COMMISSIONER CENTRAL EXCISE Vs M/S.UNITED SPIRITS LTD.
Bench: DIPAK MISRA,N.V. RAMANA
Case number: C.A. No.-005003-005003 / 2006
Diary number: 23717 / 2006
Advocates: B. KRISHNA PRASAD Vs
VIKAS MEHTA
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Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5003 OF 2006
Commissioner Central Excise, Bangalore ... Appellant(s)
Versus
M/s. United Spirits Ltd. & Anr. ... Respondent(s)
J U D G M E N T
Dipak Misra, J.
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.
2. The respondent has got its own distillery units at
various places. In addition, it has entered into agreements
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with various manufacturers of liquor who had their
bottling plants and also appropriate licences to
manufacture liquor. With these liquor manufacturers the
respondent had entered into Usership Agreement whereby
they were permitted to use the trademark of the
respondent on IMFL manufactured by them on the terms
and conditions mentioned in the agreement. The
respondent had also entered into another agreement with
the liquor manufacturers called the manufacturing
agreement which provides for manufacture and sale by
liquor manufacturers of IMFL under the respondent’s
brand names or its purchase by the respondent on the
terms and conditions mentioned in the agreement. It is
stipulated in the agreement that sale and purchase of
IMFL under the agreement shall be on principal to
principal basis. These liquor manufacturers 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 approved suppliers. It was
also provided in the manufacturing agreement that
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modalities of price payable by the respondent to the liquor
manufacturers for sale of IMFL and the price was to be the
aggregate of cost of rectified spirit, extra neutral alcohol,
blending and packing materials, storage, insurance
premium and all manufacturing costs and expenses as
mentioned in the agreement. In addition, the liquor
manufacturers were entitled to the margin of profit called
service charges in the agreement. The total price so paid
to the liquor manufacturers was the sole consideration for
the sales and such price is known as Ex-Distillery Price
(EDP), which includes all costs, charges and expenses
incurred by the liquor manufacturers for manufacture of
IMFL as well as their margin described as service charges.
The IMFL manufactured by liquor manufacturers was
affixed with the brand names owned by the respondent. It
provided the manufacturing logo, quality control, product
research, etc. The respondent provided technical
know-how/expertise to liquor manufacturers for
manufacture of IMFL.
3. The liquor manufacturers sell IMFL manufactured by
them either to the respondent or to the customers
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identified by the respondent or to the government-owned
corporations. The sales personnel of the respondent
contact the customers, book orders, collect outstanding
amounts from the market, collect statutory forms like
C-Forms, Excise Verification Certificates, Permits, etc. and
forward the same to the liquor manufacturers. The
respondent would promote its brands through marketing
teams and operation of various promotional schemes and
advertisements and all expenses with regard to the same
are incurred by the respondent. The liquor manufacturers
were entitled to receive EDP which include the actual cost
of IMFL manufactured by them plus the profit margin.
The prices were negotiated by the respondent even when
the goods were sold by the liquor manufacturers to such
buyers and they would bill by such buyers at the rates
negotiated and determined by the respondent.
4. The respondent, however, asserts that such
rates/prices negotiated with outside buyers were either
more or less than the EDP with certain consequences,
namely, (a) if the selling price to outside customers is more
than EDP, the difference was paid by the liquor
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manufacturers to the respondent by calling it under
different nomenclature like royalty or service charge; (b) if
the selling price to outside customers was less than EDP,
the difference/shortfall is borne by the respondent and
paid to the liquor manufacturers; and (c) if the price
realized from outside buyers is more than EDP, the
difference accrued to the respondent.
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.
6. Food flavours it is accepted play a role in the flavour
profile of the liquor. Food flavours are not used in all
brands of IMFL. There are certain brands of IMFL in
which no food flavours are used and wherever they are
used in IMFL, the percentage is very low ranging from
0.0001% to 00019% per litre. However, it is not the case
of the respondent, that food flavours do not matter in the
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IMFL business.
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
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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.
