Supreme Court of India
COMMISSIONER CENTRAL EXCISE, BANGALOREversusM/S. UNITED SPIRITS LTD. & ANR.
- Citation
- 2017 INSC 26
- Decided
- 5 January 2017
- Disposal
- Appeal(s) allowed
- Bench
- DIPAK MISRA
Holding
Simple mixing of duty‑paid essences does not amount to manufacture, and the royalty received has no nexus with the price of food flavours, so it cannot be added to the assessable value; the show‑cause notices are time‑barred.
Summary
The Commissioner of Central Excise appealed against United Spirits Ltd., which manufactures Indian Made Foreign Liquor (IMFL) and also produces food flavours used in IMFL. The revenue department issued show‑cause notices alleging that royalty received from franchisees for the use of its trademark should be added to the assessable value of the food flavours, thereby attracting additional excise duty, penalty and interest. The tribunal held that the royalty had no nexus with the price of the food flavours and that the show‑cause notices were time‑barred, but it did not examine whether the mixing of duty‑paid essences to produce food flavours amounted to "manufacture". The Supreme Court clarified that "manufacture" requires a transformation resulting in a new, distinct article; simple manual mixing of essences does not satisfy this test. Consequently, royalty cannot be included in the assessable value, and the limitation bar on the notices stands. The appeal was allowed and the matter remitted to the tribunal for fresh consideration of the manufacture issue and related aspects.
Issues considered
- Whether the process of mixing duty‑paid essences to produce food flavours constitutes "manufacture" under the Central Excise Act, 1944.
- Whether the royalty received by the assessee is part of the assessable value of the food flavours (nexus between royalty and price).
- Whether the show‑cause notices issued under Section 11A are barred by limitation.
Legislation cited
- Central Excise Act, 1944s. 11A, s. 11B, s. 11C, s. 4
Subjects
central excisemanufacturefood flavoursroyaltyassessable valuelimitationshow cause noticeexcise dutymixing processnexus
Judgment
[2017] I S.C.R. 54
A COMMISSIONER CENTRAL EXCISE, BANGALORE
v.
MIS. UNITED SPIRITS LTD. & ANR.
(Civil Appeal No. 5003 of2006)
B JANUARY 05, 2017
(DIPAK MISRA AND N. V. RAMANA, JJ.]
Central Excise Act, 1944 - ss. 4 and JJA Proviso - Show
cause notice by Revenue - To the assessee - On the ground that the
assessee received additional consideration from its franchisees in
c the form of royalty.for supplying food flavours' which were essential
ingredients of the IMFL manufactured by franchisees -
Re-assessment of food jluvours' by including the royalty received
by the assessee - Demand of differential duty - Penalty as well as
interest levied - Adjudicating authority confirmed the demand -
D Appellate Tribunal held that there was no nexus between the royalty
and the food flavour', that simple mixing of food flavours with
IMFL is not manufacture and that two show cause notices were
barred by /imitation - On appeal, held: Manufacture implies change,
but every change is not manufacture - The Tribunal decided in
favour of the assessee without the background check as to the actual
E
process involved and undertaken - The Tribunal while holding the
show cause notices as barred by limitation, has also not scrutinized
the dates appropriately - Therefore. the mailer is remitted to the
Tribunal.
Allowing the appeal, the Court
F
HELD: 1. 'Manufacture' implies change, but every change
is not manufacture, such change is normally a result of treatment,
labour and manipulation. [Para 23] (75-D-E]
Union of India v. Delhi Cloth & General Mills Co. Ltd.
G AIR 1963 SC 791 : [1963] Suppl. SCR 586- followed.
Deputy Commissioner of Sales Tax (Law), Board of
Revenue (Taxes), Ernakulam v. Pio Food Packers 1980
Supp. SCC 174: (1980] SCR 1271; Collector of
Customs, Bombay 1( S.H Kelker & Co. Ltd. (2000) 10
H sec 478 - relied on.
54
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S. 55
UNITED SPIRITS LTD. & ANR.
Anheuser-Busch Brewing Assn. v. United States 207 US A
556 (1908); Income Tax Ojjice1; Udaipur v. Arihant Tiles
and Marbles Pvt. Ltd. (2010) 2 SCC 699 : [2009] 16
SCR 21; CIT v. Mis NC. Budharaja and Company 1994
Supp (1) SCC 280: [1993] 2 Suppl. SCR 185- referred
to.
B
2.1 In the present case in 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 c
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 D
different processes. [Para 32] [81-D-E]
2.2 The respondent had pleaded a different factual matrix
which has been accepted by the tribunal, albeit, without referring
to specific details. General observation and broad brush approach
need not reflect true consideration paid for all transactions. A far E
greater and deeper scrutiny of facts is required before forming
any opinion, one way or the other. It would be wrong to be
assumptuons without full factual matrix being lucent and
absolutely clear. (Para 30] [80-E]
Pepsi Foods Ltd. v. Collector of Central Excise, F
Chandigarh (2005) 9 SCC 28 : (2003] 6 Suppl. SCR
232; Shyam Oil Cake Ltd. v. CCE-1, New Delhi, Jaipur
(2005) 1 SCC 264 : (2004] 6 Suppl. SCR 346; The
Additional Commissioner of Commercial Taxes,
Bangalore v. Ayili Stone Industries Etc. Etc.2016 (10)
SCALE 85 - referred to. G
3. The tribunal has held that certain show cause notices
are barre.d by limitation. The tribunal on this score has also not
scrutinized the dates appropriately, bnt has returned a cryptic
finding. [Para 33] [81-F, G]
H
56. SUPREME COURT REPORTS [20 I 7] I S.C.R.
A 4. In view or the aforesaid analysis, the matter is remitted
to the tribunal for reconsideration of the aforesaid.aspects on the
basis of observations made hereinabove and the law in the field.
