Supreme Court Upholds Excise Duty on Marketable Agarbathi Perfume: Commissioner of Central Excise vs. Karnataka Soaps & Detergents Ltd. (2017)

Introduction

Date of the Judgment: 12 October 2017

Citation: (2017) INSC 918

Judges: Madan B. Lokur, S. Abdul Nazeer, Deepak Gupta

Can a manufacturer of agarbathi perfume avoid excise duty by claiming it’s not marketable, even if it’s used in their own agarbathi production? The Supreme Court of India addressed this question in a case involving the Commissioner of Central Excise and M/s Karnataka Soaps & Detergents Ltd. The core issue was whether the perfumery compound, an intermediate product in agarbathi manufacturing, was subject to excise duty, and if actual sales were necessary for such levy. The judgment was delivered by a three-judge bench consisting of Justices Madan B. Lokur, S. Abdul Nazeer, and Deepak Gupta, with the opinion authored by Justice S. Abdul Nazeer.

Case Background

M/s Karnataka Soaps & Detergents Ltd. (referred to as “the respondent”) manufactures agarbathi perfumes, also known as odoriferous compounds, at its Bangalore unit. These compounds are then transported to its Mysore unit, where they are applied to agarbathis to complete the manufacturing process. Until March 2001, the respondent paid excise duty on these compounds under Chapter Sub-Heading 3302.90 of the Central Excise Tariff Act, 1985.

The Central Board of Excise and Customs (referred to as “the Board”) issued a circular on 22.11.1999, clarifying that odoriferous substances not capable of being bought and sold in the market were not excisable. Following this, the respondent stopped paying excise duty on the compounds, transferring them to their Mysore unit on a stock transfer basis. However, some of the compounds were sold to M/s. Tibetan Handicrafts Centre.

Timeline

Course of Proceedings

The Additional Commissioner of Central Excise, Bangalore-III, issued show-cause notices to the respondent, demanding excise duty, penalty, and interest under Sections 11A, 11AB, and 11AC of the Central Excise Act, 1944, for the period 2001-2002 to 2006-2007. The Additional Commissioner ruled against the respondent, stating that the Board’s circular was not applicable and that the respondent was liable for the dues. The appellate authority upheld this decision.

The respondent then appealed to the CESTAT (Customs, Excise, and Service Tax Appellate Tribunal), South Zonal Bench, Bangalore. CESTAT allowed the appeals, setting aside the orders to the extent that they upheld the demand for duty, interest, and penalty where there was no evidence of sale. The Revenue then challenged CESTAT’s orders in the Supreme Court.

Legal Framework

The case revolves around the interpretation of the Central Excise Tariff Act, 1985, specifically Chapter Sub-Heading 3302.90, which covers mixtures of odoriferous substances used as raw materials in industries. The Central Excise Act, 1944, particularly Sections 11A, 11AB, and 11AC, which deal with the recovery of unpaid duties, interest, and penalties, are also relevant.

The Board’s Circular No. 495/61/99-CX.3, dated 22.11.1999, is central to the dispute. This circular clarified that odoriferous compounds or agarbathi dough mixed with such substances, which are not capable of being bought and sold in the market, are not excisable. The circular states:

“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.”

Arguments

Revenue’s Arguments:

• The Revenue argued that the respondent was liable to pay excise duty under Chapter Sub-Heading 3302.90 of the Central Excise Tariff Act, 1985, as the perfumery compounds were covered under this provision.
• It was contended that the Board’s circular of 22.11.1999, was not applicable to the respondent, as the respondent did not manufacture agarbathi as per the general practice contemplated in the circular. The respondent manufactured perfumery compounds in Bangalore and then transported them to Mysore, where they were applied to raw agarbathis.
• The Revenue further argued that the perfumery compounds were capable of being sold in the open market. The CESTAT had erroneously applied a test of actual sale, whereas the test for excisability is marketability, not actual sale.
• The Revenue pointed out that the respondent had sold the perfumery compound to Tibetan Handicrafts Centre, which proved its marketability.

Respondent’s Arguments:

• The respondent contended that the perfumery compound manufactured and stock transferred to their Mysore unit was non-excisable as per the Board’s circular dated 22.11.1999.
• It was argued that the perfumery compound, as manufactured, was not marketed by the respondent and therefore did not attract excise duty.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. 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.
2. Whether actual marketing of the perfumery compound is necessary for the levy of excise duty.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Chapter Sub-Heading 3302.90 of the First Schedule to the Central Excise Tariff Act, 1985: This provision covers mixtures of odoriferous substances used as raw materials in industries.
• Sections 11A, 11AB and 11AC of the Central Excise Act, 1944: These sections deal with the recovery of unpaid duties, interest, and penalties.

Judgment

How each authority was viewed by the Court:

• A.P. State Electricity Board v. Collector of Central Excise, Hyderabad, (1994) 2 SCC 428:* The Court followed this authority to reiterate that marketability is the decisive test for dutiability, and actual marketing or sale of goods is not necessary.
• Escorts Limited vs. Commissioner of Central Excise, Faridabad, (2015) 9 SCC 109:* This case was followed to emphasize that for excise duty to be chargeable, there must be manufacture of a new substance known to the market, and that marketability is a question of fact.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the Board’s circular and the established legal principle of marketability for excise duty. The court emphasized that the circular was meant for intermediate products in a continuous manufacturing process, not for separately manufactured and transported goods. Additionally, the court reiterated that marketability, not actual sale, is the key factor for determining excise duty liability.

Logical Reasoning:

The court considered the argument that the perfumery compound was not marketed, but rejected it on the grounds that the test for excisability is marketability, not actual sale. The court also noted that the respondent had sold some of the compound, further supporting its marketability. The court’s decision was based on a careful analysis of the facts, the Board’s circular, and the relevant legal precedents.

The Court stated:

“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.”

“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.”

“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 being sold in the open market.”

Key Takeaways

• Excise duty is applicable to perfumery compounds used in agarbathi manufacturing if they are marketable, regardless of whether they are actually sold.
• The Board’s circular of 22.11.1999 does not apply to manufacturers who produce perfumery compounds separately and then transport them for use in agarbathi production.
• Marketability is the decisive test for excise duty, not actual sale.

Directions

The Supreme Court allowed the appeals and set aside the orders dated 11.11.2010 passed by the CESTAT.

Development of Law

The ratio decidendi of this case is that for excise duty to be applicable, the goods must be marketable, and actual sale is not necessary. This judgment clarifies the interpretation of the Board’s circular and reinforces the principle of marketability as the key test for excise duty. It also emphasizes that the circular cannot be applied beyond its intended scope, particularly to cases where manufacturing processes are not continuous.

Conclusion

The Supreme Court’s decision in Commissioner of Central Excise vs. Karnataka Soaps & Detergents Ltd. clarifies that perfumery compounds used in agarbathi manufacturing are subject to excise duty if they are marketable, regardless of whether they are actually sold. The court emphasized that the Board’s circular of 22.11.1999 does not apply to manufacturers who produce these compounds separately and then transport them for use in their agarbathi production. The judgment reinforces the principle that marketability, not actual sale, is the key determinant for excise duty liability.