Warranty replacement goods remain dutiable, while Section 11AC penalty needs proof of suppression or intent to evade duty.

Warranty replacement goods remained liable to central excise duty when cleared, because free replacement under warranty did not take them outside excisability and the demand was sustained. Penalty under Section 11AC was deleted, as the record did not establish fraud, wilful misstatement, suppression of facts, or intent to evade duty. Penalty under Rule 173Q was upheld because the assessee cleared the goods without duty and without following the prescribed procedure despite prior adverse adjudications, but one penalty was reduced from Rs. 5 lakhs to Rs. 1 lakh for proportionality.

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Issues: (i) Whether central excise duty was payable on goods cleared as free warranty replacement; (ii) whether penalty under Section 11AC of the Central Excise Act, 1944 was leviable; (iii) whether penalty under Rule 173Q of the Central Excise Rules, 1944 was warranted and whether the quantum required reduction.

Issue (i): Whether central excise duty was payable on goods cleared as free warranty replacement.

Analysis: The liability to duty on warranty replacement stood covered by the Supreme Court's decision in the assessee's own case. Free replacement under warranty does not take the goods outside the scope of excisability merely because the manufacturer bears the cost of replacement. The value recoverable from the customer included the component relatable to such replacement, and the goods remained dutiable when cleared.

Conclusion: Duty was payable and the demand was upheld against the assessee.

Issue (ii): Whether penalty under Section 11AC of the Central Excise Act, 1944 was leviable.

Analysis: Penalty under Section 11AC requires non-payment of duty by reason of fraud, collusion, wilful misstatement, suppression of facts, or contravention with intent to evade duty. The record showed that the department was aware of the clearances and the issue had already been the subject of prior adjudication, negativing the element of suppression or fraudulent intent necessary for Section 11AC.

Conclusion: Penalty under Section 11AC was not leviable and was set aside.

Issue (iii): Whether penalty under Rule 173Q of the Central Excise Rules, 1944 was warranted and whether the quantum required reduction.

Analysis: Rule 173Q permits penalty where excisable goods are removed in contravention of the Central Excise Rules and the goods are liable to confiscation. The assessee cleared the free warranty replacements without duty and without following the prescribed procedure despite prior adverse adjudications, making the rule applicable. However, the penalty had to be proportionate to the circumstances.

Conclusion: Penalty under Rule 173Q was justified, but one of the penalties was reduced from Rs. 5 lakhs to Rs. 1 lakh while the other penalties were maintained at Rs. 1 lakh each.

Final Conclusion: The duty demand was sustained, the statutory penalty under Section 11AC was deleted, and the penalties under Rule 173Q were retained with partial reduction in amount, resulting in only partial relief to the assessee.

Ratio Decidendi: Warranty replacement goods remain dutiable when cleared, but Section 11AC penalty requires proof of fraud or suppression with intent to evade duty, whereas Rule 173Q penalty can be imposed for contravention of the excise procedure even without such mens rea.

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