Excise Duty

Introduction
Excise duty has been one of the central pillars of India’s indirect tax architecture for seven decades. Traditionally described simply as a tax on the manufacture or production of goods within the country, excise in practice governs a complex matrix of classification, valuation, timing (when the tax becomes leviable), compliance formalities and credit mechanisms. Although the Goods and Services Tax (GST) regime (effective 1 July 2017) swept away the excise regime for the bulk of domestic transactions in goods, excise remains an active and strategically important field for specific products (notably tobacco and specified non-GST items) and for legacy disputes, transitional liabilities and anti-evasion litigation. For practitioners advising manufacturers, importers, brand owners and litigants, a practical command of excise law is therefore indispensable.

Core Legal Framework
– Constitutional source: Article 246 (Parliament’s legislative competence) read with the Union List entries that empower Parliament to legislate and levy duties of excise on goods manufactured or produced in India. The 101st Constitutional Amendment (GST) relocated the primary taxation of supplies of goods and services to the GST framework but preserved excise powers for items outside GST or as specifically provided.
– Principal central statutes and rules:
– Central Excise Act, 1944 — the primary statute controlling levy, collection, assessment, adjudication and penalties under the excise regime. (See, in particular, the provisions dealing with levy and collection and adjudicatory process — practitioners should refer to the Act for section-level detail.)
– Central Excise Tariff Act, 1985 — classification and schedule of duties; tariff headings and the harmonized nomenclature used to classify goods for excise purposes.
– CENVAT Credit Rules, 2004 — the credit mechanism (now subsumed/modified in many respects post-GST, but still relevant for transition credits and for goods outside GST).
– Central Excise Rules and various notifications, exemption notifications and rate notifications issued under the Finance Acts and administered by the Central Board of Indirect Taxes and Customs (CBIC).
– Administrative and appellate fora:
– Central Board of Indirect Taxes and Customs (CBIC) — policy, circulars and departmental instructions.
– Commissioner (Appeals) and adjudicating officers under the Central Excise Act.
– Customs, Excise & Service Tax Appellate Tribunal (CESTAT) — principal statutory tribunal for appeals.
– High Courts and the Supreme Court — constitutional and substantial questions of law, and writ jurisdiction.
– Interaction with GST:
– From 1 July 2017, domestic taxation of supplies moved largely to GST. Excise survives for certain specified products and for transitional/legacy issues (e.g., excise demands for periods prior to GST, classification disputes, and items kept outside GST). Practitioners must constantly reconcile Central Excise Act provisions, CENVAT records and GST records when advising clients or litigating.

Practical Application and Nuances
How excise arises (the chargeable event)
– Traditional conceptualisation: excise is a tax on “manufacture” or “production” of goods. The critical questions in practice are: (i) when does “manufacture” occur for excise purposes; (ii) when is removal relevant; and (iii) whether a particular activity amounts to manufacture (rather than mere sale or intermediate process).
– Manufacture vs. process: Courts and tribunals require proof that an activity resulted in new goods having a distinct name, nature or character; routine handling or packaging may not always qualify. A careful factual record (batch records, QC test results, Bill of Materials, transformation of raw material into product) is decisive.
– Job-work and principal–job-worker relationships: Job work arrangements are frequent in industry. The statute and notifications recognise special treatment for goods sent out for job work; the principal manufacturer generally remains liable if conditions in notifications are not strictly followed. Practitioners must document contracts, job work chits, gate passes and reconciliation statements to avoid liability shifting.
Classification and tariff problems
– Tariff classification under the Central Excise Tariff Act governs the rate and often whether a product is excisable at all. Classification disputes are technical and require:
– Product specifications, technical literature and test reports.
– Analysis of tariff heading text, rule of interpretation of tariff (Harmonized System) and prior rulings.
– Comparative examination of blend/materials to show prima facie identity with a specified tariff entry.
Valuation and assessable value
– Assessable value rules determine the base on which excise is computed. Key practical issues:
– Inclusion/exclusion of packing, discounts, trade margin and inter-company transfers.
– Whether the “transaction value” principle applies (subject to specific valuation provisions) and when rules prescribe value-based computation.
– Documentary proof is critical — commercial invoices, discounts and related-party transfer pricing studies, and supporting ledger entries.
Evidence and document trail
– Excise adjudications are document-intensive. Commonly required documentary proofs: daily production registers, raw material consumption sheets, input/output reconciliation, gate passes, excise invoices (pre-GST era), test certificates, shipping documents, and accounting vouchers.
– Physical verification evidence (weighment records, tankage measurements) is frequently decisive in departmental demands alleging under-reporting.
Demand, penalty and adjudication process
– The usual departmental lifecycle: audit/inspection → show cause notice → adjudication order (demand + interest + penalty) → appeal to Commissioner (Appeals) → CESTAT → High Court/Supreme Court (if constitutional/ substantial question).
– Timelines and limitation: there are statutory limitation provisions for issuing demands; practitioners must raise limitation arguments where applicable and carefully scrutinise departmental reliance on delayed notices or amended assessments.
Transitional and legacy issues after GST
– Many disputes pending on 30 June 2017 required reconciliation (credits, refunds, pending show-cause notices). Common practical problems:
– CENVAT/credit carry-forwards and eligibility.
– Classification disputes for periods before GST where excise remains adjudicatory subject matter.
– Advising clients on settlement/compounding vs. litigation, considering post-GST regulatory climate.
Concrete example scenarios
– Example 1 — Manufacturer receiving a departmental demand for alleged under-valuation:
– Assemble manufacturing records, inward material records, procurement invoices, test certificates and excise invoices. Obtain independent valuation/transaction study where related-party transfers exist. File detailed, documentary reply to the show-cause notice challenging both valuation and methodology. Seek interim stay from CESTAT with a bank guarantee, and consider alternate dispute resolution if prospective exposure is large.
– Example 2 — Job worker penalty invoked because raw material reconciliation is imperfect:
– Produce agreement with principal, return ledgers, inward/outward gate registers, certification from principal accepting stock variations. Where loss is genuine and accidental, negotiate compounding; where departmental demand is arbitrary, prefer adjudication challenge emphasizing compliance with notification conditions.
– Example 3 — Classification dispute:
– Prepare product dossier, comparative HSN/CTH analysis, prior department/tribunal rulings, expert test findings. Apply for an advance ruling to obtain binding clarity where available (where statutory provisions permit) before full-scale production/exports.

