Presented By CA Swatantra Singh B Com

Presented By CA Swatantra Singh, B. Com , FCA, MBA Email ID: singh. swatantra@gmail. com New Delhi , 9811322785, www. caindelhiindia. com, www. carajput. com 1

Basic of Central Excise

MANUFACTURE AND EXCISIBILITY Section 3 of Central Excise Act, 1944. Basis of Levy. What is Manufacture? . CE Law gives only a truncated definition for manufacture – Includes Deemed Manufacture. Widest definition is available in Foreign Trade Policy – but that is not applicable to CE Law. …contd

The statutory definition of manufacture in central excise act “Manufacture” includes any process— (i) Incidental or ancillary to he completion of a 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 as amounting to manufacture

Continued……. . (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-labeling 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

Continued…… And the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labor in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.

…contd Leading cases – Decisions of Supreme Court. - ‘Formation of a new Article’ Vide Hawkins Cookers Ltd Vs Collector [- 1997 (96) ELT 507 SC. - ‘A new distinct and commercial commodity. ’ Vide TISCO V. O. I[2004(164) ELT 372 SC.

The accepted wisdom about manufacture in central excise Manufacture implies a change; but not every change is a manufacture. A new product should emerge from the raw material stage with a new name, new use and marketability.

2) Ingredients of excisablity Fact of Manufacture. Entry availability in CE Tariff. Marketability.

Manufacture in central excise Two concepts Actual substantive manufacture & Deemed manufacture Actual substantive manufacture – does it include mere processing? Deemed manufacture

What is deemed manufacture? Process or activity specified in section or chapter notes – for example: Labeling or re labeling of containers Repacking from bulk packs to retail packs Adoption of any other treatment to render the product marketable to the consumer

Continued…. Addition of chemicals and other ingredients to certain products of tariff heading 3808 In relation to products of heading no 3920 & 3921 – process of metallization or lamination or lacquering In relation to some products of heading 7013 – the process of printing , decorating or ornamenting

Continued…. In relation to flat-rolled iron & steel products under chapter 72 – the process of hardening or tempering In relation to articles of iron and steel under chapter 73 – the process of galvanization

Continued…. In relation to motor vehicles under chapter no 87 – building a body or fabrication or mounting or fitting of structures or equipment on the chassis falling under 8706

3) Select Decided cases in Manufacture v. Affixing Information stickers on goods imported does not amount to Manufacture. -CCE Vs Proctor & Gamble Home Products 2004 [167] ELT 173 – [TRI – D]. v. Erection of imported Power Plant does not amount to manufacture. -Spectrum Power Generating Co. Ltd VCCE – 2004(177)ELT 968 [Tri-D]. v. Conversion of old, diesel operated Buses into CNG Buses does not amount to Manufacture. …contd

…contd v-Nugas Technologies India (P) Ltd. VCCE [-171 ELT 376 Tri-D]. v. Gold Plating of watch cases does not amount to Manufacture. -Commissioner Vs Divya cases – 2004[169]ELT 225[Tri-D] v Mixing of chocolate Powder with Sugar and Skimmed Milk to form drinking chocolate does not amount to Manufacture – CCE Vs Fountain Consumer Appliances Ltd – 2004 [171] ELT 329 (Tri – Chennai)

…contd v. Branding, polishing and affixing MRP on locks acquired from artisans does not amount to Manufacture. Key locks (I) P Ltd Vs CCE – 2004(165) ELT, 74 –(Tri-D). v. Printing of date of Manufacture is a Legal requirement and hence it is a Process of manufacture. - Surat Beverages (P) Ltd Vs Commissioner 2004 (165) ELT 313 [Tri- Mumbai]. v. Rubber lining/ Painting/ Cutting/ Welding/of Iron and Steel pipes and Tanks does not amount to manufacture. - Tega (I) Ltd Vs CCE – 2004(164)ELT 390 [SC]

…contd v. Transformation of Catalyst into spent Catalyst does not amount to Manufacture. -CCE Vs Deepak Fertilizers & Petro Corp. Ltd. - 2004 (178)ELT 686 [Tri-M]. v. The Test of Marketability is a Burden of Revenue. -FGP(I) Ltd Vs U. O. I – 2004(168) ELT 289 [SC] v. Testing/ Gardening/ Certification of Helium gas cylinders before Sale is an activity amounting to manufacture. - Commissioner Vs Air liquide North (I) P. Ltd - 2004[174]ELT 201 [Tri - Del].