[Para 34] [81-G-H]
Pepsi Foods Ltd. v. Collector of Central Excise,
B Chandigarh (2005) 9 SCC 28 : [2003] 6 Suppl. SCR
232; Unio11 of India & Ors v. Delhi Cloth and General
Mills Co. Limited and Ors. I 997 ELT (Jl99) SC; South
Bihar Sugar Mills Limited & Anr. Etc. v. UOI & Anr. Etc
1978 ELT (J 336); Tata Che111icals Li111ited v. R.lvl
Desai, Inspector, Central Excise, Milhapur & Ors. Moti
c La111inates Private Limited v. CCE (SC) 1995 (76) ELT
241; Ki/pest India Limited v. CCE (Tri.) 999 (108) ELT
786; XI Telecom Limited v. Supdt. Of Central Excise,
Hyderabad (AP-DB) 1999 (105) ELT 263; CCE '"
Jagatjit Industries (SC) 2002 (141) ELT 306; Bhor
D Industries Ltd v. CCE, Bombay (1989) l SCC 602 :
[1989] 1 SCR 382;Union Carbide v. CCE 1986 (24)
ELT 169 (SC); Moti Laminates Pvt. Ltd. & Ors '" CCE,
Ahmedabad (1995) 3 SCC 23 : [1995].2 SCR 81; Union
Of India & Ors. v. Sonic Electrochem (P) Ltd. and Anr.
(2002) 7 sec 435 : [2002] 2 Suppl. SCR 475; CCE,
E Chandigarh-II v. Jagatjit Industries Ltd. (SC) (2002) 3
SCC 614: [2002] 2 SCR 500; Gopal Zarda Udyog v.
CCE, New Delhi 2005 (188) ELT 251 (SC); O.K. Play
(India) Limited v. CCE, New Delhi II 2005 (180) ELT
291; Nestle l11dia Limited '" CCE, Chandigarh II 2004
F (169) ELT 315 (Tri-Del); TN. State Transport
Cmporation Limited v. CCE, Madurai 2004 (166) ELT
433 (SC); Kothari Products Li111ited '" Government of
Andhra Pradesh 1998 (98) ELT 315 (AP); CCE, Guntur
'" Crane Belfi Nut Powder Works 2005 (187) ELT 106
(Tri-Bang); Henna Export Corporation '" CCE 1~93
G (67) ELT 907 (Tribunal); CCE Chennai '" Fountain
Consu111er Appliances Li111ited 2004 (171) ELT 329 (Tri-
Chcnnai); Tega India Li111ited '" CCE, Ca/cuffa II (2004)
2 SCC 727; State of Maharashtra '" Mahalax111i Stores
(2003) 1 sec 70 : [2002] 4 Suppl. SCR 292; CCE
H Chennai v. Titanium Equipment & Anode'
COMMISSIONER CEN'.fRAL EXCISE, BANGALORE v. M/S. 57
UNITED SPIRITS LTD. & ANR.
Manufacturing Co. Ltd. 2002 (142) ELT 162 (Tri- A
C/1ennai); Servo Med Industries Pvt. Ltd. i.: CCE 2015
(6) SCALE 137; Union of India v. Ahmedabad
Electricity Co. Ltd & Ors.. (2003) 11 SCC 129 : [2003]
4 Suppl. SCR 1117; Hindustan Zinc Ltd. v. CCE, Jaipur
(2005) 2 SCC 662 : (2005] 2 SCR 391; Satnam
B
Overseas Ltd. v. CCE, New Delhi (2015) 13 SCC 166
: [2015] 4 SCR 437; CCE, Bangalore-II v. Osnar
Chemicals Private Ltd. (2012) 2 SCC 282 : (2012] 2
SCR 1035; CCE, Meerut v. Goyal Gases (P) Ltd. (2000)
9 SCC 571;Crane Betel Nut Powder Works v. Com1111:
of Custo1ns & Ce111ral Excise, Tirupathi (2007) 4 SCC c
155; Shyam Oil Cake Ltd. v. CCE-1, New Delhi, Jaipur
(2005) 1 sec 264 : [2004] 6 Suppl. SCR 346; CCE v.
