Tax planning under Central Excise

Tax planning means arranging the business affairs in such a manner so as to minimize the
consequences of the tax but at the same time remaining within the provisions of law. Tax
planning has been accepted by the Apex Court while delivering several judgments.
Following judgments upholding the tax planning are worth noting: -
“When a genuine transaction not prohibited by law reduce tax liability, it is not an
attempt to evade tax, but only a legal device to reduce tax liability, to which every tax
payer is entitled”. – (CIT vs. Sivakasi Match Exporting Co. A.I.R. 1964. S.C. 1813)
“A citizen is perfectly entitled so to arrange his affairs as may make it possible for him to
legally and lawfully not pay tax, and if he succeeds, however, reluctant the court may be
to acknowledge the cleverness of the assessee, the court must give effect to the letter of
taxation law – rather than strain that law against the assessee”. – (A.I.R. – Bombay –
95,97)
Central Excise offers very wide scope of tax planning, right from the purchase of raw
material till sale of the finished goods. The following areas can be examined for tax
planning in central excise: -
1) By determining whether the process being carried out to produce the goods
amounts to ‘manufacture’;
2) By correct classification of goods;
3) By availing the benefit of permissible exemption notifications;
4) By availing all permissible benefits for exports;
5) By availing all permissible deductions from the assessable value;
6) By management of availement and utilization of cenvat credit;
1) Determining the excisability of a process of manufacture
Excise is a levy on goods manufactured and therefore, the crucial factor for determination
of duty liability is whether the process carried out amounts to ‘manufacture’. If an
assessee succeeds in establishing that his activity does not amount to manufacture, the
question of levy of central excise does not arise. The definition of ‘manufacture’ under
Central Excise Act is an inclusive definition and not an exhaustive one. Section 2(f)
defines it as follows: -
"manufacture" includes any process, -
(i) incidental or ancillary to the completion of a manufactured product;
and
(ii) which is specified in relation to any goods in the Section or Chapter
notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of
1986) as amounting to manufacture; or
(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.
Whether a process is incidental or ancillary to the completion of a manufactured has been
a subject matter of continuous litigation. The Apex court in the case of DCM vs. Union of
India has defined that following ingredients must exist to define a process as process of
manufacture: -

 The process carried out must result in the manufacture of a new product other
than what was before;

 Such new product must have a marketability and be commercially known and
sold as such;

 The new product must be movable in nature.

However the definition of manufacture in section 2(f)(ii) and 2(f)(iii) overrides

principals as defined in above Supreme Court judgment. The manufacture of each
product requires carrying out several steps of process. Even if a process does not satisfy
the criteria laid down by Apex Court for definition of manufacture, it may be deemed to
be a process of manufacture, if it is defined as process of manufacture in the Section or
Chapter notes of the Central Excise Tariff Act, 1985. For example Chapter note of
Chapter 52 in relation to cotton sewing thread and cotton yarn defines, that the process of
dyeing, printing, bleaching, mercerizing, twisting, texturising, doubling, multiple-folding,
cabling or any other process or any one or more of these processes, or the conversion of
any form of the said products into another form of such products, as process of
manufacture. However these processes are not defined as process of manufacture in
Chapter 53 in relation to flax yarn, jute yarn, paper yarn or yarn of any other vegetable
fibre. The process of labelling or relabelling of containers and repacking from bulk packs
to retail packs or adoption of any other treatment to render the product marketable to the
consumer, has been defined as process of ‘manufacture’ in respect of various products in
section or chapter notes, for e.g. Chapter 4,16,19,20 etc. However the above activities are
not process of manufacture in respect of other products, where it has not been defined as
process of manufacture in their respective section or chapter notes.

2) Correct classification of goods

The rate of duty in respect of excisable goods is specified in Central Excise Tariff Act,
1985. The excisable goods under the Central Excise Tariff have been classified using six-
digit system. The first two digits refer to chapter in the schedule and next two digits refer
to specific item in the chapter. Two more digits have been added for further sub-
classification wherever necessary. It is necessary to determine not only the chapter under
which an excisable good is falling but also to determine the correctly classification as
well as sub-classification under the respective chapter. Even a minor change in
classification or sub-classification may determine the eligibility or otherwise of a
exemption notification. For example in respect of chapter 54 in relation to man-made
filaments, only ‘sewing thread’ classified under 54.01 is eligible for benefit of exemption
notification based on value of clearances. It would be interesting to note here the
definition of ‘sewing thread’ as defined under section note of textile and textile articles.
‘Sewing thread’ has been defined as multiple (folded) or cabled yarn: -
a) put up on supports (for example, reels, tubes) of a weight not exceeding 1,000
gms;

b) Dressed for use as sewing thread;

c) With a final ‘Z’ twist.

