2017 (1) TMI 483 - SC - Central Excise

Supreme Court orders tribunal reevaluation for thorough analysis of manufacturing process

Commissioner Central Excise, Bangalore Versus M/s. United Spirits Ltd. & Another

The Supreme Court remitted the case to the tribunal for further examination. The tribunal's findings on 'manufacture' lacked detailed scrutiny, requiring ... Manufacture - excisability of food flavours - Valuation - inclusion of amount paid for Royalty - the food flavours were “prepared” by mixing of various essences (odoriferous substances) - The liquor manufacturers under the manufacturing agreement would use food flavours in such proportions as identified by the respondent and the blending proportion was maintained as a trade secret of the respondent - The royalty paid to the respondent by the liquor manufacturers, as asserted, is the difference between their selling prices 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. - Extended period of limitation. Held that: - 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. 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. Issues Involved:1. Whether there was 'manufacture'.2. Whether there was a nexus between the royalty received and the price paid for the food flavour sold.3. Whether the two show cause notices were correctly determined to be barred by limitation by the tribunal.Issue-wise Detailed Analysis:1. Whether there was 'manufacture':The respondent argued that the process of mixing essences to produce food flavours does not amount to 'manufacture' as no new commodity with a distinct name, character, or use emerges. The tribunal referred to various precedents, including Union of India v. Delhi Cloth & General Mills Co. Ltd., which emphasized that 'manufacture' implies a transformation resulting in a new and different article. The tribunal concluded that the process of mixing essences does not bring into existence any new product, as the resultant product remains an essence. The tribunal also relied on circulars and judgments indicating that simple mixing processes do not constitute 'manufacture'. However, the Supreme Court found that the tribunal's analysis lacked a detailed examination of the actual process involved and remitted the matter for further scrutiny.2. Whether there was a nexus between the royalty received and the price paid for the food flavour sold:The tribunal observed that the royalty received by the respondent was for the use of its trade mark and not for the supply of food flavours. The tribunal noted that the agreements between the respondent and the liquor manufacturers distinguished between the supply of food flavours and the payment of royalty for the use of trade marks. The tribunal also pointed out that there were instances where royalty was paid without the supply of food flavours and vice versa, indicating no direct nexus between the two. The Supreme Court agreed with the tribunal's finding but emphasized the need for a deeper factual analysis to ascertain the exact relationship between the royalty and the price of food flavours.3. Whether the two show cause notices were correctly determined to be barred by limitation by the tribunal:The tribunal held that the show cause notices dated 11.04.2002 and 30.04.2004 were barred by limitation as they were issued after the expiry of one year from the period covered thereunder. The tribunal found no suppression of facts by the respondent to justify the invocation of the extended period of limitation under Section 11A of the Central Excise Act. The Supreme Court noted that the tribunal's finding on limitation was cryptic and required a more detailed examination of the dates and facts to determine whether the show cause notices were indeed time-barred.Conclusion:The Supreme Court remitted the matter to the tribunal for a fresh determination of the issues based on the observations made and the applicable law. The tribunal was directed to conduct a thorough analysis of the manufacturing process, the nexus between royalty and food flavours, and the limitation period for the show cause notices. The Supreme Court did not express any opinion on the merits of the case, including the imposition of penalty and interest.