Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2007-08/002

03 July 2007

PJ/Case Study/07-08/02 Date: 03/07/2007

Case study

Deposit Of Duty Before Show Cause Notice, Whether Liable For Penal Action

INTRODUCTION

The issue whether the equal penalty under Section 11AC of Central Excise Act is mandatory or discretionary has been debated many times before the Tribunal and various Courts. The another issue is whether the penalty can be imposed when the duty is deposited before issue of show cause notice. There are ample of decisions on this issue. The tribunal has decided the case of Rashtriya Ispat Nigam Limited v/s CCE, Visakhapatanam [2003 (161) E.L.T. 285 (Tri. - Bang.)] in favour of assessee. But the department has filed the appeal before the Apex Court. The Apex Court after condoning the delay in filing the appeal has dismissed the case [in 2004 (163) ELT A53 (Supreme Court)]. Similarly, the Karnataka High Court has also decided in case of CCE, Manglore v/s Shree Krishna pipes Industries [2004 (165) E.L.T. 508 (Kar.)] that where the duty has been paid before the issue of show cause notice then the penalty under Section 11AC is not imposable. Following these decisions, the Larger bench of the Tribunal has also decided the case in favour of assessee in case of CCE, Delhi-III v/s Machino Montell (I) Ltd. [2004 (168) E.L.T. 466 (Tri. – LB)]. But this decision was challenged by the department in Punjab and Haryana Court and Honourable High Court has decided the case in favour of the department saying that mandatory penalty cannot be reduced. On the Contrary, the Mumbai High Court has given its verdict in favour of the assessee. But the Jodhpur High Court has given its decision following a separate analogy. We are discussing in depth the issue and analogy drawn by the Honourable Jodhpur High Court.

Basics of the Issue

Section 11 A: Recovery of duties not levied or not paid or short- levied or short-paid or erroneously refunded:-

When any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, whether or not such levy or non-payment, short levy or short payment or erroneous refund, as the case may be, was on the basis of any approval, acceptance or assessment relating to the rate of duty on or valuation of excisable goods under any provisions of this Act or the rules made thereunder, a Central Excise Officer may within one year from the relevant date, serve notice on the person chargeable with the duty which has not been levied or paid or which has been short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice.

Section 11 AC: Penalty for short-levy or non-levy of duty in certain cases:-

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 this Act or 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 11A, shall also be liable to pay a penalty equal to the duty so determined.

M/s Pack Point V/s Central Excise Commissionerate: Jaipur- II

Brief facts of the case:-

1. M/s Pack point, Jodhpur is engaged in the manufacture of polyester flexible packing material falling under chapter 39 of the Central Excise Tariff Act, 1985.

2. They wrongly availed credit on a machinery and certain inputs contravening the provisions of the Cenvat Credit Rules.

3. The anti evasion party visited the factory and caught the above errors. The mistake was accepted and total duty wrongly credited was reversed by the appellant on the spot.

4. A show cause notice was issued imposing the interest & penalty on aforesaid amount. The reply was duly given for this show cause notice but the order imposing equal penalty under Section 11AC on them was passed by Joint Commissioner, Central Excise Commissionerate: Jaipur- II.

5. The assessee filed appeal in Commissioner (Appeal) and contended that since they have already paid the duty, the penalty should not be imposed on them. But the learned Commissioner did not adhere to the submission and passed the order-in-appeal in favour of the revenue.

6. The assessee further went into the appeal before the CESTAT( tribunal). The assessee contended that the penalty should not be imposed on them as they have deposited The CESTAT has accepted the argument and waived the penalty following the judgments of Rashtriya Ispat Nigam Limited, Shree Krishna Pipe Industries and Machino Montell cited above.

7. The Central Excise Commissionerate: Jaipur- II further filed the petition in Jodhpur High Court against the aforesaid order of the tribunal. The Hon’ble High Court decided the case in the favour of assessee and held that:-

“The proposition appears to be well settled that where the duty has been deposited before the issuance of show cause notice under section 11A and section 11AB of Central Excise Act, 1944, no action under section 11 AC of the said Act for imposition of penalty can be initiated or taken. The reason is obvious. As on the date show cause notice is issued there is no short levy of duty for which such notice can be issued.”

Comment: -

The issue to be decided was simply that whether the interest and penalty can be imposed on the duty which has already been paid before the issue of show cause notice. The Hon’ble High Court has given decision on it creating a new analogy that since the duty is deposited before the issue of show cause notice then there is no liability as on the date of show cause notice, hence the demand can not be issued for the short levy of duty under Section 11A. When the demand can not be issued for the short levy then there is no question of imposing interest and penalty on the assessee.

As we have already told in the starting of this case study that there is contradictory decisions on the issue by the various High Courts. Thus, this new analogy will favour the assessee and will be able to resolve the issue.

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PJ/CASE STUDY/2007-08/002
03 July 2007

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