THE HON'BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE ASHUTOSH MOHUNTA CENTAL EXCISE APPEAL No.112 of 2011 Date:04.08.2011 Between: The Commissioner of Customs & Central Excise, Hyderabad ..Appellant And M/s. Mahalakshmi Profiles Limited ..Respondent THE HON'BLE SRI JUSTICE GODA RAGHURAM AND THE HON’BLE SRI JUSTICE ASHUTOSH MOHUNTA CENTAL EXCISE APPEAL No.112 of 2011 JUDGMENT: This is an appeal by the Revenue under Section 35(G) of the Central Excise Act, 1944 (for short ‘the Act’) against the order dated 27.12.2007 passed by the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Bangalore (the Tribunal) in Appeal No.C/768/07 rejecting the appeal of the Revenue against the order dated 09.07.2007 passed by the Commissioner of Customs, Excise and Service Tax (Appeals-I) in Order in Appeal No.24/2007 (H-I) CE. The respondent is a manufacturer of HR tubes/pipes falling under chapter heading No.7306.90 of the Central Excise Tariff Act, 1985. Apart from factory gate sales, the respondent is clearing the finished goods to consignment agents also on payment of duty. Based on intelligence gathered that the respondent is selling its goods through consignment agents, who are adopting values higher than the values on which duty was being paid at the factory gate, Officers of Central Excise, Anti-Evasion Division, Hyderabad-I Commissionerate, visited the unit as well as its registered office on 26.02.2003 and verified the stocks of inputs and finished products, which were found to tally with the book balances. On verification of the sale patties of the consignment agents and the invoices submitted by the respondent on 06.10.2006, it was observed that the values adopted by the respondent are lesser than those adopted by the consignment agents at the time of sale of goods at or about the same time in respect of the goods cleared from the factory. Since the goods are not sold at the factory gate, but are transferred to consignment agents’ premises on stock transfer basis, the Revenue felt that the value cannot be determined under Clause (a) of Sub-Section (1) of Section 4 of the Act, but must be determined as per Rule 7 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with Clause (b) of Sub-Section (1) of Section 4 of the Act. Eventually, a show cause notice was issued as to why an amount of Rs.4,29,441/- for differential duty on excess value received on the clearance of goods through the consignment agents’ during the period from 01.10.2005 to 31.03.2006 be not paid by the respondent; why interest at the applicable rate should not be demanded on the demanded amount, under Section 11 AB of the Act; why a penalty equivalent to the duty determined should not be imposed under Section 11 AC of the Act; and why penalty should not be imposed on the respondent under Rule 25 of the Central Excise Rules, 2002 (for short ‘the Rules’), for the contraventions mentioned in the show cause notice. The respondent assessee denied any suppression or intent to evade the duty. The Commissioner of Customs & Central Excise, however, in the order dated 22.05.2007, demanded differential duty of Rs.4,29,441/- payable by the respondent - assessee; ordered appropriation of Rs.1,70,000/- paid by the assessee under protest; ordered payment of interest at the appropriate rate, on the duty demanded under Section 11 AB of the Act; and imposed a penalty of Rs.1,00,000/- on the respondent under Rule 25 of the Rules. Aggrieved thereby, the respondent - assessee preferred an appeal to the Commissioner of Customs & Central Excise (Appeals-I), which was allowed by the order dated 09.07.2007. The Appellate Authority, relying on the judgment of the Supreme Court in Hindustan Steels Ltd. vs. State of Orissa[1], held that the assessee on receipt of the sale patties worked out the differential value and paid the differential duty; that the Revenue was well aware of the sale pattern of the excisable goods in question and the manner of payment of duty thereon; the assessee admittedly filed the relevant information to the department; the adjudicating authority agreed that there was no suppression of facts in the case and accordingly declined to impose equal penalty under Section 11 AC of the Act though the said provision was invoked in the show cause notice dated 18.10.2006 and nevertheless, despite the absence of suppression and an intent to evade the duty, the adjudicating authority imposed a penalty at Rs.1,00,000/- under Rule 25 of the Rules without assigning any reason. The appellate Commissioner clearly held that the penalty is not to be imposed merely because it is lawful to do so and that penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation, relying on the judgment of the Supreme Court in Hindustan Steels Ltd. (supra 1). There against, the appellant herein – the Revenue carried the matter unsuccessfully in appeal before the Tribunal, which by the order impugned rejected the appeal confirming the order passed by the Commissioner of Customs & Central Excise. Rule 25 of the Central Excise Rules, 2002, opens with the words “subject to the provisions of Section 11 AC of the Act”. Section 11 AC of the Act enjoins levy of penalty for short-levy or non-levy of duty in certain cases and provides that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reasons of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any of the provisions of the Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under Sub- Section (2) of Section 11 AC of the Act shall also be liable to pay a penalty equal to the duty so determined. Having regard to the phraseology and structure of Rule 25 of the Rules, which makes the penalty provision enumerated therein subject to the provisions of Section 11 AC of the Act, the Legislative intent is compelling that the elements of fraud, collusion, willful mis-statement, suppression of facts or contravention of any of the provisions of the Act or of the Rules, with intent to evade payment of duty must be present before a penalty under Section 11 AC of the Act or under Rule 25 of the Rules could be levied. This is what the learned Tribunal has held and rightly. We are fortified on the interpretation, that the exercise of the power to levy penalty under Rule 25 of the Rules is conditioned by the provisions of Section 11 AC of the Act, by the decision of the Gujarat High Court in Commissioner of Central Excise vs. Tripura Containers Pvt. Ltd.[2], wherein the following interpretation on the interplay of the Act and the Rules is set out as under: “In so far as invocation of the provisions of Section 11 AC of the Act and Rule 25 of the Rules is concerned, in the entire order of the adjudicating authority there is no finding to the effect that there is any fraud, misrepresentation or suppression of facts or that there is contravention of the provisions of the Act or Rules with intent to evade payment of duty on the part of the assessee. Rule 25 of the Rules provides for levy of penalty in case of any contravention of the nature referred to in clauses (a) to (d) therein. Rule 25 opens with the words, “subject to the provisions of Section 11 AC of the Act”. Thus, for the purpose of invoking the said Rule, the requirements of Section 11 AC of the Act are required to be satisfied, namely that the default should be occasioned by reason of fraud, collusion or any willful misstatement or suppression of facts, or the contravention of any of the provisions of the Act or Rules should be with the intent to evade payment of duty. Unless, the said basic ingredients are satisfied, the question of invoking either Section 11 AC of the Act or Rule 25 of the Rules would not arise. In the circumstances, in the absence of any such finding having been recorded by the adjudicating authority, the question of imposing penalty under Section 11 AC of the Act and Rule 25 of the Rules would not arise.” For the foregoing reasons, no question of law, let alone a substantial question of law, falls for consideration in this appeal by the Revenue, which is accordingly dismissed at the stage of admission. ___________________ GODA RAGHURAM, J ______________________ ASHUTOSH MOHUNTA, J 04th August, 2011 GHN [1] 1978 (2) ELT J 159 (SC) [2] 2011 (264) ELT 339 (Guj.)