2017 (11) TMI 1040 - AT - Central Excise

Manufacture - food flavours - valuation - royalty - includibility - appellant was of the view that the food flavours were prepared by them by mixing different odoriferous substances purchased by them from different suppliers. They claimed that this process did not amount to manufacture - department is of the view that the amounts received by way of royalty by the appellant was required to be added to the consideration received for food flavours - Time limitation - Held that - the issue before us is an intricate mixture of the question whether manufacture is involved in the preparation of food flavours by the appellant as well as valuation of the same for payment of excise duty. It goes without saying that if the process of making food flavours does not amount to manufacture then there is no question of payment of excise duty. In such a scenario, the dispute on valuation becomes irrelevant - the question of manufacture taken at the outset. Held that - In the absence of detailed explanation of the processes involved, we are unable to entirely appreciate the same. Moreover, we find that the details were not considered by the adjudicating authority and in the absence of detailed discussions by the adjudicating authority on the processes involved, we are unable to take a firm view in the matter. In the absence of the details of the processes employed by the appellant on record, we are not in a position to give due consideration to all the factors and come to a judicious conclusion - we deem it necessary to remand the matter to the adjudicating authority to consider in detail the process of manufacture after ascertaining the same and decide the question whether it is a process of manufacture. In the event a view is taken that the processes amount to manufacture, the adjudicating authority will re-examine the issue of valuation of such food flavour for payment of duty. Appeal allowed by way of remand.

Summary

Issues Involved:
1. Whether the preparation of food flavours by the appellant amounts to manufacture under Section 2(f) of the Central Excise Act, 1944.
2. Valuation of food flavours for payment of excise duty, including the consideration of royalties received by the appellant.
3. Limitation period for issuing show-cause notices and demanding duty.

Detailed Analysis:

1. Manufacture of Food Flavours:
The primary issue is whether the process of preparing food flavours by the appellant constitutes "manufacture" under Section 2(f) of the Central Excise Act, 1944. The appellant argued that the activity involved merely mixing odoriferous substances without any chemical reaction, resulting in no new or commercially distinct product. They cited the case of Shaw Wallace Company Limited, where the Tribunal held that mere mixing of essences does not amount to manufacture. However, the Apex Court remanded the matter, directing the Tribunal to ascertain the actual process involved and validate the factual position. The Tribunal noted that the adjudicating authority had not discussed the details of the process, and thus, remanded the matter back to the adjudicating authority to examine whether the process constitutes manufacture.

2. Valuation of Food Flavours:
If the process is deemed to be manufacture, the next issue is the valuation of food flavours for excise duty purposes. The department contended that the royalties received by the appellant from Contract Bottling Units (CBUs) and Independent Bottling Units (IBUs) for using the appellant's trademarks should be included in the assessable value of the food flavours. The appellant, however, argued that there was no nexus between the royalties and the food flavours, as the royalties were related to the final IMFL product and not the food flavours. The Tribunal directed the adjudicating authority to re-examine the valuation issue, considering both the Manufacturing and Usership Agreements together and determining if there is a nexus between the royalties and the food flavours.

3. Limitation Period:
The Tribunal addressed the issue of the limitation period for issuing show-cause notices and demanding duty. The appellant argued that the demand was time-barred. However, the Tribunal found that the appellant had not disclosed the collection of service charges/royalty charges to the department and delayed furnishing details when asked. Therefore, the invocation of the extended period for the first show-cause notice was justified, and the second show-cause notice was within the normal period of limitation. This issue was decided against the appellant.

Conclusion:
The Tribunal set aside the impugned orders and remanded the matter to the adjudicating authority for a detailed examination of the manufacturing process and valuation of food flavours, considering the directives of the Apex Court and relevant judicial pronouncements. The adjudicating authority is to determine whether the process constitutes manufacture and, if so, re-examine the valuation issue, including the nexus between royalties and food flavours. The limitation issue was decided in favor of the department, allowing the extended period for the first show-cause notice.