Semi-finished goods and clandestine removal: RG-1 non-entry alone did not justify confiscation, while penalty survived duty payment after detection.

Goods found in a semi-finished stage awaiting further manufacture and testing could not be confiscated merely because they were not entered in RG-1, since non-entry alone did not establish that they were fully manufactured finished goods. Duty paid after detection of clandestine removal of scrap did not extinguish penalty exposure under Rule 173Q, because liability remained where evasion was detected before payment; however, the penalty was moderated on the facts.

---

---

Issues: (i) whether confiscation of excess found galvanised steel strips was justified when the goods were found in the factory in a semi-finished condition awaiting further manufacture and testing; (ii) whether penalty was exigible for clandestine removal of scrap notwithstanding payment of duty before issuance of the show cause notice, and if so, to what extent.

Issue (i): whether confiscation of excess found galvanised steel strips was justified when the goods were found in the factory in a semi-finished condition awaiting further manufacture and testing

Analysis: The strips were found on the shop floor and the assessee consistently asserted that they had not reached the final RG-1 stage and were still awaiting further processing to remove galvanisation defects. The confiscation order rested only on the absence of an entry in the RG-1 register, without any further verification of the actual manufacturing stage of the goods. On these facts, the goods could not be treated as fully manufactured finished goods liable to confiscation merely on the basis of non-entry in RG-1.

Conclusion: Confiscation of the excess found galvanised steel strips was not justified and the relief granted by the appellate authority was upheld.

Issue (ii): whether penalty was exigible for clandestine removal of scrap notwithstanding payment of duty before issuance of the show cause notice, and if so, to what extent

Analysis: The shortage of scrap was admitted and duty was paid after detection by the officers. Such payment, made after the evasion was detected, did not wipe out liability to penalty for clandestine removal under Rule 173Q of the Central Excise Rules, 1944. However, in view of the overall circumstances and the setting aside of confiscation on the other issue, the quantum of penalty required moderation.

Conclusion: Penalty was sustainable, but it was reduced to Rs. 5,000.

Final Conclusion: The appeal succeeded only in part, with confiscation set aside while penalty was maintained in a reduced amount.

Ratio Decidendi: Goods found in a semi-finished stage awaiting further manufacture cannot be confiscated merely because they were not entered in RG-1, and payment of duty after detection of clandestine removal does not by itself eliminate penalty liability, though the penalty may be moderated on the facts.

---