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Tuesday, January 10, 2017

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 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.”

                        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  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  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  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  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 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  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  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 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, Chandigarh[1], and held that the  royalty  from
the various units under the manufacturing agreement deserve to  be  included
in  the  assessable  value  of  the  food  flavour  supplied  to  them   and
accordingly confirmed the demand under proviso to Section 11A  of  the  Act.
Equal amount of penalty was imposed under Section 11 AC and  interest  under
Section  11AB  was  also  levied.   A  penalty   of                      Rs.
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  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
Others[2].   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  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, Etc[3],  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  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 charges were received from them and hence, the royalty bill  had
no nexus with the price of the food flavour.   That  apart,  it  was  argued
that the  assessee  sold  food  flavours  to  Contract  Bottling  Units  who
employed them to manufacture IMFL  products  or  to  different  other  brand
owners to whom they were paying royalty and service charges.   However,  the
other brand owners paid only the price of flavours to the assessee and  this
would be indicative of the fact that the  royalty  had  no  nexus  with  the
price of the flavours.  Additionally, it was propounded  that  material  was
purchased before the concerned Commissioner showing that assessee  had  sold
some kind of  flavour  to  certain  distilleries  with  whom  there  was  no
bottling agreement nor there was any receipt of royalty or  service  charges
because the contract unit had not applied the  brand  of  the  assessee  nor
secured services of the assessee for marketing  and  in  such  a  case,  the
Commissioner could not have asserted that the  agreement  was  for  sale  of
flavour and receipt of royalty and service charges.   Reliance on the  Pepsi
Foods Ltd. (supra) was seriously  criticised  before  the  tribunal  as  the
ratio laid down was not  applicable  to  the  case  at  hand.    Before  the
tribunal the learned counsel for the assessee had drawn attention  that  the
manufacturing  agreement  and  usership  agreement  to   highlight   certain
aspects, to draw distinction and the adjudicating authority could  not  have
proceeded to allocate the entire receipts to  the  value  of  food  flavours
alone without any basis.   Criticising the invocation  of  the  jurisdiction
under  Section  11A  of  the  Act,  it  was  contended  that  there  was  no
suppression on the part of the  appellants  as  the  factum  of  payment  of
royalty was known to the department and it was clear from the  note  of  the
Range Officer to the Deputy Commissioner which clearly laid  down  that  the
amount paid towards royalty was only for use of the brand name for  sale  of
flavour and prior to the issue of show cause  notice,  there  was  an  audit
inspection on 28.03.2001 and the  assessee  was  asked  to  clarify  various
points raised which had been clarified vide letter dated 28.04.2001 and  all
these aspects had not been  taken  into  consideration  while  invoking  the
jurisdiction.  It was also put forth that as royalty had no nexus  with  the
price of food flavours, the assessee was not expected  to  declare  it  and,
therefore, it could not be treated as suppression.  That apart, at the  time
of audit objection even the Range Superintendent was of the view that  there
was no nexus between the royalty received by the appellant and the price  of
food flavours  sold  by  the  assessee  and,  therefore,  in  the  obtaining
circumstances, the notices were clearly barred by time.
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  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,  Bombay[8],  Union  Carbide  v.  CCE[9],   Moti
Laminates Pvt. Ltd. & Ors v. CCE, Ahmedabad[10], Union Of India & Others  v.
Sonic Electrochem  (P)  Ltd.  and  another[11]  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  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
Delhi[13], O.K. Play (India) Limited v. CCE, New Delhi II[14], Nestle  India
Limited v.  CCE,  Chandigarh  II[15],    T.N.  State  Transport  Corporation
Limited v. CCE, Madurai[16],  Kothari  Products  Limited  v.  Government  of
Andhra Pradesh[17],  CCE, Guntur v. Crane Betel Nut  Powder  Works[18],  and
Henna Export Corporation v. CCE[19].  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
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 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  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 “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 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  no  difference  in  price  in  respect  of  sales  to
independent buyers and the prices at which food flavours are sold  to  CBUs.
This fact clinches the issue. It is  very  clear  that  there  is  no  nexus
between the royalty and the food flavours.  The adjudicating  authority  has
relied on the Apex Court’s decision in the Pepsi  case.  In  our  view,  the
ratio of the above decision should not have been blindly applied as done  by
the adjudicating authority.  In the Pepsi case,  both  the  concentrate  and
the final product are excisable  which  is  not  the  case  in  the  present
appeals.  The final product here is IMFL for which royalty  is  paid.   IMFL
is not subjected to Central Excise duty. In the Pepsi case, the  concentrate
is the most essential ingredient of Pepsi Cola whereas in the present  case,
it is not so.  There are certain brands of IMFL which  do  not  require  any
food flavour.  In the Pepsi case, the concentrates are  sold  only  for  the
franchisees.  In the instant case, the appellants have  sold  food  flavours
to independent manufactures of IMFL who will not be using the brand name  of
the appellants.  Such independent manufacturers would not pay  any  royalty.
In the Pepsi case,  an  express  prohibition  restricting  the  bottlers  to
purchase the concentrate from any other source was there.  No  such  express
prohibition is there in the present agreement.  It was further  pointed  out
by the appellants that there are instances wherein the appellants have  paid
an amount to bottlers when the sale price of IMFL  is  much  below  the  ex-
distillery price.  It is further seen that  apart  from  food  flavour,  the
appellants supplied other  blending  materials  to  these  CBUs.   In  these
circumstances, the entire royalty paid cannot  be  attributed  to  the  food
flavour whose cost is only 0.45% according to the  appellants.   Further  we
find that even in 2001, at the time  of  audit  inspection,  the  appellants
have taken a firm stand not only regarding the includibility of royalty  but
also the question of very excisability of the food flavour itself. In  these
circumstances, there is no justification for alleging suppression  of  facts
to invoke the larger period.  Hence the Show Cause Notice  dated  11.04.2002
and 08.03.2004 are clearly time barred. For  the  above  mentioned  reasons,
the royalty has no nexus with the price of the food flavour and  hence,  not
includible in the assessable value.  Moreover,  the  first  two  Show  Cause
notices are time barred as there is no suppression of facts.”