9. The royalty paid to the respondent by the liquor
manufacturers, as asserted, is the difference between their
selling prices of IMFL to outside buyers and the EDP of
such IMFL. As pleaded, the payment of royalty has no
nexus or connection with the food flavours. There are
several brands of IMFL where no food flavour was supplied
by the respondent to liquor manufacturers. However,
royalty on the difference between the selling price of IMFL
and EDP was still paid. The respondent claims that there
were several instances where food flavours were sold and
used in IMFL but no royalty was received. In those cases
the selling price of IMFL was lower than the EDP and
rather than receiving royalty, the respondent had borne
the shortfall and reimbursed the same to liquor
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manufacturers. On this ground, the respondent intends
to put forth the stand that royalty was solely relatable to
the higher selling prices of IMFL over and above EDP and
has nothing to do with food flavour. The food flavours
were not used in IMFL products like Signature Whisky,
Centenary Whisky, Single Malt Whisky, etc. which were
manufactured without using food flavours. In respect of
the same, the liquor manufacturers manufacturing the
said brand were paying royalty to the respondent, that
being the difference between their selling price of the said
brands and their EDP.
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
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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.
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,
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Chandigarh1, 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. 3,00,000/- was imposed on the Senior Manager
(Taxation) under Rule 26 of the Central Excise Rules,
2002.
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
1 (2005) 9 SCC 28
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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 Others2. 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
2 1997 ELT (J199)SC
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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, Etc3, 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.
13. It was further argued that in certain cases, the
flavours which were not bought are not even mixed but
were supplied directly to the bottlers, only the labels were
changed in order to maintain secrecy and such an activity
could not be regarded as ‘manufacture’ inasmuch as 3 1978 ELT (J 336) 4 1995 (76) ELT 241 5 1999 (108) ELT 786 6 1999 (105) ELT 263 7 2002 (141) ELT 306
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under Chapter Heading 3302.10 re-labelling does not
amount to manufacture. It was argued that mixing of
flavours does not bring into existence a new product and
even after mixing flavours, the resultant products still
remains to be a flavour only. Attention of the tribunal was
invited to Board’s Circular No. 247/81/96-CX dated
03.10.1996 clarifying that mixing duty paid paints to
obtain paint in different shade would not amount to
manufacture. Further submission before the tribunal was
that flavours were either mixed or supplied in the form in
which they were purchased to the bottlers and cannot be
marketed to anyone else and no other manufacturer would
buy these flavours, for they were meant only for use in the
product manufactured for the assessee.
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
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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
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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
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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.
15. The stand and stance put forth by the assessee was
controverted by the revenue contending, inter alia, that the
department had raised the question of excisability of the
product in question, when it found the modification of stay
order Nos. 838 and 839/2004 dated 10.08.2004 by the
High Court. It was also urged that there was an earlier
proceeding in 1995 relating to food flavour and the case
was adjudicated by the then Commissioner, consequent
upon which the assessee had started paying duty and
hence, excisablity of the product in question was never an
issue at all as the conduct of the assessee would reflect.
Reference was made to Entry 3302 in the Tariff and
3302.10 to highlight that the tariff itself recognizes
mixtures of odoriferous substances as excisable product
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and, hence, it could not be said that no manufacture was
involved in the mixing of the essences to produce such
food flavours. It was urged that goods to fit into the term
‘manufacture’ must be capable of being bought and sold in
the market and to be known as such. In that regard,
placing reliance on Bhor Industries Ltd v. CCE,
Bombay8, Union Carbide v. CCE9, Moti Laminates Pvt.
