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TMI Blog2006 (3) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... facturing logo, quality control, product research, etc. Further, they specify the quality of raw materials and packing materials. The present appeals actually relate to the assessable value of Food flavours sold by the appellants to the manufacturers of IMFL. The department issued a Show Cause Notice dated 11-4-2002 on the ground that the appellants received additional consideration from their franchisees in the form of royalty for supplying food flavours, which are essential ingredients of the IMFL manufactured by the franchisees. Proviso to Section 11A was invoked. It was proposed to re-determine the assessable value of food flavours by including the royalty received by the appellants. The differential duty demanded for the period from 4/1997 to 3/2001 is Rs. 35,45,85,860/-. Penalties were proposed on the appellant unit and Shri Ananda Prasad, Senior Manager (Taxation). Interest was also demanded. The Adjudicating Authority confirmed the demand in his order No. 22/2002 dated 29-8-2002. However, the appellants approached the Tribunal and the Tribunal in its Final Order dated 8-7-2003, remanded the matter to the original authority with the following observations:- 6. After consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the effect that the appellants activity of mixing duty paid essences will not amount to manufacture and therefore, they are not liable for payment of Central Excise duty at all. After hearing the parties, this Bench passed Stay Order No. 1217/2004 dated 13-12-2004 allowing the additional grounds and also waiving the entire duty demanded. Aggrieved by the above mentioned Stay Order, the Revenue filed a Writ Petition before the Hon ble High Court of Karnataka and the Single Judge, in his order dated 13-4-2005, remanded the case back to this Bench to re-consider the matter in the light of the statutory requirements under proviso to Section 35F of the Act. The assessee approached the Division Bench. However, the Division Bench confirmed the order of the Single Bench and remanded the case back to this Bench. This Bench, in the Stay Order dated 9-1-2006, ordered the appellants to make a pre-deposit of Rs. 7,00,00,000/- and to report compliance on 20-2-2006. The same was reported on 20-2-2006 and the matter was heard on 6-3-2006. 4. It may be mentioned that the Jurisdictional authority issued further orders dated 12-7-2004 and 29-4-2005 for the periods from April 2001 to March 2004. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing duty paid flavours would not amount to manufacture, in the light of the Apex Court s decision in UOI Others v. Delhi Cloth and General Millas Co. Ltd. and Others - 1977 (1) E.L.T. (J199) (S.C.). (vi) The Commissioner of Central Excise, Hyderabad-Ill Commissionerate, in his OIO dated 22-9-2003 has held that the mixing of duty paid food flavours will not result in emergence of a new product and the resultant essence which comes into existence in the premises of M/s. Shaw Wallace Co. (SWC) does not answer the test of marketability and hence they are outside the purview of Central Excise levy. In the above mentioned case, flavours were supplied to Contract Bottling Units (CBU). As the facts are identical, the above decision will establish that the appellants have a strong case. (vii) The following case-laws were relied on :- (a) 1977 (1) E.L.T. (J199) - UOI Others v. Delhi Cloth and General Mills Co. Ltd. Ors (S.C.) (b). 1978 (2) E.L.T. (J336) - South Bihar Sugar Mills Ltd. Anr. Etc. v. UOI Anr, Etc. and Tata Chemicals Ltd. v. R.M. Desai, Inspector, Central Excise, Mithapur Others (S.C.) (c) 1995 (76) E.L.T. 241- Moti Laminates Pvt. Ltd. v. CC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting services provided by the appellants to the contract bottling units. (xiv) Even though flavours were supplied to independent manufacturers, neither royalty nor service charges were received from them. This indicates that the royalty bill has no nexus with the price of the food flavour. The appellants were manufacturing the brands of other manufacturers of IMFL products and selling the said IMFL products. In those cases, the appellants only paid royalty and service charges to such other manufacturers. It is pertinent to mention that the appellants were using the flavours as blending material sold from their units. (xv) The appellants sold food flavours to Contract Bottling Units who employed them to manufacture IMFL products or to different other brand owners to whom they were paying royalty and service charges. However, the other brand owners paid only the price of flavours to the appellant. This also is an indication that the royalty has no nexus with the price of the flavours. (xvi) Several of the assertive findings of the Commissioner are either not borne by evidence or mere conjecture and to that extent perverse. (xvii) The