Custom, Excise & Service Tax Tribunal
M/S. Mcdowell & Company Ltd vs The Commissioner Of Central Excise, ... on 14 November, 2017
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL, SOUTH ZONAL BENCH BANGALORE E/590 & 591/2004; E/1051/2004 & E/563/2005 [Arising out of Orders-in-Original No.2/2004 dated 27.2.2004 (De novo); No.6/2004 dated 12.7.2004; and 6/2005 dated 29.4.2005 all passed by the Commissioner of Central Excise, Bangalore.] M/s. McDowell & Company Ltd. Food Flavour Division Appellant(s) Versus The Commissioner of Central Excise, Bangalore-III Respondent(s)
Appearance:
Mr. G. Shivadass, Advocate For the Appellant Mr. P.R.V. Ramanan, Special Counsel For the Respondent Date of Hearing: 03.10.2017 Date of Decision: 14.11.2017 CORAM:
Honble Mr. Justice (Dr.) Satish Chandra, President Honble Mr. V. Padmanabhan, Member (Technical) FINAL ORDER NO. 22787-22790 /2017 Per: V. Padmanabhan:
These appeals cover the periods as per the table below and are being considered as per the remand directions of the Honble Supreme Court of India vide their decision in Civil appeal no. 5003/2006 dated 14.01.2017. APPEAL NOS.
E/590-591/2004 E/1051/2004 E/563/2005 PERIOD April 1997 to March 2001 April 2001 to February 2002 March 2002 to December 2003 January 2004 to March 2004 DUTY demanded Rs. 35,45,85,860/-
Rs. 29,65,92,000/-
Rs. 4,34,12,000/-
TOTAL Rs. 69,45,89,860 INTEREST As applicable PENALTY Equivalent penalty and Rs. 3.00.000/- personal penalty Equivalent penalty Equivalent penalty IMPUGNED ORDER No. 2/2004 dated 27.02.2004/10.03.2004 No. 6/04 dated 14.07.2004 No. 6/2005 dated 29.04.2005
2. The Appellant is engaged in the manufacture of Indian Made Foreign Liquor (IMFL) and is a registered owner of several well-known brands such as McDowells. During the impugned periods, the Appellant also prepared food flavours which went into the manufacture of IMFL. The present appeal pertains only to said food flavours.
3. The appellant has its own distillery units for the manufacture of IMFL at various places throughout the country and obtained the license from the State Governments for manufacture of IMFL. In addition, the appellant, to cater to the increased demand also entered into agreements with various Contract Bottling Units (CBUs) and Independent Bottling Units (IBU) for manufacture and sale of IMFL. These units are having their own bottling plants and licenses to manufacture IMFL.
4. The contractual arrangement between the Appellant and CBU is explained below:
> THE CONTRACTUAL ARRANGEMENTS
1. The Appellant had entered into two agreements with CBUs which are as follows:
A. Manufacturing Agreement
2. The Manufacturing Agreement guided the manufacture of IMFL by CBUs for the Appellant on a principal to principal basis.
3. According to the agreement, the CBUs for manufacturing IMFL, 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 suppliers approved by the Appellant.
4. The CBUs sold IMFL either to the Appellants or to the customers identified by the Appellants or the Government owned corporations.
5. The considerations specified in the manufacturing agreement are as follows:
i) Sale price: The price at which the IMFL is sold by the CBUs. This Sale Price is determined by the Appellant and State Excise Duty is paid on this sale price.
ii) Ex-Distillery Price (EDP): The sole consideration payable by Appellant to CBUs for manufacture and sale of IMFL. The EDP consists of costs of raw materials, packaging, service charges and incentive payment.
B. Usership Agreement
6. Apart from the Manufacturing Agreement, the Appellant also entered into an Usership Agreement in terms of which the CBU was permitted to use the Appellants Trade Marks / Brand Name in respect of the IMFL manufactured and sold by the user.
7. For use of the Appellants trademark, the CBU was required to pay certain consideration to the Appellant which was to be mutually decided between the parties.
