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TMI Blog2017 (1) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... ught from third party and sold without any modification or process. These are all questions of fact which must be first authenticated and the actual factual position validated. The tribunal has answered the question in favour of the respondent without the background check as to the actual process involved and undertaken. Different flavours may have different processes. The tribunal has held that certain show cause notices are barred by limitation - As we notice, the tribunal on this score has also not scrutinized the dates appropriately, but has returned a cryptic finding. Appeal allowed by way of remand. - Civil Appeal No. 5003 of 2006 - - - Dated:- 5-1-2017 - Dipak Misra And N.V. Ramana, JJ. JUDGMENT Dipak Misra, J. The respondent is a manufacturer of Indian Made Foreign Liquor (IMFL) and is a registered owner of several known brands of IMFL. The respondent, as the facts have been unfolded, also manufactures food flavours at its unit at Shayura Orchards, Kumbalagodu, Bangalore and the present appeal pertains only to food flavours. 2. The respondent has got its own distillery units at various places. In addition, it has entered into agreements with vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the market, collect statutory forms like C-Forms, Excise Verification Certificates, Permits, etc. and forward the same to the liquor manufacturers. The respondent would promote its brands through marketing teams and operation of various promotional schemes and advertisements and all expenses with regard to the same are incurred by the respondent. The liquor manufacturers were entitled to receive EDP which include the actual cost of IMFL manufactured by them plus the profit margin. The prices were negotiated by the respondent even when the goods were sold by the liquor manufacturers to such buyers and they would bill by such buyers at the rates negotiated and determined by the respondent. 4. The respondent, however, asserts that such rates/prices negotiated with outside buyers were either more or less than the EDP with certain consequences, namely, (a) if the selling price to outside customers is more than EDP, the difference was paid by the liquor manufacturers to the respondent by calling it under different nomenclature like royalty or service charge; (b) if the selling price to outside customers was less than EDP, the difference/shortfall is borne by the respondent and paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of IMFL to outside buyers and the EDP of such IMFL. As pleaded, the payment of royalty has no nexus or connection with the food flavours. There are several brands of IMFL where no food flavour was supplied by the respondent to liquor manufacturers. However, royalty on the difference between the selling price of IMFL and EDP was still paid. The respondent claims that there were several instances where food flavours were sold and used in IMFL but no royalty was received. In those cases the selling price of IMFL was lower than the EDP and rather than receiving royalty, the respondent had borne the shortfall and reimbursed the same to liquor manufacturers. On this ground, the respondent intends to put forth the stand that royalty was solely relatable to the higher selling prices of IMFL over and above EDP and has nothing to do with food flavour. The food flavours were not used in IMFL products like Signature Whisky, Centenary Whisky, Single Malt Whisky, etc. which were manufactured without using food flavours. In respect of the same, the liquor manufacturers manufacturing the said brand were paying royalty to the respondent, that being the difference between their selling price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anual mixing in the proportion developed by the respondent and which was kept as a top secret and the mere process of manual mixing of the essence did not amount to manufacture; that though the said issue was raised before the jurisdictional Assistant Commissioner on 18.02.2000 and a prayer was made to consider their plea that the food flavour produced by them was not excisable and, pass an appropriate order, the concerned authority did not respond to the same and thereafter, the assessee informed the department that till a final decision was taken, the duty would be paid under protest. It is further contended that food flavours were odoriferous compounds and the quantum of food flavours used in IMFL wherever used were very negligible ranging from 0.0001% to 0.0019% per litre of various IMFL products and such use had no relevance in the marketability of IMFL product nor its final market price. Referring to the letters dated 18.02.2000 and dated 04.09.2001 wherein the assessee had taken a stand that mixing of duty paid flavours would not amount to manufacture. It reiterated the stand that it was not a manufacture on the basis of the decision rendered in Union of India Ors v. Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract bottling units and even though flavours were supplied to independent manufacturers, neither royalty nor service charges were received from them and hence, the royalty bill had no nexus with the price of the food flavour. That apart, it was argued that the assessee 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 assessee and this would be indicative of the fact that the royalty had no nexus with the price of the flavours. Additionally, it was propounded that material was purchased before the concerned Commissioner showing that assessee had sold some kind of flavour to certain distilleries with whom there was no bottling agreement nor there was any receipt of royalty or service charges because the contract unit had not applied the brand of the assessee nor secured services of the assessee for marketing and in such a case, the Commissioner could not have asserted that the agreement was for sale of flavour and receipt of royalty and service charges. Reliance on the Pepsi Foods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances as excisable product and, hence, it could not be said that no manufacture was involved in the mixing of the essences to produce such food flavours. It was urged that goods to fit into the term manufacture must be capable of being bought and sold in the market and to be known as such. In that regard, placing reliance on Bhor