2016 (3) TMI 400 - AT - Central Excise

Duty demand on Free supplies - equivalent penalty under Section 11AC - suppression - Held that - We find force in the arguments of the learned Advocate that at the relevant time, there was sufficient reason for the Appellants to have had bonafide belief that duty is not payable on the free supply of goods in view of the decision of the Tribunal in the case of Vinayaka Mosquito Coil Mfg. Co. (2004 (8) TMI 179 - CESTAT, BANGALORE ). As the issue was under dispute and was finally settled only later by the decision of the Larger Bench in the case of Indica Laboratories Pvt. Ltd (2007 (5) TMI 19 - CESTAT,AHMEDABAD ), imposition of equivalent penalty under Section 11AC is not justified. Hence, we set aside the imposition of penalty under Section 11AC in respect of both the appeals - Decided in favour of assessee

Summary

Issues Involved: Duty liability on free supplied goods, imposition of penalty under Section 11AC.

Analysis:

Issue 1: Duty liability on free supplied goods
The case involved the manufacture of P&P medicines chargeable to Central Excise duty based on MRP. The Appellants supplied goods free to distributors without paying duty, claiming it as a 'quantity discount'. They relied on a decision of CESTAT Bangalore. The Revenue issued show cause notices demanding duty on these clearances. The Adjudicating authority confirmed the duty, interest, and imposed penalties. The Commissioner (Appeals) upheld these orders. The Appellants contended that they had intimated the Department about not paying duty based on a legal decision. The issue was settled by a Larger Bench decision in 2007. The Appellants argued that they had a bona fide belief that duty was not payable on free supplied goods.

Issue 2: Imposition of penalty under Section 11AC
The Appellants did not contest the duty liability but challenged the imposition of an equivalent penalty under Section 11AC. The Appellants argued that as the issue was under dispute and they had a bona fide belief based on legal precedents, the penalty should not be levied. The Revenue contended that the Appellants deliberately evaded duty payment on free supplied goods with printed MRPs, justifying the penalty.

Upon hearing both sides and reviewing the records, the Tribunal found merit in the Appellants' argument. They acknowledged that at the relevant time, there was a genuine reason for the Appellants to believe that duty was not payable on free supplied goods, as supported by legal decisions. Since the issue was under dispute and later clarified by a Larger Bench decision, the Tribunal concluded that the imposition of an equivalent penalty under Section 11AC was unjustified. Therefore, they set aside the penalty imposition while upholding the impugned orders with this modification, disposing of both appeals accordingly.