S.R. Tissues (P) Ltd. (2005) 6 SCC 310 : (2005] 2
Suppl. SCR 355; Municipal Corporation of City of
Thane v. Vidyut Metallics Ltd. (2007) 8 SCC 688 : [2007]
D
9 SCR 1016; Cosmic Dye Chemical v. CCE, Bombay
(1995) 6 SCC 117; Padmini Products v. CCE, Bangalore
(1989) 4 SCC 275 : (1989] 3 SCR 873; Pushpam
Pharmaceuticals Ca. v. CCE. Bombay 1995 Supp (3)
SCC 462; Uniworth Textiles Ltd. " CCE, Raipur (2013)
9 SCC 753 : (2013] 3 SCR 27 - referred to. E
Case Law Reference
[2003] 6 Suppl. SCR 232 relied on Para 11
1997 ELT (Jl99) SC referred to Para 12
1978 E~T (J 336) referred to Para 12 F
1995c(76) ELT 241 referred to Para 12
999 (108) ELT 786 referred to Para 12
1999 (105) ELT 263 referred to Para 12
2002 (141) ELT 306 referred to G
Para 12
(19891 1 SCR 382 referred to Para 15
1986 (24) ELT 169 (SC) referred to Para 15
(1995] 2 SCR 81 referred to Para 15
H
58 SUPREME COURT REPORTS [2017]1 S.C.R.
A [2002] 2 Suppl. SCR 475 referred to Para 15
(2002] 2 SCR 500 referred to Para 15
2005 (188) ELT 251 (SC) referred to Para 15
2005 (180) ELT 291 referred to Para 15
B 2004 (169) ELT 315 (Tri-Del) referred to Para 15
2004 (166) ELT 433 (SC) referred to Para 15
1998 (98) ELT 315 (AP) referred to Para 15
2005 (187) ELT 106 (Tri-Bang) referred to Para 15
c 1993 (67) ELT 907 (Tribunal) referred to Para 15
2004 (171) ELT 329(Tri-Chennai) referred to Para 19
(2004) 2 sec 727 referred to Para 19
[2002] 4 Suppl. SCR 292 referred to Para 19
D
2002 (142) ELT 162 (Tri-Chennai) referred to Para 19
2015 (6) SCALE 137 referred to Para 20
[2003] 4 Suppl. SCR 1117 referred to Para 22
J2005J 2 SCR 391 referred to Para 22
E
j2015.J 4 SCR 437 referred to Para 22
[20121 2 SCR 1035 referred to Para 22
r2000) 9 sec 571 referred to Para 22
F r2001i 4 sec 155 referred to Para 22
[2004] 6 Suppl. SCR 346 referred to Para 22
[2005] 2 Suppl. SCR 355 referred to Para 22
(20071 9 SCR 1016 referred to Para 22
G (1995) 6 sec 111 referred to Para 22
j1989J 3 SCR 873 referred to Para 22
1995 Supp (3) sec 462 referred to Para 22
(2013] 3 SCR 27 referred to Para 22
H [1963] Suppl. SCR 586 followed Para 23
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S. 59
UNITED SPIRITS LTD. & ANR.
207 us 556 (1908) referred to Para 23 A
[1980) SCR 1271 relied on Para 24
(2000) 10 sec 478 relied on Para 24
[2009) 16 SCR 21 referred to Para 28
(19931 2 Suppl. SCR 185 referred to Para 28 B
2016 (10) SCALE 85 referred to Para 30
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5003 of
2006.
From the Judgment and Order Nos. 607 to 610 of 2006 dated C
17.03.2006 of the Customs Excise Service Tax Appellate Tribunal, South
Zonal Bench at Bangalore in Appeal Nos. E/590/2004, E/591/2004, El
I 051/2004 and E/563/2005.
YashankAdhyaru, Sr. Adv. Arijit Prasad, Ms. Shirin Khajuria, B.
Krishna Prasad, Advs. for the Appellant. D
Ms. lndu Malhotra, S. K. Bagaria, Sr. Advs., Ms. Nisha Bagchi,
Prashant Singh, Tanvir Nayar, Ms. Pooja Sharma, K. Aj it Singh, Ms.
Apoorva Bhumesh, Vikas Mehta, Advs. for the Respondents.
The Judgment of the Cou11 was delivered by
E
DIPAK MISRA, J. I. The respondent is a manufacturer of
Indian Made Foreign Liquor (IMFL) and is a registered owner of several
known brands ofIMFL. 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. F
2. The respondent has got its own distillery units at various places.
In addition, it has entered into agreements with various manufacturers
of liquor who had their bottling plants and also appropriate licences to
manufacture liquor. With these liquor manufacturers the respondent
had entered into Usership Agreement whereby they were permitted to G
use the trademark of the respondent on IMFL manufactured by them on
the terms and. conditions mentioned in the agreement. The respondent
had also entered into another agreement with the liquor manufacturers
called the manufacturing agreement which provides for manufacture
and sale by liquor manufacturers of!MFL under the respondent's brand
H
60 SUPREME COURT REPORTS [2017] I S.C.R.
A 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
B
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
c 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 such
price is known as Ex-Distillery Price (EDP), which includes all costs,
charges and expenses incurred by the liquor manufacturers for
D
manufacture of IMFL as well as their margin described. as service
charges. The IMFL manufactured by liquor manufacturers was affixed
with the brand names owned by the respondent. It provided the
manufacturing logo, quality control, product research, etc. The respondent
provided technical know-how/expertise to liquor manufacturers for
E manufacture of IMFL.
3. The liquor manufacturers sell IMFL manufactured by them
either to the respondent or to the customers identified by the respondent
or to the government-owned corporations. The sales personnel of the
respondent contact the customers, book orders, collect outstanding
F amounts from 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
G EDP which include the actual cost of IM FL 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. ··
H
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 61
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
4. The respondent, however, asserts that such rates/prices A
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
B
was less than EDP, the difference/shortfall is borne by the respondent
and paid to the liquor manufacturers; and (c) if the price realized from
outside buyers is more than EDP, the difference accrued to the
respondent.