A manufacturer who is manufacturing sewing thread can avail the benefit of exemption
notification on the basis of value of clearance in respect of a sewing thread by satisfying
the above conditions of definition of sewing thread.
Moreover even a slight change in classification may result in change in rate of duty. For
example under chapter 4 in relation to dairy products, flavoured milk classified under
subheading no. 0401.11 attracts nil rate of duty whereas concentrated (condensed) milk
classified under subheading no. 0401.14 attracts 16% rate of duty.
3) Availing the benefit of permissible exemption notifications
Exemption notifications are the most important tool in the hand of the assessee to avail
the benefit of concessional rate of duty. In most of the cases it so happens that the rate of
duty of a particular product is kept at 16% in the Central Excise Tariff. However at the
same time there are various types of exemptions notifications granted under central
excise subject to satisfaction of certain conditions mentioned in the notification. For
proper tax planning it is essential for an assessee to be aware of all exemption
notifications. For ease of reference various exemption notifications can be broadly
categorized as under: -

 Based on value of clearances;

 Based on location of manufacturer;

 Based on end use of product;

 Based on method of manufacture;

 Based on category of manufacturer;

 General exemptions

Exemption notifications under each broad category are briefly discussed as under: -

Exemptions based on value of clearances

a) There are two alternative set of exemption notification schemes under central excise,
which enable manufacturing units to make clearance upto a turnover of one crore at nil
rate of duty without availing cenvat credit on inputs or make clearance upto a turnover of
one crore on payment of sixty percent of normal rate of duty by availing cenvat credit on
inputs. These schemes are guided by notification 8/2003 & notification 9/2003
respectively. These are both mutually exclusive schemes & a manufacturer can choose
either of the two schemes. A manufacturer has to make a declaration of his choice at the
beginning of the financial year.
There is a myth prevailing that these benefits are available only to SSI units. But the
notification 8/2003 & notification 9/2003 nowhere uses the word SSI while defining the
eligibility criteria.
The main condition specified by the notification 8/2003 & notification 9/2003 for
availing the exemption is that: -
“The aggregate value of clearances of all excisable goods for home consumption by a
manufacturer from one or more factories, or from a factory by one or more manufacturer
should not exceed Rupees three crore in the preceding financial year”.
Hence a export oriented large scale unit, which also sells its product in the local market
can also avail this benefit provided its sale for home consumption is below Rs. three
crores in the preceding financial year.
Moreover a large-scale unit, whatever be its investment, can avail of these benefits in the
first year of its operation, as there is no previous year in its case.
There is scope of tax planning while making a selection between the alternative set of
schemes under notification 8/2003 or notification 9/2003. The manufacturers generally
prefer to opt for benefit available under notification 8/2003 as it apparently looks more
attractive because a manufacturer is not required to pay any duty upto a clearance of Rs.
one crore. But a manufacturer should make a financial calculation, at the beginning of a
financial year, of whether any surplus cenvat credit on inputs is remaining after making
the payment of duty at the rate of 60% of normal rate of duty on turnover of upto one
crore, if he opts for notification 9/2003. If any surplus cenvat credit remains, it can be
utilised for paying the duty on turnover beyond Rs. one crore. In such a case notification
9/2003 should be availed of.
b) Subject to conditions as specified in notification no. 34/2003, 35/2003 and 36/2003 as
amended by notification no. 47/2003, exemption has been granted in respect of textile
products upto value of clearance of 30 lacs/25 lacs for the financial year 2003-2004.
Exemptions based on location of manufacturer
There are exemptions, to units located in a Growth Centre, Integrated Infrastructure
Development Centre, Export Promotion Industrial Park, Industrial Estates, Industrial
Area, Commercial Estates or Scheme Area of North East States, J&K, Uttranchal,
Himachal Pradesh and Kutch (Gujrat), Sikkim, in relation to products and subject to
conditions as specified in notification no. 32/99, 33/99, 39/2001, 56/2002, 57/2002,
49/2003, 56/2003, 71/2003 as amended from time to time.

