2006 (10) TMI 146 - AT - Central Excise

Penalty - Rule 209A - when goods not available for confiscation - Rule 26 of Central Excise Rules 2002 - Meaning of Any person for the purpose of penalty - held that - for imposition of penalty under Rule 209A of the Central Excise Rules 1944 the person must have dealt with the excisable goods with knowledge that they are liable for confiscation. In a given situation where an assessee is only issuing invoices wherein there is no movement of the goods they cannot be visited with penalty under Rule 209A - In the eyes of law the corporate entity being a person would be held responsible for the act of the natural persons. But in order to punish the guilty individuals the veil of corporate entity had to be lifted to understand the correct picture. Precisely for these reasons only the provisions of Rule 209A came in to statute in order to punish the guilty acting behind the veil of corporation/company - penalty can not imposed on corporates under rule 209 / Rule 26 of the Central Excise Rules 2002

The core legal questions considered by the Tribunal in this judgment are twofold: (a) whether the decision in the Shaper Chemicals Ltd. case correctly states the law regarding imposition of penalty under Rule 209A of the Central Excise Rules, 1944; and (b) whether the decision in the Indian Roadways Corporation Ltd. case correctly interprets the law on penalty imposition under the same rule.

Rule 209A of the Central Excise Rules, 1944, prescribes penalty liability on "any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules." The legal questions thus revolve around the scope and applicability of this rule, especially concerning the necessity of physical possession or dealing with goods and the knowledge or reason to believe that such goods are liable to confiscation. Additionally, the question arises whether a corporation or transport company can be held liable under this rule, given the requirement of knowledge and the nature of corporate decision-making.

Regarding the first issue, the Tribunal analyzed the Shaper Chemicals Ltd. decision, which held that penalty under Rule 209A presupposes actual physical movement or dealing with excisable goods. In that case, since no goods physically moved and credit was availed only on documents, penalty liability could not be sustained. The Tribunal noted that the rule's language-"acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing"-implies physical handling of goods. The phrase "or in any other manner deals with" is to be read as an extension of these enumerated acts, not as covering acts devoid of physical contact with goods.

The Tribunal referred to the Godrej Boyce & Mfg. Co. Ltd. case, where it was held that Rule 209A is akin to part (b) of Section 112 of the Customs Act, which requires physical contact with goods for penalty imposition. The Court emphasized that fraudulent acts or declarations leading to illegal importation but lacking physical handling of goods do not attract penalty under this rule. This interpretation was reinforced by the Bombay High Court's judgment in Jayantilal Thakkar & Company, which clarified that for penalty under Rule 209A, the person must deal with excisable goods with knowledge or reason to believe that the goods are liable to confiscation. Mere professional involvement, such as auditing or certification of accounts without actual handling of goods, does not satisfy the statutory requirement.

Applying this legal framework, the Tribunal held that in cases where only documents or invoices are issued without actual movement or possession of goods, penalty under Rule 209A cannot be imposed. The knowledge element is critical and must relate to dealing with physical goods liable to confiscation. The Tribunal thus upheld the Shaper Chemicals Ltd. decision as correctly interpreting the law and requiring no reconsideration.

On the second issue concerning imposition of penalty on corporations or transport companies, the Tribunal examined the Indian Roadways Corporation Ltd. decision. The Tribunal acknowledged that the term "any person" under Rule 209A includes both natural and juridical persons, including companies and corporations, as per the General Clauses Act, 1897. However, the key question is whether such entities have the requisite knowledge that goods are liable to confiscation.

The Tribunal reasoned that corporations act through their human agents, such as Boards of Directors, but the corporate entity itself does not possess independent knowledge. If an individual employee acts beyond the scope of employment and commits an act rendering goods liable to confiscation, the corporation itself may not be held liable under Rule 209A unless the knowledge element is established at the corporate level. The corporate veil must be lifted to identify the guilty individuals rather than penalizing the corporation indiscriminately.

For instance, if a railway parcel clerk knowingly books goods liable to confiscation without proper documents for personal gain, the clerk is liable, but the Indian Railways as a corporation is not, as it lacks the requisite knowledge. This reasoning supports the Indian Roadways Corporation Ltd. decision, which held that penalty on the transport corporation was not sustainable where the employee acted beyond the scope of employment and the corporation had no knowledge of the confiscation liability.

The Tribunal thus affirmed the correctness of the Indian Roadways Corporation Ltd. decision, holding that the penalty under Rule 209A cannot be imposed on a corporation merely because an employee acted wrongfully without the corporation's knowledge or involvement.

In conclusion, the Tribunal answered the reference by holding that the decisions in both Shaper Chemicals Ltd. and Indian Roadways Corporation Ltd. correctly interpret Rule 209A of the Central Excise Rules, 1944. The imposition of penalty under Rule 209A requires (i) actual dealing with excisable goods involving physical possession or handling, and (ii) knowledge or reason to believe that such goods are liable to confiscation. Mere document-related transactions without physical movement of goods do not attract penalty. Further, corporations cannot be penalized under this rule unless the knowledge element is attributable to the corporation itself, and acts of individual employees beyond their employment scope do not render the corporation liable.

Significant holdings include the following verbatim legal reasoning:

"Any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules, shall be liable to a penalty..."

"The phrase 'in any other manner dealing with any goods' must be read as the extension of the number of activities enumerated there before and cannot cover the area of the action undertaken by that person which would ultimately render the same goods liable to confiscation... Sub-section necessarily involve contact with physical goods."

"It is too much to allege or to presume that the advocates or the legal advisers or auditors of the company to handle much less deal with the excisable goods as contemplated under Section 9(1)(bbb) of the Act or Rule 209A of the Rules while discharging their professional duties."

"The corporation/company, stands to no gain out of misdemeanors of the individuals i.e. Board of Directors. In the eyes of law, the corporate entity being a person would be held responsible for the act of the natural persons. But in order to punish the guilty individuals, the veil of corporate entity had to be lifted to understand the correct picture."

"If in a given situation a parcel booking clerk of the Indian Railways... colludes with others to book the goods without any duty paying documents... can the Indian Railways be penalized under the provisions of Rule 209A... The resounding answer would be 'NO' as Indian Railways is not having any knowledge that the goods so booked are liable for confiscation."

These principles establish that penalty under Rule 209A is contingent on actual dealing with excisable goods and knowledge of their confiscation liability, and that liability on corporations requires attribution of such knowledge to the corporate entity itself.

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