5. As has been stated earlier, the respondent "manufactures" food
flavours at its food flavour manufacturing unit at Bangalore. On the said
c
aspect, the respondent asserts that the food flavours were "prepared"
by mixing of various essences (odoriferous substances) purchased by
the respondent 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!MFL. There are D
certain brands oflMFL in which no food flavours are used and wherever
they are us~d 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 E
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 F
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
G
manufactured by the respondent have been always cleared Oil-payment
of central excise duty. As a procedure, the respondent used to file price
lists/declarations from time to time declaring the assessable value of
food flavours in accordance with law. The assessable value included
the entire cost of raw material, labour cost, overheads and profit margin
H·
62 SUPREME COURT REPORTS [2017] I S.C.R.
A and were cleared from the factory on payment of central excise duty.
The price of food flavours supplied to the respondent owned IMFL
manufacturing units, liquor manufacturers and to other independent IMFL
manufacturers, it is asserted by the respondent, did not vary and remain
identical.
B 9. The royalty paid to the respondeni by the liquor manufacturers,
as asserted, is the difference between their selling prices of IMFL to
outside buyers and the EDP of such. IM FL. As pleaded, the payment of
royalty has no nexus or connection with the food flavours. There are
several brands of l!y!FL where no food flavour was supplied by the
c respondent to liquor manufacturers. However, royalty on the difference
between the selling price oflMFL 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 ofIMFL was lower than the EDP and rather than receiving
royalty, the respondent had borne the shortfall and reimbursed the same
D 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
E. 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 the said brands and their EDP.
10. We have narrated the aforesaid factual scenario as
substantially put forth by the respondent. At th is juncture, it is necessary
F to state that revenue issued a show cause notice on 11.04.2000 on the
ground that the respondent-assessee received additional consideration
from its franchisees in the form of royalty for supplying food flavours
which were essential ingredients of the IMFL manufactured by the
franchisees. The proviso to Section I IA of the Act was invoked by the
G adjudicating authority and it was proposed 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
H
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 63
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
29.08.2002. The respondent approached the Customs, Excise and A
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
nut considered by the concerned Commissioner. While remitting the
matter, the tribunal observed that as the matter was being remitted, the
B
issue oflimitation 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 .02.2004. It placed reliance on the decision in Pepsi Foods Ltd. v.
c
Collector of Central Excise, Chandigarh', and held that the royalty
from the various units under the manufacturing agreement deserve to
be included in the assessable value of the food flavour supplied to them
and accordingly confirmed the demand under proviso to Section 11 A of
the Act. EquaJ .amount of penalty was imposed under Section 11 AC D
and interest under Section 11 AB was also levied. A penalty of
Rs. 3,00,000/- was imposed on the Senior Manager (Taxation) under
Rule 26 of the Central Excise Rules, 2002.
12. Before the tribunal, it was contended by the assessee that it
purchased duty paid essences from various suppliers and simply mixed E
them by a process of manual 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 F
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 G
negligible ranging from 0.0001%to0.0019% per litre of various IMFL
products and such use had no relevance in the marketability ofJMFL
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
1
(2005J 9 sec 2s H
64 SUPREME COURT REPORTS [2017] I S.C.R.
A 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 ofl11dia & Ors v. Del/ti Cloth a11dGe11eral Mills Co. Limited
a11d Others'. Reference was also made to the order passed by the
Commissioner, Central Excise, Hyderabad who vide his .letter dated
22.09.2003 had held that the mixing of duty paid food flavours could not
B
result in emergence of a new product and the resultant essence which
comes into existence in the premises ofM/s. Shaw Wallace Co. (SWC)
does not answerthe test of marketability and as the facts 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
c on Delhi Cloth a11d Ge11erals Mills Co. Limited (supra), South Bi/tar
Sugar Mills Limited & A11r. Etc. v. UOI & A11r, Etc', and Tata
Chemicals Limited v. R.M. Desai, Inspector, Ce11tral Excise,
Mitltapur & Others, Moti Lami11ates Private Limited v. CCE (SC)',
Ki/pest J11dia Limited v. CCE (Tri.)', XI Telecom Limited v. Supdt.
Of Ce11tral Excise, Hyderabad(AP-DB)', and CCE v. Jagatjit
D
lmlustries (SC)'.
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 'mantJfacture' inasmuch as
E 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 was
invited to Board's Circular No. 247/81/96-CX dated 03.10.1996 clarifying
F that mixing duty paid paints to obtain paint in different shade would not
amount to manufacture. Further submission before the tribunal was
that flavours were either mixed or supplied in the form in which they
were purchased to the bottlers and cannot be marketed to anyone else
and no other manufacturer would buy these flavours, for they were
meant only for use in the product manufactured for the assessee.
G 2
1997 ELT (Jl99)SC
'1978 ELT (J 336)
'1995 (76) ELT 241
'1999 (108) ELT 786
'1999 (105) ELT 263
7
H 2002 (141) ELT 306
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S. 65
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
14. Commenting on the nexus between the royalty and the price A
of food flavours, it was canvassed before the tribunal that the royalty
and service charges were received by the asses see for use of the trade
mark and for marketing services provided by it to the contract bottling
units and even though flavours were supplied to independent
manufacturers, neither royalty nor service charges were received from
B
them and hence, the royalty bill had no nexus with the price of the food
flavoqr. 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 c
the fact that the royalty had no nexus with the price of the flavours.
