Free-supplied denaturant must enter assessable value, but confiscation fails without notice and penalty is limited by statute.

The assessable value of denatured spirit had to include the value of denaturant supplied free of cost by buyers, so the duty demand on that basis was sustained. The extended limitation period under the Central Excise Act was upheld because non-disclosure of the free-supplied denaturant was treated as material suppression, but the penalty under Section 11AC could not be applied for the period before 28-9-1996 and the Rule 173Q penalty was reduced. Confiscation and redemption fine were set aside because the show cause notice had not proposed confiscation, so that direction lacked legal support.

---

---

Issues: (i) whether the value of denaturant supplied free of cost by buyers was required to be added to the assessable value of denatured spirit; (ii) whether the extended period for demand and the penalty provisions were rightly invoked; and (iii) whether confiscation and redemption fine could be sustained when the show cause notice did not propose confiscation.

Issue (i): whether the value of denaturant supplied free of cost by buyers was required to be added to the assessable value of denatured spirit.

Analysis: The assessable value of denatured spirit had to include the value of denaturant used in its manufacture. The dispute was not on principle, but on the manner of valuation and the source of the denaturant. The value of the free-supplied denaturant was therefore liable to be added while determining central excise duty.

Conclusion: The addition of the value of denaturant to the assessable value was upheld, against the assessee.

Issue (ii): whether the extended period for demand and the penalty provisions were rightly invoked.

Analysis: The failure to disclose receipt of denaturant free of cost was treated as material non-disclosure, and the proviso to Section 11A(1) of the Central Excise Act, 1944 was held to be attracted. The extended period for recovery of duty was therefore sustained. However, the penalty under Section 11AC of the Central Excise Act, 1944 could not be sustained for the period prior to 28-9-1996, and the penalty under Rule 173Q was considered excessive and reduced.

Conclusion: The extended period was upheld, the Section 11AC penalty was set aside for the pre-28-9-1996 period, and the Rule 173Q penalty was reduced, partly in favour of the assessee.

Issue (iii): whether confiscation and redemption fine could be sustained when the show cause notice did not propose confiscation.

Analysis: Confiscation could not be ordered in the absence of a corresponding proposal in the show cause notice. Since the notice did not allege or seek confiscation, the order of confiscation and the consequential redemption fine lacked legal support.

Conclusion: The confiscation and redemption fine were set aside, in favour of the assessee.

Final Conclusion: The duty demand on inclusion of denaturant was maintained, but the penalty was modified and the confiscation-related directions were annulled, resulting in a mixed outcome with substantial relief to the assessee.

Ratio Decidendi: Free-supplied input used in manufacture must be included in assessable value, but confiscation cannot be sustained without a corresponding allegation in the show cause notice, and penalty must conform to the applicable statutory period and legal limits.

---