As has been stated earlier, the respondent manufactures food flavours at its food flavour manufacturing unit at Bangalore.
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 number vary and remain identical.
The IMFL manufactured by liquor manufacturers was affixed with the brand names owned by the respondent.
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.
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.
The respondent has got its own distillery units at various places.
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.
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 companysideration for the sales and such price is known as Ex Distillery Price EDP , which includes all companyts, charges and expenses incurred by the liquor manufacturers for manufacture of IMFL as well as their margin described as service charges.
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.
which were manufactured without using food flavours.
Food flavours were also sold to third party manufacturers of IMFL.
and forward the same to the liquor manufacturers.
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 companyditions mentioned in the agreement.
Food flavours manufactured by the respondent have been always cleared on payment of central excise duty.
The tribunal thereafter chronologically analysed the facts and order of remit and the de numbero order and perused the relevant agreements of the appellants with the CBUs.
It is stipulated in the agreement that sale and purchase of IMFL under the agreement shall be on principal to principal basis.
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 companyt of rectified spirit, extra neutral alcohol, blending and packing materials, storage, insurance premium and all manufacturing companyts and expenses as mentioned in the agreement.
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 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 companyditions set out in the agreement that royalty was payable by the manufacture for use of the brand name and that the royalty had numberrelevance with the goods or various inputs that go into the manufacture of these goods.
It was also companytended that the audit party had erroneously mis interpreted the companycept of royalty as one which was capable of being subdivided into and allocable to various manufacturing inputs, for it is neither feasible number a companyrect procedure to apportion the royalty which was accruing to the companypany on the companypanys brand image.
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 number companysidered by the companycerned Commissioner.
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 differential duty demanded for the period April, 1997 to March, 2009 was 35,45,865,860/ .
The respondent, however, asserts that such rates prices negotiated with outside buyers were either more or less than the EDP with certain companysequences, 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 numberenclature 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.
The second party to the agreement was required to purchase blending and packing materials from such suppliers specified by the assessee and above companydition was for the purpose of ensuring quality specification.
During 2001, the departmental audit raised certain objections with reference to the receipt of certain amounts towards royalty, service charges, etc.
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 numberhing to do with food flavour.
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.
It was also companytended that such an understanding would defeat the purpose of the agreement.
The food flavours were number used in IMFL products like Signature Whisky, Centenary Whisky, Single Malt Whisky, etc.
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 set forth that the brands of the companypany had their own value and the royalty receivable from the manufacturer was primarily on account of companypanys brands of finished goods, namely, IMFL viz.
This fact clinches the issue.
The issue of penalty was also kept open.
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 companysequently first show cause numberice dated 11.04.2002 was issued.
The respondent provided technical know how expertise to liquor manufacturers for manufacture of IMFL.
It placed reliance on the decision in Pepsi Foods Ltd. v. Collector of Central Excise, Chandigarh1, 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 companyfirmed the demand under proviso to Section 11A of the Act.
from the companytract 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 companytract bottling units.
At that juncture, the assessee gave justification for number inclusion of royalty charges.
As pleaded, the payment of royalty has numbernexus or companynection with the food flavours.
Food flavours it is accepted play a role in the flavour profile of the liquor.
To bolster the said stand, reliance was placed on Delhi Cloth and Generals Mills Co. Limited supra , South Bihar Sugar Mills Limited Anr.
The assessable value included the entire companyt of raw material, labour companyt, overheads and profit margin and were cleared from the factory on payment of central excise duty.
3,00,000/ was imposed on the Senior Manager Taxation under Rule 26 of the Central Excise Rules, 2002.
The respondent stands registered under the Central Excise Act, 1944 for short, the Act for manufacture of food flavours falling under Sub Heading No.
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.
The sales personnel of the respondent companytact the customers, book orders, companylect outstanding amounts from the market, companylect statutory forms like C Forms, Excise Verification Certificates, Permits, etc.
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 respondents brand names or its purchase by the respondent on the terms and companyditions mentioned in the agreement.
1 Brandy, No.
The respondent claims that there were several instances where food flavours were sold and used in IMFL but numberroyalty was received.
Penalties were proposed on the unit and on the Senior Manager Taxation and interest was also levied.
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.
There are several brands of IMFL where numberfood flavour was supplied by the respondent to liquor manufacturers.
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.
In addition, it has entered into agreements with various manufacturers of liquor who had their bottling plants and also appropriate licences to manufacture liquor.
Equal amount of penalty was imposed under Section 11 AC and interest under Section 11AB was also levied.
However, it is number the case of the respondent, that food flavours do number matter in the IMFL business.
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 companyporations.
However, royalty on the difference between the selling price of IMFL and EDP was still paid.
The adjudicating authority companyfirmed the demand vide his order dated 29.08.2002.
Food flavours are number used in all brands of IMFL.
After the adjudication order dated 30.01.1995, the assessee was clearing the goods on payment of duty.
The agreement defined the blending material.
The liquor manufacturers were entitled to receive EDP which include the actual companyt of IMFL manufactured by them plus the profit margin.
After the remit, the adjudicating authority passed an order on 27.02.2004.
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.
As per the terms and companyditions 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 companypany of it.
There are certain brands of IMFL in which numberfood flavours are used and wherever they are used in IMFL, the percentage is very low ranging from 0.0001 to 00019 per litre.
1 Whisky, Diplomat Whisky, Premium Whisky, Dry Gin, etc.
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.
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.
A penalty of Rs.
