Remelting of returned goods and limitation defeated excise demand, but procedural breach still sustained a separate penalty.

Returned goods that were remelted and lost their identity were treated as having been subsequently cleared on duty payment, so the excise demand and the consequential penalty under Section 11AC were held unsustainable, especially where the show cause notice was issued beyond the normal limitation period and the department already knew the material facts. However, use of fresh stock in place of the returned goods amounted to non-compliance with the prescribed reprocessing procedure, and the separate procedural penalty under Rule 173Q was sustained.

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Issues: Whether the duty demand raised on goods cleared under Rule 173H and Rule 57F(4) of the Central Excise Rules, 1944, along with the consequential penalty under Section 11AC of the Central Excise Act, 1944, was sustainable, and whether the additional penalty under Rule 173Q of the Central Excise Rules, 1944 was justified.

Analysis: The returned sheets could not be repaired or reconditioned and had to be remelted, by which process they lost their identity. The records showed that the appellant had filed the requisite D-3 intimation and that the goods said to have been cleared under the reprocessing procedure were in fact subsequently cleared on payment of duty. The demand was also found to be time-barred, as the show cause notice was issued beyond the normal period and the facts were already within the department's knowledge. In that setting, the duty demand and the Section 11AC penalty were not sustainable. However, the appellant had admittedly used fresh stock in place of the returned goods, which amounted to a violation of the prescribed procedure, attracting the separate penalty under Rule 173Q.

Conclusion: The duty demand and the penalty under Section 11AC were set aside, but the penalty under Rule 173Q was upheld.

Final Conclusion: The appeal succeeded only to the extent of setting aside the duty demand and the major penalty, while the procedural penalty was sustained.

Ratio Decidendi: Where the returned goods lose identity on remelting and the goods are ultimately cleared on payment of duty, the demand fails on merits and limitation if the department was already aware of the facts; however, violation of the prescribed procedure can still justify a separate procedural penalty.

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