Hence a manufacturer planning to start a new unit should refer to above notifications to
determine whether he is eligible to exemption, if he establishes his new factory in any of
the above location.
Exemptions based on end use of the product

There are various exemption notifications granting exemption on the basis of end use of
the product. For e.g.: -
a) Exemption to specified goods meant for repairing, reconditioning, and
reengineering subject to conditions specified in notification no. 138/94 as
amended from time to time.
b) Exemption to goods sent abroad as exhibits for exhibition in international trade
fair or for demonstration or carrying out tests or trials subject to conditions
specified in notification no. 263/79 as amended from time to time.
c) Exemption to certain goods if cleared for display in any fair or exhibition subject
to conditions specified in notification no. 215/84 as amended from time to time.
d) Exemption to goods supplied to specified research institutions subject to
conditions specified in notification no. 10/97.
e) Exemption to goods supplied for defence and other specified purposes subject
conditions specified in notification no. 63/95 and 64/95 as amended from time to
time.
f) Exemption to goods supplied to UN or specified International Organisation
subject to conditions specified in notification no. 108/95 as amended from time to
time.
g) Exemption to steel and cement supplied to indenting agents for use in the
construction of houses under the Indira Awas Yojana and Hudco refinance
Housing Scheme in the notified cyclone areas subject to notification no. 43/2000
as amended from time to time.
h) Exemption has been provided to specified goods produced or manufactured by a
unit when supplied to units in Special Economic Zone, Export Oriented Units, and
Software Technology Park, Electronic Hardware Technology Park subject to
conditions specified in notification no. 58/2003 and 22/2003 as amended from
time to time.
Exemption based on method of manufacture
Exemption has been provided to specified goods produced without the aid of power
subject to conditions specified in notification 167/86 as amended from time to time.
Exemptions based on category of manufacturer
a) Exemption has been provided to specified goods produced in Export Oriented
Units, Software Technology Park, Electronic Hardware Technology Park subject
to conditions specified in notification no. 23/2003 and 24/2003 as amended from
time to time.
b) Exemption has been provided to genuine specified products of village industry,
marketed by or with the assistance of Khadi Village Industries Commission
subject to notification no. 198/87 as amended from time to time.
 c) Exemption has been provided to certain specified goods manufactured in rural
areas by co-operatives/Khadi Village Industries Commission subject to
notification no. 88/88 as amended from time to time.
d) Exemption has been provided to goods produced in a technical, educational and
research institute subject to conditions specified in notification no. 167/71 as
amended from time to time.
e) Exemption has been provided to goods designed and developed by public funded
research institutions, national laboratories and universities and manufactured by
an Indian company subject to conditions specified in notification no. 13/99 as
amended from time to time.
f) Exemption has been provided to goods manufactured by Central Government and
State government factories subject to conditions specified in notification no.
62/95 and 29/2002 as amended from time to time.
g) Exemption has been provided to goods manufactured by specified
units/institutions for use by Government Department or defence purposes subject
to conditions specified in notification no.63/95 as amended from time to time.
General Exemptions
Exemption to pay duty at concessional rate has been provided in respect of goods of
various chapters to the extent of and subject to conditions specified in notification no.
6/2002, 10/2003 and 7/2003.
There are several other exemption notifications as well specific to the chapter.
4) Export Benefits
Export of finished goods can be done without payment of duty under bond or letter of
undertaking. Alternatively export of manufactured/processed goods can be done after
procuring raw material without payment of duty. It is to be noted here that procurement
of raw material without payment of duty can be done in respect of excisable as well as
non-excisable goods. Moreover any processing not amounting to manufacture will also
be eligible for the above benefit. The conditions and procedures relating to export without
payment of duty are contained in notification no. 42/2001 to 45/2001.
Export of finished goods can also be done under claim of rebate. Alternatively export of
manufactured/processed goods can be done after procuring raw material under claim for
rebate. The conditions and procedures relating to export under claim for rebate are
contained in notification no. 40/2001 and 41/2001.
It should noted here from tax planning point of view that Export of finished goods
without payment of duty and Export under claim for rebate are not mutually exclusive
schemes. Hence a manufacturer can claim benefit of both the schemes at the same time. A
manufacturer can claim cenvat credit on inputs while exporting goods without payment
of duty. Rule 5 clarifies that if the manufacturer continuously exports his goods under
bond or letter of undertaking, cenvat credit shall be allowed to be utilized towards
payment of duty on any other final product for home consumption. Moreover if he is not
able to utilize all his accumulated balance of cenvat credit towards clearance for home
consumption, he will be entitled for refund of such credit amount.
5) Deductions from assessable value
