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Issues: (i) Whether customs duty could be sustained on raw materials used in the manufacture of goods clandestinely removed when duty was already demanded on the finished goods; (ii) Whether penalty under section 11AC of the Central Excise Act, 1944 was exigible on the duty confirmed on clandestine removal of finished goods.
Issue (i): Whether customs duty could be sustained on raw materials used in the manufacture of goods clandestinely removed when duty was already demanded on the finished goods.
Analysis: Once duty is demanded on the finished goods cleared in excess of permissible limits, the liability is attributable to the diverted or clandestinely removed finished products. The raw materials are treated as having been used for the intended manufacture, and no separate duty can be demanded again on those inputs merely because the finished goods were cleared in contravention of the scheme. The principle that duty on inputs stands extinguished where duty is recovered on the final product was applied, and the demand on raw materials was held unsustainable.
Conclusion: The demand of customs duty on raw materials was rejected and the assessee succeeded on this issue.
Issue (ii): Whether penalty under section 11AC of the Central Excise Act, 1944 was exigible on the duty confirmed on clandestine removal of finished goods.
Analysis: The confirmation of duty on clandestine removal of finished goods brought the case within the ambit of mandatory penalty under section 11AC. The absence of a cross-objection by the respondent did not alter the consequence flowing from the confirmed duty demand. The penalty for the duty confirmed on the finished goods was therefore justified.
Conclusion: Penalty under section 11AC was upheld in respect of the duty confirmed on the finished goods, and this issue was decided in favour of the Revenue.
Final Conclusion: The appeal was allowed only to the extent of restoring the penalty on the duty confirmed for clandestine removal of finished goods, while the deletion of the customs duty demand on raw materials was sustained.
Ratio Decidendi: Where duty is levied on clandestinely removed finished goods, a separate duty demand on the raw materials used in their manufacture is not sustainable, but penalty under section 11AC follows the confirmed duty on the finished goods when the statutory conditions are met.
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