# Union of India v. Delhi Cloth & General Mills Co. Ltd

- **Citation:** [2017] 1 S.C.R. 54
- **Court:** Supreme Court of India
- **Decided:** 2017-01-05
- **Case number:** Civil Appeal No. 5003 of2006
- **Bench:** Dipak Misra, N. V. Ramana
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-v-delhi-cloth-general-mills-co-ltd-31681
- **Pages:** 29

## Headnote

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
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 -
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
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
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.
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
sec 478 - relied on.
54
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S.
UNITED SPIRITS LTD. & ANR.
Anheuser-Busch Brewing Assn. v. United States 207 US
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.
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
without any modification or process. These are all questions of
fact which must be first authenticated and the actual factual position
validated. The tribunal has answered the question in favour of
the respondent without the background check as to the actual
process involved and undertaken. Different flavours may have
different processes. [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
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,
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.
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]
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SUPREME COURT REPORTS
[20 I 7] I S.C.R.
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.
[

## Text

_Characters 0–39,850 of 67,053. This is a partial read: ask again with offset=39850 for what follows._

[2017] I S.C.R. 54
A
COMMISSIONER CENTRAL EXCISE, BANGALORE
B
c
D
E
F
G
H
v.
MIS. UNITED SPIRITS LTD. & ANR.
(Civil Appeal No. 5003 of2006)
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
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 -
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
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
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.
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
sec 478 - relied on.
54
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S.
UNITED SPIRITS LTD. & ANR.
Anheuser-Busch Brewing Assn. v. United States 207 US
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.
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
without any modification or process. These are all questions of
fact which must be first authenticated and the actual factual position
validated. The tribunal has answered the question in favour of
the respondent without the background check as to the actual
process involved and undertaken. Different flavours may have
different processes. [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
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,
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.
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]
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SUPREME COURT REPORTS
[20 I 7] I S.C.R.
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,
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
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
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,
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
(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
(67) ELT 907 (Tribunal); CCE Chennai '" Fountain
Consu111er Appliances Li111ited 2004 (171) ELT 329 (TriChcnnai); Tega India Li111ited '" CCE, Ca/cuff a II (2004)
2 SCC 727; State of Maharashtra '" Mahalax111i Stores
(2003) 1 sec 70 : [2002] 4 Suppl. SCR 292; CCE
Chennai
v.
Titanium
Equipment
&
Anode'
COMMISSIONER CEN'.fRAL EXCISE, BANGALORE v. M/S.
UNITED SPIRITS LTD. & ANR.
Manufacturing Co. Ltd. 2002 (142) ELT 162 (TriC/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
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
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]
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.
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
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
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
57
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SUPREME COURT REPORTS
[2017]1 S.C.R.
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[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
E
J2005J 2 SCR 391
referred to
Para 22
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
[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
2016 (10) SCALE 85
referred to
Para 30
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5003 of
2006.
A
B
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
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.
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
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
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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 such
price is known as Ex-Distillery Price (EDP), which includes all costs,
charges and expenses incurred by the liquor manufacturers for
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
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
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
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.
··
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
4. The respondent, however, asserts that such rates/prices
negotiated with outside buyers were either more or less than the EDP
with certain consequences, namely, (a) if the selling price to outside
customers is more than EDP, the difference was paid by the liquor
manufacturers to the respondent by calling it under different nomenclature
like royalty or service charge; (b) if the selling price to outside customers
was less than EDP, the difference/shortfall is borne by the respondent
and paid 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
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
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
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
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
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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.
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
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.
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10. We have narrated the aforesaid factual scenario as
substantially put forth by the respondent. At th is juncture, it is necessary
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
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
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
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
nut considered by the concerned Commissioner. While remitting the
matter, the tribunal observed that as the matter was being remitted, the
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.
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
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
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
appropriate order, the concerned authority did not respond to the same
and thereafter, the assessee informed the department that till a final
decision was taken, the duty would be paid under protest. It is further
contended that food flavours were odoriferous compounds and the
quantum of food flavours used in IMFL wherever used were very
negligible ranging from 0.0001%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
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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
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
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
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
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
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.
2 1997 ELT (Jl99)SC
'1978 ELT (J 336)
'1995 (76) ELT 241
'1999 (108) ELT 786
'1999 (105) ELT 263
7 2002 (141) ELT 306
COMMISSIONER CENTRAL EXCISE, BANGALORE v. M/S.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
14. Commenting on the nexus between the royalty and the price
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
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
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
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
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
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,
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
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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.
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
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
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',
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
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
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.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
having distinct, separate and identifiable function, with reference to the
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
v. Government of Antlltra Pradesh", CCE, Guntur v. Crane Betel
Nut Powder Works", and Henna Export Corporation v. CCE19• 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
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
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 nonpayment of central excise duty on the food flavours produced by them
and the Commissioner confirmed the demands raised and at that time,
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
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)
"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)
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assessee before the adjudicating authority which was basically founded
on the conditions set out in the agreement that royalty was payable by
the manufacture for use of the brand name and that the royalty had no
relevance with the goods or various inputs that go into the manufacture
of these goods. It was also set forth that the brands of the company
had their own value and the royalty receivable from the manufacturer
was primarily on account of company's brands of finished goods, namely,
IMFL viz. No. 1 Brandy, No. 1 Whisky, Diplomat Whisky, Premium
Whisky, Dry Gin, etc. It was also contended that 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
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
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
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 assesseeappellant 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
COMMISSIONER. CENTRAL EXCISE, BANGALORE v. MIS.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
mark of the assessee. Referring to the usership agreement, the tribunal
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
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
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
royalty and the food flavour.
17. Be it noted, the assessee before the tribunal highlighted that
there were three types of transactions, namely, receipt of royalty and
also supply of food flavours; royalty was received though there was no
supply of food flavours; and royalty was not received even though there
was supply of food flavours. Accepting the said submission, the tribunal
held thus:-
"The appellants took us through the various documents and showed
us that there is practically no difference in price in respect of
sales to independent buyers and the prices at which food flavours
are sold to CBUs. This fact clinches the issue. It is very clear
that there is no nexus between the royalty and the food flavours.
The adjudicating authority has relied on the Apex Court's decision
in the Pepsi case. In our view, the ratio of the above decision
should not have been blindly applied as done by the adjudicating
authority. In the Pepsi case, both the concentrate and the final
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
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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
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.
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
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
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
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
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
excisable product and, therefore, no duty was leviable on such compounds
COMMISSIONER CENTRAL EXCISE, BANGALORE v. MIS.
UNITED SPIRITS LTD. & ANR. [DIPAK MISRA, J.]
during the course of manufacture of agarbati. It was urged before the
tribunal that the fact situation in the case of assessee was similar, as has
been clarified in the Board's circular in respect of agarbati.