Export diversion penalty upheld in principle, but personal penalties fail absent evidence of culpable participation.

Penalty may be sustained for diversion of sugar cleared for export to home consumption without prior permission, even where duty was paid before the show cause notice, because breach of the prescribed export procedure still attracts penal consequence; the merchant-exporter's penalty was therefore upheld in principle but substantially reduced. Personal penalties on the supplying manufacturers under Rule 26 of the Central Excise Rules, 2001 were not sustainable because they had cleared the goods against export certificates and there was no evidence of knowing assistance in the diversion; those penalties were set aside.

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Issues: (i) Whether penalty on the merchant-exporter for diverting sugar cleared for export to home consumption, after payment of duty before the show cause notice, warranted reduction; (ii) Whether personal penalties on the supplying manufacturers were sustainable under Rule 26 of the Central Excise Rules, 2001.

Issue (i): Imposition of penalty was based on diversion of export goods to home consumption without obtaining prior permission from the competent authority. The duty liability had already been discharged before issuance of the show cause notice, but the failure to follow the prescribed procedure constituted a lapse attracting some penal consequence.

Conclusion: The penalty on the merchant-exporter was upheld in principle but reduced substantially.

Issue (ii): The supplying units had cleared the sugar against certificates issued by the Superintendent for export purposes. They were not responsible for producing proof of export, and the finding that they had knowingly assisted diversion of the goods was not supported by evidence.

Conclusion: The personal penalties imposed on the supplying manufacturers were set aside.

Final Conclusion: The decision granted partial relief by substantially reducing the penalties on the merchant-exporter and deleting the penalties on the other two appellants.

Ratio Decidendi: Penalty may be sustained for breach of the prescribed export procedure even after duty is paid before notice, but personal penalty cannot be imposed without evidence of culpable participation in the improper diversion of goods.

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