Ltd. & Ors v. CCE, Ahmedabad10, Union Of India &
Others v. Sonic Electrochem (P) Ltd. and another11 and
CCE, Chandigarh-II v. Jagatjit Industries Ltd.12, it was
canvassed that in the case at hand the food flavours
manufactured by the assessee were marketable as
evidenced from the assesse’s admissions that it has been
selling food flavours to other independent bottlers who
were not manufacturing the IMFL brands of McDowell but
their own brands which establish marketability of the
product. It was further argued that the inputs were
essences and once they were mixed or prepared, they lost
their original identity. It was also urged that though the
8 (1989) 1 SCC 602 9 1986 (24) ELT 169 (SC) 10 (1995) 3 SCC 23 11 (2002) 7 SCC 435 12 (2002) 3 SCC 614
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input and finished goods were under the same tariff
heading, still there was manufacture and the finished
goods were having distinct, separate and identifiable
function, with reference to the product, i.e., IMFL. The
further stand was that mixing amounts to manufacture as
has been laid down in Gopal Zarda Udyog v. CCE, New
Delhi13, O.K. Play (India) Limited v. CCE, New Delhi II14,
Nestle India Limited v. CCE, Chandigarh II15, T.N.
State Transport Corporation Limited v. CCE,
Madurai16, Kothari Products Limited v. Government of
Andhra Pradesh17, CCE, Guntur v. Crane Betel Nut
Powder Works18, and Henna Export Corporation v.
CCE19. The revenue further contended that as per Section
4 of the Act, the assessable value depends on the nature of
transaction and each price in a transaction was an
assessable value and it cannot be compared if the type of
transaction was different. The assessee received royalty
charges from buyers who were contract bottling units and
13 2005 (188) ELT 251 (SC) 14 2005 (180) ELT 291 (SC) 15 2004 (169) ELT 315 (Tri-Del) 16 2004 (166) ELT 433 (SC) 17 1998 (98) ELT 315 (AP) 18 2005 (187) ELT 106 (Tri-Bang) 19 1993 (67) ELT 907 (Tribunal)
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separate assessable value was computable for these types
of customers and in such cases, the royalty charged by the
assessee from the buyers has to be treated as additional
consideration.
16. After noting down the submissions of the learned
counsel for the parties, the tribunal adverted to the issue
of nexus between the royalty and the price of food flavours.
The tribunal clearly stated that in the year 1995, the
department had proceeded against the assessee for
non-payment of central excise duty on the food flavours
produced by them and the Commissioner confirmed the
demands raised and at that time, the excisability of food
flavours was not questioned by the assessee. After the
adjudication order dated 30.01.1995, the assessee was
clearing the goods on payment of duty. During 2001, the
departmental audit raised certain objections with reference
to the receipt of certain amounts towards royalty, service
charges, etc. from the contract bottling units engaged in
the manufacture of IMFL and according to the audit, the
royalty charges should be added to the value of the food
flavour sold to the contract bottling units. At that
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juncture, the assessee gave justification for non-inclusion
of royalty charges. The tribunal, as the impugned order
would reflect, has adverted in detail to the justification
given by the assessee before the adjudicating authority
which was basically founded on the conditions set out in
the agreement that royalty was payable by the
manufacture for use of the brand name and that the
royalty had no relevance with the goods or various inputs
that go into the manufacture of these goods. It was also
set forth that the brands of the company had their own
value and the royalty receivable from the manufacturer
was primarily on account of company’s brands of finished
goods, namely, IMFL viz. No. 1 Brandy, No. 1 Whisky,
Diplomat Whisky, Premium Whisky, Dry Gin, etc. It was
also contended that the audit party had erroneously
mis-interpreted the concept of royalty as one which was
capable of being subdivided into and allocable to various
manufacturing inputs, for it is neither feasible nor a
correct procedure to apportion the royalty which was
accruing to the company on the company’s brand image.
