2010 (1) TMI 544 - HC - Central Excise

Penalty due to shortage of input respondent paid duty before issuance of show cause notice shortage of material was due to evaporation tendency of material Held that - there is a shortage of inputs, however, there is no intention to evade duty and further no clandestine removal of inputs, then there is no question of imposition of any penalty specially, when respondent have already paid the duty even prior to the issuance of show cause notice.

Summary

Issues:
1. Impugning the order of the Tribunal setting aside the penalty imposed on the respondents for shortage of inputs.
2. Challenge of penalty imposition before the Commissioner, Central Excise.
3. Interpretation of intention to evade duty in cases of input shortage.
4. Applicability of penalty under Rule 25 of the CENVAT Credit Rules, 2002.
5. Consideration of evaporation process impact on input shortage.
6. Justification for setting aside penalty by the Tribunal.
7. Dismissal of the appeal by the Revenue.

Analysis:

1. The case involved an appeal by the Revenue against the Tribunal's order setting aside the penalty imposed on the respondents for a shortage of inputs, namely cyclohaxamine and PVC compound, used in manufacturing footwear and P.U. Sole. The Tribunal held that there was no clandestine removal of inputs by the respondents.

2. The respondents had challenged the penalty imposition before the Commissioner, Central Excise, who maintained the penalty imposed by the Assistant Commissioner and additionally imposed a penalty for violation of Rule 13 of the Cenvat Credit Rules, 2002.

3. The Court analyzed the intention to evade duty in cases of input shortage and referred to a previous judgment where it was held that in the absence of mens rea or intention to evade duty and no clandestine removal of inputs, there should be no penalty imposed. The Court considered the shortage of cyclohaxamine due to evaporation and the negligible shortfall of PVC compound.

4. The Court examined the applicability of penalty under Rule 25 of the CENVAT Credit Rules, 2002, read with Section 11AC, and concluded that since there was no intention to evade duty and the duty had been paid even before the show cause notice, the penalty was not justified.

5. Regarding the impact of the evaporation process on the shortage of cyclohaxamine, the Court accepted the explanation provided by the respondents and found no basis to hold them liable for penalty. Similarly, the marginal shortfall in PVC compound was deemed too negligible to imply an intention to evade duty.

6. Based on the findings, the Court upheld the Tribunal's decision to set aside the penalty equivalent to the amount of duty imposed under Rule 25 of the CENVAT Credit Rules, 2002, and dismissed the appeal filed by the Revenue, concluding that there was no clandestine removal of inputs by the respondents.

7. In conclusion, the Court found no infirmity in the Tribunal's order and upheld the decision to dismiss the Revenue's appeal, emphasizing the absence of any intention on the respondents' part to evade duty despite the input shortages identified during the physical verification.