Customs, Excise and Gold Tribunal - Bangalore
Mcdowell And Company Limited And Mr. ... vs The Commissioner Of Central Excise on 9 January, 2006
Equivalent citations: 2006(106)ECC53, 2006ECR53(TRI.-BANGALORE), 2006(200)ELT549(TRI-BANG)
ORDER S.L. Peeran, Member (J)
1. All these stay applications raise a common question of law and facts and hence they are taken up together for disposal as per law. The Tribunal, by Stay Order Nos. 838 & 839/2004 dated 10.08.2004, in Appeals E/590 & 591/2004 had considered the stay applications for waiver of pre-deposit of duty of Rs. 35.45 crores and equivalent penalty on the appellant and penalty of Rs. 3 lakhs on the Senior Manager and after due consideration, had directed by the Stay Order to pre-deposit a sum of Rs. 25 crores. In the meanwhile, the Revenue had taken a decision in favour of the assessee in M/s. Shaw Wallace & Company Limited's case and the Commissioner of Central Excise, Hyderabad, had dropped the proceedings by OIO No. 45/2003 dated 22.09.2003. Therefore, the appellants moved an application for recall of the interim Stay Order directing them to pre-deposit Rs. 25 crores. They had taken additional grounds which had not been urged by the lower authorities in E/590 & 591/2004 inasmuch as they had contended that the mixing of flavours and adding essences to it which were duty paid and clearing the same to their franchisee holders does not amount to manufacture and, therefore, the Revenue's contention that they had collected Royalty, Service and Commission charges and not added the same on the value of the food flavours supplied to their franchisees was not dutiable and not to be added. The Tribunal, after due consideration of the misc. applications in Appeal Nos. E/590, 591 and in E/1051/2004, allowed their prayer for modification of the stay order including the misc. application filed for raising additional grounds by misc. Order No. 1008 to 1010/2004 and Stay Order No. 1217/2004 dated 13.12.2004 and directed the appeals to be listed for out of turn hearing on 14.03.2005. The Revenue was aggrieved with this order and filed a Writ Petition before the Single member judge of the Hon'ble High Court of Karnataka. The Single Member Bench of the High Court of Karnataka set aside the order in WP Nos. 7230/2005 and 8603 - 8608/2005 and remanded the case to the Tribunal for de novo consideration with a direction more particularly to re-consider the matter in the light of the statutory requirements under the proviso to Section 35F of the Act.
The assessees were aggrieved with the Single Member's order and filed a Writ appeal before the Division bench. The Division Bench gave directions to the Tribunal to re-consider the stay applications afresh by taking into consideration the statutory provisions, the law laid down by the Supreme Court by the Division Bench and also in the light of the observations made by the Single Member Bench.
2. The learned Senior Counsel appearing for the appellants, at the first instance, pointed out that when the appellants have established prima facie nature of the case in their favour and demonstrated that the appeal is required to be allowed in the light of the grounds taken by them, then the well settled law laid down by the Supreme Court and the High Courts is that full dispensation from pre-deposit is required to be granted by the Tribunal. He also pointed out from the plethora of judgments of the Apex Court, High Court and Tribunal that 'undue hardship' referred to in Section 35F would be to consider the hardship that would be faced by the assessee in pre-depositing the amount due even in case where they do not have a strong case on merits. The Apex Court, in the case of Vijay Packaging System Ltd. v. CC & CE, A.P. granted the waiver of pre-deposit and directed the appeal to be heard out of turn. The Division bench of the Karnataka High Court, in the case of ITC Ltd. v. CCE & C ILR 2000 KAR 25, examined all the judgments of various High Courts pertaining to pre-deposit and concluded that the view expressed by the Single Judge in Sunshine Tube Pvt. Ltd. v. CC and Anr. is not correct and affirmed the view expressed in Auma (India) Ltd. v. UOI WP No. 30161/1998, . After detailed examination of various judgments, the Division Bench held that prima facie case on merits would mean that the case is covered fully in favour of the assessee by a binding precedent like that of the judgment of the Supreme Court, jurisdictional High Court or a Special Bench of the Tribunal. It held that inspite of prima facie case, if the assessee is directed to pre-deposit duty and penalty, then it would cause "undue hardship" to the assessee. It also noted that absence of the financial hardship in such a case would be no ground to decline the dispensation of pre-deposit under the proviso to Section 35F of the Act. It has been held that the power to dispense with such deposit is conferred under the authorities and if it is not exercised under such circumstances, then this Court will require it to be so exercised.