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 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  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 Limited[20],  Tega  India  Limited  v.  CCE,
Calcutta II[21], State of  Maharashtra  v.  Mahalaxmi  Stores[22],  and  CCE
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 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.
CCE[24].   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  counsel  appearing
for the assessee in their turn would contend that  the  food  flavours  were
odoriferous compounds and are prepared by way of simple  mixing  of  various
essences (odoriferous substances) purchased  from  different  suppliers  and
thus the food flavours that were obtained from simple mixing  of  duty  paid
essences/flavours done manually cannot be regarded as  manufacture,  for  by
such mixing  no  new  commodity  having  existing  name,  character  or  use
emerges.  That apart, in around 26% of the cases even such  mixing  was  not
done and the flavours purchased from the market were cleared as such  merely
after relabeling and when flavours fall under the Heading  No.  3302.10,  no
extended meaning is to be given to the expression  ‘manufacture’.   Reliance
has been placed on circular no. 247/81/96-Cx.  dated  03.10.1996  issued  by
CBEC, Ministry of Finance, Government of India,  which  had  clarified  that
the process of tinting of  base  emulsion/enamel  paint  with  strainers  to
obtain paint of different shades does not  amount  to  ‘manufacture’  within
the meaning of Section 2(f) of the Act.  It  was  their  further  submission
that tribunal has  rightly  made  the  comparison  between  the  process  of
tinting of base emulsion/enamel paint with strainers  with  the  process  of
mixing two or  more  essences  in  certain  preparation  to  arrive  at  the
conclusion that no process of manufacture was involved in the  case  of  the
assessee.  It was urged that it is well settled that  mere  mention  of  the
goods in one of the Entries in the schedule to  the  Central  Excise  Tariff
would not render them exigible to excise  duty  unless  the  twin  tests  of
manufacture and marketability were satisfied.  It has also  been  repeatedly
held that manufacture implies a change but every change was not  manufacture
and  in  order  to  attract  the  concept  of  manufacture,  there  must  be
transformation of the raw materials into a new and different article  having
a distinctive name, character and use.  In that  regard  reliance  has  been
placed on Union of India v. Ahmedabad Electricity  Co.  Ltd  &  others.[25],
Hindustan Zinc Ltd. v. CCE, Jaipur[26], Delhi Cloth & General Mills  (supra)
and Satnam Overseas Ltd. v. CCE, New Delhi[27].  It  has  been  emphatically
put forth that a simple process of mixing do not amount  to  manufacture  as
there is no transformation of  the  inputs  into  any  new  or  differential
commodity and for the said proposition, reliance has  been  placed  on  CCE,
Bangalore-II v. Osnar Chemicals Private  Ltd.[28],   CCE,  Meerut  v.  Goyal
Gases (P) Ltd.[29] and Crane Betel Nut Powder Works v. Commr. of  Customs  &
Central Excise, Tirupathi[30].  Further stand of the respondent is  that  in
respect  of  the  Sub-Heading  3302.10  which  covers  food   flavours,   no
artificial  or  extended  meaning  has  been   given   to   the   expression
‘manufacture’ by the legislature  by  exercising  the  power  under  Section
2(f)(iii) and hence, it cannot be regarded as manufacture.   Heavy  reliance
is placed on the decisions in Shyam Oil  Cake  Ltd.  v.  CCE-I,  New  Delhi,
Jaipur[31] and CCE v. S.R. Tissues (P) Ltd.[32]  As far as the stand of  the
revenue that the assessee at one point of time had accepted the  process  of
mixing and manufacture and paid the duty under  the  specified  heading,  it
would debar the assessee to raise the plea again is sans  substance  as  the
Commissioner himself had  admitted  that  food  flavours  were  prepared  by
simple manual mixing of odoriferous substances but by  the  assessee.   That
apart, the assessee was entitled to raise such an issue in  respect  of  the
subsequent period and is not stopped to do so in view  of  the  decision  in
Municipal Corporation of City of Thane v. Vidyut Metallics Ltd.[33]  As  far
as the conclusion arrived at by the tribunal that  two  show  cause  notices
dated 11.04.2002 and 30.04.2004 are barred by limitation, no  fault  can  be
found with it inasmuch as the said show  cause  notices  were  issued  after
expiry of one year from  the  period  covered  thereunder  and  hence,  plea
barred by limitation as provided  under  Section  11A(1)  of  the  Act.   As
regards the limitation, learned  senior  counsel  for  the  respondent  have
drawn inspiration from Cosmic  Dye  Chemical  v.  CCE,  Bombay[34],  Padmini
Products  v.  CCE,  Bangalore[35],  Pushpam  Pharmaceuticals  Co.  v.   CCE,
Bombay[36] and Uniworth Textiles Ltd. v. CCE, Raipur[37]. As far as  penalty
imposed under Section 11AC is concerned, it is urged that there has been  no
fraud  or  collision  or  wilful                           mis-statement  or
suppression of facts or contravention of provisions of the Act or the  Rules
with the intention to evade payment of duty and, therefore, the  authorities
could not  have  mechanically  imposed  the  penalty  and  the  tribunal  is
absolutely justified in setting aside the same.
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
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  States[39],  which  is  to   the
following effect:-
“‘Manufacture’ implies a change, but every change  is  not  manufacture  and
yet every change of an article  is  the  result  of  treatment,  labour  and
manipulation.  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 Packers[40], a three-Judge  Bench  while  interpreting
Section 5-A(1)(a) of the Kerala General Sales Tax Act, 1963 opined that:-