5. The appellant was of the view that the food flavours were prepared by them by mixing different odoriferous substances purchased by them from different suppliers . They claimed that this process did not amount to manufacture. However, later they started discharging the excise duty on such food flavours . The dispute also arose about the valuation of such food flavours. The department is of the view that the amounts received by way of royalty by the appellant was required to be added to the consideration received for food flavours. Accordingly, by including such royalty amounts, differential duty of Central Excise stands demanded by the adjudicating authority vide the impugned orders listed above. It may also be recorded that the dispute had come before this Tribunal originally when the case was remanded for re-adjudication. The orders passed by the adjudicating authority in the de novo proceedings was again challenged by the appellant before the Tribunal and the Tribunal decided the matter in favour of the appellants in the case reported as 2006 (199) ELT 368 (Tri-Bang.). The above order of the Tribunal was challenged by Revenue before the Honble Supreme Court who remanded the matter to this Tribunal for a de novo decision in the matter on the following main grounds:
a) That the assessee had pleaded a different factual matrix which has been accepted by the Tribunal without referring to specific details;
b) That the exact nature of the process undertaken and how mixing is undertaken is not discernible and the same remains ambiguous and inconclusive;
c) That the contention of the assessee that about 26% of the sale of odiferous substances were brought from third party and sold without modification are questions of fact and the same shall be validated;
d) That the Tribunal has answered the questions in favour of the assessee without going into the background check since different flavours may have different processes;
e) That in so far as the aspect of limitation is concerned, the Tribunal has not scrutinized the dates appropriately but has returned a cryptic finding.
6. With the above background, we have heard Shri G. Shivadass, advocate Ld. Counsel for the appellant and Shri P.R.V. Ramanan, Special Counsel for the Revenue.
7. Shri G. Shivadass, learned counsel for the appellant, he justified the earlier order dated 17.3.2006 passed by the Tribunal. He submits that by following the said order, another appeal in the case of Shaw Wallace Co. Ltd. was decided by the Tribunal (CCE vs. Shaw Wallace Co. Ltd.: 2008-TIOL-884-CESTAT-BANG.). The said order, according to him, attained finality as no appeal has been filed. Hence, he prayed that the impugned order may be set aside.
7.1 It is the submission of the learned counsel that the food flavours were purchased by CBU from appelant, which were duty paid and physical mixing was done by the appellant in its factory premises. The appellant has incurred a lot of expenses for marketing, advertising, administration, etc., for the final product, which is under the Trade Mark of the appellant. It is his submission that food flavour is used in very low quantities from 0.0001 to 0.0019 per litre. He submits that, thus, the flavour content in the IMFL is negligible. He also submits that there are various instances where food flavours were sold and used in IMFL but no royalty was received by them so there is no question to pay any royalty by the appellant. According to the learned counsel, process of making the food flavour is not a manufacturing activity, since no independent product has come out and no independent labelling has been done. He submits that neither independent manufacturing nor any royalty has been paid on these food flavours.
7.2 Regarding the valuation, the learned counsel submits that no royalty was paid on the food flavour. Royalty represent the selling price minus Ex-distillery price, which is not the case in the instant case. According to the learned counsel, various expenditure were incurred like marketing, administrative, advertisement, etc., for the final products, so there is no nexus between the royalty and the food flavour. In all cases, where food flavour was supplied, royalty was not received by the appellant. Lastly, the learned counsel submits that the impugned order was rightly passed by the Tribunal.
8. On the other hand, Shri P.R.V. Ramanan, Special Counsel for the department, with the help of written submission, submits that the manufacturing activity is involved in the process of making food flavours. There is nexus between the food flavours supplied and the royalty received by them. According to the learned counsel, for manufacturing activity, an article must be capable of being bought and sold and known in the market as such. He submits that by adding the food flavour, the value of IMFL was enhanced and new product has come into existence, which amounts to manufacturing activity. By adding the food flavour as an input, a new product or character has emerged in the final product.
