Excise classification turns on goods as cleared; later reimbursement arrangements do not change duty liability, though penalty may fail without evasion intent.

For excise purposes, sugar is classified on the basis of its nature at the time of removal from the factory gate, so sugar actually cleared as free sale sugar falls under the tariff entry for free sale sugar and differential duty is payable. A later inter-departmental or reimbursement arrangement does not alter the excise character of the clearance or defeat the duty liability. Penalty is not sustainable where the dispute arises from a special factual arrangement and the record shows no intention to evade duty, even though duty remains payable.

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Issues: (i) Whether the sugar cleared as free sale sugar was correctly classifiable under the tariff entry applicable to free sale sugar, making the differential duty payable; (ii) Whether penalty was exigible in the facts and circumstances of the case.

Issue (i): Whether the sugar cleared as free sale sugar was correctly classifiable under the tariff entry applicable to free sale sugar, making the differential duty payable.

Analysis: Levy sugar and free sale sugar are separately classifiable under different sub-headings of the Central Excise Tariff Act, 1985. The decisive factor for excise purposes is the nature of the goods as cleared. Since the sugar in question was actually cleared as free sale sugar, its later adjustment under an inter-departmental arrangement could not change its classification for levy. The liability to duty had to be determined on the basis of the goods as removed from the factory gate, and a subsequent change in terms or reimbursement arrangement could not alter the excise character of the clearance.

Conclusion: The differential duty was rightly demanded and the classification as free sale sugar was upheld, in favour of Revenue.

Issue (ii): Whether penalty was exigible in the facts and circumstances of the case.

Analysis: The dispute arose from a special factual arrangement between the sugar factories and the Government department, and the adjudicating authority had recorded absence of intention to evade duty. In such circumstances, although duty remained payable, the facts did not justify penal action.

Conclusion: Penalty was not sustainable and was set aside, in favour of the assessee.

Final Conclusion: The duty demand was sustained on the basis of classification at the time of clearance, but the penalty was deleted because the case did not warrant penal consequences on its special facts.

Ratio Decidendi: For excise purposes, the classification and duty liability of goods are determined by the nature of the goods at the time of removal, and a subsequent administrative or reimbursement arrangement cannot alter that liability; however, penalty may be set aside where the circumstances show no intent to evade duty.

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