Additionally, it was propounded that material was produced 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
D
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 Footls Lttl. (supra) was seriously criticised before the tribunal as
the ratio laid down was not applicable to the case at hand. Before the E
tribunal the learned counsel for the assessee had drawn attention that
the manufacturing agreement and usership agreement to highlight certain
aspects, to draw distinction and the adjudicating authority could not have
proceeded to allocate the entire receipts to the value of food flavours
alone without any basis. Criticising the invocation of the jurisdiction
F
under Section 11 A 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, G
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
28.04.200 I and alfthese 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
H
66 SUPREME COURT REPORTS [2017] I S.C.R.
A 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 tliat 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.
B
15. The stand and stance put forth by the assessee was
controverted by the revenue contending, inter alia. that the department
had raised the question of excisability of the product in question, when it
found the modification of stay order Nos. 838 and 839/2004 dated
I 0.08.2004 by the High Court. !twas also urged thatthere was an earlier
c proceeding in 1995 relating to food flavour and the case was adjudicated
by the then Commissioner, consequent upon which the assessee had
started paying duty and hence, excisablity of the product in question was
never an issue at all as the conduct of the assessee would reflect.
Reference was made to Entry 3302 in the Tariff and 3302.10 to highlight
D that the tariff itself recognizes mixtures of odoriferous substances 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 Bl10r l11d11stries Ltd v. CCE, Bombay',
E Union Carbide v. CCE', Moti Laminates Pvt. Ltd. & Ors v. CCE,
Altmedabad'°, Union Of India & Otlters v. Sonic E/ectrocltem (P)
Ltd. and anotlter" and CCE, Clrnmligarlt-11 v. Jagatjit Industries
Ltd.", it was canvassed that in the case at hand the food flavours
ma1fufactured by the assessee were marketable as evidenced from the
F assesse's admiss.ions 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
G tariff heading, still there was manufacture and the finished goods were
' ( 1989) 1.scc 602
' 1986 (24) ELT 169 (SC)
'" 11995) 3 sec 23
11 12002) 1 sec 435
H .. " (2002) 3 sec 614
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 67
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
having distinct, separate and identifiable function, with reference to the A
product, i.e., IMFL. The further stand was that mixing amounts to
manufacture as has been laid down in Gopal Zan/a Utlyog v. CCE,
New Delhi", O.K. Pllly (Int/ill) Limited v. CCE, New Delhi II'',
Nestle India Limited v. CCE, Chandigarlt II". T.N. Stale Transport
Corporation Limited v. CCE, Madurai", Kothari Products Limited
B
v. Government of Antlltra Pradesh", CCE, Guntur v. Crane Betel
Nut Powder Works", and Henna Export Corporation v. CCE 19 • The
revenue further contended that as per Section 4 of the Act, the assessable
value depends on the nature of transaction and eaclrprice 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 c
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. Afternoting down the submissions of the learned counsel for D
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 the demands raised and at that time,
E
the excisability of food flavours was not questioned by the assessee.
After the adjudication order dated 30.01.1995, the assessee was 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 and according to the audit, the F
royalty charges should be added to.the value ofthefood flavour sold to
the contract bottling units. At that juncture, the assessee gave justification
for non-inclusion of royalty charges. The tribunal, as the impugned order
would r~flect, has adverted in detail to the justification given by the
n 2005 (188) ELT 251 (SC) G
"2005 (180) ELT 291 (SC)
"2004 (169) ELT 315 (Tri-Del)
"' 2004 ( 166) ELT 433 (SC)
17
1998 (98) ELT 315 (AP)
'" 2005 (187) ELT 106 (Tri-Bang)
" 1993 (67) ELT 907 (Tribunal) H
68 SUPREME COURT REPORTS [2017] l S.C.R.
A 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
B
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 c;,~ ;wdit party had
erroneously mis-interpreted the concept of royalty as one which was
capable of being subdivided into and allocable to various manufacturing
c 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. lt 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
D
notiCe dated 11.04.2002 was issued. The tribunal thereafter
chronologically analysed the facts and order of remit and the de nova
order and perused the relevant agreements of the appellants with the
CB Us. On scrutiny of the agreements, the tribunal found that there
were two agreements, one is called the Manufacturing Agreement and
E the other is Usership Agreement. As per the terms and conditions of the
agreement, the products were to be manufactured by the 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
F
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
G (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
H
COMMISSIONER. CENTRAL EXCISE, BANGALORE v. MIS. 69
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
mark of the assessee. Referring to the usership agreement, the tribunal A
observed that the proprietor was the assessee and the user was GDPL
and according to the said agreement, at the request of the user, the
proprietor had agreed to permit the user to use the trade marks in respect
of the goods on the terms and conditions mentioned in the agreement.
The tribunal referred to para 12 of the agreement which postulates that
B
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 and the consideration shall be paid
by the user by the following month. It further observed that though the
word royalty has not been used in the agreement, it was clear that the
sum mentioned in para 12 of the agreement refers to royalty and the c
royalty was for the 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, primafacie, there does not appear to be any close nexus between
D
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 E
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 F
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 the Pepsi case, both the concentrate and the final
G
product are excisable which is not the case in the present appeals.
