Section 11D liability attaches when exempted-goods recoveries are collected as excise duty, while the penalty was set aside.

Section 11D of the Central Excise Act applied where a manufacturer of both dutiable and exempted goods recovered 8% from buyers of exempted goods and showed it as excise duty on invoices. The amount paid under Rule 57CC to neutralise common input credit was not itself duty under Section 3, but the collection still satisfied the statutory requirements of Section 11D because the manufacturer was a person liable to pay duty and had represented the amount as excise duty. The penalty was found unjustified and was set aside.

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Issues: (i) whether the amount of 8% recovered by the manufacturer from buyers of exempted goods was payable to the Government under Section 11D of the Central Excise Act, 1944; (ii) whether the penalty imposed was sustainable.

Issue (i): whether the amount of 8% recovered by the manufacturer from buyers of exempted goods was payable to the Government under Section 11D of the Central Excise Act, 1944

Analysis: The manufacture involved both dutiable and exempted final products, and the assessee had taken Modvat credit on common inputs. Under the scheme of Rule 57C and Rule 57CC of the Central Excise Rules, 1944, the payment of 8% was only a mechanism to neutralise credit taken on inputs used in exempted goods where separate accounts were not maintained. The amount paid under Rule 57CC was not duty under Section 3 of the Central Excise Act, 1944, but Section 11D applies to a person liable to pay duty who collects an amount representing duty of excise from buyers. Since the assessee manufactured dutiable goods as well, and the amount was shown on invoices as excise duty in respect of exempted goods, the three requirements of Section 11D were satisfied.

Conclusion: The amount collected as 8% from buyers of exempted goods was recoverable by the Government under Section 11D, and the assessee's objection was rejected.

Issue (ii): whether the penalty imposed was sustainable

Analysis: In the circumstances of the case, the penalty was considered unjustified.

Conclusion: The penalty was set aside.

Final Conclusion: The substantive demand under Section 11D was upheld, but the penal portion of the order was removed, resulting in only partial relief to the assessee.

Ratio Decidendi: Where a manufacturer collecting an amount from buyers of exempted goods represents it as excise duty, Section 11D applies if the manufacturer is otherwise a person liable to pay duty under the Act or the rules, even though the amount paid under the credit-reversal scheme is not itself duty.

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