It was also contended that such an understanding would
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defeat the purpose of the agreement. Though such a stand
was explained by the assessee, yet the department was of
the view that the royalty should be added to the assessable
value and consequently first show cause notice dated
11.04.2002 was issued. The tribunal thereafter
chronologically analysed the facts and order of remit and
the de novo order and perused the relevant agreements of
the appellants with the CBUs. On scrutiny of the
agreements, the tribunal found that there were two
agreements, one is called the Manufacturing Agreement
and the other is Usership Agreement. As per the terms
and conditions of the agreement, the products were to be
manufactured by the second party would include the
products whose trade mark was owned by the
assessee-appellant before the tribunal and any other
associate company of it. The second party to the
agreement was required to purchase blending and packing
materials from such suppliers specified by the assessee
and above condition was for the purpose of ensuring
quality specification. The agreement defined the blending
material. The tribunal referred to the definition of
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“Blending Material” and opined that the said definition
includes food flavours. It referred to para 18 of the
agreement which stipulates that during the currency of
the agreement, the second party (as pointed out by the
tribunal) Gemini Distilleries (Tripura) Pvt. Ltd. (GDPL)
shall not use trade mark to or adopt any trade mark
similar to any of the trade marks on or in connection with
any product. On that basis, the tribunal opined that on
careful reading of the agreement reveals that the assessee
has good control over the manufacture of IMFL by GDPL
and it ensures the quality of the product, which bears the
trade mark of the assessee. Referring to the usership
agreement, the tribunal observed that the proprietor was
the assessee and the user was GDPL and according to the
said agreement, at the request of the user, the proprietor
had agreed to permit the user to use the trade marks in
respect of the goods on the terms and conditions
mentioned in the agreement. The tribunal referred to para
12 of the agreement which postulates that in consideration
of this licence, the user shall pay to the proprietor such
sum per case manufactured of the goods as may be
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mutually agreed upon by the parties from time to time and
the consideration shall be paid by the user by the following
month. It further observed that though the word royalty
has not been used in the agreement, it was clear that the
sum mentioned in para 12 of the agreement refers to
royalty and the royalty was for the use of trade mark and
there was no indication whatsoever to infer that the
royalty was paid for supply of food flavour. It took note of
the fact that food flavour was one of the blending materials
and not the sole blending materials sold by the assessee to
the CBU and hence, prima facie, there does not appear to
be any close nexus between royalty and the food flavour.
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
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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
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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.”
18. After so stating, the tribunal addressed the issue
pertaining to excisability of food flavours. It took note of
the fact that there was purchased duty paid odoriferous
compounds called essences and these essences were
mixed manually to obtain food flavour. In what proportion
and which essences were to be mixed has been kept a
trade secret and different brands of IMFL require food
flavour of different profiles. In order to ensure the quality
consistency in the various brands of IMFL, the production
of food flavour was centralized at Bangalore which does
not use power. The tribunal referred to Board’s circular
dated 22.11.1999 wherein it has been clarified that
agarbati manufacturing process involving simple mixing of
a few aromatic chemicals with the base oil in a container
in liquid form, which was mixed directly with the dough or
applied on agarbati in the required proportion used for
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rolling of agarbati is not excisable product and, therefore,
no duty was leviable on such compounds during the
course of manufacture of agarbati. It was urged before the
tribunal that the fact situation in the case of assessee was
similar, as has been clarified in the Board’s circular in
respect of agarbati. It is further urged that there was a
simple mixing of essences of different flavour profile and
the food flavours produced by the assessee are exclusively
used for making their brands of IMFL in their own units
and contract units and it cannot be sold in the market as
such. The tribunal posed a question whether the process
of mixing of essences results in a distinct commodity,
which was different from the original inputs. In that
context, it held thus:-
“We find that both the essences and the resultant product food flavour fall under the same Tariff Heading. Since different proportion of the ingredients give different flavours to the resultant product, we cannot say that a ingredients give different flavours to the resultant product, we cannot say that a completely distinct product emerges. The comparison with agarbathi mention in Board’s Circular is justified. Board’s Circular dated 03.11.1996 deals with the process of tinting of duty paid base white Paint with duty paid strainer to obtain paint of different shades. It has been clarified that the above process does not
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amount to manufacture on the ground that the process of tinting does not bring about any new commodity with different commercial identity as the resultant emulsion/enamel point and hence, it may not be appropriate to consider this process as amounting to manufacture. While clarifying the above position, the Board has applied the ratio of the classic judgment of the Apex Court in the DCM case wherein it has been held that “Manufacture implies change, but every change is not manufacture and yet every change in an article is a result of treatment, labour and manipulation, but something more is necessary and there must be transformation; a new and different article must emerge having distinctive name, character and use.”