Industries Ltd v. CCE, Bombay (1989) 1 SCC 602, Union Carbide v. CCE 1986 (24) ELT 169 (SC), Moti Laminates Pvt. Ltd. Ors v. CCE, Ahmedabad (1995) 3 SCC 23, Union Of India Others v. Sonic Electrochem (P) Ltd. and another (2002) 7 SCC 435 and CCE, Chandigarh-II v. Jagatjit Industries Ltd. (2002) 3 SCC 614, it was canvassed that in the case at hand the food flavours manufactured by the assessee were marketable as evidenced from the assesse s admissions that it has been selling food flavours to other independent bottlers who were not manufacturing the IMFL brands of McDowell but their own brands which establish marketability of the product. It was further argued that the inputs were essences and once they were mixed or prepared, they lost their original identity. It was also urged that though the input and finished goods were under the same tariff head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by the assessee before the adjudicating authority which was basically founded on the conditions set out in the agreement that royalty was payable by the manufacture for use of the brand name and that the royalty had no relevance with the goods or various inputs that go into the manufacture of these goods. It was also set forth that the brands of the company had their own value and the royalty receivable from the manufacturer was primarily on account of company s brands of finished goods, namely, IMFL viz. No. 1 Brandy, No. 1 Whisky, Diplomat Whisky, Premium Whisky, Dry Gin, etc. It was also contended that the audit party had erroneously mis-interpreted the concept of royalty as one which was capable of being subdivided into and allocable to various manufacturing inputs, for it is neither feasible nor a correct procedure to apportion the royalty which was accruing to the company on the company s brand image. It was also contended that such an understanding would defeat the purpose of the agreement. Though such a stand was explained by the assessee, yet the department was of the view that the royalty should be added to the assessable value and consequently first show cause not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of trade mark and there was no indication whatsoever to infer that the royalty was paid for supply of food flavour. It took note of the fact that food flavour was one of the blending materials and not the sole blending materials sold by the assessee to the CBU and hence, prima facie, there does not appear to be any close nexus between royalty and the food flavour. 17. Be it noted, the assessee before the tribunal highlighted that there were three types of transactions, namely, receipt of royalty and also supply of food flavours; royalty was received though there was no supply of food flavours; and royalty was not received even though there was supply of food flavours. Accepting the said submission, the tribunal held thus:- 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 prices 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 decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be mixed has been kept a trade secret and different brands of IMFL require food flavour of different profiles. In order to ensure the quality consistency in the various brands of IMFL, the production of food flavour was centralized at Bangalore which does not use power. The tribunal referred to Board s circular dated 22.11.1999 wherein it has been clarified that agarbati manufacturing process involving simple mixing of a few aromatic chemicals with the base oil in a container in liquid form, which was mixed directly with the dough or applied on agarbati in the required proportion used for rolling of agarbati is not excisable product and, therefore, no duty was leviable on such compounds during the course of manufacture of agarbati. It was urged before the tribunal that the fact situation in the case of assessee was similar, as has been clarified in the Board s circular in respect of agarbati. It is further urged that there was a simple mixing of essences of different flavour profile and the food flavours produced by the assessee are exclusively used for making their brands of IMFL in their own units and contract units and it cannot be sold in the market as such. The tribunal posed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnai v. Titanium Equipment Anode Manufacturing Co. Ltd. 2002 (142) ELT 162 (Tri-Chennai) 20. We have heard Mr. Yashank Adhyaru, learned senior counsel for the appellant and Ms. Indu Malhotra and Mr. S.K. Bagaria, learned senior counsel for the respondents. It is submitted by the learned counsel for the appellant that the final product food flavour is classified under Chapter Heading 3302.10 and hence is excisable and dutiable. According to him, the assessee itself had admitted that it was selling the food flavours to independent bottling units and that establishes the marketability of the product. The assessee had claimed that its product is custom made and the formula is a trade secret and further it had availed CENVAT credit of inputs for payment of duty on final product. As the facts had been established, contend Mr. Adhyaru, the finished goods are sold on different code numbers assigned by the assessee, hence a new identity is established. Learned senior counsel would urge to construe a particular good has been manufactured, the goods must be capable of being bought and sold in the market, as has been held by this Court in Bhor Industries Ltd. (supra), Jagatjit Industrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that mere mention of the goods in one of the Entries in the schedule to the Central Excise Tariff would not render them exigible to excise duty unless the twin tests of manufacture and marketability were satisfied. It has also been repeatedly held that manufacture implies a change but every change was not manufacture and in order to attract the concept of manufacture, there must be transformation of the raw materials into a new and different article having a distinctive name, character and use. In that regard reliance has been placed on Union of India v. Ahmedabad Electricity Co. Ltd others. (2003) 11 SCC 129, Hindustan Zinc Ltd. v. CCE, Jaipur (2005) 2 SCC 662, Delhi Cloth General Mills (supra) and Satnam Overseas Ltd. v. CCE, New Delhi (2015) 13 SCC 166. It has been emphatically put forth that a simple process of mixing do not amount to manufacture as there is no transformation of the inputs