Concept
It is necessary to understand the newly introduced concept of “Transaction Value”, to
determine assessable value for the purposes of charging of duty, to arrive at a conclusion
regarding allowability of various deductions from the assessable value. Let us discuss the
relevant portions of the provision of section 4 introduced w.e.f. 1.7.2000 relating to the
valuation of excisable goods.
Section 4(1)(a) of the Central Excise Act, 1944 states that:
“ In a case where the goods are sold by the assessee, for delivery at the time and
place of removal, the assessee and the buyer of the goods are not related and the
price is the sole consideration for sale, be the transaction value.”
Further Section 4(2)(d) provides the definition of the term “transaction value” as follows
“Transaction value” means the price actually paid or payable for the goods, when
sold, and includes in addition to the amount charged as price, any amount that the
buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in
connection with the sale, whether payable at the time of the sale or 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.
The definition of transaction value needs to be considered very carefully, as there is a
fundamental departure in the concept of valuation from what was essentially based on
‘Normal wholesale price’ before 1.7.2000. The concept of valuation on the basis of
normal wholesale price meant that even though different transactions were effected at
varying prices the normal wholesale price would prevail for valuation of goods for excise
purpose.
The new section 4 essentially seeks to accept different transaction values that may be
charged by the assessee for different transactions provided the buyer and the seller are not
related and price is the sole consideration for sale.
Moreover one more very significant departure from the erstwhile concept of valuation is
that the earlier section 4 had the concept of “ trade discount” which was allowable as
deduction from normal wholesale price.
However, the new section does provide for any such deduction simply because it is not
required in the context of new definition. The new definition is based on the concept of
transaction value, which means the price actually paid or payable for the goods when
sold. Since price paid or payable will exclude any amount, which is not paid, or is not
payable for whatsoever reasons such deduction will be excluded from the assessable
value.
It will be relevant here to discuss the Term ‘Trade Discount’ which was very elaborately
dealt with and defined by the Supreme Court in the case of GOI vs. MRF LTD. 1995(77)
E.L.T. 433 (S.C.) as under:
“ Discounts allowed in the trade (by whatever name such discount is described) should be
allowed to be deducted from the sale price having regard to the nature of goods, if
established under agreements or under terms of sale or by established practice, the
allowance and nature of discount being known at or prior to the removal of goods. Such
trade discounts shall not be disallowed only because they are not payable at the time of
each invoice or deducted from the invoice price.”
Based on the above definition, the Apex Court allowed turnover discount, discount to
government and other departments, year ending discounts, prompt payment or cash
discount being in the nature of trade discount as per above definition of trade discount.
However the Court did not allow TAC /Warranty discount because “the warranty is not a
discount on the tyre already sold, but relate to the goods which are being subsequently
sold to the same customers. It cannot be strictly called as discount on the tyre being sold.
It is in the nature of a benefit given to the customers by way of compensation for loss
suffered by them in the previous sale”.
However the above concept of ‘Normal Wholesale Price’ and ‘trade discount’ is no more
there in the new concept of valuation on the basis of transaction value. So the ground on
the basis of which the apex court had disallowed the warranty discount, that it cannot be
called as discount on tyre being sold & is a benefit given to the customers by way of
compensation for loss suffered by them in the previous sale, is no more there in the new
concept of valuation under transaction value. The term transaction value to again reiterate
means the price actually paid or payable for the goods when sold. Since price paid or
payable will exclude any amount that is not paid or payable for whatsoever reasons they
will be excluded from the assessable value.
Discounts not allowed at the time of sale
There are various types of discounts, that cannot be accurately quantified at the time of
sale such as cash discount, turnover discount, quarterly discount, yearly discount etc. in
such cases the assessee should claim the benefit of above discounts from the assessable
value on a provisional basis. Wherever an assessee finds that final assessment is not
possible, he shall make a detailed request in writing to the Divisional Deputy/Assistant
Commissioner of Central Excise. Where the Deputy/Assistant Commissioner of Central
Excise is satisfied with the genuineness of the assessee’s request he will issue a specific
order directing provisional assessment, clearly stating: -
(a) The grounds on which Provisional Assessment has been ordered.
(b) The rate and /or value, as the case may be, at which duty has to be provisionally
paid.
(c) The amount of differential duty for which bond is to be executed covering the
period, if any, during which assessee paid duty provisionally under the deeming
provisions, after applying the rate and/ or value specified in (b) above.
(d) The amount of security or surety as may be fixed by Assistant Commissioner
keeping in view the instructions issued by the Board from time to time.

