CX - Board Circular cannot be equated with an exemption notification - To hold product as excisable, actual sale of goods is not necessary: SC
By TIOL News Service
NEW DELHI, NOV 09, 2017: THE assessee, Karnataka Soaps and Detergents Ltd, is engaged in manufacture of various excisable goods like soaps, detergents and agarbathi perfumes of various brands.
These odoriferous compounds falling under Chapter 3302.90 which are in liquid form are packed in drums/cans and stock transferred to their unit in Mysore where they are used in manufacture of agarbathis. The assessee paid duty till April 2000 on such stock transfers and thereafter stopped payment of duty by citing Board's Circular No. 495/61/99-CX.3 dated 22.11.1999.
The Circular reads –
"Subject: Excisability of Odoriferous compound/Agarbathi mix arising during the course of manufacture of Agarbathi – Regarding.
It has been brought to the notice of the Board that field formations are demanding duty on the compound preparation arising during the course of manufacture of Agarbathi classifying them under Heading 3302.90 of the Central Excise Tariff as odoriferous compound.
2. The matter has been examined in the Board. The Agarbathi manufacturing process involves simple mixing of a few aromatic chemicals with a base oil in a container in liquid form which is mixed directly with the dough or applied on Agarbathi in the required proportion and such dough, mixed with the aromatic compound; is used for rolling of Agarbathi. The Agarbathi manufacturers normally carry out the whole process in a continuous manner in the course of manufacture of Agarbathi.
3. Moreover, each brand of Agarbathi has a different fragrance which is on account of the different formulation used by the manufacturers which is specific to that particular brand. Preparation of such odoriferous compound, substances applied on the Agarbathi varies from one Agarbathi manufacturer to another. Such preparations are not sold by them in the market so as to keep their respective trade secrets. As the constituents, their proportions and formula of preparation are kept as secret, such compounds cannot be considered to be marketable in the commercial parlance.
4. Accordingly, it is clarified that the odoriferous compound or Agarbathi dough mixed with odoriferous substances,not being capable of being bought and sold in the market in the normal course of trade, is not an excisable product and no duty is therefore, leviable on such compound arising during the course of manufacture of Agarbathi."
Nonetheless, based on investigations, the department concluded that these odoriferous substances are marketable and that the Board's clarification is inapplicable to the assessee.
SCNs were issued demanding CE duty for the period 2001-2002 to 2006-2007 and the same were confirmed with interest and mandatory penalty.
The Commissioner (Appeals) upheld the demands but set aside the penalty levied u/s 11AC on the ground that the department was already aware of these transactions.
In further challenge, the Tribunal by relying on the Board's Circular dated 22.11.1999 set aside the demand of duty on perfumery compounds where Revenue did not adduce any evidence of their marketability. However, the CE duty demand was confirmed to the extent of sale of 'Venkateswara' brand perfumery to Tibetan Handicrafts Centre along with equivalent penalty.
We reported this order as 2011-TIOL-520-CESTAT-BANG.
Revenue took the matter to the Supreme Court and the matter was decided in their favour recently.
In appeal, the main grounds taken were -
++ The respondent does not manufacture agarbathi as per the general practice which has been contemplated under the circular dated 22.11.1999. The respondent manufactures perfumery compounds in its Bangalore unit and then transports them to its Mysore unit where it is finally applied to raw agarbathis to complete the manufacturing process of agarbathis. In this process of manufacturing, the perfumery compounds are capable of being sold in the open market.
++ CESTAT erroneously devised a test of actual sale of the odoriferous substance to hold that in the absence of actual sale of such substance, no excise duty could be levied on the same.
The respondent assessee submitted that the perfumery compound manufactured and the stock transferred to their Mysore unit for use in particular brands of agarbathis is non-excisable as per the Board circular dated 22.11.1999. Further, the perfumery compound manufactured as such, is not marketed by the respondent and, therefore, does not attract excise duty.
The Supreme Court extracted the Board Circular dated 22.11.1999 and inter alia observed –
Whether the Board's Circular No.495/61/99-CX.3, dated 22.11.1999 exempts payment of excise duty on perfumery compound manufactured by the respondent?
++ The circular clarifies that odoriferous substances are not marketable because these products are not sold by manufacturers in order to protect their trade secret. The circular by way of illustration also stated that the whole process of manufacturing agarbathi, that is preparation of the odoriferous compounds and their mixing with the dough or agarbathi is normally carried out in a continuous manner since the whole process is continuous. These odoriferous substances do not remain with the manufacturer to be sold in the market.
++ It is clear from the records that respondent does not manufacture agarbathi as per general practice which has been contemplated under the circular dated 22.11.1999. The respondent manufactured perfumery compound in its Bangalore unit and then transported it to Mysore where it is finally applied to raw agarbathis to complete the manufacturing process of agarbathi. In this process of manufacturing, the perfumery compound is capable of being sold in the open market. It is not in dispute that appellant has sold some part of the compound to M/s. Tibetan Handicrafts Centre, Bylkuppe, Mysore District.
++ It is evident that the clarification is applicable to the product which comes into existence, at intermediate stage in the form of paste/dough in a continuous process of manufacture and not to the manufacture of odoriferous perfume, which is in liquid form and transported/stored in barrels/drums. The said circular cannot be made applicable to cases beyond its scope . The circular cannot be equated with that of an exemption notification but is required to be read within the limited scope of its context in which it was issued. The circular did not give exemption to products which are otherwise dutiable. The circular clarifying certain doubts cannot give effect of an exemption notification. Therefore, it cannot be said that the agarbathi compound manufactured by the respondent is covered under the aforesaid circular.
Whether actual marketing of the perfumery compound is necessary for the levy of excise duty.
++ It is settled that to hold the product as excisable/dutiable, actual marketing/sale of goods is not necessary . What is required to be proved is that the capability of marketing the product. Marketability is decisive test for dutiability. Whether the goods are, in fact, marketed or not is of no relevance. It is also not necessary that goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, makes no difference so long as they are available for purchasers.
++ In the instant case, the assessee manufactures agarbathi perfumes (odoriferous compound) by mixing inputs, aromatic chemicals, perfume oil and acids according to the pre-determined formula. It is prepared by the respondents in their Bangalore factory and then transferred to their Mysore factory where finally it is applied on raw agarbathis. In this process of manufacturing the perfumery compounds are capable of being sold in the open market. The odoriferous compound has got a shelf life and capable of being stored/transported/sold and bought by agarbathi industries.
++ The assessee had sold certain quantity of perfumery compound to M/s. Tibetan Handicrafts Centre Bylkuppe, Mysore District . Therefore, we are of the view that it is an excisable product falling under Chapter Sub-Heading 3302.90. The counter view taken by the CESTAT cannot be justified.
The CESTAT order dated 11.11.2010 was set aside and the Revenue appeals were allowed.
(See 2017-TIOL-389-SC-CX-LB )
