TaxTMI 
TaxTMI 
TaxTMI 
2017 (1) TMI 483
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs called the manufacturing agreement which provides for manufacture and sale by liquor manufacturers of IMFL under the respondent's brand names or its purchase by the respondent on the terms and conditions mentioned in the agreement. It is stipulated in the agreement that sale and purchase of IMFL under the agreement shall be on principal to principal basis. These liquor manufacturers were to purchase raw materials such as rectified spirit, extra neutral alcohol and blending and packing materials in accordance with the standards and specifications set forth in the agreement and from the approved suppliers. It was also provided in the manufacturing agreement that modalities of price payable by the respondent to the liquor manufacturers for sale of IMFL and the price was to be the aggregate of cost of rectified spirit, extra neutral alcohol, blending and packing materials, storage, insurance premium and all manufacturing costs and expenses as mentioned in the agreement. In addition, the liquor manufacturers were entitled to the margin of profit called service charges in the agreement. The total price so paid to the liquor manufacturers was the sole consideration for the sales and su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt from different suppliers. 6. Food flavours it is accepted play a role in the flavour profile of the liquor. Food flavours are not used in all brands of IMFL. There are certain brands of IMFL in which no food flavours are used and wherever they are used in IMFL, the percentage is very low ranging from 0.0001% to 00019% per litre. However, it is not the case of the respondent, that food flavours do not matter in the IMFL business. 7. Food flavours were supplied by the respondent to their IMFL manufacturing units and also sold to liquor manufacturers who were manufacturing IMFL under manufacturing/usership agreements. Food flavours were also sold to third party manufacturers of IMFL. 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. 8. The respondent stands registered under the Central Excise Act, 1944 (for short, "the Act") for manufacture of food flavours falling under Sub-Heading No. 3302.10 of the Central Excise Tariff since 1994 and holds the Central Excise Registration Certificate No. 8/94. Food flavours manufac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e franchisees. The proviso to Section 11A of the Act was invoked by the adjudicating authority and it was propose to re-determine the assessable value of food flavours by including the royalty received by the assessee. The differential duty demanded for the period April, 1997 to March, 2009 was 35,45,865,860/-. Penalties were proposed on the unit and on the Senior Manager (Taxation) and interest was also levied. The adjudicating authority confirmed the demand vide his order dated 29.08.2002. The respondent approached the Customs, Excise and Service Tax Appellate Tribunal (for short, "tribunal") which in its order dated 08.07.2003 remanded the matter to the learned Commissioner as certain invoices of sales were produced before the tribunal which were not considered by the concerned Commissioner. While remitting the matter, the tribunal observed that as the matter was being remitted, the issue of limitation and such other issues were kept open for the adjudicator to re-determine and pass an appropriate order granting the opportunity to the parties for effective hearing. The issue of penalty was also kept open. 11. After the remit, the adjudicating authority passed an order on 27.02.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts are identical in the case of the assessee, the same should have been followed by the jurisdictional Commissioner. To bolster the said stand, reliance was placed on Delhi Cloth and Generals Mills Co. Limited (supra), South Bihar Sugar Mills Limited & Anr. Etc. v. UOI & Anr, Etc 1978 ELT (J 336), and Tata Chemicals Limited v. R.M. Desai, Inspector, Central Excise, Mithapur & Others, Moti Laminates Private Limited v. CCE (SC) 1995 (76) ELT 241, Kilpest India Limited v. CCE (Tri.) 1999 (108) ELT 786, XI Telecom Limited v. Supdt. Of Central Excise, Hyderabad(AP-DB) 1999 (105) ELT 263, and CCE v. Jagatjit Industries (SC) 2002 (141) ELT 306. 13. It was further argued that in certain cases, the flavours which were not bought are not even mixed but were supplied directly to the bottlers, only the labels were changed in order to maintain secrecy and such an activity could not be regarded as 'manufacture' inasmuch as under Chapter Heading 3302.10 re-labelling does not amount to manufacture. It was argued that mixing of flavours does not bring into existence a new product and even after mixing flavours, the resultant products still remains to be a flavour only. Attention of the tribunal w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cising the invocation of the jurisdiction under Section 11A of the Act, it was contended that there was no suppression on the part of the appellants as the factum of payment of royalty was known to the department and it was clear from the note of the Range Officer to the Deputy Commissioner which clearly laid down that the amount paid towards royalty was only for use of the brand name for sale of flavour and prior to the issue of show cause notice, there was an audit inspection on 28.03.2001 and the assessee was asked to