In another Circular dated 13.07.1992, the Board has clarified that conversion of plain plastic granules into coloured plastic granules would not amount to manufacture.
In all these cases, the commercial identify of the ingredients and the finished product remained the same. In the present case also, the process of mixing two or more essences in certain proportions does not bring into existence any new product. The essence remained essences only and because of the different proportion, a distinct flavour is imparted to the resultant product. That cannot make the process as manufacture.”
19. To arrive at the said conclusion, it placed reliance on
CCE Chennai v. Fountain Consumer Appliances
Limited20, Tega India Limited v. CCE, Calcutta II21,
State of Maharashtra v. Mahalaxmi Stores22, and CCE
20 2004 (171) ELT 329 (Tri-Chennai) 21 (2004) 2 SCC 727 22 (2003) 1 SCC 70
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Chennai v. Titanium Equipment & Anode
Manufacturing Co. Ltd.23
20. We have heard Mr. Yashank Adhyaru, learned senior
counsel for the appellant and Ms. Indu Malhotra and
Mr. S.K. Bagaria, learned senior counsel for the
respondents. It is submitted by the learned counsel for
the appellant that the final product ‘food flavour’ is
classified under Chapter Heading 3302.10 and hence is
excisable and dutiable. According to him, the assessee
itself had admitted that it was selling the food flavours to
independent bottling units and that establishes the
marketability of the product. The assessee had claimed
that its product is custom made and the formula is a trade
secret and further it had availed CENVAT credit of inputs
for payment of duty on final product. As the facts had
been established, contend Mr. Adhyaru, the finished goods
are sold on different code numbers assigned by the
assessee, hence a new identity is established. Learned
senior counsel would urge to construe a particular good
has been manufactured, the goods must be capable of
23 2002 (142) ELT 162 (Tri-Chennai)
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being bought and sold in the market, as has been held by
this Court in Bhor Industries Ltd. (supra), Jagatjit
Industries Ltd. (supra) and Servo Med Industries Pvt.
Ltd. v. CCE24. Learned senior counsel would contend that
mixing which is prefixed by simple fixing by the assessee
is not acceptable because the process of mixing can
amount to manufacature as has been held in Gopal
Zarda Udyog (supra) and O.K. Play (India) Limited
(supra). As far as the royalty is concerned, it is urged by
him that the assessee had received royalty charges from
buyers who are contract bottling units and separate
assessable value is computable for this type of customers.
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
24 2015 (6) SCALE 137
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30
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
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31
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, Jaipur26, Delhi Cloth & General Mills
(supra) and Satnam Overseas Ltd. v. CCE, New Delhi27.
It has been emphatically put forth that a simple process of 25 (2003) 11 SCC 129 26 (2005) 2 SCC 662 27 (2015) 13 SCC 166
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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, Tirupathi30. 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, Jaipur31 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
28 (2012) 2 SCC 282 29 (2000) 9 SCC 571 30 (2007) 4 SCC 155 31 (2005) 1 SCC 264 32 (2005) 6 SCC 310
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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, Bombay34, Padmini Products v.
CCE, Bangalore35, Pushpam Pharmaceuticals Co. v.
CCE, Bombay36 and Uniworth Textiles Ltd. v. CCE,
Raipur37. As far as penalty imposed under Section 11AC is
33 (2007) 8 SCC 688 34 (1995) 6 SCC 117 35 (1989) 4 SCC 275 36 1995 Supp (3) SCC 462 37 (2013) 9 SCC 753
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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.
