Penalty under Section 11AC failed after pre-show cause duty payment and interpretation of Modvat credit conditions under an exemption notification.

Penalty under Section 11AC of the Central Excise Act was held not to survive where the assessee had paid the duty before issuance of the show cause notice and had not separately challenged the duty demand. The Tribunal also applied its earlier interpretation of an identical notification condition to hold that the restriction in Notification No. 6/2000-C.E. did not bar Modvat credit on inputs used in other products in the same factory. On that construction, the assessee would not have been liable to pay the duty, and the factual basis for penalty disappeared. The Revenue's appeal therefore failed.

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Issues: Whether penalty under Section 11AC of the Central Excise Act, 1944 was imposable where the assessee had deposited the duty before issuance of the show cause notice and the duty demand was not separately challenged.

Analysis: The exemption under Notification No. 6/2000-C.E. dated 01.03.2000 was denied because the assessee had availed Modvat credit on inputs and had not satisfied the notification condition. However, the Tribunal applied the earlier view taken while interpreting an identical condition in Notification No. 5/98-C.E. dated 02.06.1998, under which the relevant restriction was understood to bar credit on products manufactured in the same factory and not credit on inputs used in other products. On that basis, the assessee would not have been liable to pay the duty. Since the duty had also been paid before the show cause notice and no separate challenge was made to the duty demand, the basis for fastening penalty did not survive.

Conclusion: Penalty under Section 11AC was not imposable and the Revenue's appeal failed.

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