Penalty under Section 11AC needs intent to evade, and goods used in further manufacture are not exempted goods.

Penalty under Section 11AC of the Central Excise Act requires proof of suppression of material facts with intent to evade duty; where delayed compliance with amended Cenvat credit rules was attributed to ignorance and mens rea was not established, the equal penalty was set aside while the duty demand remained payable. In relation to credit reversal on goods cleared for use in further manufacture, the treatment adopted by the department was rejected because such goods were not to be treated as exempted goods merely due to removal without duty when they were consumed in manufacture of dutiable final products; that demand was therefore deleted.

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Issues: (i) Whether penalty was leviable under Section 11AC of the Central Excise Act, 1944 in respect of the confirmed demand of Rs. 1,52,307/-; (ii) Whether the demand of Rs. 88,982/- relating to credit reversal on goods cleared for use in further manufacture was sustainable.

Issue (i): Whether penalty was leviable under Section 11AC of the Central Excise Act, 1944 in respect of the confirmed demand of Rs. 1,52,307/-.

Analysis: The liability to duty was not disputed, but the levy of equal penalty depended on whether the assessee had suppressed material facts with intent to evade duty. The amendment to Rule 3(4) of the Cenvat Credit Rules, 2002 had come into force on 1-3-03, and the delay in compliance was attributed to ignorance of the amendment. On those facts, the requisite mens rea for penalty was not established.

Conclusion: The penalty under Section 11AC was set aside, while the duty demand of Rs. 1,52,307/- was upheld.

Issue (ii): Whether the demand of Rs. 88,982/- relating to credit reversal on goods cleared for use in further manufacture was sustainable.

Analysis: The larger bench decision on the treatment of such clearances governed the issue. Goods cleared without payment of duty, when used further in the manufacture of final products cleared on duty payment, could not be treated as exempted goods for the purpose of denying credit treatment in the manner adopted by the department.

Conclusion: The demand of Rs. 88,982/- was set aside.

Final Conclusion: The appeal succeeded to the extent of deletion of the penalty and the second demand, but the principal duty demand of Rs. 1,52,307/- with interest remained undisturbed.

Ratio Decidendi: Penalty under Section 11AC of the Central Excise Act, 1944 requires proof of suppression of material facts with intent to evade duty, and goods cleared for use in further manufacture are not to be treated as exempted goods merely because they were removed without duty payment.

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