda-
tion.
(iii) This exemption shall not apply in such cases
where the invoice, bill or challan issued by the
tour operator, in relation to a tour, only includes
the service charges for arranging or booking
accommodation for any person and does not
include the cost of such accommodation.
(iii) any services other than specified at (i) 40 (i) CENVAT credit on inputs, capital goods and in-
and (ii) above. put services [other than the input service of a
tour operator], used for providing the taxable
service, has not been taken under the provi-

Service Tax

No. tage
taxable
sevice
payable
(1) (2) (3) (4)
(ii) The bill issued indicates that the amount

charged in the bill is the gross amount charged
for such a tour.

12. Construction of a complex, building, civil (i) CENVAT credit on inputs used for providing the
structure or a part thereof, intended for a taxable service has not been taken under the
sale to a buyer, wholly or partly, except provisions of the CENVAT Credit Rules, 2004;
where entire consideration is received after (ii) The value of land is included in the amount
issuance of completion certificate by the charged from the service receiver.
competent authority,
(a) for a residential unit satisfying both the
following conditions, namely:-
(i) the carpet area of the unit is less than 25
2000 square feet; and
(ii) the amount charged for the unit is less 30
than rupees one crore;
(b) for other than the (a) above.
Rationalization of Abatements Existing Proposed

Rationalization of Abatements
1 Credit of input services is being allowed on transport of passengers by rail at the existing rate of abatement of
70%.
Existing
4.2%
Without
credit
Amemded
4.2%
With input
service credit
2 Credit of input services is being allowed on transport of goods, other than in containers, by rail at the existing
rate of abatement of 70%.
Existing
4.2%
Without
credit
Amended
4.2%
With input
service credit

3 Credit of input services is being allowed on transport of goods in containers by rail at a reduced abatement rate
of 60%.
Existing
4.2%
Without
credit
Amended
5.6%
With input
service credit
4 Credit of input services is being allowed on transport of goods by vessel at the existing rate of abatement of
70%.
Existing
4.2%
Without
credit
Amended
4.2%
With input
service credit
5 The abatement rate in respect of services by way of construction of residential complex, building, civil structure,
or a part thereof, is being rationalized at 70% by merging the two existing rates (70% for high end flats and 75%
for low end flats).
Existing
3.5% / 4.2%
Amended
4.2%
6 The abatement rate in respect of services by a tour operator in relation to packaged tour (defined where tour
operator provides to the service recipient transportation, accommodation, food etc) and other than packaged
tour is being rationalized at 70%.
Existing
3.5% / 5.6% of amount charged
Amended
4.2% of amount charged
7 The abatement on shifting of used household goods by a Goods Transport Agency (GTA) is being rationalized at
the rate of 60%, without CENVAT credit on inputs, input services and capital goods. (The existing rate of abate-
ment of 70% allowed on transport of other goods by GTA continues unchanged).
Existing
4.2%
Proposed
5.6%

Service Tax
8 The abatement rate on services of a foreman to a chit fund is being rationalised at the rate of 30%, without CEN-
VAT credit on inputs, input services and capital goods.
Existing
14%
Proposed
9.8%
[The above changes came into effect from 1st April, 2016]
5.12 POINT OF TAXATION
Introduction
We must thoroughly understand terms Point of Taxation, taxable event and value of taxable services for the
following reasons:
i. The amount of service tax is based on the Point of Taxation.
ii. Service tax is payable on the basis of provision of service instead of realization of value of taxable service ex-
cept in the case of individuals/firms/limited liability partnership firms (LLPs) w.e.f. 1-4-2012.
iii. If money is received in advance, ahead of completion or rendering of service, service tax is payable as soon as
the advance is received.
The point of taxation defines the point in time when a service shall be deemed to have been provided. It has impact
on determination of rate of tax, as normally the rate of tax shall apply as prevailing on the date when service shall be
deemed to have been provided.
The Government of India has introduced the Point of Taxation Rules, 2011 to remove the disputes about applicability
of the rate of tax and for ascertainment of the Point of Taxation. These rules have been explained with the help of
examples are as follows:
Rule 1: These rules shall be called the Point of Taxation Rules, 2011
Rule 2: Definitions
Rule 2(a) Act means the Finance Act, 1994;Rule 2(b) associated enterprises shall have the meaning assigned to it
in section 92A of the Income Tax Act, 1961;
Rule 2(ba) change in effective rate of tax shall include a change in the portion of value on which tax is payable in
terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made there under (w.e.f.
1.4.201 2).
Rule 2(c) continuous supply of service means any service which is provided, or to be provided continuously or on
recurrent basis, under a contract, for a period exceeding three months with the obligation for payment periodically or
from time to time or where the Central Govt. by notification in the Official Gazette, prescribes provision of a particular
service to be a continuous supply of service, whether or not subject to any condition.
Rule 2(d) invoice means the invoice referred to in rule 4A of the Service Tax Rules, 1994 and shall include any docu-
ment as referred to in the said rule;
Rule 2(e) point of taxation means the point in time when a service shall be deemed to have been provided;
Rule 2(f) taxable service (omitted w.e.f. 1-7-201 2)
Rule 2A: Date of payment (w.e.f.1-4-2012):
When change in effective rate of tax or new levy between date of book entry or credited to bank
Date of payment shall be the earlier of the dates on which the payment is entered in the books of accounts or is cred-
ited to the bank account of the person liable to pay tax:
Example 25: Payment was credited in the books of accounts on 7.6.2016 Payment was credited in the bank account
on 10.6.2016.
Date of change in effective rate of tax is on 8.6.2016.
Answer:
Date of payment is 7.6.2016
Date of payment shall be the date of credit in the bank account.
Example 26: Payment was credited in the books of accounts on 1.6.2015 Payment was credited in the bank account
on 10.6.2015.
Date of change in effective rate of tax is on 5.6.2015.
Answer:
DATE OF PAYMENT IS 10.6.2015.
Rule 3: Determination of point of taxation:
(a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 30 days
from the date of completion of the provision of service (w.e.f. 1-4-2012).
(b) Date of completion of the provision of service or payment, whichever is earlier if the invoice is not issued within
the prescribed period as state in rule 4A of the Service Tax Rules, 1994.
w.e.f. 1-4-2012, in case of continuous supply of service where the provision of the whole or part of the service
is determined periodically on the completion of an event in terms of a contract, which requires the receiver of
service to make any payment to service provider, the date of completion of each such event as specified in
the contract shall be deemed to be the date of completion of provision of service.
Example 27: In the case of construction services if the payments are linked to stage-by-stage completion of con-
struction, the provision of service shall be deemed to be completed in part when each stage of construction is com-
pleted.
Wherever the provider of taxable service receives a payment up to ` Rs.1,000 in excess of the amount indicated in the
invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service,
shall be the date of receipt of such amount.
Example 28: M/s X Pvt. Ltd. provided services for ` 1,00,000 and service tax charged separately @15% vide invoice
dated 1-4-2016. Payment received ` 1,15,400 on 1st July 2016. It means excess payment received is ` 400. Hence, no
need to issue separate invoice for the same. Hence, the point of taxation for the invoice value is 1-4-2016, whereas for
` 400 the point of taxation is 1st July 2016.
POT = Point of Taxation
Example 29: The applicability of the rule will be clear from the following table:
M/s X Pvt. Ltd. is provider of service.
SL. Date of Date of Date on which Point of Due date of Remarks
No. completion invoice payment recd. Taxation payment
of service
1. April 10, April 20, June 30, 2016 April 20, 6th May 2016 Invoice issued in 30 days
2016 2016 2016 from the date of
completion of service. Dt.
of payment whichever
is earlier
2. April 10, May 26, June 30, 2016 April 10, 6th May 2016 Invoice not issued within 30
2016 2016 2016 days and payment received
after completion of service

Service Tax
SL. Date of Date of Date on which Point of Due date of Remarks

No. completion invoice payment recd. Taxation payment
of service
3. May 10, May 20, April 15, 2016 April 15, 6th May 2016 Invoice issued in 30 days but
2016 2016 2016 payment received before
invoice
4. April 10, May 26, April 5, 2016 April 5, 2016 6th May 2016 Invoice not issued in 30 days.
(part) and And April Part payment before
May 25, 2016 10, 2016 for completion, remaining later
(remaining) respective
amounts
Service Tax liability on receipt basis for Individuals and Partnership Firms including LLPs (w.e.f. 1-4-2012)
It is pertinent to note point of taxation in case of individuals and partnership firms whose aggregate value of taxable
services provided from one or more premises is ` 50 lakhs or less in the previous financial year, the service provider shall
have the option to pay tax on taxable services provided or to be provided by him up to a total of ` 50 lakhs in the cur-
rent financial year, by the dates specified in the Rule 6 of Service Tax Rules, 1994, with respect to the relevant quarter,
in which payment is received.
INDIVIDUALS/FIRMS
OR LLPS (w.e.f. 1-4-12)
P.Y.
NO TAXABLE YES
SERVICES
` 50 L
C.Y. C.Y. C.Y.

POINT OF TAXATION OPTION 1 OPTION 2
IS AS PER RULE 3
Pay tax on taxable services provided or to be

provided upto ` 50 Lac in the C.Y. year on
receipt basis (Rule 6 of STR 1994). Over and above
` 50 Lac of taxable services provided pay tax
as per Rule 3 in C.Y.
P.Y = Previous Year, C.Y= Current Year.

Example 30: Mr. C, Practicing C.A. started profession in the year 2015-16 has been chosen the option to pay service
tax on receipt basis in the current year.

(` in lakhs)
Particulars 1st qtr. 2nd qtr.
services provided 20 2
services to be provided (i.e. advance) 35 NIL
TOTAL 55 2
S.T. @15%
Note: small service provider exemption not availed 5.25 0.3
Note:
Services provided or to be provided exceeds ` 50 lakhs in the 1st quarter itself. Entire value of ` 35 lakhs is taxable on
receipt basis as per point of taxation rule 3.
Services provided in the 1st quarter for ` 20 lakhs will be taxable on receipt basis.
Service provided or to be provided in the 2nd quarter fully taxable as per Point of Taxation Rule 3.
(` in lakhs)
services provided 55 2
services to be provided (i.e. advance) NIL NIL
TOTAL 55 2
S.T. @15% 8.25 0.3
Note 1:
i) small service provider exemption not availed
ii) Since, ` 50 lakhs exceeds in the 1st quarter, services provided over and above ` 50 lakhs is taxable as per point
of taxation rule 3.
Service tax is payable on ` 5 lakhs on provisional basis and balance ` 50 lakhs will be taxable on receipt basis.
From 2nd quarter onwards services are taxable based on point of taxation rule 3
(` in lakhs)
services provided NIL 2
services to be provided (i.e. advance) 55 NIL
TOTAL 55 2
S.T. @15% 8.25 0.3
Note:
(i) small service provider exemption not availed
(ii) Since, in the 1st quarter services to be provided for which advance received exceeds ` 50 lakhs, then the en-
tire value on receipt basis taxable, and subsequently service provider is liable to pay service tax as per Point of
Taxation Rule 3.

Service Tax
Rule 4: Determination of point of taxation in case of change in effective rate of tax:

Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate
of tax in respect of a service, shall be determined in the following manner, namely:-
(a) in case a taxable service has been provided before the change in effective rate,
(i) where the invoice for the same has been issued and the payment received after the change in effective
rate, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or
(ii) where the invoice has also been issued prior to change in effective rate but the payment is received
after the change in effective rate, the point of taxation shall be the date of issuing of invoice; or
(iii) where the payment is also received before the change in effective rate, but the invoice for the same has
been issued after the change in effective rate, the point of taxation shall be the date of payment;
Example 33: (a) The applicability of the rule will be clear from the illustrations in the following table:
Sl. Date of provision Date of Date on which Point of taxation
No. of service Invoice payment received
(i) Before change After change After change Date of payment or invoice,
whichever is earlier
(ii) Before change Before change After change Date of invoice
(iii) Before change After change Before change Date of payment
(b) In case a taxable service has been provided after the change in effective rate,-
(i) where the payment for the invoice is also made after the change in effective rate but the invoice has
been issued prior to the change in effective rate, the point of taxation shall be the date of payment; or
(ii) where the invoice has been issued and the payment for the invoice received before the change in ef-
fective rate, the point of taxation shall be the date of receipt of payment or date of issuance of invoice,
whichever is earlier; or
(iii) where the invoice has also been raised after the change in effective rate but the payment has been
received before the change in effective rate, the point of taxation shall be date of issuing of invoice.
Example 34: The applicability of the rule will be clear from the illustrations in the following table:
Sl. Date of provision Date of Date on which Point of taxation
No. of service Invoice payment received
(i) After change Before change After change Date of payment
(ii) After change Before change Before change Date of payment or invoice,
whichever is earlier
(iii) After change After change Before change Date of invoice
Explanation: For the purposes of this rule, change in effective rate of tax shall include a change in the portion of
value on which tax is payable in terms of a notification issued under the provisions of Finance Act, 1994 or rules made
thereunder.
Alternative: there are three voters namely date of provision of service, date of invoice and date of payment received
and two candidates namely new rate of tax and old rate of tax. Hence, majority wins.
Example 35:
Sl. No. Date of provision of service Date of Invoice Date on which payment received Effective rate of S.T.
(i) Before change After change After change New Rate
(ii) Before change Before change After change Old Rate
(iii) Before change After change Before change Old Rate
(iv) After change Before change After change New Rate
(v) After change Before change Before change Old Rate
(vi) After change After change Before change New Rate

Rule 5: Payment of tax in cases of new services:
Where a service, not being a service covered by rule 6, is taxed for the first time, then,
(a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice
before such service became taxable;
Example: Food King Pvt. Ltd., provider of restaurant services having facility of air conditioning and license to serve
alcoholic beverages in relation to serving of food or beverage. These services are taxable w.e.f. 1-5-2011. Payment
received and invoice raised prior to 1-5-2011 are not taxable.
(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has
been issued within 14 days of the date when the service is taxed for the first time (w.e.f. 1-4-2012).
Example 36: Queen Pvt. Ltd., provider of taxable services. These services are taxable w.e.f. 1-5-2012. Payment was
received from a customer for ` 5,00,000 on 20-4-2012. The invoice has been issued on 4-5- 2012 (i.e. within 14 days of
the date when the service is taxed for the first time). Hence, service provider not liable to pay service tax on the entire
value of ` 5,00,000.
Rule 6: Determination of point of taxation in case of continuous supply of service (Omitted w.e.f. 1-4-2012)
Rule 7: Determination of point of taxation in case of specified services or persons (w.e.f. 1-4-2012) Notwithstanding
anything contained in rules 3, 4 or 8, the Point of Taxation in respect of the persons required to pay tax as recipients of
service under the rules made in this regard in respect of services notified under section 68(2) of the Finance Act, 1994
shall be the date on which payment is made.
Provided that the payment is not made within a period of three months of the date of invoice, the point of taxation
shall be the date immediately following the said period of three months.
In case of associated enterprises, where the person providing the service is located outside India, the point of taxa-
tion shall be the date of debit in the books of account of the person receiving the service or date of making the pay-
ment whichever is earlier.

Service Tax
Rule 8: Determination of point of taxation in case of copyrights, etc.
In respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, where the whole amount
of the consideration for the provision of service is not ascertainable at the time when service was performed, and the
payment for the benefit of such service is made subsequently. In this case, point of taxation will be each time when
the payment received or the date when the invoice is issued by the provider of service, whichever is earlier.
Rule 8A: POT in other cases [Best Judgment Assessment of POT]
For determination of POT in other cases whereby in the cases where date of invoice or date of payment is not avail-
able, the C.E.O. (Central Excise Officer) can conduct best judgment assessment to determine the point of taxation.
Rule 9: Transitional Provisions:
Nothing contained in these rules shall be applicable
(i) where the provision of service is completed; or
(ii) where invoices are issued
prior to the date on which these rules come into force.
Rule 10: Determination of point of taxation if payment is made after specified period
Notwithstanding anything contained in the first proviso to rule 7, if the invoice in respect of a service, for which point
of taxation is determinable under rule 7 has been issued before the 1st day of October, 2014 but payment has been
made as on the said day, the point of taxation shall:-
(a) if payment is made within a period of six months of the date of invoice, be the date on which payment is
made;
(b) if payment is not made within a period of six months of the date of invoice, be determined as if rule 7 and this
rule do not exist.
5.13 TAXABLE EVENT IN SERVICE TAX
Taxable event and tax liability do not happen at the same time. Taxable event happens when a taxable service is
rendered. Tax liability is required to pay as per Point of Taxation Rules, 2011 (w.e.f. 1-4-2011).
of Taxation as per the Point of Taxation Rules, 2011,
Date of Invoice (or)
Payment received (or)
Completion of the provision of service
Whichever is earlier.
As per the Point of Taxation Rules, discussed above, different points of time have been chosen when a service shall be
deemed to have been provided, whereas the rules has made by introducing a deeming fiction when a service shall
be deemed to have been provided, but no such provisions have been made in the Finance Act, 1994.
However, the said provision is not applicable for those service providers named under Rule 7 of the Point of Taxation
Rules, 2011 namely determination of point of taxation in case of specified services or persons. For them taxable event
is rendering of taxable service only.
When Service Provider Receives an Advance
Payment may be received in advance (i.e. ahead of rendering of complete service) or in arrears (i.e. after rendering
of service).
When the service provider receives an advance payment in respect of a taxable service being rendered by him, the

liability to pay service tax arises as soon as he receives the advance.
When the service provider receives an advance payment in respect of a non-taxable service which is not taxable
at the time the advance is being received, there will be service tax liability if the services are taxable at the time of
rendering the services.
Service tax is payable on value of taxable service actually billed, even though the value of taxable services yet to be
received.
If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions
of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the
revised amount provided the excess amount is either refunded or a suitable credit is issued to the service receiver.
Concession is not available for bad debts
If an assessee issues invoice, say for ` 5,00,000 and realized only ` 4,80,000 from his client and ` 20,000 becomes bad
debt, then he cannot claim that he has paid excess tax for ` 20,000 and in such a situation, he shall not be entitled to
make any adjustment of tax paid in respect of ` 20,000, which has become a bad debt.
Example 37: The service provider, a chartered accountant whose previous year (2015-16) turnover less than ` 50 lakhs,
received an amount of ` 1,00,000 in April 2015, for a consulting engagement worth ` 5,00,000 which he completes
in the month of July 2015 and for which balance payment is received on August 2015. Service tax is payable on
` Rs.1,00,000 for the quarter April to June on or before 6th July 2015. Service tax liability for the balance of ` 4,00,000 for
the quarter July to September, on or before 6th October 2015. Service provider is liable to pay service tax on receipt
basis as per rule 3 of the Point of Taxation Rules, 2011 read with rule 6 of Service Tax Rules, 1994 (w.e.f. 1-4-2012).
Example 38: Information technology software services provided by X Ltd. for ` 25,00,000 lakhs and an invoice issued
on 1st July 2016. Service provider has not been received consideration upto the end of 31st July, 2016. As per rule 3 of
the Point of Taxation Rules, 2011 service provider is liable to pay service tax on the value of invoice on or before 6th
August, 2016.
Example 39: A Ltd., being an interior decorator received the advance money from his customer of ` 30,000 in the
month of July 2016, for which he is going to work in the month of September, 2016. A Ltd. being service provider is liable
to pay the service tax @ 15% on ` 30,000 for the month of July, 2016 on or before 6th August, 2016. The order has been
cancelled on 25th August, 2016. Hence, A Ltd. can file refund for the amount paid as service tax. Alternatively he can
adjust the same against any taxable output services.
Example 40: X Ltd. provided cargo handling services for ` 15,00,000 in the month of 15th May, 2016. Invoice issued on
1st July 2016. 50% has been received on 1st April, 2016 and balance on 5th July, 2016.
You are required to find out due dates of payment of service tax.
Answer:
As per rule 3 of the Point of Taxation Rules, 2011, point of taxation for the first 50% received on 1st April, 2016 (i.e. date
of completion of service or date of receipt of payment whichever is earlier, since, invoice has not been issued within
30 days of completion of service).
Therefore, due date of payment of service tax is 6th May, 2016.
Point of taxation for the balance 50% is 15th May, 2016 (i.e. date of completion of service or date of receipt of pay-
ment whichever is earlier, since, invoice has not been issued within 30 days of completion of service).
Therefore, due date of payment of service tax is 6th June, 2016.
Example 41: A provider (X Ltd.) of information technology software services received on advance of ` 10 lakhs on
21st July 2016 and the balance ` 40 lakhs on 1st October 2016. Information technology software service was listed as
a taxable service w.e.f. 16-5-2008. Services actually rendered on 1st August 2016 and invoice issued on 10th August
2016. There will be service tax liability @15% on ` 10 lakhs for the month of July 2016, and on ` 40 lakhs for the month
of August 2016.

Service Tax
5.14 PLACE OF PROVISION OF SERVICE RULES
The Place of Provision of Services Rules, 2012 specifies the manner to determine the taxing jurisdiction for a service.
Hitherto, the task of identifying the taxing jurisdiction was largely limited in the context of import or export of services.
For this purpose rules were formulated which handled the subject of place of provision of services somewhat indirectly,
confining to define the circumstances in which a provision of service would constitute import or export.
These rules are primarily meant for persons who deal in cross-border services. They will also be equally applicable for
those who have operations with suppliers or customers in the state of Jammu and Kashmir.
Additionally service providers operating within India from multiple locations, without having centralized registration will
find them useful in determining the precise taxable jurisdiction applicable to their operations. The rules will be equally
relevant for determining services that are wholly consumed within a SPEICAL ECONOMIC ZONE (SEZ), to avail the out-
right exemption.
Rule 1: place of provision of services rules, 2012 (w.e.f. 1-7-2012) Definitions.- In these rules, unless the context other-
wise requires,-
(a) Act means the Finance Act, 1994;
(b) account means an account bearing interest to the depositor, and includes a non-resident external account
and a non-resident ordinary account;
(c) banking company has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India
Act, 1934 (2 of 1934);
(d) continuous journey means a journey for which a single or more than one ticket or invoice is issued at the same
time, either by one service provider or through one agent acting on behalf of more than one service provider,
and which involves no stopover between any of the legs of the journey for which one or more separate tickets
or invoices are issued;
(e) financial institution has the meaning assigned to it in clause (c) of section 45-I of the Reserve Bank of India
Act,1 934 (2 of 1934);
(f) intermediary means a broker, an agent or any other person, by whatever name called, who arranges or
facilitates a provision of a service (hereinafter called the main service) or a supply of goods between two or
more persons, but does not include a person who provides the main service or supplies the goods on his ac-
count (w.e.f. 1.10.2014);
(g) leg of journey means a part of the journey that begins where passengers embark or disembark the convey-
ance, or where it is stopped to allow for its servicing or refueling, and ends where it is next stopped for any of
those purposes;
(h) location of the service provider means-
(a) where the service provider has obtained a single registration, whether centralized or otherwise, the prem-
ises for which such registration has been obtained;
(b) where the service provider is not covered under sub-clause (a):
(i) the location of his business establishment; or
(ii) where the services are provided from a place other than the business establishment, that is to say,
a fixed establishment elsewhere, the location of such establishment; or
(iii) where services are provided from more than one establishment, whether business or fixed, the
establishment most directly concerned with the provision of the service; and
(iv) in the absence of such places, the usual place of residence of the service provider.
(i) location of the service receiver means:-

(a) where the recipient of service has obtained a single registration, whether centralized or otherwise, the
premises for which such registration has been obtained;
(b) where the recipient of service is not covered under sub-clause (a):
(i) the location of his business establishment; or
(ii) where services are used at a place other than the business establishment, that is to say, a fixed
establishment elsewhere, the location of such establishment; or
(iii) where services are used at more than one establishment, whether business or fixed, the establish-
ment most directly concerned with the use of the service; and
(iv) in the absence of such places, the usual place of residence of the recipient of service.
Explanation:- For the purposes of clauses (h) and (i), usual place of residence in case of a body corporate means
the place where it is incorporated or otherwise legally constituted.
Explanation 2:- For the purpose of clause (i), in the case of telecommunication service, the usual place of residence
shall be the billing address.
(j) means of transport means any conveyance designed to transport goods or persons from one place to an-
other;
(k) non-banking financial company means137
(i) a financial institution which is a company; or
(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; or
(iii) such other non-banking institution or class of such institutions, as the Reserve Bank of India may, with the
previous approval of the Central Government and by notification in the Official Gazette specify;
(l) online information and database access or retrieval services means providing data or information, retrievable
or otherwise, to any person, in electronic form through a computer network;
(m) person liable to pay tax shall mean the person liable to pay service tax under section 68 of the Act or under
sub-clause (d) of sub-rule (1) of rule (2) of the Service Tax Rules, 1994;
(n) provided includes the expression to be provided;
(o) received includes the expression to be received;
(p) registration means the registration under rule 4 of the Service Tax Rules, 1994;
(q) telecommunication service means service of any description (including electronic mail, voice mail, data
services, audio tex services, video tex services, radio paging and cellular mobile telephone services) which is
made available to users by means of any transmission or reception of signs, signals, writing, images and sounds
or intelligence of any nature, by wire, radio, visual or other electro-magnetic means but shall not include broad-
casting services.
(r) 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.
Rule 3: Location of the receiver:
The place of provision of a service shall be the location of the recipient of service:
Provided that in case the location of the service receiver is not available in the ordinary course of business, the place
of provision shall be the location of the provider of service.

Service Tax
Example 42:
Example 43:
Rule 4: Performance based Services:

Place of provision of service shall be the location where the services are actually performed. However services pro-
vided by way of electronic means in relation to tangible goods, the place of provision of service shall be the actual
location of goods:
Rule 4(a): services that are provided in respect of goods Rule 4(a): not covers where supply of goods by the
that are made physically available, by the receiver to receiver is not material to the rendering of services
the service provider in order to provide the service
i. Repair or reconditioning or any other job work on i. Consultancy report commissioned by a person is
goods (not amounting to manufacture) given on pen drive belonging to the customer
ii. Storage and warehousing ii. Market research service etc.,
iii. Courier services
iv. Cargo handling services
v. Technical testing /inspection/certification/analysis
of goods
vi. Dry cleaning etc.,

The clause shall not apply in case of a service provided in respect of goods that are temporarily imported into India for
repairs and are exported after the repairs without being put to any use in the taxable territory, other than that which
is required for such repair. (w.e.f. 1.10.2014).
Place of provision of service shall be the location where the services are actually performed:
Rule 4(b): services that are provided to an individual Rule 4(b): not covers where physical presence of an
which required the physical presence of the receiver individual is not required being recipient of service
with the provider for provision of the service and
includes a person acting on behalf of the receiver.
i. Cosmetic or plastic surgery, i. Auditing
ii. Beauty treatment services ii. Interior decoration etc.,
iii. Personal security services
iv. Class room teaching
v. Photographic services
vi. Internet cafe services
Rule 5: Location of Immovable Property:

Place of provision of service is where the immovable property is located or intended to be located:
The place of provision of services relating to immovable The place of provision of services relating to immovable
property located in the taxable territory includes: property located in the taxable territory does not
includes:
i. Lease or a right to use, occupation enjoyment i. Repair and maintenance of machinery
or provision of hotel accommodation by a hotel,
guest house, club
ii. Construction service ii. Advice relating to land prices
iii. Architects iii. Real estate feasibility studies
iv. Interior decorators iv. Services of an agent who arranges finance
v. Renting of immovable property etc., v. Legal opinion
vi. Computation of tax for rent of immovable property
Rule 6: Services relating to Events:
Place of provision of service shall be the place where the event is actually held:
The place of provision of services relating to events in The place of provision of services relating to events
the taxable territory includes: does not includes:
Services in relation to admission as well as organisation i . A service of courier agency used for distribution
of events such as conventions, of entry tickets for an event is a service that is not
i. Conferences, exhibitions, fairs, ancillary to admission to the event
ii. Seminars,
iii. Workshops,
iv. Weddings,
v. Sports and cultural events ,
vi. Artistic
vii. Scientific, educational,
viii. Entertainment events
ix. Services ancillary to such admission

Service Tax
Rule 7: Part Performance of a Service at Different Locations:

Place of provision of service will be the place in the taxable territory where the greatest proportion of services is pro-
vided.
Where any service stated in rules 4, 5, or 6 is provided at more than one location, including a location of taxable ter-
ritory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is
provided
Rule 8: Service Provider and Receiver in Taxable Territory:
The place of provision of service will be the location of the receiver, notwithstanding the earlier rules (i.e. 4 to 6).
Rule 9: Specified Services:
Place of provision is location of the service provider.
SPECIFIED SERVICES INCLUDES:
(a) Services provided by a banking company, or financial company, or a NBFC to account holders
(b) Online information and database access or retrieval services
(c) Intermediary services (i.e. travel agent, tour operator, commission agent etc)
(d) Services consisting of hiring of all means of transport, other than, (i) aircrafts, and (ii) vessels except yachts upto
a period of one month w.e.f. 1.10.2014.
Rule 10: Place of Provision of a Service of Transportation of Goods:
Place of provision of service of transportation of goods is the place of destination of goods, except in the case of ser-
vices provided by a G.T.A (in case of GOODS TRANSPORT AGENCY the place of provision of service is the location of
the person liable to pay service tax).
Covered under rule 10 Not covered under rule 10
Goods transported by Goods transported by
Air Courier
Vessel Mail
Rail
Road
Rule 11: Passenger Transportation Services:
The place of provision of a passenger transportation service is the place where the passenger embarks on the convey-
ance for a continuous journey.
Rule 12: Services Provided on Board Conveyances:
Any service provided on board a conveyance (air craft, vessel, rail, or rodways bus) will be covered here. The place
of provision of service is the first scheduled point of departure of that conveyance for the journey.
Example 44: A video game or a movie on demand is provided as on board entertainment during the Kolkata Delhi
leg of a Bangkok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok (outside taxable territory)
and hence not taxable,
Rule 13: Power to Notify Services or Circumstances:
In order to prevent double taxation or non-taxation of the provision of a service or for the uniform application of
rules.
Rule 14: Order of Application of Rules:
When two or more rules may appear equally applicable then rule that occurs later among the rules preferable.

Place of Provision of Services Rules, 2012
(adopted from Educational Guide issued by TRU, CBE&C, MoF, GoI)
Rules at a glance:
Rule 3 Location of the Receiver
Rule 4 Performance based Services
Rule 5 Location of Immovable Property
Rule 6 Services relating to Events
Rule 7 Part performance of a service at different locations
Rule 8 Services where the Provider as well as Receiver is located in Taxable Territory
Rule 9 Specified services- Place of provision is location of the service provider
Rule 10 Place of Provision of a service of transportation of goods
Rule 11 Passenger Transportation Services
Rule 12 Services provided on board conveyances
Rule 13 Power to notify services or circumstances
Rule 14 Order of application of Rules
Rule 3- Location of the Receiver

What is the implication of this Rule?
The main rule or the default rule provides that a service shall be deemed to be provided where the receiver is lo-
cated.
The main rule is applied when none of the other later rules apply (by virtue of rule 14 governing the order of applica-
tion of rules- see para 5.14 of this guidance paper). In other words, if a service is not covered by an exception under
one of the later rules, and is consequently covered under this default rule, then the receivers location will determine
whether the service is leviable to tax in the taxable territory.
The principal effect of the Main Rule is that:-
A. Where the location of receiver of a service is in the taxable territory, such service will be deemed to be provided in
the taxable territory and service tax will be payable.
B. However if the receiver is located outside the taxable territory, no service tax will be payable on the said service.
If the place of provision of a taxable service is the location of service receiver, who is the person liable to pay tax on
the transaction?
Service tax is normally required to be paid by the provider of a service, except where he is located outside the taxable
territory and the place of provision of service is in the taxable territory.
Where the provider of a service is located outside the taxable territory, the person liable to pay service tax is the re-
ceiver of the service in the taxable territory, unless of course, the service is otherwise exempted.
Following illustration will make this clear:-
A company ABC provides a service to a receiver PQR, both located in the taxable territory.
Since the location of the receiver is in the taxable territory, the service is taxable. Service tax liability will be discharged
by ABC, being the service provider and being located in taxable territory.
However, if ABC were to supply the same service to a recipient DEF located in non-taxable territory, the provision of
such service is not taxable, since the receiver is located outside the taxable territory.
If the same service were to be provided to PQR (located in taxable territory) by an overseas provider XYZ (located in
non-taxable territory), the service would be taxable, since the recipient is located in the taxable territory. However,
since the service provider is located in a nontaxable territory, the tax liability would be discharged by the receiver,

Service Tax
under the reverse charge principle (also referred to as tax shift).

Who is the service receiver?
Normally, the person who is legally entitled to receive a service and, therefore, obliged to make payment, is the
receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his
behalf.
Illustration 1:
A lady leaves her car at a service station for the purpose of servicing. She asks her chauffer to collect the car from
the service station later in the day, after the servicing is over. The chauffer makes the payment on behalf of the lady
owner and collects the car.
Here the lady is the person obliged to make the payment towards servicing charges, and therefore, she is the re-
ceiver of the service.
What would be the situation where the payment for a service is made at one location (say by the headquarters of a
business) but the actual rendering of the service is elsewhere (i.e. a fixed establishment)?
Occasionally, a person may be the person liable to make payment for the service provided on his behalf to another
person. For instance, the provision of a service may be negotiated at the headquarters of an entity by way of central-
ized sourcing of services whereas the actual provision is made at various locations in different taxing jurisdictions (in
the case of what is commonly referred to as a multi-locational entity or MLE). Here, the central office may act only as
a facilitator to negotiate the contract on behalf of various geographical establishments.
Each of the geographical establishments receives the service and is obligated to make the payment either through
headquarters or sometimes directly. When the payment is made directly, there is no confusion. In other situations,
where the payment is settled either by cash or through debit and credit note between the business and fixed es-
tablishments, it is clear that the payment is being made by a geographical location. Wherever a fixed establishment
bears the cost of acquiring, or using or consuming a service through any internal arrangement (normally referred to as
a recharge, reallocation, or a settlement), these are generally made in accordance with corporate tax or other
statutory requirements. These accounting arrangements also invariably aid the MLEs management in budgeting and
financial performance measurement.
Various accounting and business management systems are generally employed to manage, monitor and document
the entire purchasing cycle of goods and services (such as the ERP Enterprise Resource Planning System). These sys-
tems support and document the company processes, including the financial and accounting process, and purchas-
ing process.
Normally, these systems will provide the required information and audit trail to identify the establishment that uses or
consumes a service.
It should be noted that in terms of proviso to section 66B, the establishments in a taxable and non-taxable territory are
to be treated as distinct persons. Moreover, the definition of location of the receiver clearly states that where the
services are used at more than one establishment, whether business or fixed, the establishment most directly con-
cerned with the use of the service will be the location. Thus, the taxing jurisdiction of service, which is provided under
a global framework agreement between two multinational companies with the business establishment located
outside the taxable territory, but which is used or consumed by a fixed establishment located in the taxable territory,
will be the taxable territory.
What is the place of provision where the location of receiver is not ascertainable in the ordinary course of business?
Generally, in case of a service provided to a person who is in business, the provider of the service will have the location
of the recipients registered location, or his business establishment, or his fixed establishment etc, as the case may be.
However, in case of certain services (which are not covered by the exceptions to the main rule), the service provider
may not have the location of the service receiver, in the ordinary course of his business. This will also be the case where
a service is provided to an individual customer who comes to the premises of the service provider for availing the ser-
vice and the provider has to, more often than not, rely on the declared location of the customer. In such cases the
place of provision will be the location of the service provider. It may be noted that the service provider is not required
to make any extraordinary efforts to trace the address of the service receiver. The address should be available in the
ordinary course of business.
In case of certain specified categories of services, the place of provision shall be the place where the services are
actually performed. These are discussed in the following paragraphs.
Rule 4- Performance based Services
What are the services that are provided in respect of goods that are made physically available, by the receiver to the
service provider, in order to provide the service?- sub-rule (1):
Services that are related to goods, and which require such goods to be made available to the service provider or
a person acting on behalf of the service provider so that the service can be rendered, are covered here. The es-
sential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical
possession or control of the service provider, and without this happening, the service cannot be rendered. Thus, the
service involves movable objects or things that can be touched, felt or possessed. Examples of such services are re-
pair, reconditioning, or any other work on goods (not amounting to manufacture), storage and warehousing, courier
service, cargo handling service (loading, unloading, packing or unpacking of cargo), technical testing/ inspection/
certification/ analysis of goods, dry cleaning etc. It will not cover services where the supply of goods by the receiver
is not material to the rendering of the service e.g. where a consultancy report commissioned by a person is given on
a pen drive belonging to the customer. Similarly, provision of a market research service to a manufacturing firm for
a consumer product (say, a new detergent) will not fall in this category, even if the market research firm is given say,
1000 nos. of 1 kilogram packets of the product by the manufacturer, to carry for door-to-door surveys.
What is the implication of the proviso to sub-rule (1)?
The proviso to this rule states as follows:-
Provided further that where such services are provided from a remote location by way of electronic means, the
place of provision shall be the location where goods are situated at the time of provision of service.
In the field of information technology, it is not uncommon to provide services in relation to tangible goods located
distantly from a remote location. Thus the actual place of performance of the service could be quite different from
the actual location of the tangible goods. This proviso requires that the place of provision shall be the actual location
of the goods and not the place of performance, which in normal situations is one and the same.
What are the services that are provided to an individual which require the physical presence of the receiver with
the provider for provision of the service.?- sub-rule (2)
Certain services like cosmetic or plastic surgery, beauty treatment services, personal security service, health and fit-
ness services, photography service (to individuals), internet caf service, classroom teaching, are examples of services
that require the presence of the individual receiver for their provision. As would be evident from these examples, the
nature of services covered here is such as are rendered in person and in the receivers physical presence.
Though these are generally rendered at the service providers premises (at a cosmetic or plastic surgery clinic, or
beauty parlor, or health and fitness centre, or internet caf), they could also be provided at the customers premises,
or occasionally while the receiver is on the move (say, a personal security service; or a beauty treatment on board
an aircraft).
What is the significance of ..in the physical presence of an individual, whether represented either as the service re-
ceiver or a person acting on behalf of the receiver in this rule?
This implies that while a service in this category is capable of being rendered only in the presence of an individual, it
will not matter if, in terms of the contractual arrangement between the provider and the receiver (formal or informal,
written or oral), the service is actually rendered by the provider to a person other than the receiver, who is acting on
behalf of the receiver.
Illustration 2:
A modelling agency contracts with a beauty parlour for beauty treatment of say, 20 models. Here again is a situation
where the modelling agency is the receiver of the service, but the service is rendered to the models, who are receiv-
ing the beauty treatment service on behalf of the modelling agency. Hence, notwithstanding that the modelling
agency does not qualify as the individual receiver in whose presence the service is rendered, the nature of the service
is such as can be rendered only to an individual, thereby qualifying to be covered under this rule.
Rule 5- Location of Immovable Property
In the case of a service that is directly in relation to immovable property, the place of provision is where the immov-
able property (land or building) is located, irrespective of where the provider or receiver is located.

Service Tax
What is immovable property?

