Clandestine removal and cum-duty valuation require duty recomputation, with section 11AC penalty sustained and adjusted accordingly.

Goods cleared without invoices or statutory records were treated as clandestinely removed, and letters describing them as samples or seconds did not prove they were reject or substandard goods. The valuation stand based on reject status was therefore rejected, but the duty had to be recomputed on a cum-duty basis because duty was embedded in the price realised. Amounts paid during investigation were to be appropriated against duty. Penalty under section 11AC was attracted once clandestine removal was established, with consequential recomputation if the duty demand changed.

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Issues: (i) whether the appellant clandestinely removed the goods without invoice or accounting entries; (ii) whether the goods were liable to be valued as normal goods or as substandard/reject goods, including the question of cum-duty valuation; (iii) whether penalty under section 11AC of the Central Excise Act, 1944 was attracted; and (iv) whether the amount already paid during investigation was to be deducted while determining the penalty.

Issue (i): whether the appellant clandestinely removed the goods without invoice or accounting entries

Analysis: The goods were admittedly cleared without raising invoices and without making the necessary entries in the statutory records. The recipients' letters describing the goods as samples or seconds did not establish that the goods were substandard. In the circumstances, the claim that the clearances were of reject goods was not substantiated.

Conclusion: The appellant clandestinely removed the goods.

Issue (ii): whether the goods were liable to be valued as normal goods or as substandard/reject goods, including the question of cum-duty valuation

Analysis: The finding that the goods were not proved to be rejects or substandard justified denial of the assessee's primary valuation stand. At the same time, the duty computation required recalculation on a cum-duty basis, since duty was embedded in the price realised. The demand already paid during investigation was liable to be appropriated against the confirmed duty.

Conclusion: The goods were not proved to be reject goods, but the duty had to be recomputed on cum-duty value.

Issue (iii): whether penalty under section 11AC of the Central Excise Act, 1944 was attracted

Analysis: Once clandestine removal was established, the ingredients for penalty under section 11AC were made out. Payment of part of the duty during investigation did not, by itself, eliminate the statutory penalty, although any recomputation of the duty would require corresponding adjustment in the penalty amount.

Conclusion: Penalty under section 11AC was attracted.

Issue (iv): whether the amount already paid during investigation was to be deducted while determining the penalty

Analysis: The amount deposited during investigation was to be adjusted against the confirmed duty, but it did not warrant reduction of the penalty as a matter of principle. However, if the duty was recalculated on a cum-duty basis, the corresponding penalty also had to be recalculated.

Conclusion: The amount already paid was to be appropriated against duty, with corresponding recomputation of penalty if required.

Final Conclusion: The appeal succeeded only to the limited extent of remand for fresh computation of duty on cum-duty basis and consequential recomputation of penalty, while the finding of clandestine removal and the applicability of penalty were sustained.

Ratio Decidendi: Where clandestine removal is proved, duty and penalty may be sustained, but the duty demand must be recomputed on a cum-duty basis when the price collected included duty, with consequential adjustment of the penalty.

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