On finalisation of provisional assessment the amount of each differential duty shall be

paid along with interest. Where any refund becomes due to the assessee, the assessee will
be required to submit proof to the Assistant/Deputy Commissioner of Central Excise that
the duty incidence was borne by him (assessee). If the assessee fails to produce such
proof/evidence, the Assistant/Deputy Commissioner of Central Excise will pass an order
directing deposit of the amount in Consumer Welfare Fund in the prescribed manner.

6) Management of availement and utilization of cenvat credit

Cenvat credit of duty is allowed in respect of inputs and capital goods used in or in
relation to the manufacture of final products, whether directly or indirectly and whether
contained in the final product or not. There is no difficulty in claiming cenvat credit in
respect of inputs contained in the final product. However disputes arise in respect of
inputs, which are not contained in the final product or regarding capital goods used
indirectly in relation to the manufacture of final product, to establish that they are used in
or in relation to the final product. To overcome this difficulty, all processes in the
manufacture of final product should be clearly defined and inputs and capital goods
required directly or indirectly to complete the process of manufacture should be properly
documented.

It must be noted here that, there is no one to one co-relation between inputs and final
product. Hence cenvat credit on inputs used in relation to any final product in a factory
can be utilized for payment of duty on any final product. Moreover cenvat credit will not
be denied to a manufacturer, for inputs used in relation to exempted final product if he is
manufacturing both exempted and dutiable final product. In such a case a manufacturer
will be required to debit cenvat credit @ 8% on price of exempted final product. The
excess credit if any after debit @ 8% can be utilized for clearance of other dutiable final
product.

Cenvat credit on capital goods is not allowed if is exclusively used in relation to

exempted final product. Hence attempt should be made, as far as possible, to utilize the
capital good in relation to both exempted as well as dutiable final product.

In many cases it so happens that cenvat credit gets accumulated and remains unutilized.
In such cases attempts should be made to source raw material from SSI units. By
sourcing the input from SSI units there will not be any incidence of duty on inputs
whereas the accumulated credit can be utilized for payment of duty on finished goods.

Rule 8 of the Credit Rules, allows a manufacturer to transfer CENVAT credit lying
unutilized in his accounts to transferred, sold, merged, leased or amalgamated factory on
account of shifting his factory to another site or factory transferred due to change in
ownership on sale, merger, amalgamation, lease or transfer of a factory to joint venture
with specific provision for transfer of liabilities of such factory. This is allowed only if
stock of inputs as such or in process or capital goods is also transferred to new site and
the same is duly accounted for to the satisfaction of the Commissioner. So a manufacturer
may go for amalgamation or merger also to utilize the accumulated cenvat credit.
Depreciation under Income Tax Act is not allowed on the amount of duty paid on capital
goods, if cenvat credit has been availed of, in respect of the same. So in a situation of
excess accumulated cenvat credit depreciation should be claimed instead of cenvat credit.
Moreover if cenvat credit is disallowed on capital goods, duty amount can be capitalized
and depreciation can be claimed either from the year of purchase by submitting revised
I.T. return, if possible, or in the subsequent years.

In case of SSI units once the exemption limit of Rs. 100 lakhs is crossed and assessee
starts paying duty, he is eligible to take cenvat credit in respect of inputs lying in stock,
inputs contained in finished goods lying in stock and on the inputs contained in stock of
process. For this purpose, the assessee has to quantify the amount of admissible credit on
the basis of documentary evidence and records maintained for this purpose. So SSI units
should maintain proper stock records and excise invoices, to claim cenvat credit on stock
once his turnover crosses one crore.
Cenvat credit is available on the basis of duty paying documents as defined in rule 7 of
Cenvat Credit Rules, 2002. Hence procurement of input and capital goods should be
made, as far as possible, directly from manufacturers, importers or registered dealers who
can provide them duty paying document.

Cenvat credit is allowed on inputs lying in stock, inputs contained in stock in process and
inputs contained in finished product lying in stock in the following cases: -

- When the exemption granted to any product stands withdrawn;

- When any final product becomes excisable for the first time.

Hence even those manufacturers whose products are not excisable should procure their
raw material directly from manufacturers, importers or registered dealers who can
provide them duty paying document. So that, in case their product becomes excisable
they can claim cenvat credit on stock.

Tax planning – A continuous process

In the present economic scenario, in a developing country like India, it is an unavoidable

political factor that exemptions are to be granted either for certain section of the society
or for certain type of goods or certain locations in India. Regularly pleas are made to the
government to grant various types of exemptions. In the year 2003 itself already 76
exemption notifications have been issued.
Hence, while there is a tremendous scope tax planning in Central Excise, the entire
exercise will be futile if the latest changes and amendments are not reviewed for deriving
the maximum benefits granted under the law. So an assessee should keep himself
regularly updated with the latest changes in law. For regular updation authorized website
of Central Board of Central Excise and Customs www.cbec.gov.in can be referred.