Rule 26 penalty requires proof of knowledge or participation in fraud; merchant exporters were not shown to be involved.

Merchant exporters were held not liable to penalty under Rule 26 of the Central Excise Rules, 2002 because the record did not show that they were party to, or had knowledge of, their supplier's fraudulent availment of Cenvat credit. The goods were purchased under excise invoices and ARE-1 documents, payment was made for the supplies, and the exported goods were the same goods received by the appellants. In the absence of cash dealings, deliberate collusion, or conscious involvement in the fraud, the element required for Rule 26 penalty was not proved, so the penalty was set aside.

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Issues: Whether the appellants, as merchant exporters who purchased goods under excise invoices and ARE-1 documents, were liable to penalty under Rule 26 of the Central Excise Rules, 2002 for the fraudulent availment of Cenvat credit by their supplier.

Analysis: The fraudulent availment of Cenvat credit by the supplier had already attained finality, but the separate question was whether the appellants were shown to be party to that fraud or had knowledge of it. The goods were purchased under invoices and ARE-1 documents, payment was made for the supplies, and the exported goods were the same goods received by the appellants. The evidence did not establish any cash transaction, deliberate collusion, or conscious involvement of the appellants in the supplier's fraud. Penalty under Rule 26 requires at least knowledge of, or participation in, dealings with goods liable to confiscation, and that element was not proved against the appellants.

Conclusion: Penalty under Rule 26 was not sustainable against the appellants, and the appeals were allowed by setting aside the impugned order.

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