Central Excise penalty under Section 11AC fails absent specific fraud or suppression allegations and prior duty payment

Penalty under Section 11AC of the Central Excise Act, 1944 is sustainable only where the notice and record contain specific allegations of fraud, collusion, wilful misstatement or suppression of facts with intent to evade duty. Here, duty was paid on depot clearances on a transaction-value basis, and both duty and interest had been discharged before the show-cause notice. As the notice and adjudication record did not establish the required mens rea-based ingredients for penalty, the penal action under Rule 25(1)(d) read with Section 11AC could not be maintained. The penalty was therefore set aside.

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Issues: Whether penalty under Rule 25(1)(d) of the Central Excise Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was sustainable when the duty and interest had been paid before issuance of the show-cause notice and the notice did not contain specific allegations of fraud, collusion, wilful misstatement or suppression of facts with intent to evade duty.

Analysis: The dispute arose from valuation of clearances to a depot, where duty had been discharged on the basis of transaction value instead of Rule 7 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. The decisive question for penalty was whether the statutory conditions for invoking Section 11AC were established. The notice and the adjudication record did not contain a specific prima facie allegation of fraud, collusion, suppression of facts, or wilful misstatement with intent to evade duty. The duty and interest were paid before issuance of the show-cause notice, which further undermined the basis for penal action.

Conclusion: The penalty was not sustainable and was set aside.

Ratio Decidendi: Penalty under Section 11AC of the Central Excise Act, 1944 can be imposed only when the notice and record establish fraud, collusion, wilful misstatement or suppression of facts with intent to evade duty; absent such specific allegation and where duty with interest is paid before the show-cause notice, penalty cannot be sustained.

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