8.1 Regarding the valuation, the learned counsel for the Department submits that royalties are received from the Contract Bottling Units (CBUs) and Independent Bottling Units (IBUs) manufacturing IMFL bearing the brands of the appellant. In such cases, both Manufacturing and User-ship Agreements exist. According to the learned Special Counsel, the appellant has granted to other manufacturers the license to use their Trade Mark under User-ship Agreements and tight control is maintained by the appellant. Appellant has invariably received royalty/service charges from Contract Bottling Units under a composite and indivisible agreement. No separate agreements exist for manufacturers not buying food flavour. Department is, therefore, of the view that there is nexus between the supply of food flavour and royalty received in all such cases and that the same constitutes additional consideration and should form part of assessable value of food flavours. Finally, the learned Special Counsel submits that the impugned order passed by Commissioner may be upheld.
9. To counter it, learned counsel for the appellant submits that there no royalty is payable on the food flavour, so the duty cannot be demanded on the food flavour. He also argued that the demand was time barred.
10. We heard the learned counsels of both sides and perused the material on record.
11. First of all on limitation aspect, it appears from the record that show-cause notices were issued for the demands under consideration. Collection of service charges/royalty charges was not at all brought to the notice of the Department. None of the declarations under the then Rule 173C or 173CC of extant Central Excise Rules, 1944 contained any disclosure about receipt of such charges. Further, even when asked for, appellant delayed furnishing of details of such charges and hence, invoking of extended period is justified in respect of first show-cause notice. The second show-cause notice is within the normal period of limitation, thus, this issue is decided against the appellant.
12. After hearing both the sides and on perusal of the record, we note that the issue before us is an intricate mixture of the question whether manufacture is involved in the preparation of food flavours by the appellant as well as valuation of the same for payment of excise duty. It goes without saying that if the process of making food flavours does not amount to manufacture then there is no question of payment of excise duty. In such a scenario, the dispute on valuation becomes irrelevant. In view of the above, we take up the question of manufacture at the outset.
13. It has been contended by the appellant that the activity undertaken to prepare food flavours does not amount to manufacture. It is submitted by the Appellant that they prepared the food flavour by merely manually mixing the odoriferous substances in certain proportions. There is no process of chemical reaction between the food flavours as received and mixed. Such mixing cannot be said to constitute a manufacturing activity under Section 2(f) of the Central Excise Act, 1994 to attract levy of excise duty under Section 3 of Central Excise Act, 1994. Furthermore, the resultant food flavours are not chemically different from the ingredients and therefore, no new or commercially distinct product comes out of such mixing.
The Appellant submits that the very issue regarding excisability of food flavours that are physically mixed, came up for consideration in the case of Shaw Wallace Company Limited, another leading manufacturer of IMFL, wherein the Hyderabad Commissioner vide Order-in-Original No. 45/2003 dated 22.09.2003, after examining the process of preparation of food flavours, held that the mere mixing of essences does not amount to manufacture (referred to in para 12 of the Supreme Courts order). The said order was upheld by this Honble Tribunal in CCE, Hyderabad vs. Shaw Wallace Company Limited, 2008-TIOL-884-CESTAT-BANG by following Tribunal decision dated 17.3.2006 in the case of the Appellant. The said order of the Tribunal in Shaw Wallace case has been accepted by the department and not been challenged by the department to the Supreme Court. It is submitted that the department cannot consider the same activity of physically mixing of the flavour to be an activity of manufacture for one assessee and not an activity of manufacture another assessee.
14. We have considered the submission and also the decision of the Tribunal in the Shaw Wallace Company Ltd. (supra). We find that it is no more good law because the decision in that case was based on this Tribunals decision in the appellants case which, upon further appeal by Revenue, stands set aside by the Apex Court resulting in the matter before us. Hence, it is necessary for us to examine, ab initio, whether the process undertaken can be considered as a process of manufacture .
15. The Apex Court, while remanding the matter has referred to several case laws on the subject of manufacture including the following.
1. Union of India vs. Delhi Cloth & General Mills Co. Ltd.
[AIR 1963 SC 791] ;
2. Deputy Commissioner of Sales Tax (Law) Board of Revenue (Taxes), Ernakulam vs. Pio Food [ 207 US 556 (1908)];
3. Collector of Customs, Bombay vs. S H Kelker & Co. Ltd.
[2000 10 SCC 478];
4. Income Tax Officer, Udaipur vs. Arihant Tiles & Marbles P Ltd. [2010 2 SCC 699]
5. Shyam Oil Cake Ltd. vs CCE-I New Delhi [2005 1 SCC 264] Finally the Apex Court has observed as under :-
32. 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.