23. From the factual narration and the submissions
advanced at the Bar, we find three issues, namely,
(i) whether there was ‘manufacture’, (ii) whether there was
nexus in royalty received and the price paid for the food
flavour sold, and (iii) whether two show cause notices
have been correctly determined to be barred by limitation
by the tribunal. First we shall advert to the issue of
‘manufacture’. The submission of the respondent is that
they are mixing essences and in some cases merely selling
food flavours purchased from third parties without any
processing and in any case mixing of essences under no
circumstances can amount to manufacture. The said
submission is founded on the principle that by such
process of mixing change takes place and no separate and
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marketable commodity comes into existence. Various
judgments have been cited at the Bar to explain the term
‘manufacture’. It is well settled in law that ‘manufacture’
implies change, but every change is not manufacture,
such change is normally a result of treatment, labour and
manipulation. In this regard, we think it appropriate to to
reproduce a passage from Union of India v. Delhi Cloth
& General Mills Co. Ltd.38 wherein the Constitution
Bench quoted with approval from an American judgment
in Anheuser-Busch Brewing Assn. v. United States39,
which is to the following effect:-
“‘Manufacture’ implies a change, but every change is not manufacture and yet every change of an arti- cle is the result of treatment, labour and manipula- tion. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use.”
24. In Deputy Commissioner of Sales Tax (Law),
Board of Revenue (Taxes), Ernakulam v. Pio Food
Packers40, a three-Judge Bench while interpreting Section
5-A(1)(a) of the Kerala General Sales Tax Act, 1963 opined
38 AIR 1963 SC 791 39 207 US 556 (1908) 40 1980 Supp. SCC 174
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that:-
“There are several criteria for determining whether a commodity is consumed in the manufacture of an- other. The generally prevalent test is whether the ar- ticle produced is regarded in the trade, by those who deal in it, as distinct in identity from the com- modity involved in its manufacture. Commonly manufacture is the end result of one more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential differ- ence in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufac- ture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity.”
25. After so stating, the Court posed the question: does
the processing of original commodity brings into existence
a commercially different and distinct article? In that
context, the three-Judge Bench analysed the ratio in
previous decisions and stated thus:-
“Some of the cases where it was held by this Court that a different commercial article held come into
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existence include Anwarkhan Mahboob Co. v. State of Bombay41 (where raw tobacco was manufactured into bidi patti), A. Hajee Abdul Shakoor and Co. v. State of Madras42 (raw hides and skins constituted a different commodity from dressed hides and skins with different physical properties), State of Madras v. Swastik Tobacco Factory43 (raw tobacco manufac- tured into chewing tobacco) and Ganesh Trading Co., Karnal v. State of Haryana44, (paddy dehusked into rice). On the other side, cases where this Court has held that although the original commodity has undergone a degree of processing it has not lost its original identity include Tungabhadra Industries Ltd., Kurnool v. CTO45, (where hydrogenated ground- nut oil was regarded as groundnut oil) and C.S.T., U.P., Lucknow v. Harbilas Rai and Sons46 (where bristles plucked from pigs, boiled, washed with soap and other chemicals and sorted out in bundles ac- cording to their size and colour were regarded as re- maining the same commercial commodity, pigs bris- tles).”
26. Adverting to the fact situation which pertained to
pineapple fruit and canned pineapple slices, the Court
held:-
“In the present case, there is no essential difference between pineapple fruit and the canned pineapple slices. The dealer and the consumer regard both as pineapple. The only difference is that the sliced pineapple is a presentation of fruit in a more conve- nient from and by reason of being canned it is capa- ble of storage without spoiling. The additional
41 AIR 1961 SC 213 42 AIR 1964 SC 1729 43 AIR 1966 SC 1000 44 (1974) 3 SCC 620 45 AIR 1961 SC 412 46 (1968) 21 STC 17 (SC)
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sweetness in the canned pineapple arises from the sugar added as a preservative. On a total impres- sion, it seems to us, the pineapple slices must be held to possess the same identity as the original pineapple fruit.”
