Central Excise - Manufacture, Limitation - Tribunal's Order Cryptic - Supreme Court Remands Matter
By TIOL News Service
NEW DELHI, JAN 06, 2017: HISTORY of the case : In this Revenue appeal before the Supreme Court, the respondent-assessee are manufacturers of Indian Made Foreign liquor. They also manufacture food flavours which are used in liquor manufacture. The genesis of the dispute was a valuation case against the assessee for including the royalty received from the IMFL manufacturers for the food flavours supplied by the assessee. An amount of over Rs 35 Crores was confirmed along with attendant penalties for the period 1997-2001. The Tribunal had in 2003 remanded the case to the Commissioner. In 2004 the Commissioner in de novo order held that royalty is includable in the assessable value and confirmed the earlier demands.
On their second trip to the Tribunal they were asked to pre-deposit an amount of Rs. 25 Crores [2004-TIOL-1095-CESTAT-BANG]. The company approached the Tribunal for a modification of the order raising a new ground that the goods in question were not at all excisable and once it is decided that they are not excisable the question of valuation becomes redundant. The Tribunal allowed the additional grounds and waived the entire pre-deposit [2005-TIOL-324-CESTAT-BANG]. Aggrieved by the waiver of pre-deposit, revenue took the matter in writ to the Karnataka High Court. The High Court was not happy with the Tribunal's order and remanded the case to the Tribunal to re-consider the matter [2005-TIOL-72-HC-KAR-CX]. The assessee approached the division Bench of the High Court against this single judge's order. The division bench confirmed the order of the single bench and remanded the case to the Tribunal. The Tribunal ordered pre-deposit of Rs 7 Crores and on compliance of which the appeal was decided [2006-TIOL-524-CESTAT-BANG]. In the mean time demands to the tune of Rs. 34 Crores had been confirmed by the Commissioner for subsequent periods.
Though the very excisability of the product has been agitated before the Tribunal, to be fair to the adjudicating authority, the Tribunal first took up the question of inclusion of royalty in the assessable value.
The Tribunal observed that
++ Royalty is paid for use of the trade mark.
++ There is no indication whatsoever to infer that royalty is paid for supply of food flavour.
++ Food flavour is one of the blending materials.
++ It is not the sole blending material.
++ There does not appear to be any close nexus between the royalty and food flavour.
++ There are three types of transactions
1. There is receipt of royalty and also supply of food flavours.
2. Royalty received though there is no supply of food flavours.
3. Royalty is not received though food flavours are supplied.
++ The above facts indicate that royalty is not relatable to the supply of food flavours and not integrally connected to the sale of the food flavours.
++ In the Pepsi case on which the revenue relied strongly, the concentrate and the final product were both excisable which is not the case here.
++ The first two Show Cause Notices are time barred as there was no suppression and the assessee had always taken a clear stand.
Therefore, the Tribunal took a view that there was no nexus between royalty and the price of food flavours and so the royalty is not includable in the assessable value.
The Tribunal next considered the important question of excisability of the food flavours and observed
++ The process of mixing two or more essences in certain proportions does not bring in to existence any new product.
++ There is no manufacturing process.
++ The food flavour prepared by mixing two or more essences is not excisable. Even if the resultant product is marketable, it cannot be held to be excisable.
++ Just because a product is marketable it cannot be held to be excisable.
Tribunal finally summed up its order as
(i) There is no nexus between the royalty and the price of the food flavour supplied by the appellants to CBUs.
(ii) The process of mixing essences to obtain food flavour in certain proportions does not amount to manufacture.
(iii) The first two Show Cause Notices are clearly time barred, as there is no evidence of suppression of facts.
Therefore, the entire demand has been set aside and as the demands fail the penalties also followed suit.
The aggrieved Revenue is before the Supreme Court.
The Supreme Court noted that there are three issues to be decided:
Whether -
1. there was 'manufacture'
2. there was nexus in royalty received and the price paid for the food flavour sold, and
3. two show cause notices have been correctly determined to be barred by limitation by the tribunal.
First Issue - manufacture : The submission of 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 marketable commodity comes into existence. The said submission is founded on the principle that by such process of mixing change takes place and no separate and marketable commodity comes into existence. Various judgments have been cited at the Bar to 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.
The Supreme Court quoted extensively from several judgements to explain the concept of manufacture:
'Manufacture' implies a change, but every change is not manufacture and yet every change of an article is the result of 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.
Commonly manufacture is the end result of one more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place.
Tribunal's Order ambiguous and inconclusive : The Supreme Court observed, "In the case at hand, as we find from the order of the tribunal the exact nature of the process undertaking and how mixing is undertaken and the process involved is not discernible and has not been ascertained and commented. It remains ambiguous and inconclusive. The respondent claims that about 26% of the sales of odoriferous substances were brought from third party and sold without any modification or process. These are all questions of fact which must be first authenticated and the actual factual position validated. The tribunal has answered the question in favour of the respondent without the background check as to the actual process involved and undertaken. Different flavours may have different processes."
Till this issue is decided, the question of valuation will not obviously arise.
The third issue - limitation. The Supreme Court observed, "As we notice, the tribunal on this score has also not scrutinized the dates appropriately, but has returned a cryptic finding."
Matter Remanded. The Supreme Court remitted the matter to the tribunal for reconsideration of the above aspects on the basis of observations made by the Court and the law in the field. However, the Court added that it has not expressed anything on the merits of the case including the imposition of penalty and interest. The Court expected the tribunal to advert to each and every facet in detail so that the Supreme Court can appropriately appreciate the controversy.
And so the case is back in the Tribunal.
PS: When we reported the Tribunal Order in May 2006, a concerned Netizen commented on our message board, "This case has a chequered history and ultimately the Tribunal decided it in favour of the assessee. The revenue will sure take it to the next level i.e. Hon'ble Supreme Court irrespective of the strength of its arguments on the excisability and valuation of the final products and the obvious reason for this is the huge revenue involved and its recurring effect in future. It may take years before the Apex court delivers its judgment but it is one case which is worth tracking for the sheer drama involved in its history.”
(See 2017-TIOL-06-SC-CX)
