Penalty for removal of excisable goods without duty is attracted, but the amount must remain proportionate to the breach.

Penalty was attracted where excisable goods were removed and used captively without payment of duty, because the Central Excise Rules deem captively consumed goods to have been removed immediately before such use and authorise penalty for contravention. On that basis, liability to penalty was upheld. The quantum, however, had to be exercised proportionately to the circumstances; given the exemption in other periods, the limited non-exempt period, and the assessee's status as a Government Department, the original penalty was found excessive and reduced substantially.

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Issues: (i) whether penalty was imposable for removal and captive use of excisable goods without payment of duty; (ii) whether the penalty of Rs. 75 lakhs was excessive and liable to reduction.

Issue (i): whether penalty was imposable for removal and captive use of excisable goods without payment of duty

Analysis: Under Rules 9 and 49 read with Rules 173F and 173G of the Central Excise Rules, excisable goods cannot be removed without payment of duty, and goods manufactured and used captively for making another commodity are deemed to have been removed immediately before such use. Rule 173Q authorises penalty where excisable goods are removed in contravention of the Rules. The reasoning adopted from the Supreme Court authority on Rule 173Q was that liability to penalty follows once contravention is established, though the amount remains discretionary.

Conclusion: Penalty was imposable on the assessee.

Issue (ii): whether the penalty of Rs. 75 lakhs was excessive and liable to reduction

Analysis: The goods were exempted during other periods and were not exempt only for the material period. The assessee was also a Government Department, and the circumstances showed that the penalty imposed was disproportionate to the breach. The reasoning also recognised that, unlike the fixed liability aspect, the quantum of penalty must be adjusted according to the facts of the case.

Conclusion: The penalty was reduced to Rs. 1 lakh.

Final Conclusion: The liability to penalty was upheld, but the quantum was substantially reduced, resulting in partial relief to the assessee.

Ratio Decidendi: Where removal of excisable goods in breach of the Central Excise Rules is established, penalty is attracted, but the amount of penalty remains discretionary and must be proportionate to the circumstances of the case.

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