Duty on diverted and unaccounted high speed diesel oil sustained, but equal penalty under Section 11AC was set aside.

Duty remained payable on high speed diesel oil obtained under a rule-based procurement scheme where 1,980 litres was not duly accounted for after alleged transit loss and 62,983 litres was diverted from the permitted use for export manufacture. The document states that loss in transit did not excuse liability unless properly reported and accounted for, and that diversion from the authorised purpose justified the duty demand on the diverted quantity. It further states that penalty under Section 11AC was not sustainable because the duty did not arise from a Section 11A determination against the assessee as manufacturer, but penalty under Rule 173Q was maintainable for diversion of the goods.

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Issues: (i) Whether central excise duty was payable on high speed diesel oil not duly accounted for and allegedly lost in transit before reaching the factory of the assessee, (ii) whether duty was payable on the quantity of high speed diesel oil diverted for purposes other than manufacture of export goods, and (iii) whether penalty under Section 11AC of the Central Excise Act and penalty under Rule 173Q of the Central Excise Rules were sustainable.

Issue (i): Whether central excise duty was payable on high speed diesel oil not duly accounted for and allegedly lost in transit before reaching the factory of the assessee.

Analysis: The assessee had obtained the excisable goods under the relevant rule-based exemption/procurement scheme and had taken delivery without payment of duty. Under the governing rule, loss in transit does not absolve liability unless the loss is duly reported and accounted for in the manner required by the proper officer. Since the alleged loss was not reported and the quantity did not reach the factory after delivery, the duty liability attached to that quantity.

Conclusion: Duty on the quantity of 1,980 litres was correctly demanded and the assessee is liable.

Issue (ii): Whether duty was payable on the quantity of high speed diesel oil diverted for purposes other than manufacture of export goods.

Analysis: It was undisputed that the assessee used 62,983 litres of high speed diesel oil for purposes other than those for which it was obtained. Once the goods were diverted from the permitted use, the duty demand on that quantity was justified.

Conclusion: Duty on 62,983 litres was rightly upheld against the assessee.

Issue (iii): Whether penalty under Section 11AC of the Central Excise Act and penalty under Rule 173Q of the Central Excise Rules were sustainable.

Analysis: Section 11AC applies where duty becomes payable on determination under Section 11A and the statutory conditions for such determination are satisfied. In the present case, the assessee was not the manufacturer of the diesel oil and the duty demand could not be treated as a levy falling under Section 11A(2). Therefore, the statutory basis for invoking Section 11AC was absent. By contrast, the conduct of diverting the goods from their intended use justified penal action under Rule 173Q, and prior payment of duty did not erase the misconduct.

Conclusion: The penalty under Section 11AC was unsustainable and was set aside, while the penalty under Rule 173Q was upheld.

Final Conclusion: The duty demands were sustained on both disputed quantities, the Rule 173Q penalty remained in force, and only the equal penalty under Section 11AC was deleted.

Ratio Decidendi: Penalty under Section 11AC can be imposed only when the duty liability is determined in a case falling within Section 11A, whereas duty liability arising under a separate rule-based procurement scheme does not automatically attract that equal penalty.

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