Immovable Property has not been defined in the Finance Act, 1994. However, in terms of section 4 of the General
Clauses Act, 1897, the definition of immovable property provided in sub-section 3 (26) of the General Clauses Act will
apply, which states as under:
Immovable Property shall include land, benefits to arise out of land, and things attached to the earth, or perma-
nently fastened to anything attached to the earth.
It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would
be covered by the definition of immovable property. The property must be attached to some part of earth even if
underwater.
What are the criteria to determine if a service is directly in relation to immovable property located in taxable terri-
tory?
Generally, the following criteria will be used to determine if a service is in respect of immovable property located in
the taxable territory:
(i) The service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable prop-
erty;
(ii) the service is physically performed or agreed to be performed on an immovable property (e.g. maintenance)
or property to come into existence (e.g. construction);
(iii) the direct object of the service is the immovable property in the sense that the service enhances the value of
the property, affects the nature of the property, relates to preparing the property for development or redevel-
opment or the environment within the limits of the property (e.g. engineering, architectural services, surveying
and sub-dividing, management services, security services etc);
(iv) the purpose of the service is:
(a) the transfer or conveyance of the property or the proposed transfer or conveyance of the property (e.g.,
real estate services in relation to the actual or proposed acquisition, lease or rental of property, legal
services rendered to the owner or beneficiary or potential owner or beneficiary of property as a result of
a will or testament);
(b) the determination of the title to the property.
There must be more than a mere indirect or incidental connection between a service provided in rela-
tion to an immovable property, and the underlying immovable property. For example, a legal firms gen-
eral opinion with respect to the capital gains tax liability arising from the sale of a commercial property
in India is basically advice on taxation legislation in general even though it relates to the subject of an
immovable property. This will not be treated as a service in respect of the immovable property.
Examples of land-related services
(i) Services supplied in the course of construction, reconstruction, alteration, demolition, repair or maintenance
(including painting and decorating) of any building or civil engineering work;
(ii) Renting of immovable property;
(iii) Services of real estate agents, auctioneers, architects, engineers and similar experts or professional people,
relating to land, buildings or civil engineering works. This includes the management, survey or valuation of prop-
erty by a solicitor, surveyor or loss adjuster;
(iv) Services connected with oil/gas/mineral exploration or exploitation relating to specific sites of land or the sea-
bed;
(v) The surveying (such as seismic, geological or geomagnetic) of land or seabed;
(vi) Legal services such as dealing with applications for planning permission;
(vii) Packages of property management services which may include rent collection, arranging repairs and the
maintenance of financial accounts;
(viii) The supply of hotel accommodation or warehouse space.

What if a service is not directly related to immovable property?
The place of provision of services rule applies only to services which relate directly to specific sites of land or property.
In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which,
a service is being provided. Thus, there needs to be a very close link or association between the service and the im-
movable property.
Needless to say, this rule does not apply if a provision of service has only an indirect connection with the immovable
property, or if the service is only an incidental component of a more comprehensive supply of services.
For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa
would be land-related. However, if an interior decorator is engaged by a retail chain to design a common dcor for
all its stores in India, this service would not be land related.
The default rule i.e. Rule 3 will apply in this case.
Examples of services which are not land-related
(i) Repair and maintenance of machinery which is not permanently installed. This is a service related to goods.
(ii) Advice or information relating to land prices or property markets because they do not relate to specific sites.
(iii) Land or Real Estate Feasibility studies, say in respect of the investment potential of a developing suburb, since
this service does not relate to a specific property or site.
(iv) Services of a Tax Return Preparer in simply calculating a tax return from figures provided by a business in respect
of rental income from commercial property.
(v) Services of an agent who arranges finance for the purchase of a property.
Rule 6- Services relating to Events
What is the place of provision of services relating to events?
Place of provision of services provided by way of admission to, or organization of a cultural, artistic, sporting, scientific,
educational, entertainment event, or a celebration, conference, fair, exhibition, or any other similar event and of ser-
vices ancillary to such admission, shall be the place where the event is held.
What are the services that will be covered in this category?
Services in relation to admission as well as organization of events such as conventions, conferences, exhibitions, fairs,
seminars, workshops, weddings, sports and cultural events are covered under this Rule.
Illustration 3:
A management school located in USA intends to organize a road show in Mumbai and New Delhi for prospective
students. Any service provided by an event manager, or the right to entry (participation fee for prospective students,
say) will be taxable in India.
Illustration 4:
An Indian fashion design firm hosts a show at Toronto, Canada. The firm receives the services of a Canadian event
organizer. The place of provision of this service is the location of the event, which is outside the taxable territory. Any
service provided in relation to this event, including the right to entry, will be non-taxable.
What is a service ancillary organization or admission to an event?
Provision of sound engineering for an artistic event is a prerequisite for staging of that event and should be regarded as
a service ancillary to its organization. A service of hiring a specific equipment to enjoy the event at the venue (against
a charge that is not included in the price of entry ticket) is an example of a service that is ancillary to admission.
What are event-related services that would be treated as not ancillary to admission to an event?
A service of courier agency used for distribution of entry tickets for an event is a service that is not ancillary to admis-
sion to the event.

Service Tax
Rule 7- Part performance of a service at different locations

What does this Rule imply?
This Rule covers situations where the actual performance of a service is at more than one location, and occasionally
one (or more) such locations may be outside the taxable territory.
This Rule states as follows:-
Where any service stated in rules 4, 5, or 6 is provided at more than one location, including a location in the taxable
territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service
is provided.
The following example illustrates the application of this Rule:-
Illustration 5:
An Indian firm provides a technical inspection and certification service for a newly developed product of an over-
seas firm (say, for a newly launched motorbike which has to meet emission standards in different states or countries).
Say, the testing is carried out in Maharashtra (20%), Kerala (25%), and an international location (say, Colombo 55%).
Notwithstanding the fact that the greatest proportion of service is outside the taxable territory, the place of provision
will be the place in the taxable territory where the greatest proportion of service is provided, in this case Kerala.
This rule is, however, not intended to capture insignificant portion of a service rendered in any part of the taxable ter-
ritory like mere issue of invoice, processing of purchase order or recovery, which are not by way of service actually
performed on goods.
It is clarified that this rule is applicable in performance-based services or location-specific services (immovable prop-
erty related or event-linked). Normally, such services when provided in a non-taxable territory would require the pres-
ence of separate establishments in such territories. By virtue of an explanation of sub-clause (44) of section 65B, they
would constitute distinct persons and thus it would be legitimate to invoice the services rendered individually in the
two territories.
Rule 8- Services where the Provider as well as Receiver is located in Taxable Territory
What is the place of provision of a service where the location of the service provider and that of the service receiver
is in the taxable territory?
The place of provision of a service, which is provided by a provider located in the taxable territory to a receiver who
is also in the taxable territory, will be the location of the receiver.
This Rule covers situations where the place of provision of a service provided in the taxable territory may be determin-
able to be outside the taxable territory, in terms of the application of one of the earlier Rules i.e. Rule 4 to 6, but the
service provider, as well as the service receiver, are located in the taxable territory.
The implication of this Rule is that in all such cases, the place of provision will be deemed to be in the taxable territory,
notwithstanding the earlier rules. The presence of both the service provider and the service receiver in the taxable
territory indicates that the place of consumption of the service is in the taxable territory. Services rendered, where
both the provider and receiver of the service are located outside the taxable territory, are now covered by the mega
exemption.
Illustration 6:
A helicopter of Pawan Hans Ltd (India based) develops a technical snag in Nepal. Say, engineers are deputed by
Hindustan Aeronautics Ltd, Bangalore, to undertake repairs at the site in Nepal. But for this rule, Rule 4, sub-rule (1)
would apply in this case, and the place of provision would be Nepal i.e. outside the taxable territory. However, by ap-
plication of Rule 7, since the service provider, as well as the receiver, are located in the taxable territory, the place of
provision of this service will be within the taxable territory.
Rule 9- Specified services- Place of provision is location of the service provider
What are the specified services where the place of provision is the location of the service provider?
Following are the specified services where the place of provision is the location of the service provider:-
i) Services provided by a banking company, or a financial company, or a non-banking financial company to ac-
count holders;
ii) Online information and database access or retrieval services;
iii) Intermediary services;
iv) Service consisting of hiring of means of transport, up to a period of one month.
is the meaning of account holder? Which accounts are not covered by this rule?
Account has been defined in the rules to mean an account which bears an interest to the depositor. Services pro-
vided to holders of demand deposits, term deposits, NRE (non-resident external) accounts and NRO (non-resident
ordinary) accounts will be covered under this rule. Banking services provided to persons other than account holders
will be covered under the main rule (Rule 3- location of receiver).
What are the services that are provided by a banking company to an account holder (holder of an account bearing
interest to the depositor)?
Following are examples of services that are provided by a banking company or financial institution to an account
holder, in the ordinary course of business:-
i) services linked to or requiring opening and operation of bank accounts such as lending, deposits, safe deposit
locker etc;
ii) transfer of money including telegraphic transfer, mail transfer, electronic transfer etc.
What are the services that are not provided by a banking company or financial institution to an account holder, in the
ordinary course of business, and will consequently be covered under another Rule?
Following are examples of services that are generally NOT provided by a banking company or financial institution to
an account holder (holder of a deposit account bearing interest), in the ordinary course of business:-
i) financial leasing services including equipment leasing and hire-purchase;
ii) merchant banking services;
iii) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money
changing;
iv) asset management including portfolio management, all forms of fund management, pension fund manage-
ment, custodial, depository and trust services;
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) banker to an issue service.
In the case of any service which does not qualify as a service provided to an account holder, the place of provision
will be determined under the default rule i.e. the Main Rule 3. Thus, it will be the location of the service receiver where
it is known (ascertainable in the ordinary course of business), and the location of the service provider otherwise.
What are Online information and database access or retrieval services?
Online information and database access or retrieval services are services in relation to online information and data-
base access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are
essentially delivered over the internet or an electronic network which relies on the internet or similar network for their
provision. The other important feature of these services is that they are completely automated, and require minimal
human intervention.
Examples of such services are:-
i) online information generated automatically by software from specific data input by the customer, such as web-
based services providing trade statistics, legal and financial data, matrimonial services, social networking sites;
ii) digitized content of books and other electronic publications, subscription of online newspapers and journals,
online news, flight information and weather reports;
iii) Web-based services providing access or download of digital content.
The following services will not be treated as online information and database access or retrieval services:-

Service Tax
i) Sale or purchase of goods, articles etc over the internet;

ii) Telecommunication services provided over the internet, including fax, telephony, audio conferencing, and
videoconferencing;
iii) A service which is rendered over the internet, such as an architectural drawing, or management consultancy
through e-mail;
iv) Repair of software, or of hardware, through the internet, from a remote location;
v) Internet backbone services and internet access services.
What are Intermediary Services?
Generally, an intermediary is a person who arranges or facilitates a supply of goods, or a provision of service, or
both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two
supplies at any one time:
i) the supply between the principal and the third party; and
ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually
charged.
For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying or selling
agent, or a stockbroker) is excluded by definition.
Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules
as the main service), but provides the main service on his own account.
In order to determine whether a person is acting as an intermediary or not, the following factors need to be consid-
ered:-
Nature and value: An intermediary cannot alter the nature or value of the service, the supply of which he facilitates
on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also,
the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts
that the intermediary obtains must be passed back to the principal.
Separation of value: The value of an intermediarys service is invariably identifiable from the main supply of service
that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount
charged by an agent from his principal is referred to as commission.
Identity and title: The service provided by the intermediary on behalf of the principal is clearly identifiable.
In accordance with the above guiding principles, services provided by the following persons will qualify as intermedi-
ary services:-
i) Travel Agent (any mode of travel)
ii) Tour Operator
iii) Commission agent for a service [an agent for buying or selling of goods is excluded]
iv) Recovery Agent
Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by
the guiding principles outlined above, this rule will apply. Normally, it is expected that the intermediary or agent would
have documentary evidence authorizing him to act on behalf of the provider of the main service.
Illustration 7:
A freight forwarder arranges for export and import shipments. There could be two possible situations here- one when
he acts on his own account, and the other, when he acts as an intermediary.
When the freight forwarder acts on his own account (say, for an export shipment)
A freight forwarder provides domestic transportation within taxable territory (say, from the exporters factory located
in Pune to Mumbai port) as well as international freight service (say, from Mumbai port to the international destination),
under a single contract, on his own account (i.e. he buys-in and sells fright transport as a principal), and charges a
consolidated amount to the exporter. This is a service of transportation of goods for which the place of supply is the
destination of goods. Since the destination of goods is outside taxable territory, this service will not attract service tax.
Here, it is presumed that ancillary freight services (i.e. services ancillary to transportation- loading, unloading, handling
etc) are bundled with the principal service owing to a single contract or a single price (consideration).
On an import shipment with similar conditions, the place of supply will be in the taxable territory, and so the service
tax will be attracted.
When the freight forwarder acts as an intermediary
Where the freight forwarder acts as an intermediary, the place of provision will be his location.
Service tax will be payable on the services provided by him. However, when he provides a service to an exporter of
goods, the exporter can claim refund of service tax paid under notification for this purpose.
Similarly, persons such as call centres, who provide services to their clients by dealing with the customers of the client
on the clients behalf, but actually provided these services on their own account, will not be categorized as interme-
diaries.
What is the service of hiring of means of transport?
Normally the following will constitute means of transport:-
i) Land vehicles such as motorcars, buses, trucks;
ii) Vessels;
iii) Aircraft;
iv) Vehicles designed specifically for the transport of sick or injured persons;
v) Mechanically or electronically propelled invalid carriages;
vi) Trailers, semi-trailers and railway wagons.
The following are not means of transport:-
i) Racing cars;
ii) Containers used to store or carry goods while being transported;
iii) Dredgers, or the like.
What if I provide a service of hiring of a fleet of cars to a company on an annual contract? What will be place of pro-
vision of my service if my business establishment is located in New Delhi, and the company is located in Faridabad
(Haryana)?
This Rule covers situations where the hiring is for a period of upto one month. Since hiring period is more than one
month, this sub-rule cannot be applied to the situation. The place of provision of your service will be determined in
terms of Rule 3 i.e. receiver location, which in this case is Faridabad (Haryana).
Rule 10- Place of Provision of a service of transportation of goods
What are the services covered under this Rule?
Any service of transportation of goods, by any mode of transport (air, vessel, rail or by a goods transportation agency),
is covered here. However, transportation of goods by courier or mail is not covered here.
What is the place of provision of a service of transportation of goods?
Place of provision of a service of transportation of goods is the place of destination of goods, except in the case of
services provided by a Goods Transportation Agency in respect of transportation of goods by road, in which case the
place of provision is the location of the person liable to pay tax (as determined in terms of rule 2(1)(d) of Service Tax
Rules, 1994 (since amended).
Illustration 8:
A consignment of cut flowers is consigned from Chennai to Amsterdam. The place of provision of goods transportation
service will be Amsterdam (outside India, hence not liable to service tax). Conversely, if a consignment of crystal ware
is consigned from Paris to New Delhi, the place of provision will be New Delhi.
Service Tax
What does the proviso to this Rule imply?

The proviso to this Rule states as under:-
Provided that the place of provision of services of transportation of goods by goods transportation agency shall be
the location of the person liable to pay tax.
Sub-rule 2(1)(d) of Service Tax Rules, 1994 provides that where a service of transportation of goods is provided by a
goods transportation agency, and the consignor or consignee is covered under any of the specified categories pre-
scribed therein , the person liable to tax is the person who pays, or is liable to pay freight (either himself or through his
agent) for the transportation of goods by road in a goods carriage. If such person is located in non-taxable territory,
then the person liable to pay tax shall be the service provider.
Illustration 9:
A goods transportation agency ABC located in Delhi transports a consignment of new motorcycles from the factory
of XYZ in Gurgaon (Haryana), to the premises of a dealer in Bhopal, Madhya Pradesh. Say, XYZ is a registered assessee
and is also the person liable to pay freight and hence person liable to pay tax, in this case. Here, the place of provision
of the service of transportation of goods will be the location of XYZ i.e. Haryana.
Illustration 10:
A goods transportation agency ABC located in Delhi transports a consignment of new motorcycles from the factory of
XYZ in Gurgaon (Haryana), to the premises of a dealer in Jammu (non-taxable territory). Say, as per mutually agreed
terms between ABC and XYZ, the dealer in Jammu is the person liable to pay freight. Here, in terms of amended provi-
sions of rule 2(1)(d), since the person liable to pay freight is located in non-taxable territory, the person liable to pay
tax will be ABC. Accordingly, the place of provision of the service of transportation of goods will be the location of
ABC i.e. Delhi.
Rule 11- Passenger Transportation Services
What is the place of provision of passenger transportation services?
The place of provision of a passenger transportation service is the place where the passenger embarks on the convey-
ance for a continuous journey.
What does a continuous journey mean?
A continuous journey means a journey for which:-
(i) a single ticket has been issued for the entire journey; or
(ii) more than one ticket or invoice has been issued for the journey, by one service provider, or by an agent on be-
half of more than one service providers, at the same time, and there is no scheduled stopover in the journey
What is the meaning of a stopover? Do all stopovers break a continuous journey?
Stopover means a place where a passenger can disembark either to transfer to another conveyance or break his
journey for a certain period in order to resume it at a later point of time. All stopovers do not cause a break in con-
tinuous journey. Only such stopovers will be relevant for which one or more separate tickets are issued. Thus a travel
on Delhi-London- New York-London-Delhi on a single ticket with a halt at London on either side, or even both, will be
covered by the definition of continuous journey. However if a separate ticket is issued, say New York-Boston-New York,
the same will be outside the scope of a continuous journey.
Rule 12- Services provided on board conveyances
What are services provided on board conveyances?
Any service provided on board a conveyance (aircraft, vessel, rail, or roadways bus) will be covered here. Some ex-
amples are on-board service of movies/music/video/ software games on demand, beauty treatment etc, albeit only
when provided against a specific charge, and not supplied as part of the fare.
What is the place of provision of services provided on board conveyances?
The place of provision of services provided on board a conveyance during the course of a passenger transport opera-
tion is the first scheduled point of departure of that conveyance for the journey.
Illustration 11:
A video game or a movie-on-demand is provided as on-board entertainment during the Kolkata-Delhi leg of a Bang-
kok-Kolkata-Delhi flight. The place of provision of this service will be Bangkok (outside taxable territory, hence not liable
to tax).
If the above service is provided on a Delhi-Kolkata-Bangkok-Jakarta flight during the Bangkok-Jakarta leg, then the
place of provision will be Delhi (in the taxable territory, hence liable to tax).
Rule 13- Power to notify services or circumstances
This Rule states as follows:-
In order to prevent double taxation or non-taxation of the provision of a service, or for the uniform application of rules,
the Central Government shall have the power to notify any description of service or circumstances in which the place
of provision shall be the place of effective use and enjoyment of a service.
The rule is an enabling power to correct any injustice being met due to the applicability of rules in a foreign territory
in a manner which is inconsistent with these rules leading to double taxation. Due to the cross border nature of many
services it is also possible in certain situations to set up businesses in a non-taxable territory while the effective enjoy-
ment, or in other words consumption, may be in taxable territory. This rule is also meant as an anti-avoidance measure
where the intent of the law is sought to be defeated through ingenious practices unknown to the ordinary ways of
conducting business.
Rule 14- Order of application of Rules
Rule 14 provides that where the provision of a service is, prima facie, determinable in terms of more than one rule, it
shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration.
This Rule covers situations where the nature of a service, or the business activities of the service provider, may be such
that two or more rules may appear equally applicable.
Following illustrations will make the implications of this Rule clear:-
Illustration 12:
An architect based in Mumbai provides his service to an Indian Hotel Chain (which has business establishment in New
Delhi) for its newly acquired property in Dubai. If Rule 5 (Property rule) were to be applied, the place of provision would
be the location of the property i.e. Dubai (outside the taxable territory). With this result, the service would not be tax-
able in India.
Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place
of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable terri-
tory, the service would be taxable in India.
By application of Rule 14, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision.
Illustration 13:
For the Ms Universe Contest planned to be held in South Africa, the Indian pageant (say, located in Mumbai) avails
the services of Indian beauticians, fashion designers, videographers, and photographers. The service providers travel
as part of the Indian pageants entourage to South Africa. Some of these services are in the nature of personalized
services, for which the place of provision would normally be the location where performed (Performance rule-Rule 4),
while for others, under the main rule (Receiver location) the place of provision would be the location of receiver.
Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place
of provision would be the location of the service receiver i.e. New Delhi. Place of provision being in the taxable terri-
tory, the service would be taxable in India.
By application of Rule 15, the later of the Rules i.e. Rule 8 would be applied to determine the place of provision.
Taxability of bundled services
Bundled service means a bundle of provision of various services wherein an element of provision of one service is
combined with an element or elements of provision of any other service or services. An example of bundled service
Service Tax
would be air transport services provided

by airlines wherein an element of transportation of passenger by air is combined with an element of provision of ca-
tering service on board. Each service involves differential treatment as a manner of determination of value of two
services for the purpose of charging service tax is different.
Two rules have been prescribed for determining the taxability of such services in clause (3) of section 66F of the Act.
These rules, which are explained below, are subject to the provisions of the rule contained in sub section (2) of section
66F.
Services which are naturally bundled in the ordinary course of business
The rule is If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be
treated as provision of a single service which gives such bundle its essential character
Illustrations 14:
A hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the
ordinary course of business. The service of hotel accommodation gives the bundle the essential character and
would, therefore, be treated as service of providing hotel accommodation.
A 5 star hotel is booked for a conference of 100 delegates on a lump sum package with the following facili-
ties:
Accommodation for the delegates
Breakfast for the delegates,
Tea and coffee during conference
Access to fitness room for the delegates
Availability of conference room
Business centre
As is evident a bouquet of services is being provided, many of them chargeable to different effective rates of tax.
None of the individual constituents are able to provide the essential character of the service. However, if the service
is described as convention service it is able to capture the entire essence of the package. Thus the service may be
judged as convention service and chargeable to full rate. However it will be fully justifiable for the hotel to charge
individually for the services as long as there is no attempt to offload the value of one service on to another service that
is chargeable at a concessional rate.
Services which are not naturally bundled in the ordinary course of business
The rule is If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall
be treated as provision of a service which attracts the highest amount of service tax.
Illustrations 15:
A house is given on rent one floor of which is to be used as residence and the other for housing a printing press. Such
renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore, if a single rent
deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of
service tax. In this case renting for use as residence is a negative list service while renting for non-residence use is
chargeable to tax. Since the latter category attracts highest liability of service tax amongst the two services bundled
together, the entire bundle would be treated as renting of commercial property.
Significance of the condition that the rule relating to bundled service is subject to the provisions of sub-section (2) of
section 66F
Sub-section (2) of section 66 lays down : where a service is capable of differential treatment for any purpose based
on its description, the most specific description shall be preferred over a more general description. This rule predomi-
nates over the rule laid down in sub-section (3) relating to bundled services. In other words, if a bundled service falls
under a service specified by way of a description then such service would be covered by the description so specified.
The illustration, relating to a bundled service wherein a pandal and shamiana is provided in combination with catering
service, given in the second bullet in para 9.1.2 above explains the operation of this rule.
Manner of determining if the services are bundled in the ordinary course of business
Whether services are bundled in the ordinary course of business would depend upon the normal or frequent practices
followed in the area of business to which services relate. Such normal and frequent practices adopted in a business
can be ascertained from several indicators some of which are listed below
The perception of the consumer or the service receiver. If large number of service receivers of such bundle of
services reasonably expect such services to be provided as a package then such a package could be treated
as naturally bundled in the ordinary course of business.
Majority of service providers in a particular area of business provide similar bundle of services. For example,
bundle of catering on board and transport by air is a bundle offered by a majority of airlines.
The nature of the various services in a bundle of services will also help in determining whether the services are
bundled in the ordinary course of business. If the nature of services is such that one of the services is the main
service and the other services combined with such service are in the nature of incidental or ancillary services
which help in better enjoyment of a main service. For example service of stay in a hotel is often combined with
a service or laundering of 3-4 items of clothing free of cost per day. Such service is an ancillary service to the
provision of hotel accommodation and the resultant package would be treated as services naturally bundled
in the ordinary course of business.
Other illustrative indicators, not determinative but indicative of bundling of services in ordinary course of business
are
There is a single price or the customer pays the same amount, no matter how much of the package they
actually receive or use.
The elements are normally advertised as a package.
The different elements are not available separately.
The different elements are integral to one overall supply if one or more is removed, the nature of the sup-
ply would be affected.
No straight jacket formula can be laid down to determine whether a service is naturally bundled in the ordinary course
of business. Each case has to be individually examined in the backdrop of several factors some of which are outlined
above.
When two or more rules may appear equally applicable then rule that occurs later among the rules preferable.
5.15 VALUATION OF TAXABLE SERVICES (SECTION 67)
SECTION 67: Valuation of taxable services for charging service tax
(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference
to its value, then such value shall,
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by
the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be
such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount
as may be determined in the prescribed manner.
(2) 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 pay-
able, is equal to die gross amount charged.
Service Tax
(3) The gross amount charged for die taxable service shall include any amount received towards the taxable ser-
vice before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may
be prescribed.
Explanation For the purposes of this section,
(a) (i) consideration includes any amount that is payable for the taxable services provided or to be provided;
(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of
providing or agreeing to provide a taxable service, except in such circumstances, and subject to such
conditions, as may be prescribed;
(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in
addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the
difference in the face value of lottery ticket and the price at which the distributor or selling agent gets
such ticket.
(c) 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, and any amount credited or debited, as the
case may be, to any account, whether called Suspense account or by any other name, in the books of account of
a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.
SECTION 67A: Date of determination of rate of tax, value of taxable service and rate of exchange The rate of service
tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable ser-
vice or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been
provided or agreed to be provided.
Explanation.- For the purpose of this section, rate of exchange means the rate of exchange determined in accor-
dance with such rules as may be prescribed.
Rule 1: Service Tax (Determination of Value) Rules, 2006
Rule 2: Definitions
Rule 2(a): Act means the FINANCE ACT, 1994
Rule 2(b): section means the section of the Act;
Rule 2(c): value shall be the meaning assigned to it in section 67;
Rule (d): words and expressions used in these rules and not defined but defined in the Act shall have the meaning
respectively assigned to them in the Act.
Rule 2A: Determination of value of service portion in the execution of a works contract.
In case of works contract service provider has two options for payment of service tax. Once any one of the option has
been claimed that is final for the given contract.

Net service tax in case of option 2: @40% on 15% in case of original works, 70% on 15% in case of maintenance and
repair of goods in relation to movable and completion and finishing services.
Original works means
(i) all new constructions,
(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make
them workable
(iii) erection, commissioning or installation or plant, machinery or equipment or structures, whether pre-fabricated
or otherwise.
Rule 2B: Determination of value of service in relation to money changing (w.e.f. 1-4-2011):
In respect of purchase or sale of foreign currency, including money changing, the value of taxable service shall be
determined by the service provider for payment of service tax is in terms of Rule 2B of the Service Tax (Determination
of Value) Rules, 2006, are as follows :
(i) The difference between buying rate or selling rate, as the case may be, and the RBI reference rate for that cur-
rency at that time multiplied by units of currency exchanged;
Example 45: US$1000 are sold by a customer at the rate of ` 65 per US$.
RBI reference rate for US$ is ` 65.50 at that time `
RBI reference rate for US$ at that time = 65.50
Less: selling rate by a customer = 65.00
Difference (irrespective of Plus or Minus) = 0.50
The taxable value = ` 500 (i.e. US$1000 x ` 0.50)

Service Tax
Service Tax (Standard Rate) = ` 75 (i.e. ` 500 x 15%)

Example 46: INR70000 is changed into Great Britain Pound (GBP) and the exchange rate offered is ` 70, thereby giving
GBP 1000.
RBI reference rate for that currency at that time for GBP is ` 69.
`
RBI reference rate for GBP at that time = ` 69.00
Less: Buying rate by a customer = ` 70.00
Difference (irrespective of Plus or Minus) = ` 1.00
The taxable value = ` 1000.00 (i.e. GBP1000 x ` 1.00)
Service Tax (Standard Rate) = ` 150.00 (i.e. ` 1000 x 15%)
(ii) In case where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount
of Indian Rupees provided or received, by the person changing the money.
Example 47:
INR70000 is changed into Great Britain Pound (GBP) and the exchange rate offered is ` 70, thereby giving GBP 1000.
RBI reference rate for that currency at that time for GBP is not available.
The taxable value = ` 700 (i.e. GBP1000 x ` 70 x 1%)
(iii) In case both the currencies are not Indian rupees, @1% of the lesser of the amounts received if the two currencies
are converted at RBI reference rate.
Example 48: US$ 1,000 is changed into UK 571 .4286 (i.e. 1 UK POUND = US$ 1.75).
RBI reference rate for that currency at that time for 1 US$ is ` 45 and for 1 UK POUND = ` 85
Particulars Value in ` Remarks
US Dollars converted into RBI reference rate at that time of exchange 45,000 USD 1000 x ` Rs.45
UK Pounds converted into RBI reference rate at that time of exchange 48,571 UK 571.4286 x ` Rs.85
The lower of the above two currencies at RBI reference rate is ` 45,000. Therefore, the taxable value is `Rs. 450 (i.e.
` 45,000 x 1%)
Rule 2C: Determination of value of service in supply of food and drink in a restaurant or outdoor catering (w.e.f. 1-7-
2012):
The value of the service portion shall be determined in the following manner-
Value of service portion in an activity wherein goods, being food or any other article of human consumption or any
drink (whether or not intoxicating) is supplied in any manner as part of the activity.

C.C. = CENVAT CREDIT
I.S. = INPUT SERVICE
C.G. = CAPITAL GOODS
I.G. = INPUT GOODS
Important - As per Explanation 1 to the said Rule 2C Total amount (referred to in the second column of the table
above) means the sum total of gross amount charged and the fair market value of all goods and services supplied
by the service receiver in or in relation to the supply of food or any other article of human consumption or any drink
(whether or not intoxicating), under the same contract or any other contract, less (i) the amount charged for such
goods or services provided by the service receiver; and
(ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount,
as the case may be.
Example 49: Food Delhi Pvt. Ltd. Supplies foods and beverages only.
(i) at a restaurant for ` 11,250 (inclusive of VAT ` 1,250) located at Mayapuri and supplied food to Train Ltd for `
22,500 (including of VAT ` 2,500). Find service tax liability?
Answer:
(i) Value of service = 10,000 x 40% = ` 4,000 (i.e. restaurant services)
(ii) Value of service = 20,000 x 60% = ` 12,000 (i.e. outdoor catering services)
Total value of services = ` 16,000
Service Tax 15% on ` 16,000 = ` 2,400
Rule 3: Consideration received is not wholly or partly consisting of money
Rule 3(a): Valuation shall be on the basis of gross amount charged by service provider for similar services.
Rule 3(b): Valuation shall be on the basis of equivalent money value of such consideration, which shall not be less than
cost of provision of such services. [Rule 3(b) is applicable if value cannot be determined as per Rule 3(a)].
The value of services as per the equivalent money in no case shall be less than the cost of provision of such taxable
service. Such cost will have to be worked out on the basis of usual costing principles of normal costs and allocation of
normal overheads including reasonable profit thereon. A certificate from a practicing Cost Accountant or a practic-
ing Chartered Accountant should be obtained for this purpose.
Rule 4: Rejection of value
Where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance
with the provisions of the Act or these rules, he shall issue a notice to such service provider to show cause why the
value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in
the notice.
The Central Excise Officer shall, after providing reasonable opportunity of being heard, 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.
The Central Excise Officer has to follow the principle of natural justice.
Rule 5: Inclusion in or exclusion from value of certain expenditure or costs
Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such
expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be
included in the value for the purpose of charging service tax on the said service.
Out of pocket expenses incurred are includible in the value of taxable service.
Reimbursement of expenses is not includible
If the expenditure is not part of service provided by the service provider to service receiver, but incurred by him as per
business practice or convenience are not includible.
If the reimbursement expenditure is part of service provided by the service provider to service receiver is to be in-

Service Tax
cluded in the value of taxable services. However, expenditure incurred by service provider as pure agent of service
receiver is not includible [Rule 5(2) of Valuation Rules].
Example 50: Reimbursement expenses can be viewed as Octroi or entry tax paid by carriage and freight forwarding
agent on behalf of owner of goods, Customs duty by customs house agent on behalf of client, Advertisement charges
paid by an advertising agency to newspaper on behalf of clients, Ticket charges paid by Travel Agent and recovered
from his customer.
Pure Agent
As per Rule 5 Pure Agent means
Anything charged extra over
i. A person who enters into a contractual agreement with recipient of service
and above pure agent, such an
to act as his pure agent to incur expenditure or costs in the course of pro-
amount will be taxable.
viding taxable services.
ii. A person who 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.
iii. Any person who does not use such goods or services so procured
iv. Any person who receives only the actual amount incurred to procure such goods or services.
v. 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;
vi. The recipient of service receives and uses the goods or services so procured by the service provider in his ca-
pacity as pure agent of the recipient of service;
vii. The recipient of service is liable to make payment to the third party;
viii. The recipient of service authorizes the service provider to make payment on his behalf;
ix. 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;
x. 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;
xi. The service provider recovers from the recipient of service only such amount as has been paid by him to the
third party; and
xii. 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.
For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration con-
sisting of all components of the taxable service, it is immaterial that the details of individual components of the total
consideration is indicated separately in the invoice are not.
Example 51: X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement on televi-
sion. 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 Y. 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.
Example 52: 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 ex-
penditure merely because they are indicated separately in the invoice issued by the service provider to the recipient
of service.
Example 53: A contract 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 itemized 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.
Example 54: 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 consti-
tutes part of gross amount charged for the provision of services by the company X. This sum is subject to service tax.
Rule 6: The commission costs, etc., will be included or excluded
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 commis-
sion 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 ap-
plication 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 authorized 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.
x. the amount realised as demurrage or by any other name whatever called for the provision of a service beyond
the period originally contracted or in any other manner relatable to the provision of service.
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 Interest on loans.
iv. Interest on delayed payment of any consideration for the provision of services or sale of property, whether mov-
able or immovable;
v. the taxes levied by any Government on any passenger travelling by air, if shown separately on the ticket, or the
invoice for such ticket, issued to the passenger;
vi. accidental damages due to unforeseen actions not relatable to the provision of service.
Example 55: In respect of delay payment charges recovered by the service provider is includable in the value of tax-
able service?
Answer:
vide CBEC LETTER 137/25/2011 dt.3.8.2011, it is clarified in the following manner:
Service Tax
5.16 IMPORTANT ISSUES UNDER SERVICE TAX PROVISIONS
There is no Service Tax on free services. This is because there is no consideration involved in rendering the free service.
However the service tax department is likely to verify whether the services were in fact rendered free.
If the service provider received an amount from service receiver indirectly in addition to receiving the value of ser-
vices, such receipt is not subject to Service Tax.
Example 56: A mandap keeper lets out his premises to a contactor at market rates. The contractor then gave dona-
tion of ` Rs.20 lakhs to the mandap keeper as contribution to corpus of the mandap. This amount was not in relation
to service of mandap provided by mandap keeper and hence will not attract service tax. CKP Mandal v CCE (2006)
(Bom. HC).
However, in the above instance if the market rate is say ` 5 lakhs and the service has been offered at ` 2 lakhs, the
difference between ` 5 lakhs and ` 2 lakhs i.e. ` 3 lakhs will suffer service tax and the balance i.e. ` 20 lakhs less ` 3
lakhs will not suffer service tax. This is laid out in Service Tax (Determination of Value) Rules, 2006 which says that if any
amount is received indirectly as part of consideration for the services rendered then such indirect consideration will
form part of the value of taxable services.
Option to pay an amount in case of lottery service under section 65(105) (zzzzn):
The distributor or selling agent is liable to pay service tax for the taxable service of promotion, marketing, organizing or
any other manner assisting in organizing lottery.
As per Rule 6(7C) of the Service Tax Rules, 1994 the distributor or selling agent shall have the option to pay an amount
at the rate specified below instead of paying service tax w.e.f 01-06-2015 (vide 15/2015-ST, dt. 19.05.2015).
S.No. Rate Condition
i ` 8,200 on every ` 10 lakh (or part of ` 10 lakh) of If the lottery or lottery scheme is one
aggregate face value of lottery tickets printed by the where the guaranteed prize payout
organizing State for a draw is more than 80%.
ii ` 12,800 on every ` 10 lakh (or part of ` 10 lakh) of If the lottery or lottery scheme is one
aggregate face value of lottery tickets printed by the where the guaranteed prize payout
organizing State for a draw is less than 80%.
Provided that in case of online lottery, the aggregate face value of lottery tickets for the purpose of this sub-rule shall
be taken as the aggregate value of tickets sold, and service tax shall be calculated in the manner specified in the
said Table.
Provided further that the distributor or selling agent shall exercise such option within a period of one month of the
beginning of each financial year and such option shall not be withdrawn during the remaining part of the financial
year.