27. In Collector of Customs, Bombay v. S.H. Kelker &
Co. Ltd.47, the assessee had imported an organic chemical
“abbalide” which the assessee had classified under
Chapter 29 and not as an odoriferous substances under
Heading 33.02 of the tariff. Reversing the judgment of the
tribunal, it was held by the Court as under:-
“10. Heading 33.02 of the Tariff refers to “mixtures of odoriferous substances and mixtures (including alcoholic solutions) with a basis of one or more of these substances, of a kind used as raw materials in industry”.
It envisages (i) mixtures of odoriferous substances, and (ii) mixtures (including alcoholic substances) with a basis of one or more of odoriferous sub- stances and the mixtures are of a kind used as raw materials in industry. In the present case, it has been found that the chemical, in its original form, consists of various isomers and is an odoriferous substance. It has been dissolved in diethyl phtha- late, a non-odoriferous substance. The odoriferous substance is the basis of the mixture. It is not dis- puted that the mixture is used as a raw material, viz., perfume in industry. It can, therefore be said that the compound is a mixture with a basis of an odoriferous substance and since it is for use as a
47 (2000) 10 SCC 478
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raw material in industry, it would be classifiable un- der Heading 33.02.
11. In our opinion, the Tribunal was in error in con- struing clause 1(e) of Chapter 29 and in holding that the said product was classifiable under Chap- ter 29. Clause 1(e) of the Notes in Chapter 29 postu- lates that if a product mentioned in sub-clauses (a), (b) or (c) of clause 1 is dissolved in a solvent and the solution constitutes a normal and necessary method of putting up these products adopted solely for the reasons of safety or for transport then the product would fall within Chapter 29 only if the solvent does not render the product particularly suitable for spe- cific use rather than for general use. As per the cer- tificate dated 19-9-1986 issued by the manufacturer the compound imported by the respondents cannot be used in the condition it is manufactured and for making it suitable for use and for retaining its suit- ability for use it has to be dissolved in a solvent. The need of a solvent is not only for the purpose of stor- age and transport of the chemical, but also for re- taining the suitability of the product after it is man- ufactured. Its dissolution in the solvent is necessary in order to make the product suitable for use. Since the product is used only for perfumery and not for any other purpose, it has to be held that the prod- uct is intended for specific use only. In view of clause 1(e) of the Notes in Chapter 29, it may be held that the product imported by the respondents cannot be regarded as falling under Chapter 29 of the Tariff and would fall under Heading 33.02 in Chapter 33 of the Tariff. We are, therefore, unable to uphold the impugned judgments of the Tribunal.”
28. We have referred to the decisions to highlight the
concept of essential change in the character of the
product. In this regard, useful reference may be made to
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the authority in Income Tax Officer, Udaipur v. Arihant
Tiles and Marbles Pvt. Ltd.48, the Court after referring to
CIT v. M/s N.C. Budharaja and Company49, opined
thus:-
“25. Applying the above tests laid down by this Court in Budharaja case to the facts of the present cases, we are of the view that blocks converted into polished slabs and tiles after undergoing the process indicated above certainly results in emer- gence of a new and distinct commodity. The original block does not remain the marble block, it becomes a slab or tile. In the circumstances, not only is there manufacture but also an activity which is some- thing beyond manufacture and which brings a new product into existence and therefore, on the facts of these cases, we are of the view that the High Court was right in coming to the conclusion that the activ- ity undertaken by the respondent assessees did constitute manufacture or production in terms of Section 80-IA of the Income Tax Act, 1961.
26. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely, that the activity undertaken by the respondents herein is not manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying ex- cise duty, some of the respondents are job-workers and the activity undertaken by them has been recognised by various government authorities as manufacture. To say that the activity will not amount to manufacture or production under Sec- tion 80-IA will have disastrous consequences, par- ticularly in view of the fact that the assessees in all the cases would plead that they were not liable to
48 (2010) 2 SCC 699 49 1994 Supp (1) SCC 280
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pay excise duty, sales tax, etc. because the activity did not constitute manufacture.”