4]Valuation – The Crux of the matter ØTending to become more like an opinion poll. ØSection 4 and 4 A/ Valuation Rules 2000. ØWhat is Transaction value? . Requirements for acceptance of Transaction Price ØSale of goods. ØFor Delivery, at the time and place of removal ØSeller and Buyer not related. ØPrice is the sole consideration for sale. ØThe legal fiction created by the definition of time of removal – let us note this

A tour of the valuation rules 2000 The official name for the rules is this – Central Excise Valuation ( Determination of price of excisable goods) Rules, 2000 These rules apply when any of the ingredients of transaction value is missing The rules are used for ascertaining the “normal transaction value” at which the greatest aggregate quantity of goods are sold

The valuation rules…. They are 11 rules in all Rule 1 – name & entry into force from 1 -7 -2000 Rule 2 – definitions Rule 3 – exhortation to decide the value (when the transaction value is unavailable or unacceptable)

The valuation rules…. Rule 4 – ascertainable equivalent price of such goods – nearest in time to the time of removal of goods from the factory – margin adjustment on account of differences in dates of delivery allowed Rule 5 – cases when the delivery of goods is at a place other than the factory

The valuation rules…. . Rule 6 – when there is additional consideration to the sale not reflected in the transaction price charged – solution: monetize the additional consideration and add it up to the tax value Rule 7 – Depot / branch sales – solution: adopt the nearest prevailing depot price

Valuation rules…. Rule 8 – captive /self consumption/use – solution: tax value is 110% of the cost of production of the goods (as per CAS 4) Rule 9 – sales to related persons – solution: resale price of related person / 110% of the cost where the related person does not resell but consumes or uses for self

Valuation rules…. Rule 10 – sales to inter-connected undertakings /holding company /subsidiary company – solution: : do as per rule 9 above. Rule 10 A – job work on behalf of a principal manufacturer – solution: resale price of the principal manufacturer Rule 11 – residual method

5) Exclusions From Value v-By Statute v. Excise Duty. v. Sales Tax. v. Other taxes such as Octroi, entry tax. v-By Court / Tribunal Decisions v. Trade Discount. v. Cash Discount/ Prompt Payment discount. v. Turn over discount. v. Quantity discount. v. Year – end/ Bonus discount. … contd

…contd v. Freight and Freight insurance, including equalised Freight. v. Bought – out items [not integral/ critical to Product]. v. Carry bags for Laptops. v. Syringe bought out and supplied with P & P medicines. v. Computer Software ( discuss with NCR case) v. Third party Inspection charges at the instance of and borne by the buyer. v. Excess of Freight collected over actual expenditure on freight. v. Interest on receivables …contd

…contd v. Erection, Commissioning charges if products emerge as immovable property. v. Free items supplied with products. v. Advertising charges borne by the client – buyer on his own account. v. Additional warranty charges. v. Notional interest on Advances/ deposits from buyers not influencing the price. v. Straw supplied with Juice. v. Rental paid on durable and returnable container v. Liquidated damages received for non- lifting of molasses

6) Inclusions into Value v-By Statute v. Advertising. v. Publicity. v. Marketing/ Sales Promotion. v. Storage/ Outward handling. v. Servicing. v. Warranty. v. Commission. v-By Tribunal/ Court Decisions v. Dharmada. v. Design/ Development/ Engineering. …contd

…contd v. Royalty. v. Amortised Cost of tools/ dies/ moulds received from buyers. v. Interest on inventory. v. Value of waste retained by Jobworker. v. Packing. v. Cost of material supplied by Customer.

7) Valuation When goods are assembled at site v. Is it a Composite/ turnkey/ works contract? v. Excise duty is not leviable on immovable property but on Parts / Components/ goods already manufactured. v. Case Studies – Lifts/ Boiler Plants/ Industrial Furnaces.

8) Valuation in Jobwork v. When does Jobwork amount to Manufacture? . v. Labor/ Jobwork charges + Raw material costs are includible in assessable value. v. Ujjagar Prints etc Vs U. O. I. v. Empire Industries Vs U. O. I. v. Pawan Biscuits Co. Vs CCE. v. Is buyer’s profit margin includible in Assessable Value in the hands of Jobworker? . v. Food Specialities Ltd Vs U. O. I.

Continued……. The impact of new valuation rule 10 A The Central Board of Excise & Customs circular no 902/22/2009 dated 20 -10 -09 in the case of vehicle body builders Job work exemption under notification no 214/86

9) MRP based Valuation v. Section 4 A/ weights & Measurements Act. v. MRP minus prescribed abatement is the assessable value. v. Region – wise MRP accepted v. If different MRPs are printed, the maximum MRP will be taken as the basis. v. Sale of phones with MRP fixed, to customer, by phone companies U/S 4 A only. v. Multi – Piece Packages.

