Revenue-neutral duty short payment defeats penalty where sister unit takes credit and no mala fide intent is shown

Undervaluation of clearances to a sister unit under Rule 8 of the Central Excise Valuation Rules was treated as inadvertent where the short-paid duty had already been deposited and the recipient unit had taken credit of that duty. On those facts, the situation was revenue neutral and there was no material to infer mala fide intent to evade duty. The duty demand was maintained, but penalty on the assessee and connected persons was set aside because penalty could not be sustained in the absence of intent to evade and with no revenue loss.

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Issues: Whether penalty under the Central Excise law was sustainable when the differential duty arising from undervaluation was paid by the manufacturer and the recipient sister unit had taken credit, making the situation revenue neutral.

Analysis: The clearances to the sister units were subject to valuation at 115% of cost under Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The duty short-paid on a small portion of the clearances had already been deposited by the assessee, and the receiving units had availed credit of that duty. In such circumstances, there was no revenue loss and no material to infer mala fide intention to evade duty. The undervaluation in a limited segment of clearances was treated as inadvertent.

Conclusion: The demand of duty was maintained, but the penalty imposed on the assessee and the connected persons was set aside.

Ratio Decidendi: Where duty short-paid on clearances to a sister unit is available as credit to the recipient unit, the matter is revenue neutral and penalty cannot be sustained in the absence of mala fide intent.

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