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2025 (6) TMI 758 - AT - Central Excise
Undervaluation of the goods cleared by BIPL occurred due to inadvertence or whether it was deliberate - suppression of material facts and contravention of the provisions of the Central Excise Act 1944 or not - levy of penalty u/s 11AC of the Central Excise Act 1944 - cenvat credit availed by WAL on the supplementary invoice of BIPL - ineligible availment of cenvat credit or not - HELD THAT - The entire sequence of transactions have been elaborated in detail and we are satisfied that the appellant s adoption of the system generated cost of production for the items cleared to WAL as the provisional value without recognizing the fact that the system while generating the cost of production for the said items did not take into consideration the anterior conversion charges at WAL which were hitherto being fed in consequent to their change from job work procedure to duty paid clearance procedure was an entirely plausible inadvertent error. The appellant has also categorically averred in its reply that they have shown their bonafides by suo motu working out the differential duty liability and paying the same along with applicable interest before the issuance of the notice. It is also pertinent that when WAL was paying duty and clearing the goods to BIPL they were availing credit and subsequently when BIPL paid duty and returned the job worked items to WAL they availed credit. Thus while there has been a short payment of duty in the intermediate stage equally it has only resulted in the respective party availing less credit and paying more duty in cash while clearing the hose assembly. Had the duty been paid on the correct value by BIPL the same would have been availed as credit by WAL and used for payment of duty on the Hose Assembly cleared from their end. It is satisfied that the mistake that has resulted in understating the value is a Bonafide mistake without any intention to evade payment of duty. It is also noted that neither the SCN nor has the adjudicating authority too in the impugned Order in Original attributed any positive or deliberate act of wilful misstatement or suppression of facts with intent to evade payment of duty on the part of the appellant. That is to say there is no evidence adduced by the Department that the mistake of BIPL which is claimed to be inadvertent was in fact intentional - the Revenue has not discharged its burden of proving that the appellant had made these transactions with any malafide intent or with an intent to evade payment of duty. The finding of the adjudicating authority that since the appellant has not chosen to pay the 1% penalty prescribed under Section 11(6) of the CEA 1944 it goes to prove wilful suppression and misstatement of facts with intent to evade payment of duty is literally turning the provision on its head. It is evident from a plain reading of the said Section 11(6) that it applies only to a person chargeable with duty under Section 11(5) which in turn is attracted only where during the course of any audit investigation or verification it is found that any duty has not been levied or paid or has been short levied or short paid for the reasons mentioned in clauses (a) to (e) of sub-section (4) namely the ingredients that are necessary to attract the invoking of extended period of limitation - in the absence of any of the aforesaid ingredients of sub-section (4) there was no necessity for the appellant to have paid the penalty stipulated under Section 11(6) and the finding of the adjudicating authority in this regard is unsustainable. The appellant BIPL has deliberately suppressed material facts and contravened the provisions of the CEA 1944 and the rules made thereunder with intend to evade payment of duty and to impose equivalent penalty on the appellant are wholly untenable. The adjudicating authority has erred in imposing equivalent penalty on the appellant in these facts and circumstances and it cannot sustain. Conclusion - i) The undervaluation by BIPL is inadvertent and bona fide. ii) Penalty under Section 11AC imposed on BIPL is set aside. iii) CENVAT credit availed by WAL on the supplementary invoice is lawful; and (4) Penalty imposed on WAL is set aside. Appeal allowed.
The core legal questions considered by the Tribunal in these interconnected appeals are: (1) Whether the undervaluation of goods cleared by the appellant manufacturer was due to inadvertence or deliberate suppression with intent to evade duty; (2) Whether the imposition of penalty under Section 11AC of the Central Excise Act, 1944 on the appellant manufacturer for alleged suppression and duty evasion is justified; and (3) Whether the CENVAT credit availed by the supporting manufacturer on the supplementary invoice issued by the appellant manufacturer is eligible and whether the penalty imposed on the supporting manufacturer for availing such credit is sustainable.
Regarding the first issue, the legal framework involves provisions of the Central Excise Act, 1944, particularly Section 11AC dealing with penalty for suppression of facts and evasion of duty, and Section 11A(6) regarding payment of penalty during audit or investigation. The CENVAT Credit Rules, 2004, especially Rule 9(1)(b), govern the admissibility of credit on valid documents. Precedents relied upon include the Supreme Court decisions in Nirlon Ltd. v. Commissioner of Central Excise and Commissioner of Central Excise, Calcutta-II v. Indian Aluminium Co. Ltd., which clarify the necessity of mala fide intent to impose penalty and the principle that bona fide mistakes do not attract penalty.