The final product here is lMFL for which royalty is paid. IMFL is
not subjected to Central Excise duty. In the· Pepsi case, the
concentrate is the most essential ingredient of Pepsi Cola whereas
in the present case, it is not so. There are certain brands oflMFL
H
70 SUPREME COURT REPORTS [2017] I S.C.R.
A which do not require any food flavour. In the Pepsi case, the
concentrates are sold only for the franchisees. Jn 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
B
the bottlers to purchase the concentrate from any other source
was there. No such express prohibition is there in the present
agreement. It was fu11her pointed out by the appellants that there
are instances wherein the appellants have paid an amount to bottlers
when the sale price oflMFL is much below the ex-distillery price.
c It is further seen that apart from food flavour, the appellants supplied
other blending materials to these CB Us. In these circumstances,
the entire royalty paid cannot be attributed to ihe food flavour
whose cost is only 0.45% according to the appellants. Further
we find that even in 200 I, at the. time of audit inspection, the
appellants have taken a firm stand not only regardingthe includibility
D
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 11.04.2002 and 08.03.2004 are
clearly time barred. For the above mentioned reasons, the royalty
E 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."
18. After so stating, the tribunal addressed the issue pertaining to
excisability of food flavours. It took note of the fact that there was
F purchased duty paid odoriferous compounds called essences and these
essences were mixed manually to obtain food flavour. In what proportion
and which essences were to be mixed has been kept a trade secret and
different brands of JMFL 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
G 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 ofa 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
H excisable product and, therefore, no duty was leviable on such compounds
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 71
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
during the course of manufacture of agarbati. It was urged before the A
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
B
units and it cannot be sold in the market as such. The tribunal posed a
question whether the process of mixing of essences results in a distinct
commodity, which was different from the original inputs. In that context,
it held thus:-
"We find that both the essences and the resultant product food
flavour fall under the same Tariff Heading. Since different c
proportion ofthe ingredients give different flavours to the resultant
product, we cannot say that a ingredients give different flavours
to the resultant product, we cannot say that a completely distinct
product emerges. The comparison with agarbathi mention in
Board's Circular is justified. Board's Circular dated 03.11. I 996 D
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 E
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 ai1icle F
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
G
conversion of plain plastic granules into coloured plastic granules
would not amount to manufacture.
In all these cases, the commercial identify 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
doe.s not bring into existence any new product. The essence H
72 SUPREME COURT REPORTS [2017] 1 S.C.R.
A remained essences only and because of the different proportion,
a distinct flavour is imparted to the resultant product. That cannot
make the process as manufacture."
19. To arrive at the said conclusion, it placed reliance on CCE
Che1111ai v. Fou11tai11 Consumer Appliances Limited'°, Tega India
B Limited v. CCE, Calcutta IF', State of Malum1slttra v. Malrnlaxmi
Stores", and CCE C/1e111uti v. Titanium Equipment & Anode
Manufacturing Co. Ltd."
20. We have heard Mr. Yashank Adhyaru, learned senior counsel
for the appellant and Ms. lndu Malhotra and Mr. S.K. Bagaria, learned
c 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 3302.1 O.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
D 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
E 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 Bltor Industries
Ltd. (supra), Jagatjit Industries Ltd. (supra) and Servo Med Industries
Pvt. Ltd. v. CCE". Learned senior counsel would contend that mixing
which is prefixed by simple mixing by the assessee is not acceptable
because the process of mixing can amount to manufacature as has been
F held in Gopal Zarda Utlyog (supra) and O.K. Play (India) Limited
(supra). As far as the royalty is concerned, it is urged by him that the
assessee had received royalty charges from buyers who are contract
bottling units and separate assessable value is computable for this type
of customers.
G 21. In the instant case, as the revenue would put forth, the royalty/
"' 2004 ( 171) ELT 329 (Tri-Chennai)
" (2004) 2 sec 727
" (2003) 1 sec 10
" 2002 (142) ELI' 162 (Tri-Chennai)
H " 2015 (6) SCALE 137
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 73
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
service charge received by the assessee under the various agreement A
with other manufacturers of!MFL fonns 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. lndu Malhotra, learned senior counsel
appearing for the assessee in their turn would contend that the food B
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
c
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 expression'manufacture'. Reliance has been placed on
circular no. 247/81/96-Cx. dated 03.10.1996 issued by CBEC, Ministry D
· of Finance, Government oflndia, which had clarified that the process of
tinting of base emulsion/enamel paint with strainers to obtain paint of·
different shades does not amount to 'manufacture' within the meaning
of Section 2(f) of the Act. It was their further subniission that tribunal
has rightly made the comparison between the process of tinting of base
E
emulsion/enamel paint with strainers with the process of mixing two or
more essences in certain preparation to arrive at the conclusion that no
process of manufacture was involved in the case of the assessee. It
was urged that it is well settled that mere mention of the goods in one of
the Entriesjn the schedule to the Central Excise Tariff would not render
them exigible to excise duty unless the twin tests of manufacture and F
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
transfonnation 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 Unio11 of 1111/ia v. Aftmetlabatl Electricity Co. Lttl & G
others.", Hintl11s1<111 Zi11c Ltcl. v. CCE, Jaipur'°, Del/ti Clotft &
Genera/Mills (supra) and Satnam Overseas Ltd. v. CCE, New Del/ti".
