CESTAT sets aside excise duty demands based on annual capacity fixation under protest; interest and penalties quashed per SC ruling

The CESTAT Kolkata allowed the appeal, setting aside the confirmed demands based on annual capacity fixation for excise duty, as the appellant consistently disputed and paid duty under protest without agreeing to the fixed capacity. The tribunal found no evidence that the appellant had opted for annual capacity-based payment, rendering the Revenue's demands unsustainable. Additionally, following SC precedent invalidating interest and penalty provisions under the Central Excise Rules, the tribunal also set aside the interest and penalty demands. The impugned order was therefore quashed and the appeal allowed.

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ISSUES:

Whether an assessee can switch between excise duty payment based on annual capacity determination and actual production within the same financial year under Section 3A of the Central Excise Act, 1944 and Rules 96ZO and 96ZP of the Central Excise Rules.Whether the fixation of annual capacity of production by the Commissioner without considering actual production amounts to valid determination of duty liability under Section 3A.Whether the demand of excise duty, interest, and penalty based on annual capacity determination is sustainable when the assessee has consistently opted to pay duty on actual production basis.Whether Rules 96ZO, 96ZP, and 96ZQ of the Central Excise Rules are valid and whether interest and penalty can be imposed under these Rules.

RULINGS / HOLDINGS:

The Court held that Section 3A(4) of the Act and Rules 96ZO and 96ZP provide two alternative procedures for duty payment, and the assessee must opt for one; "once having done so he cannot claim the benefit of the other" within the same financial year.The fixation of annual capacity of production by the Commissioner without the assessee's consent or acceptance, when the assessee has consistently paid duty on actual production basis and protested the capacity determination, is not a valid basis for demand of duty.The demands confirmed solely on the basis of non-payment according to the annual capacity fixed by the Revenue are "legally not sustainable" where the assessee exercised the option for actual production based payment throughout.The imposition of interest and penalty under Rules 96ZO, 96ZP, and 96ZQ is "illegal, invalid and unsustainable" as these Rules are "ultra vires the Central Excise Act" and violate Articles 14 and 19(1)(g) of the Constitution; no interest or penalty can be charged under these provisions.

RATIONALE:

The Court applied the statutory framework of Section 3A of the Central Excise Act, 1944, and Rules 96ZO and 96ZP of the Central Excise Rules, relying on binding precedent from the Hon'ble Supreme Court in Commissioner of Central Excise & Customs v. Venus Castings (P) Ltd. and Union of India v. Supreme Steel and General Mills.The Court emphasized the principle that the two procedures under Section 3A and the Rules are mutually exclusive and that the assessee's consistent option for actual production based assessment precludes demand based on annual capacity.The Court noted the absence of any material evidence supporting the Revenue's contention that the assessee initially opted for annual capacity based duty payment and later switched to actual production basis, rejecting the Commissioner's contrary finding as unsupported by record.The Court followed the Supreme Court's ruling in Shree Bhagwati Steel Rolling Mills, which declared that Rules 96ZO, 96ZP, and 96ZQ are ultra vires the Act and unconstitutional for imposing interest and penalty, thereby invalidating such demands.No dissenting or concurring opinions were noted in the judgment.

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