Company cannot face penalty under Rule 26 for excise duty verification failure, only individuals liable

CESTAT Mumbai held that penalty under Rule 26 of Central Excise Rules, 2002 cannot be imposed on companies, only on individuals. The appellant company failed to verify excise duty payment in invoices for CDs/DVDs, but the contract specified price was inclusive of all excise duty and taxes. The Tribunal ruled that Rule 26 requires personal knowledge of goods being liable to confiscation, which applies only to natural persons, not legal entities. Following precedent in Kakateeya Fabs case, the penalty imposition was set aside and appeal allowed.

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Issues Involved:

1. Imposition of penalty under Rule 26 of the Central Excise Rules, 2002 on a company.
2. Knowledge and intent to evade central excise duty.
3. Applicability of Rule 26 to legal entities.

Issue-wise Detailed Analysis:

1. Imposition of penalty under Rule 26 of the Central Excise Rules, 2002 on a company:

The appellants, M/s Zapak Digital Entertainment Ltd., contested the imposition of a penalty under Rule 26 of the Central Excise Rules, 2002, arguing that such penalties can only be imposed on individuals and not on a company. They cited several Tribunal decisions supporting their stance, including Kakateeya Fabs (P) Ltd., Simplex Infrastructures Ltd. Vs. CCE, Bhopal, Zapak Digital Entertainment Ltd. Vs. CCE, Mumbai, and Apple Sponge and Power Ltd. Vs. Commissioner of Service Tax, Audit-I, Mumbai. The Tribunal agreed with this contention, referencing the legal provisions of Rule 26, which specify that penalties can be imposed on individuals who knowingly deal with excisable goods liable for confiscation. The Tribunal found no grounds to impose the penalty on the appellants, as the rule is intended for individuals, not legal entities.

2. Knowledge and intent to evade central excise duty:

The show-cause notice accused the appellants of knowingly selling excisable goods without payment of central excise duty, thus aiding and abetting the manufacturer, M/s KRCD (India) Pvt. Ltd., in evading duty. The learned Commissioner had previously found that the appellants, along with M/s KRCD and M/s Red Hat India Pvt. Ltd., were aware that the CDs/DVDs were excisable and had evaded duty systematically. However, the Tribunal noted that the purchase orders from the appellants to M/s KRCD explicitly stated that prices were inclusive of excise duty, indicating no deliberate intention to evade duty. The Tribunal found no evidence that the appellants had knowledge of nonpayment of duty, thus negating the basis for the penalty.

3. Applicability of Rule 26 to legal entities:

The Tribunal examined Rule 26 and concluded that penalties under this rule are applicable to individuals who have knowledge of the excisable goods being liable for confiscation. The Tribunal cited several cases, including Kakateeya Fabs (P) Ltd. and Zapak Digital Entertainment Ltd., where it was held that Rule 26 penalties are not applicable to companies. The Tribunal emphasized that legal entities, such as companies, cannot possess the requisite knowledge or intent ascribed to natural persons. Therefore, the penalty imposed on the appellants under Rule 26 was deemed legally unsustainable.

Conclusion:

The Tribunal set aside the impugned order to the extent it imposed a penalty on the appellants under Rule 26 of the Central Excise Rules, 2002, and allowed the appeal in favor of the appellants. The decision reaffirmed that penalties under Rule 26 are intended for individuals and cannot be imposed on legal entities like companies. The Tribunal's judgment emphasized the necessity of individual knowledge and intent in the imposition of such penalties.

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