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)
