Commissioner Central Excise vs M/S.United Spirits Ltd.& Anr

The respondent is a manufacturer of Indian Made Foreign Liquor (IMFL) and is a registered owner of several known brands of IMFL. 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.

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.

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 on 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 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.

10. We have narrated the aforesaid factual scenario as substantially put forth by the respondent. At this 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 11A of the Act was invoked by the adjudicating authority and it was propose to re-determine the assessable value of food flavours by including the royalty received by the assessee. The differential duty demanded for the period April, 1997 to March, 2009 was 35,45,865,860/-. Penalties were proposed on the unit and on the Senior Manager (Taxation) and interest was also levied. The adjudicating authority confirmed the demand vide his order dated 29.08.2002. The respondent approached the Customs, Excise and Service Tax Appellate Tribunal (for short, “tribunal”) which in its order dated 08.07.2003 remanded the matter to the learned Commissioner as certain invoices of sales were produced before the tribunal which were not considered by the concerned Commissioner. While remitting the matter, the tribunal observed that as the matter was being remitted, the issue of limitation and such other issues were kept open for the adjudicator to re- determine and pass an appropriate order granting the opportunity to the parties for effective hearing. The issue of penalty was also kept open.

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% to 0.0019% per litre of various IMFL products and such use had no relevance in the marketability of IMFL 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 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 of India & Ors v. Delhi Cloth and General Mills Co. Limited and Others[2]. 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 of M/s. Shaw Wallace Co. (SWC) does not answer the 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 and Generals Mills Co. Limited (supra), South Bihar Sugar Mills Limited & Anr. Etc. v. UOI & Anr, Etc[3], and Tata Chemicals Limited v. R.M. Desai, Inspector, Central Excise, Mithapur & Others, Moti Laminates Private Limited v. CCE (SC)[4], Kilpest India Limited v. CCE (Tri.)[5], XI Telecom Limited v. Supdt. Of Central Excise, Hyderabad(AP-DB)[6], and CCE v. Jagatjit Industries (SC)[7].

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 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 Court 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.