Compounded levy scheme treated as a self-contained code, barring post-period CENVAT credit for duty, while penalty fell.

Duty arising during a compounded levy scheme had to be paid in the manner prescribed under Section 3A and Rule 96ZO, because the scheme operated as a self-contained code and general CENVAT credit provisions did not apply to liabilities incurred within that period. The assessee therefore could not use CENVAT credit earned after the scheme period to discharge that duty, and the demand on that basis was upheld. However, the penalty imposed for default under Rule 96ZO(3) could not survive because that penalty provision had already been struck down by the Supreme Court in relation to the same scheme, so the penalty was set aside.

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Issues: (i) Whether duty payable during the compounded levy scheme could be discharged by utilising CENVAT credit earned after the scheme period. (ii) Whether penalty imposed for default in payment under the compounded levy scheme was sustainable.

Issue (i): Whether duty payable during the compounded levy scheme could be discharged by utilising CENVAT credit earned after the scheme period.

Analysis: The duty liability under the compounded levy arrangement was governed by Section 3A of the Central Excise Act, 1944 and Rule 96ZO of the Central Excise Rules, 1944, which prescribed the mode, manner and time of payment. The scheme was treated as a self-contained and comprehensive code, and the general credit provisions were held inapplicable during its operation. Since the scheme required payment in the manner stipulated therein, duty arising during the scheme period could not be shifted to CENVAT credit accumulated later.

Conclusion: The issue was decided against the assessee.

Issue (ii): Whether penalty imposed for default in payment under the compounded levy scheme was sustainable.

Analysis: The penalty provision under Rule 96ZO(3) of the Central Excise Rules, 1944 had been struck down by the Supreme Court in the context of the same scheme. In view of that binding declaration, the penalty could not survive, though the scheme itself otherwise remained operative.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The duty demand based on non-compliance with the prescribed payment mechanism was upheld, but the penalty could not stand, resulting in one appeal being dismissed and the connected appeal being allowed.

Ratio Decidendi: A compunded levy scheme that prescribes a specific mode and time for payment is a self-contained code, excluding general CENVAT credit rules for liabilities arising during the scheme period, and a penalty provision declared invalid cannot be sustained.

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