1

 REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURSIDCITON

CIVIL APPEAL NOS. 4822-4825 OF 2015

COMMISSIONER OF CENTRAL EXCISE  & SERVICE TAX, BANGALORE               … APPELLANT  

VERSUS

M/S KARNATAKA SOAPS & DETERGENTS LTD.       … RESPONDENT

J U D G M E N T

  S.ABDUL NAZEER, J.

1. These appeals raise two questions, namely:

(i) Whether  the  Board’s  Circular  No.495/61/99-CX.3,  dated

22.11.1999  exempts  payment  of  excise  duty  on  perfumery

compound manufactured by the respondent; and

(ii) Whether  actual  marketing  of  the  perfumery compound  is

necessary for the levy of excise duty.  

2. The  respondent  is  a  manufacturer  of  agarbathi  perfumes.   The  agarbathi

perfumes are odoriferous compound prepared by the respondent in its Bangalore unit

and then transported to its Mysore unit, where it is applied to agarbathis to complete

the process of manufacture of agarbathis.   The respondent was paying excise duty

with  respect  to  these  odoriferous  compounds till  March 2001 as  this  substance  is

covered under  Chapter  Sub-Heading 3302.90 of  the First  Schedule to  the Central

Excise Tariff Act,  1985. The Central Board of Excise and Customs (for short ‘the

2

Board’) issued the aforesaid circular which clarified that the odoriferous substance,

not capable of being bought and sold in the market in the normal course of trade, is

not excisable.  The respondent transferred the odoriferous compounds to its Mysore

unit on stock transfer basis.  Some part of the compounds was sold to M/s. Tibetan

Handicrafts Centre, Bylkuppe, Mysore District.

3. The  Additional  Commissioner  of  Central  Excise,  Bangalore-III,  issued

show-cause notices calling upon the respondent to pay excise duty along with penalty

and  interest  at  the  appropriate  rates  under  Sections  11A,  11AB and  11AC of  the

Central Excise Act, 1944 (for short ‘the Act’) for the period 2001-2002 to 2006-2007.

These  notices  were  contested  by  the  respondent.   The  Additional  Commissioner

passed orders holding that the Board’s circular dated 22.11.1999 is not applicable to

the respondent  and hence the respondent  is  liable  to  pay excise  duty, penalty and

interest thereon in respect of odoriferous substance prepared by it.  These orders were

confirmed by the appellate  authority  in  the appeals  filed  by the  respondent.   The

respondent  challenged  the  said  orders  before  the  CESTAT,  South  Zonal  Bench,

Bangalore. The CESTAT has allowed the appeals and set aside the said orders to the

extent they uphold the demand of duty, interest thereon and the penalty imposed on

the appellant for which there was no evidence of sale. The Revenue has challenged the

legality and correctness of the said orders in these appeals.  

4. Appearing for  the Revenue,  Sri  P.S.  Narasimha,  learned Additional  Solicitor

General,  submits  that  the rate  of  duty to  be paid on the perfumery compounds is

clearly mentioned under Chapter Sub-Heading 3302.90 of the First Schedule to the

3

Central Excise Tariff Act, 1985 and it is on this rate that the respondent used to pay

duty till March, 2001.  The respondent is, therefore, not entitled to the benefit under

the  ambit  of  the  circular  dated  22.11.1999.  The  respondent  does  not  manufacture

agarbathi as per the general practice which has been contemplated under the circular

dated  22.11.1999.   The  respondent  manufactures  perfumery  compounds  in  its

Bangalore unit and then transports them to its Mysore unit where it is finally applied

to raw agarbathis to complete the manufacturing process of agarbathis. In this process

of manufacturing, the perfumery compounds are capable of being sold in the open

market.  

5. It is further submitted that CESTAT erroneously devised a test of actual sale of

the odoriferous substance to hold that in the absence of actual sale of such substance,

no excise duty could be levied on the same.  It is argued that the respondent has sold

the  Venkateshwara  Brand  agarbathi  perfumery  compound  to  Tibetan  Handicrafts

Centre vide invoice Nos. 9 and 33 dated 11.5.2004 and 10.8.2004 respectively.   The

CESTAT ought to have appreciated that although the final product, i.e. the agarbathi,

is exempted, the intermediate product has got marketability.  