clarify various points raised which had been clarified vide letter dated 28.04.2001 and all these aspects had not been taken into consideration while invoking the jurisdiction. It was also put forth that as royalty had no nexus with the price of food flavours, the assessee was not expected to declare it and, therefore, it could not be treated as suppression. That apart, at the time of audit objection even the Range Superintendent was of the view that there was no nexus between the royalty received by the appellant and the price of food flavours sold by the assessee and, therefore, in the obtaining circumstances, the notices were clearly barred by time. 15. The sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Transport Corporation Limited v. CCE, Madurai 2004 (166) ELT 433 (SC), Kothari Products Limited v. Government of Andhra Pradesh 1998 (98) ELT 315 (AP), CCE, Guntur v. Crane Betel Nut Powder Works 2005 (187) ELT 106 (Tri-Bang), and Henna Export Corporation v. CCE 1993 (67) ELT 907 (Tribunal). The revenue further contended that as per Section 4 of the Act, the assessable value depends on the nature of transaction and each price in a transaction was an assessable value and it cannot be compared if the type of transaction was different. The assessee received royalty charges from buyers who were contract bottling units and separate assessable value was computable for these types of customers and in such cases, the royalty charged by the assessee from the buyers has to be treated as additional consideration. 16. After noting down the submissions of the learned counsel for the parties, the tribunal adverted to the issue of nexus between the royalty and the price of food flavours. The tribunal clearly stated that in the year 1995, the department had proceeded against the assessee for non-payment of central excise duty on the food flavours produced by them and the Commissioner confirmed t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....second party would include the products whose trade mark was owned by the assessee-appellant before the tribunal and any other associate company of it. The second party to the agreement was required to purchase blending and packing materials from such suppliers specified by the assessee and above condition was for the purpose of ensuring quality specification. The agreement defined the blending material. The tribunal referred to the definition of "Blending Material" and opined that the said definition includes food flavours. It referred to para 18 of the agreement which stipulates that during the currency of the agreement, the second party (as pointed out by the tribunal) Gemini Distilleries (Tripura) Pvt. Ltd. (GDPL) shall not use trade mark to or adopt any trade mark similar to any of the trade marks on or in connection with any product. On that basis, the tribunal opined that on careful reading of the agreement reveals that the assessee has good control over the manufacture of IMFL by GDPL and it ensures the quality of the product, which bears the trade mark of the assessee. Referring to the usership agreement, the tribunal observed that the proprietor was the assessee and the u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....FL which do not require any food flavour. In the Pepsi case, the concentrates are sold only for the franchisees. In the instant case, the appellants have sold food flavours to independent manufactures of IMFL who will not be using the brand name of the appellants. Such independent manufacturers would not pay any royalty. In the Pepsi case, an express prohibition restricting the bottlers to purchase the concentrate from any other source was there. No such express prohibition is there in the present agreement. It was further pointed out by the appellants that there are instances wherein the appellants have paid an amount to bottlers when the sale price of IMFL is much below the ex-distillery price. 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 cir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y that a completely distinct product emerges. The comparison with agarbathi mention in Board's Circular is justified. Board's Circular dated 03.11.1996 deals with the process of tinting of duty paid base white Paint with duty paid strainer to obtain paint of different shades. It has been clarified that the above process does not amount to manufacture on the ground that the process of tinting does not bring about any new commodity with different commercial identity as the resultant emulsion/enamel point and hence, it may not be appropriate to consider this process as amounting to manufacture. While clarifying the above position, 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." In another Circular dated 13.07.1992, the Board has clarified that conversion of plain plastic granules into coloured plastic granules would....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g units and separate assessable value is computable for this type of customers. 21. In the instant case, as the revenue would put forth, the royalty/service charge received by the assessee under the various agreement with other manufacturers of IMFL forms additional consideration and is includible in the assessable value under Section 4 of the Act read with Valuation Rules as has been held in Pepsi Foods Ltd. (supra). 