Case: Union Of India Vs. M/S Rajasthan Spinning &amp; Weaving Mills

2. What are the conditions and the circumstances that would attract the imposition of penalty under section 11AC of the Central Excise Act (`The Act, hereinafter)? In the two cases before us the Tribunal has taken the view that there was no warrant for levy of penalty since the assessees had deposited the balance amount of excise duty (that was short paid at the first instance) even before the show cause notice was issued. On the other hand, on behalf of the Revenue, the appellants in the two appeals, it was contended, relying upon a recent decision of this Court in Union of India Vs. Dharamendra Textile Processors, 2008 (231) ELT 3  that mere non payment or short payment of duty (without anything else!) would inevitably lead to imposition of penalty equal to the amount by which duty was short paid. In our view the reason assigned by the Tribunal to strike down the levy of penalty against the assessees is as misconceived as the interpretation of Dharamendra Textile is misconstrued by the Revenue. We completely fail to see how payment of the differential duty, whether before or after the show cause notice is issued, can alter the liability for penalty, the conditions for which are clearly spelled out in section 11AC of the Act.3. Though both the appeals turn on a question of law, it would be nevertheless useful to take a brief look at the facts of the two cases.4. In the appeal arising from SLP (C) No.15927/2007 the respondent- assessee is a manufacturer of P/V yarn. On July 12, 2000 the Preventive Party of Central Excise Division, Udaipur visited the assessees factory premises and on scrutiny of its internal records took the view that in clearances of goods on ex-mill sales there was short payment of duty by Rs.1,09,682.00 and by Rs.69,900.00 on sales made from the assessees depot. The short payment of duty, according to the Revenue, took place in the following circumstances. The assessee was collecting handling and forwarding charges at the rate of Rs.6.00 per bag/ carton up to October, 1996 and after that at the rate of Rs.8/-. The amount of handling and forwarding charges was shown in the invoices separately from the assessable value of the goods. During the material time the assessee had collected a sum of Rs.7,46,219.00 as handling and forwarding charges on its sales from the mill. The assessee paid duty only on the difference between the amount collected by it and the actual expenditure incurred on loading and handling of goods within the factory. In this way a sum of Rs.5, 59,603.00 was left out of reckoning for levy of excise duty. The excise duty on the aforesaid sum came to Rs.1, 09,682.00. In the same manner there was short payment of duty amounting to Rs.69, 900.00 on sales made from the assessees depot.5. On the aforesaid facts the Additional Commissioner, Central Excise, Jaipur issued a show cause notice to the assessee on March 27, 2001. In the notice it was expressly acknowledged that on being pointed out the assessee deposited the full amount of duty (that is, Rs.1,09,682.00 + Rs.69,900.00) on August 26, 2000. Nevertheless, the notice went on to say that with effect from October 1, 1996 the requirement to submit the invoices to the Central Excise department was dispensed with and the assessee had discontinued submitting its invoices to the concerned authorities. This resulted into suppression of material facts on its part that the handling and forwarding charges were not being added on to the assessable value of the goods. The Additional Commissioner, therefore, invoked the provision of penalty as well. The assessee filed its show cause against imposition of penalty but the Joint Commissioner by his order dated September 26, 2001 not only confirmed the demand of duty (that was already deposited by the assessee) but also imposed penalty amounting to Rs.1,79,522/- under section 11AC of the Act. On appeal, however, the Tribunal set aside the imposition of penalty on the sole ground that the assessee had made payment of the full duty amount even before the issuance of notice.6. M/s Lanco Industries Limited, the respondent-assessee in the appeal arising from SLP (C) No. 4078/2008 is a company engaged in the manufacture of pig iron. The assessee sold pig iron and molten metal to another company called M/s. Lanco Kalahasthi Castings Limited (LKCL) which was in existence at the material time before its amalgamation with the respondent company, with effect from, April 8, 2004 as per the order of the Andhra Pradesh High Court, dated February 20, 2004 in Company Petition no. 182-83/ 2003. LKCL had its factory at a distance of about 150 metres from the assessees factory where the pig iron and molten metal, on sale, were transferred for manufacture of ductile iron pipes by the transferee company. The sold goods were cleared from the factory of the assessee on payment of central excise duty on transaction value, that is, the price actually charged by it from LKCL. LKCL would get full CENVAT credit for the duty paid by the respondent company and would reimburse to the assessee the amount of duty at actuals.7. The Central Excise officers on scrutiny of the annual record of the respondent for the period July 1, 2000 to March 31, 2004 took the view that the assessee had been clearing molten iron and pig iron to M/s. LKCL on an improper assessable value. In the annual reports of the respondent company for the years 2000-01 and 2001-02 LKCL was listed as one of its associate companies. The annual reports further revealed that the two companies had a number of common directors on their respective boards, as key managerial personnel. The common directors were also related to each other. The two companies were having related party transactions in the form