10) Refunds & Rebates v. Section 11 B/ Rule 18/ cenvat Rule 5/ Section 11 BB. v. One year time limit / Provision for Interest. v. Theory of unjust enrichment. v. Refund claim thro’ credit notes – what happens? v. Mafatlal Industries Vs U. O. I. v L&T Sargent Lundy Ltd Vs CCE

11)SSI Exemption ØNotification no: 8/ 2003 as amended. ØBasic ceiling Rs. 1. 5 Cr. ØOuter ceiling Rs. 4 Cr. ØOnly listed goods benefit. ØUse of Trademark/ symbol/ brand of another person disentitles.

…contd ØPerennial issues – Clubbing of Clearances and use of Brand name. ØUse of Foreign – owned Trade mark/ Brand name by Indian SSI Units. ØClearances Excluded / included for Computing Rs. 1. 5 Cr and Rs 4 Cr. Value Caps.

Valuation of Depot Sales (Stock Transfer) Where the excisable goods are transferred to : - a depot/premises of consignment agent/branch/any other place , from where those excisable goods are to be sold, in that case, the “Assessable Value “ shall be • The price at which maximum no. of goods are sold, • At the branch, • At the time of removal from factory.

Example of Stock Transfer Factory Branch Sent to Branch on 01/01/07 Received on 10/01/07 Ex-factory Price = Rs. 500 Price on 10/01/07 = Rs. 800 Ex-Depot Price = Rs. 700 Sale on 15/01/07 Price on 15/01/07 = Rs. 900 A. V. shall be Rs. 700 on which E. D. will be charged.

Valuation of Captive Consumption A. V shall be : - (Cost of Production)*110% even if the same or identical or, comparable goods are manufactured & sold by the same assesee.

Manner of Payment ØLast Day : - 5 th day of the following month (Exception : - in case of goods removed during the march : - 31 st March) ØExplanation : - The “date of presentation” of the cheque shall be the date on which duty is paid, subject to “realization” of that cheque

Excise Invoice Ø The Invoice shall be serially numbered & shall contain: (a). Registration Number (b). Description of goods (C). Classification (d). Time & Date of Removal (e). Mode of Transport & Vehicle Registration No. (f). Rate of duty (g). Qty. & Value of goods (h). Amt. of duty (i). Address of concerned Central excise Division. Ø It shall be prepared in Triplicate (Buyer/Transporter/Assesee). Ø Before using Invoice book, the serial no. should be intimated to Superintendent.

Return & AFIR Ø Return submission : - (a). Monthly (b). Form ER-1 within 10 days from the close of month. Ø Annual Financial Information Statement (AFIR) : * Annually * Form ER-4 * 30 th November of succeeding year * filing only if duty of Rs. 1 crore or mor has been paid through “PLA”

Records Required To Be Maintained Ø RG-23 A- Part I (Stock Account of Input Goods) Ø RG-23 A- Part II (Credit on Input Goods) Ø RG-23 C- Part II (Credit on Capital Goods) Ø RG-1 (Daily Stock Account) Ø PLA (Personal Ledger Account)

RG-23 A (Part I) Register ü The Receipt, ü Disposal, ü Consumption, ü Inventory of Inputs & Capital Goods.

RG-23 A (Part II) Register ü ü The Assessable Value, Duty Paid, Cenvat Credit taken or utilized, Persons from whom Input/Capital Goods are procured. Conditions for allowing Cenvat Credit on “Input” Goods : ü 100% credit immediately on receipt of Input goods ü Credit shall be taken on Process Losses but not on Storage & Transit Losses ü Input does not includes LDO, HSD, Petrol.

RG-23 C (Part II) Register ü ü The Assessable Value, Duty Paid, Cenvat Credit taken or utilized, Persons from whom Input/Capital Goods are procured. Conditions for claiming Cenvat Credit on Capital Goods : - ü 50% in the year of receipt. ü Remaining 50% in subsequent year (if in possession) but possession not necessary for components, spares& accessories, refractory & refractory material, moulds & dies. Ø Exception : - 100% allowed if capital goods cleared in the year of receipt itself. ü Credit on non-specified machine is not allowed.

Daily Stock Account Ø Maintain Proper Records on a daily basis regarding : (a). Description of goods manufactured (b). Opening Balance ©. Goods manufactured (d). Goods removed (e). Inventory (f). A. V of goods (g). Duty payable (h). Actual duty paid Ø The first & last page of account shall be duly authenticated. Ø Preserve Records for 5 years after the end of F. Y. to which records pertains.

Personal Ledger Account The “Credit” in taken when duty is deposited through TR-6 Challans. The “Debit” is passed when duty is required to be paid. 2 copies of PLA & TR-6 ---- To be filed with ER-1.

Job Work If Input/Capital goods not received back within 180 days, then Cenvat Credit taken on those goods has to be reversed. Exception : - Jigs, Fixtures, Moulds.

