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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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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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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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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