Provided also that the distributor or selling agent shall exercise such option for financial year 2010-11, within a period of
one month of the publication of this sub-rule in the Official Gazette or, in the case of new service provider, within one
month of providing of service under the said sub-clause and such option shall not be withdrawn during the remaining
part of that financial year.
Terms Meanings Examples
Face value The amount mentioned on
the lottery ticket.
Face value of ` 10 per ticket

Aggregate face value For printed tickets:
Face value of ticket x No. of
lottery tickets printed.
For online tickets:
Face value of ticket x No. of
lottery tickets sold
2,50,000 tickets printed x ` 10 = ` 25 lacs
2,00,000 tickets sold x ` 10 = ` 20 lacs
Guaranteed prize payout the aggregate prize money Let us say ` 15 lacs in case of printed tickets
distributed to all winners out of ` 25 lacs. (i.e. 60%)
Example 57: M/s Martin Pvt. Ltd. is a distributor or selling agent authorized by a State in India. Following is the details of
lotteries of a distributor to be organized by the State.
Particulars Lakhpati (Printed) Crorepati (Online)
No. of tickets proposed 2,50,000 3,00,000
Face value of ticket ` 10 each ` 500 each
Guaranteed prize payout @60% @90%
No. of tickets sold 2,00,000 2,35,000
Calculate the service tax under composition scheme as per Rule 6(7C) of the Service Tax Rules, 1994.
Answer:
Lakhpati lottery tickets - Printed
No. of tickets proposed 2,50,000 tickets
Face value of ticket ` 10 each
Total face value ` 25,00,000
Guaranteed prize payout @60%
Multiples of TEN lakhs or part of TEN lakhs 3 (i.e. ` 25,00,000/` 10,00,000)
Service tax payable for every ` 10 lakhs or part thereof ` 12,800
Total Service tax (subject to Cess) 38,400 (i.e. 3 x ` 12,800)

Service Tax
Crorepati lottery tickets Online

No. of tickets sold 2,35,000 tickets
Face value of ticket ` 500 each
Total face value ` 11,75,00,000
Guaranteed prize payout @90%
Multiples of TEN lakhs or part of TEN lakhs 118 (i.e. ` 11 ,75,00,000/` 10,00,000)
Service tax payable for every ` 10 lakhs or part thereof ` 8,200
Total Service tax (subject to Cess) ` 9,67,600 (i.e. 118 x ` 8,200)
Total service tax liability payable by M/s Martin Pvt. Ltd.
Particulars (`)
Lakhpati lottery tickets - Printed 38,400
Crorepati lottery tickets Online 9,67,600
Total 10,06,000
Persons marking the lottery tickets are exempt from service tax (vide Notification No. 50/201 0-ST, dated. 08-10-
2010):
The Central Government, exempts persons marketing the lottery tickets (hereinafter referred to as such person), oth-
er than the distributors or selling agents appointed or authorized by the lottery organising State (hereinafter referred to
as such distributor or selling agent), from the whole of service tax leviable thereon on the value of taxable service of
marketing of lottery, if the optional composition scheme under sub-rule (7C) of rule 6 of Service Tax (2nd Amendment)
Rules, 2010 dated 8th October 2010 is availed of by such distributor or selling agent, in respect of such lottery during
the financial year.
Provided that if such person also markets lottery tickets for distributors or selling agents who have not so opted, then
nothing contained in this notification shall apply to the value of service provided to the distributors or selling agents
who have not so opted.
Penalty for Non-Payment or Delayed Payment of Service Tax (Section 76 of the Finance Act, 1994) w.e.f. 14.05.2015:
(1) Where service tax has not been levied or paid, or has been short-levied or short-paid, or erroneously refunded,
for any reason, other than the reason of fraud or collusion or wilful mis-statement or suppression of facts or con-
travention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade pay-
ment of service tax, the person who has been served notice under sub-section (1) of section 73 shall, in addition
the service tax and interest specified in the notice, be also liable to pay a penalty not exceeding ten per cent
of the amount of such service tax:
Provided that where service tax and interest is paid within a period of thirty days of
(i) the date of service of notice under sub-section (1) of section 73, no penalty shall be payable and pro-
ceedings in respect of such service tax and interest shall be deemed to have been concluded;
(ii) the date of receipt of the order of the Central Excise Officer determining the amount of service tax under
sub-section (2) of section 73, the penalty payable shall be twenty-five per cent of the penalty imposed
in that order, only if such reduced penalty is also paid within such period.
(2) Where the amount of penalty is increased by the Commissioner (Appeals), the Appellate Tribunal or the court,
as the case may be, over the above the amount as determined under sub-section (2) of section 73, the time
within which the reduced penalty is payable under clause (ii) of the proviso to sub-section (1) in relation to such
increased amount of penalty shall be counted from the date of the order of the Commissioner (Appeals), the
Appellate Tribunal or the court, as the case may be.]
Service Tax Liability In case of Tax Deducted at Source (TDS) under Income Tax Act, 1961 Service Tax is payable on
the value of Service and Not on value net of TDS.
Service Tax is to be paid on the gross value of taxable service which is charged by a Service Tax assessee for providing
a taxable service. Income tax deducted at source is includible in the charged amount. Therefore, service Tax is pay-

able on the gross amount including the amount of Income Tax deducted at source also.
Example 59: Mr. X, an architect has received the fees of ` 4,48,500 after the deduction of Income Tax of ` 51,500. The
Service Tax is payable on ` 4,48,500 whether the statement is correct?
Answer: No, the service tax can be payable on value of services. Hence, the value of services is ` 5,00,000 and the
service tax @ 15% can be levied on ` 5,00,000.
Hence, the service tax liability is ` 65,217 (i.e. ` 5,00,000 x 15/115)
5.17 E-PAYMENT OF SERVICE TAX
Every assessee shall electronically pay the service tax payable by him, through internet banking. Provided that the
Assistant Commissioner or the Deputy Commissioner of Central Excise, as the case may be, having jurisdiction, may
for reasons to be recorded in writing, allow the assessee to deposit the service tax by any mode other than internet
banking.
5.18 SELF ADJUSTMENT OF EXCESS TAX PAID
Tax paid in excess to the credit of Government for a month/quarter may be adjusted by the assessee against the tax
payable for the succeeding month/quarter Rule 6(4A) of the Service Tax Rules, 1994.
Conditions for Self-Adjustment
As per the Rule 6(4B) of the Service Tax Rules, 1994, self adjustment of excess payment of service tax allowed under
Rule 6(4A) is subject to the following conditions:
i. Excess payment since exact amount to be paid could not be calculated
ii. When tax is to be paid by 31st March and calculation of exact amount of service tax is difficult
iii. Any calculation mistakes
An assessee who have centralized registration (i.e. one RC) Self adjustment will not be applicable when excess
can adjust the excess service tax paid on their own without payment relates to interpretation of law, taxability,
any monetary limit provided the excess amount paid is on ac- classification, valuation or eligibility to exemption no-
count of delayed receipt of details of payments from branch- tification.
es.
In case of an assessee with multiple registration certificates (RCs), excess service tax paid on their own without any
monetary limit w.e.f. 1.4.2012 [NT3/201 2-ST dt 17-3-2012]. The monetary limit is ` 2,00,000 upto 31-3-2012 for a month/
quarter as per Rule 6(4B) (iii) of the Service Tax Rules, 1994.
Such adjustment can be made only in the succeeding month or quarter.
The details of self-adjustment should be intimated to the Superintendent of Central Excise within a period of 15 days
from the date of adjustment as per Rule 6(4B) (iv) of the Service Tax Rules, 1994. W.e.f. 1-4-2012 there is no need to
intimate to the Department about such self-adjustment.
Advance payment of Services Tax
As per Rule 6(1A) of the Service Tax Rules, 1994
i. The assessee may, on his own, pay Service tax in advance and adjust the amount towards future liability.
ii. He shall intimate details of advance payment to the Jurisdiction Superintendent of Central Excise within 15 days
of such payment.
iii. He shall indicate the details of adjustment of advance payment in the returns.

Service Tax
5.19 SPECIAL AUDIT
Section 72A
(1) If the Principal Commissioner of Central Excise or the Commissioner of Central Excise, has reasons to believe that
any person liable to pay service tax (herein referred to as such person),-
(i) Has failed to declare or determine the value of a taxable service correctly; or
(ii) Has availed and utilized credit of duty or tax paid-
(a) Which is not within the normal limits having regard to the nature of taxable service provided, the
extent of capital goods used or the type of inputs or input services used, or any other relevant fac-
tors as he may deem appropriate; or
(b) By means of fraud, collusion, or any willful misstatement or suppression of facts; or
(iii) Has operations spread out in multiple locations and it is not possible or practicable to obtain a true and
complete picture of his accounts from the registered premises falling under 20 the jurisdiction of the said
Commissioner,
He may direct such person to get his accounts audited by a chartered accountant or cost accountant nomi-
nated by him, to the extent and for the period as may be specified by the Commissioner.
(2) The chartered accountant or cost accountant referred to in sub-section (1) shall, within the period specified by
the said Commissioner, submit a report duly signed and certified by him to the 25 said Commissioner mentioning
therein such other particulars as may be specified by him.
(3) The provisions of sub-section (1) shall have effect notwithstanding that the accounts of such person have been
audited under any other law for the time being in force.
(4) The person liable to pay tax shall be given an opportunity of being heard in respect of any material gathered on
the basis of the audit under Sub-Section (1) and proposed to be utilized in any proceeding under the provisions
of this Chapter or rules made thereunder.
Explanation For the purposes of this section
(i) chartered accountant shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the
Chartered Accountants Act, 1949;
(ii) cost accountant shall have the meaning assigned to it in clause (b) of sub-section (1) of section 2 of the ost
and Works Accountants Act, 1959.;
5.20 RETURN
Filing of Returns
Every assessee registered under Service tax provisions should file returns mandatorily electronically (w.e.f. 1-10-2011)
as explained below:
Period Due date Return (must be Person responsible Remarks
(e-filing) filed in triplicate) to file
1st April to 25th of ST-3 All assessees (provider Due date is a public holiday, then next
30th October or recipient of service working day is the due date. One ST-3
September Every assessee as the case may be) can file for multiple services.
shall submit the
half-yearly return Nil return acceptable but no return
electronically will attract penalty.
w.e.f. 1-10 2011.

Period Due date Return (must be Person responsible Remarks
(e-filing) filed in triplicate) to file
1st Octo- 25th April ST-3 All assessees (provider Due date is a public holiday, then next
ber to 31st or recipient of service working day is the due date. One ST-3
March Every assessee shall as the case may can file for multiple services.
submit the half- be)
yearly return elec- Nil return acceptable but no return
tronically will attract penalty.
w.e.f. 1-10-2011.
1st April to 25th of ST-3A All assessees to whom A statement giving details of the differ-
30th October provisional assessment ence between the service tax deposit-
September Every assessee shall has been granted. ed and the service tax liable to be paid
submit the half- for each month or quarter, as the case
yearly return elec- may be, in a memorandum accompa-
tronically nying the half-yearly return.
w.e.f. 1-10-2011.
1st Octo- 25th April ST-3A All assessees to whom A statement giving details of the differ-
ber to 31st provisional a s s e s s ence between the service tax deposit-
March Every assessee has ment has been granted and the service tax liable to be paid
submit the half- ed. for each month or quarter as the case
yearly return elec- may be in a memorandum accompa-
tronically nying the half-yearly return.
w.e.f. 1-10-2011.
Service Tax Return Preparer (STRP)

With effect from Finance Act, 2008, dated 10-5-2008 a scheme of Service Tax Return Preparer being introduced in the
service tax provisions.
A STRP shall assist the person or class of persons to prepare and furnish the return in such manner as may be specified
in the Scheme.
Service Tax Return Preparer (STRP) being an individual, who has authorized to act as a service tax return preparer
under the Scheme.
Preservation Period of Records and Documents
All records and documents concerning any taxable service, CENVAT transactions etc. must be preserved for a mini-
mum period of 5 years immediately after the financial year to which such records pertain (Rule 5(3) of Service Tax
Rules 1994.)
Revised Return
With effect from 1st March, 2008 (Rule 7B of the Service Tax Rules), an assessee is allowed to rectify mistakes and file
Revised Return within 90 days from the date of filing of the original return. Revised return after 90 days not allowed.
(w.e.f. 1.3.2007 to 29.2.2008 the time limit was 60 days).
This implies that Returns pertaining to the period prior to 1st March, 2007 can be revised without the time limit.
Example 60: X Ltd. filed the ST-3 return on 30th November 2016 for the period from 1st April 2016 to 30th September
2016. Subsequently on 1st February 2017, some mistakes were found in the ST-3 return which was originally submitted
on 30th November 2016. Service tax authorities rejected the revised return filed by the X Ltd. on 5th February, 2017,
since the revised return was filed by the assessee after 90 days from the due date of filing the return (i.e. 25th October,
2016). Is the action of the department correct?
Answer: No, the department action is not sustainable in the eyes of law. As per Rule 7B of the Service Tax Rules, 1 994,
the time limit of 90 days for filing of revised return counts only from the date of filing of the original return and not from
the due date for filing of original return as contained in the Explanatory Notes. Therefore, X Ltd. can file revised return
by 5th February, 2016.

Service Tax
5.21 PENALTIES
Late fee (Penalty) in case of late filing of Form ST-3

Fee for Late filing of ST-3 (As per Rule 7C of Service Tax Rules, 1994)
If a person fails to furnish the ST-3 return within the due date [25th October and 25th April every year] he shall be liable
to pay late fee (penalty) is as follows:
Delay upto 15 days ` 500
Delay upto 30 days ` 1,000
Delay beyond 30 days ` 1,000 + ` 100 per day subject to a maximum of ` 20,000 (w.e.f. 8-4-2011 ` 2,000 enhanced to
` 20,000)
Late fee should be paid at the time of filling the return without waiting for any communication or notice from the De-
partment. However, filing of return cannot be refused for non-submission of evidence of payment of late fee along
with the Return.
Other Penalties
Sl. Types of penalty Penalty (prior to 8-4-2011) Penalty (w.e.f. 8-4-2011)
No.
i. Non-filing of Return Section Upto ` 5,000 Upto ` 10,000
77 of the Finance Act, 1994)
ii. Not obtaining registration ` 200 per day for every ` 200 per day for every day of default
(section 77 of the day of default or ` 5,000 or ` 10,000 whichever is higher, starting with
Finance Act, 1944) whichever is higher. the first day after the due date, till the date
of actual compliance;
iii. Non-maintenance of proper Upto ` 5,000 Upto ` 10,000
books of accounts (Section
iv. Non-appearance before ` 200 per day for every ` 200 per day for every day of default or
Officers on issue of summons day of default or ` 10,000 whichever is higher, starting
(Section 77 of the Finance ` 5,000 whichever is higher with the first day after the due date, till
Act, 1994) the date of actual compliance;
v. Failure to pay tax Upto ` 5,000 Upto ` 10,000
electronically when so
required to pay (Section
vi. Issuing incorrect invoice or Upto ` 5,000 Upto ` 10,000
not accounting invoices in
books (Section 77 of the
Finance Act, 1994)
vii. Section 78A Section 78A is being introduced, to make
Evasion of service tax, provision for imposition of penalty on
Isuance of invoice without director, manager, secretary or other officer
provision of service, of the company, who is in any manner
availment of Cenvat knowingly concerned with specified
Credit without recipt of contraventions.
service of goods, or Penalty upto ` 1 Lakh
Service tax collected
remaining overdue for
more than 6 months.

Sl. Types of penalty Penalty (prior to 8-4-2011) Penalty (w.e.f. 8-4-2011)
No.
viii. Fraud or suppression of acts A show cause notice has 100% of the service tax, where the true and
(Section 78 of the Finance been issued under Section complete details of the transactions are not
Act, 1994): 73(1A) of the Finance Act, recorded in the specified records. This penalty
Wrongful utilization of Cenvat 1994 by demanding Minimum cannot be waived. Penalty reduced to 15%
credit by reason of fraud, 100% of service tax. Maximum of tax, if tax, interest and reduced penalty also
collusion or any willful 200% of service tax. The paid within 30 days of receipt of notice.
mis-statement etc. with the penalty will be reduced to Penalty reduced to 25% of tax, if tax, interest
intent to evade the payment 25%, if tax, interest and and reduced penalty also paid within 30 days
of service tax, the provider penalty paid within 30 days of receipt of order. Penalty cannot exceed
of service shall be liable to from the date of receipt of 50% of service tax in case transactions
pay penalty in terms of the order of Central recorded in specified records between
provisions of Section 78 of Excise Officer. 08.04.2011 to 14.05.2015. Notices issued on or
the Finance Act, 1994. after 14.05.2015 or order passed on or after
14.05.2015, period of 30 days to be reckoned
from 14.05.2015.
ix. During the Department audit Omitted w.e.f 14.05.2015.
or verification of records of the
assessee, they found short
payment of service tax or
sometimes, the amount
erroneously refunded to the
assessee. If all such
transactions are completely
recoded in the specified
records (Section 73(4A) of the
Finance Act, 1994 w.e.f.
8-4-2011). This provision is
applicable to those assessees
who have no intention to
evade tax.
Clause (4B) inserted in Section 73 to prescribe time limit for determining the amount of Service Tax due in terms with
Show Cause Notice
A time limit has been prescribed for completing the adjudication process and determining Service Tax dues in terms
with Show Cause Notice issued under Section 73(1) of the Act. However, the proposed amendment comes in a rider
stating where it is possible to do so, which allows authorities to by-pass the time limit. The following time limit has been
prescribed for the adjudication process:
Sl. No. Period of Limitation Time Limit
1 Normal Period of Limitation i.e. up to 18 months 6 months from the date of notice
2 Extended Period of Limitation i.e. up to 5 years 12 months from the date of notice
5.22 ADJUDICATION & APPEALS
Adjudication
(i) Central Excise Officers have been empowered to adjudicate in following
(a) Demand of service tax and its recovery - section 73.
(b) Rectification of mistake by amending own order - section 74.
(c) Imposition of penalty - section 83A
(d) Refund of service tax - section 11B of Central Excise Act made applicable to Service Tax.

Service Tax
(ii) Time limit for issue of show cause notice - If it is found that assessee has paid less tax, department will issue a
show cause notice cum demand.
If any service tax is not levied or not paid or short levied or short paid or erroneously refunded, Central Excise
Officer shall issue a show cause notice for demand can be made within 18 months from relevant date [section
73(1)].
If such short payment etc. was by reason of fraud, collusion, wilful mis-statement, suppression of facts or contra-
vention of any provision of Finance Act, 1994 or rules, show cause notice can be issued within five years [proviso
to section 73(1)]. If notice is issued under 5 years, the demand for normal period would not Service S.C. Deci-
sion in the case of Alcobex Metals. After considering the representation, Central Excise Officer will determine
the service tax payable. Such tax cannot be more than the amount specified in show cause notice. Thereupon,
the person shall pay the amount so determined [section 73(2)].
(iii) Voluntary Payment before receipt of show cause notice - Assessee may pay such tax on the basis of his own
ascertainment or on the basis of tax ascertained by Central Excise Officer, before issue of show cause notice.
After payment of tax, assessee should inform the Central Excise Officer in writing about such payment, and then
the central excise officer shall not issue any show cause notice under section 73(1) in respect of service tax so
paid [section 73(3)].
(iv) Rectification - The Central Excise Officer who has passed order (of assessment or demand or penalty) can
rectify any mistake apparent from the record, within two years of the date in which the order was passed. The
mistake must be apparent from the records.
(v) Revision - The Commissioner of Central Excise can revise the orders passed by adjudicating authority subordi-
nate to him. The revision order can be passed any time within two years of the original order, but not afterwards.
No revision can be made if appeal against such order is pending with Commissioner (Appeals) [section 84].
Appeal against the order of Commissioner (after revision) lies with CESTAT under section 86.
In case of assessee appeal also, appellate tribunal can admit an appeal or permit the filing of memorandum
of cross objections after the expiry of the relevant period.
APPEALS
(i) Appeal to Commissioner (Appeals) - Appeal to Commissioner (Appeals) can be made against order of any
Central Excise Officer subordinate to Commissioner in respect of demand, interest or penalty or denial of refund
of service tax. Appeal should be in prescribed form and duly verified. Appeal must be filed within three months
from date of receipt of order. Delay upto three months can be condoned by Commissioner (Appeals). The
procedures and powers will be similar to those under Central Excise. [section 85 of Finance Act, 1994].
(ii) Appeal to Tribunal - Appeal to CESTAT (Tribunal) can be made against order of Commissioner passed by him
under section 73, 83A or order of Commissioner (Appeals) passed by him under section 85 [order in appeal
from order of AC/DC] by assessee or the department. Appeal has to be filed within three months from date of
receipt of order by assessee, Board or Commissioner as the case may be. [section 86 of Finance Act, 1994].
Tribunal can condone the delay in filing appeal on showing sufficient cause. Appeal has to be accompanied
with prescribed fees, if appeal is by the assessee. Tribunal is final fact finding authority.
Where an order, relating to a service which is exported, has been passed under section 85 and the matter re-
lates to grant of rebate of service tax on input services, or rebate of duty paid on inputs, used in providing such
service, such order shall be dealt with in accordance with the provisions of section 35EE of the Central Excise
Act.
(iii) Appeals to HC/SC If issue involves classification or valuation, appeal lies with Supreme Court. If issue does not
involve classification or valuation dispute, appeal lies with High Court only on substantial question of law.
PRACTICAL PROBLEMS
Point of Taxation:
Example 61: Sun Academy Pvt. Ltd., is providing commercial training services since, 2009. During the year 2015-16
service tax liability arises to pay was ` 12,00,000. However, service tax paid was paid ` 8 lacs after adjustment of CEN-
VAT CREDIT of ` 4 lacs. In the month of April 2016, 60 students were joined for pursing Point of Taxation Rules (from 1st

April16 to 10th April16). Fee per student is ` 3,000 (inclusive of Service tax) paid by all students the month of June 2016.
Service Tax @15% paid on 5th July 2016. Calculate the following:
(a) Point of Taxation
(b) Due Date
(c) Service Tax liability
(d) Interest if any
Answer:
(a) Point of taxation = April 2015
(b) Due date = 6th May 2015
(c) Service tax = ` 23,478 (i.e. ` 3,000 x 60 x 15/115)
(d) Interest = ` 695 (i.e. ` 23,478 x 18/100 x 60/365)
Example 62: State briefly whether the following service under the Finance Act, 1994 relating to service tax are tax-
able service.
(a) Service provided in the State of Rajasthan by a person having a place of business in the State of Jammu and
Kashmir.
(b) Service provided from India for use outside India
(c) Service provided from outside India and received in India by Individual otherwise than purpose of use in busi-
ness or commerce.
(d) Service provided to an Export Oriented Unit
Answer:
(a) These are taxable services. Services rendered within India (except in the state of Jammu and Kashmir) are
come under the service tax net, provided these services are taxable services.
(b) These services can be considered as export of services, which are exempted from the service tax liability.
(c) Services in the nature of import are taxable if these are imported for the purpose of business or commerce.
Services imported for the purpose of personal use by individuals are exempted from service tax.
(d) Service provided to export oriented undertaking is liable to service tax. Service rendered to EOU or supplies of
services by EOU in domestic market is not presently exempt from service tax.
Example 63: Answer the following with reference to the Finance Act, 1994 as amended relating to applicability of
service tax:
Service provided by educational institutions like IIMs by charging a fee from prospective employers like corporate
houses regarding recruiting candidates through campus interviews.
Answer:
Manpower recruitment or supply agency is defined as any person engaged in providing any service, directly or indi-
rectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to a client.
Educational institutes like IITs, IIMs etc. fall within the above definition. Thus, service tax is liable to be paid on services
provided by such institutes in relation to campus recruitment.
Example 64: Answer the following:
(a) A particular service has been brought into service tax net with effect from 1-5-2016. Ms.Gouri has provided this
service on 10-05-2016 and invoice has been issued on the same date. The payment for the same was received
on 30-4-2016. Is service tax payable on the same?
(b) Mr. Saravanan has collected ` 15,000 as service tax from a client mistakenly, even though no service tax is
chargeable for such service. Should the amount so collected be remitted to the credit of the Central Govern-
ment?

Service Tax
(c) Briefly explain the nature of the service tax

Answer:
(a) As per Rule 5(b) of the Point of Taxation Rules, 2011, no tax shall be payable if the payment has been received
before the service becomes taxable and invoice has been issued within the period referred to in rule 4A of the
Service Tax Rules, 1994.
As per rule 4A of the Service Tax Rules, 1994, an invoice is required to be issued within 30 days from the date of
completion of service or from the date of receipt of any payment of taxable service, whichever is earlier.
In the given case Ms.Gouri is not liable to pay service tax.
(b) Section 73A of the Finance Act, 1994 casts an obligation on every person who has collected service tax from
any recipient of service in any manner as service tax, to remit the same to the credit of the Central Govern-
ment. On account of this provision, where any person has collected any amount, which is not required to be
collected from any other person, in any manner as representing service tax, he should also immediately pay the
amount so collected to the credit of the Central Government.
Hence, Mr. Saravanan has to remit the service tax collected by him on the non taxable services to the credit of
Central Government of India.
(c) Section 70 of the Finance Act, 1994 enjoins that every person liable to pay service tax shall himself assess the tax
due on the services provided by him and shall furnish a return to the Superintendent of Central Excise.
Example 65: Mr.Ranveer rendered taxable services to a client. A bill of ` 40,000 were raised on 29-4-2016. ` 15,000
were received from the client on 1-5-2016 and the balance on 23-5-2016. No service tax was separately charged in
the bill.
(a) Is Ms. P liable to pay service tax, even though the same has not been charged by her?
(b) If so, what is the value of taxable services and the service tax?
(c) Due date of payment of service tax? Note: previous year turnover is ` 25 lakhs
Answer:
(a) Mr. Ranveer is liable to pay service tax even though he has not collected the service tax from his client, by con-
sidering the service tax is inclusive in the value of the bill. The point of taxation is 29-4-2016. It means she is liable
to pay service tax for the month of April, 2016.
(b) Service tax liability is as follows:
Value of taxable services = ` 40,000 x 100/115 = ` 34,783
Service tax liability = ` 34,783 x 15/100 = ` 5,217
(c) Due date of payment of service tax is 6th July 2016.
Example 66: Mrs. Malini is a practicing Cost Accountant, has rendered freely, a service to a client which is taxable, but
has not charged or received any fee from a client. Is service tax payable on such free services?
Answer:
Service tax is payable when services are provided for consideration as per Section 67 of the Finance Act, 1994. More-
over the charging section 66 provides that service tax is chargeable on the value of taxable service. Hence, if the
value is Free no service tax is payable even though the service may be taxable. However, this principle applies only
when there is really a free service and not when its cost is recovered through different means.
Example 67: Mr. Batra, a Management Consultant raised a bill of `172500 (including service tax @15%) on his
client for consulting services rendered by him in the month of June, 2016. A partial payment of ` 72,500 was received
by Mr. Batra in the month of September 2016 as full and final settlement. Compute the service tax amount payable by
Mr. Batra and the due date by which service tax can be deposited. Previous year taxable services are ` 87 lakhs.
Answer:
Service tax is payable only on the basis of point of taxation rules. Hence, service tax is required to be paid on the entire
bill value. The service tax is required to be paid on the value of service which is actually billed in the month of June
2016.

Value of taxable services (`1,72,500 x 100/115) = ` 1,50,000
Service tax payable on ` 1,50,000 @ 15% = ` 22,500

Total =
` 1,72,500

Therefore, service tax payable to the government ` 22,500.
Due dates of payment of service tax is quarterly for an individual. Therefore, due date is on or before 6th July 2016.
Tax Dedcuted at Source:
Example 68: CIT Ltd. provided Information Technology & Software services to Japan Ltd. in the month of July 2016. A
bill inclusive of Service Tax issued in the month of July 2016. Japan Ltd paid ` 45,00,00 (after deducting TDS under sec
194J of the Income Tax Act, 1961 @10% towards TDS) in the month of August, 2016. You are required to calculate:
(a) Service tax liability
(b) Due date of payment of service tax.
Answer: (Amount in ` )
(a) Net payment received = 45,00,000 = 90%
TDS @ 10% = 5,00,000 = 10%

Total bill value 50,00,000

Service tax liability = ` [50,00,00 x 15 x100] 7,50,000
(b) Due date of payment of service tax in case of electronically payment through interest banking is on or before
6th of August 2016.
Due date of payment of service tax in case of other than e-payment is on or before 5th August 2016.
Interest
Example 69: Mrs. Jamuna practicing Chartered Accountant received ` 40,00,000 in the June 2016. She paid service
tax on 26th July 2016 by way of e-payment. Gross receipts in the year 2015-16 were ` Rs.50 lakhs.
You are required to calculate Interest on delay payment of service tax.
Answer :
Service tax @15% on ` 40,00,000 = ` 6,00,000.
Due date of payment of service tax- 6th July, 2016.
No. of days delay = 20 days
Interest = ` 4,932 (i.e.` 6,00,000 x 15/100 x 20/365)
Example 70: What is the rate of interest for late filing of return (i.e. V Form ST-3)?
Answer :
No interest will be levied in case of late filing of return Form ST-3.
Interest for Delayed Payment of Service Tax.
Example 71: JCT Ltd. is liable to pay service tax of ` 2,50,000 on or before 6th July 2016 but he paid it on 16th July 2016.
What is the penalty for non-payment or delayed payment of service tax? Can this penalty be waived or reduced?
Answer:
(1) Where service tax has not been levied or paid, or has been short-levied or short-paid, or erroneously refunded,
for any reason, other than the reason of fraud or collusion or wilful mis-statement or suppression of facts or con-
travention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade pay-

Service Tax
ment of service tax, the person who has been served notice under sub-section (1) of section 73 shall, in addition
the service tax and interest specified in the notice, be also liable to pay a penalty not exceeding ten per cent
of the amount of such service tax:
Provided that where service tax and interest is paid within a period of thirty days of
(i) the date of service of notice under sub-section (1) of section 73, no penalty shall be payable and pro-
ceedings in respect of such service tax and interest shall be deemed to have been concluded;
(ii) the date of receipt of the order of the Central Excise Officer determining the amount of service tax under
sub-section (2) of section 73, the penalty payable shall be twenty-five per cent of the penalty imposed in
that order, only if such reduced penalty is also paid within such period.
(2) Where the amount of penalty is increased by the Commissioner (Appeals), the Appellate Tribunal or the court,
as the case may be, over the above the amount as determined under sub-section (2) of section 73, the time
within which the reduced penalty is payable under clause (ii) of the proviso to sub-section (1) in relation to such
increased amount of penalty shall be counted from the date of the order of the Commissioner (Appeals), the
Appellate Tribunal or the court, as the case may be.]
Penalty for Late Filing of Return:
Example 72: Paul Ltd. filed its service tax returns for the half years ending on September 2015 and March 2016 on 25-
11-2015 and 31-7-2016. The two half yearly returns show a service tax liability of ` 4,00,000 and ` 2,00,000 respectively.
Is any late fee/fine payable by Paul Ltd.? If yes, what is the quantum of such fee in both the cases?
Will your answer be different if Paul Ltd. files a nil return for the half year ending on September 2015?
Answer:
Form ST-3 half yearly due dates
25th October for the first half year ending 30th September
25th April for the second half year ending 31st March
Actual No. of days delay for the first half year return = 31 days
(Oct 6 days + Nov 25 days)
Therefore, penalty is ` 2,200
Actual No. of days delay for the 2nd half year return = 97 days
(April 5 days + May 31 days + June 30 days + July 31 days)
Upto 30 days of delay ` 1,000 plus ` 100 per day of delay subject to maximum of ` 20,000 (w.e.f. 8-4-
2011) Therefore, penalty is `15,400.
Penalty can be reduced or waived if the ST-3 return belongs to nil return.
Fill in the Blanks

(i) Registration of service tax is granted by Superintendent of central excise.
(ii) If Service Tax Return is filed late by one day, the late fee payable is ` 500.
(iii) Central Government can grant general or total exemption from Service Tax but it cannot grant with retrospec-
tive effect.
(iv) Service tax came into force from the year 1994.
(v) The effective rate of Service Tax at present is 15%.
(vi) For non-corporate assesses, e-fihing of service tax return is mandatory.
(vii) Cenvat Credit cannot (can/cannot) be utilized for payment of Service Tax in respect of services where the per-
son liable to pay tax is the Service Receiver.
(viii) A certificate of registration shall be issued in prescribed Form ST 2 under Service Tax laws within 7 (7/30) day of
the receipt of the application.

(ix) Erection of civil structure is (is / is not) taxable services.
(x) An out-door caterer is providing full and substantial meals. His invoice does not show breakup between value of
food and value of service. He is liable to pay service tax on 60% of the bill amount.

(1) MR. SMITH a consulting engineer, raised a bill of Rs.2,57,625 (Including Service Tax) on his client for consultancy
services rendered by him on January 15, 2016. If a partial payment of Rs.2,00,375 is received by Mr. Smith on
February 5, 2016, what would be the amount of Service Tax payable by him for the quarter ending March 31,
2016. Consider the rate of service tax @ 15%.
(A) ` 33,603
(B) ` 1,75,000
(C) ` 15,150
(D) Insufficient data
Ans. (A) ` 33,603

(i) Abatement of 30% is allowed from the gross amount charged in case of services provided in relation to chit, by
whatever named called.
Ans. False, abatement @ Nil % is allowed from the gross amount charged in case of services provided in relation to
chit, by whatever named called.
(ii) A service provider can opt for centralized registration under service tax even if he does not have any central-
ized billing system.
Ans. False. Where an assessee is providing a taxable service from more than one premises or offices and has a cen-
tralized billing systems or centralized accounting systems in respect of such service, and such centralized billing
systems or centralized accounting system are located in one or more premises or offices he may, at his option,
register such premises or office where such centralized billing systems or centralized accounting systems are
located.
(iii) Commission received by distributors for distribution of Mutual Fund units are not liable to Service Tax.
Ans. False, commission received by distributors for distribution of Mutual Fund units are liable to Service Tax, however,
tax is required to be paid by mutual fund house.
(iv) In case of delayed payment of service tax the assessee has to pay simple interest @13% for the period for which
the payment is delayed.
Ans. False. As per Sec.75, simple interest @ 15% (24% in specified case) is required to pay for the period for which the
payment of service tax is delayed.
(v) The Commissioner of Central Excise is empowered to review the service tax orders passed by the officers subor-
dinate to him and re-adjudicate it, in case he finds the order to be legally inappropriate.
Ans. False. The above power is withdrawn.
(vi) The person providing both taxable and non-taxable services and not maintaining separate books of accounts,
wishing to avail Cenvat credit is required to reverse 7% of the value of exempted services.
Ans. True. The person providing both taxable and non-taxable services and not maintaining separate books of ac-
counts, wishing to avail Cenvat credit is required to reverse 7% of the value of exempted services.
(vii) A service provider is required to file return in form ST-4 on quarterly basis within 15 days from close of quarter.
Ans. False. A service provider is required to file return in form ST-3 on half yearly basis within 25 days from the end of
half-year.
(viii) Service sector SEZs should have an area of 1000 hectares or more in order to be eligible for exemption.
Ans. False. Service Sector SEZs should have an area of 100 hectares or more (as per first proviso to rule 5(2)(a) of SEZ
Rules) in order to be eligible for exemption.
Service Tax
(ix) All assesses are now required to pay service tax electronically.
Ans. True. W.e.f. 01-10-2014, all assessee is required to pay service tax electronically.
(x) Service provider providing taxable service under brand name of others liable to pay service tax.
Ans. True. The taxable services provided by a person under a brand name or trade name, whether registered or not,
of another person; will not be eligible for exemption available to small service providers.
Short Questions & Answers

(i) Service tax cannot be imposed on a transaction which is covered entirely within powers of State Government.
Is it correct? State your view giving reasons.
Ans. Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law.
Schedule VII divides this subject into three categories-
List I. Union list (only Central Government has power of legislation)
List II. State list (only State Government has power of legislation)
List Ill. Concurrent list (both Central and State Government can pass legislation).
The Constitution provides for delineation of power to tax between the Centre and States. While the Centre is
empowered to tax services and goods upto the production stage, the States have the power to tax sale of
goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have
power to levy tax on the sale of goods.
(ii) A non-executive director of a company is receiving sitting fees and commission of rupees three lakhs from a
private limited company. Is service tax payable? Under which head ? Who is liable to pay service tax?
Ans. Service tax will be payable by the company on sitting fees paid to directors for attending meetings of Board
and Committees of Board, travelling expense and incidental expenses for attending meetings of Board and
their committees., commission or other remuneration paid, if any.
(iii) A service was provided on 15th Arpil, 2016. What would be point of taxation in each case, if invoice was raised
on (a) 15th April, 2016, (b) 14th May, 2016, (c) 30th June, 2016?
Ans. (a) 15th April, 2016; (b) 14th May, 2016 (c) 15th April, 2016
(iv) Which entry in Seventh Schedule to Constitution of India is relevant for purpose of Imposition of service tax?
Ans. The power to charge service tax vests with the Central Government. This authority is granted to the Central Gov-
ernment by Entry 92C (yet to be made effective) of the union list. However, currently, the service tax is collected
under the power of the Residuary Entry 97 of the Union List.
(v) Voyage organizes tours all over the world. They arrange a tour to Europe. Ms. Sarita, from Bengaluru partici-
pated in the tour. Ms. Sarita is of the view that no service tax is chargeable by the Tour Operator as the tour is
outside India. Is the contention of Ms. Sarita correct? State with reasons.
Ans. Since location of both service provider and service receiver is Taxable Territory (i.e., India), place of provision
of service is taxable territory (i.e., India) as per rule 8 of Place of Provisions of Service Rules. Hence, service tax will
be payable even if service is actually performed outside India.
(vi) Name two services covered under definition of continuous supply of service.
Ans. The following services have been notified as continuous supply of services by the Government:
(a) Telecommunication service
(b) Works contract service
(vii) What are the Constitutional provisions under which service tax is levied?
Ans. Service tax is levied under entry 97 of List I of Seventh Schedule to Constitution of India.
(viii) Determine point of taxation when date of completion of service is 10-6-2016, invoice was issued on 27-7-2016
and payment for service was received in advance on 30-5-2016.
Ans. 30-05-2016 as advance is received.

(ix) What are the fees payable to Government while applying for service tax registration?
Ans. Nil
(x) What is the rate of interest payable if there is delay in payment of service tax?
Ans. Interest rates on delayed payment of duty/tax across all indirect taxes are being rationalized and made uniform
at 15%, except in case of Service Tax collected but not deposited to the exchequer, in which case the rate of
interest will be 24% from the date on which the Service Tax payment became due.
In case of assessees, whose value of taxable services in the preceding year/years covered by the notice is less
than ` 60 Lakh, the rate of interest on delayed payment of Service Tax will be 12%.
(xi) A service provider charged excess service tax in his invoice dated 15-09-2015 by mistake. He paid the service
tax for month of September 2015 on 5.10.2015. He filed ST-3 return for the period April 2015 to September 2015
on 24.10.2015.
What is the last date for filing refund claim in respect of excess service tax paid by him?
Ans. As per sec. 11 B of the Central Excise Act (which is also applicable in case of service tax), refund claim should be
filed within 1 year from the date of payment. In the given case, excess payment has been made on 05- 10-2015.
Thus, refund should be claimed by 05-10-2016
(xii) Jeevan has entered into franchise agreement with a leading franchisor for providing service under the brand
name of franchisor. The details of business of Jeevan are as follows:
(I) Started business on 1.5.2016
(ii) Reached value of service provided 5 lakhs on 1.7.2016
(iii) Reached value of service provided 9 lakhs on 1.8.2016
(iv) Reached value of service provided Rs. 10 lakhs on 1.9.2016. Advise Jeevan when he should apply for regis-
tration under service tax.
Ans. Exemption is not available when service is provided under brand name of other person. Hence, application for
registration is to be made within 30 days i.e., before 31.05.2016.
(xiii) Sports Co. Ltd. filed half yearly service tax return on 24th April 2016. Later, during internal audit, it was discovered
that there was short payment of rupees one lakh. The mistake came to notice on 2nd July 2016: Advise Sports
Co. Ltd. about the course of action.
Ans. Sports Co. Ltd. should pay amount of service tax with interest and file revised return as revised return can be filed
within 90 days from the date of submission of the return under rule 7 of the Service Tax Rules, 1994
(xiv) A service provider is required to pay service tax for month of March, 2016 before 31.3.2016. He is not able to
correctly calculate service tax payable. Advise him course of action to be adopted to avoid interest liability.
Ans. The service provider can estimate his probable liability and pay the estimated liability with some additional
amount within 31.03.2016. Excess payment, if any, can be adjusted in subsequent months or quarters as per rule
6(4A) of Service Tax Rules.
(xv) whole-time director of a company is receiving salary of rupees twenty two lakhs from a private limited Com-
pany. Is service tax payable? If payable, who is liable to pay service tax?
Ans. When there is employer employee relation, the transaction is outside the definition of service itself, as per sec-
tion 65B(44) of Finance Act, 1994. Hence, no service tax is payable. Since, no service tax is payable, there is no
reverse charge.
(xvi) State the provisions regarding payment of service tax by service receiver in case of service of security agency.
Ans. In case of security service, if the service provider is an Individual, HUF, proprietary or partnership firm, AOP locat-
ed in taxable territory and service receiver is Business entity registered as body corporate located in the taxable
territory, service tax is payable by the service receiver under reverse charge mechanism. Similarly, if security
service is provided by CISF or Police, 100% service tax is payable by service receiver.
(xvii) When can a Central Excise Officer make best judgment assessment of service tax liability of a person?
Ans. As per sec. 72, if any person, liable to pay service tax
Service Tax
(a) fairs to furnish the return u/s 70;

(b) having made a return, fails to assess the tax in accordance with the provisions of this Chapter or rules
made there under, the Central Excise Officer, may require the person to produce such accounts, docu-
ments or other evidence as he may deem necessary and after taking into account all the relevant
material which is available or which he has gathered, shall by an order in writing, after giving the person
an opportunity of being heard, make the assessment of the value of taxable service to the best of his
judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of
such assessment
Note: For determination of POT in the cases where date of invoice or date of payment is not available, the C.EO.
(Central Excise Officer) can conduct best judgment assessment to determine the point of taxation
(xviii) An Indian company is required to pay ` 1,00,000 to a German company for technical knowhow. It deducted
` 10,000 as income tax at source and paid ` 90,000 to the German company. On what amount the Indian com-
pany will be liable to pay service tax under reverse charge?
Ans. Service tax is required to be computed on ` 1,00,000/-
(xix) Carry Transport Company provided goods transport service to JBT Pvt. Ltd. on 4.3.2015, and issued consignment
note showing freight amount of ` 1,00,000. JBT Pvt. Ltd. paid the freight amount to Carry Transport Company on
5.11.2015. Calculate service tax payable by Carry Transport Company. Service tax rate of 15%.
Ans. Carry Transport Company is not liable to pay service tax. JBT Pvt. Ltd. is liable to pay service tax under reverse
charge mechanism. The taxable value of service after abatement of 70% will be ` 30,000. Hence, service tax
payable will be 15% of ` 30,000 = ` 4,500.
(xx) A landlord had given his commercial property on rent. He issued invoice for rent charging service tax @ 15%.
The tenant stated that he is not liable to pay service tax in terms of rent agreement. The tenant paid only net
amount to landlord. The landlord did not deposit service tax with Government stating that he is not liable to pay
service tax as tenant has not paid service tax amount to him. He is only acting as collecting agent. Is his conten-
tion valid?
Ans. No, the landlord is liable even if the tenant does not pay service tax amount.
(xxi) Mr. Mahim was employed with Sodium Ltd. As per terms of the contract, he was required to give three months
notice before leaving job. However, Mr. Mahim requested for immediate release and offered to pay three
months salary of ` 6 lakhs in lieu of notice. The company accepted his offer and released him from employment.
Discuss implications relating to service tax.
Ans. Tolerating an act or a situation in return for provision of a service is a declared-service. Thus, Sodium Ltd. is liable
to pay service tax calculated as under: ` 6,00,000 x 15% / 115% = ` 78,261/-
(xxii) Sen and Sen, a firm of advocates provided service to Tyre Manufacturers Ltd. and issued invoice on 15.6.2015 for
`1,00,000. Tyre Manufacturers Ltd. paid the bill amount to Advocates on 20.12.2015. State person liable to pay
service tax, service tax payable and due date of payment of service tax. Assume service tax rate of 15%.
Ans. Service tax of `15,000/- is required to be paid by Tyre Manufacturers Ltd. under reverse charge mechanism. As
per Rule 7 of Point of Taxation Rules, where the payment is not made within a period of 3 months of the date
of invoice, the point of taxation shall be the date immediately following the said period of 3 months. Thus in the
instant case, point of taxation is 15-09-2015. The tax is required to be paid by 06-10-2015.
(xxiii) A recognized educational institution is providing bus services to its students for which separate charges are re-
covered. Is the school liable to pay service tax? State with reasons.
Ans. The service is a naturally bundled service of education. Hence, it is not taxable even if separate charge is
made.
(xxiv) An Indian company had placed purchase order for import of cement machinery from Germany. The contract
envisaged that two engineers from Germany will be deputed to India for erection, commissioning and com-
missioning of the equipment in India. The German company will charge separately for such services. Advise
whether the amount paid to foreign company will be considered as fees for technical services.
Ans. This transaction is directly linked with the installation of machinery supplied by the same manufacturer from out-
side India. It is not a separate transaction. Hence, this will not be considered as fees for technical services.