Returns Raj in central excise ER 1 – monthly – due by the 10 th of the following month ER 2 – monthly, for EOU – due by the 10 th of the following month ER 3 – quarterly for SSI units – due by the 10 th of the following quarter

Continued…. ER 4 – Annual financial statement for units paying INR I crore in excise – due by the 30 th of April of the following year ER 5 – CENVAT – Annual Return of information relating to principal inputs – due by 30 th April of the following year – some class of manufacturers given exemption

Continued…… ER 6 – monthly return of principal cenvat inputs due by the 10 th of the following month – some class of manufacturers given exemption ER 7 – Annual Installed capacity statement – due by the 30 th April of the following year

Important procedures in central excise Issue of invoice under Rule 11 of central excise rules 2002 Provisional assessment under Rule 7 & finalization Time and manner of payment of duty under Rule 8 Remission of duty under Rule 21 for damaged/defective/unfit/unmarketable goods

Important procedures in central excise Credit of duty paid on sales returns under Rule 16 -A – removal of any inputs as such or partially worked outside the factory for testing, repair etc Rule 16 -B – removal of semi-finished products for further work / finishing and return

Important procedures in central excise Rule -16 C – removal of finished goods outside for test etc & return Export without payment of duty as well under claim for rebate of duty – LUT (UT 1), Bond, ARE Removal of excisable goods without duty for export warehousing under Rule 20

Penal provisions in central excise – simply draconian & colonial Prosecution for select offenses under section 9 of the Act Demand of duty under section 11 A with normal time limit of one year and 5 years for cases where suppression of facts by the assesses is alleged Time limit for adjudication of SCN

Penal provisions in central excise Interest for delayed payment under section 11 AB Penalty equal to duty under section 11 AC in cases involving suppression of facts. Penalty under Rule 25 – maximum upto duty or Rs 2000/-whichever is greater, with confiscation of the goods

Penal provisions in central excise Rule 26 – penalty for abettors , transporters, issuers of false invoices – max upto duty or Rs 2000/- whichever is greater Rule 27 – general penalty where no penalty is specified for any offense in the rules, max of Rs 5, 000/- with possible confiscation of the goods

Penal provisions in central excise Tax default – penalty under rule 8 – daily clearance on payment of duty in cash, plus prohibition of using cenvat credit, till dues are paid up. Rule 12 CC – blanket powers given to the department to impose restrictions on Manufacturers and Dealers involved in tax evasion

Penal provisions in central excise Section 11 DDA – power to order provisional attachment of property to protect “Revenue” during he pendency of proceedings Section 14 – power to issue summons Section 13 – power to arrest

CENVAT CREDIT The foundation of the value-added tax system Avoids cascading effect of tax on tax Integrates goods and services Cenvat credit Rules 2004 – apply to Manufacturers & Service providers

Cenvat credit rules – what is the gain? Input stage duty relief in the form of tax credit to – Capital goods Input services

Cenvat credit – Capital goods All goods falling under the following chapters – Chapter 82 – tools etc Chapter 83 – miscellaneous articles of base metals Chapter 84 – machinery, equipment etc

Capital goods…. . Chapter 85 – electrical / Electronic machinery & equipment etc Chapter 90 – optical, photographic, medical , checking, measuring equipment etc Abrasives under heading no 6805 Grinding wheels & the like under heading 6904

Capital goods…… Pollution control equipment Components, spares & accessories of the goods for the above two categories Moulds, dies , jigs and fixtures Refractories, and Refractory materials Tubes, pipes and fittings thereof Storage tank

Capital goods… Used in the factory of the manufacturer of final products, but does not include any equipment or appliance used in the office Or, used for providing output service Motor vehicles registered in the name of the following service providers are allowed – courier agency, GTA, Rent a cab operator , tour operator, outdoor caterer

Capital goods…. Ownership of capital goods is not required for a manufacturer or service provider except for the motor vehicle credit Credit to be taken for 50% of the duty in the first year and the rest in any subsequent year Depreciation under Income tax prohibited

Capital goods…. . The 50% restriction does not apply to special CVD of 4% paid on imported capital goods Removal of capital goods requires reversal of credit – 2. 5% depreciation on credit for every quarter of use Removal on scrapping of capital goods requires payment of duty on transaction value

Capital goods…. Provision for removal of capital goods for test, repair etc Moulds, dies , jigs and fixtures can be deployed at the premises of the job worker Capital goods can be produced and used in the factory of production for manufacture of excisable goods – duty exempt

Capital goods…. Capital goods on which credit is taken should not be solely used in the manufacture of exempted goods Capital goods which are not defined in the CCR but used in the factory of production will qualify for credit as “Inputs”. – Benco Products Vs CCE – CESTAT larger bench decision

INPUTS Wide definition in the CCR “Inputs” means all goods except light diesel oil, high speed diesel and petrol Used in or in relation to the manufacture of final products Whether directly or indirectly Whether contained in the final product or not