3. After taking us through the plethora of judgments on the aspect pertaining to pre-deposit, rendered by the Apex Court, High Courts and Tribunals, the learned Senior Counsel proceeded to argue on the additional grounds raised by them in the appeal. It was pointed out that the misc. application for raising additional grounds in the first three appeals was allowed by the Tribunal along with the stay applications and that has not been challenged by the Revenue before the Single Member Bench of the High court. The Single Member Bench, while remanding the matter, has not set aside this portion of the tribunal's order on the misc. application. Therefore, they are entitled to raise the ground pertaining to the excisability of the product in question. He referred to the order passed by the Commissioner of Central Excise, Hyderabad, in the case of Shaw Wallace wherein in an identical situation, the Revenue has applied proceedings holding that the mixing of duty paid food flavours along with essences does not amount to manufacture and, therefore, the royalty, service and commission charges received by the assessee cannot be added to the sale of the food flavours to the franchisees. The learned Counsel referred to a large number of judgments on the aspect pertaining to the "manufacture". He particularly drew our attention to Chapter note in Chapter 33 wherein note 4 clearly refers to the products under heading Nos. 33.03, 33.04 and 33.05 and lays down that conversion of powder into tablets, labelling or relabelling of containers intended for consumers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the products marketable to the consumer, shall be considered as "manufacture". While no such section note has been incorporated for products under 33.02 in which the mixing of odoriferous substances are classified. He referred to Board's Circulars under this Tariff which clearly held that mixing of perfumes in preparation of odoriferous compounds, substances applied on the Agarbathi could not amount to manufacture. This clarification has been given by circular No. 495/61/99-CX 3 dated 22.11.1999. He further referred to the Board's Circular No. 247/81/96-CX dated 3.10.1996 pertaining to the activity of tinting of base white paint carried out by the companies in their tinting centres or the sale depots and saying that that does not amount to a process of manufacture. He submits that this Board's circulars are clearly applicable to the facts of the case and, therefore, the appellants' activity of mixing of various odoriferous food flavours with essences does not amount to a process of manufacture and, therefore, the question of their adding the royalty, service and commission charges to these flavours which are sold to their franchisees does not arise.
4. The learned Senior Counsel pointed out to the SCN and the allegations made thereunder and the detailed replies given by them. It is contended in the first place that:
(a) the remand order of the Tribunal (Final Order Nos. 907 & 908/2003 dated 08.07.2003) to re-consider their prayer has not been complied with by the Commissioner and, therefore, the impugned orders are not speaking orders and are required to be set aside. He took us through the grounds made out by them in the reply to the SCN. It was pointed out that a specific stand has been taken by them that the duty calculation has not been properly made by the Revenue. At best considering even the revenue's case, the total duty liability would be only Rs. 38 lakhs. In this context he has produced all the invoices to show that the royalty, service and commission charges were towards the fixing of trade mark Mc Dowell by the manufacturers of Indian Made Foreign Liquor (IMFL) i.e. the Franchise holders. It has been pointed out that the food flavours are also sold to other units who are not franchise and the price has remained the same. In such a situation, the royalty, service and commission charges are received not for food flavours but it was only for the bottling of liquor by the franchises on using the trade name of the appellant. Therefore, the same was not required to be added in the assessable value.
(b) It was clearly pointed out that the duty calculation has not been properly made by the department. The extent of food flavour used in IMFL is very negligent ranging from 0.0001% to 0.0019% per litre for various IMFL products. He referred to the Agreements entered into by the appellant by their franchisee and pointed out that the royalty, commission and services charges were received for use of trade name by the franchise holders and not for sale of the food flavours. There was no intrinsic value to be added to the food flavours as alleged in the Show Cause Noticed The SCN alleged that the assessee had been paying duty only on the cost of raw materials used for the food flavours and not on its intrinsic value. It had alleged that royalty, service and commission charges etc. paid by their users/tie-up units has nexus with the assessable value of the food flavours cleared by the assessee. He pointed out that there was no such nexus in terms of the invoices produced by them and even if it is there, it was only to an extent of 0.0001% to 0.0019% per litre and the duty liability would be only Rs. 38 lakhs and not to the extent of Rs. 69 crores as confirmed in the impugned orders.
(c) He pointed out that these submissions have not been attended to by the Commissioner and the orders are totally non-speaking orders in the light of the documents produced and the submissions raised and also in the light of several judgments of the Apex Court, High Court and tribunal.
(d) The learned Senior Counsel pointed out that the assessee, on their own, had addressed letters to the Superintendent on 28.04.2001 contending that the royalty charges was not required to be added to the value of the food flavours in the assessable value of the goods cleared during the period 01.04.1998 to 24.02.2001. It is submitted by the learned Senior Counsel that the whole proceedings emerged as a result of audit objection and the Superintendent of Central Excise, by his letter dated 03.05.2001 to the Deputy Commissioner of Central Excise, Kengeri Division, after due examination opined that there was no documentary evidence to prove that the royalty received towards IMFL is attributable to the food flavours cleared from their factory and that no action for demanding duty can be taken from their office. The learned Senior counsel pointed out from the record that the department was fully aware of all these correspondences including the Superintendent's letter to the DC not to initiate the proceedings and, therefore, the question of invoking larger period in all the three demands does not arise. He submits that the demands and SCN dated 11.04.2002 for the period April 1997 to March 2001 for Rs. 35 crores would be clearly barred by time. So also, he pointed that the SCN dated 08.03.2004 for demands for April 2001 to February 2002 would be barred by time except for a small period of six months. The demands are to an extent of Rs. 33.36 crores. The learned senior Counsel submits that if they are directed to pre-deposit the entire amounts, then severe financial difficulties would arise and, therefore, the appellants should be given full waiver as they have a very strong case of succeeding in the matter. In view of (i) the mixing of food flavours does not amount to manufacture; (ii) the royalty, service and commission charges were received for using the trade mark of IMFL and it has no connection with the sale of the food flavours to the franchisees ; (iii) that the blending of flavours sold to the franchises in terms of the Agreement comprises of many items and the content of food flavours is only to the extent of 0.0001% to 0.0019% per litre, the duty appropriation is not correct. If duty appropriation is correctly done, the total duty liability would be only Rs 38 lakhs and not beyond.; (iv) that the demands are barred by time.