(xxv) A tax consultant in India provided consultancy service in India to a foreign diplomat in his personal capacity.
The consultancy was in respect of his personal income tax issues. Is the service taxable?
Ans. Services provided for the use of Embassy, etc. Notification No. 27/2012 ST dated 20-06-2012] All taxable services
provided by any person to the following is exempt from whole of the service tax:
(a) for the official use of a foreign diplomatic mission or consular post in India, or
(b) for personal use or for the use of the family members of diplomatic agents or career consular officers posted
therein
The exemption is available only if a certificate from the Ministry of External Affairs is obtained. Further, the notifi-
cation prescribed the procedure to claim such exemption.
Practical Problems
(i) Ascertain whether the refund of Service tax paid on input services can be claimed in the following case.
Total credit on Service Tax on input service ` 6,000/-
Total turnover of output services ` 30,000/-
Output services exported ` 20,000/-
Ans. Computation of refund of service tax
Particulars Amount
Total turnover of output services ` 30,000
Output services exported [A] ` 20,000
Total Turnover [B] ` 50,000
Total credit on Service Tax on input service [C] ` 6,000
A
C
B
Refund ` 2,400
(ii) T & L Ltd. have carried out following works which are liable to sales tax as it is works contract involving transfer of
property in goods during the course of performance of work. You are required to calculate value of the service
and the service tax payable from the following particulars:
(I) New construction of work ` 10 lakhs;
(II) Supply, erection and commissioning of new plant and machinery ` 300 lakhs;
(III) Repairs and maintenance of immovable property ` 6 lakhs.
These amounts are excluding service tax and Vat.
Ans. Computation of value of taxable service & tax thereon
Particulars Amount
New construction of work [`10 lakh x 40%] ` 4,00,000
Supply, erection and commissioning of new plant and machinery [`300 lakh x 40%] ` 1,20,00,000
Repairs and maintenance of immovable property [`6 lakh x 70%] ` 4,20,000
Value of taxable service ` 1,28,20,000
Service tax on above including cess [`1,28,20,000. x 15%] 19,23,000
(iii) A hotel provided following services:

Service Tax
(1) Hotel room with daily rent ` 1,500 (availed eligible Cenvat credit)
(2) Hotel room with daily rent ` 900 (did not avail Cenvat credit)
(3) Renting of motor vehicle with driver `1,800 (did not avail any Cenvat credit)
(4) Renting of hall for marriage with food ` 10,000 (availed eligible Cenvat credit) Calculate service tax
liability in each case.
Ans. Computation of taxable value and tax thereon
Particulars Amount `
Hotel room with daily rent of ` 1,500 1,500
Hotel room with daily rent of ` 900 Nil
Renting of motor vehicle with driver [` 1,800 * 40%] 720
Renting of hall for marriage with food 10,000
Value of taxable service 12,220
Service tax on above @ 15% 1,833
Abatement in respect of Hotel Room and renting of hall is not available as CENVAT credit has been availed.
(iv) Mr. Hiyastab, a Cost Accountant, has provided following services during April 2015 to March 2016
(1) Cost Audit fees received from Government companies ` 11 lakhs. (2) Stock audit fees received from Banks `
7 lakhs, (3) Consultancy services provided to UN Organisation ` 8 lakhs, (4) Cost audit fees received from
private companies ` 5 lakhs, (5) Fees for appearing before CESTAT (Tribunal) ` 9 lakhs. He had availed
input services on which the service providers had charged service tax of ` 1 lakh. These input services are
common to all the services provided by him. Calculate the net amount of service tax payable by Mr.
Hiyastab, by considering service tax rate @ 15%.
Ans. Since common input services has been used for both exempted services and taxable services, liability of Mr.
Hiyastab are as under:
(a) If Mr. Hiyastab do not files declaration under Rule 6(3)(i) of CENVAT Credit Rules
Computation of taxable value of service tax and service tax payable.
Cost Audit fees received from Government companies 11,00,000
Stock audit fees received from Banks 7,00,000
Consultancy services provided to UN Organisation Exempt
Cost audit fees received from private companies 5,00,000
Fees for appearing before CESTAT (Tribunal) 9,00,000
Value of Taxable Service 32,00,000
Tax on above [` 32,00,000 x 15%] 4,80,000
Less: CENVAT Credit 1,00,000
3,80,000
Add: Amount @ 7% on ` 8,00,000 [Exempted service] under Rule 6(3)] 56,000
Service Tax Payable 4,36,000
(b) If Mr. Hiyastab files declaration under Rule 6(3A)(a) of CENVAT Credit Rules,

computation of taxable value of service tax and service tax payable will be as under:
Cost Audit fees received from Government companies 11,00,000
Stock audit fees received from Banks 7,00,000
Consultancy services provided to UN Organisation Exempt
Cost audit fees received from private companies 5,00,000
Fees for appearing before CESTAT (Tribunal) 9,00,000
Value of Taxable Service 32,00,000
Tax on above [ ` 32,00,000 x 15%] 4,80,000
Less: CENVAT Credit 1,00,000
3,80,000
Add: Amount [` 1,00,000 x 8,00,000 / ` 40,00,000] 20,000
Service Tax Payable 4,00,000
(v) A consulting engineer provided following services in a month
(1) Free Professional advice to his friend (normal charges for such service would be ` 10,000],
(2) Computer software services ` 10 lakhs
(3) Consultancy Services to Government of Gujarat Rs.8 lakhs. Service tax was charged separately, wherever
applicable. He has paid ` 50,000 as cess under Section 3 of the Research and Development Cess Act,
1986.
What is the amount of service tax payable by him? Service tax rate of 15%.
Ans. Computation of service tax
Free professional advice Not taxable
Computer software service 10,00,000
Consultancy service , 8,00,000
Value of Taxable Service. 18,00,000
Tax on above @ 15% 2,70,000
Less: R & D Cess 50,000
Service tax payable 2,20,000
(vi) A contractor provided service of erection and commissioning to John and Michael Pvt. Ltd., without any mate-
rial. The contractor had charged service tax in his invoice. The company paid ` 26,00,000 to the contractor after
deducting income tax (TDS of income tax) @ 10% under section 194 J of Income Tax Act in full settlement of Bill.
Find out the total bill amount of the contractor, assuming service tax rate is 14%. Ignore cess
Ans. Assuming Value of taxable service is X.
TDS is required to be deducted on the value of invoice excluding service tax. Thus, TDS is 0.10X Further, service
tax is 0.15X
Finally, X + 0.15X 0.10X = ` 26,00,000
X = ` 24,76,190
Value of taxable service = ` 24,76,190
Service tax on above @ 15% = ` 3,71,429
Total Bill = ` 28,47,619
Central Sales Tax Act, 1956
Study Note - 6
CENTRAL SALES TAX ACT, 1956

6.1 Introduction
6.2 Constitutional Provisions & Nexus Theory
6.3 Principles & Objects of CST Act, 1956
6.4 Definition (Section 2)
6.5 Sale or Purchase in the course of Interstate Sale (Section 3)
6.6 Sale or Purchase outside a State (Section 4)
6.7 Sale in the course of Export/Import (Section 5)
6.8 Person liable to pay CST [Section 6(1) & 6(1A)]
6.9 Exemption in respect of Subsequent Sale [Sec 6(2)]
6.10 Taxability of Transfer of Goods made otherwise than by way of Sale (Sec 6A)
6.11 Registration of Dealer
6.12 Rates of Tax in the course of Inter-state Trade or Commerce [Section 8(1) & 8(2)]
6.13 Purchase of Goods by a Registered Dealer [Section 8(3)]
6.14 Furnishing of Declaration [Section 8(4)]
6.15 Power to Exempt or Impose Tax at Concessional Rates [Section 8(5)]
6.16 Sale for Units located in Special Economic Zone [Section 8(6)]
6.17 Determination of Taxable Turnover (Section 8A)
6.18 Levy & Collection of Tax (Section 9)
6.19 Penal Provisions under CST Act (Section 10)
6.20 Imposition of Penalty in Lieu of Prosecution (Section 10A)
6.21 Cognizance of Offences (Section 11 & 12)
6.22 Goods of Special Importance (Section 14)
6.23 Liability of Liquidator of Company in Liquidation (Section 17)
6.24 Liability of Directors of Private Company in Liquidation (Section 18)
6.25 Central Sales Tax Appellate Authority (Section 19)
6.26 Appeals (Section 20)
6.27 Procedure on Receipt of Appeal (Section 21)
6.28 Powers of the CST Appellate Authority (Section 22 & 23)
6.29 Authority for Advance Rulings (Section 24)
6.30 Transfer of Pending Proceedings (Section 25)
6.31 Applicability of Order Passed (Section 26)
6.32 Forms under CST
6.1 INTRODUCTION
i. Central Sales Tax is an indirect tax which is levied by the Central Government.
ii. In this case, the taxable event is sale of goods inter-state.
iii. CST applies to the whole of India including the state of Jammu & Kashmir.
iv. CST is payable in the state in which the movement of goods commences.
v. Though it is called CST, it is actually assessed, collected & administered by the local (i.e. State) sales tax authorities
(namely Commercial Tax Department of the State) only.
vi. Also, the tax collected under CST is actually retained by the state (in which it is collected). It means CST is the
revenue of the State Government.

Seller is liable to pay CST on interstate sale to the State Government Commercial Tax Department where he has the
place of business.
6.2 CONSTITUTIONAL PROVISIONS & NEXUS THEORY

(A) Constitutional Provisions
i. The power to levy tax is given through the constitution of India. (Entry No.92A and 92B of List I, called the Union
List, in the Seventh Schedule to the Constitution of India, as per Article 246(1).
ii. Article 265 of the Constitution of India states that no tax shall be levied or collected except by authority of
law.
iii. Article 269 (1)(G) empowers the Central Government to levy taxes on sale or purchase of goods other than
newspapers, which takes place in the course of inter-state trade or commerce. (Entry No.92A and 92B)
iv. Article 269(2) assigns the levy of such tax to the States.
v. Article 269(3) empowers the Parliament to formulate principles for determining when a sale or purchase takes
place in the course of interstate trade or commerce.
vi. Article 286 prohibits the States to levy tax on transactions which are covered by the CST Act.
(B) Nexus Theory
Sales tax is levied on the transaction of sale of goods. A sale of goods has various elements such as goods, agree-
ment to sell, transfer of property, valuable consideration, seller, buyer etc.
It is possible that each such element of sale may be distributed over more than one state.
For e.g. : the seller is in one state, the buyer is in another state, transfer takes place in the third state, consideration
may pass in the fourth state etc.
Earlier, each such state tried to subject a single sale transaction to its own sales tax under the Nexus Doctrine.
Nexus means connection or link.
Under the guise of having a territorial nexus each state brought a single sale transaction to its own sales tax.
This consequently resulted in the same sale transaction being subject to multiple taxation.
To put an end to this unfair multiple taxation on a single sale transaction, Article 286 of the Constitution of India
was amended.
Article 286 provides that no law of a State shall impose, or authorize the imposition, of a tax on the sale or pur-
chase of goods where such sale or purchase takes place
(a) Outside the State, or
(b) In the course of the import of the goods into, or export out of, the territory of India.
6.3 PRINCIPLES & OBJECTS OF CST ACT, 1956
(A) Principles of Central Sales Tax Act

Entry 92 (a) of the List-I (Union List) to the Seventh Schedule of the Constitution of India empowers the
Union Government to levy tax on the sale or purchase of goods, which takes place in the inter-state Trade or Com-
merce. Accordingly, the Central Sales Tax Act was enacted.
(B) Objective of the CST Act:
The objects of the Central Sales Tax Act, 1956 as given in the Preamble of the Act are as follows:
i. To formulate principles for determining when a sale or purchase of goods takes place:
(a) In the course of interstate trade or commerce (Sec 3)
(b) Outside a state (Sec 4)

(c) In the course of import into or export from India (Sec 5).
ii. To provide for the levy, collection and distribution of taxes on the sale of goods in the course of interstate trade
or commerce (Sec 9).
iii. To declare certain goods to be of special importance in inter-state trade or commerce (Sec 14).
iv. To specify the restrictions and conditions on the State laws imposing taxes on the sale or purchase of such goods
of special importance (Sec 15).
v. To provide for collection of taxes from companies under liquidation (Sec 16 - 18).
6.4 DEFINITION (SECTION 2)
1. Sec 2(a) -Appropriate State means:

(a) in relation to a dealer who has one or more places of business situated in the same state, that state.
(b) In relation to a dealer who has places of business situated in different states, every such state with respect to
the place or places of business situated within its territory.
Significance of Appropriate State.
i. Administration, levy and collection of tax have been delegated to Appropriate State (Sec 9).
ii. Registration should be made with the authorities of the Appropriate State.
iii. Monthly returns, appeals, reviews, references, refunds and compounding of penalties are to be dealt with by
the Appropriate State.
iv. Appropriate state is equally significant in the application of :
(a) Sec 8(2) (rate of tax on sales not covered by C Form);
(b) Sec 8(1) and Sec 8(2)(c) (extension of tax concessions on intra state sales to inter-state sales) and
(c) Sec 9(2A) (offences under General Sales Tax Acts are offences under CST Act too in the respective states).
2. Sec 2(aa) -Business includes:
(a) Any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or
manufacture,
i. whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to
make gain or profit and
ii. whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure or concern;
(b) Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adven-
ture or concern.
Analysis of the definition:
i. The meaning of business is significant since dealer u/s 2(b) is a person who carries on the business of buying, sell-
ing, supplying or distributing goods.
ii. The definition of business is inclusive and not exhaustive.
iii. For determining whether a transaction is in the nature of business, frequency regularity and volume of such trans-
action has to be looked into.
iv. It is not necessary that the business is carried on with a profit motive. Even an activity suffering a loss may be
called a business.
v. Business may be legal or illegal. It may be carried on regularly or otherwise.
vi. If the main activity of a dealer is business under clause (a) above - only then incidental or ancillary activities under
clause (b) above will also be business.
Example 1: (a) Temples sell prasadam which is an ancillary activity. However, the main activity of temples is not busi-
ness. Hence, sale of prasadams cannot be taxed. (Tirumala Tirupathi Devasthanam Case).
(b) The sale of assets by bank for realisation of loans (an ancillary activity) cannot be taxed as the main activity of
bank is not business (trade, commerce, manufacture etc.) (Canara Bank Case).
3. Sec 2(ab) - Crossing the Customs Frontiers of India means crossing the limits of the area of a customs station in
which imported goods or export goods are ordinarily kept before clearance by customs authorities.
Customs station means a customs port, customs airport or a land customs station as defined under the Customs Act,
1962.
4. Sec 2(b) - Dealer means any person
(i) who carries on (whether regularly or otherwise), the business of
(ii) buying, selling, supplying or distributing goods, directly or indirectly,
(iii) for cash or for deferred payment, or for commission, remuneration or other valuable consideration.
Dealer includes the following :
(a) A Local Authority, a Body Corporate, a Company, any Co-operative Society or other Society, Club, Firm, HUF or
Other Association of Persons which carries on such business.
(b) A Factor, Broker, Commission Agent, Del-credre Agent, or any other Mercantile Agent, by whatever name called,
and whether of the same description as herein before mentioned or not, who carries on the business of buying,
selling, supplying or distributing, goods belonging to any principal whether disclosed or not, and
(c) An auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether
disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a
nominee of the principal.
5. Deemed Dealers
Explanation 1 : Every person who acts as an agent, in any State, of a dealer residing outside that state and buys, sells,
supplies, or distributes, goods in the State or acts on behalf of such dealers as
(a) A Mercantile Agent as defined in the Sale of Goods Act, 1930, or
(b) An Agent for handling of goods or documents of title relating to goods, or
(c) An agent for the collection or the payment of the sale price of goods or as a guarantor for such collection or
payment, and every local branch or office in a state of a firm registered outside that State or a Company or
other Body Corporate, the principal office or headquarters whereof is outside that state, shall be deemed to be
a dealer for the purposes of this Act.
Explanation 2: A Government which, whether or not the course of business buys, sells, supplies or distributes goods,
directly or otherwise, for cash or for deferred payment or for commission, remuneration or other valuable consider-
ation, shall except in relation to any sale, supply or distribution of surplus, un-serviceable or old stores or materials or
waste products or obsolete or discarded machinery or parts or accessories thereof, be deemed to be a dealer for the
purposes of the CST Act.
Example 2: Central Government can become a dealer, but the State Government cannot - is the statement correct?
Give reasons.
Answer:
(i) The statement is not correct. According to Explanation 2 under Sec 2(b), a Government which, whether or not
the course of business buys, sells, supplies or distributes goodsshall.. be deemed to be a dealer for the pur-
poses of CST Act,
(ii) The word used is Government and not Central Government,
(iii) No distinction is sought to be made between Central Government and State Government,
(iv) Hence every government, be it Central or State, buying / selling goods will be deemed to be a dealer.
6. Sec 2(c) - Declared Goods means goods declared under Section 14 to be of special importance in Interstate
Trade or Commerce.
7. Sec 2(d) - Goods includes all materials, articles, commodities and all other kinds of movable property, but does not
include newspapers, actionable claims, stocks, shares & securities.
Analysis of definition:
The definition of Goods is inclusive definition. It does not bring out the essential characteristics of goods, but declares
that all materials, articles commodities and all other kinds of movable property are goods and excludes some speci-
fied items. Article 366(12) of the Constitution of India, defines the term Goods to include all materials, commodities
and articles. But this definition is very wide, when compared with the definition of goods under the CST Act.
Held to be Goods Held not to be Goods
Electricity and electric meters Labour
Animals or Birds in captivity and livestock Money (Cash/Currency/Cheque/DD)
Copyrights, Branded software programs Oil Tanker embedded in earth
of Floppies or Discs Claim for loss or damages
Lottery tickets, incomplete films, steam etc.
Goods include all Movable Property :
(i) The immovable property is excluded from the definition of Goods. Immovable property includes land, benefits
arising out of land and things attached to earth or permanently fastened to anything that is attached to the
earth.
(ii) However, goods include standing crop, grass and things attached to and forming part of land, which is agreed
to be severed before sale or under contract of sale. But standing trees are not goods and not taxable, unless
timber is identified, contract is unconditional and the timber is in deliverable state.
(iii) The securities like shares, debentures, stocks or money certificates are not goods and hence not taxable.
Example 3: Sushila sells his land along with the standing crops and trees for ` 35 lakhs. Sales tax officer wants to assess
for sales tax the value of standing crops and trees. Comment.
Answer:
(i) What is sold is land along with standing crops and trees.
(ii) The sale does not pertain to the latter alone in which case they are uprooted and removed. Consequently, they
become goods.
(iii) In the instant case, the standing crops and trees are immovable.
(iv) They are not goods and hence do not attract sales tax.
Example 4: Are sale of bundles of old newspapers as waste papers exempt from CST?
Answer:
As per section 2(d), goods do not include news paper.
In Sait Rikhaji Furtarnal Vs State of AP, the Supreme Court held that when old newspapers are sold as newspapers, they
are only in the character of newspapers and they are not goods.
However, when the newspapers are sold as waste papers, they are not newspapers and hence they are goods.
Therefore, sale of bundles of old newspapers as waste papers is taxable. (The Hindu vs. State of Tamil Nadu)
8. Sec 2(dd) -Place of Business includes:
(a) In any case, where a dealer carries on business through an agent (by whatever name called), the place of busi-
ness of such agent;
(b) A warehouse, godown or other place where a dealer stores his goods; and
(c) A place where a dealer keeps his books of account.
Significance of Place of Business
(i) The Place of Business has significance in the context of registration of dealers for Sec 7, 8 & 9 of the CST Act,
1956.
(ii) A dealer having a place of business in more than one state - has to get himself registered under each state.
(iii) If a dealer has different places of business in one state, then he can apply for registration through a single ap-
plication for that state.
9. Sec 2(g) - Sale means any transfer of property in goods by one person to another for cash or for deferred payment
or for any other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge
on goods.
10. Deemed Sale:
Pursuant to amendment of Article 366 of the Constitution, the following deemed transactions are also covered:
i. A transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or
other valuable consideration;
ii. A transfer of property in goods (whether as goods or in some other form) involved in the execution of a Works
Contract;
iii. A delivery of goods on Hire-Purchase or any system of payment by installments;
iv. A 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;
v. A supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred
payment or other valuable consideration;
vi. A supply, by way of or as part of any service of goods, being food or any other article for human consumption or
any drink (whether or not intoxication), where such supply or service is for cash, deferred payment or other valu-
able consideration.
Essential ingredients of a sale:
i. There must be two parties to the contract of sale (i.e.) the buyer & the seller.
ii. There must be valid consent of both the above parties.
iii. There must be an actual transfer of property in goods (i.e. agreement to sell is not a sale).
iv. There must be a consideration in cash or in deferred payment or any other valuable consideration in money or
moneys worth.
v. Sale includes deemed sales.
vi. Sale does not include a mortgage or hypothecation of or a charge or pledge on goods.
Example 5: Is transfer of property in goods without consideration chargeable to CST?
Answer:
Sale u/s 2(g) means transfer of property for cash or deferred payment or for any other valuable consideration. Where
there is transfer of property in goods without consideration, it does not amount to sale within the meaning of the defini-
tion under the act and therefore CST is not attracted.
Example 6: Is transfer by way of mortgage chargeable to CST?
Answer:
The definition of sale u/s 2(g) specifically excluded mortgage, hypothecation of goods, charge or pledge on goods.
Hence, CST cannot be charged when there is transfer by way or mortgage.
11. Sec 2(h) -Sale price means the amount payable to a dealer as consideration for the sale of any goods, less, any
sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum
charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof, other
than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged.
Inclusions in Sale Price:
i. Central Sales Tax - whether or not shown separately in invoice (then back calculations are made).
ii. Excise Duty- the excise duty payable is includible in Sale Price. Hindustan Sugar Mills vs. State of Rajasthan(1979);
Ramco Cement Distribution Co.(P) Ltd. V. State of Tamilnadu Sales tax is also payable on excise duty whether or

not shown separately in invoice and even if paid directly by purchaser. However, this is so only when liability to
pay duty is on seller.-McDowell and Co.Ltd v. CTO.
Excise duty is a part of turnover, even in that case, the duty was payable by the purchaser, as primary liability to
pay duty is of the manufacturer-Mohan Breweries & Distilleries Ltd v.CTO(1997), State of Kerala V.MRF(1997)-the
judgementjudgment was in case of cess payable.
iii. Packing material and packing charges - sales tax is leviable on packing material as well as packing charges (i.e.
labour charges for packing goods). Sales tax is leviable on packing charges, even if shown separately-CST v. Rai
Bharat Das (1988); Ramco Cement Distribution Co .(P) Ltd. V. State of Tamilnadu; Dalmia Cement (Bharat)Ltd. V.
State of Tamilnadu(1991). Cost of packing material is includible in sale price-HPCL v .State of Kerala(1993).
iv. Bonus discount or incentive bonus- for additional sales affected by the distributor/dealer.
v. Insurance charges- if the goods are insured by the seller.
vi. Freight and delivery charges incidental to sale only are deductible- if the goods are sold from depot, trans-
port charges from factory to the depot cannot be allowed as deduction-Dyer Meakin Breweries Ltd.V. State of
Kerala(1970).
vii. Design charges- in case of goods includible if charged separately in respect of goods manufactured as per
design and sold to buyer,asbuyer, as it is a pre-sale expense and forms part of manufacturing cost- American
Refrigerator Co.Ltd.v.State of Tamilnadu(1994).
viii. Compulsory warranty charges- includible if a manufacturer sales goods with service warranty on which customer
has no option, the charges for warranty are includible as there is no sale without it-State of AP V. Hyderabad All-
wyn Ltd(1970).
ix. Weighment charges paid for goods- includible in the sale price.
x. Subsidy/incentive paid to supplier - these are not post sale expense, hence includible. EID Parry V.ACCT(1997).
xi. Tax paid by buyer when liability is of seller - if the liability to pay tax/cess/duty is in the buyer, the same cannot
be considered for purpose of sale price-P.V.Beedies(P)Ltd v. State of Mysore (1963); G M S Prakash Rice Mills v.
State of Punjab(1993). Market Cess collected by dealer from buyer and paid to Government is not part of con-
sideration for sale and hence is not taxable-State of AP v. T. Siddaiah Naidu (1997).
xii. Any sum charged for anything done by the dealer- in respect of goods at the time of or before delivery of such
goods.
Exclusions from Sale Price:
The following items shall not be a part of sale price for the calculation of sales tax liability :
i. Freight / transport charges for delivery of goods- CST is not payable on freight and transport charges. However,
CST is payable on freight charges if (a)Freight Charges are not shown separately in invoice or (b) contract is for
FOR destination.
Supreme Court envisaged three situations: (1) Price at the factory gate, i.e. ex-works price. Here tax is not pay-
able on freight, (2) Contract for sale is FOR destination & (3) the price is FOR destination, but contract does not
have all ingredients of FOR destination railway contract. Hindustan Sugar Mills Ltd. V. State of Rajasthan(SC);
Kurkunta and Seram Stones (P)Ltd. V.State of Karnataka; Black Diamond Beverages v.CTO, Hyderabad Asbestos
Cement Products Ltd v.State of AP; CST v. Ballarpur Industries Ltd(1995).
ii. Cost of Installation if charged separately- is not to be includible.
iii. Cash discount for making timely payments- is not includible.
iv. Trade discounts- is deduction from list price to wholesalers/dealers, cannot be considered for calculation of CST.
Dy.CST v .Advani Oerlikons (P) Ltd (SC); State of Tamilnadu V.Alkali Chemical Corporation (1994); Dy.CST v.Kerala
Rubber and Allied Products (1993); Dy.CST v.Motor Industries Co (SC).
v. Insurance on transit if incurred at the request of buyer- are not chargeable to CST.
vi. Goods returned within 6 months of the date of sale- Sec 8A(b) provides that if goods are returned by buyer within
six months, its sale price will be deducted from aggregate sale price, if satisfactory evidence is produced before
sales tax authority in respect of the same. Dy.CST v.Motor Industries Co (SC); State of Maharashtra v.BASF (India)
Ltd (SC).
vii. Goods Rejected- In such case, the period of six months is not applicable, as in case of rejected goods, there is
no complete sale at all within the meaning of CST Act or Sale of Goods Act, as the purchasing party has not
accepted the goods. Return of goods is a bilateral transaction brought about by consent of seller and purchaser,
while rejection of goods is a unilateral transaction, open only to purchaser. It means that sale has not taken place
to attract tax. Metal Alloy Co.(P) Ltd. V. CTO, Bhavanipur Charge Calcutta(1977); State of Tamilnadu v. General
Engineering Stores(1993)
viii. Government subsidy & other subsidy- is excludible from the sale price for CST.
ix. Deposits for returnable containers- Deposits taken for returnable bottles or tin containers are not sales. Even if the
customer does not return the container for long time and security deposit is transferred to profit and loss account
that will convert the deposits as part of sale proceeds. There is no intention to sale the container. If the container
is not returned the deposit is retained as liquidated damages for loss of bottle. United Breweries Ltd. V.State of AP
(SC); State of Tamilnadu V McDowell (SC); Kalyani Breweries v.State of West Bengal.
x. Customs duty paid by Buyer- when sale is by transfer of documents-Gujarat Export Corporation Ltd.V. State of
Maharashtra(1990)
xi. Taxes and fees statutorily recoverable from Buyer- Anand Swarup Mahesh Kumar v.CST(SC); State of AP v. T Sid-
daiah Naidu
12. Sec. 2 (i) : Sales Tax Law and General Sales Tax Law
Sales Tax Law means any law for the time being in force in any state or part thereof which provides for the levy of
taxes on the sale or purchases of goods generally or on any specified goods expressly mentioned in that behalf.
General Sales Tax Law means the law for the time being in force in any state or part thereof which provides for the
levy of tax on the sale or purchase of goods generally.
13. Sec 2 (j) -Turnover means the aggregate of the sale prices received and receivable by him in respect of sales of
any goods in the course of interstate trade or commerce made during any prescribed period and determined in ac-
cordance with the provisions of the CST Act and the Rules made there under.
14. Sec 2(k) -Year in relation to a dealer means the year applicable in relation to him under the General
Sales Tax Law of the appropriate State and where there is no such year applicable, the financial year.
6.5 SALE OR PURCHASE IN THE COURSE OF INTERSTATE SALE (SECTION 3)
According to Section 3 of the Central Sales Tax Act, 1956, a sale or purchase of goods shall be deemed to take place
in the course of inter-state trade or commerce if the sale or purchase :
(a) Occasions the movement of goods from one state to another; or
(b) Is effected by a transfer of documents of title to goods during their movement from one state to another.
The essential ingredients of interstate sale are as follows:
i. The transaction should be a complete sale.
ii. There should be movement of goods from one state to another state by virtue of agreement to sale.
iii. The completed sale must take place in a state different from the state in which movement of goods commenc-
es.
iv. It is not necessary that completed sale precedes the movement of goods. Sale can be either before or after the
movement of goods.
v. There must be physical movement of goods from one state to another state.
vi. Where the movement of goods commences and terminates in the same state, it shall not be deemed to be a
movement of goods from one state to another by reason merely of the fact that in the course of such movement
the goods pass through the territory of any other state.
vii. The movement of goods shall commence when the goods are delivered to the carrier or other bailee for trans-
mission and the movement of the goods shall end when the delivery is taken from such carrier or bailee. Thus, the
transfer of documents to the title of the goods (Lorry receipt/ Railway Receipt, Bill of Lading, Airway Bill) shall be
made during the movement of the goods from one state to another.
Case Laws :
In Union of India Vs K.G. Khosla Co. Ltd it was held that a sale can be interstate sale even if the contract of sale does
not itself provide for the movement of goods from one state to another. However, such movement should be the result
of a covenant of sale or an incidence of that contract.
In East India Corporation Ltd. Vs State of Tamil Nadu, the assessee and the customer were from the same state (i.e.
Tamil Nadu). However, it was held as an interstate sale u/s 3(b) since goods had moved in from a state outside Tamil
Nadu.
In Mewalal Kawal Kishore v CST, it was held that there can well be an interstate sale between the two persons belong-
ing to the same state, if the goods move from one state to another, as a result of a contract of sale or the goods are
sold, while they are in transit by transfer of documents.
Section 3 of the Central Sales Tax Act, 1956 is being amended so as to insert an explanation:
Explanation - Where the gas sold or purchased and transported through a common carrier pipeline or any other com-
mon transport distribution systems becomes co-mingled and fungible with other gas in the pipeline or system and such
gas is introduced into the pipeline or system in one State and is taken out from the pipeline in another State, such sale
or purchase of gas shall be deemed to be a movement of goods from one state to another.
Exceptions to Section 3 :
i. Generally, CST is leviable on interstate sale transactions which cover movement of goods from one state to an-
other.
ii. However, all dispatches of goods from one state to another state do not ipso facto result in interstate sale u/s. 3
of the CST Act.
iii. Only when the movement is on account of a covenant or the sale effected by a transfer of document of title to
the goods during their movement from one state to another, it will be an interstate sale U/s 3.
iv. The following are the instances where goods move from one state to another but do not amount to interstate
sales:
(a) A movement of goods from one state to another will not amount to interstate sales unless the seller had the
responsibility to deliver the goods outside that state or the movement was as a result of a covenant or incident
of contract of sale;
(b) Stock transfer between head office & branch office will not amount to interstate sales as the basic elements
of sale i.e., the presence of a buyer & seller; consideration & transfer of ownership etc. are not present;
(c) Sale or purchase in the course of Export/ Import does not attract levy of CST since these have been specifi-
cally covered u/s 5 of the CST Act, 1956;
(d) Sale through commission agent / on account sales will not amount to interstate sales as the agent only acts
on behalf of the seller and he does not acquire any ownership of the goods. The agent is only entitled to
receive commission on the sales effected by him and will also get re-imbursement of the expenses incurred
byhim.
Examples 7: Is sale by VPP liable to Central Sales Tax?
Answer:
i. In order to be an interstate sale, there must be movement of goods in connection with the sale as stipulated in
Section 3.
ii. In a sale by VPP, both the requirements of Section 3 are satisfied. In a sale by VPP, there is an order by the buyer
on the seller.
iii. The seller dispatches the goods by post parcel and the goods are to be delivered by postal authorities to the
buyer on payment of price.
iv. The sale takes place in the state where the parcel is received and its value is paid to the post office.
6.6 SALE OR PURCHASE OUTSIDE A STATE (SECTION 4)
i. Section 4(1) provides that subject to the provisions of Section 3, if a sale or purchase of goods is said to take place
inside a state, then, such sale or purchase shall be deemed to have taken place outside all other states.
ii. According to Section 4(2), a sale or purchase of goods shall be deemed to take place inside a state, if :
In case of ascertained or specific goods If the goods are within the State at the time of contract of
sale

In case of unascertained or future goods If the goods are within the State at the time of their appro-
priation to the contract of sale by the seller or by the buyer,
whether assent of the other party is prior or subsequent to
such appropriation
iii. Where there is a single contract for sale or purchase of goods situated at more than one place, it shall be treated
as separate contracts in respect of goods at each such place.
6.7 SALE IN THE COURSE OF EXPORT /IMPORT (SECTION 5)
(A) Sale in the course of export [Section 5(1)]

i. Section 5(1) provides that a sale or purchase of goods shall be deemed to take place in the course of export only
if:
(a) The sale or purchase occasions such export, or
(b) It is effected by a transfer of documents of title to the goods after the goods have crossed the customs fron-
tiers of India.
ii. The requisites of an export sale are:
(a) There is a contract of sale between an Indian exporter and a foreign buyer.
(b) There must be an obligation to export as a result of the above foreign contract.
(c) There must be an actual export of goods to a foreign destination.
iii. An export sale can also be effected by transferring documents of title to the goods to a foreign buyer after the
goods have crossed the Customs Frontiers of India.
(B) Sale in the course of Import [Section 5(2)]
i. Section 5(2) provides that a sale or purchase of goods shall be deemed to take place in the course of import only
if:
(a) The sale or purchase occasions such import, or
(b) It is effected by a transfer of documents of title to the goods before the goods have crossed the customs
frontiers of India.
ii. The requisites of an import sale are :
(a) There is a contract of sale between an Indian importer and a foreign seller.
(b) There must be an obligation to import as a result of the above foreign contract.
(c) There must be an actual import of goods from a foreign destination.
iii. An import sale can also be effected by transferring documents of title to the goods in favour of an Indian buyer
before the goods have crossed the customs frontiers of India.
(C) Penultimate sale for export of goods [Section 5(3)]
i. Penultimate sale is the last sale immediately prior to the origial export.
ii. According to Section 5(3) of the CST Act, the last sale or purchase of any goods preceding the sale or purchase
occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of
such export if the following conditions are satisfied :
(a) There must have been pre-existing agreement or order to sell the specific goods to a foreign buyer.
(b) The last purchase as referred above, must have taken place after that agreement with the foreign buyer was
entered into.
(c) The last purchase must have been made for the purpose of complying with the pre-existing agreement or
order.
(d) The same goods, which are purchased in the penultimate sale, must be exported.

