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11. After the remit, the adjudicating authority passed an order on 27.02.2004. It placed reliance on the decision in Pepsi Foods Ltd. v. Collector of Central Excise, Chandigarh[1], and held that the royalty from the various units under the manufacturing agreement deserve to be included in the assessable value of the food flavour supplied to them and accordingly confirmed the demand under proviso to Section 11A of the Act. Equal amount of penalty was imposed under Section 11 AC and interest under Section 11AB was also levied. A penalty of Rs.

14. Commenting on the nexus between the royalty and the price of food flavours, it was canvassed before the tribunal that the royalty and service charges were received by the assessee for use of the trade mark and for marketing services provided by it to the contract bottling units and even though flavours were supplied to independent manufacturers, neither royalty nor service charges were received from them and hence, the royalty bill had no nexus with the price of the food flavour. That apart, it was argued that the assessee sold food flavours to Contract Bottling Units who employed them to manufacture IMFL products or to different other brand owners to whom they were paying royalty and service charges. However, the other brand owners paid only the price of flavours to the assessee and this would be indicative of the fact that the royalty had no nexus with the price of the flavours. Additionally, it was propounded that material was purchased before the concerned Commissioner showing that assessee had sold some kind of flavour to certain distilleries with whom there was no bottling agreement nor there was any receipt of royalty or service charges because the contract unit had not applied the brand of the assessee nor secured services of the assessee for marketing and in such a case, the Commissioner could not have asserted that the agreement was for sale of flavour and receipt of royalty and service charges. Reliance on the Pepsi Foods Ltd. (supra) was seriously criticised before the tribunal as the ratio laid down was not applicable to the case at hand. Before the tribunal the learned counsel for the assessee had drawn attention that the manufacturing agreement and usership agreement to highlight certain aspects, to draw distinction and the adjudicating authority could not have proceeded to allocate the entire receipts to the value of food flavours alone without any basis. Criticising the invocation of the jurisdiction under Section 11A of the Act, it was contended that there was no suppression on the part of the appellants as the factum of payment of royalty was known to the department and it was clear from the note of the Range Officer to the Deputy Commissioner which clearly laid down that the amount paid towards royalty was only for use of the brand name for sale of flavour and prior to the issue of show cause notice, there was an audit inspection on 28.03.2001 and the assessee was asked to clarify various points raised which had been clarified vide letter dated 28.04.2001 and all these aspects had not been taken into consideration while invoking the jurisdiction. It was also put forth that as royalty had no nexus with the price of food flavours, the assessee was not expected to declare it and, therefore, it could not be treated as suppression. That apart, at the time of audit objection even the Range Superintendent was of the view that there was no nexus between the royalty received by the appellant and the price of food flavours sold by the assessee and, therefore, in the obtaining circumstances, the notices were clearly barred by time.

17. Be it noted, the assessee before the tribunal highlighted that there were three types of transactions, namely, receipt of royalty and also supply of food flavours; royalty was received though there was no supply of food flavours; and royalty was not received even though there was supply of food flavours. Accepting the said submission, the tribunal held thus:-

“The appellants took us through the various documents and showed us that there is practically no difference in price in respect of sales to independent buyers and the prices at which food flavours are sold to CBUs. This fact clinches the issue. It is very clear that there is no nexus between the royalty and the food flavours. The adjudicating authority has relied on the Apex Court’s decision in the Pepsi case. In our view, the ratio of the above decision should not have been blindly applied as done by the adjudicating authority. In the Pepsi case, both the concentrate and the final product are excisable which is not the case in the present appeals. The final product here is IMFL for which royalty is paid. IMFL is not subjected to Central Excise duty. In the Pepsi case, the concentrate is the most essential ingredient of Pepsi Cola whereas in the present case, it is not so. There are certain brands of IMFL which do not require any food flavour. In the Pepsi case, the concentrates are sold only for the franchisees. In the instant case, the appellants have sold food flavours to independent manufactures of IMFL who will not be using the brand name of the appellants. Such independent manufacturers would not pay any royalty. In the Pepsi case, an express prohibition restricting the bottlers to purchase the concentrate from any other source was there. No such express prohibition is there in the present agreement. It was further pointed out by the appellants that there are instances wherein the appellants have paid an amount to bottlers when the sale price of IMFL is much below the ex- distillery price. It is further seen that apart from food flavour, the appellants supplied other blending materials to these CBUs. In these circumstances, the entire royalty paid cannot be attributed to the food flavour whose cost is only 0.45% according to the appellants. Further we find that even in 2001, at the time of audit inspection, the appellants have taken a firm stand not only regarding the includibility of royalty but also the question of very excisability of the food flavour itself. In these circumstances, there is no justification for alleging suppression of facts to invoke the larger period. Hence the Show Cause Notice dated 11.04.2002 and 08.03.2004 are clearly time barred. For the above mentioned reasons, the royalty has no nexus with the price of the food flavour and hence, not includible in the assessable value. Moreover, the first two Show Cause notices are time barred as there is no suppression of facts.”