5. The learned Senior Counsel also relied on the judgment of the Allahabad High Court rendered in the case of Kanpur Cigarettes Ltd. v. CCE, Delhi which deals with the aspect pertaining to grant of waiver of pre-deposit both on prima facie nature of the case as well as on undue hardship) which would be caused to the assessee if they are directed to deposit the amount.
6. The Senior Counsel for Revenue, Shri Ashok Haranahalli, relied on the Apex Court judgment rendered in the case of Pepsi Foods Ltd. v. CCE, Chandigarh in which the Apex Court has held that the royalty amount collected for sale of concentrate is required to be added. The learned Senior Counsel for the appellants distinguished this judgment on the ground that the concentrate is utilized for manufacture of excisable goods while in the present case the food flavours are not utilized for manufacture of excisable goods. The IMFL is a State subject and no excise duty is charged and, therefore, the judgment of Pepsi Foods Ltd. is clearly distinguishable.
7. The learned Senior Counsel Shri Ashok Haranahalli, appearing for the Revenue contended that the additional grounds raised by them can be considered only at the time of final hearing and they cannot be considered at the prima facie stage as these have not been raised by the assessee even at the time of hearing of the stay application for the first time, by which they were directed to pre-deposit R. 25 crores. He pointed out that in 1995, the Commissioner had passed an order holding that the mixing of food flavours amounts to manufacture. They had not raised this issue thereafter and had paid the duty. They had not disclosed to the department about the collection of royalty, service and commissioner charges and the same having intrinsic connection with the sale of food flavours and, therefore, the same was required to be added to the assessable value of food flavours. He pointed out that price is not the sole consideration between the appellant and the independent bottlers. They had under valued the price of food flavours and had received the extra consideration in the nomenclature of royalty, service and commission charges and, therefore, the same were required to be added to the assessable value of the food flavours. He pointed out that food flavour is excisable and the mixing of several other essences would bring into existence new goods and merely because it does not carry a different name and kept as a trade secret that by itself cannot be held that it is not a new product. He pointed out that the internal correspondence of Superintendent to the Deputy Commissioner, relied by the assessee, cannot be taken into consideration. There was suppression of facts and, therefore, larger period was invokable. He pointed out that the appellants do not have a financial hardship and the revenue interest is also required to safeguarded in the light of the observations made by the Single Judge of the Karnataka High Court.
8. After detailed consideration and several queries raised by the bench on the prima facie nature of the case in the light of the documents and on the aspect that the Commissioner had not considered the various remand directions given by the Tribunal; that the contentions raised pertaining to the duty liability being only Rs. 38 lakhs and that the correspondence was in existence from 2001 onwards and the SCN has not been raised within time, and in view of these circumstances, a prima facie view can be taken that orders are required to be set aside therefore the bench directed both sides to arrive at some figure for pre-deposit to satisfy the requirement of Section 35F of the Act, Both sides, after consultation and after consulting the Commissioner of Central Excise, who was present in the court, it was agreed upon by both sides that the assessee should pre-deposit within one month a sum of Rs. 7 crores and on such deposit, the appeal is required to be heard out of turn on 06.03.2006. The Bench accepted the offer made by both sides and has passed the following order.
The assessee shall pre-deposit a sum of Rs. 7.00.00.000/- (Rupees seven crores only) within one month as agreed by the appellants & the Revenue and in consultation with the Commissioner of Central Excise, Bangalore. The appellant shall report compliance on 20th February, 2006. The appeal is to be heard out of turn on such deposit on 06th March, 2006. Registry not to list any other matter except this matter for final hearing on 06.03.2006. This bench has not expressed any opinion on the final result of the case except to point out to the learned Senior counsel appearing for the Revenue that there are several infirmities in the order passed by the Commissioner. If the tribunal is called upon to express its prima facie findings at this stage in the light of the documents, case law and pleas raised, then it may prejudice the interest of the revenue. Therefore, keeping in view the direction given by the Single Member Bench of the Karnataka High Court while remand proceedings and to safeguard the interest of revenue in the matter, the offer given by the appellants and the Senior Counsel for the Revenue in consultation with the Commissioner is accepted; and the above order has been passed for due compliance.
Ordered accordingly.
(Operative portion of this Order was pronounced in open court on conclusion of hearing)