Uniform Penalties on Scrap Dealers Unsustainable without Role Assessment: CESTAT Scales Down Penalties After Examining Gravity Of Violations [Read Order]

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, in a recent decision held that penalties under Rule 26(2) of the Central Excise Rules, 2002 cannot be imposed mechanically or uniformly on multiple notices without assessing their individual role extent of involvement and gravity of violations.

The appeals were based on a common adjudication order passed in the wake of a DGCEIinvestigation into the alleged misuse of CENVAT credit by Sri Madurai Meenakshi Amman Steel Re Rolling Mills (SMMAS).

The Department claimed that a number of scrap dealers and traders, including SSK Iron and Steels Pvt. Ltd., J.M. Trading Corporation, Saravana Metal Corporation, Magnum Steels and Sri Ambal Steel Traders had generated central excise invoices without any movement of goods thereby facilitating the availing of inadmissible CENVAT credit by SMMAS.

On the basis of these allegations, penalties were imposed on all appellants under Rule 26(2) at a uniform rate calculated with reference to the credit allegedly passed on without distinguishing between the respective roles played by each notice.

The appellants to a large extent, did not contest the findings of fact on the issuance of invoices without actual supply. However they contested the quantum and consistency of the penalties as they had differing levels of involvement, some had debited duty amounts and most had not derived any direct financial benefit.

The Revenue supported the penalties as they argued that the issuance of invoices without goods was sufficient to invoke Rule 26(2) regardless of profit or actual utilization of credit.

The court of Justice Ajayan T.V. held that the failure to issue invoices for the absence of goods is a grave violation and liable for penalty under Rule 26(2). But it also clarified that the penalty should be discretionary and proportionate to the violation. The CESTAT held that the imposition of penalties in a uniform manner without taking into consideration the facts the rate of occurrence and the level of guilt was not sustainable.

Noticing that the penal provisions are designed to punish according to the level of violation, the Tribunal confirmed the violations but substantially reduced the penalties imposed on each of the appellants.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates