Commissioner, Central Excise and Customs vs M/s. Sun Shine Pipes (P) Ltd.

K.S. Radhakrishnan, J.—Commissioner of Central Excise and Customs is the appellant in all the appeals and respondent in the review petitions. Commissioner is aggrieved by the order of the Customs. Excise and Service Tax Appellate Tribunal, South Zonal Bench in C.E. Appeal Nos. 6, 3 and 34 of 2005 reducing the quantum of penalty from what has been statutorily prescribed u/s 11AC of the Central Excise Act, 1944. C.E. Appeal Nos. 32 and 33 of 2005 have been filed by the Commissioner aggrieved by the reduction of quantum of penalty prescribed under Rule 96 ZP (3) (ii) of the Central Excise Rules, 1-944 by the Tribunal. C.E. Appeal No. 42 of 2005 was also filed by the Commissioner aggrieved by the reduction of the quantum of penalty imposed under Rule 96Z P(1)(i) of the Rules. C.E. Appeal Nos. 8 and 27 of 2004 were filed by the review petitioners in R.P. Nos. 803 and 804 of 2005 pointing out the fact that this court while disposing of those appeals did not consider the grievances of the petitioners against the imposition of maximum penalty under Rule 96 ZO (II)(C) of the Central Excise Rules, 1944. Counsel submitted that the authorities on a wrong interpretation of Section 96 ZO (II)(C) imposed the maximum penalty which was unwarranted in the facts and circumstances of the case. The question that is posed for consideration in all these cases is whether assessing authority is duty bound to impose the maximum penalty as provided in the above mentioned provisions without any element of discretion statutorily conferred on them for reduction of penalty. Sri. C.S. Gopalakrishnan Nair, counsel for the review petitioners submitted that though imposition of penalty is mandatory once an offence is detected. It is not mandatory on the part of the authorities to impose the maximum penalty. The authorities have always got an element of discretion depending upon the facts and circumstances of each case and the nature and gravity of the offence. Assistant Solicitor General Sri. John Varghese on the other hand contended that statutory provision gives no element of discretion on the authorities and they are bound to impose the maximum penalty strictly in terms of the statutory provisions. In the wake of these contentions it is necessary to examine the various statutory provisions under which penalties have been imposed by the authorities under the Central Excise Act including the Commissioner and the Tribunal. For easy reference we may first refer to Section 11 AC of the Act, 1944 with which we are concerned in C.E. Appeal Nos. 6, 3 and 34 of 2005. The said Section is extracted below.

11 AC. Penalty for short-levy or non-levy of duty in certain cases. Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reasons of fraud, collusion or any wilful misstatement or suppression of facts or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (2) of Section 11A. shall also be liable to pay a penalty equal to the duty so determined:

Provided that where the duty determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the duty as reduced or increased, as the case may be, shall be taken into account.

The Deputy Commissioner of Central Excise and Customs, Kochi passed order dated 26-01-1998 confirming the demand of Rs. 2,04,274/- towards central excise duty and also ordered confiscation of 7,592.5 kgs. of formic acid valued at Rs. 3,79,625/- under Rule 173Q of the Central Excise Rules, 1944. Further the officer also imposed penalty of Rs. 2,04,274/-, equal to the amount of duty attempted to be evaded u/s 11 ACof the Central Excise Act, 1944. Contention was raised before the appellate authority that imposition of maximum penalty was not justified. Appellate Authority however reduced the penalty to Rs. 99791. Petitioner took up the matter in appeal before the Tribunal. Tribunal further reduced the penalty and fixed at Rs. 30,000/- Aggrieved by the same, as we have already indicated Department has filed C.E. No. 6 of 2004.

In C.E. Appeal No. 3 of 2005 penalty imposed was Rs. 2,34,744/- u/s 11 AC of the Act. In C.E. Appeal No. 34 of 2005 also originally penalty imposed was Rs. 2,07,188/- u/s 11 AC of the Act which was reduced to Rs. 55,000/ by the Tribunal. In C.E. Appeal No. 33 of 2005 penalty imposed was 2,49,275/- which was reduced to Rs 50,000/- by the Tribunal. In C.E. Appeal No. 42 of 2005 penalty imposed was Rs. 2,77,954/- under Rule 96 ZP(3) of the Central Excise Rules. Imposition of penalty was confirmed in appeal. However, the Tribunal reduced the same to Rs. 1 lakh.

We have already indicated the penalty provision dealt with in both the review petitions is Rule 96 ZO (II)(C)(ii) of the Central Excise Rules 1944, which is extracted below for easy reference.

