Madhya Pradesh High Court
Customs Central Excise And Service Tax vs Ace Caldreys Ltd. on 5 February, 2026
Author: Vivek Rusia
Bench: Vivek Rusia
NEUTRAL CITATION NO. 2026:MPHC-JBP:11166
1 CEA-6-2016
IN THE HIGH COURT OF MADHYA PRADESH
AT JABALPUR
BEFORE
HON'BLE SHRI JUSTICE VIVEK RUSIA
&
HON'BLE SHRI JUSTICE PRADEEP MITTAL
ON THE 5 th OF FEBRUARY, 2026
CENTRAL EXCISE APPEAL No. 6 of 2016
CUSTOMS CENTRAL EXCISE AND SERVICE TAX
Versus
ACE CALDREYS LTD.
Appearance:
Shri Gajendra S. Thakur - Advocate for the appellant.
None present for the respondent.
ORDER
Per: Justice Vivek Rusia The appellant/Commissioner, Customs, Central Excise and Services Tax has filed the present appeal under sub-section (1) of Section 35-G of the Central Excise Act, 1944, against the final order passed in ST/A/52833- 52834/2015-CU(DB) on 03.07.2015 (Annexure A/2) by the Customs, Central Excise and Appellate Tribunal, New Delhi.
Facts of the case, in short, are as follows:-
2. M/s. ACE Caldrey, Ltd., Katni Refractory Bricks, Katni/respondent was engaged in the manufacture of branded Aluminum Fire Bricks and other refractory materials from its factory at Katni. The respondent had granted "Franchise" for the manufacture of goods of specifications, design and quality described by them to some other small manufacturing units located at Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166
2 CEA-6-2016 Katni and nearby areas, under the Notarised Agreements executed in the month of August 1994. The pattern of awarding the work of manufacturing of Fire Bricks of specifications, design and quality provided by the respondent and dispatched to its customer, was considered as a Franchise Agreement between them, as defined under Section 65(48) of the Finance Act, 1994.
3. By way of the Finance Act, 2005, a new definition of "Franchise" was introduced w.e.f., 16.06.2005. A show cause notice No.17/COMMR/ST/JBP/2010 dated 22.02.2010 (Annexure A/3) under Section 73 of the Finance Act, 1994 was issued to the respondent demanding the service tax amounting to Rs.4,65,42,505/- (Rupees Four Crores Sixty Five Lakhs Forty Two Thousand Five Hundred and Five Only) collected for the franchise service along with interest and imposition of penalty under Sections 75, 76, 77 and 78 of the Finance Act, 1994. The respondent appeared and denied the existence of any Franchise Agreement with the small manufacturers.
4. The assessee was called upon to provide the details of the incremental cost received by him from various small manufacturing units. The assessee denied any payment of incremental cost by the vendors. Rather, the assessee paid them the purchase value. After considering all the materials, legal provisions and submissions, the Commissioner, Customs, Central Excise and Service Tax passed an Order-In-Original dated 26.08.2010 confirming the demand of Rs.4,65,42,505/- along with interest and penalty.
Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 3 CEA-6-2016
5. Being aggrieved by the aforesaid order, the respondent/assessee preferred an appeal before the Customs, Central Excise and Service Tax Appellate Tribunal (in short "CESTAT"). Vide order dated 03.07.2015, the CESTAT allowed the appeal and set aside the impugned Order-In-Original. Thereafter, the Commissioner filed this appeal under Section 35-G(1). This appeal came to be admitted on the following substantial questions of law on 25.09.2017:-
"(A) Whether on the basis of facts and circumstances of the case the activity conducted by the respondent/assessee is taxable under the category of 'Franchise Service' especially when the respondent/assessee has received a sizable amount under the name and guise of "Incremental Cost/Opportunity Cost" against the activities defined in Section 65(47) of Finance Act, 1994?
(B) Whether the agreement has been misread by the Tribunal inasmuch as the agreement reads that the party No.1/assessee has agreed to grant franchisee to partyNo.2/manufacturer on specific condition that they shall manufacture the firebreaks on the specifications, design and quality as directed by party no.1/assessee as specified and shall dispatch the firebreaks only to such customers of partyNo.1/assessee as specified in their purchase orders, whereas the finding recorded by the Tribunal that the goods were in fact sold by the manufacturer to the assessee?"