Inputs…. Inputs include -- Lubricating oils Greases Cutting oils Coolants Accessories of the final products

Inputs… Goods used as… Paint or packaging material or as fuel or for generation of electricity or steam Used in or in relation to the manufacture of final products or for any other purpose Within the factory of production

Inputs…… For service providers: All goods except light diesel oil, high speed diesel , petrol and motor vehicles And used for providing output service Inputs will not include cement, angles and channels, CTD / TMT bars & other items used for construction in the factory / building or in laying of foundation or structural support of capital goods

Input services For manufacturers: Any service used by a 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

Input services…. . For service providers: Any input service used by a provider of output service for providing an output service

Input services allowed to both manufacturers to service providers Services used in relation to – Setting up Modernization Renovation Repairs Of a factory or the premises of the service provider

Common services…. Or an office relating to such factory or the premises Advertisement Sales promotion Market research Storage upto the place of removal Procurement of inputs

Common services…. Activities relating to Business “such as” – Accounting Auditing Financing Recruitment and quality control Coaching and training

Common services…. Computer networking Credit rating Share Registry Security Inward transportation of inputs & capital goods Outward transportation upto the place of removal

Important features of cenvat credit Input credit can be availed immediately on receipt of the goods accompanied by the relevant invoice No one-to-one correlation between input and output Cenvat credit is a legal and vested right

Important features of cenvat credit Input service tax credit should be taken only after settling the service supplier invoice with value and tax Transfer of credit on transfer of business allowed Transitional credit

Important features of cenvat credit Importance of new rule 6 in CCR 2004 Options there under Maintain separate accounts Or pay 5% on the value of exempted goods and six % on the value of exempted services

Important features of cenvat credit Or take credit proportionate to the taxable turnover as per formula prescribed Inputs & capital goods & input services should not be exclusively utilized in the manufacture / provision of exempted goods or exempted services Clearances to EOU/SEZ/BTP/STP/EHTP & exports will not require reversal of credit

Important features of cenvat credit Storage of inputs outside the factory allowed subject to applying for the same Significance of tax invoice in CENVAT credit system First stage dealer/second stage dealer/input service distributor

Adjudication Proceedings under Service Tax

Provisions at a Glance Section 14 of CEA, 1944 - Power to summon persons to give evidence and produce documents in inquiries under this Act Section 73 of FA, 1994 - Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded Section 73 A of FA, 1994 - Service Tax Collected from any person to be deposited with Central Government Section 73 B of FA, 1994 - Interest on amount collected in excess Section 73 C of FA, 1994 - Provisional attachment to protect revenue in certain cases 88

. . Provisions at a Glance Section 73 D of FA, 1994 - Publication of information in respect of persons in certain cases Section 74 of FA, 1994 - Rectification of mistake Section 75 of FA, 1994 - Interest on delayed payment of service tax Section 83 A of FA, 1994 – Power of Adjudication Section 87 of FA, 1994 - Recovery of any amount due to Central Government 89

Power to summon persons to give evidence and produce documents in inquiries Sub section (1) of Section 14 of CEA, 1944 Any Central Excise Officer duly empowered by the Central Government in this behalf, shall have power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any other thing in any inquiry which such officer is making for any of the purposes of this Act. A summons to produce documents or other things may be for the production of certain specified documents or things or for the production of all documents or things of a certain description in the possession or under the control of the persons summoned. 90

Inquiry before Show Cause Notice F. No 137/39/2007 -CX-4 dated 26 -2 -2007 and F. No. 137/39/2007 -CX-4 dated 21 -1 -2008 At first instance: For calling for information/documents normally the mode of communication should be either in the form of a telephone call or by way of sending a simple letter. Second instance: Issuance of summons should be resorted to, only when the above mentioned modes of communications are found to be ineffective or are likely to jeopardize revenue interest or when it is essential to ensure personal presence of the person concerned to tender evidence or record statement in connection with a service tax evasion case; 91

…. Inquiry Simple Notices are not summons Simple notices are not summons but, it should be an endeavor that no notice should left unattended / unreplied. Even if some notices are wrong, must be replied politely. Precautions during inquiry proceedings Inquiry before issuance of show cause notice is very critical stage and therefore, must be handled carefully. 92

…. . Inquiry Making statement in the course of inquiry ◦ Statement must be given carefully. It is difficult to rebut the statement later. ◦ Statement can be used against the person making such statement. ◦ Where statement is to be retracted, it should be retracted as soon as possible. Collected cheques under force during inquiry: ◦ There is power with the department to collect / recover amount during inquiry. 93