29. At this juncture, it is obligatory to state that revenue
has heavily relied upon on Pepsi Foods Ltd. (supra). In
the said case the Court had found that the consideration
payable as royalty was an inevitable consequence of the
sale of the concentrate and in such circumstances the
price paid for the concentrate was not the sole
consideration paid by the purchaser. The terms of
agreement had obligated the bottler to purchase the
concentrate from the assessee alone, use the assessees’
trade mark on the bottled beverage and also pay royalty
for assessees’ trade mark at the specified percentage of
the maximum retail price of each bottle. In the given
circumstances and evidence available, it was held that the
price actually paid for sale of concentrate was not to be the
determinative factor as the price paid for the sale of
concentrate, i.e., invoice would not be determinative, as
the royalty payment was inseparably linked with the sale
consideration paid for the concentrate. The indelible
nexus and connect was established to club the two
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considerations.
30. The respondent, in its turn, has placed reliance on
Shyam Oil Cake Ltd. (supra) and contended that mere
separate tariff entry is not indicative whether the same
amounts to manufacture, for tariff entry can be merely for
the purpose of identifying the product and the rate
applicable to it. In such case, it would not have the effect
of rendering the specified commodity to be excisable.
Section 2(f) defines “manufacture” and by deeming effect, a
process can amount to manufacture. Albeit, for a deeming
provision to come into play, it must be specifically stated
that a particular process amounts to manufacture. The
respondent has also placed reliance on Circular no.
495/61/99-CX-3 dated 22nd November, 1998, but the said
circular relates to compound preparation during the
course of manufacture of agarbati. In the context of the
said product, clarification was issued. It is noticeable that
the respondent had pleaded a different factual matrix
which has been accepted by the tribunal, albeit, without
referring to specific details. General observation and
broad brush approach need not reflect true consideration
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43
paid for all transactions. A far greater and deeper scrutiny
of facts is required before forming any opinion, one way or
the other. It would be wrong to be assumptuous without
full factual matrix being lucent and absolutely clear.
31. Recently, in The Additional Commissioner of
Commercial Taxes, Bangalore v. Ayili Stone
Industries Etc. Etc.50 the Court was dealing with the
issue of grant of exemption on polished granite stone and
the view of the revenue that the polished and unpolished
granite stones are under separate Entries in the second
schedule to the Karnataka Sales Tax Act, 1957. The
question arose before this Court pertained to
interpretation of polished and granite stones and in that
context the concept of manufacture and after referring to
various judgments, it held that:-
“28. There is a distinction between polished granite stone or slabs and tiles. If a polished granite stone is used in a building for any purpose, it will come under Entry 17(i) of Part S of the second schedule, but if it is a tile, which comes into existence by different process, a new and distinct commodity emerges and it has a different commercial identity in the market. The process involved is extremely relevant. That aspect has not been gone into. The Assessing Officer while framing the assessment
50 Civil Appeal Nos. 1983-2039 of 2016 dated 18.10.2016
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order has referred to Entry 17(i) of Part S but without any elaboration on Entry 8. Entry 8 carves out tiles as a different commodity. It uses the words “other titles”. A granite tile would come within the said Entry if involvement of certain activities is established. To elaborate, if a polished granite which is a slab and used on the floor, it cannot be called a tile for the purpose of coming within the ambit and sweep of Entry 8. Some other process has to be undertaken. If tiles are manufactured or produced after undertaking some other activities, the position would be different. A finding has to be arrived at by carrying out due enquiry and for that purpose appropriate exercise has to be undertaken. In the absence of that, a final conclusion cannot be reached.”
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
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and undertaken. Different flavours may have different
processes.
33. The third issue relates to the issue of limitation. The
tribunal has held that certain show cause notices are
barred by limitation. Mr. Bagaria, learned senior counsel
has submitted that the said conclusion is absolutely
flawless, if the dates are taken into consideration. For the
aforesaid purpose, he has commended us to the decision
already referred to hereinabove. As we notice, the tribunal
on this score has also not scrutinized the dates
appropriately, but has returned a cryptic finding.
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.
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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.
.............................J. [Dipak Misra]
.............................J. New Delhi; [N.V. Ramana] January 05, 2017