Duty-free raw material recovery limited to duty forgone; extended limitation and director penalty were sustained.

Duty-free raw material found unaccounted could not be assessed under the proviso to Section 3 of the Central Excise Act, 1944 because that provision applies to goods manufactured or produced by a 100% EOU; recovery was confined to the duty forgone under the governing exemption notification for improper accountal or use. The limitation challenge under Section 11A failed because departmental knowledge of non-accountal, by itself, did not defeat invocation of the extended period where the statutory conditions were otherwise met. Penalty under Section 11AC was to be re-quantified in line with the revised duty liability, while the director's penalty under Rule 26 was sustained on the basis of his admitted role in diversion of duty-free material.

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Issues: (i) Whether duty on unaccounted duty-free raw material procured under CT-3 could be demanded under the proviso to Section 3 of the Central Excise Act, 1944, or only to the extent of duty forgone under Notification No. 1/95-CE dated 04.01.1995; (ii) Whether the demand was barred by limitation under Section 11A of the Central Excise Act, 1944; (iii) Whether penalty under Section 11AC of the Central Excise Act, 1944 and Rule 26 of the Central Excise Rules, 2002 was sustainable.

Issue (i): Whether duty on unaccounted duty-free raw material procured under CT-3 could be demanded under the proviso to Section 3 of the Central Excise Act, 1944, or only to the extent of duty forgone under Notification No. 1/95-CE dated 04.01.1995.

Analysis: The goods found unaccounted were raw materials procured duty free and not goods manufactured by the unit. The proviso to Section 3 applies to goods manufactured or produced by a 100% EOU, and therefore could not be used to levy duty on such raw materials. The relevant notification, however, required proper accountal and permitted recovery of an amount equal to the duty foregone on procurement where the goods were not duly accounted for or used as prescribed.

Conclusion: The duty demand under the proviso to Section 3 was not sustainable and the demand was restricted to the duty forgone on the duty-free procurement.

Issue (ii): Whether the demand was barred by limitation under Section 11A of the Central Excise Act, 1944.

Analysis: Mere knowledge of the department about non-accountal on the date of visit was held insufficient to defeat invocation of the extended period where the conditions for such invocation were otherwise present. The delay in issuance of the show cause notice therefore did not by itself make the demand time-barred.

Conclusion: The limitation challenge failed.

Issue (iii): Whether penalty under Section 11AC of the Central Excise Act, 1944 and Rule 26 of the Central Excise Rules, 2002 was sustainable.

Analysis: Since the duty liability was re-quantified to the amount of duty forgone, the penalty under Section 11AC had to be correspondingly revised. As regards the director, the admitted role in day-to-day affairs and in the diversion of duty-free material justified invocation of Rule 26.

Conclusion: Penalty on the unit was reduced to the re-quantified duty-related amount, and the personal penalty on the director was upheld.

Final Conclusion: The appeal of the unit succeeded only to the extent of restricting the duty demand to the duty foregone on the duty-free raw material, while the limitation plea failed and the personal penalty was sustained, leaving the matter for re-quantification.

Ratio Decidendi: Duty-free raw material not manufactured by the assessee cannot be assessed under the proviso to Section 3 of the Central Excise Act, 1944, and recovery in such a case is confined to the duty foregone under the governing exemption notification.

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