Excisability of Odoriferous compound/agarbathi mix - Board clarifies a 15 year old Circular
THE BACKDROP:
CBEC in Circular No. 495/61/99-CX.3 dated 22.11.1999 clarified:
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 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.
Following this Circular, Karnataka Soaps and Detergents Ltd, who were paying duty on stock transfer of certain odoriferous compounds to their own unit, stopped payment of duty with effect from April 2000. This was accepted by the Department for some time, but in November 2005 some wise officers felt that Board was wrong and so issued Show Cause Notices to the assessee - Karnataka Soaps. As usual the Adjudicating Authorities confirmed the demand with Odoriferous penalties.
The Tribunal observed - , "In our considered view, the board has taken a view which is applicable to the entire length and breadth of India and it cannot be so easily brushed away by the departmental officers ........ In our considered view, the Board Circular will apply in its full force to the case in hand before us at least to the agarbathi perfumery compounds wherein revenue has not produced any evidence of they being bought and sold."
The love of litigation took the Revenue to the Supreme Court, where the case is pending.
Fifteen Years after the Circular was Issued: New wisdom dawned in the dark corridors of power and Board has now clarified:
It has been reported that some manufacturers of such odoriferous compounds have claimed non- excisability on the ground that such compounds are a trade secret, not sold in the market and hence not excisable. This is despite the fact that such compounds have shelf life and are capable of being marketed as a distinct identifiable commodity.
It may be noted that Section 2(d) of the Central Excise Act, 1944 has been amended in 2008 to insert a deeming fiction regarding marketability. Specific cases have been detected, where intermediate masala mix has been found to be actually bought and sold. It is therefore clarified that Board's Circular No. 495/61/1999-CX.3 dated 22.11.1999 is applicable only to such intermediate compound or odoriferous compounds as are not capable of being bought and sold. In cases where on the basis of evidence it is established that such intermediate compounds are capable of being marketed, the same will be excisable, irrespective of whether the compound is actually marketed or not.
Why did the Board wait for fifteen years to clarify this position and why did the Board take the matter to the Supreme Court when an assessee had followed its own circular?
How much money are they going to get from the agarbathi (perfumed incense stick) manufacturers as excise duty on the secret odoriferous compounds? Even if it is excisable and dutiable, shouldn't it be exempted - and what is the cost of litigation?
And what about the other stick industry - cigarette?
CBEC Circular No. 989/13/2014-CX.3, Dated: November 7, 2014