6. On  the  other  hand,  Ms.  L.  Charanya,  learned  counsel  appearing  for  the

respondent-assessee  submits  that  the  perfumery  compound  manufactured  by  the

respondent and the stock transferred to their Mysore unit for use in particular brands

of agarbathis is non-excisable as per the Board circular dated 22.11.1999.  It is further

contended that the perfumery compound manufactured as such, is not marketed by the

respondent.  Therefore, it does not attract excise duty.  She prays for dismissal of the

4

appeals.

7. We have carefully considered the submissions of the learned counsel for the

parties.   The  basic  issue  is  with  regard  to  the  exciseability  of  the  product,  viz.

agarbathi perfume also called as odoriferous compound which is used in manufacture

of  agarbathis  sold  in  the  market.   The  Board  vide  its  circular  clarified  that  such

odoriferous compound mixed with dough is not excisable.  For better understanding,

the Board’s circular is as under:

“The  Board’s  Circular  No.495/61/99-CX.3  dated 22.11.1999:

Subject:  Excisability  of Odoriferoous compound/Agarbathi mix arising during the course of manufacture of Agarbathi – Regarding.

It  has been brought to  the notice of  the Board that field  formations  are  demanding  duty  on  the  compound preparation  arising  during  the  course  of  manufacture  of Agarbathi  classifying them under  Heading 3302.90 of  the Central Excise Tariff as odoriferous compound.

2. The  matter  has  been  examined  in  the  Board.  The Agarbathi manufacturing process involves simple mixing of a few aromatic chemicals with a base oil in a container in liquid form which is mixed directly with the dough or applied on Agarbathi in the required proportion and such dough, mixed with the aromatic compound; is used for rolling  of  Agarbathi.  The  Agarbathi  manufacturers normally  carry  out  the  whole  process  in  a  continuous manner in the course of manufacture of Agarbathi.

3. Moreover,  each  brand  of  Agarbathi  has  a  different fragrance  which  is  on  account  of  the  different formulation used by the manufacturers which is specific to that particular brand.  Preparation of such odoriferous compound,  substances  applied  on  the  Agarbathi  varies from  one  Agarbathi  manufacturer  to  another.   Such preparations are not sold by them in the market so as to

5

keep their respective trade secrets.  As the constituents, their proportions and formula of preparation are kept as secret,  such  compounds  cannot  be  considered  to  be marketable in the commercial parlance.

4. Accordingly, it is clarified that the odoriferous compound or Agarbathi dough mixed with odoriferous substances, not being capable of being bought and sold in the market in the normal course of trade, is not an excisable product and  no  duty  is  therefore,  leviable  on  such  compound arising during the course of manufacture of Agarbathi.”

8. The  above  circular  is  issued  in  the  context  of  dispute  with  regard  to

dutiability/excisability of mixture, viz. aromatic chemicals (perfumes) which is also

classifiable  as  odoriferous  compound,  under  Central  Excise  Tariff  and  comes into

existence during the course of manufacture of agarbathis, in a continuous process, as

an  intermediate  product.  The  circular  clarifies  that  odoriferous  substances  are  not

marketable because these products are not sold by manufacturers in order to protect

their trade secret.  The circular by way of illustration also stated that the whole process

of manufacturing agarbathi, that is preparation of the odoriferous compounds and their

mixing with the dough or agarbathi is normally carried out in a continuous manner

since the whole process is continuous.  These odoriferous substances do not remain

with the manufacturer to be sold in the market.   

9. The Central Excise Chapter Heading No. 3302.90 covers all types of mixtures

of odoriferous substances of a kind, used as raw materials in industries.  It is clear

from  the  records  that  respondent  does  not  manufacture  agarbathi  as  per  general

practice  which  has  been  contemplated  under  the  circular  dated  22.11.1999.   The

respondent  manufactured  perfumery  compound  in  its  Bangalore  unit  and  then

6

transported it to Mysore where it is finally applied to raw agarbathis to complete the

manufacturing process of agarbathi.  In this process of manufacturing, the perfumery

compound is  capable  of  being sold  in  the  open market.   It  is  not  in  dispute  that

appellant has sold some part of the compound to  M/s. Tibetan Handicrafts Centre,

Bylkuppe, Mysore District.

10. Thus, it is evident that the clarification is applicable to the product which comes

into  existence,  at  intermediate  stage  in  the  form of  paste/dough  in  a  continuous

process of manufacture and not to the manufacture of odoriferous perfume, which is in

liquid form and transported/stored in barrels/drums. The said circular cannot be made

applicable to cases beyond its scope. The circular cannot be equated with that of an

exemption notification but is required to be read within the limited scope of its context

in which it was issued.  The circular did not give exemption to products which are

otherwise  dutiable.  The circular  clarifying certain  doubts  cannot  give  effect  of  an

exemption notification.   Therefore,  it  cannot  be  said  that  the  agarbathi  compound

manufactured by the respondent is covered under the aforesaid circular.

