Penalty under Section 11AC of CEA, 1944

PJ/Case Laws/2011-12/1269

Penalty under Section 11AC of CEA, 1944 - presence of mens rea

Case: RANBAXY LABORATORIES LTD. V/s COMMR. OF C. EX., CHANDIGARH

Citation: 2011 (269) E.L.T. 237 (Tri. - Del.)

Issue:- Imposition of penalty under Section 11AC of CEA, 1944 – mens rea is required to be proved.

Brief Facts:- Appellants are manufacturers of bulk drugs. They had availed Cenvat credit on certain inputs. Later the quality control store department rejected the impugned inputs on 3-12-2002. On the same day the Central Excise Officers found a report titled "Status of Obsolete, Slow Moving, Non-Moving Materials" lying in the room of Senior Manager (Stores). The officers directed that the Cenvat credit availed on the impugned inputs should be immediately reversed. Appellants reversed such credit on 4-12-2002.

Later the department issued a show cause notice proposing penalty under Section 11AC of the Central Excise Act alleging that Appellant had intention not to reverse the credit and they reversed the same only because the report regarding unusable Inputs were detected by officers of the department. The SCN culminated in imposition of penalty under Section 11 AC. In appeal, the Commissioner (Appeal) confirmed the penalty imposed under Section 11AC. Aggrieved by order of the Commissioner (Appeal) Appellants are before the Tribunal.

Appellant’s Contention:- Appellants argued that due date for reversal of duty was 20-12-2002 though they reversed the credit ahead of the due date as instructed by the officers. They contest that the department has not been able to prove any mala fide intention on the part of the Appellants not to reverse the credit.

Respondent’s Contention:- The department's contention was that the appellant reversed the credit only when the Appellants were caught on the wrong foot. The Commissioner (Appeal) has relied on the decision of Tribunal in ADM India Enterprises v. CCE, Delhi - 2008 (12) S.T.R 127 and on the decision of the Supreme Court in Dharamendra Textile Processors – 2008 (231) E.L.T.3 (S.C.) and held that for imposition of penalty under Section 11AC mens rea is not an essential ingredient.

Reasoning of Judgement:- The Tribunal held that mens rea is required to be proved for imposition of penalty under Section 11AC.It was held that the judgment of the Apex Court in Dharmendra Textiles Case was given in the context of Rule 96ZO and Rules 96ZQ in the erstwhile Central Excise Rules relating to compounded levy schemes. It as to be decided with regard to these provisions that mens rea was an essential requirement as mens rea was not mentioned as an essential requirement under the said Rules. So the Apex Court held that penalty under these rules are statutory penalty and therefore for imposing such penalty mens rea is not relevant.

The Tribunal perused the provisions of Section 11AC and held that it is very clear that mens rea is to be proved to imposed penalty under Section 11AC as this section prescribes imposing penalty only where fraud, collusion or any wilful mis-statement or suppression of facts is involved. In cases involving contravention of any other provisions of rules, it was held that penalty is to be imposed only if such contravention is made with intention to evade payment of duty.

The Tribunal held that in this case an internal control process of the company resulted in identifying that of some of the inputs had become unusable. The company was in the process of writing off such inputs in their stores account and there is nothing to suggest that they would not have reversed the credit at the time of writing off the inputs in their stocks. By no stretch of imagination it can he considered necessary as per Central Excise Rules or Cenvat Credit Rules that credit should be reversed immediately when an employee of an assessee notices defect in input and it is reported to his superior or the departmental head, in charge of stores. A short delay can not imply that there was an intention to evade duty by not reversing the credit taken on the input.

Decision:- Appeal allowed with consequential relief.

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PJ/Case Laws/2011-12/1269

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