Featured image for Supreme Court Judgment dated 12-10-2017 in case of petitioner name Commissioner of Central Excise vs M/S Karnataka Soaps & Detergen
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Excise Duty on Odoriferous Compounds: Supreme Court Clarifies Marketability Test

The Supreme Court of India recently ruled on a significant taxation dispute concerning the excisability of odoriferous compounds used in manufacturing agarbathis (incense sticks). The case, Commissioner of Central Excise & Service Tax, Bangalore vs. M/S Karnataka Soaps & Detergents Ltd., addressed whether such compounds, which are intermediate products, should be subjected to excise duty under the Central Excise Act, 1944.

The core issues before the Court were:

  • Whether the Board’s Circular No. 495/61/99-CX.3, dated 22.11.1999, exempts excise duty on odoriferous compounds.
  • Whether actual marketing of the perfumery compound is necessary for it to be subjected to excise duty.

Background of the Case

The respondent, M/S Karnataka Soaps & Detergents Ltd., is a manufacturer of agarbathi perfumes. The company prepares odoriferous compounds at its Bangalore unit and transfers them to its Mysore unit, where they are applied to agarbathis. The respondent had been paying excise duty on these substances until March 2001, when it stopped based on the Board’s circular, which clarified that non-marketable odoriferous substances are not excisable.

However, the Additional Commissioner of Central Excise, Bangalore-III, issued a show-cause notice demanding excise duty along with penalty and interest under Sections 11A, 11AB, and 11AC of the Central Excise Act, 1944, for the period from 2001-2002 to 2006-2007. The authorities held that the Board’s circular was not applicable and that the respondent must pay duty on the compounds.

Arguments of the Appellant (Revenue)

The Revenue, represented by Additional Solicitor General P.S. Narasimha, made the following points:

  • The excise duty applicable to the odoriferous compounds is clearly defined under Chapter Sub-Heading 3302.90 of the Central Excise Tariff Act, 1985.
  • The Board’s circular dated 22.11.1999 does not apply because the respondent manufactures the perfumery compound separately and then transports it to another unit, rather than applying it directly in a continuous process.
  • The perfumery compound is capable of being sold in the open market, making it excisable.
  • The CESTAT (Customs, Excise, and Service Tax Appellate Tribunal) erred in holding that the absence of actual sales exempts the product from excise duty.

Arguments of the Respondent (M/S Karnataka Soaps & Detergents Ltd.)

The respondent, represented by counsel Ms. L. Charanya, countered:

  • The perfumery compound is not directly sold but is used internally, making it non-excisable.
  • The Board’s circular explicitly states that odoriferous compounds used in the agarbathi manufacturing process are not excisable.
  • Since the compound is not a finished product meant for sale, it should not be subject to excise duty.

Supreme Court’s Key Findings

The Supreme Court ruled in favor of the Revenue and made the following observations:

“The Board’s circular applies only to odoriferous compounds mixed with dough during a continuous process of manufacture. However, if the compound is separately manufactured and capable of being sold, it is excisable.”

The Court further held that actual sales are not necessary for excise duty to apply:

“Marketability is the decisive test for dutiability. Whether the goods are marketed or not is irrelevant, as long as they are capable of being marketed.”

Conclusion and Impact

The Supreme Court set aside the CESTAT’s ruling and reinstated the demand for excise duty. The key takeaways from the ruling are:

  • Odoriferous compounds are excisable if they are capable of being sold, even if they are not actually marketed.
  • Exemptions based on Board circulars must be applied strictly within their scope.
  • The ruling clarifies the taxation of intermediate goods in the manufacturing process.

This judgment reinforces the principle that the ability to market a product, rather than its actual sale, determines excisability. It has significant implications for industries dealing with intermediate products.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: Commissioner of Cent vs MS Karnataka Soaps Supreme Court of India Judgment Dated 12-10-2017.pdf

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