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SUPREME COURT OF INDIA
Dipak Misra, N.V. Ramana, JJ.
Commissioner Central Excise, Bangalore – Appellants
Versus
M/s. United Spirits Ltd. & Anr. – Respondents
CIVIL APPEAL NO. 5003 OF 2006
Decided On : 05-01-2017
AIR 1963 SC 791; 1980 Supp. SCC 174; (2000) 10 SCC 478; (2010) 2 SCC 699; 1994 Supp (1) SCC 280 – Relied upon
(b) Administration of justice – Manufacture – Tribunal not ascertaining and analysing the process of mixing of flavours in IMFL – As to limitation Tribunal not scrutinizing the dates appropriately – Cryptic finding – Not proper – Matter remanded. (Para 32, 33, 34)
(2005) 9 SCC 28; 1997 ELT (J199)SC; 1978 ELT (J 336); 1995 (76) ELT 241(SC); (1999 (108) ELT 786; 1999 (105) ELT 263; 2002 (141) ELT 306(SC); (1989) 1 SCC 602; 1986 (24) ELT 169 (SC); (1995) 3 SCC 23; (2002) 7 SCC 435; (2002) 3 SCC 614; 2005 (188) ELT 251 (SC); 2005 (180) ELT 291 (SC); 2004 (169) ELT 315 (Tri-Del); 2004 (166) ELT 433 (SC); 1998 (98) ELT 315 (AP); 2005 (187) ELT 106 (Tri-Bang); 1993 (67) ELT 907 (Tribunal); 2004 (171) ELT 329 (Tri-Chennai); (2004) 2 SCC 727; (2003) 1 SCC 70; 2002 (142) ELT 162 (Tri-Chennai); 2015 (6) SCALE 137; (2003) 11 SCC 129; (2005) 2 SCC 662; (2015) 13 SCC 166; (2012) 2 SCC 282; (2000) 9 SCC 571; (2007) 4 SCC 155; (2005) 1 SCC 264; (2005) 6 SCC 310; (2007) 8 SCC 688; (1995) 6 SCC 117; (1989) 4 SCC 275; (1995 Supp (3) SCC 462; (2013) 9 SCC 753 – Referred
Facts of the case:
The respondent is a manufacturer of Indian Made Foreign Liquor (IMFL) and is a registered owner of several known brands of IMFL. The respondent also “manufactures” food flavours.
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.
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 did not vary and remain identical.
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 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
The tribunal opined that the definition of “Blending Material” includes food flavours. 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. 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. 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.
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.
Finding of the Court:
Cryptic order passed by the Tribunal is not sustainable.
Result: Appeal allowed. Matter remitted back to Tribunal.
JUDGMENT
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 ED
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