" (2003) 11 sec 129
" (2005) 2 sec 662
" (2015) 13 sec 166 H
74 SUPREME COURT REPORTS (2017] I S.C.R.
A 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. 08 , CCE, Meerut v. Goyal Gases (P) Ltd. 29 and Crane Betel Nut
Powder Works v. Commr. of Customs & Central Excise, Tirupat!ti' 0 •
B
Further stand of the respondent is that in respect of the Sub-Heading
3302.10 which covers food flavours, no artificial or extended meaning
has been given to the expression 'manufacture' by the legislature by
exercising the power under Section 2(f)(iii) and hence, it cannot be
regarded as manufacture. Heavy reliance is placed on the decisions in
c Shyam Oil Cake Ltd. v. CCE-1, New Delhi, Jaipur31 and CCE v.
S.R. Tissues (P) Ltd." 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
D
by simple manual mixing of odoriferous substances but by the assessee.
That apa1t, 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 o/Tlwne v. Vidyut Metallics Ltd. 33
As far as the conclusion arrived at by the tribunal that two show cause
E 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 11 A( I) of the
Act. As regards the Iimitation, learned senior counsel for the cespondent
have drawn inspiration from Cosmic Dye Chemical v. CCE, Bombay",
F
Padmini Products v. CCE, Banf(alore35 , Pushpam Pharmaceuticals
Co. v. CCE, Bombay" and Uniwortft Textiles Ltd. v. CCE, Raipur".
'" (2012) 2 sec 282
" (2000J 9 sec 571
"' (2007) 4 sec 155
G " (2005) 1 sec 264
" (2005)6 sec 310
" (2007) 8 sec 688
"(1995)6SCC 117
'' ( 1989) 4 sec 275
'" 1995 Supp (3) sec 462
H "(2013) 9 sec 753
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 75
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
As far as penalty imposed under Section l l AC is concerned, it is urged A
that there has been no fraud or collision or wilful mis-statement or
suppression of facts or contravention of provisions of the Act or the
Rules with the intention to evade payment of duty and, therefore, the
authorities could not have mechanically imposed the penalty and the
tribunal is absolutely justified in setting aside the same.
B
23. From the factual narration and the submissions advanced at
the Bar, we find three issues, namely, (i) whether .there,was manufacture',
(ii) whether there was nexus in royalty received 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
c
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 D
marketable commodity comes into existence. Various judgments have
been cited at the Barto 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 repro.duce a
passage from Union of India v. Delhi Cloth & Geneml Mills Co. E
Ltd." wherein the Constitution Bench quoted with approval from an
American judgment in Anlreuser-Buscft Brewing Assn. v. United
States", which is to the following effect:-
'" Manufacture' implies a change, but every change is not
manufacture and yet every change of an article is the result of F
treatment, labour and manipulation. But something more is
necessary and there must be transformation; a new and different
article must emerge having a distinctive name, character or use."
24. In Deputy Commissioner of Sales Tax (Law), Board of
Revenue (Taxes), Ernakulam v. Pio Food Packers'0 , a three-Judge G
Bench while interpreting Section 5-A(l )(a) of the Kerala General Sales
Tax Act, I 963 opined that:•
"AIR 1963 SC 791
" 207 us 55.6 ( 1908)
. ".1.980 Supp. sec I 74 H
76 SUPREME COURT REPORTS [2017] I S.C.R.
A "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
Tesult of one more processes through which the original commodity
B
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 5uffered, the original commodity
experiences a change. But it is only when the change, or a series
c 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
D
the manufacture of another. Although it has undergone a degree
of processing, it must be regarded as still retaining its original
identity."
25. After so stating, the Court posed the question: does the
processing oforiginal commodity brings into existence a commercially
E different and distinct article? In that context, the three-Judge Bench
analysed the ratio in previous decisions and stated thus:-
"Some of the cases where it was held by this Court that a different
commercial article held come into existence include Anwarkhan
Mahboob Co. v. State of Bombay"' (where raw tobacco was
F manufactured into bidi patti), A. Hqjee Abdul Shakoor and Co.
v. State of Madras'° (raw hides and skins constituted a different
commodity from dressed hides and skins with different physical
properties), State of Madras v. Sll"astik Tobacco Factory"' (raw
tobacco manufactured into chewing tobacco) and Ganesh
Trading Co., Karna/ v. State of Haiyana", (paddy dehusked
into rice). On the other side, cases where this Court has held that
" AIR I96I SC 2I3
" AIR I 964 SC I 729
" AIR I 966 SC 1000
H " 1I974)3 sec 620
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S. 77
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
although the original commodity has undergone a degree of A
processing it has not lost its original identity include Tzmgabhadra
Industries Ltd., Kurnool v. CTO", (where hydrogenated
groundnut oil was regarded as groundnut oil) and C.S. T, UP.,
Lucknow v. Harbi/as Rai and Sons" (where bristles p'lucked
from pigs, boiled, washed with soap and other chemicals and sorted
B
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 pe1tained to pineapple
fruit and canned pineapple slices, the Court held:-
"In the present case, there is no essential difference between. · c
pineapple fruit and the canned pineapple slices. The dealer and
the consumer regard both as pineapple. The only difference is
that the sliced pineapple is a presentation of fruit in a more
convenient from and by reason of being canned it is capable of
storage without spoiling. The additional sweetness in the canned
pineapple arises from the sugar added as a preservative. On a D
total impression, it seems to us, the pineapple slices must be held
to possess the same identity as the original pineapple fruit."
27. ln Collector of Customs, Bombay v. S.11. Kelker & Co.
