1. 1 Basic Procedures including Classification under Central Excise; Demands and Penalties under Central Excise Law Bharat Raichandani Advocate

2. 2 CLASSIFICATION To impose taxes at different rates. To impose taxes at different rates. Need to know the details of trade. Need to know the details of trade. Standardization and methodical system of classification. Standardization and methodical system of classification. Avoid over-simplicity Avoid over-simplicity Avoid unnecessary differentiation Avoid unnecessary differentiation

3. 3 USED BY Customs authorities Customs authorities Statisticians Statisticians Carriers Carriers Producers Producers

4. 4 EVOLUTION Brussels Tariff Nomenclature 1949 Brussels Tariff Nomenclature 1949 Customs Co-operation Council Nomenclature 1974 Customs Co-operation Council Nomenclature 1974 Harmonized System of Nomenclature 1988 Harmonized System of Nomenclature 1988

5. 5 Harmonised System Harmonized System of Nomenclature Harmonized System of Nomenclature Used as basis for National Customs Tariff – CTA 1975 Used as basis for National Customs Tariff – CTA 1975 Used as basis for Levying excise duty in India – CETA 1985 – 28-2-1986 Used as basis for Levying excise duty in India – CETA 1985 – 28-2-1986 VAT – 2005 many states VAT – 2005 many states

6. 6 General structure Multi-purpose nomenclature Multi-purpose nomenclature Headings grouped in Chapters Headings grouped in Chapters Chapters grouped under Sections Chapters grouped under Sections Arranged in 21 Sections Arranged in 21 Sections

7. 7 STRUCTURE contd…  General Rules for the interpretation of the System Section Notes, Chapter Notes, Sub- heading Notes. Section Notes, Chapter Notes, Sub- heading Notes. Headings arranged in a systematic order Headings arranged in a systematic order Headings, where appropriate sub- divided into sub-headings Headings, where appropriate sub- divided into sub-headings

8. 8 Structure contd… Headings and sub-headings, which, together with the Headings and sub-headings, which, together with the Section Notes, Chapter Notes and sub-heading notes and Section Notes, Chapter Notes and sub-heading notes and Interpretative Rules, Interpretative Rules, Provide for a systematic and unfiorm classification of goods. Provide for a systematic and unfiorm classification of goods.

9. 9 SECTION AND CHAPTER NOTES Certain Sections and Chapters have Notes. Certain Sections and Chapters have Notes. These notes form an integral part of the Tariff and have the same legal force as the Interpretative Rules. These notes form an integral part of the Tariff and have the same legal force as the Interpretative Rules. Some of these notes are grouped under the title “Sub-heading notes”. Some of these notes are grouped under the title “Sub-heading notes”.

10. 10 FUNCTION OF SECTION AND CHAPTER NOTES The function of the notes is to define the precise scope and limits of each sub-heading, Heading (group of headings), Chapter or Section. The function of the notes is to define the precise scope and limits of each sub-heading, Heading (group of headings), Chapter or Section. General definition delimiting the scope of General definition delimiting the scope of -a sub-heading or -a sub-heading or -heading or -heading or -the meaning of particular term: -the meaning of particular term:

11. 11 INTERPRETATIVE RULES There are six Rules for interpretation of the Tariff.. There are six Rules for interpretation of the Tariff.. Rule 1 takes precedence over all the following Rules. Rule 1 takes precedence over all the following Rules. Rule 1 – classification to be determined by the terms of the Heading Rule 1 – classification to be determined by the terms of the Heading and of the Section or Chapter Notes. and of the Section or Chapter Notes. Only where the terms of the headings or Section/Chapter Notes do not otherwise require, other Rules come into play. Only where the terms of the headings or Section/Chapter Notes do not otherwise require, other Rules come into play.

12. 12 Interpretative Rule 2(a) Extends the scope of the heading Extends the scope of the heading To cover not only the Complete article but also articles incomplete and unfinished To cover not only the Complete article but also articles incomplete and unfinished -Provided – as presented – -Provided – as presented – it has the essential character of the complete or finished article. it has the essential character of the complete or finished article.

13. 13 Interpretative Rule 2(a) contd… Extends the scope of the heading Extends the scope of the heading to cover also the Complete or finished article Presented in unassembled Or disassembled form in the same heading as to cover also the Complete or finished article Presented in unassembled Or disassembled form in the same heading as assembled articles. assembled articles.

14. 14 Second part of Rule 2(a) In this case also incomplete In this case also incomplete and unfinished and unfinished -Provided – as presented – it has the essential character of the complete or finished article.

