Capacity-based duty demand upheld; penalty under Rule 96ZP(3) treated as discretionary, with interest maintained.

Finalised capacity determination supported the duty demand for both disputed periods: the assessed annual production capacity had attained finality, the subsequent recomputation was not challenged, and no fresh change in installed capacity justified further pro rata reduction. Penalty under Rule 96ZP(3) was not treated as automatic in every case; applying the approach comparable to Section 11AC, the provision was read as allowing discretion based on the facts and circumstances. As there was no finding of mala fide intent and delayed payment still attracted interest, the penalty was reduced to nil while interest liability remained payable.

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Issues: (i) Whether the duty demand raised on the basis of the annual capacity of production determined under the capacity determination rules was sustainable for the periods in dispute. (ii) Whether penalty equal to duty under Rule 96ZP(3) was mandatory, or whether a lesser or nil penalty could be imposed.

Issue (i): Whether the duty demand raised on the basis of the annual capacity of production determined under the capacity determination rules was sustainable for the periods in dispute.

Analysis: The annual capacity of production had been fixed by the competent authority and was never challenged by the assessee. The later re-computation on the basis of the changed parameter was also not challenged, and the constitutional challenge to the determination rule had failed. For the first period, there was no change in the relevant parameters and the demand followed the final and binding capacity determination. For the later period, the plea for a fresh pro rata reduction was rejected because the duty had already been worked out on the basis of the changed parameter and no further reduction was warranted in the absence of any fresh change in installed capacity during the year.

Conclusion: The duty demands for both periods were upheld and the challenge to the demand failed.

Issue (ii): Whether penalty equal to duty under Rule 96ZP(3) was mandatory, or whether a lesser or nil penalty could be imposed.

Analysis: The provision was construed in the light of the principle that penalty is not invariably automatic merely because duty has been determined or paid late. The authority itself had proceeded on the footing that the provision was comparable to the penalty regime under Section 11AC of the Central Excise Act, 1944. On that basis, the penalty clause was held to admit of discretion depending on the facts and circumstances, and the prolonged dispute between the parties showed absence of mala fide intent. Interest remained payable for delayed payment of duty, but the penalty required reassessment on a reasonable basis.

Conclusion: Equal penalty was not mandatory and a nil penalty was substituted, while interest on delayed duty payment was sustained.

Final Conclusion: The duty demands were sustained, but the penalty order was modified by reducing the penalty to nil and maintaining liability to pay interest.

Ratio Decidendi: Where the capacity determination has attained finality and no further change in installed capacity is shown, duty based on that determination is sustainable; penalty under Rule 96ZP(3) is not compulsory in every case and must be fixed with reference to the facts and circumstances.

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