(e) The dealer should obtain proof of export from the original exporter.
(f) The original exporter should give Form H to the dealer and only on that basis the dealer can claim exemption
of deemed export.
(D) Difference between a Sale for Export and Sale in the Course of Export
Sale for Export Sale in the Course of Export

i. A sale effected by the dealer (seller) and he is not Seller has an express between the sale and the export.
connected with the export of the goods which
actually takes place subsequently.
ii. Seller may or may not have the knowledge that the The seller who purchases goods in India subsequently
buyer intends to export the goods purchased. exports as such.
iii. Seller does not know the ultimate destination of the Seller has clear address for ultimate destination of his
goods he has sold. goods.
iv. Seller has no intention for export. Seller has clear intention to export.
v. This sale may be called as penultimate sale. This sale is called as export sale.
vi. Sale exempted from CST provided Form H Sale exempted from CST automatically.
received from his buyer.
vii. This sale is covered under Section 5(3) of the This sale is covered under Section 5(1) of the
CST Act, 1956. CST Act, 1956.
6.8 PERSON LIABLE TO PAY CST [SECTION 6(1) & 6(1A)]
Section 6(1) of the CST Act provides that subject to the other provisions contained in this Act, every dealer shall, with
effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being
earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other
than electrical energy effected by him in the course of interstate trade or commerce during any year on and from
the date so notified.
However, a dealer shall not be liable to pay tax under this Act on any sale of goods which, in accordance with the
provisions of section 5(3), is a sale in the course of export of those goods out of the territory of India.
Analysis of Section 6(1) :
Section 6(1) is the charging Section. It reveals the following ingredients:
(a) The taxability under this Section is subject to other provisions of the Act.
(b) A sale under this Section shall be taxed only if it comes within the scope of section 3 of the Act, to be determined
as Interstate Sale.
(c) An assessee, to become liable to pay tax, should be dealer within the meaning of section 2(b) of the Act.
(d) The liability to tax shall arise in respect of all goods, except electrical energy.
(e) The penultimate sales in the course of export of goods outside the territory of India are exempt from tax liability.
i. Section 6(1A) provides that a dealer shall be liable to pay tax under the CST Act on sale of any goods effected
in the course of interstate trade or commerce notwithstanding that no tax would have been leviable under
the Local Sales Tax Act of the appropriate state if such sale had taken place inside that State.
ii. Thus, the absence of levy in intra state sales has no bearing on the levy in respect of interstate sale
6.9 EXEMPTION IN RESPECT OF SUBSEQUENT SALE [SEC 6(2)]
i. According to Section 6(2) of the Central Sales tax Act, 1956, any sale effected during the movement of goods
from one state to another by transfer of document of title is known as subsequent sale.

ii. Such subsequent sale shall be exempted from CST when the following conditions are fulfilled:
(a) The first sale should be an interstate sale.
(b) A sale subsequent to the sale mentioned here in above should take place.
(c) The subsequent sale should be during the course of movement of goods from one state to another.
(d) Such subsequent sale shall be effected by a transfer of documents of title to such goods.
(e) The subsequent sale shall be made to the government or a registered dealer other than the government.
(f) Where the subsequent sale is made to a registered dealer other than the government, the goods are of the
description referred to in Section 8(3).
(g) The dealer effecting the subsequent sale furnishes the prescribed certificate or declaration to the appropriate
authority.
(h) The entire transaction of sale shall be supported by the following supporting documents:
Nature of Sales Form to be issued Form to be issued
by the Buyer* by the Seller
Original Inter State Sale [Section 3(1)] Form C Form E-I
Next Inter State sale by transfer of documents of Form C Form E-II
title to goods
Subsequent sale u/s 6 (2) Form C Form E-II
Second subsequent sale during same transit Form C Form E-II
* If the sale is made to Government, Form D will be issued.
iii. In case of subsequent sale in the course of Interstate sale, the dealer effecting subsequent sale can avail exemp-
tion by submitting Form C issued by his customer and by submitting Form E-I, issued by his seller.
iv. Form, E-I, E-II & E-III etc. are printed by the Sales Tax department and are supplied to the registered dealer for their
use. Form E-I & E-III will have to be issued, in case there are more than one subsequent sale.
v. Thus, it should be noted that Form E-I can be issued by the first seller alone. Form E-II & E-III will have to be submit-
ted by those selling dealer (other than the first dealer) to their purchaser, who can avail of the exemption under
section 6(2), subject to the condition that Form C is submitted as well.
vi. Where a Government Department has submitted Form D there cannot be subsequent resale by it.
Thus, any number of subsequent sales effected in the course of such single interstate movement of the goods from
one state to another by transfer of documents of title to the goods by one dealer to another shall be exempt provided
that the above conditions are fulfilled and relevant f6rms are obtained and filed.
6.10 TAXABILITY OF TRANSFER OF GOODS MADE OTHERWISE THAN BY WAY OF SALE (SEC 6A)
i. Where any dealer claims that he is not liable to pay tax under the CST Act, in respect of any goods, on the ground
that the movement of such goods from one State to another was occasioned by reason of transfer of such goods
by him to any other place of his business or to his agent or principal and not by reason of sale, the burden of prov-
ing that the movement of those goods was so occasioned shall be on that dealer.
ii. The dealer may furnish to the assessing authority, within the prescribed time a declaration, duly filled and signed
by the principal officer of the other place of business, or his agent or principal, containing the prescribed particu-
lars in the prescribed form (Form F) obtained from the prescribed authority, along with the evidence of dispatch
of such goods.
iii. If the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed to have been
occasioned as a result of sale.
iv. If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars con-
tained in the declaration furnished by a dealer are true, he may make an order to that effect.

v. Thereupon, the movement of goods to which the declaration relates shall be deemed to have been occasioned
otherwise than as a result of sale.
6.11 REGISTRATION OF DEALER
Mode of Registration
Section 7 of the CST Act lays down the provisions for registration of Dealers as under:
(A) Compulsory Registration: [Section 7(1)]
Section 7(1) provides that every dealer liable to pay tax under the CST Act shall, within such time as may be prescribed
for the purpose, make an application for registration to such authority in the appropriate Stale as the Central Govern-
ment may, by general or special order, specify, and every such application shall contain such particulars as may be
prescribed.
(B) Voluntary Registration: [Section 7(2)]
i. Section 7(2) provides that any dealer liable to pay tax under the sales tax law of the appropriate State, or
where there is no such law in force in the appropriate State or any part thereof, any dealer having a place of
business in that State or part, as the case may be, may, notwithstanding that he is not liable to pay tax under
the CST Act, apply for registration to the authority referred to in Section 7(1), and every such application shall
contain such particulars as may be prescribed.
ii. A dealer shall be deemed to be liable to pay tax under the sales tax law of the appropriate State notwith-
standing that under such law a sale or purchase made by him is exempt from tax or a refund or rebate of tax
is admissible in respect thereof.
Issue of Certificate of Registration [Section 7(2A) & 7(3)]
i. Section 7(2A) provides that where it appears necessary to the authority to whom an application is made for
registration, he may for the proper realisation of the tax payable under the CST Act or for the proper custody
and use of the forms impose as a condition for the issue of a certificate of registration, by an order in writing
and for reasons to be recorded therein, a requirement that the dealer shall furnish in the prescribed manner
and within such time as may be specified in the order specified security for all or any of the aforesaid pur-
poses.
ii. Section 7(3) provides that if the authority is satisfied that the application is in conformity with the provisions
of the CST Act and the rules made thereunder and the condition, if any, imposed, has been complied with,
he shall register the applicant and grant to him a certificate of registration in the prescribed form which shall
specify the class or classes of goods for the purposes of Section 8(1).
Security for Registration [Section 7(3A), 7(3B), 7(3BB) & 7(3C)]
i. Section 7(3A) provides that where it appears necessary to the authority granting a certificate of registration he
may for the proper realisation of tax payable under the CST Act or for the proper custody and use of the forms
require, at any time while such certificate is in force, by an order in writing and for reasons to be recorded
therein, require from the dealer, to whom the certificate has been granted, to furnish within such time as may
be specified in the order and in the prescribed manner such security, or, if the dealer has already furnished
any security, such additional security, as may be specified in the order, for all or any of the aforesaid pur-
poses.
ii. Section 7(3B) provides that no dealer shall be required to furnish any security or additional security unless he
has been given an opportunity of being heard.
iii. Section 7 (3BB) provides that the amount of security which a dealer may be required to furnish or the ag-
gregate of the amount of such security and the amount of additional security which he may be required to
furnish by the authority referred to therein, shall not exceed :
(a) in the case of a dealer other than a dealer who has made an application, or who has been registered in
pursuance of an application, a sum equal to the tax payable under this Act, in accordance with the esti-
mate of such authority on the turnover of such dealer for the year in which such security or as the case may
be, additional security is required to be furnished; and
(b) in the case of a dealer who has made an application, or who has been registered in pursuance of an ap-

plication a sum equal to the tax leviable under this Act, in accordance with the estimate of such authority
on the sales to such dealer in the course of inter-State trade or commerce in the year in which such security
or, as the case may be, additional security is required to be furnished, had such dealer been not registered
under the CST Act.
iv. Section 7(3C) provides that where the security furnished by a dealer is in the form of a surety bond and the surety
becomes insolvent or dies, the dealer shall, within thirty days of the occurrence of any of the aforesaid events,
inform the authority granting the certificate of registration and shall within ninety days of such occurrence furnish
a fresh surety bond or furnish in the prescribed manner other security for the amount of the bond.
Forfeiture of Security [Section 7(3D) & 7(3E)]
i. Section 7(3D) provides that the authority granting the certificate of registration may by order and for good and
sufficient cause forfeit the whole or any part of the security furnished by a dealer:
(a) for realising any amount of tax or penalty payable by the dealer;
(b) if the dealer is found to have misused any of the forms or to have failed to keep them in proper custody.
ii. However, no order shall be passed under this sub-section without giving the dealer an opportunity of being
heard.
iii. Section 7(3E) provides that where by reason of an order, the security furnished by any dealer is rendered insuf-
ficient; he shall make up the deficiency in such manner and within such time as may be prescribed.
Refund of Security [Section 7(3G)]
Section 7(3G) provides that the authority granting a certificate of registration may, on application by the dealer to
whom it has been granted, order the refund of any amount or part thereof deposited by the dealer by way of security
under Section 7, if it is not required for the purposes of the CST Act.
Refusal to issue forms [Section 7(3F)]
Section 7(3F) provides that the authority issuing the forms may refuse to issue such forms to a dealer who has failed to
comply with an order or with the provisions of, until the dealer has complied with such order or such provisions, as the
case may be.
Appeal against the order [Section 7(3H), 7(31) & 7(3J)]
i. Section 7(3H) provides that any person aggrieved by an order may, within thirty days of the service of the order
on him, but after furnishing the security, prefer, in prescribed form and manner, an appeal against such order to
the prescribed appellate authority.
ii. However, the appellate authority may, for sufficient cause, permit such person to present the appeal:
(a) after the expiry of the said period of 30 days; or
(b) without furnishing the whole or any part of such security.
iii. Section 7(3I) provides the procedure to be followed in hearing any appeal and the fees payable in respect of
such appeals. This shall be such as may be prescribed.
iv. Section 7(3J) provides that the order passed by the appellate authority in any appeal shall be final.
Cancellation of Registration: [Section 7(4) & 7(5)]
i. Section 7(4) provides that a certificate of registration granted under Section 7 may :
(a) Either on the application of the dealer to whom it has been granted, or, where no such application has been
made, after due notice to the dealer, be amended by the authority granting it if he is satisfied that by reason
of the registered dealer having changed the name, place or nature of his business or the class or classes of
goods in which he carries on business or for any other reason the certificate of registration granted to him
requires to be amended; or
(b) Be cancelled by the authority granting it where he is satisfied, after due notice to the dealer to whom it has
been granted, that he has ceased to carry on business or has ceased to exist or has failed without sufficient
cause, to comply with an order or with the provisions or has failed to pay any tax or penalty payable under
the CST Act, or in the case of a dealer registered has ceased to be liable to pay tax under the sales tax law
of the appropriate State or for any other sufficient reason.
ii. Section 7(5) provides that a registered dealer may apply in the prescribed manner not later than six months be-
fore the end of a year to the authority which granted his certificate of registration for the cancellation of such
registration, and the authority shall, unless the dealer is liable to pay tax under this Act, cancel the registration
accordingly, and where he does so, the cancellation shall take effect from the end of the year.
Amendment in Certificate
i. A certificate of registration can be amended in any of the following cases :
(a) Where the dealer changes his place of business;
(b) Where there is a change in the goods dealt with by the dealer;
(c) Where there is change in the constitution of the firm.
ii. The dealer should get his Certificate of Registration modified in the above cases, in order to avoid penalty.
Benefits of Certificate of Registration
i. A certificate of registration provides the following benefits to the dealer :
(a) By obtaining the requisite declaration forms from the department and using them, he can make interstate
purchase @ 5%.
(b) The dealer can also obtain form, which will enable him to claim total exemption in respect of subsequent
sales, as laid down by section 6(2).
ii. Failure to get registered under the CST Act prevents a dealer from effecting interstate sale, even where the turn-
over is only ` 1.
6.12 RATES OF TAX IN THE COURSE OF INTER-STATE TRADE OR COMMERCE [SECTION 8(1) & 8(2)]
Incidence of central sales tax
If a sale or purchase takes place as per section 3(a) or 3(b) of the CST Act, 1956, then such sale or purchase falls within
the ambit of the CST Act. Appropriate rate of tax will be levied on such taxable turnover based on the sale or purchase
taken place between two registered dealers or between registered and unregistered dealer.
Example 8: Goods worth ` 2,04,000 are sold by M of Mumbai to K of Kanpur, CST @ 2% is included in the above. If the
local sales tax rate is 0%, 1%, 5% or 13.5% on such sale within the state of Maharashtra. What will be the tax liability?
(i) If buyer is the registered dealer and C Form given.
(ii) If buyer is the unregistered dealer.

Answer:
First we have to find the taxable turnover
Taxable turnover ` 2,04,000 x 100/102 = ` 2,00,000
Local sales tax rate: 0% 1% 5% 13.5%
(i) Buyer is the registered Dealer 0% 1% 2% 2%
(ii) Buyer is the Unregistered Dealer 0% 1% 5% 13.5%
Tax liability
(i) Buyer is the registered Dealer 0 ` 2,000 ` 4,000 ` 4,000
(ii) Buyer is the unregistered Dealer 0 ` 2,000 ` 10,000 ` 27,000
From the above discussion we came to know the tax implicit and its relevance under CST Act, 1956. The concept
of minimum of 10% CST has been removed w.e.f. 1-4-2007, the CST for sale to persons other than registered dealers,
would be equal to the local VAT rate applicable in the state of the selling dealer, which may be 1%, 5% or 13.5%.
One Form C, E-I, E-II can be issued to cover one quarter transactions. Declaration in form C,E-I,E-II or F is required to be
submitted to assessing authority within 3 three months after the end of the period to which it relates.
In case of Form F, it is required to be obtained on a monthly basis. Hence, within three months after the end of the
month, Form F is to be submitted.
In case of Form H, I and J, no time limit has been prescribed. Submission of these forms at any time before assessment
should be sufficient.
6.13 PURCHASE OF GOODS BY A REGISTERED DEALER [SECTION 8(3)]
Under section 8(3), a registered dealer can purchase goods as under:

i. Goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the
goods as being intended:
(a) for re-sale by him or subject to any rules made by the Central Government in this behalf, or
(b) for use by him in the manufacture of processing of goods for sale, or
(c) in mining, or
(d) in the generation or distribution of electricity or any other form of power.
ii. Containers or other materials specified in the certificate of registration of the registered dealer purchasing the
goods, being containers or materials intended for being used for the packing of goods for sale or in the telecom-
munications network.
iii. Containers or other materials used for the packing of any goods or classes of goods specified in the certificate of
registration referred to above or for the packing of any containers or other materials specified in the certificate
of registration referred to above.
Thus, the purpose for which the dealer purchases goods will have to conform to the purpose for which he was regis-
tered under the CST Act.
6.14 FURNISHING OF DECLARATION [SECTION 8(4)]
i. Section 8(4) provides that the provisions of Section 8(1) shall not apply to any sale in the course of interstate
trade or commerce, unless the dealer selling the goods furnishes to the prescribed authority in the prescribed
manner :
(a) a declaration duly filled and signed by the registered dealer to whom the goods are sold containing the pre-
scribed particulars in a prescribed form obtained from the prescribed authority; or
(b) if the goods are sold to the Government, not being a registered dealer, a certificate in the prescribed form
duly filled and signed by a duly authorised officer of the Government.
ii. However the declaration in prescribed Form, is required to be furnished within the prescribed time or within such
further time as that authority may, for sufficient cause, permit.

6.15 POWER TO EXEMPT OR IMPOSE TAX AT CONCESSIONAL RATES [SECTION 8(5)]
Section 8(5) provides that the State Government may, on the fulfillment of the requirements laid down in Section 8(4)
by the dealer, if it is satisfied that it is necessary so to do in the public interest, by notification in the Official Gazette and
subject to such conditions as may be specified therein, direct that :
(a) No tax under this Act shall be payable by any dealer having his place of business in the State in respect of the
sales by him, in the course of interstate trade or commerce to a registered dealer or the Government, from any
such place of business of any such goods or classes of goods as may be specified in the notification, or that the
tax on such sales shall be calculated at such lower rates than those specified in Section 8(1) or Section 8(2), as
may be mentioned in the notification;
(b) In respect of all sales of goods or sales of such classes of goods, as may be specified in the notification, which are
made, in the course of interstate trade or commerce to a registered dealer or the Government, by any dealer
having his place of business in the State or by any class of such dealers as may be specified in the notification to
any person orto such class of persons as may be specified in the notification, no tax under the CST Act shall be
payable or specified the tax on such sales shall be calculated at such lower rates than those specified in Section
8(1) or Section 8(2), as may be mentioned in the notification.
6.16 SALE FOR UNITS LOCATED IN SPECIAL ECONOMIC ZONE [SECTION 8(6)]
Section 8(6) provides that sale made by a dealer in the course of interstate trade or commerce to a registered dealer
in any Special Economic Zone is not liable for tax subject to the following conditions:
i. The sale should be to a registered dealer in Special Economic Zone.
ii. The registered dealer has been purchasing the goods for the purpose of setting up operation, maintenance,
manufacture, trading, production, processing, assembling, repairing, reconditioning, reengineering, packaging
or for use as packing material or packing accessories in an unit located in any Special Economic Zone.
iii. The establishment of such unit is authorized by the Authority specified by the Central Government.
iv. The goods or class of goods shall be specified in the certificate of registration of such dealer.
v. The dealer selling the goods should obtain a declaration in the prescribed form duly filled and signed by the
dealer in Special Economic Zone to whom such goods are sold.
vi. The above declaration should be furnished, by the dealer, who sold the goods to the prescribed authority.
6.17 DETERMINATION OF TAXABLE TURNOVER (SECTION 8A)
(A) Deduction from Aggregate of the Sale Prices [Section 8A(1)]

The following deductions are permitted for the aggregate of sales prices, in determining the turnover:
i. The amount arrived at by applying the following formula :
No deduction on the basis of the above formula shall be made if the amount by way of tax collected by a reg-
istered dealer has been otherwise deducted from the aggregate of sale prices.
Where the turnover of a dealer is taxable at different rates, the aforesaid formula shall be applied separately in
respect of each part of the turnover liable to a different rate of tax.
ii. The sale price of all goods returned to the dealer by the purchasers of such goods within a period of 6 months
from the date of delivery of the goods.
However, satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price
thereof is produced before the authority competent to assess or, as the case may be, reassess the tax payable
by the dealer under the CST Act; and
iii. Such other deductions as the Central Government may prescribe, having regard to the prevalent market condi-
tions, facility of trade and interests of consumers.
(B) No Other Deduction from Aggregate Sale Prices [Section 8A(2)]
No other deductions are allowed from the aggregate of the sale prices except which are provided in Section

8A(2).
To determine the turnover from the Turnover inclusive of CST (as calculated above), following formula shall be
applied:
(Turnover inclusive of CST)
Turnover = --------------------------------------------- x 100
(100 + Rate of Tax)
(Turnover inclusive of CST) x (Rate of Tax)
CST = -------------------------------------------------------------
(100 + Rate of Tax)
6.18 LEVY & COLLECTION OF TAX (SECTION 9)
A. Section 9(1):
Nature of Transaction State empowered to levy tax
i. Interstate sale transaction whether covered State in which movement of goods commenced.
by Section 3(a) or 3(b).
ii. Subsequent sale not exempt u/s 6(2) State from which the registered dealer obtained the
effected by a registered dealer. relevant forms for claiming exemption.
iii. Subsequent sale not exempt u/s 6(2) State from which such subsequent sale has been
effected by an unregistered dealer. effected by the unregistered dealer.
B. Section 9(2): Powers of Authorities of the Appropriate State under CST Act.
i. The authorities of the appropriate state are empowered to assess, re-assess, collect and enforce payment of any
tax, including any penalty payable by a dealer under the CST Act as if it is a tax or penalty payable under the
local sales tax law.
ii. For the aforementioned purpose, the authorities may exercise all or any of the powers they have under the gen-
eral sales tax law of the State.
iii. All the provisions of the local sales tax law in relation to offences, penalties and penalties in lieu of prosecution
shall, with necessary modifications, apply to offences under CST Act, except for the provisions of Section 10 and
10A of the Act.
C. Section 9A: Collection of Tax to be only by Registered Dealers-
Section 9A provides that no person who is not a registered dealer shall collect in respect of any sale by him of goods
in the course of interstate trade or commerce any amount by way of tax under the CST Act, and no registered dealer
shall make any such collection except in accordance with the CST Act and the rules made thereunder.
6.19 PENAL PROVISIONS UNDER CST ACT (SECTION 10)
Section 10 of the CST Act, 1956 provides for levy of penalty as provided below :
Sec. Offence Penalty
10(a) Issue of false certificate under Sections 6(2) or 6A(1) Simple imprisonment, which may
or 8 (4). extenedextended to six months, or with
ine or with both.
10 (aa) Failure to get registered under Section 7. Fine of ` 50 per day till the offence continues.
10(b) Falsely represents that to purchase of goods of such Upto 1.5 times of the tax due.
class which are not covered by his registration
certificate.
10 (c) Purchase of goods without having a registration Upto 1.5 times of the tax due.
certificate.
Sec. Offence Penalty

10 (d) Purchase of goods for the purpose mentioned Upto 1.5 times of the tax due.
in Section 8 (3) but failure to make use of goods
for any such specified purpose.
10 (e) Having possession of any prescribed form, Upto 1.5 times of the tax due.
which has not been obtained as per prescribed
procedure.
10 (f) Collecting any amount of tax in contravention Upto 1.5 times of the tax due.
of the provision of Section 9A.
6.20 IMPOSITION OF PENALTY IN LIEU OF PROSECUTION (SECTION 10A)
i. Section 10A(1) provides that if any person purchasing goods is guilty of an offence under section -10(b), (c) or (d),
the authority who granted to him or, as the case may be, is competent to giant to him a certificate of registration
may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of
penalty a sum not exceeding one and a half times the tax which would have been levied under Section 8(2) in
respect of the sale to him of the goods, if the sale had been one falling under that provision.
ii. No prosecution for an offence under section 10 shall be instituted in respect of the same facts on which a penalty
has been imposed under Section 10A.
iii. Section 10A(2) provides that the penalty imposed upon any dealer shall be collected by the Government of
India in the manner provided in Section 9(2) :
Nature of offence Manner of collection
Offence u/s 10(b) or 10(d) Collected in the State in which the dealer purchasing the goods ob-
tained in form prescribed u/s 8(4) (a) in connection with the purchase
of such goods
Offence u/s 10(c) Collected in the State in which the person purchasing the goods should
have registered himself if the offence had not been committed.
6.21 COGNIZANCE OF OFFENCES (SECTION 11 & 12)
1. No Court shall take cognizance of any offence punishable under the CST Act or the rules made thereunder ex-
cept with the previous sanction of : (a) The Government within the local limits of whose jurisdiction the offence
has been committed or (b) Such officer of that Government as it may, by general or special order, specify in this
behalf.
2. No Court inferior to that of a Presidency Magistrate or a Magistrate of the first class shall try any such offence.
3. All offences punishable under the Act shall be cognizable and bailable.
4. However, no suit, prosecution or other legal proceeding shall lie against any officer of Government for anything
which is in good faith done or intended to be done under the Act or the rules made thereunder.
6.22 GOODS OF SPECIAL IMPORTANCE (SECTION 14)
The following categories of goods are declared as goods of special importance in interstate trade or commerce:
(a) Cereals (paddy, rice, wheat, maize, barley etc.)
(b) Coal (including coke in all its forms but excluding charcoal)
(c) Cotton of all kinds, cotton fabrics, cotton yarn
(d) Crude oil (including crude petroleum oils and mineral oils)
(e) Hides and skins (whether in a raw or dressed state)
(f) Jute

(g) Oilseeds (Peanut, Til, Cotton seed, Soya bean, etc)
(h) Pulses (Black gram, Green gram etc.)
(i) Man-made fabrics
(j) Sugars
(k) Tobacco (including unmanufactured tobacco, cigars, cigarettes etc.)
(l) Woven fabrics of wool
(m) Iron and steel (including pig & cast iron, steel semis, bars, plates, discs, rings, forgings and castings etc)
Restrictions and Conditions with reference to Declared Goods :
Section 15 provides that every sales tax law of a State shall imposes or authorises the imposition of a tax on the sale or
purchase of declared goods, be subject to the following restrictions and conditions:
i. The tax payable under the Sales tax law in respect of sales inside the State shall not exceed 4%. Thus, the maxi-
mum rate of tax on declared goods for interstate or local sales shall be only 4%.
ii. Where local sales tax has been levied in respect of the sale or purchase inside the State of any declared goods
and such goods are sold in the course of interstate trade or commerce, and CST having been paid thereupon,
the local sales tax paid shall be reimbursed to the seller making the interstate sale.
iii. Where a tax has been levied under the State law in respect of the sale or purchase inside the State of any pad-
dy, the tax leviable on rice procured out of such paddy shall be reduced by the amount of tax levied on such
paddy.
iv. Where a tax on sale or purchase of paddy is leviable under that law and the rice procured out of such paddy is
exported out of India, then, for the purposes of section 5(3), the paddy and rice shall be treated as a single com-
modity.
v. Each of the pulses referred to in Section 14, whether whole or separated, and whether with or without husk, shall
be treated as a single commodity for the purposes of levy of tax under State law.
Analysis of section 14 & 15
i. While section 14 declares certain goods to be of special importance, Section 15 places restriction on the tax that
can be levied on such declared goods.
ii. One of the primary conditions laid down by section 15 is that on the declared goods the sales tax shall not be
levied in excess of 4%. Further, Sales tax will not be levied at more than one stage.
iii. Secondly where under the local sales tax law tax has been levied on sale or purchase of goods within a state and
where such goods are subsequently sold in the course of interstate sale and sales tax has been paid on such a
sale, the local sales tax paid will have to be refunded to the dealer, making the Interstate sale.
iv. Also, where there are more than one enactments levying tax like sales tax, surcharge, turnover, additional tax
etc. on the sale of goods, the aggregate of the multiple rates shall not exceed 4%.
v. When declared goods are sold in the same condition in which they are purchased without any further manufac-
ture or processing, the subsequent sale will be exempted from tax. Single point Sales Tax exemptions can be
claimed only if the declared goods purchased, are sold subsequently in the same form.
6.23 LIABILITY OF LIQUIDATOR OF COMPANY IN LIQUIDATION (SECTION 17)
i. Notice of Appointment of Liquidator/Receiver : Every person-

(a) Who is the liquidator of any company, which is being wound up, whether under the orders of a Court or oth-
erwise; or
(b) Who has been appointed the receiver of any assets of a company, shall, within thirty days after he has be-
come such liquidator, give notice of his appointment as such to the appropriate authority.
ii. Notification by Appropriate Authority: On receipt of notice from the Liquidator
(a) The appropriate authority should notify to the liquidator the amount, which in the opinion of the appropriate

authority would be sufficient to provide for any tax which is then or is likely thereafter to become payable by
the company.
(b) The above intimation should be made within 3 months of the receipt of notice of appointment.
(c) The appropriate authority is empowered to make such inquiry or call for such information, as it may deem fit,
for arriving at the tax liability.
(d) The Companys liability under the CST Act, upto the date of winding up, shall be notified to the liquidator, in
writing.
iii. Duties of Liquidator: The liquidator shall not part with any of the assets of the company or the properties in his
hands until he has been notified by the appropriate authority. On being so notified, he shall set aside an amount
equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the
company or the properties in his hands.
iv. However, the Liquidator can part with such assets or properties of the Company for the following purposes:
(a) Compliance with any order of a Court;
(b) Payment of the tax payable by the Company under the CST Act;
(c) Payment to secured creditors whose debts are entitled under law to priority of payment over debts due to
Government on the date of liquidation;
(d) Meeting reasonable costs and expenses of the winding up.
v. Personal Liability of Liquidator: The liquidator shall be personally liable for the payment of the tax, which the com-
pany would be liable to pay, if he: (a) fails to give the notice, as provided or (b) fails to set aside the amount as
required by, or (c) parts with any of the assets of the company or the properties in his hands in contravention of
the provisions.
vi. Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this
section shall attach to all the liquidators jointly and severally.
vii. Effect of these Provisions: The provisions of this section shall have effect notwithstanding anything to the contrary
contained in any other law for the time being in force.
6.24 LIABILITY OF DIRECTORS OF PRIVATE COMPANY IN LIQUIDATION (SECTION 18)
i. Directors of a private company shall be jointly & severally liable for tax due under the CST Act if the following
conditions are fulfilled:
(a) The private company is wound up after the commencement of the CST Act.
(b) Any tax assessed on the Company under the CST Act for any period, whether before or in the course of or
after its liquidation, cannot be recovered.
(c) The person was a director of the private company at anytime during the period for which the taxes due.
ii. The Director shall not be jointly and severally liable for the payment of such tax if he proves that the non-recovery
cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of
the company.
6.25 CENTRAL SALES TAX APPELLATE AUTHORITY [Section 19]
i. Section 19 provides that the Central Government shall constitute an Authority, to be known as the Central Sales
Tax Appellate Authority, which would settle inter-State disputes failing under Section 6A read with Section 9 of
the CST Act.
ii. Composition of Authority: The Authority shall consist of the following Members appointed by the Central Govern-
ment:
Member Qualification
A Chairman Retired Judge of the Supreme Court, or a retired Chief Justice of a High
Court
An officer of the Indian Legal Service Is or qualified to be, an Additional Secretary to the Government of In-
dia
An officer of a State Government Not below the rank of Secretary or an officer of the Central Govern-
ment not below the rank of Additional Secretary, who is an expert in
sales tax matters.
iii. Staff & Officers: The Central Government shall provide the Authority with such officers and staff as may be neces-
sary for the efficient exercise of the powers of the Authority under this Act.
iv. Terms & Conditions: The salaries and allowances payable to, and the terms and conditions of service of, the
Chairman and Members shall be such as may be prescribed.
6.26 APPEALS [Section 20]
i. This section shall apply to appeals filed by the aggrieved dealer against any order of the assessing authority
made under Section 6A or Section 9 of the CST Act.
ii. The appeal shall be filed by the aggrieved dealer within 45 days from the date on which the order is served on
him.
iii. However, the Authority may entertain any appeal after the expiry of 45 days, but not later than 60 days from the
date of such service, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal in
time.
iv. The application shall be made in quadruplicate and be accompanied by a fees of ` 5,000.
6.27 PROCEDURE ON RECEIPT OF APPEAL (SECTION 21)
i. On receipt of an appeal, the Authority shall cause a copy thereof to be forwarded to the Assessing Authority
concerned as well as to each State Government concerned with the appeal and to call upon them to furnish
the relevant records.
ii. The Authority shall adjudicate and decide upon the appeal filed against an order of the assessing authority.
iii. The Authority, after examining the appeal and the records called for either allow or reject the appeal.
iv. The appeal shall not be rejected without giving the appellant dealer a reasonable opportunity of being heard.
v. Whether an appeal is rejected or accepted, reasons for such rejection or acceptance shall be given in the or-
der.
vi. The order shall be passed by the Authority within 6 months from the receipt of the appeal.
vii. A copy of every order shall be sent to the appellant and to the assessing authority.
6.28 POWERS OF THE CST APPELLATE AUTHORITY (SECTION 22 & 23)
Section 22:
i. The Authority shall have the same powers as are vested in a court under the Code of Civil Procedure, 1908 in
respect of the following matters, namely:
(a) Enforcing the attendance of any person, examining him on oath or affirmation;
(b) Compelling the production of accounts and documents;
(c) Issuing commission for the examination of witnesses;
(d) The reception of evidence on affidavits;
(e) Any other matter which may be prescribed.
ii. Every proceeding before the Authority shall be deemed to be a judicial proceeding within the meaning of the
Indian Penal Code.

Section 23 :
The Authority shall have the power to regulate its own procedure in all matters arising out of the exercise of power
under the CST Act.
6.29 AUTHORITY FOR ADVANCE RULINGS (SECTION 24)
The Authority for Advance Rulings constituted under section 245-0 of the Income-tax Act, 1961 shall be the authority
under the CST Act till such time an authority is constituted under Section 19.
On and from the date of the constitution of the Authority in under the CST Act, the proceedings pending with the Au-
thority for Advance Rulings under Section 245-0 shall be transferred to the Authority under Section 19.
6.30 TRANSFER OF PENDING PROCEEDINGS (SECTION 25)
Section 25 provides that on and from the date when the Authority is constituted under Section 19, every appeal arising
out of the provisions contained in Chapter VI :
(a) Which is pending immediately before the constitution of such Authority before the appellate authority consti-
tuted under the general sales tax law of a State or of the Union territory, as the case may be; or
(b) Which would have been required to be taken before such appellate Authority; shall stand transferred to such
Authority on the date on which it is established.
6.31 APPLICABILITY OF ORDER PASSED (SECTION 26)
An order passed by the Authority shall bt, binding on each State Government concerned, the assessing authorities
and other authorities created by or under any law relating to general sales tax, in force for the time being in any State
or Union territory.
6.32 FORMS UNDER CST
Form A This form is prescribed for application to get registered u/s 7 of CST Act.
Details such as name, status, place of business, warehouses, nature of business, nature and pur-
pose of goods to be dealt, goods to be bought from outside the state etc., are required to be
furnished.
Form B Certificate of registration shall be issued by the authority in this form.
The certificate of registration should be kept in the principal place of business an copies thereof in
the branches inside the appropriate state
Form C Registered dealers are entitled to certain exemptions under CST Act, 1956
Form C is used by a purchasing dealer to get the goods at confessional rate of duty and is issued
in favour of the dealer who effects interstate sale.
It is obtained from the sales tax authorities in the state in which the purchasing dealer is regis-
tered.
It contains particulars such as name of purchasing dealer, sales tax registration no., its validity,
details of goods obtained (whether for resale, manufacture, processing or as packing material),
name and address of the seller etc.
Form D Abolished w.e.f. 1.4.2007
Form EI & E II In case of subsequent sale in the course of Interstate sale, the dealer effecting subsequent sale can
avail exemption by submitting Form C issued by his customer and by submitting Form E-1, issued by
his seller.
Form, E-I & E-II etc. are printed by the Sales Tax department and are supplied to the registered
dealer for their use.
Form E-II will have to be issued, in case there are more than one subsequent sale.
Thus, it should be noted that Form E-I can be issued by the first seller alone. Form E-II & E-III will have
to be submitted by those selling dealer (other than the first dealer) to their purchaser, who can avail
of the exemption under section 6(2), subject to the condition that Form C is submitted as well.

Form F Form by branch / consignment agent for goods received on stock transfer
Form G Indemnity bond when C form lost
Form H Certificate of Export
Form I Certificate by SEZ unit
Practical Problems on CST

Example 9: Ms. Kona furnishes the following information pertaining to inter-state sales effected by him:
Products
Sa Re Ge
Local VAT rates 13.5% 5% 1%
Total sales value 7,84,000 5,40,000 4,12,000
Additional information (i) In respect of product Sa sold in May, 2015, goods of total sales value of ` 67,200 were re-
turned in July, 2015 and ` 44,800 in December, 2015: ` 56,000 were rejected and returned in January, 2016.
(ii) Buyer of product Ga did not produce C forms.
(iii) Buyer of product Re for total sale value ` 43,200 did not furnish C form as the product was not covered in his
registration certificate.
Compute the taxable turnover and the sales tax liability of the three products Sa, Re and Ga for the financial year
2015-16.
Answer:
Product-Sa (`)
Total Sales 7,84,000
(Less) Sales return within (67,200)
6 months
(Less) Rejection (56,000)
------------------
6,60,800
------------------
` 6,60,800
Sales Sales Return

` 6,16,000 beyond 6 months
C Form Given ` 44,800
CST = 2% (or) 13.5% whichever is lower Form C not given
Hence CST = 13.5%
Therefore,
CST = ` 6,16,000 x 100/113.5 x 2 /100 CST= 44,800 x 13.50/113.5
=
` 10,855 CST = ` 5,329

Product-Re (`)
C Form given C Form not given

` 4,96,800 ` 43,200
CST = 2% or local VAT rate 5% whichever is lower inclusive of CST 5%
CST = ` 4,96,800 x 100/105 x 2/100 CST = ` 43,200 x 5/105
CST = ` 9,463 CST = ` 2,057
Product-Ga (`)
Buyer of product Ga did not produce C Forms
Therefore CST = Local VAT rate
Hence CST = 4,12,000 x 100 /101 x 1% = ` 4,079
Example 10: (a) State with proper reasons whether the following statements are True/False with regard to the provi-
sions of the Central Sales Tax Act, 1956:
(i) Works contract does not include a contract of alteration of a building.
(ii) The damaged goods of the insured are taken possession by the insurance company. The insurance com-
pany is a dealer if such goods are sold by it later on.
(iii) Rajkumar of Rajkot of Gujarat comes to Jaipur of Rajasthan and purchases goods and brings them with him
to Rajkot of Gujarat. The sale is an Inter-State Sale.
(iv) During the course of penultimate sale, the declaration is to be signed by the dealer selling the goods.
(v) The burden of proving that the transfer of goods is otherwise than by way of sale shall be on the Sales Tax
Authority.
(b) Fill in the blanks with reference to the provisions of the Central Sales Tax Act, 1956:
(i) Mr. A, a dealer in West Bengal, has sold goods to Mr. S in Gujarat for which the sales-tax rate in West Bengal
is 2% and the rate in Gujarat is 5%. The CST leviable is ...........
(ii) The copy of every order passed by the Appellate Authority shall be sent to..and .............
(iii) Government subsidy .form part of sale price.
(iv) A newspaper publisher sold the unsold copies of the paper as waste. This sale is .to Central Sales-
tax.
(v) Praveen effected his first inter-State sale on 25.3.15 and applied for registration on 15.4.15. The effective date
of registration will be .............
Answer (a):
(i) False: The definition of Works Contract under section 2(ja) of the Central Sales Act, 1956 includes a contract for
alteration of any movable or immovable property.
(ii) True: Selling of damaged goods is incidental or ancillary to the business of insurance and hence, the insurance
company is a dealer.
(iii) False: the sale is an intra-State sale.
(iv) False: It is to be filled in and signed by the exporter to whom the goods are sold and it is to be furnished to the
prescribed authority by the dealer selling the goods.
(v) False: the burden of proving that the transfer of goods is otherwise than by way of sale shall lie on the dealer
claiming the exemption of tax.
Answer (b):
(i) 2%
(ii) Appellant, Assessing Authority
(iii) Does not
(iv) Liable
(v) 25.03.2015
Example 11: Mr. Brijmohan a first stage dealer in l plant and boiler in the State of Gujarat, furnishes the under men-
tioned information:
(`)
(i) Total inter-State sales during financial year 2015-16 (CST not shown separately) 4,62,50,000
(ii) Trade commission for which credit notes have to be issued separately 11,56,250
(iii) Freight and transportation charges (of this ` 3,00,000 is on inclusive basis) 9,00,000
(iv) Insurance premium paid prior to delivery of goods 1,40,000
(v) Installation and commissioning charges levied separately in invoices 1,50,000
Compute the tax liability under the CST Act, assuming the rate of tax @ 2%.
Answer :
(`)
Sales turnover 4,62,50,000
Less: Trade Commission 11,56,250
Freight and transportation charges to the extent shown
separately in the invoices 6,00,000
Installation and commissioning charges levied
separately in invoice 1,50,000

Total Turnover 4,43,43,750
Less: Central Sales Tax (` 4,43,43,750 x 2/102) 8,69,485
-
Taxable turnover 4,34,74,265

Example 12: Mr. Hazarika (H) dispatches goods from Assam and raises invoice on Mr. Prasad (P) in Bihar, Mr. H charges
2% CST and pays the same in Assam. During the course of movement of goods, Mr P sells goods to Ms. Nandini (N) in
Odisha and Ms. N ultimately sells goods to Mrs. Sanjukta (S) in West Bengal. Mrs. Sanjukta (S) takes delivery of goods
and the movement of goods comes to end. Sales from Mr. P to Mr. N and Ms.N to Mrs.S are by transfer of lorry way bill
receipts. Explain the forms to be issued so that the first and subsequent sales are exempt from central sales tax.
Answer :
Mr.H will receive declaration in C Form from Mr. P and will issue declaration in E-I Form to Mr.P. Later, Mr.P will issue
declaration in E-II Form to Ms.N and receive declaration in C Form from Ms.N.
Finally, Ms.N will issue declaration in E-II Form to Mrs.S and receive declaration in C Form from Mrs.S, which will com-
plete the chain. Because, Mrs.S has taken the possession of goods, thereby movement of goods from one state to
another ends.

