No Penalty u/s 11AC of Central Excise Act can be imposed in absence of allegation for evasion of excise duty: CESTAT [Read Order]

The Mumbai bench of Customs Excise and Service Tax Appellate Tribunal (CESTAT) held that the penalty under section 11AC of the Central Excise Act, 1944 cannot be imposed in the absence of allegation for evasion of excise duty and modified the impugned order in an appeal by Siddheshwar SSK Ltd (The Appellant) against the Commissioner of Central Excise (CCE) (The Respondent).

The appeal was against the order passed by the CCE demanding ₹ 57,50,058 under section 11A of the Central Excise Act, 1944, with interest under section 11AB and penalty of like amount under section 11AC by recourse to two separate options afforded by rule 6 of CENVAT Credit Rules, 2004 for clearing rectified spirit, kraft paper, sugar, molasses, and denatured spirit which were taxable services.

As ‘rectified spirit’ was not excisable, show cause notice had proposed that credit proportional to production be reversed and for reversal pertinent to ‘kraft paper’, being excisable but exempt, be computed 10%/5% as prescribed in rule 6 of CENVAT Credit Rules, 2004 and for ‘kraft paper’ its clearances were as per notification no. 4/2006-CE; duty on clearances to the extent of 3500 MT per annum.

The counsel who appeared on behalf of the appellant contended that rule 6 of CENVAT Credit Rules, 2004 was intended to neutralize credit taken on ‘inputs’ or ‘input services’ used for the manufacture of goods that were exempted from duty and not partially exempt, as ‘kraft paper’ was and relied on the decision of the High Court of Madras in Commissioner of Central Excise, Tirunelveli v. DCW Ltd (2011).

The counsel further relied on the decision of the High Court of Calcutta in Commissioner of Service Tax-1, Kolkata v. Surya Vistacom Pvt Ltd (2022) and contented that it was not open to the adjudicating authority to insist on a specific form of neutralization and, more especially, when an audit objection relating to utilization of ‘molasses’ in rectified spirit had been settled by reversal of proportional credit. It was further demonstrated that, with effective disputed credit being ₹ 6,89,777, the impugned order has been disproportionate in taking recourse to rule 6 of CENVAT Credit Rules, 2004.

The counsel who appeared on behalf of the revenue submitted that it was admitted fact that the appellant had not maintained separate books of accounts for ‘dutiable goods’ and ‘exempt goods’ thus precluding availability of information for any option other than the one resorted to by the adjudicating authority.

The two-member bench consisting of Ajay Sharma (Judicial Member) and C.J. Mathew (Technical Member) after hearing both sides held that “We also find no reason to sustain the penalty imposed under section 11AC of Central Excise Act, 1944 as there is no allegation of evasion of duty otherwise payable on account of non-availability of sufficient credit on clearance of dutiable goods.” The impugned order was modified to limit recovery available under rule 6 of CENVAT Credit Rules, 2004.

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