15. 15 Interpretative Rule 2(b) Goods consisting of more than one material or substance, must be classified according to the principles of Rule 3. Goods consisting of more than one material or substance, must be classified according to the principles of Rule 3. Question : Question : application of Rule 2(b) to application of Rule 2(b) to Imported through different Ports Imported through different Ports Cleared from different factories Cleared from different factories

16. 16 Interpretative Rule 3(a) Goods should be classified in the heading giving the most specific description. Goods should be classified in the heading giving the most specific description. If two or more headings, each refer If two or more headings, each refer To only one of the materials or substances contained in mixed or composite goods, or To only one of the materials or substances contained in mixed or composite goods, or to only some of the articles included in a set put up for retail sale, to only some of the articles included in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods. those headings are to be regarded as equally specific in relation to those goods. This is so even if one of them gives a more complete description than the other. This is so even if one of them gives a more complete description than the other.

17. 17 SPECIFIC vs GENERAL Description by name is more specific than description by class Description by name is more specific than description by class Description which more clearly identifies them – where identification is less complete. Description which more clearly identifies them – where identification is less complete.

18. 18 Interpretative Rule 3(b) To apply only if Rule 3(a) fails for -- To apply only if Rule 3(a) fails for ---Mixtures -composite goods consisting of different materials, -composite goods consisting of different components; -goods put up in sets for retail sales -To be classified in the heading appropriate to the material or component which gives them their essential character

19. 19 Test of essential character?? Vary between different kind of goods. Vary between different kind of goods. Nature of the material Nature of the material Nature of the component Nature of the component Bulk Quantity Weight or Value Bulk Quantity Weight or Value Role of a constituent material in relation to use of the goods. Role of a constituent material in relation to use of the goods.

20. 20 Interpretative Rule 3(c) Applicable for goods not classifiable in terms of Rule 3(a) or 3(b). Applicable for goods not classifiable in terms of Rule 3(a) or 3(b). Goods should be classified in the heading which occurs last in numerical order amongst those which equally merit consideration. Goods should be classified in the heading which occurs last in numerical order amongst those which equally merit consideration.

21. 21 Interpretative Rule 4 Goods which are not specifically covered by any heading (e.g. because they have newly appeared on the world market) Goods which are not specifically covered by any heading (e.g. because they have newly appeared on the world market) Shall be classified in the heading appropriate to the goods to which they are most akin. Shall be classified in the heading appropriate to the goods to which they are most akin.

22. 22 Interpretative Rule 5(a) Governs classification of cases, boxes and similar containers presented with the articles for which they are intended. Governs classification of cases, boxes and similar containers presented with the articles for which they are intended. Shall be classified with such articles when of a kind normally sold therewith. Shall be classified with such articles when of a kind normally sold therewith. This rule will not apply to containers which give the whole the essential character. This rule will not apply to containers which give the whole the essential character.

23. 23 Interpretative Rule 5(b) Governs classification more generally to packing containers presented with the goods they hold. Governs classification more generally to packing containers presented with the goods they hold. To be classified with the goods, if they are of a kind normally used for packing such goods. To be classified with the goods, if they are of a kind normally used for packing such goods. This will not apply where they are suitable for repetitive use. This will not apply where they are suitable for repetitive use.

24. 24 Interpretative Rule 6 Sub-headings of a Heading Sub-headings of a Heading According to the terms of the sub- headings. According to the terms of the sub- headings. Related sub-heading notes. Related sub-heading notes. In terms of the above Rules. In terms of the above Rules. Sub-headings at the same level are comparable. Sub-headings at the same level are comparable. Within a single heading, the choice of a Within a single heading, the choice of a single dash sub-heading may be madesingle dash sub-heading may be made Only on the basis of the texts ofOnly on the basis of the texts of the competing single dash sub-headings.the competing single dash sub-headings.

25. 25 Harmonized system Uses 6 digit nomenclature Uses 6 digit nomenclature Each Heading is identified by four digit code. Each Heading is identified by four digit code. First two digits indicate the Chapter. First two digits indicate the Chapter. Later two digits indicate the position of the heading in the Chapter Later two digits indicate the position of the heading in the Chapter

26. 26 HSN vs CTA - CETA HSN uses 6 digits HSN uses 6 digits CETA uses 8 digits CETA uses 8 digits 8 digits referred to as Tariff item 8 digits referred to as Tariff item Rate of duty is indicated against tariff item Rate of duty is indicated against tariff item

27. 27 Division of Headings Heading further sub-divided into Heading further sub-divided into -One or more Single dash– sub-heading of the Heading -One or more Double dash-- sub-heading of the single dash sub-heading -One or more Triple dash---sub-heading of the double dash sub-heading -One or more Four dash----sub-heading of the triple dash sub-heading