16. Hence, it is the directive of the Apex Court that this Tribunal should ascertain the actual process involved and undertaken in the preparation of flavours. After going through the appeal records, we find that the details of the process undertaken by the appellant has not been discussed by the adjudicating authority. The impugned orders almost entirely discussed the issue of valuation i.e. whether the royalty amounts are to be added to the value of food flavours for payment of excise duty. The learned counsel for the appellant, during the course of argument, has submitted a flow chart of the activities carried out by the appellant and tried to explain the processes involved. The flow chart is:
17. The learned special counsel for the Revenue has submitted as follows on the issue of manufacture.
(i) To attract the definition of manufacture three criteria are required to be met, namely,
(a) The article must be capable of being bought and sold in the market and to be known as such;
(b) The article must arise as a result of conversion of inputs and such conversion is in the nature of transformation not merely a change;
(c) The article should be goods in the sense that it should be moveable. [This aspect is not in dispute]
(ii) In the instant case, subject Food flavours are marketable as they are being sold to other independent bottlers who manufacture their own brands; besides, these flavours are being used in the brand of Herbetsons Ltd.; further these are custom - made and for use in a particular brand of IMFL.
(iii) The food flavours/essences are mixed together and a new flavour/essence emerges in the process. Inputs lose their identity and are never the same after such mixing with other flavours. Trade name / descriptions of resultant products are different from the trade names / descriptions of inputs. Further, inputs cannot be used in the original form in which it is received by appellant. It has to undergo a process of mixing with other essences to be fit to be used in the particular brand of IMFL.
(iv) Mixing of ingredients has been found to be amounting to manufacture in several cases [eg. [2005(188)ELT(251)SC] - Gopal Zadra; 2005(187)ELT(106) Trib- Crane Betel Nut]
(v) Description of inputs in input invoices is different from the description of final products. Final products are known by a different name in the market. There is value addition. Inputs are not capable/are not used in the manufacture of IMFL, whereas the final products are capable of being used in a particular IMFL. Thus, the process of manufacture undertaken by Appellant has resulted in a product different in character and use vis-`-vis the inputs. Appellant had not contested the issue of manufacture at the time of adjudication of their case in 1995. During hearing and in the reply to the two Show cause notices dated 2004 the issue of manufacture was not contested. In any case, for the period covered in the impugned order in originals, relief can be given to the appellants.
18. After considering the submissions made by both sides, we are of the view that the issue of manufacture is fundamental to the present dispute. In the absence of detailed explanation of the processes involved, we are unable to entirely appreciate the same. Moreover, we find that the details were not considered by the adjudicating authority and in the absence of detailed discussions by the adjudicating authority on the processes involved, we are unable to take a firm view in the matter. In the absence of the details of the processes employed by the appellant on record, we are not in a position to give due consideration to all the factors and come to a judicious conclusion keeping in view the various decisions referred to by the Apex Court . In this scenario, we deem it necessary to remand the matter to the adjudicating authority to consider in detail the process of manufacture after ascertaining the same and decide the question whether it is a process of manufacture, in the light of various case laws discussed above.
19. In the event a view is taken that the processes amount to manufacture, the adjudicating authority will re-examine the issue of valuation of such food flavour for payment of duty. For this purpose he will consider both the Manufacture and Usership Agreements together and examine if there is nexus between the royalty and the piece of food flavours. He will also keep in view various judicial pronouncements on the subject including the Apex Court judgement in the case of Pepsi Foods vs CCE [2003 (158) ELT 5552(SC)]. Additional evidence may be admitted as per law.
20 In view of the above discussions, impugned orders are set aside and matter remanded to the adjudicating authority.
[Order Pronounced in the open court on 14.11.2017 ]
(Justice Dr. Satish Chandra) (V. Padmanabhan)
President Member (Technical)
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