Commissioner Of Central Excise & Service Tax, Bangalore vs M/S Karnataka Soaps & Detergents Ltd.

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

JUDGMENT

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 Signature Not Verified Digitally signed by

with respect to these odoriferous compounds till March 2001 as this substance is JAYANT KUMAR ARORA Date: 2017.10.13 16:10:34 IST Reason:

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)