28. 28 Rate of duty Customs Act Customs Act Section 12Section 12 Customs Tariff Act Customs Tariff Act Section 2Section 2 Central Excise Act Central Excise Act Section 3Section 3 Section 2(d)Section 2(d)

29. 29 Rate of duty Eight digit description is referred to as “Tariff item” Eight digit description is referred to as “Tariff item” Rate of duty is indicated against the “Tariff item” Rate of duty is indicated against the “Tariff item” If the rate of duty is left “blank”, then there is no levy. If the rate of duty is left “blank”, then there is no levy. If “nil” is indicated in the rate of duty column, it denotes that the levy is attracted but the rate chargeable is NIL. If “nil” is indicated in the rate of duty column, it denotes that the levy is attracted but the rate chargeable is NIL.

30. 30 CLASSIFICATION How to approach How to approach State of goods State of goods Principles Principles Selecting section / chapter Selecting section / chapter Question to be asked Question to be asked

31. 31 APPROACH TO CLASSIFICATION Clearly understand the product Clearly understand the product Description of the product Description of the product Qualities/properties of the product Qualities/properties of the product Functions of the product Functions of the product Field of Industry in which used Field of Industry in which used Source of energy–mechanical /thermal/ hydel/electrical Source of energy–mechanical /thermal/ hydel/electrical Chemical formula Chemical formula Stage of the product – raw-rough / semi finished / finished Stage of the product – raw-rough / semi finished / finished Worked / not worked etc. Worked / not worked etc.

32. 32 Process by which it is obtained/ Method of manufacture Distillation Distillation Solvent extraction Solvent extraction Purification Purification Concentration Concentration Welding Welding Extrusion Extrusion Moulding Moulding Pressing Pressing Forging/casting Forging/casting Mining Mining Chemical synthesis Chemical synthesis Formulation Formulation Mixing Mixing Re-packing from bulk Re-packing from bulk By product of By product of Residue of Residue of

33. 33 Selecting Section / Chapter Sections are arranged progressively Sections are arranged progressively Natural or made therefrom Natural or made therefrom Derived therefrom Derived therefrom Man made Man made

34. 34 Questions to be asked Whether the Section throws you out. Whether the Section throws you out. If yes, no need to look into any of the chapters within the said Section. If yes, no need to look into any of the chapters within the said Section. If the Section does not throw you out, If the Section does not throw you out, Whether the Chapter throws you out Whether the Chapter throws you out If yes, no need to look into any of the Headings within the said Chapter If yes, no need to look into any of the Headings within the said Chapter Within the chapter see the description of the Heading which Within the chapter see the description of the Heading which Accommodates you. Accommodates you. Thereafter find out the sub-heading which covers you. Thereafter find out the sub-heading which covers you.

35. 35 PRINCIPLES OF CLASSIFICATION Statutory definition Statutory definition Common parlance/trade parlance Common parlance/trade parlance Dictionary meaning Dictionary meaning Scientific or technical meaning Scientific or technical meaning IS Glossary IS Glossary Primary function Primary function Advertisement claims Advertisement claims End use End use Residuary entry Residuary entry

36. Demands and Penalties DEMAND UNDER SECTION 11 A DEMAND UNDER SECTION 11 A Show cause notice : Show cause notice : Who Can Issue Who Can Issue Proper officerProper officer Proper officer means an officer who is assigned those functions by Central Board of Excise & Customs (CBEC) or CommissionerProper officer means an officer who is assigned those functions by Central Board of Excise & Customs (CBEC) or Commissioner Officers of DGCEI also empoweredOfficers of DGCEI also empowered 36

37. Section 11A SCN when to be issued : SCN when to be issued : If excise duty : If excise duty : has not been levied or has not been levied or has been short levied or has been short levied or has been erroneously refunded has been erroneously refunded 37

38. Section 11 A Time limit for issuing SCN :Time limit for issuing SCN : Normal period : One Year from relevant dateNormal period : One Year from relevant date Extended Period: Five years from relevant dateExtended Period: Five years from relevant date (in cases of collusion, wilful mis-statement or suppression of facts) 38

39. Section 11A Extended period of five years when there is a) Wilful Suppression/Misstatement b) Fraud c) Collusion with intention to evade duty 39

40. Section 11A Suppression should be wilful (Tamilnadu Housing Board vs CCE 74 ELT 9) b)No suppression if all facts disclosed c) No suppression if facts which were not required to be disclosed, are not disclosed d) No suppression if bonafide belief 40

