Mixed-product duty liability applies only to the underlying component, with penalty set aside absent intent to evade.

Low diesel oil cleared after being mixed with furnace oil did not lose its duty liability merely because it was cleared as part of a mixed product; the assessee had to pay the differential between the duty already paid on furnace oil and the duty payable on the low diesel oil component. Mere operational difficulty in removing small quantities from storage tanks did not justify treating the goods as exempt or unmarketable, and remission under Rule 21 would have been the proper route if the goods were unfit for marketing as such. Penalties were set aside because the clearance was made under a bona fide belief and the facts did not show intent to evade duty.

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Issues: (i) Whether the duty liability on low diesel oil cleared as furnace oil stood discharged on payment of duty on the mixed product, subject to payment of the differential amount, and (ii) whether the penalties imposed were sustainable.

Issue (i): Whether the duty liability on low diesel oil cleared as furnace oil stood discharged on payment of duty on the mixed product, subject to payment of the differential amount.

Analysis: The clearance was effected as furnace oil after mixing the low diesel oil with furnace oil in storage tanks. The quantity of low diesel oil had not suffered duty at the higher rate applicable to low diesel oil. Mere operational difficulty in clearing small quantities from the tank bottom did not justify treating the goods as exempt or as not marketable. If the goods had become unfit for marketing as such, remission ought to have been sought under Rule 21 of the Central Excise (No. 2) Rules, 2001. The cited precedent was found inapplicable on its facts. However, since duty had been paid on the mixture as furnace oil, the assessee was required only to make good the differential between the duty paid on furnace oil and the duty payable on low diesel oil.

Conclusion: The duty liability on the low diesel oil was held to stand discharged only on payment of the differential duty amount.

Issue (ii): Whether the penalties imposed were sustainable.

Analysis: The goods were cleared under a bona fide belief that duty on the mixed product satisfied the liability, and the dispute turned on the proper duty attributable to the low diesel oil component rather than on any established intent to evade duty. In these peculiar facts, penal action was not justified.

Conclusion: The penalties were set aside.

Final Conclusion: The dispute was sent back for consequential consideration with the duty liability confined to the differential amount and the penalties annulled.

Ratio Decidendi: Where a product is cleared in admixture with another product and duty has been paid on the mixed clearance, the duty liability on the underlying component is discharged only to the extent of the duty actually attributable to that component, and penalty is not justified absent circumstances warranting it.

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