…Forced recovery during investigation In NARESH KUMAR & COMPANY Versus UOI [2010 -TMI - 77634 – CALCUTTA - HC] has held that, The authority concerned has no jurisdiction or authority to collect any amount at the time of raid simply it is not empowered legally to do so. Also see: ABHISHEK FASHIONS PVT. LTD. versus UOI [2006 -TMI - 701 - HIGH COURT OF GUJARAT] - In absence of any statutory provision on the basis of which any such recovery can be made, the action of the respondent authorities in collecting the cheques from the petitioner cannot be sustained in law 94

Power of Adjudication – S. 83 A Not. 30/2005 dt. 10/8/2005 and 48/2010 dt. 8/9/2010 Superintendent of Central Excise ◦ Not exceeding Rs. one lakh (excluding the cases relating to taxability of services or valuation of services and cases involving extended period of limitation. ) Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise ◦ Not exceeding Rs. five lakhs (except cases where Superintendents are empowered to adjudicate. ) 95

…Power of Adjudication – S. 83 A Joint Commissioner of Central Excise Above Rs. five lakhs but not exceeding Rs. fifty lakhs Additional Commissioner of Central Excise Above Rs. twenty lakhs but not exceeding Rs. fifty lakhs Commissioner of Central Excise Without limit 96

Show Cause Notice – Section 73 Normal Period of Limitation (1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the 2[Central Excise Officer] may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice: 97

…. SCN - Section 73 Extended Period of Limitation PROVIDED that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of— (a) fraud; or (b) collusion; or (c) wilful misstatement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words "one year", the words "five years" had been substituted. 98

SCN – Period of limitation Explanation: Where the service of the notice is stayed by an order of a court, the period of such stay shall be excluded in computing the aforesaid period of one year or five years, as the case may be. 99

SCN – Relevant Date (6) For the purposes of this section, "relevant date" means, — (i) in the case of taxable service in respect of which service tax has not been levied or paid or has been short-levied or short-paid— (a) where under the rules made under this Chapter, a periodical return, showing particulars of service tax paid during the period to which the said return relates, is to be filed by an assessee, the date on which such return is so filed; (b) where no periodical return as aforesaid is filed, the last date on which such return is to be filed under the said rules; (c) in any other case, the date on which the service tax is to be paid under this Chapter or the rules made thereunder; (ii) in a case where the service tax is provisionally assessed under this Chapter or the rules made thereunder, the date of adjustment of the service tax after the final assessment thereof; (iii) in a case where any sum, relating to service tax, has erroneously been refunded, the date of such refund. 100

Contents of SCN should not be vague or ambiguous SCN must be specific RUD should be supplied with SCN Corrigendum to SCN may be issued but no new ground be raised No corrigendum after submission of reply to SCN 101

Serving of SCN – Section 37 C of CEA, 1944 (1) Any decision or order passed or any summons or notices issued under this Act or the rules made thereunder, shall be served, — (a) by tendering the decision, order, summons or notice, or sending it by registered post with acknowledgement due, to the person for whom it is intended or his authorised agent, if any; (b) if the decision, order, summons or notice cannot be served in the manner provided in clause (a), by affixing a copy thereof to some conspicuous part of the factory or warehouse or other place of business or usual place of residence of the person for whom such decision, order, summons or notice, as the case may be, is intended; …………. 102

…Serving of SCN – Section 37 C of CEA, 1944 (c) if the decision, order, summons or notice cannot be served in the manner provided in clauses (a) and (b), by affixing a copy thereof on the notice board of the officer or authority who or which passed such decision or order or issued such summons or notice. (2) Every decision or order passed or any summons or notice issued under this Act or the rules made thereunder, shall be deemed to have been served on the date on which the decision, order, summons or notice is tendered or delivered by post or a copy thereof is affixed in the manner provided in sub-section (1). 103

Serving of SCN Mere issue of SCN is not sufficient, it has to be served on the person Refusal to accept notice is due service of notice In case of partnership firm, SCN can be issued to any partner In case of company, SCN can be issued to any of director, secretary or principal officer Notice to agent is valid. 104

Reply to SCN Submission of Reply to SCN with 30 days or extended period as sought. Assessee can take inconsistent and contrary stands Assessee can raise dispute to demand on different grounds If the statement of a third person relied upon by the department, assessee can demand cross-examination of such person and have statement by such person. Personal hearing may be opted. In case the officer is changed, new officer should give personal hearing. 105

Challenge to invoking of extended period of limitation Where extended period of limitation has been invoke, carefully examine the SCN to see: ◦ Whether, allegation for invoking extended period is specific ◦ ◦ or general. Which of the allegation has been invoked. Calculate period before knowledge of facts to the department and after knowledge of facts to the department. What evidences have been adduced by the department to prove its allegation. Whether department has discharged its initial burden to prove the allegation. 106

