Diversion of duty-paid inputs and Rule 26 penalty turn on proof of knowing involvement and quantified diversion.

Contemporaneous statements and seizure-linked recoveries were treated as a coherent chain of evidence showing diversion of duty-paid CP 172 SG resin, so Cenvat credit and interest were sustained only to the extent of the quantity proved diverted, with fresh quantification ordered for the balance. Penalty under Rule 26 was set aside for a director against whom no direct material showed knowing involvement in goods liable to confiscation. Penalties on other noticees were largely upheld, though one penalty was reduced and the duty-related penalty on the main noticee was remanded for recomputation on the diverted quantity finally determined.

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Issues: (i) whether the Cenvat credit demand on CP 172 SG resin allegedly diverted by the assessee was sustainable in part and to what extent; (ii) whether penalty under Rule 26 of the Central Excise Rules, 2002 was sustainable against the director who was not specifically shown to have played a direct role; (iii) whether the penalties on the remaining noticees and the remand for re-determination were justified.

Issue (i): whether the Cenvat credit demand on CP 172 SG resin allegedly diverted by the assessee was sustainable in part and to what extent.

Analysis: The statements of the principal persons, together with the recoveries from the premises of the trading and user concerns, supported the finding that a major part of the resin purchased under credit had been diverted without reversal of credit. The claim that the resin was also used in manufacture of PVC tapes was accepted only to a limited extent, since the evidence regarding the tape samples did not satisfactorily dislodge the department's case for the balance quantity. The available material justified giving benefit of doubt only for the quantity shown to have been used in PVC tapes, while the remaining quantity remained unaccounted and liable to duty and interest with extended limitation.

Conclusion: The Cenvat credit demand and interest were upheld only to the extent of the quantity found to have been illicitly diverted, and the matter was remanded for re-determination of the exact quantum.

Issue (ii): whether penalty under Rule 26 of the Central Excise Rules, 2002 was sustainable against the director who was not specifically shown to have played a direct role.

Analysis: The record did not contain any statement of the director concerned, no independent inquiry established his participation, and no material showed that he knowingly dealt with goods liable to confiscation. The role attributed in the evidence remained confined to the other director who handled the relevant transactions. On that footing, the ingredients for penalty under Rule 26 were not made out against the director against whom no direct role was proved.

Conclusion: The penalty on the director was set aside.

Issue (iii): whether the penalties on the remaining noticees and the remand for re-determination were justified.

Analysis: The evidence was sufficient to sustain penalties on the noticees who were shown to have dealt with the diverted goods or participated in the paper trail, though the quantum imposed on one director was considered excessive and was reduced. Since the duty demand had to be confined to the quantity ultimately found diverted, the corresponding penalty on the main noticee also required re-determination on that basis.

Conclusion: The penalties on the remaining noticees were substantially upheld with modification in one case, and the adjudicating authority was directed to re-compute the duty and corresponding penalty on the remanded basis.

Final Conclusion: The appeals succeeded only to a limited extent by reducing one penalty, setting aside another, and directing fresh quantification of the duty and related penalty on the diverted quantity determined by the Tribunal.

Ratio Decidendi: Where contemporaneous statements and seizure-linked recoveries form a coherent chain of evidence of diversion of duty-paid inputs, the credit can be denied to the extent of the proved diversion and penalties under the confiscation-linked provisions can follow, but a person against whom no direct material shows knowing involvement cannot be penalised under Rule 26.

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