22. Mr. Bagaria and Ms. Indu Malhotra, learned senior counsel appearing for the assessee in their turn would contend that the food flavours were odoriferous compounds and are prepared by way of simple mixing of various essences (odoriferous substances) purchased from different suppliers and thus the food flavours that were obtained from simple mixing of duty paid essences/flavours done manually cannot be regarded as manufacture, for by such mixing no new commodity having existing name, character or use emerges. That apart, in around 26% of the cases even such mixing was not done and the flavours purchased from the market were cleared as such merely after relabeling and when flavours fall under the Heading No. 3302.10, no extended meaning is to be given to the expres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....05) 6 SCC 310 As far as the stand of the revenue that the assessee at one point of time had accepted the process of mixing and manufacture and paid the duty under the specified heading, it would debar the assessee to raise the plea again is sans substance as the Commissioner himself had admitted that food flavours were prepared by simple manual mixing of odoriferous substances but by the assessee. That apart, the assessee was entitled to raise such an issue in respect of the subsequent period and is not stopped to do so in view of the decision in Municipal Corporation of City of Thane v. Vidyut Metallics Ltd. (2007) 8 SCC 688 As far as the conclusion arrived at by the tribunal that two show cause notices dated 11.04.2002 and 30.04.2004 are barred by limitation, no fault can be found with it inasmuch as the said show cause notices were issued after expiry of one year from the period covered thereunder and hence, plea barred by limitation as provided under Section 11A(1) of the Act. As regards the limitation, learned senior counsel for the respondent have drawn inspiration from Cosmic Dye Chemical v. CCE, Bombay (1995) 6 SCC 117, Padmini Products v. CCE, Bangalore (1989) 4 SCC 275, P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 5-A(1)(a) of the Kerala General Sales Tax Act, 1963 opined 38 AIR 1963 SC 791 that:- "There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly manufacture is the end result of one more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mported an organic chemical "abbalide" which the assessee had classified under Chapter 29 and not as an odoriferous substances under Heading 33.02 of the tariff. Reversing the judgment of the tribunal, it was held by the Court as under:- "10. Heading 33.02 of the Tariff refers to "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". It envisages (i) mixtures of odoriferous substances, and (ii) mixtures (including alcoholic substances) with a basis of one or more of odoriferous substances and the mixtures are of a kind used as raw materials in industry. In the present case, it has been found that the chemical, in its original form, consists of various isomers and is an odoriferous substance. It has been dissolved in diethyl phthalate, a non-odoriferous substance. The odoriferous substance is the basis of the mixture. It is not disputed that the mixture is used as a raw material, viz., perfume in industry. It can, therefore be said that the compound is a mixture with a basis of an odoriferous substance and since it is for use as a raw material in industry, it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e circumstances, not only is there manufacture but also an activity which is something beyond manufacture and which brings a new product into existence and therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activity undertaken by the respondent assessees did constitute manufacture or production in terms of Section 80-IA of the Income Tax Act, 1961. 26. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely, that the activity undertaken by the respondents herein is not manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job-workers and the activity undertaken by them has been recognised by various government authorities as manufacture. To say that the activity will not amount to manufacture or production under Section 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales tax, etc. because the activity did not constitute man....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... being lucent and absolutely clear. 31. Recently, in The Additional Commissioner of Commercial Taxes, Bangalore v. Ayili Stone Industries Etc. Etc. Civil Appeal Nos. 1983-2039 of 2016 dated 18.10.2016 the Court was dealing with the issue of grant of exemption on polished granite stone and the view of the revenue that the polished and unpolished granite stones are under separate Entries in the second schedule to the Karnataka Sales Tax Act, 1957. The question arose before this Court pertained to interpretation of polished and granite stones and in that context the concept of manufacture and after referring to various judgments, it held that:- "28. There is a distinction between polished granite stone or slabs and tiles. If a polished granite stone is used in a building for any purpose, it will come under Entry 17(i) of Part S of the second schedule, but if it is a tile, which comes into existence by different process, a new and distinct commodity emerges and it has a different commercial identity in the market. The process involved is extremely relevant. That aspect has not been gone into. The Assessing Officer while framing the assessment order has referred to Entry 17(i) of Par....