into any new or differential commodity and for the said proposition, reliance has been placed on CCE, Bangalore-II v. Osnar Chemicals Private Ltd. (2012) 2 SCC 282, CCE, Meerut v. Goyal Gases (P) Ltd. (2000) 9 SCC 571 and Crane Betel Nut Powder Works v. Commr. of Customs Central Excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and the price paid for the food flavour sold, and (iii) whether two show cause notices have been correctly determined to be barred by limitation by the tribunal. First we shall advert to the issue of manufacture . The submission of the respondent is that they are mixing essences and in some cases merely selling food flavours purchased from third parties without any processing and in any case mixing of essences under no circumstances can amount to manufacture. The said submission is founded on the principle that by such process of mixing change takes place and no separate and marketable commodity comes into existence. Various judgments have been cited at the Bar to explain the term manufacture . It is well settled in law that manufacture implies change, but every change is not manufacture, such change is normally a result of treatment, labour and manipulation. In this regard, we think it appropriate to to reproduce a passage from Union of India v. Delhi Cloth General Mills Co. Ltd. AIR 1963 SC 791 wherein the Constitution Bench quoted with approval from an American judgment in Anheuser-Busch Brewing Assn. v. United States 207 US 556 (1908), which is to the following effect:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and skins constituted a different commodity from dressed hides and skins with different physical properties), State of Madras v. Swastik Tobacco Factory AIR 1966 SC 1000 (raw tobacco manufactured into chewing tobacco) and Ganesh Trading Co., Karnal v. State of Haryana (1974) 3 SCC 620 , (paddy dehusked into rice). On the other side, cases where this Court has held that although the original commodity has undergone a degree of processing it has not lost its original identity include Tungabhadra Industries Ltd., Kurnool v. CTO AIR 1961 SC 412 , (where hydrogenated groundnut oil was regarded as groundnut oil) and C.S.T., U.P., Lucknow v. Harbilas Rai and Sons (1968) 21 STC 17 (SC) (where bristles plucked from pigs, boiled, washed with soap and other chemicals and sorted out in bundles according to their size and colour were regarded as remaining the same commercial commodity, pigs bristles). 26. Adverting to the fact situation which pertained to pineapple fruit and canned pineapple slices, the Court held:- In the present case, there is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate dated 19-9-1986 issued by the manufacturer the compound imported by the respondents cannot be used in the condition it is manufactured and for making it suitable for use and for retaining its suitability for use it has to be dissolved in a solvent. The need of a solvent is not only for the purpose of storage and transport of the chemical, but also for retaining the suitability of the product after it is manufactured. Its dissolution in the solvent is necessary in order to make the product suitable for use. Since the product is used only for perfumery and not for any other purpose, it has to be held that the product is intended for specific use only. In view of clause 1(e) of the Notes in Chapter 29, it may be held that the product imported by the respondents cannot be regarded as falling under Chapter 29 of the Tariff and would fall under Heading 33.02 in Chapter 33 of the Tariff. We are, therefore, unable to uphold the impugned judgments of the Tribunal. 28. We have referred to the decisions to highlight the concept of essential change in the character of the product. In this regard, useful reference may be made to the authority in Income Tax Officer, Udaipur v. Arihant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n circumstances and evidence available, it was held that the price actually paid for sale of concentrate was not to be the determinative factor as the price paid for the sale of concentrate, i.e., invoice would not be determinative, as the royalty payment was inseparably linked with the sale consideration paid for the concentrate. The indelible nexus and connect was established to club the two considerations. 30. The respondent, in its turn, has placed reliance on Shyam Oil Cake Ltd. (supra) and contended that mere separate tariff entry is not indicative whether the same amounts to manufacture, for tariff entry can be merely for the purpose of identifying the product and the rate applicable to it. In such case, it would not have the effect of rendering the specified commodity to be excisable. Section 2(f) defines manufacture and by deeming effect, a process can amount to manufacture. Albeit, for a deeming provision to come into play, it must be specifically stated that a particular process amounts to manufacture. The respondent has also placed reliance on Circular no. 495/61/99-CX-3 dated 22nd November, 1998, but the said circular relates to compound preparation during the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaken. In the absence of that, a final conclusion cannot be reached. 32. In the case at hand, as we find from the order of the tribunal the exact nature of the process undertaking and how mixing is undertaken and the process involved is not discernible and has not been ascertained and commented. It remains ambiguous and inconclusive. The respondent claims that about 26% of the sales of odoriferous substances were brought from third party and sold without any modification or process. These are all questions of fact which must be first authenticated and the actual factual position validated. The tribunal has answered the question in favour of the respondent without the background check as to the actual process involved and undertaken. Different flavours may have different processes. 33. The third issue relates to the issue of limitation. The tribunal has held that certain show cause notices are barred by limitation. Mr. Bagaria, learned senior counsel has submitted that the said conclusion is absolutely flawless, if the dates are taken into consideration. For the aforesaid purpose, he has commended us to the decision already referred to hereinabove. As we notice, the tri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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