Captive consumption duty payable before use; later payment did not erase liability, though penalty was reduced.

Duty on switch boards manufactured in-house for captive power distribution was held payable before their use under Rule 9(2) of the Central Excise Rules, 1944, and later payment did not extinguish the liability that had already arisen. The duty demand was sustained. On penalty, the prior payment of duty before the panchnama and well before the show cause notice justified penalty, but the circumstances warranted moderation of the quantum. The penalty was therefore reduced while the duty demand remained upheld.

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Issues: (i) Whether duty was payable on the switch boards manufactured within the factory and used in the captive power distribution system under the Central Excise Rules; (ii) Whether the penalty imposed required interference and reduction.

Issue (i): Whether duty was payable on the switch boards manufactured within the factory and used in the captive power distribution system under the Central Excise Rules.

Analysis: For goods manufactured for captive consumption or internal use, the stage for payment of duty is before use, as indicated by the explanation to Rule 9(2) of the Central Excise Rules, 1944. The record showed installation and use of the switch boards during the relevant period, and the fact that duty was paid later did not negate the liability already attracted.

Conclusion: The duty demand was sustained.

Issue (ii): Whether the penalty imposed required interference and reduction.

Analysis: Although the appellant had not paid duty at the initial stage, duty was paid in respect of the switch boards before the panchnama and well before the show cause notice. In these circumstances, while the conduct justified a penalty, the quantum deserved moderation.

Conclusion: The penalty was reduced.

Final Conclusion: The appeal succeeded only to the extent of reduction of penalty, while the duty demand remained upheld.

Ratio Decidendi: For goods manufactured for captive consumption, duty becomes payable before their use, and the penalty may be reduced where duty is subsequently paid before formal proceedings despite the liability having arisen.

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