2018 (12) TMI 855 - AT - Central Excise

Levy of penalty under Rule 25 - 100% EOU - clandestine removal - Dimethy phosphonate - penalty - Held that - The Noticee is doing only contract research and manufacturing service (CRAMS) wherein they manufacture fluorine molecules through R&D for the customers. The said fluorine molecules is used in specialized advanced pharmaceuticals by the client (like Pflizer, vertex, Noverts Gilead etc in USA) i.e. used into the manufacturing of their Active Pharmaceuticals ingredients (API) which they were developing at their end to get it parented and which they would launch in next 3.8 years time for the trade. Thus, Noticee manufactures the goods under contract which will be used by the clients for their R&D purpose. Thus, goods manufactured by the Noticee is manufactured under contract and are special purpose goods and thus are of no use to other customers - as per the contract Noticee cannot share the chemistry developed/manufactured/sell these product developed to any other customer. Therefore, there is no possibility of clandestine removal. The goods which were there in stock were manufactured for the purpose of export under the contract which establish the fact that goods were not meant to be removed clandestinely with intent to evade duty. Therefore, the charges of suppressing with intent to clear the same clandestinely are not sustainable. There is otherwise no evidence on record to prove any intention of clandestine clearance. Above all there is no evidence on record to prove any intention of clandestine clearance - penalty set aside. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Imposition of penalty under Rule 25 of Central Excise Rules based on clerical error in showing closing balance of finished goods as nil.
2. Requirement of malafide intention for imposing penalty under Rule 25.
3. Interpretation of Rule 25 in relation to Section 11AC of Central Excise Act.

Analysis:
Issue 1:
The case involved the appellant, a 100% EOU engaged in manufacturing chemical products, facing penalty under Rule 25 of Central Excise Rules due to a clerical error in showing nil closing balance of finished goods in the ER-2 return for September 2016. The Joint Commissioner rejected the proposal of confiscation of stock but confirmed the penalty. The Commissioner(Appeals) upheld the penalty imposition, leading to the appellant appealing before the Tribunal. The appellant argued that the penalty was not sustainable as there was no intent to evade duty, citing a case law. The Department justified the penalty imposition, emphasizing that malafide intention was not a prerequisite for Rule 25. The Tribunal observed that the issue narrowed down to the penalty imposition, noting that the stock was physically available and meant for export, thus not for clandestine removal.

Issue 2:
The crucial question was whether malafide intention was necessary for imposing penalty under Rule 25. The Tribunal analyzed the legislative intent under Rule 25 and Section 11AC of the Central Excise Act. Referring to case laws, including the Supreme Court's interpretation, it concluded that malafide intention was a basic requirement for penalty imposition under Rule 25, especially with the clause subject to Section 11AC. The Tribunal set aside the findings denying the necessity of mensrea, thereby allowing the appeal.

Issue 3:
The interpretation of Rule 25 in conjunction with Section 11AC was pivotal. The Tribunal highlighted that Rule 25's opening words "Subject to the provisions of Section 11AC" indicated a condition for exercising power under Rule 25. Citing precedents from various High Courts, the Tribunal clarified that the elements mentioned in Section 11AC, including fraud or willful misstatement, were crucial for determining penalty under Rule 25. The Tribunal's detailed analysis established that malafide intention was indeed a prerequisite for imposing penalty under Rule 25, ultimately leading to allowing the appeal and setting aside the penalty imposition.

In conclusion, the Tribunal's judgment revolved around clarifying the requirement of malafide intention for penalty under Rule 25, emphasizing the legislative intent and legal precedents. The detailed analysis provided a comprehensive understanding of the issues involved and the reasoning behind setting aside the penalty imposition.