“There are several criteria for determining whether a commodity is  consumed
in the manufacture of another. The generally prevalent test is  whether  the
article produced is regarded in the trade, by  those  who  deal  in  it,  as
distinct in  identity  from  the  commodity  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
difference in identity between the  original  commodity  and  the  processed
article it is not possible to say that one commodity has  been  consumed  in
the  manufacture  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 existence include  Anwarkhan  Mahboob  Co.
v. State of  Bombay[41]  (where  raw  tobacco  was  manufactured  into  bidi
patti), A. Hajee Abdul Shakoor and Co. v. State  of  Madras[42]  (raw  hides
and skins constituted a different commodity from  dressed  hides  and  skins
with different physical properties), State  of  Madras  v.  Swastik  Tobacco
Factory[43] (raw tobacco  manufactured  into  chewing  tobacco)  and  Ganesh
Trading Co., Karnal v. State of Haryana[44], (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.  CTO[45],  (where
hydrogenated groundnut oil was regarded as groundnut oil) and C.S.T.,  U.P.,
Lucknow v. Harbilas Rai and Sons[46]  (where  bristles  plucked  from  pigs,
boiled, washed with soap and other  chemicals  and  sorted  out  in  bundles
according to their size and colour  were  regarded  as  remaining  the  same
commercial commodity, pigs bristles).”


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 convenient  from  and  by  reason  of  being
canned it is capable of storage without spoiling. The  additional  sweetness
in the canned pineapple arises from the sugar added as a preservative. On  a
total impression, 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
substances 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  phthalate,  a  non-odoriferous  substance.
The odoriferous substance is the basis of the mixture. It  is  not  disputed
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  raw  material  in
industry, it would be classifiable under Heading 33.02.

11. In our opinion, the Tribunal was in error in construing clause  1(e)  of
Chapter 29 and in holding that  the  said  product  was  classifiable  under
Chapter 29. Clause 1(e) of the Notes in Chapter  29  postulates  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  specific  use  rather
than for general use. As per the certificate 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 suitability for use it has to be dissolved in a  solvent.  The
need of a solvent is not only for the purpose of storage  and  transport  of
the chemical, but also for retaining the suitability of  the  product  after
it is manufactured. 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  product
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 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 Company[49], 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  emergence  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 something 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  activity
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 excise 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  Section  80-IA  will   have   disastrous
consequences, particularly in view of the fact that  the  assessees  in  all
the cases would plead that they were not liable to 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 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 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
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 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.

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
-----------------------
[1]     (2005) 9 SCC 28
[2]    1997 ELT (J199)SC
[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
[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
[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)
[20]    2004 (171) ELT 329 (Tri-Chennai)
[21]    (2004) 2 SCC 727
[22]    (2003) 1 SCC 70
[23]    2002 (142) ELT 162 (Tri-Chennai)
[24]    2015 (6) SCALE 137
[25]    (2003) 11 SCC 129
[26]    (2005) 2 SCC 662
[27]    (2015) 13 SCC 166
[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
[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
[38]    AIR 1963 SC 791
[39]    207 US 556 (1908)
[40]    1980 Supp. SCC 174
[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)
[47]    (2000) 10 SCC 478
[48]    (2010) 2 SCC 699
[49]    1994 Supp (1) SCC 280
[50]    Civil Appeal Nos. 1983-2039 of 2016 dated 18.10.2016

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