41. Section 11A (2) Conclusion of proceedings if full duty, interest and 25% of duty as penalty amount, is paid If part amount of duty is paid, proceedings to continue for balance amounts 41

42. Section 11A (2B) Circumstances in which SCN need not be issued Circumstances in which SCN need not be issued If duty is paid with interest before SCN and the officer is duly informed If duty is paid with interest before SCN and the officer is duly informed This applies only in cases of normal period of limitation This applies only in cases of normal period of limitation If extended period invoked, issuance of SCN cannot be stopped If extended period invoked, issuance of SCN cannot be stopped 42

43. Section 11A Necessary ingredients of SCN Necessary ingredients of SCN -Should give all essential particulars and amount demanded -Should state nature of contravention and provisions contravened -Charges/Allegations to be informed alongwith grounds 43

44. Cotspun’s Case 1999 (7) SCC 633. Supreme Court held : Supreme Court held : If excise duty paid on the basis of classification list approved by the Department, there cannot be any short levy and no show cause notice under Section 11A can be issued If excise duty paid on the basis of classification list approved by the Department, there cannot be any short levy and no show cause notice under Section 11A can be issued 44

45. Amendment to Section 11A overcame Cotspun’s ratio There can be a short levy even if classification lists were approved and SCN’s could be issued There can be a short levy even if classification lists were approved and SCN’s could be issued retrospective effect was given i.e from 17-11- 1980 when Section 11A of the Central Excise Act came into effect retrospective effect was given i.e from 17-11- 1980 when Section 11A of the Central Excise Act came into effect 45

46. No amendment to Rule 10 Amendment to Section 11A did not validate the action taken under Rule 10 of the erstwhile Central Excise Rules, 1944 Amendment to Section 11A did not validate the action taken under Rule 10 of the erstwhile Central Excise Rules, 1944 Therefore Cotspun’s ratio still applies to erstwhile Rule 10 Therefore Cotspun’s ratio still applies to erstwhile Rule 10 46

47. Cotspun’s case applies to Customs Act Since there was an amendment in Section 11 A of Excise Act only, And no such amendment in corresponding Section 28 of Customs Act Cotspun’s ratio will apply to Customs Act and there cannot be any short levy if department has approved, assessed or accepted value or rate of duty 47

48. Some issues Applied for rectification of mistake- No appeal filed- What is the position? Applied for rectification of mistake- No appeal filed- What is the position? Appeal is time barred beyond condonable period – What happens? Appeal is time barred beyond condonable period – What happens? 48

49. Some issues Can commissioner (appeals) condone delay beyond period of 30 days? Can commissioner (appeals) condone delay beyond period of 30 days? Singh enterprises 2008 (221) ELT 163 (SC) Singh enterprises 2008 (221) ELT 163 (SC) 49

50. Some issues Can department file appeal under section aggrieved person for the purpose of filing an appeal Can department file appeal under section aggrieved person for the purpose of filing an appeal Narendra P Unrao 15 ELT 275 (T). Narendra P Unrao 15 ELT 275 (T). 50

51. Some issues Power of commissioner (appeals) to remand matter back to adjudicating authority Power of commissioner (appeals) to remand matter back to adjudicating authority MIL India limited 2007 (210) ELT 188 (SC) MIL India limited 2007 (210) ELT 188 (SC) 51

52. Section 11 D Any amount collected by a person who is liable to pay duty, Any amount collected by a person who is liable to pay duty, from a buyer, from a buyer, representing the same as duty of excise, representing the same as duty of excise, shall be deposited with Central Govt shall be deposited with Central Govt 52

53. Time Limit under Section 11D No time limit prescribed to issue SCN under Section 11 D No time limit prescribed to issue SCN under Section 11 D Does time limit under Section 11A apply to Section 11D Does time limit under Section 11A apply to Section 11D What can be a reasonable time to issue SCN under Section 11D What can be a reasonable time to issue SCN under Section 11D 53

54. Amendment to Section 11D W.e.f 10/05/2008 W.e.f 10/05/2008 Any person who collects the amount Any person who collects the amount And not “every person liable to pay duty” And not “every person liable to pay duty” 54

55. Penalties under Central Excise Act Section 9 Offences and penalties Section 9 Offences and penalties Section 9 AA offences by companies Section 9 AA offences by companies Section 9 C presumption of culpable mental State. Section 9 C presumption of culpable mental State. Penalty under section 11 AC Penalty under section 11 AC 55

56. 56.. THANK YOU E:b_raichandani@yahoo.com M:09820875305