21. In the instant case, as the revenue would put forth, the royalty/service charge received by the assessee under the various agreement with other manufacturers of IMFL forms additional consideration and is includible in the assessable value under Section 4 of the Act read with Valuation Rules as has been held in Pepsi Foods Ltd.

(supra).

22. Mr. Bagaria and Ms. Indu Malhotra, learned senior counsel appearing for the assessee in their turn would contend that the food flavours were odoriferous compounds and are prepared by way of simple mixing of various essences (odoriferous substances) purchased from different suppliers and thus the food flavours that were obtained from simple mixing of duty paid essences/flavours done manually cannot be regarded as manufacture, for by such mixing no new commodity having existing name, character or use emerges. That apart, in around 26% of the cases even such mixing was not done and the flavours purchased from the market were cleared as such merely after relabeling and when flavours fall under the Heading No. 3302.10, no extended meaning is to be given to the expression ‘manufacture’. Reliance has been placed on circular no. 247/81/96-Cx. dated 03.10.1996 issued by CBEC, Ministry of Finance, Government of India, which had clarified that the process of tinting of base emulsion/enamel paint with strainers to obtain paint of different shades does not amount to ‘manufacture’ within the meaning of Section 2(f) of the Act. It was their further submission that tribunal has rightly made the comparison between the process of tinting of base emulsion/enamel paint with strainers with the process of mixing two or more essences in certain preparation to arrive at the conclusion that no process of manufacture was involved in the case of the assessee. It was urged that it is well settled that mere mention of the goods in one of the Entries in the schedule to the Central Excise Tariff would not render them exigible to excise duty unless the twin tests of manufacture and marketability were satisfied. It has also been repeatedly held that manufacture implies a change but every change was not manufacture and in order to attract the concept of manufacture, there must be transformation of the raw materials into a new and different article having a distinctive name, character and use. In that regard reliance has been placed on Union of India v. Ahmedabad Electricity Co. Ltd & others.[25], Hindustan Zinc Ltd. v. CCE, Jaipur[26], Delhi Cloth & General Mills (supra) and Satnam Overseas Ltd. v. CCE, New Delhi[27]. It has been emphatically put forth that a simple process of mixing do not amount to manufacture as there is no transformation of the inputs into any new or differential commodity and for the said proposition, reliance has been placed on CCE, Bangalore-II v. Osnar Chemicals Private Ltd.[28], CCE, Meerut v. Goyal Gases (P) Ltd.[29] and Crane Betel Nut Powder Works v. Commr. of Customs & Central Excise, Tirupathi[30]. Further stand of the respondent is that in respect of the Sub-Heading 3302.10 which covers food flavours, no artificial or extended meaning has been given to the expression ‘manufacture’ by the legislature by exercising the power under Section 2(f)(iii) and hence, it cannot be regarded as manufacture. Heavy reliance is placed on the decisions in Shyam Oil Cake Ltd. v. CCE-I, New Delhi, Jaipur[31] and CCE v. S.R. Tissues (P) Ltd.[32] As far as the stand of the revenue that the assessee at one point of time had accepted the process of mixing and manufacture and paid the duty under the specified heading, it would debar the assessee to raise the plea again is sans substance as the Commissioner himself had admitted that food flavours were prepared by simple manual mixing of odoriferous substances but by the assessee. That apart, the assessee was entitled to raise such an issue in respect of the subsequent period and is not stopped to do so in view of the decision in Municipal Corporation of City of Thane v. Vidyut Metallics Ltd.[33] As far as the conclusion arrived at by the tribunal that two show cause notices dated 11.04.2002 and 30.04.2004 are barred by limitation, no fault can be found with it inasmuch as the said show cause notices were issued after expiry of one year from the period covered thereunder and hence, plea barred by limitation as provided under Section 11A(1) of the Act. As regards the limitation, learned senior counsel for the respondent have drawn inspiration from Cosmic Dye Chemical v. CCE, Bombay[34], Padmini Products v. CCE, Bangalore[35], Pushpam Pharmaceuticals Co. v. CCE, Bombay[36] and Uniworth Textiles Ltd. v. CCE, Raipur[37]. As far as penalty imposed under Section 11AC is concerned, it is urged that there has been no fraud or collision or wilful mis-statement or suppression of facts or contravention of provisions of the Act or the Rules with the intention to evade payment of duty and, therefore, the authorities could not have mechanically imposed the penalty and the tribunal is absolutely justified in setting aside the same.