41
Ltd. , the assessee had imported an organic chemical "abbalide" which
the assessee had classified under Chapter 29 and not as an odoriferous E
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
F
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. ln 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
" AIR 1961 SC 412
46
(1968)21STC17(SC)
., (2000l 10 sec 478 H
78 SUPREME COURT REPORTS [2017] l S.C.R.
A 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 would be classifiable under Heading 33.02.
B
11. In our opinion, the Tribunal was in error in construing clause
I (e) of Chapter 29 and in holding that the said product was
classifiable under Chapter 29. Clause I (e) of the Notes in Chapter
29 postulates that ifa product mentioned in sub-clauses (a), (b)
or (c) of clause I is dissolved in a solvent and the solutiqn constitutes
c a normal and necessary method of putting up these products
adopted solely for the reasons of safety or for transport then the
product would fall within Chapter 29 only ifthe solvent does not
renderthe product particularly suitable for specific use rather than
for general use. As per the certificate dated 19-9-1986 issued by
D 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
E
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 l(e) of the Notes
in Chapter 29, it may be held that the product imported by the
F 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 tq the decisions to highlight the concept of
G 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. Arilwnt Tiles and Marbles Pvt. Ltd.", the Court after referring to
CIT v. Mis N.C. Budlwraja and Company", opined thus:-
"(201 O) 2 sec 699
H " 1994 Supp (I) sec 280
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S. 79
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
"25. Applying the above tests laid down by this Court in Budharaja A
case to the facts of the present cases, we are of the view that
blocks converted into polished slabs and tiles after undergoing the
process indicated above certainly results in emergence of a new
and distinct commodity. The original block does not remain the
marble block, it becomes a slab or tile. In the circumstances, not
B
only is there manufacture but also an activity which is somethin·g
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 c
Tax Act, 1961.
26._Before concluding, we would like to make one observation. If
the contention of the Depa11ment is to be-accepted, namely, that
the activity undertaken by the respondents herein is not
manufacture, then, it would have serious revenue consequences.. D
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 E
assessees in all the cases would plead that they were not liable to
·pay excise duty, sales tax, etc. becat1Se the activity did not
constitute manufacture."
29. Atthisjuncture, it is obligatory to state that revenue has heavily
relied upon on Pepsi Footls Lttl. (supra). In the said case the Court had. F
found that the consideration payable as royalty was an inevitable
consequence of the sale of the concentrate and in such circlimsta)1ces
the price paid·for the concentrate was not the sole consideration paid by
the purchaser. The terms of agreement had obligated the bo.ttler to
purchase the concentrate from the asses see alone, use the assessees' G
trade mark on the bottled beverage and also.pay royalty for assessees'
trade mark at the specified percentage of the maximum retail price of
each bottle. In the given circumstances and· evidence available, it was
he Id 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.,
H
80 SUPREME COURT REPORTS [2017] 1 S.C.R.
A 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 Sliyam Oil
B 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 ofrendering
the specified commodity to be excisable. Section 2(f) defines
"manufacture" and by deeming effect, a process can amount to
c 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 22"<l November, 1998, but the said circular relates to compound
preparation durine the course of manufacture of agarbati. In the context
D of the said product, clarification was issued. It is noticeable that the
respondent had pleaded a different factual matrix which has been
accepted by the tribunal, albeit, without referring to specific. details.
General observation and broad brush approach need not reflect true
consideration paid for all transactions. A far greater and deeper scrutiny
of facts is required before forming any opinion, one way or the other. It
E would be wrong to be assumptuous without full factual matrix being
lucent and absolutely clear.
31. Recently, in The Additimwl Commissioner of Co111111ercial
Taxes, Bangalore v. Ayili Stone Industries Etc. Etc. ;o the Court was
dealing with the issue of grant of exemption on polished granite stone
F 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
-G 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 l 7(i) of Part S of the second
schedule, but if it is a tile, which comes into existence by different
H '"Civi1Appea1Nos.1983-2039of2016dated 18.10.2016
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS. 81
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
process, a new and dis.tine! commodity emerges and it has a 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 I 7(i) of Part S but without any elaboration on Entry 8.
Entry 8 carves out tiles as a different commodity. It uses the
B
words "other titles". A granite tile would come within the said
Entry if involvement of certain activities is established. To
elaborate, if a polished granite which is a slab and used on the
floor, it cannot be called a tile for the purpose ofcoming within the
ambit and sweep of Entry 8. Some other process has to be
undertaken. If tiles are manufactured or produced after c
undertaking some other activities, the position would be different.
A finding has to be arrived at by carrying out due enquiry and for
that purpose appropriate exercise has to be undertaken. 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 D
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
clai1l's 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 E
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 F
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 c9mmended us to the decision already referred
to hereinabove. As we notice, the tribunal on this score has also not G
scrutinized the dates appropriately;but has returned a cryptic finding.
34. In view of the aforesaid analysis, we are constrained to remit
the matter to the tribunal for reconsideration of the aforesaid aspects on
the basis of observations made hereinabove and the law in the field.
However, we may proceed to state that we have not expressed anything H
82 SUPREME COURT REPORTS [2017] l S.C.R.
A on the merits of the case including the imposition of penalty and interest.
We expect the tribunal shall advert to each and every facet in detail so
that this Cou1t can appropriately appreciate the controversy.
35. Resultantly, the appeal is allowed and the matter is remitted to
the tribunal for fresh determination. There shall be no order as to costs.
B Kalpana K. Tripathy Appeal allowed.
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