If the chain is broken, CST will be payable again. Otherwise, all subsequent sales will be exempt from sales tax.
The same can be explained in the following diagrammatic presentation:
Form E-I Form E-II Form E-II
Goods sold Goods sold Goods sold

Mr. H Mr. P Ms. N Mrs. S
Form C Form C Form C

Example 13: A dealer effected following inter-state sales during the quarter July, 2015-September, 2015. (a) Invoice
No. 25 dated 5th July, 2015: ` 1,12,400 (tax not shown separately), (b) Invoice No. 26, dated 13th August, 2015: ` 50,000
plus tax @ 5% i.e. ` 2,500. Total ` 52,500, (c) Invoice No. 27 dated 18th September, 2015: ` 20,000 plus tax @ 5% ` 1,000
i.e. Total ` 21,000, (d) Invoice No. 28 dated 27th September, 2015: ` 31,200. Tax not shown separately. Goods returned
within 6 months were ` 8400 (inclusive of taxes). Sales Tax rate is 5% if goods are sold within the State.
(a) What is the turnover and what is tax payable, if the buyers did not issue C Form?
(b) What is the impact of VAT on CST?
Answer :
(a) Statement showing total turnover, taxable turnover and central sales tax payable for the quarter July 2015 to
September 2015:
Date Invoice Total Taxable Turnover Central Sales
No. Turnover (`) (`) Tax payable (`) Workings
5th July 2015 25 1,12,400 1,07,048 5,352 ` 1,12,400 x 5/105 =
(1,12,400 5,352) ` 5,352
13th Aug 2015 26 52,500 50,000 2,500 ` 50,000 x 5%
=` 2,500
18th Sep 2015 27 21,000 20,000 1,000 ` 20,000 x 5%
=` 1,000
27th Sep 2015 28 31,200 29,714 1,486 ` 31,200 x 5/105
(31,200 1,486) = ` 1,486
Sub-total 2,17,100 2,06,762 10,338
Less: sales return 8,400 8,000 400 ` 8,400 x 5/105 =
within six months ` 400
from the date
of sale
Net amount 2,08,700 1,98,762 9,938
(b) The impact of VAT on CST:
(i) If goods are purchased from another state, Input Tax Credit (ITC) of CST paid in other state will not be granted by
the State where the goods are consumed or sold.
(ii) If goods are sent to another State on stock transfer basis, only restricted input credit will be given. It means up to
@2% tax paid on inputs ITC not allowed.
Example 14: Vivitha & Co., is a dealer in an electronic product, chargeable to CST at 2%. For the year ended 31.3.2016,
the dealer has shown total turnover (including CST) at ` 38,76,000. In the above, the dealer has treated the following
amounts thus:
(i) Dharmada collected from buyers, shown separately in invoice ` 28,000
(ii) Weighment Charges incidental to sale ` 14,000
(iii) Central excise duty collected ` 2,06,000
The dealer has recorded the following amount in separate folios in the ledger:
(i) Packing charges (These have been collected from buyers through Debit notes) ` 45,000
(ii) Cash discount allowed to buyer ` 18,000
(iii) Indemnity/guarantee charges collected from buyer to cover loss during transit ` 12,000
(iv) Marine insurance premium for transporting goods to the premises of buyers,
collected from buyers ` 32,000
Determine the total and taxable turnover under CST Act 1956 for the financial year 2015-16. You are required to show
the treatment of each and every item distinctly.
Answer :
Determination of turnover for CST purposes (`)

Turnover including CST as per books 38,76,000
Less: CST included in above 38,76,000 x 2/102 76,000
Turnover as per books excluding CST 38,00,000
Add: Packing Charges 45,000
Marine insurance 32,000
Taxable turnover 38,77,000
Add: CST @2% on 38,77,000 77,540
Total Turnover 39,54,540
Note:
The following items addable in the selling price, which has been added already in the sale price:
(i) Dharmada collected from buyers, shown separately in invoice ` 28,000
(ii) Weighment Charges incidental to sale ` 14,000
(iii) Central excise duty collected ` 2,06,000
The dealer has recorded the following amount in separate folios in the ledger:
(i) Packing charges (These have been collected from buyers through Debit notes) is ` 45,000. It is addable into the
assessable value even though the same has been charged separately. The Honorable Supreme Court of India in
Rai Bhart Das and Brothers v CST (1988) 71 STC 277 held that the packing charges realized by the dealer was an
integral part of the sale price. (Service charges are different from charges for packing materials).
(ii) Cash discount allowed to buyer is ` 18,000, it is assumed to be already deducted from the sale price.
(iii) Indemnity/guarantee charges collected from buyer to cover loss during transit is ` 12,000 charged separately.
Hence, not Included in the sale price.
(iv) Marine insurance premium for transporting goods to the premises of buyers, collected from buyers is ` 32,000 is
included in the selling price, because Freight and insurance charges incurred by the assessee prior to the delivery
of the goods at their places of business to their customers, form part of turnover.

Example 15: Sri Ram, a Registered Dealer at Mumbai, furnishes the following information:
(`)
(i) Inter-state sale of goods 40,00,000
This includes the following
(ii) Excise duty 42,000
(iii) Goods returned on 17/1/2016 [These goods were sold on 12/4/2015] 1,05,000
(iv) Cash discount shown in invoice and allowed according to prevailing trade practice
50,000
(v) Freight and transportation charges (of this ` 1,50,000 is on inclusive basis) 4,50,000
(vi) Insurance premium paid prior to delivery of goods 70,000
(vii) Installation and commissioning charges levied separately in invoices 75,000
Compute the tax liability under the CST Act, assuming the rate of tax @ 2%.
Answer :
(`)
Sales turnover 40,00,000
Less: Deductions
Cash discount according to normal trade practice 50,000
Freight and transportation charges deductible to the extent shown separately in the invoices 3,00,000
Installation and commissioning charges levied separately in invoices 75,000
Turnover inclusive of CST 35,75,000
Less: Central Sales Tax 70,098
Note: It is assumed that local VAT rate of the seller state is @2%. Therefore, goods returned after 6 months from the date
of sale attracted CST @2%.
Example 16: Doshi Ltd., Patna sells goods for a value of ` 40,00,000 inclusive of central sales tax @ 2% to Fine Ltd. in
Kolkata, both of them are registered dealers. The local sales tax on goods in Patna is 1%. Ascertain sales tax payable.
If Fine Ltd. were unable to submit Form-C, being an unregistered dealer, what will be the central sales tax liability, if
the local sales tax rate is 13.50%?
Answer :
Central Sales Tax payable against Form C sales = ` 39,215 [i.e. (` 40,00,000 x 100/102) x 1/100]. Central Sales Tax pay-
able (if Form C not received) = `5,29,412[` 40,00,000 x 100/102) 13.50/100]
Example 17: Mr. Vishal is a dealer. His sales during the first quarter of 2014-15 (April to June) are as under:
Date Invoice No. Amount (`)

(i) 05-4-2015 103/FCA/01/2015 10,000 plus tax @2%
(ii) 12-4-2015 103/FCA/02/2015 80,000 plus tax @2%
(iii) 05-5-2015 103/FCA/03/2015 62,400 (inclusive of tax)
(iv) 06-6-2015 103/FCA/04/2015 14,000 plus C.S.T. @2%
(v) 27-6-2015 103/FCA/05/2015 18,000 plus C.S.T. @2%
(vi) Goods worth ` 7,000 (exclusive of tax) against Invoice No.103/FCA/04/2014 were returned on 29-6-2015.
(vii) Goods worth ` 13,000 (inclusive of tax @2%) sold on 26-12-2014 were returned on 30-6-2015.
(viii) Goods worth ` 6,500 (inclusive of tax @2%) sold on 27-12-2014 were returned on 30-6-2015.

404
l INDIRECT TAXATION

All the above sales were made in the course of interstate trade against Form C. Calculate the turnover and CST pay-
able @2%. Value Added Tax in the state of seller 5%.
Answer :
Statement showing taxable turnover and central sales tax payable for the first quarter from April 2015 to June 2015:
Date Invoice No. Taxable Central Sales Total Turn- Workings (`)
Turnover Tax payable over (`)
(`) (`)
05-4-2015 103/FCA/01/2015 10,000 200 10,200 10,000 x 2% = 200
12-4-2015 103/FCA/02/2015 80,000 1,600 81,600
05-5-2015 103/FCA/03/2015 61,176 1,224 62,400 62,400 x 2/102 = ` 1,224
06-6-2015 103/FCA/04/2015 14,000 280 14,280 14,000 x 2% = 280
27-6-2015 103/FCA/05/2015 18,000 360 18,360 18,000 x 2% = 360
Sub-total 1,83,176 3,664 1,86,840
Less: sales returns within 7,000 140 7,140 7,000 x 2% = 140
six months from the date
of sales
Net amount 1,76,176 3,524 1,79,700
Sales returns beyond six months from the date of sale considered as sales made to unregistered dealer (since, buyer
can not issue Form C for returns):
Sales returns beyond six months from the date of sales attract CST @ 5%. (i.e. 2% or Local VAT rate 5% whichever is
higher):
Taxable turnover = ` 19,118 [(i.e. ` 13,000 + ` 6,500) x 100/102]
CST payable = ` 956 (i.e. ` 19,118 x 5/100)
Summary:
CST payable against Form C sales = ` 3,524
Add: CST payable (Form C not received) = ` 956
----------------
=
` 4,480
Less: CST already paid on sales returns beyond six months = ` 382 (i.e. ` 19,118 x 2%)
---------------
Net CST liability for the 1st quarter (April June) = ` 4,098
=
=
==
=
==
=
Example 18:
Mr. Y reported sales turnover of ` 72,40,000. This includes the following:
(i) Excise duty ` 6,00,000; and
(ii) Deposit for returnable containers and packages ` 10,00,000.
Sales Tax was not included separately in the sales invoice.
Compute tax liability under the CST Act, assuming the rate of tax @ 2%.

Answer :
Computation of Central Sales Tax liability of Mr. Y
Turnover (including Central sales tax and deposit received towards returnable containers and packages) 72,40,000
Less: Deposit received towards returnable containers and packages not to be considered in turnover 10,00,000
Turnover (including central sales tax) 62,40,000
Less: Central sales tax thereon = 62,40,000 x 2/102 1,22,353
Taxable Turnover (excluding central sales tax) 61,17,647
Note: Excise duty is part of turnover and hence should not be excluded from turnover.
Example 19:
Mr. H, the proprietress of Aarav Enterprises is a registered dealer in Vadodara (Gujarat). From the under mentioned
particulars relating to the quarter ended 31st March, 2016. Find out her taxable turnover and the tax payable under
the Central Sales Tax Act, 1956:
(a) Goods worth ` 2,20,000 were invoiced to its against at NOIDA (U.P) while the goods were in transit, these were
sold to Uttar Pradesh Government for ` 2,41,020. The rate of tax in respect of such goods in the appropriate state
is 13.5%.
(b) Sale to a 100% Export Oriented Undertaking (EOU), goods worth ` 20,20,000 in Mumbai. The rate of tax in the State
is 1%.
The above selling prices are inclusive of the central sales tax. The dealer has submitted all necessary declarations,
wherever required.
Answer :
Taxable Turnover = ` 2,12,352 (i.e. ` 2,41,020 x 100/113.5)
Taxable Turnover = ` 20,00,000 (i.e. ` 20,20,000 x 100/101)
-----------------
Total = ` 22,12,352
===========
Central Sales Tax payable
CST on sale of goods to UP Government = ` 28,668 (i.e. ` 2,12,352 x 13.5/100)
CST on sale of goods to 100% EOU = ` 20,000 (i.e. ` 20,00,000 x 1/100)
---------------
Total = ` 48,668
== = = == = = =
Notes: (a) Branch transfer exempted from Central Sales Tax against Form F. However, goods are sold during the
movement from one state to another state which will attract CST.
(b) Goods sold to 100% Export Oriented Units subject to Central Sales Tax.
Example 20:
Mrs. Vasudha, a registered dealer in Chennai, furnishes the following information relating to Inter-State sales made by
her during the year ended 31.3.2016:

`
Sales turnover as per books 36,72,000
Above includes
(a) Excise duty 3,20,000
(b) Freight (of this ` 30,000 alone is shown separately in sales invoices) 1,10,000
(c) Deposit for returnable containers 2,40,000
(d) Transfer to branch (covered by Form F) 12,15,000
(e) Packing charges 35,000
Further, in ascertaining the sales turnover above which includes CST also, the dealer has deducted the following:
1. Turnover relating to goods worth ` 10,000 (exclusive of tax) covered by invoice dated 2.4.2015, which were re-
turned on 1.10.2015.
2. Goods worth ` 12,400 (including tax) covered by invoice dated 13.4.2015 were rejected by the customer and the
dealer received back the goods on 14.10.2015.
Vasudha deals only in one type of commodity which is chargeable to VAT at 2% in Tamil Nadu.
You are required to compute the total turnover, CST and taxable turnover for the financial year 2015-16. Treatment of
each item above should be shown distinctly.
Answer:
Statement showing taxable turnover, CST and total sales for the year 2015-16:
Particulars Taxable Workings Turnover (`)

Total sales 36,72,000
Less: Freight shown separately 30,000
Less: Deposit of returnable containers 2,40,000
Less: Transfer to Branch 12,15,000 No CST against Form F
Less: sales returns within 6 months from the date of sales --- Deductible, already deducted
Less: Goods rejected --- Allowed to deduct irrespective of time, al-
ready deducted
Total sales 21,87,000
Less: Central Sales Tax 42,882 ` 21,87,000 x 2/102
Taxable Turnover 21,44,118
Example 21: Ram & Co., a registered dealer with head office at Kolkata, furnishes to you the following information:
`
Inter-State sale of goods (it includes ` 10,00,000 being the value of goods transferred to Chennai Branch
covered by Form F) 49,20,000
Dharmada collected 25,000
Weighment dues charged separately from buyers 2,15,000
Cash discount shown in invoice as per trade practice 60,000
Indemnity charges (recovered from buyers to cover transit loss based on their request 53,000
Calculate the turnover and CST payable, on the assumption that all the sales were made to registered dealers.

Answer:
Statement Showing Taxable Turnover & CST Payable

Inter-State sale of goods 49,20,000
Less: Branch transfer against Form F (10,00,000)
Add: Weighment charges charged separately 2,15,000
Add: Dharmada Collected 25,000
Less: Cash discount (60,000)
CST @2% on taxable turnover 82,000
Notes:
Indemnity charges do not form part of sale price Hence, should not be added
It is assumed that dharmada, weighment dues and indemnity charges are shown separately in the invoice and have
not been included in the total value of inter-State sale of ` 49.20 lakh and cash discount has also not been deducted
therefrom.
It is also assumed that the sale value of ` 49.20 lakh does not include Central Sales-tax.
Cash discount allowed as per trade practices does not form part of sale price. Hence, should be deducted.
Example 22:
Mr. Raja, a first stage dealer in packing machinery in the State of Tamil Nadu furnishes the following data:
`
(i) Total inter-state sales during F.Y. 2015-16 (CST not shown separately) 92,50,000
(ii) Above sales include:
Excise duty 9,00,000
Freight (Of this ` 50,000 is not shown separately in invoices) 1,50,000
Insurance charges incurred prior to delivery of goods 32,000
Installation and commissioning charges shown separately 15,000
Incentive on sales received from manufacturer 30,000
Determine the turnover and CST payable, assuming that all transactions were covered by valid C Forms.
Answer:
Computation of turnover of Mr. Raja and central sales tax payable by him:
Particulars `
Total inter-State sales 92,50,000
Less: Freight shown separately in the invoices 1,00,000
Installation and commissioning charges shown separately 15,000
Aggregate turnover 91,35,000

CST payable is ` 1,79,118 (i.e. ` 91,35,000 x 2/102)
Taxable turnover is ` 89,55,882 (i.e. ` 91,35,000 1,79,118)
Notes:
Excise duty forms part of the sale price and is not deductible.
Freight not shown separately in the invoices and insurance charges incurred prior to delivery of goods are not deduct-
ible in calculating the turnover.

Sale price includes incentive on sales received from manufacturer.
The CST on transactions covered by valid C forms is 2% or the State sales-tax rate, whichever is lower. It has been as-
sumed that in this case, the State VAT rate is higher than 2%. Therefore, the rate of CST is taken as 2%.
Example 23: Total interstate sale for the Financial Year 2015-16 of X Ltd. is ` 1,50,70,000, which consists of the following:
`
4 % CST sales 91,50,000
2% CST sales 59,20,000
Out of the goods sold for ` 91,50,000, on 16.7.2015 that were liable to CST @ 4% goods worth ` 50,000 were returned on
12.12.2015 and goods worth ` 1,20,000 were returned on 01.2.2015. A buyer to whom goods worth ` 55,000 carrying 2%
CST was dispatched on 16.4.2015, rejected the goods and the same were received back on 15.1.2016.
Compute the taxable turnover and tax liability of X Ltd., since all the relevant Forms have been received.
Answer:
Statements showing taxable turnover and CST payable:
Particulars Taxable Turnover (`) CST payable (`) Workings

Sales against Form C 86,34,615 1,72,692 91,00,000 1,20,000 = (`) 89,80,000.
CST = ` 1,72,692 (89,80,000x100x104) x 2/100
Sales against Form C 57,50,000 1,15,000 58,65,000 x 100/102 = ` 57,50,000
Sales without Form C 1,15,385 4,615 1,20,000 x 100/104 = ` 1,15,385
Total 1,45,00,000 2,92,307
Working Note:
Particulars 4% CST sales (`) 2% CST sales (`)

Sales 91,50,000 59,20,000
Less: sales returns within six months from the date of sales 50,000
Less: rejected --- 55,000
Sub-total 91,00,000 58,65,000
Example 24: M/s. Snow White Ltd., Mumbai sells iron rods to M/s. Hyderabad Ltd. in Vijayawada for a value of
` 10,00,000 inclusive of Central Sales Tax @ 2%. The local sales tax on iron rods in Mumbai is 13.5%. Both the dealers are
registered dealers.
(i) Ascertain the Central Sales-tax payable.
(ii) If Hyderabad Ltd. were unable to submit Form C, being an unregistered dealer, what will be the Central Sales
Tax liability, if the local sales tax rate is 13.5%?
Note: Iron rods are not declared goods.
Answer :
(i) CST payable if both are registered dealer = ` 19,608 [(i.e. ` 10,00,000 x 100/102) x 2/100]
(ii) CST payable if Hyderabad Ltd. is unregistered dealer = ` 1,32,353 [(i.e. ` 10,00,000 x 100/102) x 13.5/100]
Example 25: Mr. K of Kolkata sells goods to Mr. C of Chennai and delivers the same at Kolkata to MKS Transport. The
lorry receipt was sent to Mr. C by post. While goods were in transit, Mr. C sells the goods to Mr. V of Vijayawada by
making an endorsement of LR and goods were diverted to Vijayawada. Is the second sale between Mr. C and Mr. V
chargeable to tax?
Answer:
The first sale by Mr. K to Mr. C is chargeable to central sales tax. However, sale of goods by C to V is exempt under
Section 6(2) i.e. subsequent sale by transfer of documents to avoid multiple tax incidences.
Note: Form E-I from K and Form C from V has to be received by C.


(i) Which of the following is not liable to sales tax under CST Act?
(a) Lottery tickets
(b) Newspapers
(c) Sim cards
(d) Trade debtors .
Ans. (b) Newspapers
(ii) Goods returned are not liable to sales tax if they are returned
(a) by the buyer at any time in the financial year in which sale takes place
(b) within six months of the end of the financial year in which sale takes place
(c) Within six months of sale
(d) Within six months of sale but not-later than three months from end of the relevant financial year in which sale
took place.
Ans. (d) Within six months of sale but not-later than three months from end of the relevant financial year in which sale
took place.
(iii) Inter-State sale is defined in Sec. 3 of CST Act as a sale or purchase those occasions the movement of goods
from
(a) one State to another,
(b) one country to another,
(c) one State Government to another.
(d) one district in one State to another district in the same state through another State.
Ans. (a) one State to another
(iv) Which one of the following is incorrect?
(a) Form C can be issued by a registered dealer,
(b) CST is collected in the State in which the goods are delivered.
(c) Sales in the course of export are exempt from CST,
(d) Electricity is chargeable to CST.
Ans. (b) CST is collected in the State in which the goods are delivered
(v) Sale under CST Act includes a transaction in the nature of/a delivery of goods on_________
(A) Job work
(B) Hypothecation
(C) Hire purchase
(D) Pledge
Ans. (C) Hire purchase
(vi) CST is not chargeable on the following as it is not sale of goods
(A) Business
(B) Copyright
(C) trade mark
(D) advance license
Ans. (A) Business
(vii) A SEZ (Special Economic Zone) unit has to submit the following forms to the manufacturer to obtain goods without
CST from him
(A) Z form
(B) S form
(C) H form
(D) I form
Ans. (D) l form

(viii) In case of sale to registered dealers which issue C forms the maximum rate of CST tax is
(A) 0%
(B) 1%
(C) 4%
(D) 2%
Ans. (D) 2%
(xx) R of Coimbatore, Tamilnadu sold to a Malaysian Ship at Kochi port in Kerela, some goods for consumption on
board the ship; such sale will be
(A) Intra-State sale
(B) Inter-State sale
(C) Export sale as it is a foreign ship
(D) Sale in the course of import
Ans. (B) Inter-State sale.
Fill in the blanks
(i) First appellaleappellate authority can condone delay up to 30 days in filing the CST appeal if proper cause is
shown.
(ii) CST is payable on inter state sales, while VAT is payable on sale within the State.
(iii) Central Sales Tax applies to the whole of India including the State of Jammu & Kashmir.
(iv) Certificate of registration under Central Sales Tax Act is to be issued by the registration authority in the prescribed
Form B (B / G).
(v) Offences under CST are cognizable but are bailable.
(vi) A Dealer has made inter State sale of goods to a Buyer who exported the goods. The Dealer is not liable to pay
Central Sales Tax if the Buyer issues Form H to Dealer.
(vii) Declared goods means goods declared u/s. 14 of the CST Act to be of Special importance.
(viii) State Government is empowered to grant exemption from charge of CST.
(ix) The Central Sales Tax applicable to goods exempt from State Sales Tax is Nil.
(i) As per section 8(2) of the Central Sales Tax Act, 1956 in respect of inter-State of goods not falling under section
8(1), the CST rate applicable is the State Sales tax (or VAT) rate.
Ans. True, in respect of inter-State of goods not falling u/s 8(1), the CST rate applicable is the State Sales tax (or VAT)
ate.
(ii) Under Central Sales Tax Act, for an activity to be classified as business profit motive is immaterial.
Ans. True. As per Sec.2 (aa), it is specifically mentioned that profit motive is immaterial.
(iii) Security demanded from dealer under the Central Sales Tax Act, 1956 can be satisfied in the form of surety
bond.
Ans. True, however, where the security furnished by a dealer is in the form of a surety bond and the surety becomes
insolvent or dies, the dealer shall -.
1. within 30 days of the occurrence of such event inform the authority granting the certificate of registration;
and
2. Within 90 days of the occurrence of such event furnish a fresh surety bond or other security.
(iv) Appeal against an order passed by the Registration authority must be filed within 90 days of the service of order
to the Central Sales Tax Authority.
Ans. False. Appeal against an order passed by the Registration authority must be filed within 30 days of the service of
order to the Central Sales Tax Authority.
(v) Lottery ticket is not goods under the CST Act.
Ans. True, Lottery ticket is an actionable claim and hence not considered as goods [Sunrise Associates vs. Govt. of
NCT of Delhi & Ors (SC)]
(vi) Insurance company which takes possession of. damaged goods for which it has paid, sells the damaged goods.
The insurance company is a dealer under the Central Sales Tax Act.

Ans. True. Insurance company which takes possession of damaged goods for which it has paid, sells the damaged
goods is treated as dealer.
(vii) The sale of assets by bank for realization of loans is liable to tax under CST Act.
Ans. False. The sale of assets by bank (being ancillary activity) for realization of loans is not liable to tax under CST as
the main activity of bank is not business (trade, commerce, manufacture, etc.). Refer (Canara Bank Case).
(viii) CST is leviable on sale of stocks, share and securities traded by a dealer in shares.
Ans. False, stock, share and securities are not considered as a goods, hence CST is not levied.
(ix) Stock transfer is to be treated as Inter State Sale under the CST Act, 1956.
Ans. False, Stock transfer between head office & branch office will not amount to interstate sales as the basic ele-
ments of sale i.e., the presence of a buyer & seller, consideration & transfer of ownership etc. are not present.
(x) Transfer by way of mortgage is liable to CST.
Ans. False, the definition of sale u/s 2(g) specifically excluded mortgage, hypothecation of goods, charge or pledge
on goods. Hence, CST cannot be charged when there is transfer by way or mortgage.
(i) Place of Business under the Central Sales Tax Act 1956. Comment.
Ans. Place of Business [Sec. 2(dd)] It includes -
(I) A warehouse, godown or other place where a dealer stores his goods;
(II) The place of business of an agent, where a dealer carries on business through such agent; and
(III) A place where a dealer keeps his books of account.
(ii) Goods under CST includes all kinds of movable property. Comment.
Ans. Goods includes all movable assets except newspaper, actionable claim and shares & securities.
(iii) Normally, if tax is levied by law of Parliament it is administered by Central Government. However, there is one tax
which is levied by law of Parliament, but administered by State Government. Which is that Tax?
Ans. Central Sales Tax Act is passed by Parliament but administered by State Government
(iv) manufactured goods within State of Odisha. The Vat paid on inputs was ` 1,30,000. The goods were sold in inter-
state for ` 20 lakhs by charging Central Sales Tax 2%. How much Input Tax Credit can be availed by the manu-
facturer?
Ans. ` 1,30,000 is available as input credit .
(v) As per definition of Central Sales Tax Act, the turnover is inclusive of Central Sales Tax or exclusive of Central
Sales Tax?
Ans. Turnover is exclusive of Central Sales Tax.
(vi) Offences Under C.S.T are cognizable. Mention a few.
Ans. As per Sec.11, all offences punishable under this Act shall be cognizable and bailable. Some of the offences
are:
(a) Fails to get himself registered even when the dealer is required to do so;
(b) False representation by a registered dealer that the goods purchased are covered by his certificate;
(c) Falsely represents himself as a registered dealer, though he is not;
(d) Collecting tax in contravention of the Act.
(vii) is a single declaration form in Form C sufficient to cover all the transactions between two dealers in a financial
year under the Central Sales Tax Act, 1956?
Ans. No, Form C is required on quarterly basis.
(viii) What type of goods are eligible from purchase at concessional rate in inter-State sales? Should any document
be submitted in this regard?
Ans. Following goods are eligible from purchase at concessional rate in inter-State sales against Form C:
(a) Goods intended for resale
(b) Used in manufacturing/processing of goods for sale
(c) Used in mining
(d) Used in generation/distribution of power

(e) Used in packing of goods for sale / resale
(f) Used in telecommunication network.
(ix) State briefly whether sales tax will be levied on the following:
(i) Shares and Debentures
(ii) Sale of newspaper.
Ans.
(i) No, as shares and debentures are specifically excluded from the definition of goods, hence CST is not levied on
shares and debentures.
(ii) No, as newspaper is specifically excluded from the definition of goods, hence CST is not levied on shares and
debentures.
(x) Why certificate in form H is necessary to a penultimate exporter?
Ans. Sale is the course of export is exempt for CST. Actual exports have full export documents to establish his export
sale. However, penultimate seller does not have many documents to establish his sale for the purpose. Thus, in
order to establish his sale, actual exporter provides him Form H as an evidence for penultimate sale.
(xi) What will be the Central Sales Tax leviable to registered and unregistered dealer in following situations? Rate of
CST applicable is 2%.
(i) If local VAT is 1%
(ii) If VAT is 2%
(iii) If VAT is 4%
(iv) If VAT is 12.5%
Ans.
CST rates applicable to Registered and Unregistered dealers are as follows:
SI No. Situations Registered Dealer Unregistered Dealer

A If local VAT is 1% 1% 1%
B If local VAT is 2% 2% 2%
C If local VAT is 4% 2% 4%
D If local VAT is 12.5% 2% 12.5%
(xii) State whether the following are includible in Sale Price.
(i) Excise Duty
(ii) Packing materials and Packing charges
(iii) Insurance charges
(iv) Weighment charges paid for goods
Ans.
(i) Yes
(ii) Yes
(iii) Yes, if goods are insured by the seller
(iv) Yes
(xiii) Sales Tax payable on product A is sold within state of Punjab is 10%. If the product is sold in inter state sale, what
will be the Central Sales Tax payable if:
(I) Buyer furnish H form
(ii) Buyer furnish J form.
Ans.
(i) If buyer is providing Form H, then CST is not applicable as Form H is provided by the seller in the course of export
to the penultimate seller. Penultimate sale is exempted sale under the CST Act.
(ii) Sale of any goods made by a dealer to an official personnel, consular or diplomatic agent of any foreign dip-
lomatic mission or consulate in India or the United Nations or other similar international body is exempt from CST
provided buyer provides declaration in Form J.

(xiv) Define Works contract as per CST Act. Can Sales Tax is levied on activity of textile processing?
Ans. As per Sec. 2(ja), Works Contract means a contract for carrying out any work which includes assembling, con-
struction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improve-
ment, repair or commissioning of any movable or immovable property. VAT can be levied on activity of textile
processing.
(xv) Bikash despatches goods from Bihar to Rajasthan and raises invoice on Pawan in Delhi, Bikash charges 4% CST
and pays the same in Bihar. During movement of goods, Pawan sells goods to Ram of UP and Ram ultimately sells
goods to Dhiraj in Kerala. Dhiraj takes delivery of goods and the movement of goods comes to end. Sale from
Pawan to Ram and Ram to Dhiraj is by transfer of documents. Explain the form to be issued so that the subsequent
sales are exempt from central sales tax.
Ans. In case of subsequent sale, seller must give a certificate in Form E-I (in case of first sale) and Form E-ll (in case of
subsequent sale). Further, every seller must obtain a certificate in Form C from the buyer.
In the instant case only sale made by Bikash to Pawan is liable to tax under CST Act and all other subsequent sales
made during the movement of goods from one State to another are exempted.
(xvi) M/s, Rama Traders placed orders for import of sugar from various exporters abroad. All import documents were
in the name of M/s. Rama Traders. After import, M/s. Rama Traders allotted the imported sugar to various buyers
in India. No Sales Tax was charged as the sales were treated as in the course of import. Is this in order? Discuss.
Ans. As per sec.5(2) of the Central Sales Tax Act, 1956 Sale or purchase of goods shall be deemed to take place in the
course of import of goods into India if -
(a) the sale or purchase occasions such import; or
(b) it is effected by a transfer of documents of title to the goods before the goods have crossed the customs
frontiers of India.
Further, it is to be noted that import of goods starts at a point, when the goods cross the custom barrier of the
foreign country and ends at a point when the goods cross the custom barrier of India.
Since M/s Rama Traders has sold sugar after completion of import i.e., after the good have crossed the customs
frontier of India, hence the same shall not be considered as sale in the course of import.
(xvii) Can State Government impose sales tax on sale of newspapers? Answer with relevant provision in constitution
of India.
Ans. Entry 54 of List II of Seventh Schedule to Constitution of India states Tax on sale or purchase of goods other than
newspapers, subject to the provisions of entry 92A of List I.
Thus, Constitution of India prohibits levy of sales tax on sale of newspapers by State Government
(xviii) State various purposes for which goods can be purchased at concessional rate under Central Sales Tax Act, by
issuing C form.
Ans. As per sec. 8(3), following goods are covered in the certificate:
1. Goods which are intended for resale by the purchasing dealer;
2. Goods purchased by the dealer for use by him in
(a) the manufacture or processing of goods for sale;
(b) telecommunication network;
(c) mining: or
(d) generation or distribution of electricity or any other form of power.
3. Containers or materials used in packing of goods for sale;
4. Containers or materials used for packing above-mentioned goods or containers.
(xix) A sold goods to B in inter-state sales. A is registered under Central Sales Tax Act but B is not registered. What will
be the rate of central sales tax if
(a) State Vat rate for Goods sold within the State is 1%.
(b) State Vat rate for Goods sold within the State is 15%.
Ans.
(a) 1%;
(b) 15%
(xx) Who is required to issue F form under Central Sales Tax Act and to whom?

Ans. This form is used by registered dealer for making a declaration to the effect that the transfer of goods from one
state to another by him is done otherwise than by way of sale as per the provisions of Section 6A of the CST Act,
1956. These forms are issued by the sales tax authorities of the concerned state where the goods are received
(xxi) At what frequency C form is required to be issued?
Ans. C Form is required to be issued quarterly.
(xxii) A manufacturer supplied goods for export to merchant exporter in India located in another State. The merchant
exporter then exported the goods. State how the manufacturer can claim exemption from payment of Central
Sales tax.
Ans. If the merchant exporter issues H form to the manufacturer, the manufacturer can claim exemption from pay-
ment of CST.
(xxiii) A dealer made inter-state sale by charging CST@ 2% on assumption that buyer will issue C form. However, the
buyer did not issue any C form. State implications.
Ans. Central Sales Tax (CST) will be payable at the rate as applicable to those goods under State Vat provisions. Inter-
est for delayed payment will also be payable.
(xxiv) A manufacturer sent his manufactured goods to his branch in another State. Which form is required to be issued
and by whom, so that the manufacturer can claim exemption from Central Sales Tax? What would be the con-
sequences, if that form is not issued?
Ans. Form F is required to be issued by branch office receiving the goods as branch. If the form is not issued the trans-
action will be treated as sale for all purposes of the CST Act.
(xxv) State (a) restrictions on State Governments on imposing sales tax on goods of special importance (b) Provision
if goods of special importance are purchased within the State and sold inter-state.
Ans. Restriction on levying tax on sale or purchase of declared goods [Sec. 15]
Maximum percentage of local sales tax on declared goods [Sec. 15(a)] The local sales tax payable in respect
of any sale or purchase of declared goods within a State should not exceed 5% (at a time) of the sale or pur-
chase price thereof.
Refund of local tax [Sec. 15(b)] Where local sales tax has been paid on the sale or purchase of declared goods
within the State and subsequently, such goods are sold (in the same form) in the course of inter-State trade or
commerce, then local sales tax paid on such goods are reimbursed (not set off) to the person making such inter-
State sale, provided
(a) Whole amount of central sales tax has been paid in respect of the sale of such goods in the course of inter
State trade or commerce; and
(b) The local sales tax has been paid in respect of the sale of such goods within the State.
Note: Central sales tax must have been paid on inter State sale. This implies, an inter-State sale, which is exempt
under this Act, shall not be entitled for refund of local tax paid on intra-State sale.
E.g. If tax liability under CST Act is Rs.6OO on an inter-State sale of declared goods and such dealer has already
paid 150 local sales tax, then on payment of Rs.600 (being central sales tax) he will get a refund of 15O (local tax).
It is to be noted that he cannot pay Rs. 450 (i.e. Rs. 600 Rs. 15O) as tax on inter-State sale.
(xxvi) State in brief provisions where Parliament can impose restrictions on rate of sales tax (VAT) which can be im-
posed by State Government on goods sold within the State.
Ans. Article 286(3)(a) of Constitution of India authorises Parliament to declare some goods as of special importance
and to impose restrictions and conditions in regard to power of States in regard to levy, rates and other incidence
of tax on such goods. Parliament can restrict powers of State Government to tax such declared goods.
(xxvii) XYZ Ltd. made an inter-state sale of 10 lakhs plus CST @ 2% on 16.7.2014. State Vat rate on those goods is 13.5%.
The goods were returned by customer on 12.2.2015 as non-saleable. Calculate how much CST would be pay-
able.
Ans. If goods were rejected even after 6 months, the dealer is not liable for payment of CST.

Practical Problems
(i) X reported a sales turnover of ` 36, 20,000. This includes (1) trade commission ` 3, 00,000; (ii) deposit for returnable
containers and packages ` 5, 00,000. Sales tax was not included separately in the Sales Invoice. Compute tax
liability under C.S.T. Act, assuming the rate of tax @ 2%.
Ans. Computation of tax liability
Particulars Amount (`) Amount (`)

Sales Turnover 36,20,000
Less:
Trade Commission 3,00,000
Returnable Turnover 5,00,000 8,00,000
Tax on above 2% 56,400
(ii) Mr. X, a dealer located in the State of Maharashtra, dealing in machinery used is rolling mills furnishes following
information for the financial year 2015-16.
(a) Total inter-state Sales during in the financial year (CST not shown separately) ` 2,29,50,000
(b) Trade Commission for which credit have been issued separately ` 5,78,125
(c) Freight and Transportation charges charged separately in invoice ` 4,00,000
(d) Freight charges included in value but not shown separately ` 2,00,000
(e) Insurance for transport of machinery upto destination ` 75,000
(f) Installation and commissioning charges levied separately in invoice ` 1,00,000
(g) The buyers have issued C forms in respect of machinery bought by them from Mr. X. Compute the tax liability
under.CST Act.
Ans. Computation of Tax Liability

Gross turnover (including CST) 2,29,50,000
Less:
Trade commission 5,78,125
Freight charges separately in the invoices 4,00,000
Installation & Commissioning 1,00,000 10,78, 125
Aggregate Sale Price 2,18,71,875
2 4,28,860
Tax on above (` 2,18,71,875 x )
102
Turnover 2,14,43,015

(iii) Bims Traders, a registered dealer in Haryana made total interstate sale of ` 16,00,000 (including CST @ 2%)
during 2015-16, as per invoices issued. These include installation charges of ` 25,000 charged separately and out-
ward freight and insurance charges incurred at request of buyer and charged separately in invoice ` 60,000. The
total sale value also included excise duty of ` 80,000. The dealer had given trade discount of ` 48,000 by way of
a credit note. Goods worth ` 40,000 were sold on 6.6.2015 ad returned on 1.12.2015. The buyers had issued C form
for all invoices. Calculate CST payable.