Landmark Judgments
(The following are representative authorities; examine the full reported texts before relying on them for argument. Exact citations should be verified from official law reports.)

• State of Madras v. Gannon Dunkerley & Co. Ltd. (landmark on the scope of “manufacture” and levy): This line of decisions emphasises that excise is a levy on the activity of manufacture and not a tax on sale; courts have looked to the change in name, character or use of raw material to determine if manufacture has occurred. The practical take-away is that factual proof of transformation is essential — not merely departmental assertion.
• Commissioner of Central Excise v. Larsen & Toubro Ltd. (noted authority on classification/assessability and the role of technical evidence): This and allied decisions underscore that classification disputes require a structured analysis of tariff text, technical specifications and product function; reliance on commercial nomenclature alone is insufficient. Practitioners should bring detailed technical and expert evidence when classification is contested.

(Practitioners must verify current applicability — post-GST many excise jurisprudential principles continue to be cited by tribunals and courts in relation to legacy matters and non-GST items.)

Strategic Considerations for Practitioners
– Pre-launch compliance: Before commercial production, conduct a tax-technical due diligence — tariff classification, likely rate, valuation methodology, and documentation systems (production register, quality control, inventory reconciliation). Early identification avoids future litigations.
– Records-first strategy: In excise disputes, documentary evidence often decides the issue. Institute contemporaneous records: raw material receipts, QC tests, work-in-progress logs, and serially numbered outwards/inwards passes.
– Advance ruling and classification opinions: Where available and binding, obtain advance rulings for classification and valuation; even where not binding, they provide persuasive support in negotiations with the department.
– Timeliness and limitation vigilance: Challenge belated show-cause notices on limitation grounds; ensure appeals are filed within prescribed periods and pre-deposit requirements are complied with (or challenged with strong stay applications).
– Tactical use of interim relief: Seek interim stays from CESTAT with bank guarantees rather than litigating entirely on paper; use stay to negotiate while avoiding immediate cash drain.
– Settlement and compounding: For companies facing large historical exposures, consider negotiated settlement or compounding where permissible, weighing the long-term reputational and precedent costs against immediate certainty.
– Cross-check GST records: Where activities straddle GST and excise (transitional credits, excisable items outside GST), reconcile GST returns and excise records to prevent conflicting statements that undermine credibility in litigation.
– Avoid common pitfalls:
– Ignoring department circulars and notifications that modify liability or prescribe procedural steps.
– Over-reliance on post-facto explanations — departmental officers prefer contemporaneous and forensic documentary support.
– Neglecting to segregate excisable and non-excisable streams in mixed product lines.
– Failure to avail technical experts early in classification/valuation disputes.

Conclusion
Excise duty law, even in the post-GST era, remains practically important for specific commodities, transitional liabilities and legacy litigations. For practitioners the central tasks are: (i) to identify precisely when the excise charge arises (manufacture/production/event), (ii) to secure technical documentation for classification and valuation disputes, (iii) to maintain a rigorous contemporaneous documentary trail, and (iv) to choose procedural remedies—advance rulings, interim relief, appeals and settlements—with a clear cost-benefit analysis. Success in excise practice combines technical tariff- and valuation- knowledge, meticulous record-keeping, early technical expert engagement and tactical use of appellate remedies.