2005 (9) TMI 162 - AT - Central Excise

Penalty under Rule 173Q annulled as appellant eligible for Modvat credit, leading to refund of interest paid.

The penalty of Rs. 1,00,000 under Rule 173Q was set aside as the appellant, deemed eligible for Modvat credit, had the demand for Modvat credit annulled. ... Refund of interest Issues involved: Imposition of penalty under Rule 173Q when demand for Modvat credit has been set aside.Analysis:The appeal in question dealt with the issue of whether a penalty of Rs. 1,00,000 under Rule 173Q was justifiable when the appellant had been deemed eligible for Modvat credit and the demand related to Modvat credit had been annulled. The appellants argued that they had already reversed the credit by paying the amount along with interest and were entitled to a refund of the interest as well as the setting aside of the penalty amount. The learned Consultant contended that once the demand had been invalidated due to its legal insustainability, the imposition of a penalty under Rule 173Q would not hold. Reference was made to a judgment by the Larger Bench of the Tribunal in the case of Godrej Soaps v. Commissioner of Central Excise, Mumbai, which established that penal provisions could not be enforced against the assessee when the demand was dropped for any reason, rendering the penalty unsustainable.Upon hearing the arguments, the learned JDR defended the impugned order. After careful consideration, it was observed that the Commissioner (Appeals) had ruled in favor of the assessee on the merits of the case. Consequently, the assessee was deemed eligible for a refund of the interest paid on the annulled demand. Following the precedent set by the Larger Bench of the Tribunal, it was concluded that the penalty imposed under Rule 173Q was not sustainable when the assessee had succeeded on the merits. Therefore, the penalty of Rs. 1,00,000 under Rule 173Q was set aside, and the appeal was allowed with consequential relief. The Department was directed to refund the interest amount collected in accordance with the Tribunal's judgment.