The Tribunal analyzed the facts that the appellant manufacturer (BIPL) had inadvertently undervalued the job-work goods cleared to the supporting manufacturer (WAL) due to a system-generated cost data error. The system failed to account for the initial conversion costs incurred by WAL before the goods were sent to BIPL for plating. This led to the goods being valued below the actual cost, but the appellant had voluntarily paid the differential duty along with interest prior to issuance of the show cause notice. The appellant also filed a detailed affidavit explaining the sequence of transactions and the inadvertent nature of the undervaluation, which the adjudicating authority had not addressed or controverted.
The Tribunal noted that the entire transaction was revenue neutral because the duty short-paid by BIPL was ultimately paid and credited by WAL, and the final product cleared by WAL suffered the full duty at the selling price fixed by BIPL. This negated any revenue loss or gain from the undervaluation. The Tribunal emphasized that the Department failed to produce evidence of deliberate suppression or mala fide intent by BIPL, and the burden of proving such intent lies heavily on the revenue. Reliance was placed on the Apex Court's ruling that the absence of mala fide intention precludes imposition of penalty under Section 11AC.
Regarding the contention that BIPL's failure to pay the 1% per month penalty under Section 11A(6) indicated suppression, the Tribunal held that this provision applies only where extended period of limitation is invoked due to specific reasons such as fraud or willful misstatement. Since the appellant's error was inadvertent and bona fide, no such penalty was warranted or obligatory. The adjudicating authority's reasoning to the contrary was found to be a misinterpretation of the statutory provisions.
On the second issue concerning the supporting manufacturer WAL, the Tribunal considered whether the CENVAT credit availed on the supplementary invoice issued by BIPL was legitimate. Since the Tribunal concluded that BIPL's duty payment was valid and free of any taint of suppression or evasion, the invoice issued by BIPL was a valid document under Rule 9(1)(b) of the CENVAT Credit Rules, 2004. Consequently, WAL's availing of CENVAT credit on that invoice was lawful. The penalty imposed on WAL for availing such credit was therefore unsustainable and was set aside.
The Tribunal also addressed the argument that even if suppression were assumed, WAL would still be entitled to credit based on precedents where credit was allowed in the absence of malafide intention or revenue loss. However, since no suppression was found, this was a supplementary observation.
In conclusion, the Tribunal held that the undervaluation by BIPL was a bona fide inadvertent error without any intention to evade duty. The voluntary payment of differential duty and interest prior to notice further evidenced good faith. The penalty imposed under Section 11AC on BIPL was set aside as unsustainable. Similarly, the CENVAT credit availed by WAL on the supplementary invoice was held to be legitimate, and the penalty imposed on WAL was also set aside.
Significant holdings include the following verbatim excerpt from the Apex Court in Nirlon Ltd.:
"9. We have ourselves indicated that the two types of goods were different in nature. The question is about the intention, namely, whether it was done with bona fide belief or there was some mala fide intentions in doing so. It is here we agree with the contention of the learned Senior Counsel for the appellant, in the circumstances which are explained by him and recorded above. It is stated at the cost of repetition that when the entire exercise was revenue neutral, the appellant could not have achieved any purpose to evade the duty.
10. Therefore, it was not permissible for the respondent to invoke the proviso to Section 11A(1) of the Act and apply the extended period of limitation. In view thereof, we confirm the demand insofar as it pertains to show cause notice dated 25-2-2000. However, as far as show cause notice dated 3-3-2001 is concerned, the demand from February, 1996 till February, 2000 would be beyond limitation and that part of the demand is hereby set aside. Once we have found that there was no mala fide intention on the part of the appellant, we set aside the penalty as well."
Core principles established are that mere inadvertent or bona fide mistakes in valuation, which are rectified voluntarily before notice, do not attract penalty under Section 11AC; that the burden of proving mala fide intent lies on the revenue; that revenue neutrality negates intent to evade duty; and that CENVAT credit availed on valid invoices, free from suppression, is legitimate.
Final determinations are: (1) The undervaluation by BIPL was inadvertent and bona fide; (2) Penalty under Section 11AC imposed on BIPL is set aside; (3) CENVAT credit availed by WAL on the supplementary invoice is lawful; and (4) Penalty imposed on WAL is set aside. Both appeals are allowed accordingly.