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2017 (1) TMI 483 - SUPREME COURT

2017 (1) TMI 483 - SUPREME COURT - TMI - Manufacture - excisability of food flavours - Valuation - inclusion of amount paid for Royalty - the food flavours were “prepared” by mixing of various essences (odoriferous substances) - 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 - The royalty paid to the respondent by the liquor manufa .....

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dent 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. - The tribunal has held that certain show cause no .....

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tures 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 .....

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t 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 rectif .....

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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 resp .....

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nt. 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 consequ .....

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een 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 u .....

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he 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 .....

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o 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, royalt .....

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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 fa .....

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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 08.0 .....

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fter 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 (2005) 9 SCC 28, 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 intere .....

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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 quantu .....

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f India & Ors v. Delhi Cloth and General Mills Co. Limited and Others 1997 ELT (J199)SC. 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 .....

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com Limited v. Supdt. Of Central Excise, Hyderabad(AP-DB) 1999 (105) ELT 263, and CCE v. Jagatjit Industries (SC) 2002 (141) ELT 306. 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 th .....

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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 indep .....

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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 no .....

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te 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 .....

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dit 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 .....

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ixtures 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 (1989) 1 SCC 602, Union Carbide v. CCE 1986 (24) ELT 169 (SC), Moti Laminates Pvt. Ltd. & Ors v. CCE, Ahme .....

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y 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, Ne .....

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r 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 consideratio .....

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he 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 fo .....

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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 .....

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f 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 bl .....

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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 an .....

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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 he .....

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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. .....

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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 .....

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t 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 .....

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he 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 .....

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ribunal 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 disti .....

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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 distin .....

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ifferent 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 2004 (171) ELT 329 (Tri-Chennai), Tega India Limited v. CCE, Calcutta II (2004) 2 SCC 727, State of Maharashtra v. Mahalaxmi Stores (2003) 1 SCC 70, and CCE Chennai v. Titanium Equipment & Anode Manufacturing Co. Ltd. 2002 (142) ELT 162 (Tri-Chennai) 20. We hav .....

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duct. 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 .....

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see 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. B .....

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merges. 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 s .....

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ion 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 .....

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n CCE, Bangalore-II v. Osnar Chemicals Private Ltd. (2012) 2 SCC 282, CCE, Meerut v. Goyal Gases (P) Ltd. (2000) 9 SCC 571 and Crane Betel Nut Powder Works v. Commr. of Customs & Central Excise, Tirupathi (2007) 4 SCC 155. 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 .....

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red 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. (2007) 8 SCC 688 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 sho .....

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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, .....

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sences 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 appropr .....

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sformation; 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 1980 Supp. SCC 174, a three-Judge Bench while interpreting Section 5-A(1)(a) of the Kerala General Sales Tax Act, 1963 opined 38 AIR 1963 SC 791 that:- There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether th .....

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s 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 underg .....

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of Bombay AIR 1961 SC 213 (where raw tobacco was manufactured into bidi patti), A. Hajee Abdul Shakoor and Co. v. State of Madras AIR 1964 SC 1729 (raw hides and skins constituted a different commodity from dressed hides and skins with different physical properties), State of Madras v. Swastik Tobacco Factory AIR 1966 SC 1000 (raw tobacco manufactured into chewing tobacco) and Ganesh Trading Co., Karnal v. State of Haryana (1974) 3 SCC 620, (paddy dehusked into rice). On the other side, cases w .....

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s 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 wi .....

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e 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 .....

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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 .....

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nly 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 .....

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. Budharaja and Company 1994 Supp (1) SCC 280, 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 .....

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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 al .....

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chaser. 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 wou .....

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n 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 manufa .....

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t full factual matrix being lucent and absolutely clear. 31. Recently, in The Additional Commissioner of Commercial Taxes, Bangalore v. Ayili Stone Industries Etc. Etc. Civil Appeal Nos. 1983-2039 of 2016 dated 18.10.2016 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 thi .....

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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 an .....

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