6. We have heard learned counsel for the parties.
7. There is no dispute about the execution of the agreement by the respondent/assessee for getting the fire bricks manufactured with its own specifications, design and quality from small manufacturing units. The terms and conditions of agreement are reproduced below:-
"This agreement is entered into between M/s. Associated Cement Companies, Bombay Company incorporated under the Indian Companies Act, having its head office at 121 Maharshi Carve Road, 'Cement House', Bombay and a unit called Katni Refractory Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 4 CEA-6-2016 Works at Katni (MP) (hereinafter called party no. 1 and M/s. Katni Tiles Works, Katni (M.P.), a registered partnership firm, through its partner Shri Jashwant Singh Gugalia, Katni, hereinafter called the party no.2 witnesseth :
Whereas the party no.1 is the highest manufacturer and supplier of firebricks and other refractory products;
And where the party No.2 M/s. Katni Tile Works, Katni has agreed to manufacture firebricks on the specifications, design and quality as specified by party No.1 in their purchase order has made a request for getting franchise;
And whereas the party no.1 has agreed to grant franchise to the party no. 2 on specified condition that they shall manufacture the firebricks on the specification, design and quality as directed by party no.1 and shall dispatch the firebrick only to such customers of party no.1 has specified in their purchase orders;
And whereas the party no.2 has agreed to supply the firebricks on the terms and conditions of party no. 1 and to the customers of party no.1 alone on the price directed by party no.1 and shall reimburse the incremental cost to party no.1 as mentioned in the purchase orders/Annexure by way of payment of opportunity cost;"
8. Party No.1 is a respondent/assessee, and by way of agreement, Party No. 2 did agree to manufacture firebricks with specifications, design and quality as specified by the party No.1 in its purchase orders. The party No.2 agreed to manufacture the firebricks on the given specifications and quantity and would be dispatched only to the customer of party No.1 as specified in Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 5 CEA-6-2016 their purchase order. It further provides that party No.2 supplies fire bricks to party No.1 and to a customer of party No.1 alone at the price fixed by party No.1, which shall be reimbursed by party No.1 by way of payment of opportunity cost. Party number two was not given any authority to manufacture and sell directly in the market or to the customers the product of party number one.
9. The term "Franchise" is defined under Section 65(47) of the Finance Act, 1994, which is reproduced below:-
(i) franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with the Franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol, as the case may be, is involved;
(ii) the Franchisor provides concepts of business operation to the franchisee, including know-how, method of operation, managerial expertise, marketing technique or training and standards of quality control except passing on the ownership of all know-how to the franchisee;
(iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and
(iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person.
10. The Finance Act, 2005 has substituted the definition for a special term "Franchise" w.e.f., 16.06.2005, which is reproduced below:-
"'Franchise' is an agreement by which the franchisee is granted Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 6 CEA-6-2016 representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved."
11. According to which, 'Franchise' is an agreement, by which the franchisee is granted a representational right to sell or manufacture goods of a trademark, service mark, trade name or logo. The franchisee is an individual or a Company that buys the right to operate a business using the branding product and proven business model of an established company that is the franchisor. The franchisee pays upfront initial franchise fees and royalties, usually a percentage of gross sales of the franchisor, subject to following the specific rules on how to run a business with the exact ingredients, quality, specifications etc.
12. In the present case, the respondent did not give any right to manufacture its brand to the small unit and sell it directly to the customer. The franchisees were given only specifications, quantity of firebricks, or were directly supplied to the assessee or to the customer at a given rate mentioned in the purchase order. Therefore, there is no Authority to manufacture bricks under the brand name of the assessee and the liberty to sell in the open market. Thus, it has been wrongly treated as a "Franchise Agreement".