Challenge to invoking of extended period of limitation Mere non declaration is not sufficient but a positive mis declaration is necessary See: circular no. 5/92 dated 13/10/192 CE PADMINI PRODUCTS Versus CCE [2008 -TMI – 42519 – SC = mere failure or negligence on the part of the producer or manufacturer either not to take out a licence in case where there was scope for doubt as to whether licence was required to be taken out or where there was scope for doubt whether goods were dutiable or not, would not attract Section 11 -A of the Act. 107

…. Challenge to extended period of limitation Suppression, miss declaration must be willful Intention to evade duty is not mere failure to pay duty. It must be something more. Mere inaction is not suppression Mere ommission to give correct information is not supression it is willfull No suppression if assessee was ignorant about legal provisions No suppression if assessee had a bonafide belief. If there is a confusion prevailing in field, no suppression 108

…. Challenge to extended period of limitation If there is a clarificatory circular, it is a ground of banafide belief. Contradictory judgments on of the tribuanl or courts are valid ground of no suppression. No suppression if department is aware of facts No suppression if SCN were issued on the same subject If demand is based on return, no suppression No suppression in case of PSU / govt. undertakings No suppression if figures were disclosed in published balance sheets. 109

…. Challenge to extended period of limitation Revenue neutral position Where assessee is able to take the cenvat credit of tax paid, suppression can not be held But, mere availability of cenvat credit is no conclusive that there was no suppression of facts. Suppression of facts is a question of facts and must be challenged accordingly. 110

Others aspects of SCN and demand Demand based on third party’s records without considering other parameters are not sustainable. Demand based on mere presumption is not sustainable. In case of normal period of limitation, if service tax with interest is deposited before issuance of SCN, no notice would be served and penalty be imposed. In case of extended period of limitation, where service tax with interest and 25% penalty is deposited, no notice would be issued and penalty be imposed. 111

Forced Recovery ST from third person – Section 87(b) empowered the central excise officers to recover the amount from the third person. O. N. G. C. LTD. Versus DC. OF CCE [2010 -TMI - 77636 - ANDHRA PRADESH HIGH COURT] – recovery can not made from the third parties merely by issuing notice in the absence of assessment order. . 112

Swami Vivekananda said…. . The lamp is constantly burning out, and that is its life. If you want to have life, you have to die every moment for it. Life and death are only different expressions of the same thing looked at from different standpoints; they are the falling and the rising of the same wave, and the two form one whole. One looks at the "fall" side and becomes a pessimist another looks at the "rise" side and becomes an optimist. (KARMA-YOGA – Chapter VIII) 113

EXCISE AUDIT

TYPES OF AUDIT IN CENTRAL EXCISE DEPT INTERNAL AUDIT SPECIAL AUDIT U/S 14 A &14 AA STATUTORY AUDIT BY C&AG

PROCEDURES IN EXCISE AUDIT ANNUAL & MONTHLY PROGRAMME SELECTION OF ASSESSEE PRELIMINARY DESK REVIEW TOUR OF THE PLANT INTERVIEW OF KEY PERSONNEL EVALUATION OF INTERNAL CONTL PREPARATION OF AUDIT PLAN CONDUCT OF AUDIT PREPARATION OF AUDIT REPORT

REQUIREMENT ON THE PART OF CA WELL VERSED WITH THE ACCOUNTING SYSTEM ADOPTED BY VARIOUS UNITS SHOULD NOT BE A COST AUDITOR FOR THE SAME UNIT CAS-4 CERTIFICATIONS NOT ISSUED FOR THE SAME UNIT SOUND WORKING KNOWLEDGE OF CENTRAL EXCISE LAWS ESPECIALLY EXCISE AUDIT, CENVAT & VALUATION

WHAT IS EXPECTED OF COST ACCTS TO SCRUTINISE ER-5 & ER-6 RETURNS TO VALIDATE, INTERPRET & ANALISE DATA AS PER THESE RETURNS TO IDENTIFY VALUATION ISSUES IN CASE OF RELATED UNITS TO VALIDATE & INTERPRET CAS-4 CERTIFICATE

SCOPE OF THE WORK SUCH ASSIGNMENTS ARE SELECTIVE IN NATURE SERVICES OF CA ARE ONLY ADVISORY IN NATURE ONLY FOR DESK REVIEW REPORT OF CWA FORM PART OF WORKING PAPERS OF DEPT.