11. The  next  question  for  consideration  is  whether  actual  marketing  of  the

perfumery compound manufactured by the respondent is  necessary for the levy of

excise  duty.   It  is  settled  that  to  hold  the  product  as  excisable/dutiable,  actual

marketing/sale of goods is not necessary.  What is required to be proved is that the

capability  of  marketing  the  product.   Marketability  is  decisive  test  for  dutiability.

Whether the goods are, in fact,  marketed or not is of no relevance.  It is also not

necessary that goods in question should be generally available in the market.  Even if

7

the goods are available from only one source or from a specified market, makes no

difference so long as they are available for purchasers. (See  A.P. State Electricity

Board v. Collector of Central Excise, Hyderabad, (1994) 2 SCC 428.)      

12. In Escorts Limited vs. Commissioner of Central Excise, Faridabad, (2015) 9

SCC  109,  this  Court  has  held  that  for  excise  duty  to  be  chargeable  under  the

constitutional entry read with Section 3 of the Central Excise Act, two prerequisites

are necessary. First, there must be “manufacture” which is understood to mean the

bringing  into  existence  of  a  new  substance.   And  secondly,  the  word  “goods”

necessarily means that such manufacture must bring into existence a new substance

known to the market as such which brings in the concept of marketability in addition

to manufacture.  ‘Marketability’ is thus essentially a question of fact to be decided on

the facts of each case.  There can be no generalisation.  The fact that goods are not in

fact marketed is of no relevance.  So long as the goods are marketable, they are goods

for the purposes of Section 3 of the Act.  It is also not necessary that the goods in

question should be generally available in the market.  The marketability of articles

does not depend neither upon the number of purchasers nor is the market confined to

the territorial limits of this country.   

13. In the instant case, the assessee manufactures agarbathi perfumes (odoriferous

compound) by mixing inputs, aromatic chemicals, perfume oil and acids according to

the  pre-determined formula.   It  is  prepared by the  respondents  in  their  Bangalore

factory and then transferred to their Mysore factory where finally it is applied on raw

agarbathis.  In this process of manufacturing the perfumery compounds are capable of

8

being sold in the open market.  The odoriferous compound has got a shelf life and

capable  of  being  stored/transported/sold  and  bought  by  agarbathi  industries.   As

noticed above, the assessee had sold certain quantity of perfumery compound to M/s.

Tibetan Handicrafts Centre Bylkuppe, Mysore District.  Therefore, we are of the view

that  it  is  an  excisable  product  falling  under  Chapter  Sub-Heading  3302.90.  The

counter view taken by the CESTAT cannot be justified. Hence, the appeals are allowed

and the orders dated 11.11.2010 passed by the CESTAT are hereby set aside.   No

costs.   

……………………………J. (MADAN B. LOKUR)

……………………………J. (S. ABDUL NAZEER)

……………………………J. New Delhi; (DEEPAK GUPTA) OCTOBER 12, 2017.

9

ITEM NO.1501               COURT NO.4               SECTION IV-A                S U P R E M E  C O U R T  O F  I N D I A                        RECORD OF PROCEEDINGS

Civil Appeal  No(s).  4822-4825/2015 COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX,  BANGALORE   Appellant(s)                                 VERSUS M/S KARNATAKA SOAPS & DETERGENTS LTD               Respondent(s) Date : 12-10-2017 These appeals were called on for Judgment today.  For Appellant(s) Mr. B. Krishna Prasad, AOR                     For Respondent(s) Mr. L. Badri Narayanan, Adv.  

Ms. L. Charanya, Adv.  Mr. Aditya Bhattacharya, Adv.  Mr. Victer Das, Adv.  Ms. Apeksha Mehta, Adv.  Mr. M. P. Devanath, AOR                     

Hon'ble Mr. Justice S. Abdul Nazeer pronounced the reportable Judgment  of  the  Bench  comprising  Hon'ble  Mr.  Justice  Madan  B. Lokur, His Lordship and Hon'ble Mr. Justice Deepak Gupta.   

The appeals are allowed.   Pending Interlocutory Applications, if any, stand disposed of.

(JAYANT KUMAR ARORA)                            (SNEH LATA SHARMA)    COURT MASTER   COURT MASTER

(Signed reportable Judgment is placed on the file)