Excise duty on in-factory control samples upheld, while penalty was reduced on proportionality grounds.

Control samples of manufactured medicines retained inside the factory under the Drugs and Cosmetics Act were treated as liable to central excise duty because the excise rules deemed in-factory consumption or utilisation to be removal from the place of manufacture, and their retention for quality control did not exclude them from the charging provisions. The plea that the samples were taken before the goods became excisable was rejected, and the duty demand was sustained. Although liability was upheld, the penalty was found excessive on proportionality grounds and was reduced to a nominal amount, giving the assessee only partial relief.

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Issues: (i) whether control samples of medicines retained inside the factory under the Drugs and Cosmetics Act were liable to central excise duty as deemed removals under the Central Excise Rules; (ii) whether the penalty imposed required reduction.

Issue (i): whether control samples of medicines retained inside the factory under the Drugs and Cosmetics Act were liable to central excise duty as deemed removals under the Central Excise Rules.

Analysis: The goods retained as control samples were manufactured medicines, and duty became payable before their clearance. The fact that the samples were kept for quality control and not for sale did not take them out of the charging provisions. The relevant rules treated excisable goods manufactured and consumed or utilised within the factory as deemed to have been removed from the place of manufacture before such utilisation. The samples were retained only after the quality control process on the other sample had succeeded, and the plea that they were taken before the goods became excisable was rejected.

Conclusion: The demand of duty on the control samples was upheld against the assessee.

Issue (ii): whether the penalty imposed required reduction.

Analysis: Although liability to duty was sustained, the quantum of penalty was found to be excessive in the facts of the case. The penalty was therefore reconsidered on the basis of proportionality and reduced to a nominal amount.

Conclusion: The penalty was reduced in favour of the assessee.

Final Conclusion: The duty demand on the control samples was sustained, but the penalty was substantially reduced, resulting in only partial relief to the assessee.

Ratio Decidendi: Samples of excisable goods retained inside the factory in compliance with another regulatory regime may still attract excise duty where the governing excise rules deem manufacture and in-factory utilisation or retention to be removal from the place of manufacture.

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