LIMITATIONS OF WORK CWA NOT ALLOWED TO VISIT UNITS CONFLICT OF INTEREST PART OF AUDIT TEAM & NOT INDEPENDENT COMPLETELY ONLY EMPANELLED CWA ARE CONSIDERED ONE/TWO DAYS ONLY

DOCUMENTS TO BE SCRUTINISED MONTHLY RETURNS ER-5 & ER-6 RETURNS ANNUAL REPORT W. R. T. QUANTITATIVE DETAILS COST AUDIT REPORT CAS-4 CERTIFICATE

REPORTING FORMAT TO BE DESIGNED BY INSTITUTE IT IS IN THE NATURE OF ADVISE NOTE TO BE SUBMITTED TO SUPT. INCHARGE OF TEAM TO BE COMPLETED BEFORE AUDIT SCHEDULE

POINTS TO PONDER TREND ANALYSIS OF CENVAT/DUTY RISK LOSS ANALYSIS INPUT/OUTPUT RATIO VALUE ADDITION RECONCILIATION OF DUTY OTHER RATIOS

WHAT TO KNOW FROM P&L SALE VALUE AND ED PAID PURCHASE AND CENVAT LOSS BY FIRE/THEFT WRITING OFF OF OBSOLETE ITEMS DISCOUNT RECEIVED/PAID OTHER INCOMES DEPRECIATION

WHAT TO KNOW FROM P&L ROYALTY/TECH KNOW HOW DESIGN & DEVT. CHARES INSURANCE CLAIMS ERRECTION CHARGES – ST ANGLE EXCISE DUTY PAID

STATISTICAL TECHNIQUES RISK ASSESSMENT RIST LOSS ANALYSIS TREND ANALYSIS ABC ANALYSIS INPUT-OUTPUT RATIO

RISK LOSS ANALYSIS IN RESPECT OF – EXCISE DUTY PAID OF FINISHED GOODS CENVAT ON INPUT vs PURCHASES SALES REVENUE WITH INCOME TAX AND SALES TAX RETURNS

RLA – ED PAID – STEP 1 NOTE DOWN DUTY PAID AS PER RT 12 DEDUCT ED RELATING TO PREVIOUS PERIODS, EXPORT GOODS, INPUTS CLEARED AS SUCH, WASTE, MISC HEAD OF PLA, ETC. NET DUTY PAYABLE ON FINISHED GOODS

RLA- STEP 2 TOTAL SALE VALUE AS PER P&L a/c DEDUCT SALES TAX (as per sales tax returns) DEDUCT EXPORT VALUE, SCRAP SALE VALUE, VALUE OF EXEMPTED GOODS, TRADING GOODS, ETC. GET SALE VALUE OF DUTIABLE GOODS

RLA – STEP 3 IF NET SALE VALUE IS INCLUSIVE OF ED, CALCULATE ED PAYABLE AS NET SALE VALUE x 16 116 IF NET SALE VALUE IS EXCLUDING ED, ED PAYABLE IS SALE VALUE x 16/100

RLA – STEP 4 COMPARE THE ED AS PER RT 12 (step 1) With ED PAYABLE AS PER P&L a/c (step 3) If the difference is very negligible, ignore Otherwise, we have to ask for reconciliation by the assessee.

RATIO ANALYSIS SALES TO RAW MATERIALS SALES TO OTHER INCOME SALES TO DISCOUNT SALES TO SCRAP SALES TO EXPORTS SALES TO DEBTORS SALES TO EXCISE DUTY

CONTENT OF COST AUDIT REPORT 1 REPORT BY COST AUDITOR 2 DETAILS OF ASSESSEE 3 COST ACCOUNTING SYSTEM 4 FINANCIAL POSITION 5 EXPENSES TO BE SPECIFIED 6 RATIOS 7 RAW MATERIALS

8 POWER AND FUEL 9 WAGES AND SALARIES 10 STORES AND SPARES 11 DEPRECIATION 12 OVERHEADS 13 ROYALTY/TECH KNOW-HOW 14 SALES 15 ABNORMAL COSTS 16 OTHER ITEMS 17 AUDITOR’S OBERVATIONS

EXPENSES/INCOMES TO BE SPECIFIED j) Expenses to be specified Expenditure on spl exhibitions Expdr. -abonormal or non-recurring Incomes to be specified c) Abnormal or non-recurring incomes

RATIOS & RAW MAT Cost of production on Cap Employed Actual production vs Installed capacity Cost of major RM consumed Specify Significant transport cost Analysis of variances Comment of Inventory accounting

STORES AND SALES COMMENT ON THE METHOD OF STORES ACCOUNTING NON-MOVING ITEMS OVER 2 YRS PRODUCT-WISE SALES REALISATION EXPORT REALISATION-PROFIT?

AUDITOR’S OBSERVATION PRINCIPLE DEVIATIONS NEGLIGENCE & NON-COMPLIANCE SCOPE OF INTERNAL AUDIT AGREEMENTS OF SALE/PURCHASE SEPARATE ANNEX FOR DIFF UNITS

Presented By CA Swatantra Singh, B. Com , FCA, MBA Email ID: singh. swatantra@gmail. com New Delhi , 9811322785, www. caindelhiindia. com, www. carajput. com 139