of sale of goods etc. In light of the facts disclosed in the respondent companys annual reports the Central Excise authorities took the view that after the amendment of Section 4 with effect from July 1, 2000, in relation to the respondent company, LKCL was `related person within the meaning of section 4(3) (b) (ii) of the Central Excise Act. That being the position the value of molten iron and pig iron cleared by the assessee to LKCL, for payment of duty was required to be determined in terms of Rule 8 of Central Excise Valuation (Determination of Price of Excisable goods) Rules 2000, i.e., @ 115% of the cost of production upto August 4, 2003 and after that date @ 110% in terms of the amendment introduced in the rule by notification No. 60/2003-CE (NT), dated August 5, 2003. The authorities calculated the amount of duty short-paid by the assessee for the period July 1, 2000 to March 31, 2004 at Rs. 56,04,274.00 for pig iron and Rs. 70,05,163.00 for molten metal, totaling to Rs. 1,26,09,437.00. Accordingly, the Commissioner, Central Excise, issued notice to the assessee on July 27, 2005 raising the demand of differential duty, besides interest and penalty, alleging that the assessee had willfully suppressed the relevant facts from the department with intent to evade the proper payment of duty.8. The assessee in his reply explained that it had deposited the entire amount of the demand on the same day (July 27, 2005). Moreover, the whole exercise was revenue neutral and, therefore, there was no reason to impose interest, much less any penalty. The Commissioner, however, not only confirmed the demand of duty but by his order dated January 25, 2006 also levied interest under section 11AB and 100% penalty under section 11AC of the Act observing whether or not the demand was revenue neutral was not relevant to the issue before him. Against the order of the commissioner the assessee filed an appeal before the Customs Excise and Service Tax Appellate Tribunal. The Tribunal allowed the appeal by its order dated September 5, 2006 as noted above.9. On behalf of the assessees in both the cases it was submitted the stand of the Revenue that there was any short payment of duty and the consequent demand for recovery of the differential duty was quite untenable but the assessees had made payment of the demands simply in order to buy peace and to avoid any litigation. In those circumstances the imposition of penalty was wholly unjust, unwarranted and unauthorised in

Court's reasoning:
17. The main body of1 lays down the conditions and circumstances that would attract penalty and the various provisos enumerate the conditions, subject to which and the extent to which the penalty may be reduced.18. One can not fail to notice that both the proviso to sub section 1 of section 11A and section 11AC use the same expressions: "....by reasons of fraud, collusion or any wilfulmisstatement or suppression of facts, or contravention of any of the provisions of this Act orof the rules made thereunder with intent to evade payment of duty,...". In other words the conditions that would extend the normal period of one year to five years would also attract the imposition of penalty. It, therefore, follows that if the notice under section 11A (1) states that the escaped duty was the result of any conscious and deliberate wrong doing and in the order passed under section 11A (2) there is a legally tenable finding to that effect then the provision of section 11AC would also get attracted. The converse of this, equally true, is that in the absence of such an allegation in the notice the period for which the escaped duty may be reclaimed would be confined to one year and in the absence of such a finding in the order passed under section 11A (2) there would be no application of the penalty provision in section 11AC of the Act. On behalf of the assessees it was also submitted that sections 11A and 11AC not only operate in different fields but the two provisions are also separated by time. The penalty provision of section 11AC would come into play only after an order is passed under section 11A(2) with the finding that the escaped duty was the result of deception by the assessee by adopting a means as indicated in section 11AC.19. From the aforesaid discussion it is clear that penalty under section 11AC, as the word suggests, is punishment for an act of deliberate deception by the assessee with the intent to evade duty by adopting any of the means mentioned in the section.20. At this stage, we need to examine the recent decision of this Court in Dharamendra Textile (supra). In almost every case relating to penalty, the decision is referred to on behalf of the Revenue as if it laid down that in every case ofor short payment of duty the penalty clause would automatically get attracted and the authority had no discretion in the matter. One of us (Aftab Alam,J.) was a party to the decision in Dharamendra Textile and we see no reason to understand or read that decision in that manner.From the above, we fail to see how the decision in Dharamendra Textile can be said to hold that section 11AC would apply to every case ofor short payment of duty regardless of the conditions expressly mentioned in the section for its application.The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of section 11AC would depend upon theexistence or otherwise of the conditions expressly stated in the section, once the section is applicable in a case the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under(2) of section 11A. That is what Dharamendra Textile decides.24. It must, however, be made clear that what is stated above in regard to the decision in Dharamendra Textile is only in so far as section 11AC is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in that decision.