appellants produced evidence before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stricting the bottlers to purchase the concentrate from any other source, other than M/s. Pepsi. No such express prohibition is there in the present agreement. (e) The final product in Pepsi case is leviable to Central Excise Duty. In the present case, the final product viz. IMFL is not under the purview of CE Law. (f) In the Pepsi case, the only point is whether the money received from the Bottler should be included to the assessable value of the concentrate supplied. But in the instant case, the fundamental questions like manufacture, marketability, apportionment, jurisdiction, limitation, etc. are involved. (g) ln the Pepsi case, there had been a receipt from the bottler against every sale of beverage establishing an inextricable bond. In the instant case, there are instances wherein the appellants have paid an amount to bottlers when the sale price of the IMFL is much below the Ex-Distillery Price (EDP). This goes to prove that there is no nexus between the supply of food flavours and the receipt of royalties to service charges. The learned Advocates took us through both the Manufacture Agreement and the Usership Agreement to urge the above poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above submissions, the learned Advocates pleaded for setting aside the Orders-in-Original and allow the appeal. 7. Shri Ashok Haranahalli, the learned Senior Counsel appearing for Revenue urged the following points:- (i) It was urged that the appellants, for the first time, have raised a question of excisability of the impugned product, only when they find the modification of stay Order dated 838 839/2004 dated 10-8-2004. In fact, there was an earlier proceeding in 1995 relating to food flavour and the case was adjudicated by the then Commissioner. Consequent to the said order, the appellants started paying duty. Therefore, the excisability of the impugned product was never an issue at all as can be seen from the conduct of the party. (ii) The learned Sr. Counsel referred to the following Entry in the Tariff: 3302 - Mixtures of Odoriferous substances and mixtures (including alcoholic solutions) with a basis of one or more of these substances, of a kind used as raw materials in industry; other preparations based on odoriferous substances, of a kind used for the manufacture of beverages. 3302.10 - Of a kind used in the food or dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r use in Typewriter amounts to manufacture. (ix) The Supreme Court, in the case of CCE v. Kapri International (P) Ltd. - 2002 (142) E.L.T. 10 (S.C.), held that though the input and the finished goods are under the same tariff heading still there is manufacture if the finished goods are having distinct, separate and identifiable function. (x) In the following decisions, it has been conclusively held that the process of Mixing amounts to manufacture. (a) Gopal Zarda Udyog v. CCE, New Delhi - 2005 (188) E.L.T. 251 (S.C.) (b) O.K. Play (India) Ltd. v. CCE, New Delhi-II - 2005 (180) E.L.T. 291 (S.C.) (c) Nestle India Ltd. v. CCE, Chandigarh-II - 2004 (169) E.L.T. 315 (Tri.-Del.) (d) T.N. State Transport Corporation Ltd. v. CCE, Madurai - 2004 (166) E.L.T. 433 (S.C.) (e) Kothari Products Limited v. Govt. of Andhra Pradesh - 1998 (98) E.L.T. 315 (AP) (f) Kothari Chemicals v. UOI - 1996 (86) E.L.T. 209 (All.) (g) CCE, Guntur v. Crane Betel Nut Powder Works - 2005 (187) E.L.T. 106 (Tri.-Bang.) (h) Henna Export Corporation v. CCE - 1993 (67) E.L.T. 907 (Tribunal) (xi) It is seen that the description of the goods are diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to be fair to the adjudicating authority, we shall first take up the question of inclusion of royalty. 9. It is true that even in the year 1995, the department proceeded against the appellants for non-payment of Central Excise duty on the food flavours produced by them. The then Commissioner confirmed the demands raised. At that time, the excisability of food flavours was not questioned by the appellants. In fact, after the adjudication order dated 30-1-1995, the appellants were clearing the goods on payment of duty. During 2001, the departmental audit raised certain objections with reference to the receipt of certain amounts towards royalty, service charges, etc. from the Contract Bottling Units engaged in the manufacture of IMFL. According to the audit, the royalty charges should be added to the value of the food flavours sold to the CBUs. Even at that time, the appellants gave justification for not including the royalty charges in the following manner:- 6. Para - 5 - Appointment of Royalty and commission of finished goods to FFD. This Royalty Agreement/Bottling Agreement/Franchise Agreement stipulates that for every unit of production of our brands viz. number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e department held the view that royalty should be added