13. The Tribunal has rightly examined the issue involved in this case, and it found that the agreement entered into by the respondent with the manufacturer was not in the nature of a "Franchise Agreement" and the appellant did not provide franchise services to the manufacturer. Paras-9 and Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 7 CEA-6-2016 10 are reproduced below:-
9. We have seen some of the invoices issued by the appellant as well as the manufacturers. We find that the manufacturers have issued invoices where the goods were shown to be sold to the appellant and the consignee is the person to whom the goods were consigned as per the direction of the appellant. The appellant in turn sent the invoice to the consignee- customer in which the total value shown was the aggregate of the value of the goods plus various taxes shown in the invoice of the manufacturer raised on the appellant. From this it is evident that as far as the manufacturer is concerned the goods were sold to the appellant and were consigned only to those persons whom the appellant directed the manufacturer to consign them to. The manufacturer did not have any right to sell these goods directly to any customer in the market. The goods were manufactured and consigned by these manufacturers as per the purchase orders placed by the appellant in which it indicated the name of the consignee but there was no direct contact between the manufacturers and the consignee either with regard to placing of orders or with regard to payment for the goods. The payment for the goods by the consignee- customers was made to the appellant and appellant, in effect, paid to the manufacturers the amount agreed upon for manufacturing those goods. It was only a financial mechanism that because the manufacturer's invoices raised on the appellant showed the value of the goods at which the appellant sold the goods to the customers so as to pay due excise duty and sales tax thereon but as the manufacturer was entitled to receive only the amount agreed upon between the appellant and the manufacturer for manufacture of goods, the manufacturer also issued a credit note of an amount which represented the difference between the value of the invoice and the amount which the manufacturer was entitled to receive for manufacturing those goods as a result of which the appellant was enabled to pay to the manufacturer only that am which was agreed Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 8 CEA-6-2016 upon between the appellant and the manufacturer for manufacture of those goods while the transactions as per invoices also got squared off. Thus, the actual transactions are also in conformity with the agreement and clearly support the analysis/inference in the preceding para.
10. We find that CESTAT in the case of M/s Skol Breweries Ltd, (supra) involving similar circumstances has held as under :
"8. Having considered the rival submissions, we find that as per the agreement between the parties, the risk of manufacture and sale lies with the appellant in respect of the Foster Brand beer got manufactured by it from FIPL. It is evident from the contract that FIPL is only responsible for bottling, packing and dispatch as per the specification, terms, formula etc. as laid down by the appellant. Further FIPL is bound to charge the price from the notified Identer of the appellant as fixed by the appellant. Only for the risks associated with the manufacturing process fastened on FIPL (CBU), it cannot be said that as FIPL is responsible for proper quality, quantity and timely production, they are providing Franchise Service and/or IPR Service. Further taking notice of the definitions which are reproduced below:-
"47. "Franchise" means an agreement by which Franchisee is granted representational right to sell or manufacture good or to provide service or undertake any process identified with franchisor, whether or not a trademark, service mark, trade name or logo or any such of symbol, as the case may be, is involved.
(48) "Franchisor" means any person who enters into franchise with a franchisee and includes any associate of franchisor or a person designed by franchisor to enter into Signature Not Verified Signed by: SHRUTI JHA Signing time: 13-02- 2026 13:53:44 NEUTRAL CITATION NO. 2026:MPHC-JBP:11166 9 CEA-6-2016 franchise on this behalf and the terms 'franchisee' shall be construed accordingly."
From the aforementioned definitions, it is crystal clear that in the facts and circumstances, no services have been provided by the appellant to FIPL under the classification of 'Franchise Service' and 'IPR service'.
Although the said judgment clearly supports the case of the appellant, we hesitate to draw support therefrom as we are unable to discern any guiding analysis/principle/ratio therein. However, as our independent analysis in the preceding paras unequivocally brings out, the agreements entered into by the appellant with the manufacturers were not in the nature of franchise agreements, and the appellant did not provide franchise service to the manufacturer.
14. All the conditions of the franchise agreements are not being fulfilled in this case. We are in full agreement with the view taken by the learned Tribunal and do not find any ground to interfere with the impugned order. Hence, the question of law is answered negatively against the appellant.
15. Hence, the Central Excise Appeal is dismissed accordingly.
(VIVEK RUSIA) (PRADEEP MITTAL)
JUDGE JUDGE
Shruti
Signature Not Verified
Signed by: SHRUTI JHA
Signing time: 13-02-
2026 13:53:44