2006 (3) TMI 384 - AT - Central Excise

Summary

Issues Involved:
1. Excisability of Food Flavour.
2. Inclusion of Royalty in the Assessable Value of Food Flavours.
3. Nexus between Royalty and the Price of Food Flavours.
4. Limitation and Suppression of Facts.

Detailed Analysis:

1. Excisability of Food Flavour:
The appellants argued that the process of mixing duty-paid essences to create food flavours does not amount to manufacture. They cited the Board's Circular dated 22-11-1999, which clarified that simple mixing of aromatic chemicals does not result in an excisable product. The Tribunal agreed, stating that the process of mixing essences does not create a new product with a distinct identity. Both the input (essences) and the output (food flavour) fall under the same tariff heading, and the resultant product remains an essence. The Tribunal referenced several case laws and Board's Circulars to support this view, concluding that the food flavour is not excisable.

2. Inclusion of Royalty in the Assessable Value of Food Flavours:
The department contended that the royalty received by the appellants from their franchisees should be included in the assessable value of the food flavours. The appellants argued that the royalty was for the use of their trademark and not related to the sale of food flavours. The Tribunal examined the agreements between the appellants and their franchisees and found that the royalty was indeed for the use of the trademark and not for the sale of food flavours. The Tribunal noted that the price of food flavours sold to independent buyers was the same as that sold to contract bottling units, indicating no nexus between the royalty and the price of food flavours.

3. Nexus between Royalty and the Price of Food Flavours:
The Tribunal found that there was no close nexus between the royalty and the food flavours. The royalty was paid for the use of the trademark and not for the food flavours. The Tribunal noted that there were instances where royalty was received without the supply of food flavours and vice versa. This further indicated that the royalty was not integrally connected to the sale of food flavours. The Tribunal also distinguished the present case from the Pepsi Foods case, where the concentrate was an essential ingredient of the final product, and both the concentrate and the final product were excisable. In the present case, the final product (IMFL) is not excisable.

4. Limitation and Suppression of Facts:
The appellants argued that there was no suppression of facts as the department was aware of the royalty payments. The Tribunal agreed, noting that the appellants had informed the department about the royalty payments and had been paying duty under protest. The Tribunal found that the show cause notices were time-barred as there was no evidence of suppression of facts.

Conclusion:
The Tribunal held that the process of mixing essences to create food flavours does not amount to manufacture, and therefore, the food flavours are not excisable. There is no nexus between the royalty and the price of the food flavours, and the royalty should not be included in the assessable value. The show cause notices were also found to be time-barred due to the lack of suppression of facts. Consequently, the duty demands and penalties were set aside, and the appeals were allowed with consequential relief.