to the assessable value. Consequently, the first Show Cause Notice dated 11-4-2002 was issued. We have already dealt with the various developments in the issue in a chronological manner. Suffice it to say, that the adjudicating authority in the de novo order dated 27-2-2004 held that the royalty paid has a close nexus with the price of the food flavours sold to the CBUs. Hence, she confirmed the duty and imposed equal penalty. Penalty on Shri Ananda Prasad was also imposed. To examine the issue, let us go through the relevant agreements of the appellants with the CBUs. In fact there are two agreements. One is called the Manufacturing Agreement and the other is Usership Agreement. In a typical Agreement, the appellant McD is one party and the other party is Gemini Distilleries (Tripura) Pvt. Ltd. (GDPL in short). GDPL situated in Tripura has all facilities for manufacture of Indian Made Foreign Liquor. McD is also a well known unit manufacturing IMFL. By the Manufacturing Agreement, GDPL shall manufacture and McD shall purchase from GDPL certain brands of IMFL on certain conditions. It is expressly understood that the products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of transactions. In the first type, there is receipt of royalty and also supply of food flavours. In the second type, royalty is received though there is no supply of food flavours. In the last type royalty is not received even though there is supply of food flavours. The above facts also indicate that the royalty is not relatable to the supply of food flavours and not integrally connected to the sale of the food flavours. In the remand order, the Tribunal directed the adjudicating authority to consider the fact that the sales made to independent buyers is at the same price as that of transfers made for captive consumption or to contract manufacturers. The appellants took us through the various documents and showed us that there is practically no difference in price in respect of sales to independent buyers and the price at which food flavours are sold to CBUs. This fact clinches the issue. It is very clear that there is no nexus between the royalty and the food flavours. The adjudicating authority has relied on the Apex Court s decision in the Pepsi case. In our view, the ratio of the above decision should not have been blindly applied as done by the adjudicating authority. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IMFL, the production of FFL (Food Flavour) is centralised at Bangalore. They have also stated that they do not use power. The appellants, in their letter dated 18-2-2000 referred to the Board s Circular dated 22-11-1999 wherein it is clarified that the Agarbathi manufacturing process involving simple mixing of a few aromatic chemicals with a base oil in a container in liquid form, which is mixed directly with the dough or applied on agarbathi in the required proportion and such dough, mixed with aromatic compound, used for rolling of Agarbathi is not excisable product and therefore no duty is leviable on such compounds during the course of manufacturing of agarbathi. The appellants have contended that the situation in the case of FFL is analogous to the agarbathi clarified in Board s Circular. Further, they stated that FFL is an odoriferous compound, which is made by simple mixing of essences of different flavour profile, which are also odoriferous compounds. The FFLs produced by the appellants are exclusively used for making their brands of IMFL in their own units and contract units. Hence, the FFLs cannot be sold in the market as such. In order to decide the excisability, we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Apex Court, in the case of Tega India Ltd v. CCE, Calcutta-II - 2004 (164) E.L.T. 390 (S.C.), held that mere coating would not amount to manufacture of a new commodity when tariff item does not make any difference between coated and uncoated goods. In the present case also even after mixing of the essences, the tariff entry remains the same. Hence, the ratio of the above case is clearly applicable to the present case. 16. The Apex Court, in the case of State of Maharashtra v. Mahalaxmi Stores - 2003 (152) E.L.T. 30 (S.C.), has held that every type of variation of the goods or finishing of goods would not amount to manufacture unless it results in emergence of a new commercial commodity. In the above mentioned case, it was held that crushing of boulders into small size Gitti does not amount to manufacture. 17. The Tribunal, in the case of CCE, Chennai v. Titanium Equipment Anode Manufacturing Co. Ltd. - 2002 (142) E.L.T. 162 (Tri.-Chennai) has held that the process of mixing and dilution undertaken by the assessee for preparing chelate solution does not amount to manufacture as the character of precious metal chloride does not change. This decision has been upheld by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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