Rule 173Q penalty must be proportionate where duty is paid after self-detected lapse before notice.

Penalty under Rule 173Q of the Central Excise Rules, 1944 was treated as attracted where Modvat-availing inputs and job-worked goods were diverted to spare-parts sales, but the penalty did not have to match the duty amount in every case. The controlling factors were that the assessee itself detected the irregularity, quantified the liability, and paid the duty before issuance of the show cause notice. On those facts, the penalty had to be proportionate to the gravity of the offence and the mitigating circumstances, so equal penalty was considered excessive and reduced.

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Issues: Whether the penalty imposed under Rule 173Q of the Central Excise Rules, 1944 was required to be sustained at the equal amount of duty, or whether it deserved reduction in the facts and circumstances of the case.

Analysis: The dispute concerned diversion of Modvat-availing inputs and job-worked goods to spare-parts sales, with duty having been paid by the assessee before the show cause notice and after the irregularity was noticed internally. The majority view treated the matter as involving a breach of excise procedure, but held that the quantum of penalty was not required to mirror the duty demand in every case. The decision turned on the facts that the assessee itself detected the lapse, quantified the liability, paid the duty before formal proceedings, and that penalty under Rule 173Q, though attracted, had to be fixed with reference to the gravity of the offence and mitigating circumstances. The separate view confirmed that equal penalty was excessive and that the amount fixed at the stay stage represented an appropriate measure.

Conclusion: The penalty was not required to be maintained at an amount equal to the duty. It was reduced to Rs. 10,00,000, with the appeal succeeding to that extent.

Ratio Decidendi: Where duty is paid before issuance of show cause notice after the assessee itself detects the lapse, penalty under Rule 173Q remains attracted but must be proportionate to the offence and the mitigating circumstances.

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