AI Drafter 
TaxTMI 
TaxTMI 
2006 (3) TMI 384
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....nt. The appellants provide manufacturing 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 o....
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..... The additional ground raised a question of law to 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 2....
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.... The Commissioner failed to take into consideration the letter given by the appellants dated 18-2-2000 and dated 4-9-2001 stating that the process of mixing 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)....
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....f transfers made for captive consumption or to contract manufacturers as it goes to the root of establishing valuation under the Central Excise law. But the Commissioner has just made a passing reference without considering the issue properly. (xiii) The Royalty and service charges were received by the appellants for use of the trade mark of the appellant and for marketing 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 serv....
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...., if the royalty payment did not enter into the bargaining. In the instant case, the appellants have sold the food flavours to independent manufacturer of IMFL also, who will not be using the brand name of the appellants on the IMFL manufactured by them. The price at which such sale was made is equal to the price at which the appellants have sold the food flavours to the CBUs. (d) In the Pepsi case, there was an express prohibition in the contract, restricting 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) &nbs....
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....8-3-2004 are clearly time-barred. The appellants have been periodically filing the price-lists. Since the royalty has no nexus with the price of the food flavour, they were not expected to declare it. This cannot be treated as suppression. At the time of audit objection, even the Range Superintendent was of the view that that there is no nexus between the royalty received by the appellants and the price of the food flavours sold by the appellants. In these circumstances, the notices are clearly time-barred. The learned Advocates took us through all the correspondences between the appellants and the department. 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 adjudic....
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.... prescribed two-fold tests for excisability. (UOI v. J.G. Glass Industries Ltd. - 1998 (97) E.L.T. 5 (S.C.) (a) Whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist? (b) Whether the commodity which was already in existence will serve no purpose but for the said process? (vii) In the instant case, the inputs are essences. Once they are mixed, they lose their identity. The trade name for inputs are different from the trade name of the finished goods. Therefore, the input and finished goods are entirely different. Moreover, the inputs cannot be used in the original form in which the appellant receives them in their premises. It has to undergo a process of mixing with other essences. (viii) The Supreme Court, in the case of Kores India Ltd. - 2004 (174) E.L.T. 7 (S.C.), has held that the process of mere cutting the ribbons in Jumbo rolls to form small spools for 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 (....
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....ditional consideration. The instances of sale to independent bottling units manufacturing their own brands are not relevant, as there is no Manufacturing/Usership agreement. (xiii) The application of Pepsico Foods case to the McDowell case is contested by the assessee on the ground that in Pepsi case, both the input and finished goods are under Central Excise whereas in McDowell case, the input is under Central Excise and Finished goods are under State Excise Control. The above arguments are irrelevant. As long as food flavour manufactured by the assessee are excisable goods, and Royalty etc. collected are from the buyers who have bought food flavours, including the same in the assessable value is relevant in view of the Pepsi Co. case. The applicability of the Pepsi case to the present case has been dealt in detail in the OIO passed by the Commissioner. 8. We have gone through the records of the case carefully. Nexus between the Royalty and the price of Food Flavours:- In the first two Orders-in-Original, the main issue before the adjudicating authority was only the inclusion of royalty in the assessable value of the food flavour sold by the appellants to various ....
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....s one which is capable of being subdivided into and allocable to various manufacturing inputs. It will be neither feasible nor a correct procedure to apportion the Royalty which is accruing to the company on the company's brand image. If we have to adopt the practice as interpreted by the Excise, it will amount to reduce the cost of inputs by the Royalty receivable and attributable to these inputs. Such a method of accounting is not contemplated by any of the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and would defeat the very nature of the agreement entered into between by the company and the contractee units. Given the background, we deny that additional consideration was passed on to us in the form of Royalty of essence/food flavour for the assessable value of goods cleared during the period 1-4-1996 to 24-2-2001. As such, there is no question of paying duty of Rs. 18,38,024.86 which is claimed by the audit party. In this connection we are enclosing copies of sample credit Notes (Annexure 'G') received from the manufacturers, from which you will find that Royalty is payable for us based on the company's brands produced by them. ....
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....has good control over the manufacture of IMFL by GDPL. As already stated it is only to ensure the quality of the product, which bears the Trade Mark of the appellants. There is another agreement called Usership Agreement. In this Agreement, the proprietor is McD and the user is GDPL. According to this Agreement, at the request of the User, the Proprietor has agreed to permit the User to use the Trade Marks in respect of the goods on the terms and conditions mentioned in the Agreement. As per para 12, "In consideration of this licence, the User shall pay to the Proprietor such sum per case manufactured of the goods as may be mutually agreed upon by the parties from time to time. The consideration shall be paid by the User by the following month. Even though the word Royalty has not been used in the Agreement, it is clear that the sum mentioned in para 12 refers to Royalty and the Royalty is for use of the Trade Mark. There is no indication whatsoever to infer that the Royalty is paid for the supply of food flavour. In fact, food flavour is one of the blending materials. It is not the sole blending material sold by the appellants to the CBU. Prima facie, there does not appear to be a....
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....ce. It is further seen that apart from food flavour, the appellants supplied other blending materials to these CBUs. In these circumstances, the entire royalty paid cannot be attributed to the food flavour whose cost is only 0.45% according to the appellants. Further we find that even in 2001, at the time of audit inspection, the appellants have taken a firm stand not only regarding the includibility of royalty but also the question of very excisability of the food flavour itself. In these circumstances, there is no justification for alleging suppression of facts to invoke the larger period. Hence the Show Cause Notice dated 11-4-2002 and 8-3-2004 are clearly time-barred. For the above mentioned reasons, the royalty has no nexus with the price of the food flavour and hence, not includible in the assessable value. Moreover, the first two Show Cause Notices are time barred as there is no suppression of facts. Excisability of food flavours : 11. The appellants purchased duty paid odoriferous compounds called essences. These essences are mixed manually to obtain food flavour. In what proportion and which essences are to be mixed is a trade secret of the appellants. Different....
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...., the Board has applied the ratio of the classic judgment of the Apex Court in the DCM case wherein it has been held that "Manufacture implies change, but every change is not manufacture and yet every change in an article is a result of treatment, labour and manipulation, but something more is necessary and there must be transformation; a new and different article must emerge having distinctive name, character and use". 12. In another Circular dated 13-7-1992, the Board has clarified that conversion of plain plastic granules into coloured plastic granules would not amount to manufacture. 13. In all these cases, the commercial identity of the ingredients and the finished product remained the same. In the present case also, the process of mixing two or more essences in certain proportions does not bring into existence any new product. The essences remained essences only and because of the different proportions, a distinct flavour is imparted to the resultant product. That cannot make the process as manufacture. 14. In a decision in the case of CCE, Chennai v. Fountain Consumer Appliances Ltd - 2004 (171) E.L.T. 329 (Tri.-Chennai), the Tribunal held that mixing....