Ans. Computation of turnover

Gross turnover 16,00,000
Less: 25,000
Installation charges 48,000
Trade discount 60,000
Freight and insurance charged separately in the invoices 40,000 1,73,000
Goods Returned within 6 months 14,27,000
CST included [` 14,27,000 /102% * 2%] 27,980
Tax on above [` 13,99,020 * 2%] 27,980

(iv) Laxman & Co. furnishes to you the following information:
(1) Inter-State sale of goods (it includes `10,00,000 being the value of goods transferred to Chennai Branch for
which Chennai Branch had issued Form F) ` 69,00,000
(2) Dharmada (Charity) collected separately ` 25,000 [This was collected only from buyers who had voluntarily
agreed for such charge]
(3) Weighment charge recovered separately from buyers ` 2,40,000
(4) Cash discount shown in invoice as per trade practice ` 60,000.
(5) Transit Insurance charges recovered from buyers to cover transit loss based on their request ` 50,000.
alculate the turnover and CST payable, on the assumption that all the sales were made to registered dealers,
C
who have issued C forms. Assume that the price is exclusive of CST.
Ans.
Computation of Taxable Turnover

Gross turnover 69,00,000
Add: Weighment charges 2,40,000
Dharmada (Charity) 25,000
71,65,000
Less:
Stock transfer to the branch 10,00,000
Cash Discount 60,000
Transit Insurance 50,000 11,10,000
Tax on above [ ` 60,55,000 2%] 1,21,100


State Level VAT
Study Note - 7
STATE LEVEL VAT

7.1 Background of State VAT
7.2 Basic Principle of VAT
7.3 Registration Under VAT
7.4 Overview of State VAT
7.5 Purchase Tax in VAT or Reverse Charge
7.6 Tax Rates Under VAT
7.7 Valuation of Taxable Turnover
7.8 Procedural Provisions under VAT
7.9 Assessment of Tax
7.10 Impact of VAT on CST
7.11 Role of Cost Accountant Under VAT
7.12 Agricultural Products or Commodities
7.13 High Seas
7.14 Phased out Inter-state Sales-tax (i.e. Central Sales Tax)
7.1 BACKGROUND OF STATE VAT
Tax on sale within the State is a State subject. Over the period, many distortions had come in taxation. Following were
some of the problems -
i. Unhealthy competition among States by giving sales tax incentives to new industries. When one State gave
incentives, others also had to give. This ruined State finances.
ii. Tax rate war started to attract more revenue to State. Often, goods from the State were sent to another State
on stock transfer basis and brought back in the same State to show as Inter-State Sale.
iii. States introduced first point sale to avoid cascading effect of State sales tax. This made tax evasion easy.
iv. Cascading effect of tax due to Central Sales Tax.
Discussions with State Governments - Central Government initiated discussions with State Governments in 1995. After
lot of persuasion by Central Government, all States ultimately agreed to introduce State Level Vat at the conference
of Chief Ministers all States at Delhi in November, 1999.
Empowered Committee of State Governments - A high power committee consisting of senior representatives of all 29
States was constituted under Chairmanship of Dr. Asim Dasgupta, Finance Minister, West Bengal. After deliberations
and many meetings, it was announced that all States have agreed to introduce VAT w.e.f. 1-4-2005. A White paper
was released by Dr. Asim Dasgupta, Chairman of Empowered Committee, on 17-1-2005. The White Paper is a policy
document indicating basic policies of State Sales Tax VAT.
CST is proposed to be abolished Vat is consumption based tax while CST is production based tax. Thus, CST is against
principles of Vat.
Revenue loss if CST rate is reduced - If CST rate is reduced, State finances will suffer, since revenue of Central Sales Tax
goes to respective State Government. It is proposed to authorise State Governments to levy tax on some services like
medical, legal and education.

State-Wise position of VAT
Haryana was the only State to introduce VAT w.e.f. 1-4-2003. 20 States introduced VAT w.e.f. 1-5-2005. These include
Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal.
States ruled by BJP like Gujarat, Chhatisgarh, Jharkhand, Madhya Pradesh and Rajasthan introduced Vat w.e.f. 1-4-
2006. Tamilnadu has introduced Vat on 1-1-2007.
Uttaranchal has not introduced Vat till November, 2007. UP has introduced Vat w.e.f. 1-1-2008. J&K is not in the picture
due to constitutional issues.
Vat system not same in all States - The VAT system as introduced is result of deliberations of committee of representa-
tives from 29 States. Each State has its own views and peculiarities. Hence, having uniform nationwide Vat is very dif-
ficult and some compromises/adjustments are inevitable.
Vat law not uniform in all States - Each State has made changes as per their needs. Though basic concepts are same
in Vat Acts of all States, provisions in respect of credit allowable, credit of tax on capital goods, credit when goods are
sold inter-state are not uniform. Even definitions of terms like business, sale, sale price, goods, dealer, turnover,
input tax etc. are not uniform. Schedules indicating tax rates on various articles are also not uniform, though broadly,
the schedules are expected to be same.
State VAT is Diluted Version of VAT
The VAT as introduced, is a diluted version of VAT and some compromises have been made. There is no credit of
Central Sales Tax paid on inter-state purchases. This problem will not arise if CST rate is reduced to 0% on 1-4-2010, as
planned and inter-state sale is made zero rated.
If goods are sent outside State on stock transfer basis, credit (set off) of tax paid on inputs is available only to the extent
of tax paid in excess of 2%. Thus, credit (set off) to the extent of 2% tax on inputs is lost. It is not clear what will be position
when CST rate is brought down to Nil. Thus, the VAT as introduced is State VAT and not a National VAT.
World Scenario in Respect of Development of VAT
Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transpar-
ent tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
First introduced in France - Concept of VAT was first conceived by Mr. Maurice Laure, Joint Director of French Tax Au-
thority. Vat (termed as TVA in France) was introduced for the first time in France on 10-4- 1954.
VAT in Europe - Vat system got real impetus when European Union (EU) made adopting VAT regime as condition
precedent to joining European Common Market. Members of EU (that time it was European Common Market) were
required to introduce common system of Vat vide Sixth Council Directive No. 77/388/EEC dated 17-5-1977. This is most
important document so far as Vat is Europe is concerned.
Vat is imposed in Europe on both goods and services. Vat rate varies in various member countries of European Union.
Minimum is 15% and maximum is 25%. General Vat rate in UK is 17.5%, but there is lower rate of 5% in case of some
goods and some goods are exempt.
General Vat rate in some other countries is as follows : Sweden 25%, Germany 19%, France 19.6%.
If goods or services are exported to another EU member country or other country, Vat is not imposed. Vat paid on
inputs is granted as refund.
European Union was formed on 1-11-1993. Many countries joined EU later. As in July 2007, 27 countries are part of EU.
Development in other Countries - Many countries in Asia, Central America and other parts of Europe have introduced
Vat. So far, about 135 countries have introduced Vat.
VAT in China - China introduced in VAT on 24 items in 1984. Later, regulations for VAT Tax were made effective on 1-1-
1994 and VAT was extended to all goods and services. The general VAT rate is 17%. Vat rate is reduced to 13% in some
cases. There is no VAT on exports.
Consumption Tax in Japan Japan has system of consumption tax, which is levied @ 5%.
No VAT in USA - USA has not introduced VAT. In USA, tax is levied by State Governments on retail sale. The rate varies
between 0% to 8.8%. There is no tax on services in USA.
Development in India - In India, VAT was introduced at manufacturing stage under Central Excise in 1986, termed

State Level VAT
as MODVAT (modified value Added Tax). MODVAT was re-named as CENVAT w.e.f. 1-4- 2000. System of VAT was
introduced in Service Tax w.e.f. 16-8-2002. Credit of excise duty and service tax was made inter-changeable w.e.f. 10-
9-2004. Thus, partial integration of goods and service tax has been achieved. Presently, full integration is not possible
since power to levy Sales Tax is with State Government.
7.2 BASIC PRINCIPLE OF VAT
VAT (Value Added Tax) is a tax on final consumption of goods and services.
VAT works on the principle that when raw material passes through various manufacturing stages and manufactured
product passes through various distribution stages, tax should be levied on the Value Added at each stage and
not on the gross sales price. This ensures that same commodity does not get taxed again and again and there is no
cascading effect. In simple terms, Value Added means difference between selling price and purchase price. VAT
avoids cascading effect of a tax.
Basically, VAT is Multi-Point Tax, with provision for granting set off (credit) of the tax paid at the earlier stage. Thus, tax
burden is passed on when goods are sold. This process continues till goods are finally consumed. Hence, VAT is termed
as consumption based tax. It is tax on consumption of goods and services. VAT works on the principle of Tax Credit
System.
Distinction between Sales Tax and VAT - Basic distinction between Vat and sales tax is that sales tax is payable on total
value of goods while Vat is payable only on value addition at each stage.
Cascading Effect of Tax
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through
various stages and processes till it reaches the ultimate stage e.g., Steel Ingots are made in a steel mill. These are rolled
into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manu-
facturer becomes input for second manufacturer, who carries out further processing and supply it to third manufac-
turer. This process continues till a final product emerges.
This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer. If a
tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes
from one stage to other, as given below, where A sales to B and B sales to C.
Details A B C
(`) (`) (`)
Purchase 110 165
Value Added 100 40 35
Sub-Total 100 150 200
Add Tax 10% 10 15 20
Total 110 165 220
You will find that B is paying tax not only on his contribution of ` 40 but also on ` 100 and ` 10. Thus, same material gets
taxed again and again and there is also tax on tax. As stages of production and/ or sales continue, each subsequent
purchaser has to pay tax again and again on the material which has already suffered tax. Tax is also paid on tax. This
is called cascading effect.
Disadvantages of Cascading Effect of Taxes
A tax purely based on selling price of a product has cascading effect, which has the following disadvantages:
i. Real tax content in the price of a product cannot be known, as a product passes through various stages and
tax is levied at each stage.
ii. Tax burden on any commodity will vary widely depending on the number of stages through which it passes in
the chain from first producer to the ultimate consumer.
iii. Ancillarisation is discouraged and manufacturer tries to manufacture all parts and do all processes in his plant
itself. This increases manufacturing costs.

iv. End use based exemptions and concessions (e.g. exports or goods consumed by poor) cannot be given since
it is not known what were taxes paid in earlier states.
v. Exports cannot be made fully tax free.
VAT avoids Cascading Effect of Tax
System of VAT works on tax credit method. In Tax Credit Method of VAT, the tax is levied on full sale price, but credit
is given of tax paid on purchases. Thus, effectively, tax is levied only on Value Added. Most of the countries have
adopted tax credit method for implementation of VAT.
The aforesaid Example will work out as follows under VAT system.
B will purchase goods from A @ ` 110, which is inclusive of duty of ` 10. Since B is going to get credit of duty of
` 10, he will not consider this amount for his costing. He will charge conversion charges of ` 40.00 and sell his goods at
` 140. Following example will illustrate the tax credit method of VAT.
Transaction without VAT Transaction with VAT
Details A B A B
(`) (`) (`) (`)
Purchases 110 100
Value Added 100 40 100 40
Sub-Total 100 150 100 140
Add Tax 10% 10 15 10 14
Total 110 165 110 154
Note - B is purchasing goods from A. In second case, his purchase price is ` 100 as he is entitled to VAT credit of
` 10 i.e. tax paid on purchases. His invoice shows tax paid as ` 14. However, since he has got credit of ` 10, effectively
is paying only ` 4 as tax, which is 10% of ` 40, i.e. 10% of value added by him.
Meaning of Value Added - In the above example, the value of inputs is ` 110, while value of output is ` 150. Thus,
the manufacturer has made value addition of ` 40 to the product. Simply put, Value Added is the difference be-
tween selling price and the purchase price.
Revenue Neutral Rate
Government was earlier getting tax revenue of ` 25. In above example, Government gets revenue of `14 only. To
avoid loss of revenue, rate of tax will have to be suitably increased such that Government gets same revenue as per
previous system. This is termed as RNR (Revenue Neutral Rate). In aforesaid example, RNR will be high i.e. 17.86%
(25/140100).
Practically, since most State Governments had single point sales tax at first level, RNR is not high. In fact, RNR is lower
than the earlier sales tax rate since under VAT, tax is realised on final selling price and not the price at the first level.
For example, if earlier sales tax rate was 15% on wholesale price of ` 100; under VAT system, tax will be collected at
consumption stage i.e. on retail price of (say) ` 140.
It has been decided to levy sales tax at RNR of 13.5% to 15% for most of commodities.
What is meant by Consumption types of VAT? - Consumption based tax means tax is actually levied only when
goods are finally consumed/ utilised. Till then, the tax burden is passed on to next buyer.
Advantages of VAT Over Conventional System of Taxation
Advantages of VAT are as follows:
i. Tax burden is only at the last i.e. consumption stage. This is useful for taxation structure based on destination
principle.
ii. It becomes easier to give tax concessions to goods used by common man or goods used for manufacture of
capital goods or exported goods.
iii. Exports can be freed from domestic trade taxes.

State Level VAT
iv. It provides an instrument of taxing consumption of goods and services.

v. Interference in market forces is minimum.
vi. Simplicity and transparency.
vii. Aids tax enforcement by providing audit trail through different stages of production and trade.
viii. Thus, it acts as a self-policing mechanism resulting in lower tax evasion.
ix. Tax rates can be lower as tax is levied on retail price and not on wholesale price.
Disadvantages and Pitfalls in VAT
One major disadvantage of Vat is tremendous paper work and record keeping. Vat system can work only if record
keeping is proper and reliable. The elaborate record keeping is not possible to small businesses. Hence, exemption is
granted to tiny businesses whose turnover is below prescribed limits. In case of small businesses, a composition scheme
is provided where tax is paid on gross value of sales at a fixed rate.
Some major problems in Vat are
i. Bogus Invoices on which tax credit is availed, i.e. invoice without actual purchase of goods.
ii. Acquisition fraud (missing trader fraud).
iii. Carousel Fraud (missing trader fraud).
Acquisition fraud - The acquisition fraud is based on the fact that goods imported are tax free. A dealer imports goods
and makes sale within the country. The dealer either has his own Vat registration number or he hijacks others Vat
number. He collects the tax from buyer and then disappears without paying the collected tax to Government. The
buyer is usually innocent and is not aware that the seller is not going to pay tax to Government. This is missing trader
fraud of one type.
In Indian context, this fraud is possible when CST rate is Nil or is reduced to 1%. A dealer can purchase goods inter-state
and make sale within the State. He will collect tax and then disappear. He may use someone elses vat number in his
invoices or may himself get registered with address of some temporary rented premises.
7.3 REGISTRATION UNDER VAT
There are two types of Registration

(A) Compulsory Registration, and
(B) Voluntary Registration.
Registration is essential for a dealer for availing the benefit of VAT credit. If a dealer is either not registered or is regis-
tered as TOT (Turnover Tax) dealer then such dealers are not eligible for VAT credit on their purchases. Further, they
cannot pass the VAT credit to others.
(A) Compulsory Registration
Compulsory registration is attracted either
i. Based on Turnover, or
ii. Based on Transactions
(i) Based on the Turnover
Registration under VAT of dealers is compulsory whose gross annual turnover is above ` 5 lakh.Provision has been
initiated for voluntary registration also. 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.
No need of compulsory registration for small dealers whose gross annual turnover is less than ` 5 lakh. Also, the Empow-
ered Committee of State Finance Minister subsequently allowed the States to increase the threshold limit for the small
dealers to ` 10 lakh with the condition that the concerned State would bear the revenue loss, on account of increase
in limit beyond ` 5 lakh.
Example 1: Mr. Kamal commenced business with effect from 1st July, 2015 for buying and selling automobile parts
within the state of Tripura Nadu. His turnover exceeds ` 0 lakhs in the month of 1st of December, 2015 then he has to
get register within 30 days from the date of crossing the threshold limit of ` 10 lakhs.
(ii) Based on transactions
Registration is Compulsory based on transactions (irrespective of turnover) if the dealer falls under the following cat-
egory:
(a) Dealer is an importer.
(b) Dealer resides outside the State but is carrying on business within the State other than the State in which he has
residence.
(c) Dealer is registered or liable to be registered under the Central Sales Tax Act, 1956, or any dealer making pur-
chases or sales in the course of inter-state trade or commerce or dispatches any goods to a place outside the
State otherwise than by way of sale.
(d) Dealer is liable to pay tax at Special rates as specified in the Schedule.
(e) Every commission agent, broker, del-credere agent, auctioneer or any other mercantile agent whatever name
called, who carries on the business of buying, selling, supplying or distributing goods on behalf of his non- resi-
dential principal.
(f) Every person availing an industrial incentive in the form of a tax holiday or tax deferment.
(g) Every dealer executing any works contract exceeding ` 5 lakhs for the State Government or a local authority
and any dealer executing works contract and opting to pay tax by way of composition.
Example 2: Special rate of tax will be levied on a few commodities listed in Schedule VI to the APVAT Act, 2005, like
Liquor, petrol other than aviation motor sprit, Aviation motor sprit, Aviation turbine fuel, Diesel.
i. Every commission agent, broker, del-credere agent, auctioneer or any other mercantile agent by whatever
name called, who carries on the business of buying, selling, supplying or distributing goods on behalf of his non-
resident principal.
ii. Every person availing an industrial incentive in the form of a tax holiday or tax deferment.
iii. Every dealer executing any works contract exceeding ` 5 lakhs for the State Government or a local authority
and any dealer executing works contract and opting to pay tax by way of composition.
(B) Voluntary Registration
A Dealer can get himself voluntarily registered if he is not required to get himself compulsorily registered. Taxable turn-
over of a dealer does not exceed the limit of ` 10 lakhs in the case of sales of goods and such dealer do not expect
to exceed this limit still apply for voluntary registration for VAT.
He can do so if the activities of the dealer constitute a business for VAT purposes.
A dealer seeks voluntary registration because it gives him the following advantages:
i. When dealer makes taxable sales to other VAT dealers he can pass the input tax credit
ii. When dealer deals principally with other VAT dealer for purchasing of goods
iii. When dealer input tax credit likely to exceed the tax on the sales he made
iv. When dealer exports the goods input tax credit can be claimed as refund
None of the above advantages will be available to him if he does not get himself registered.
Without a registration he cannot issue tax invoice to his customer who is eligible otherwise for input tax credit. Such a
customer will therefore have to charge a higher price for his sales if he cannot claim a credit for the VAT. In this case
he might choose to trade with another VAT dealer and unregistered dealer would lose business.
Voluntary Registration may be refused by the department in any one of the following situations:
i. Dealer has no taxable sales at all
ii. Dealer has no proper place of business

State Level VAT
iii. Dealer is not in a position to keep proper books of accounts

iv. Dealer has no bank account with any bank
v. Dealer has arrears outstanding under General Sales Act, CST Act, etc.
vi. Dealer has no proper identity
Effective date of Registration
If the dealer falls under the compulsory registration category then the dealer has to register under the respective State
VAT Act. The registration is effective from the date on which application for registration is made, even if the registration
is granted later.
Apply for Registration
The dealer, who is required to be COMPULSORILY registered under VAT Act, will have to apply in the respective State
VAT Form [For example Andhra Pradesh State Value Added Tax From VAT 100] in the name of the tax office in
whose jurisdiction the dealers business premises is located.
Once registration is effected the dealer has to account for output tax attributable to his taxable sales. He will also
have to submit VAT returns monthly to the Commercial Taxes Department and keep proper books of accounts.
Cancellation of VAT Registration
Registration can be cancelled in the following cases
i. Dealer ceases to exist for which he got registered under respective state VAT Act.
ii. Dealer got insolvent
iii. Change of business constitution.
iv. Amalgamation or liquidation of company
v. Sale of entire business.
Display of Certificate of Registration
i. The certificate of VAT registration or TOT registration shall be displayed in a conspicuous place at the place of
business mentioned in such certificate and a copy of such certificate shall be displayed in a conspicuous place
at every other place of business within the State.
ii. No certificate of registration issued shall be transferred.
iii. Where the certificate of registration issued is lost, destroyed, defaced or mutilated a duplicate of the certificate
shall be obtained from the authority prescribed.
Tax Identification Number
Salient features of Tax Identification Number are as follows:
i. TIN consist of 11 digits
ii. First two characters represent the state code which is allotted by the Central Government which is common for
all the dealer of a state and balance nine characters will be, however, different in different States.
iii. TIN is useful to the department of commercial tax in case of computer applications, for detecting stop filers and
delinquent accounts
TIN also help full to the department for cross checking of sales and purchases across the state VAT dealers.
VAT Invoice
A VAT invoice is also called as Tax Invoice. A VAT invoice shows certain VAT details of a sale or other supply of goods
and services. It can be either in paper or electronic form. Under the scheme of VAT, the most important document is
tax invoice. A registered dealer is entitled to claim set-off only on the basis of a valid tax invoice. Set off is not available
on purchases affected through a bill or cash memorandum. A Tax Invoice is must to claim input tax credit (set off).
A valid Tax Invoice shall contain the following particulars:
i. The word tax invoice in bold letter at the top or at a prominent place.
ii. A consecutive serial number
iii. The date on which the invoice is issued
iv. The name, address and the TIN of the seller
v. The name, address and TIN of the buyer
vi. The description of the goods;
vii. The quantity or volume of the goods and price;
viii. The value of the goods;
ix. The rate and amount of tax charged; and
x. The total value of the goods
VAT Invoice Format
TAX INVOICE
M/S. . (Name & Address of the selling dealer) Book No. (Pre-printed )
Tax Identification Number (TIN) . Serial No. (Pre-printed )
Date ______/______/______
To. (Name and address of the purchasing dealer ) Purchasers
Tax Identification Number (TIN) (in any)
Sl. No. Description of Goods Quantity Unit price or Rate Total Amount (` )
1 Air condition Machines 2 ` 20,000 ` 40,000
Total Sale value before adding VAT ` 40,000

Plus VAT @ 12.5% ` 5,000
Total Sale Price with VAT ` 45,000
Signature
(of Selling Dealer)
Incentive Schemes under VAT
Incentives under VAT by and large are given to VAT Dealers by way of exemption from VAT, deferment of VAT liability
and remission of duty. Each one described below.
Exemption from VAT
Dealers are exempted from payment of tax if their taxable turnover in any financial year does not exceeds ` 10 lakhs
(some States restricted this limit to ` 5 lakhs).
The State Governments are empowered to issue exemption notifications from the payment of VAT to the eligible
industry. However, such exemption notifications, ceases either with the expiry of exemption period or the exemption
amount whichever occurs first.
Deferment of VAT liability
Under this eligible dealer collect VAT and pays VAT on their sales and purchases respectively. However, such eligible
dealer is not required to pay the collected tax to the Government immediately. It means the liability to pay service
to the Government is deferred for particular period. After expiry of such period, the liability is required to be paid in
prescribed installments.
Remission of VAT
Remission of VAT means VAT liability arises to pay but exempted from payment (i.e. remits). Under this mode an eligible
dealer is allowed to collect tax at an appropriate rate but is not required to pay the same. Such dealer is required to
State Level VAT
file periodical returns by showing tax liability. The Commercial Tax Department remits the tax liability. It means the VAT
liability is deemed to have been paid. The input tax paid (i.e. VAT on purchases) by the dealer is being given as refund
immediately after filing the return.
Carousel Fraud in VAT
Carousel means merry-go-around or roundabout (Concise Oxford Dictionary). This is missing trader fraud of
another type. It is much more involved and difficult to trace. The fraud works as follows
One dealer A imports goods without tax. He sells goods to B and charges Vat. B avails credit of tax shown by A
in his Invoice. B sells the goods to C and charges VAT. Actually, B has to pay only differential amount as tax. C
avails credit of tax shown by B in his Invoice. C sells goods to D by charging VAT. Since C has availed credit of
VAT paid by B, he has to pay only differential amount,
which is small. D exports the goods and claims refund of input tax i.e. entire tax shown by C in his Invoice.
This is a legitimate transaction. The missing link is that A actually does not deposit tax to Government. A either has
his own VAT registration number or he hijacks others VAT number. He collects tax and then disappears. Thus, D gets
refund of tax which is actually not paid by A. By the time Government traces the transaction to A, he i.e. A has
disappeared.
The same goods are used again and again for imports and exports. That is why the fraud is termed as carousel
fraud. The high value goods like microchips and mobile phones are generally used for such deals.
UK is said to be main victim of such fraud. It is reported that UK has lost 12.6 billion Euro in such frauds. It is said that
fraudsters prefer UK since it has weak and time consuming legal system.
In UK, reverse charge has been introduced in 2006 on tax payable on wholesale sales of mobile phones and micro-
chips to combat the fraud. In reverse charge, buyer himself is liable to pay VAT on goods purchased.
Can the fraud work in Indian context? In Indian context, the fraud can work in inter-state purchases and sales in the
same way in which it works in European countries in imports/exports. The person finally selling the goods outside the
State can either claim refund of tax paid on his purchases or can adjust the credit for paying taxes on sales made
within the States.
In fact, it is possible that actually, goods may not move. Only documents may move from one State to another.
What happens if D is innocent and had entered into genuine transaction? - If D is innocent, he cannot be penalised
for default of A. One such case has been decided by Court of Justice of European Communities, which is the highest
Court of European Union. In Optigen Ltd v. Commissioners of Customs and Excise 2006 EUECJ C-354/03 (decided on
12-1-2006), it has been held that Government cannot refuse refund in such cases.
In India also, Tribunal has held that a buyer cannot be penalised for default of the seller.
In Prachi Poly Products v. CCE 2005 (186) ELT 100 (CESTAT SMB), it was held that a genuine buyer is eligible for Cenvat
credit, even if the seller-manufacturer did not pay duty.
In R S Industries v. CCE 2003(153) ELT 114 (CEGAT), the manufacturer supplied goods to buyer on duty paying docu-
ment. The manufacturer had availed Cenvat credit on inputs fraudulently. It was held that the buyer is not responsible
for fraud of supplier and he is entitled to Cenvat credit on basis of a valid duty paying document.
Precautions being taken by State Governments under VAT - State Governments have put up or are in process of
putting up check posts at State borders to ensure that all goods entering and leaving State are properly recorded.
Though the purpose is sound, it is experience everywhere that such physical barriers increase harassment of honest tax
payers while dishonest taxpayers can devise their own ways to hoodwink the system.
7.4 OVERVIEW OF STATE VAT
A White paper was released by Dr. Asim Dasgupta, Chairman of Empowered Committee, on 17-1- 2005. The White
Paper is a policy document indicating basic policies of State Sales Tax VAT.
The white paper gives background of problems in present system of sales tax, principles of VAT and its advantages. It

also gives basic design of State level VAT proposed to be implemented. States have generally followed the principles
as given in the White Paper. Of course, there are variations.
Highlights of Policy regarding State VAT as Contained in White Paper are given below.
A. Tax Credit - Manufacturer will be entitled to credit of tax paid on inputs used by him in manufacture. A trader
(dealer) will be entitled to get credit of tax on goods which he has purchased for re-sale [para 2.3 of White
Paper on State-Level VAT].
B. Input Tax Credit - Credit will be available of tax paid on inputs purchased within the State. Credit will not be
available of certain goods purchased like petroleum products, liquor, petrol, diesel, motor spirit (position of fur-
nace oil is not clear in white paper, but many States do not give credit).
C. No credit is available in case of Inter-State purchases.
D. Credit of tax paid on capital goods - Credit will be available of tax paid on capital goods purchased within the
State. Credit will be available only in respect of capital goods used in manufacture or processing. The credit will
be spread over three financial years and not in first year itself. There will be a negative list of capital goods [para
2.4 of White Paper on State-Level VAT]
States has deviated from these provisions. In West Bengal and Kerala, it is available in 36 monthly installments.
In Karnataka, it is available in 12 monthly installments, but value of capital goods should be minimum ` 10 lakhs.
Capital goods of value less than ` 10 lakhs will be inputs and immediate credit will be available. In Maharash-
tra, entire credit is available immediately.
E. Instant credit Credit will be available as soon as inputs are purchased. It is not necessary to wait till these are
utilised or sold [para 2.3 of White Paper on State-Level VAT].
F. No credit of CST paid - Credit of Central Sales Tax (CST) paid on inputs and capital goods purchased from other
States will not be available [para 2.6 of White Paper on State-Level VAT]. This appears to be discriminatory and
violative of Articles 303 and 304(a) of Constitution.
G. Transitional Credit of stock as at the beginning of VAT Act - Input tax as already paid on goods lying in stock as
on the day when Vat was introduced (which are purchased within one year prior to that date) was available
to dealer. For example, if Vat was introduced on 1-4-2005, credit of tax paid on stock lying as on 31-3-2005 was
allowed if the goods were purchased on or after 1-4-2004.
Detailed stock statements were required to be submitted to sales tax authorities. This credit will be available over a
period of six months after an interval of 3 months need for verification [para 2.7 of White Paper on State-Level VAT].
States have deviated from these provisions.
One to one correlation not required VAT does not require one to one i.e. Bill to Bill correlation between input and
output. Credit is available as soon as inputs/capital goods are purchased. The credit can be utilised for payment of
VAT on any final product. It is not necessary to wait till the input is actually consumed/ sold.
Entry tax/Octroi will continue - There is no proposal to extend VAT to entry tax (in lieu of octroi) or Octroi levied by lo-
cal authorities. These will continue.
7.5 PURCHASE TAX IN VAT OR REVERSE CHARGE
Though white paper makes no mention of purchase tax, some States like Kerala and Andhra Pradesh have made pro-
vision for imposition of purchase tax when purchase is from unregistered dealers. Its credit will be available where VAT
credit on purchases is available. Thus, in effect, in respect of purchases where VAT credit is not available, purchase
tax will be payable.
This is termed as reverse charge.
In UK, reverse charge has been introduced in 2006, on tax payable on sale of mobile phones and microchips.
Reverse charge - Normally, VAT is payable by seller of goods. However, in some cases, the liability is cast on the pur-
chaser of goods. This is termed as reverse charge.
This concept is used in service tax also. In reverse charge, the service receiver also acts as service provider. He pays
tax on services received by him. He can avail Cenvat credit of tax paid by him, since the service is actually his input

State Level VAT
service.
There is provision of tax collection at source under section 206C of Income Tax Act. Here, seller of liquor is liable to pay
tax at source. The buyer has no liability. Tax deduction at source (TDS) under Income tax is really not reverse charge,
since basic responsibility of payment of income tax continues to be that of person earning income.
Mode of reverse charge is used when it is administratively difficult to collect tax from seller of goods or service pro-
vider or income earner.
7.6 TAX RATES UNDER VAT
Ideally, VAT should have only one rate. Though this is not possible, it is certain that there should be minimum varieties
of rates. Broadly, following VAT rates are proposed [para 2.18 and 2.19 of White Paper on State-Level VAT]
i. 0% on natural and un-processed produces in unorganised sector, goods having social implications and items
which are legally barred from taxation (e.g. newspapers, national flag). This will contain 46 commodities, out of
which 10 will be chosen by individual States which are of local or social importance. Other commodities will be
common for all States. Certain specified life saving medicines has been exempted from VAT.
ii. No VAT on Additional Excise Duty items (textile, sugar and tobacco) in first year. Position will be reviewed later.
VAT has been imposed by State Governments @ 12.5% on tobacco products w.e.f. 1-4-2007.
iii. 1% floor rate for Gold and Silver Ornaments, Precious and Semi-Precious Stones.
iv. 5% for goods of basic necessities (including medicines and drugs), all industrial and agricultural inputs, declared
goods & capital goods. This will consist of about 270 commodities.
v. 13.5% to 15% RNR (Revenue Neutral Rate) on other goods.
vi. Aviation turbine fuel (ATF) and petroleum products (petrol, diesel and motor spirit) will be out of VAT regime. Li-
quor, cigarettes, lottery tickets, will also be taxed at a higher rate. These will have uniform floor rates for all States
(generally 20%). Tax paid on these will not be eligible for input tax credit.
Broadly, VAT rates of all States follow this pattern, but still there are many variations.
For example, in some States, VAT rate on gold and silver ornaments has been reduced to 0.25%, as traders were facing
competition from neighboring States. Kerala State has imposed tax @ 20% on some luxury goods, though tax on such
goods should be @ 13.5% as per the white paper.
In some States, hand tools are taxed at 5%, while in some States, these are taxed at 13.5%.
Policy about turnover tax, surcharge, additional tax etc. imposed by State Governments
States were levying turnover tax, surcharge etc. on sales tax,. Those taxes on sale will go. However, Octroi and Entry tax
(which is in lieu of octroi) will continue. Other type of Entry Tax will either be discontinued or will be made liable under
VAT [para 2.16 of White Paper on State-Level VAT] .
Concessions for small dealers
A. VAT tax will be payable only by those dealers whose turnover exceeds ` 5 lakhs per annum. The dealers whose
turnover is less than ` 5 lakhs can register on optional basis. Dealers having turnover exceeding ` 5 lakhs should
register within 30 days from date of liability to get registered [para 2.9 of White Paper on State-Level VAT]
In case of Karnataka, the limit is only ` 2 lakhs. Most of States have kept the limit as ` 5 lakhs.
B. Composition scheme for dealers with turnover upto ` 50 lakhs - Small dealers having gross turnover exceeding
` 5 lakhs but less than ` 50 lakhs have option of composition scheme. They will have to pay a small percentage
of gross turnovers. They will not be entitled to any input tax credit [para 2.9 of White Paper on State-Level VAT]
The percentage has not been announced in white paper, but earlier, it was announced as 1%. This rate has
been prescribed in West Bengal VAT Act, AP VAT Act, Delhi VAT Act, Kerala VAT Act and Karnataka VAT Act.
In case of Karnataka, composition scheme is available only to a dealer whose turnover in a period of four con-
secutive quarters does not exceed ` 15 lakhs.
In Maharashtra, tax payable under composition scheme is 8% of difference between value of turnover of sales

less value of turnover of purchases including tax (other than excluded goods) (in short, it is 8% of gross margin of
trader). Second hand car dealer is required to pay sales tax @ 4%. In case of works contract, tax can be paid
@ 8% of total contract value after deducting amount payable towards sub-contracts to the sub-contractors.
C. Dealers who make inter-State purchases are not eligible for the composition scheme. This provision applies to
VAT law of almost all States.
The scheme is optional. They can opt to pay normal VAT tax and avail credit of input tax.
Composition scheme is a practical scheme considering ground realities, though it dilutes the basic concept of
VAT that tax is payable at consumption stage. Of course, such schemes are provided in almost all VAT regimes
prevailing in Europe and elsewhere, considering practical difficulties in assessing and collecting tax from small
traders.
Where Input Credit will not be Available
Credit of tax paid on inputs will be denied in following situations -
i. No credit if final product is exempt - Credit of tax paid on inputs is available only if tax is paid on final products.
Thus, when final product is exempt from tax, credit will not be availed. If availed, it will have to be reversed on
pro-rata basis.
ii. Restricted credit if output goods are transferred to another State - If the final products are transferred to another
State as stock transfer or branch transfer, input credit availed will have to be reversed on pro-rata basis, which
is in excess of 2%. In other words, in case of goods sent on stock transfer/branch transfer out of State, 2% tax on
inputs will become payable e.g. if tax paid on inputs is 12.5%, credit of 10.5% is available. If tax paid on inputs
is 2%, no credit is available (This is termed as retention). Thus, the VAT as introduced is State VAT and not a
national VAT (In case of some States, even if CST is reduced to 2%, retention has been kept @ 5% only).
iii. No input credit in certain cases - In following cases, the dealer is not entitled to input credit
(a) Final product is exempted from VAT.
(b) Inter-state purchases i.e. goods purchased from outside the State.
(c) Goods imported (obvious, since there will be no VAT invoice).
(d) Goods purchased from unregistered dealer (as he cannot charge VAT).
(e) Goods purchased from dealer who is paying VAT under composition scheme (as he cannot charge VAT
separately in invoice).
(f) Purchase where final goods sold are exempt from VAT.
(g) Final product is given free i.e. goods not sold.
(h) Inputs stolen/lost/damaged before use/sale as there is no sale.
(i) Proper Tax Invoice showing VAT separately is not available.
(j) Ineligible purchases like automobiles, fuel, certain capital goods etc. as specified in relevant State VAT
Law i.e. items in negative list.
iv. No credit on Certain Purchases Generally, in following cases, credit is not available (a) Purchase of automo-
biles (except in case of purchase of automobiles by automobile dealers for re-sale), (b) fuel.
There are variations between provisions of different States.
Note: VAT on purchases if not allowed as input tax credit then the portion of VAT becomes form part of cost of pur-
chases.
Distinction between Zero Rated Sale and Exempt Sale
Certain sales are Zero Rated i.e. tax is not payable on final product in certain specified circumstances. In such cases,
credit will be available on the inputs i.e. credit will not have to be reversed. Distinction between Zero Rated Sale and
Exempt Sale is that in case of Zero Rated Sale, credit is available on tax paid on inputs, while in case of exempt
goods, credit of tax paid on inputs is not available.

State Level VAT
As per para 2.5 of White Paper on State-Level VAT, export sales are zero rated, i.e. though sales tax is not payable on
export sales, credit will be available of tax paid on inputs.
In respect of sale to EOU/SEZ, there will be either exemption of input tax or tax paid will be refunded to them within 3
months. If supplies to EOU/SEZ are exempt from sales tax, then the question will arise whether these are Zero Rated
or Exempt Goods.
In case of stock transfer to another State, CST is not payable, but input credit will have to be reversed to the extent of
3%. Thus, stock transfer of goods to another State is Exempt and not Zero Rated.
It is not clear what will be the policy after CST is reduced to 2% or when CST is reduced to zero. As per basic concept
of VAT, inter-state transactions should be Zero Rated and not Exempt.
Refund if VAT Credit of Input Tax available cannot be Utilised for any Reason
Entire input tax will be refundable within three months, when final product is exported. In respect of sale to EOU/SEZ,
there will be either exemption of input tax or tax paid will be refunded within three months [para 2.5 of White Paper
on State-Level VAT].
If tax credit exceeds tax payable on sales, the excess credit will be carried to end of next financial year. Excess unad-
justed credit at end of second year will be eligible for refund [para 2.4 of White Paper on State-Level VAT]
Such excess credit can arise when purchases of inputs are made locally, but final product is mainly exported or stock
transferred to another State.
Exemptions and Incentives to New Industries Already Granted to Continue
All State Governments were offering sales tax incentives to new industries set up in the State. The incentives were
broadly of three types - (a) Exemption - Dont charge tax and dont pay, (b) Deferral - Charge sales tax in invoice but
pay after long period of (say) 12 to 18 years (c) Remission - Charge in the invoice but retain and do not pay to Govern-
ment. State Governments have stopped giving incentives to new industries after January, 2000. However, there are
commitments in respect of industries set up prior to January, 2000. State Governments to continue with the incentives
which were already granted [para 2.15 of White Paper on State-Level VAT). [Some States may allow industries under
exemption scheme to convert to deferral scheme so that such industries can pass on benefit of VAT to their buyers].
7.7 VALUTION OF TAXABLE TURNOVER
The dealer paying VAT shall deduct the following from the taxable turnover if these are already included in the tax-
able turnover:-
(a) Discount which is a regular discount in a regular practice
(b) Amount charged separately as interest
(c) Finance charges/interest if any in case of hire-purchase transaction or installment payment system
(d) Sales cancelled
(e) Goods returned to the seller within a period of 12 months from the date of sale and dealer making the sale has
accepted the return of goods. [ some states have restricted this time limit for 6 months]
Note:
In the above list from (a) to (d) where either a tax invoice or an invoice has not yet been issued, the sale price shall be
suitably adjusted in the tax invoice or in the said invoice. Where a tax invoice or invoice has been issued, a credit or
debit note shall be used to make the necessary adjustment.
The VAT dealer shall be eligible to make an adjustment of an excess payment of output tax. However, such an adjust-
ment is not permissible if the sale has been made to a person who is not a VAT dealer unless the amount of the excess
tax has been repaid by the VAT dealer to the recipient.
Where the output tax liability due in respect of the sale exceeds the output tax actually accounted for by the VAT
dealer making the sale, the amount of the excess shall be regarded as tax charged by the VAT dealer in relation to a
taxable sale made in the tax period in which the adjustment took place.

In the case of a VAT dealer namely a VAT dealer who is running any restaurant, eating house or hotel, being food
or any other articles for human consumption or drink other than liquor, such a dealer may opt to pay tax by way of
composition at the rate of twelve and half per cent (12.5%) on sixty percent (60%) of the total amount charged by
the said VAT dealer for such supply. This means that 40% of the total amount of consideration charged by such dealer
shall be allowed as deduction. This type of tax is called compounding levy of tax, which is generally not applicable
for input tax credit.
Example 3: Mr. Amit the owner of a restaurant selling food. He opted to pay the VAT by way of composition of tax. For
January, 2016, his total sales was `1,50,000. He also purchased the input material after payment of VAT of `3,000.
The net VAT payable is as follows:
Output tax payable = `1,50,000 60% 12.5% 11,250
Less : Input Tax Credit Nil
VAT Payable 11,250
7.8 PROCEDURAL PROVISIONS UNDER VAT
A system of audit checks will have to be established to keep check on bogus invoices. One essential requirement is to
give TIN (Tax Identification Number) to all registered dealers, so that a check is maintained that (a) The tax as shown in
the invoice has indeed been paid, (b) There is no double credit on basis of same invoice. TIN will have to be indicated
on each invoice issued. It will be a 11 digit numerical code. First two digits will indicate State Code. Thus, State level
computer network with check based on TIN will be established. Otherwise, misuse will be rampant.
Documentation required to avail credit of Tax paid on Inputs and Capital Goods
Tax credit will be given on basis of document, which will be a Tax Invoice, cash memo or bill. Such invoice can be
issued only by a registered dealer, who is liable to pay sales tax. The invoice should be serially numbered and duly
signed, containing prescribed details. The tax payable should be shown separately in the Invoice. The dealer should
keep counterfoil/duplicate of such invoice duly signed and dated.
In case of manufacturer, Invoice issued under Central Excise Rules should serve purpose of VAT also, if the invoice
contains required particulars.
Dealers availing composition scheme shall not show any tax in their invoice. They are not entitled to any credit of tax
paid on their purchases.
Debit Note and Credit Note - If sale price is increased/reduced subsequent to sale, the transaction will be recorded
through proper debit/credit note. The buyer will adjust the input credit available to him accordingly.
Records and Accounts
Each State has prescribed records to be maintained. Broadly, following records will be required:-
i. Records of purchases of Inputs.
ii. Record of debit notes and credit notes.
iii. Quantity record of inputs.
iv. Record of credit notes received from supplier.
v. Record of capital goods.
vi. Sale register and tax charged on sales.
Record of Tax credit available - Monthly/quarterly totals of the following should be taken - (a) Input credit available,
(b) Credit available on capital goods, (c) Credit notes from suppliers.
Carry forward/refund of tax credit - If input tax credit cannot be utilised in a particular month/year, the credit can be
carried forward and used in subsequent months/year. Refund of such excess credit is permitted only if goods were
exported out of India. If credit is not utilised in two years, refund will be granted.

State Level VAT
Preservation of records - Since assessment can be opened for prescribed period (usually five to eight years), it is nec-
essary to preserve all relevant records for prescribed period from the close of the financial year. The records can be
audited by departmental audit party.
Payment of VAT Tax and Filing of Returns
Every dealer is required to file returns on monthly/quarterly basis. If the records are kept properly, filing the return will be
very easy and mistakes will be minimum.
Net Tax payable - Net tax payable will have to be calculated as follows - (a) Output tax: plus (b) Reversal of Credit
(On exempted goods, stock transfers, free samples, lost inputs) : Less (c) Input tax credit available.
This net amount is required to be paid through prescribed challan on or before due date.
Accounting Treatment of VAT
ICAI has issued Guidance Note on Accounting for State level VAT on 15-4-2005. The guidance note is based on prin-
ciples of VAT as contained in White paper released on 17-1-2005. However, there are variations in respect of each
State. Hence, accounting policies will have to be adopted to suit provisions of VAT law of the particular State. Follow-
ing broad principles should be kept in mind -
i. As per AS-2, cost of purchase for the purpose of inventory valuation should not include tax, if credit of tax paid
is available.
ii. For purpose of income tax, inventory valuation should be inclusive of taxes, even if its credit is available, as per
section 145A of Income Tax Act.
iii. Purchase account should be debited with net amount. VAT credit receivable on purchases should go to VAT
Credit receivable (Input) Account.
iv. Account of each rate i.e. 0%, 1%, 5%, 13.5% etc. is required to be kept separately.
v. In case of capital goods, as per AS-10, cost of fixed assets should include only non-refundable duties or taxes.
vi. If entire credit of tax on capital goods is not available immediately, the credit that is available immediately
should be debited to VAT Credit Receivable (Capital Goods) Account and credit which is not available imme-
diately should be taken to VAT Credit Deferred Account.
vii. In case of sales, the sales account should be credited only with net amount (i.e. exclusive of VAT). Tax payable
should be credited to separate account VAT Payable Account [This is exclusion method. Interestingly, in
case of excise duty paid on final product, inclusive method is permitted, i.e. sale account is credited inclusive
of excise duty on final product].
viii. If any VAT is payable at the end of period (after adjusting VAT credit available), the balance is to be shown as
current liability.
7.9 ASSESSMENT OF TAX
Dealer is required to assess his tax and pay himself. It will be basically self assessment. There will be no compulsory as-
sessment at end of the year. If notice is not issued within prescribed time, dealer will be deemed to have been self
assessed [para 2.12 of White Paper on State-Level VAT]
Returns will be filed monthly/quarterly, as prescribed, along with challans. Returns will be scrutinised and if there is tech-
nical mistake, it will have to be rectified by dealer [para 2.11 of White Paper on State-Level VAT]
As per West Bengal VAT Act, if dealer does not receive any intimation within two years from end of the accounting
year, it is deemed that his return has been accepted by Sales Tax Authority. In case of Andhra Pradesh, the time limit
is four years from the date of filing of return.
Audit of records - There will be audit wing in department and certain percentage of dealers will be taken up for audit
every year on scientific basis. The audit wing will be independent of tax collection wing, to remove bias. There will be
cross verification with Central Excise and Income Tax also. [para 2.13 of White Paper on State-Level VAT]
Audit by outside Agencies VAT laws of some States provide for audit by outside agencies. AP Vat Act provides for
audit by CA, cost Auditor or Sales tax Practitioner (STP), if audit is ordered by Commissioner.
In Karnataka, audit report is required if turnover exceeds ` 25 lakhs.
In Delhi, the dealer is required to submit copy of audit report u/s 44AB of Income Tax Act (This report is required when
turnover exceeds ` 40 lakhs per annum). No separate audit is prescribed, unless special audit is ordered by depart-
ment.
In Maharashtra, audit report from Chartered Accountant or Cost Accountant is required if sales turnover exceeds
` 40 lakhs.
7.10 IMPACT OF VAT ON CST
The provisions in respect of Central Sales Tax are summarised below

i. Para 4.3 of White Paper on State-Level VAT had stated that present CST rate (earlier it was 4%) will continue
for some time. CST may go after decision in respect of loss of revenue to States is taken and comprehensive
Taxation information System is put in place. Accordingly, CST rate has been reduced to 2% or LST whichever is
lower.
ii. Present CST forms i.e. C, E-I/E-II, F, H, I and J will also continue.
iii. There will be no credit of CST paid on inter-state purchases [para 2.6 of White Paper on State-Level VAT].
iv. If goods are sent on stock transfer outside the State, input tax paid in excess of 5% will be allowed as credit. In
other words, input tax to the extent of 5% will not be allowed as credit if goods are sent inter-state (The CST rates
has been reduced to 2%. When goods one sold against declaration in Form C.
Unfortunately, the way sales tax VAT is to be implemented by States, it is only Local (i.e. State) VAT and not
National VAT. This is because
(a) If goods are purchased from another State, credit (set off) of CST paid in other State will not be granted
by the State where the goods are consumed/used/sold.
(b) If goods are sent to another State on stock transfer basis, only restricted input credit will be given, i.e.
there will be no credit on first 5% tax paid on inputs.
Obviously, this is against basic concept of VAT. Thus, the State Level VAT is a truncated version of VAT. It can at
the most be termed as Local Sales Tax VAT and not National Sales Tax VAT.
Discriminatory Treatment to CST
Provision of not granting credit of CST seems discriminatory. Article 303 of Constitution of India provides as follows,
Neither Parliament nor the Legislature of State shall have power to make any law giving any preference to one State
over another, or making any discrimination between one State and another.
As per Article 304(a), State Government can impose tax on goods imported from other States, but cannot discriminate
between goods imported from other States and goods manufactured within the State.
Kelkar Committee in para 7.2 of its final report submitted in December 2002, has expressed apprehensions about legal
implications of Article 304(a) in State Level VAT. The Kelkar Committee has expressed apprehension that investment
decisions will tend towards States where the market within the State is larger than outside.
Giving credit only for locally purchased goods appears to be discriminatory and it appears that this will discourage
inter-state purchases.
States indirectly Taxing Inter-State Transaction - If goods sent on stock transfer basis, credit will be granted only in ex-
cess of 5% tax paid on inputs. Thus, indirectly, tax will be levied on stock transfers.
As per Article 286, State Government cannot impose tax on sale or purchase during imports or exports; or tax on sale
outside the State. It means that State Government can impose sales tax only on sale within the State.
Will Inter-State Sale be Zero Rated?
The VAT system will be VAT compliant if inter-state sale or stock transfer is zero rated i.e. no tax will be payable on
inter-state sale or stock transfers, but entire credit of taxes paid on inputs and capital goods is available. If CST is re-
duced to Nil, but restricted credit of tax paid inputs is available, then the inter-state sales will be exempt and not zero
rated. Then the VAT system will not be as per principles of VAT.

State Level VAT
The intention seems to be to make inter-state sales zero rated and not merely exempt. However, white paper issued
by Empowered Committee does not categorically say so.
Deemed sales
Deemed sales are those which are not really sales but have been deemed as sales.
Examples:
leasing
hire purchase transaction,
works contract,
These deemed sales that are taxable under the Value Added Tax (VAT).
It is pertinent to note that the inclusion or otherwise of deemed sales under VAT differs from State to State.
A. Leasing and hire Purchase transactions:
As per Accounting Standard 19 on Lease issued by the Institute of Chartered Accountants of India, is an agreement
whereby the lessor conveys the lessee in return for a payment or series of payments the right to use an asset for an
agreed period of time. A lease agreement also includes a Hire Purchase Agreement.
Taxable event attracts at the time of transfer of right to use any goods for any purpose for cash or deferred payment
or other valuable consideration. This is known as deemed sale. Sub-lease of an asset is also attracting VAT, unless the
State VAT law permits exemption.
Sale of leased asset after the lease period over is taxable in the manner in which normal sale of such asset would have
been taxed. Normally, such sale effected to the same lessee and hence such sale would be local one taxable under
the VAT laws of the State in which the asset is located.
The lessor would pay VAT at the time of purchase of goods. However, liability to pay VAT on lease rentals will be spread
over the tenure of the lease. Input Tax Credit allowed to the lessor against payment of VAT on lease rentals or VAT
payable on any other goods.
Example 4: M/s Fin Finance Ltd. purchased equipment on 1.7.2015 from a vendor for ` 100 lakhs (exclusive of VAT @5%)
on behalf of a dealer for giving on lease. The deemed sale Price of such goods is ` 1,20,00,000 (principal amount),
taxable @5% of VAT and interest for the lease period is ` 30,00,000. The lease term covers substantially the whole useful
life of the equipment. Assume input tax credit on purchased equipment is fully allowed in the first year.
Find VAT payable by M/s Fin Finance Ltd.
Answer:
VAT on deemed sale @5% x ` 120 L 6,00,000
Less: input tax credit ` 100 L x 5% 5,00,000
Net VAT liability 1,00,000
Note: the interest of ` 30 lakhs will be subject to service tax with an abatement of 90%.
B. Hire-purchase sale
Under this transaction, the hire-purchaser acquires the goods immediately on signing the hire purchase agreement
but ownership is transferred only when all installments including last installment is paid. VAT attracts at the time of
physical delivery of goods. VAT paid on hire-purchase goods allowed as input tax credit.
If goods are repossessed, for any reason then these goods are treated par with sales return. Many States have
provided the time limit for granting the claim of returned goods. Therefore, repossessed goods are allowed as sales
returns if these goods are repossessed within the specified period of time.
C. Works contract
As per Central Sales Tax Act, 1956 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.
A dealer dealing with works contract is liable to pay VAT on value of material transferred while executing works con-
tract and service tax on value of services.
Works contract dealer can also opt to pay composition of VAT (i.e. reduced rate of VAT) on the entire value of con-
tract inclusive of value of service, where bifurcation towards value of material and services not possible. Dealers who
opts composition scheme not eligible to avail the input tax credit.
7.11 ROLE OF COST ACCOUNTANT UNDER VAT
Cost Accountants have the following key role to play in proper implementation of VAT:
(i) Record keeping: VAT requires proper record keeping and accounting. Systematic records of input credit and
its proper utilization is necessary for the dealer to take input tax credit. No doubt, Cost Accountants are well
equipped to perform these activities.
(ii) Tax planning: Cost Accountant is competent to analyze various alternatives and its impact on dealer so as to
minimize the tax impact.
(iii) Negotiations with suppliers to reduce price: VAT credit alters cost structure of goods supplied as inputs. A Cost
Accountant will ensure that the benefit of such cost reduction is passed on by the suppliers to his company.
(iv) Helping to departmental officers: There will be audit wing in department and certain percentage of dealers will
be taken up for audit every year on scientific basis. Cost Accountant can ensure proper record keeping so as
to satisfy the departmental auditors.
(v) External audit of VAT records: Under VAT system, self assessment has been brought into force. Cost Accountants
can play a very vital role in ensuring tax compliance by audit of VAT accounts.
As per the Bombay High Court in the case of Sales Tax Practitioners Association of Maharashtra v State of Maharashtra
(2008), has held that VAT audit can be conducted only by Chartered Accountants and Cost Accountants.
7.12 AGRICULTURAL PRODUCTS OR COMMODITIES
Some State Government have given some concessions to farmers under the VAT regime.
Farmers are not dealers if they are selling their own agricultural produce. They are thus outside the scope of VAT.
However, if they process them into some other from and sell, they are liable to tax provided their turnover is above the
threshold limits as specified above.
For example:
Conversion of paddy into rice.
Sugar cane into Jaggery
Oilseeds into vegetable oil
Farm products are exempted from the VAT in the hands of farmers.
Persons other than farmers who are in the business of buying, selling, supplying and distributing such farm products are
liable to pay tax under the State VAT Act, provided their turnover exceeds the threshold limits.
7.13 HIGH SEAS
Exclusive economic zone extends to 200 nautical miles from the base line of the coast. Beyond 200 nautical miles from
the base line called as High Seas. Goods purchased from High Seas, VAT does not attract. Hence, High Seas purchases
are not eligible for input tax credit.

State Level VAT
7.14 PHASED OUT INTER - STATE SALES-TAX (I.E. CENTRAL SALES TAX)
As per White Paper of VAT, there is a need for phasing out of Central Sales Tax (CST) after introduction of Value Added
Tax (VAT) system in India. Otherwise, cascading effect of tax can not be eliminated to the extent of CST. Hence, Em-
powered Committee of States for implementation of VAT and the Government of India agreed upon an agreement
to phase out CST from 4% to 3% with effect from 1.4.2007. The rate of CST has been further reduced to 2% with effect
from 1st June 2008. However, CST rate 2% against Form C continues till the date.
Practical Problems on VAT
Intra State Sales:
Example 5: Purchases by A & Co. for the month of December 2015 are as follows:
(1) ` 1,00,000 at 5% Vat
(2) ` 5,00,000 at 13.5% Vat.
Sales of A & Co. for the month of December 2015 are as follows:
(1) Sales of ` 3,00,000 at 5% Vat
(2) Sales of ` 3,00,000 at 13.5% Vat
Compute eligible inputs tax credit and Vat payable for the month.
Answer:
(a) Statement showing VAT payable on sales
Description Value (` ) VAT (` )
5% VAT Sales 3,00,000 15,000
13.5% VAT Sales 3,00,000 40,500
Total 6,00,000 55,500
Eligible input tax credit is ` 55,500
(b) Statement showing input tax credit:
Description Value (` ) ITC (` )
5% VAT Purchases (raw material) 1,00,000 5,000
13.5% VAT Purchases (Plant and machinery) 5,00,000 67,500
Total 6,00,000 72,500
Excess Input Tax Credit (ITC) carried forward into next month:
VAT payable on Sales = ` 55,500
Less: ITC = ` 72.500
__________
Excess ITC = ` 17,000
========
Example 6: Compute the VAT amount payable by Mr. A who purchases goods from a manufacturer on payment of
` 2,27,000 (including VAT) and earn 10% profit on cost to retailers? VAT rate on purchase and sale is 13.50%.
Answer :
Cost of purchases ` 2,27,000 x 100 / 113.5 = ` 2,00,000
Add: Profit ` 2,00,000 x 10% = ` 20,000
________________
Taxable turnover = ` 2,20,000
________________
VAT payable on sales ` 2,20,000 x 13.5% = ` 29,700
Less: Input tax credit ` 2,27,000 x 13.5/113.5 = ` 27,000
------------------
Net VAT liability = ` 2,700
==========
Example 7: Calculate the total VAT liability under the State VAT law for the month of October 2015 from the following
particulars:
Particulars `
Inputs purchased within the state 1,70,000
Capital goods used in the manufacture of the taxable goods 50,000
Finished goods sold within the state 2,00,000
Applicable tax rates are as follows:-
VAT rate on capital goods 13.5%
Input tax rate within the state 13.5%
Output tax rate within the state 5%
Answer:
Input Tax Credit available = (1,70,000 + 50,000) x 13.50% = ` 29,700
Output Tax payable on sales = 2,00,000 x 5% = ` 10,000
Excess of credit can be carried forward into next month = ` 19,700
Example 8: Compute the VAT liability of Mr. X for the month of January 2015, using invoice method of computation
of VAT, from the following particulars:-
Purchase price of the inputs purchased from the local market (inclusive of VAT) ` 52,500
VAT rate on purchases 5%
Storage cost incurred ` 2,000 Transportation cost ` 8,000
Goods sold at a profit margin of 5% on cost of such goods
VAT rate on sales 13.5%
Answer:
Cost of Purchases = ` 52,500 x 100/105 = ` 50,000
Add: Storage cost and transportation cost = ` 10,000
Total cost = ` 60,000
Addl profit 5% on Cost (` 60,000 x 5%) = ` 3,000
Taxable Turnover = ` 63,000
Add; VAT on Taxable Turnover (` 63,000 x 13.50%) = ` 8,505
Net VAT Tax liability
VAT payable on Sales = ` 8,505
Less: ITC (` 52,500 ` 50,000) = ` 2,500
Net VAT liability payable by Mr. X for the month of Jan 2016 = ` 6,005
Example 9: Mr. X, a manufacturer sells goods to Mr. B, a distributor for ` 2,000 (excluding of VAT). Mr. B sells goods to
Mr. K, a wholesale dealer for ` 2,400. The wholesale dealer sells the goods to a retailer for ` 3,000, who ultimately sells
to the consumers for ` 4,000.
Compute the Tax Liability, input credit availed and tax payable by the manufacturer, distributor, wholesale dealer
and retailer under Invoice method assuming VAT rate @ 13.5%.

State Level VAT
Answer: (invoice method)
Particulars Amount (`) VAT Liability (`) VAT Credit (`) Tax to Government (`)
Mr. X sold to Mr. B
Taxable turnover @13.50% = 2,000 270 -- 270
Mr. B sold to Mr. K = 2,400 324 270 54
Mr. K sold to Retailer = 3,000 405 324 81
Retail sold to consumer = 4,000 540 405 135
Note: Total VAT paid into the credit of Government (i.e. from the Manufacturer to Consumer) is ` 540/- (i.e. ` 270 + 54
+ 81 + 135).
Example 10:
Mr. Y dealer, purchases goods for ` 2,50,000 (exclusive of VAT). He incurs ` 35,000 on the goods and sells them at a
profit of ` 15,000. Compute the invoice value to be charged and amount of tax payable under VAT. The rate of VAT
on purchases and sales is 5%.
Answer:
Computation of invoice value

Cost of goods purchased 2,50,000
Add: Expenses 35,000
Profit margin 15,000
Add: VAT @ 5% on ` 3,00,000 15,000
Invoice Value 3,15,000
Computation of amount of tax payable under VAT

VAT payable on sales 15,000
Less: Input credit of VAT paid on purchases @ 5% on 2,50,000 12,500
Tax Payable under VAT 2,500
Example 11:
Mr. X is regularly paying excise duty and value added tax on his manufacturing and sales activities respectively. He
seeks your advice while calculating the Value Added Tax on sales as well as net VAT liability from the following infor-
mation:
Purchases from local market (VAT inclusive of @13.5%) ` 1,41,875.
Manufacturing expenses is ` 75,000.
Profit on Cost @ 80%.
Excise Duty @12.5%
Output VAT @13.5%

Answer:
Cost of Purchases ` 1,25,000 (i.e. `1,41,875 x 100/113.5)

Manufacturing expenses ` 75,000
Total cost ` 2,00,000
Profit @80% on cost ` 1,60,000 (i.e. ` 2,00,000 x 80 / 100)
Assessable Value ` 3,60,000
Add: Excise Duty ` 45,000 (i.e. ` 3,60,000 x 12.5/100)
Taxable Turnover ` 4,05,000
Add: VAT ` 54,675 (i.e. ` 4,05,000 x 13.50%/100)
Aggregate Sales ` 4,59,675
Value Added Tax payable ` 54,675
Less: Input Tax Credit ` 16,875
Net Value Tax Payable ` 37,800
Example 12: Mr. G, a trader selling raw materials to a manufacturer of finished products. He imports his stock in trade
as well as purchases the same from the local markets. Following transactions took place during financial year 2015-16.
Calculate the VAT and invoice value charged by him to a manufacturer. Assume the rate of VAT @ 13.50%:
(`)
Cost of imported materials (from other State) excluding tax 1,00,000
Cost of local materials including VAT 2,27,000
Other expenditure includes storage, transport, interest and
loading and unloading and profit earned by him 87,500
Answer :
Cost of Imported material from other states ` 1,00,000
Cost of local material ` 2,27,000 x 100/113.50 ` 2,00,000
Cost of other expenditure and profit ` 87,500
Taxable Turnover ` 3,87,500
VAT payable on sales ` 52,313
Invoice Value or Sale Value ` 4,39,813 Net VAT payable by Mr. G is ` 25,313 (i.e. ` 52,313 ` 27,000)
Example 13: R Ltd. of Gujarat made total purchases of input and capital goods for ` 65,00,000 during the month of
January 2016. The following further information are as follows:
(i) Goods worth ` 25,00,000 were purchased from Tamil Nadu on which C.S.T @2% was paid.
(ii) The purchase made in January 2016 includes goods purchased from un-registered dealers amounting to
` 18,50,000.
(iii) It purchased capital goods for ` 6,50,000 (not eligible for Input Tax Credit) and those eligible for input tax
credit for ` 9,00,000.
Sales made in the state of Gujarat for ` 10,00,000 on which VAT @13.50% during the month of January 2016. All pur-
chases are exclusive of tax and VAT on purchases @5%. Calculate net VAT liability.
Note: Credit on capital goods is available in 36 equal monthly installments.

State Level VAT
Answer :
Total Purchases in the month of January, 2016 = ` 65,00,000
Less: Interstate purchases = ` (25,00,000)
Purchases from unregistered dealer = ` (18,50,000)
Capital goods for which no ITC = ` (6,50,000)
-------------------
Total Purchases eligible for input tax credit = ` 15,00 000
Less: Purchases (capital goods) eligible for input tax credit = ` (9,00,000)
-------------------
Purchases (other than capital goods) eligible for ITC = ` 6,00,000
==========
ITC on capital goods ` 9 lacs x 5% x 1/36 = ` 1,250
ITC on input goods ` 6 lacs x 5% = ` 30,000
_____________
Total ITC = ` 31,250
===========
VAT payable on sales ` 10 lacs x 13.5% = ` 1,35,000
Less: Input Tax Credit (ITC) receivable = ` (31,250)
--------------------
Net VAT Payable = ` 1,03,750
===========
Example 14: Compute the net VAT liability from the following information:-
Particulars `
Raw material purchased from foreign market (including duty paid on imports @ 20%) 12,000
Raw material purchased from local market (including VAT charged on the material @5%) 21,000
Raw material purchased from neighbouring state (including CST paid on purchases @ 2%) 7,140
Storage, transportation cost and interest 2,500
Other manufacturing expenses incurred 600
The goods are sold at 10% profit on cost of production. VAT rate on sale of such goods is 13.5%.
Answer:
Particulars `
Raw material purchased from foreign market 12,000
Add: Raw material purchased from local market (` 21,000 ` 1,000) [` 21,000 x 5/105 = ` 1,000] 20,000
Raw material purchased from neighbouring state 7,140
Storage, transportation cost and interest 2,500
Other manufacturing expenses incurred 600
Cost of production 42,240
Add: Profit @10% on ` 42,240 4,224
Sale Price 46,464
VAT @ 13.5% x 46,464 6,273
Computation of VAT liability:-
VAT on sale price 6,273
Less: Input tax credit on purchases 1,000
Net VAT payable 5,273

Example 15: Compute net VAT liability of Mr. Ram from the following information:
Particulars (`) (`)
Raw material from the foreign market 1,20,000
(Including duty paid on imports @20%)
Raw material purchased from local market
Cost of material 2,50,000
Add: Excise duty 12.5% 31,250
2,81,250
Add: VAT @4% 11,250 2,92,500
Raw material purchase from neighboring State (includes CST @2%) 51,000
Storage and transportation cost 9,000
Manufacturing expenses 30,000
Mr. Ram sold goods to Mohan and earned profit @12% on cost of production.
VAT rate on sale of such goods is 5%.
Answer:
Statement showing net VAT liability of Mr. Ram
Particulars `
Raw material from the foreign market 1,20,000
Raw material from local market 2,81,250
Raw material from neighboring 51,000
State Storage and transport cost 9,000
Manufacturing expenses 30,000
Cost of production 4,91,250
Add: profit @12% on cost of production 58,950
Add: VAT @ 5% on taxable turnover 27,510
Sale value 5,77,710
VAT payable on sales 27,510
Less: ITC on purchases 11,250
Net VAT liability 16,260
Example 16: Mr. Raj is a registered dealer and gives the following information. You are required to compute the net
tax liability and total sales under the VAT from the following information.
Raj sells his products to dealers in his state and other states as well.
The profit margin in 15% of cost of production and VAT rate of sales is 13.5% of sales.
(i) Intra state purchase of raw material is ` 2,50,000 (excluding VAT of 5%)
(ii) Purchase of raw material from an unregistered dealer ` 80,000 (including VAT of 13.5%)
(iii) Import of raw material ` 1,85,000 (excluding custom duty of 10%)
(iv) Purchase of raw material from other state ` 50,000 (excluding CST of 2%)
(v) Transportation charges, wages and other manufacturing expenses excluding tax ` 1,45,000
(vi) Interest on bank loan ` 1,60,000.
State Level VAT
Answer:
Statement showing net VAT liability and total sales for Mr. Raj
Particulars `
Intra state purchases 2,50,000
Raw material purchased from unregistered dealer including VAT 80,000
Import of raw material (including customs duty) 2,03,500
Purchase of raw material from other states (including CST) 51,000
Transportation charges, wages etc. 1,45,000
Total cost of production 7,29,500
Add: profit @15% 1,09,425
Add: VAT @ 13.5% 1,13,255
Sales 9,52,180
Net VAT liability is ` 1,00,755 (i.e. ` 1,13,255 `12,500)
Taxable as Well as Exempted Turnover:
Example 17: Mr. Y, a dealer in Mumbai dealing in consumer goods, submits the following information pertaining to the
Month of March, 2016.
(i) Exempt goods P purchased for ` 2,00,000 and sold for ` 2,50,000.
(ii) Goods Q purchased for ` 2,27,000 (including VAT) and sold at a margin of 10% profit on purchases (VAT rate
13.5%);
(iii) Goods R purchased for ` 1,00,000 (excluding VAT) and sold for ` 1,50,000 (VAT rate 5%);
(iv) His unutilized balance in VAT input credit on 1.3.2016 was ` 1,500.
Compute the turnover, Input VAT, Output VAT and Net VAT payable by Mr. Y.
Answer:
Hints:
Net VAT liability payable by Mr. Y
VAT payable ` 37,200 (2,00,000 110% 13.5% + 1,50,0005%)

Less: Input Tax Credit
Opening balance 1,500
During the month (5,000+27,000) 32,000 ` 33,500
Net VAT payable ` 3,700
Works Contract
Example 18: Determine the taxable turnover, input tax credit and net VAT payable by a works contractor from the
details given below on the assumption that the contractor maintains sufficient records to quantify the labour charges.
Assume output VAT at 13.5%:
` lakhs
(i) Total contract price (excluding VAT) 100
(ii) Labour charges paid for execution of the contract 35
(iii) Cost of consumables used not involving transfer of property in goods 5
(iv) Material purchased and used for the contract taxable at 13.5% VAT (VAT included) 45.40

The contractor also purchased a plant for use in the contract for ` 10.5 lakhs. In the VAT invoice relating to the same
VAT was charged at 5% separately and the said amount of ` 10.5 lakhs is inclusive of VAT. Assume 100% input credit
on capital goods.
Make suitable assumption wherever required and show the working notes.
Answer:
Particulars ` lakhs
Total contract price (excluding VAT) 100.00
Less: Labour charges paid for execution of the contract (35.00)
Less: Cost of consumables used not involving transfer of property in goods (5.00)
Taxable Turnover 60.00
VAT @13.50% on ` 60 lakhs 8.10
Less: ITC ` 45.40 lakhs x 13.50/113.50 (5.40)
Less: ITC ` 10.50 lakhs x 5/105 (0.50)
Net VAT payable 2.20
Miscellaneous
Example 19: Compute the purchases eligible for availing input tax credit from the following particulars:-
Purchases `
Goods for resale within the State 10,000
Capital goods required for the purpose of the
Manufacture or resale of taxable goods 14,000
Goods purchased from the unregistered dealer 3,200
Goods which are being utilized in the manufacture of exempted goods 6,600
High seas purchases 2,300
Answer:
Goods for resale within the State `

Capital goods required for the purpose of the 10,000
Manufacture or resale of taxable goods 14,000
Eligible input tax credit 24,000
(i) VAT rate of gold, if within State of Gujarat, is 1%. If gold is sold to an unregistered buyer in Delhi, the CST rate will
be
(a) Nil
(b) 1%
(c) 4%
(d) 10%
Ans. (b) 1%
(ii) ALIANCE & CO. a dealer in Delhi dealing in consumer goods, had purchased goods of Rs.2,16,000 (exclusive
VAT) and after adding for expenses of Rs.24,000 and of Profit Rs.60,000 had sold out the same. If the rate of VAT
on purchase and sales is 12.5%. What would be the amount of tax payable (Net) under VAT?

State Level VAT
(A) ` 10,500
(B) ` 9,000
(C) ` 3,000
(D) None of the above
Ans. (A) ` 10,500
Fill in the Blanks
(i) R N R (Revenue Neutral Rate) is 12.5% for most of the commodities.
(ii) As per White Paper, VAT rates prescribed are 0%, 1%, 4% and 12.5%.
(iii) As per White Paper, VAT becomes payable where the turnover exceeds ` 5 lakhs.
(iv) Tax payers Identification Number (TIN) given to each dealer under Value Added Tax Act is consist of 11 (11/12)
digit
(v) VAT cannot be imposed on the value of Service
(i) VAT helps in checking tax evasion and in achieving neutrality.
Ans. True. Input credit system encourages traders to collect invoice which will lead to transparency.
(ii) Levy of VAT will have effect on retail price of goods.
Ans. True. Since cascading effect of tax has been eliminated, hence retail price of goods will be reduced.
(iii) Under VAT system there will be compulsory assessment at the end of each year.
Ans. False. If no notice is served for assessment by the Department within stipulated time, the liability computed by
the dealer in self-assessment shall be considered as assessment
(iv) Unbranded Software is service.
Ans. True. Service tax is levied on tailor made software.
(v) A dealer holding stocks purchased from outside the State cannot opt for Composition Scheme under VAT
law.
Ans. True. A dealer engaged in the inter-State sale or purchase is not eligible for composition scheme.
Short Notes
(i) Reverse Charge in VAT and Service Tax.
Ans. Generally, VAT is payable by seller of goods. However, in some exceptional cases, VAT is payable by the pur-
chaser of goods. This is called Reverse Charge. Similarly, in service tax, tax is payable by the service provider, but
in some cases it is payable by the receiver of service. E.g. the company is liable to pay service tax on transport
charges paid by it. Goods transport operator is not liable to pay tax on said services.
(ii) Subtraction method of VAT;
Ans. Subtraction method of VAT
Steps of computation involved in the method
1. Determine Value addition from either of the following methods:
Direct Subtraction method
Total value of sales
Less: Total value of purchases
(both exclusive of tax)
or

Intermediate subtraction method
Total value of sales
Less: Total value of purchases
(both inclusive of tax)
2. Apply the rate of tax on the amount calculated in step 1.
Pros and Cons of this method
(a) This method is normally applied where the tax is not charged separately.
(b) Tax is charged only on the value added at each stage of the sale of goods
(c) There is no tax credit as the total value of goods sold is not taken into account.
(i) Set-off of input tax credit on capital goods is available only to manufacturers and not to traders. Comment
Ans. Set-off of input tax credit on capital goods also available to traders, when he is trading of those capital
goods.
(ii) What is the maximum rate at which State Vat can be imposed on declared goods?
Ans. The maximum Rate for State Vat on declared goods is 5%.
(iii) What is Tax Payers Identification Number (T I N) for purpose of VAT?
Ans. An eleven digit unique number will be allocated to every dealer which will be considered as his identity and
registration number. The first two digit of the number will represent the State code as used by the Union Ministry
of Home Affairs. The character of other nine digit will be at the choice of the State. The TIN will be helpful in vari-
ous computer application like detecting stop filers of return, cross-checking of sales and purchases, etc.
(iv) Explain briefly whether VAT is leviable on Inter-State leasing.
Ans. As per Central Sales Tax Act, sale includes leasing. Thus, inter-State leasing is subject to CST and not VAT.
(v) A State Government prescribed Vat rate on a product as follows:
(A) Goods manufactured within State 5%.
(B) Goods brought from outside State and sold within State 12.5%.
State constitutional validity of the provision.
Ans. No, a product can be taxable at one rate only.
(vi) Small dealers are eligible for composition scheme under VAT However; some dealers are not eligible for com-
position scheme of VAT, even if they are small dealers.
Ans. Following dealers are not eligible for the scheme:
(a) A manufacturer or a dealer who sells the goods in the course of inter-state trade or commerce; or
(b) A dealer who sells goods in the course of import into or export out of the territory of India;
(c) A dealer transferring goods outside the State otherwise than by way of sale or for execution of works
contract.
(vii) A borrower had taken loan from Bank on basis of pledge of gold. The borrower failed to repay loan and interest.
Hence, gold was sold by bank to recover the loan amount. Vat department is demanding Vat on this sale. Bank
states that it is not business of bank to sell gold. Advise Bank.
Ans. The-Apex Court has answered the question in Federal Bank Ltd. [2007] 6 VST 736;[2007] 4 SCC 188 the bank is a
dealer and is liable to pay tax (Value Added Tax) on the transaction of sale of goods in auction conducted by
it to recover the loan dues.
(viii) Goods are sold in Delhi Airport in duty shops. Is State VAT (sales tax) payable on such sale?
Ans. VAT is not applicable as the goods has been sold before crossing of customs frontier of India.

State Level VAT
(ix) State provisions of works contract as contained in Constitution of India.

Ans. As per Article 366(29A)(b) of Constitution & India, Tax on the sale or purchase of goods includes -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 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.
(x) A manufacturer purchased 1,000 kg of inputs @ ` 100 per kg. Vat rate was 5%. During transit 50kg were stolen
and the manufacturer received 950kg in his factory. Calculate the input tax credit available to the manufac-
turer.
Ans. Input tax credit: ` 100 * 950 kg * 5% = ` 4,750/-
Practical Problems
(i) Anuradha & Co., a registered dealer in VAT, furnishes following details of purchases and sales for the month of
March. 2016:
Particular Amount
Opening balance of VAT Input Tax Credit 25,000
Opening balance of stock of inputs Nil
Purchase of goods from registered dealers within the State (including State VAT) 28,62,500
Purchases from outside State against issue of C form (including CST amount) 15,30,000
Net sales within State excluding State VAT 55,00,000
Closing stock of goods purchased within the State as on 31.03.2016 (inclusive of VAT paid on 1,14,500
purchases)
VAT rate on both inputs and outputs is 14.5%. Determine VAT liability of dealer for the month of March, 2016.
Ans.
Computation of VAT Payable:

VAT Output [` 55,00,000 x 14.5%] 7,97,5000
Less: input
Opening Balance 25,000
Local Purchase [ ` 28,62,500 /114.5% x 14.5%] 3,62,500
CST Purchase Nil 3,87,500
VAT Payable 4,10,000
(ii) M/s Simple Traders have purchased goods @ ` 3,45,000 including VAT. He intends to earn gross margin of 10%
on his net purchase cost. The VAT rate is 15% on both purchases and sales.
(1) Find his selling price and the net VAT payable by him on this transaction.
(2) Illustrate how the VAT is payable by Simple Traders only on his value added.

Ans.
Computation of Invoice Value and Output VAT:
Particular Amount
Value of purchase [excluding VAT] [` 3,45,000/115% x 100%] 3,00,000
Add: Value addition
Profit Margin [10% of ` 3,00,000/-] 30,000
Sale Price 3,30,000
Add: Vat @ 15% 49,500
Invoice Value 3,79,500

Computation of VAT Payable:
Particular Amount
VAT output 49,500
Add: Input Vat credit [ ` 3,45,000 /115% x 15%] 45,000
VAT Payable 4,500
Check:
Profit addition by Simple Traders ` 30,000
VAT@15% ` 4,500

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INTERMEDIATE : PAPER - 11

INDIRECT TAXATION INTERMEDIATE

The Institute of Cost Accountants of India

Copyright of these Study Notes is reserved by the Institute of Cost

Skill set required

(b) Value Added Tax (VAT)

1.1 Basis for Taxation 1

Study Note 2 : Central Excise

3.1 Background of Cenvat Credit 115

Study Note 4 : Customs Law

4.1 Introduction 158

4.22 Anti - Dumping Duty - An Overview 249

5.1 Introduction 273

Study Note 6 : Central Sales Tax Act, 1956

6.1 Introduction 376

Study Note 7 : State Level VAT

7.1 Background of State VAT 418

This Study Note includes

1.1 BASIS FOR TAXATION

1.2 DIRECT TAXES AND INDIRECT TAXES

1.3 FEATURES OF INDIRECT TAXES

Advantages of Direct taxes Limitations of Direct taxes

1.4 CONSTITUTIONAL VALIDITY

Power of Taxation under Constitution of India is as follows:

1.5 ADMINISTRATION AND RELEVANT PROCEDURES

List I List II List III

Taxation under Constitution

List III : Concurrent List

This Study Note includes

2.2 LAWS RELATING TO CENTRAL EXCISE

2.3 CENTRAL EXCISE ACT,1944

2.4 DUTIES LEVIABLE

2.5 LEVY, COLLECTION & EXEMPTIONS FROM EXCISE DUTY

Goods has not been defined in the central Excise Act,1944.

Goods Manufactured in India

2.7 EXCISABILITY OF PLANT & MACHINERY, WASTE AND SCRAP

Excisability of Plant & Machinery

Thus, according to the above definition, the manufacturer is a person:

Trade Parlance Theory/ Commercial Parlance

2.11 VALUATION OF GOODS

Excise duty is payable on any one of the following basis:

Methods & Techniques of Valuation

Sl. No. Particulars Total Cost Cost/Unit

Sr. No. Particulars Amount (`)

Sr. No. Particulars Amount (`)

Sr. No. Particulars Total Cost (`)

2.12 VALUATION IN CASE OF JOBWORK RULE 10A

2.13 SOME CRITICAL ISSUES IN CENTRAL EXCISE

Software is Goods, But Unbranded Software is Service

Affixation of RSP is mandatory Affixation of RSP is not mandatory

2.14 ASSESSABLE VALUE UNDER SECTION 4

Valuation in Case of Stock Transfer

2.15 VALUE BASED ON RETAIL SALE PRICE

2.16 MRP BASED VALUATION

Product partly sold in retail and partly in Wholesale

Qty Price Total(`)

Duty payable is 12.5% of ` 3,02,500 i.e. ` 37,812.50.

Check the answer as follows