RULE 96 ZO, Procedure to be followed by the manufacturer of ingots and billet. (1) A manufacturer of non-alloy steel ingots and billets falling under sub heading Nos. 7206.90 and 7207.90 of the Schedule to the Central Excist Tariff Act 1985 (5 of 1986), shall debit an amount calculated at the rate of Rs. 750 per metric tonne at the time of clearance of ingots and billets of non-alloy steel from his factory in the account-current maintained by him under sub-rule (1) of rule 173G of the Central Excise Rules. 1944 subject to the condition that the total amount of duty liability shall be calculated and paid in the following manner;

I. xx xx xx xx xx

II. Total amount of duty liability for a financial year subsequent to 1997-98.

(c) if a manufacturer fails to pay the total amount of duty payable under clause (a) by the 31st day of March, of the relevant financial year, he shall be liable to.

(i). xx xx xx xx xx

(ii) a penalty equal to such outstanding amount of duty or five thousand rupees, whichever is greater.

In C.E. Appeal Nos. 32 and 33 of 2005, penalty was imposed under Rule 96ZP (3)(ii) which is extracted below for easy reference.

96.ZP. Procedure to be followed by the manufacturer of hot re-rolled products.

(1). xx xx xx xx xx

(2) xx xx xx xx xx

(3) Notwithstanding anything contained elsewhere in these rules, a manufacturer may, in the beginning of each month from 1st day of September, 1997 to the 31st day of March, 1998 or any other financial year, as the case may be, and latest by the tenth of each month, pay a sum equivalent to one-twelfth of the amount calculated at the rate of Rs. 300/- multiplied by the annual capacity in metric tonnes, as determined under sub-rule (3) of rule 3 of the Hot Re-rolling Mills Annual Capacity Determination Rules, 1997, and the amount so paid shall be deemed to be full and final discharge of his duty liability for the period from the 1st day of September, 1997 to the 31st day of March, 1998 or any other financial year, as the case may be, subject to the condition that the manufacturer shall not avail of the benefit, if any, under the proviso to subsection (3) or under sub-section (4) of the section 3A of the Central Excise Act, 1944(1 of 1944):

XX XX XX XX XX

Provided also that where a manufacturer fails to pay the whole of the amount of duty payable for any month by the 10th day of such month, he shall be liable to pay.

(i). xx xx xx xx xx

(ii) a penalty equal to the amount of duty outstanding from him at the end of such month or five thousand rupees, whichever is greater.

Provided further that if the manufacturer fails to pay the total amount of the duty payable for each of the months from September 1997 to March, 1998 by the 30th day of April 1998, he shall also be liable to pay a penalty equal to the outstanding amount of duty as on the 30th day of April, 1998 or five thousand rupees, whichever is greater;

The apex court had occasion to consider the scope of Section 11 AC of the Central Excise Act, 1944 in State of Madhya Pradesh and others Vs. Bharat Heavy Electricals, . Contention was raised in that case that imposition of levy of penalty equal to ten times in lieu of confiscation is ultra vires the provisions of the Madhya Pradesh Sthaniya Kshetra Me Mai Ke Pravesh Par Kar Adhiniyam 1976. Though that question was not pointedly considered, the apex court held as follows:

This stand of the State itself concedes that the assessing authorities are not bound to levy fixed penalty equal to ten times the amount of entry tax whenever the provisions of Section 7 (5) are attracted. Depending upon the facts of each case the assessing authority has to decide as to what would be the responsible amount of penalty to be imposed the maximum being ten times the amount of the entry tax. So construed, sub-section (5) of Section 7 cannot be regarded as confiscatory.

The above mentioned decision was followed by the apex court in Zunjarrao Bhikaji Nagarkar v. Union of India (1999 (112) 772). Relating to penalty u/s 173 Q of the Central Excise Rules with reference to Section 11 AC the Court held as follows:

Two principal issues arise for our consideration: (1) if levy of penalty under Rule 173Q was obligatory and (2) was there enough background material for the Central Government to form a prima facie opinion to proceed against the officer on the charge of misconduct on his failure to levy penalty under Rule 173Q. Appellant has contended that it is only now after insertion of Section 11 AC in the Act that levy of penalty has become mandatory and that it was not so under Rule 173Q. This contention does not appear to be correct. In both Rule 173Q and Section 11 AC the language is somewhat similar. Under Rule 173Q "such goods shall be liable to confiscation" and the person concerned "shall be liable to penalty" not exceeding three times the value of excisable goods or five thousand rupees whichever is greater. u/s 11 AC the person, who is liable to pay duty on the excisable goods as determined "shall also be liable to pay penalty equal to the duty so determined". What is the significance of the word "liable" used both in Rule 173Q and Section 11 AC? Under Rule 173Q apart from confiscation of the goods the person concerned is liable to penalty. u/s 11 AC the word "also" has been used but that does not appear to be quite material in interpreting the word "liable" and if liability to penalty has to be fixed by the adjudicating authority. The word "liable" in the concise Oxford Dictionary;means "legally bound subject to a tax or penalty, under an obligation". In Black''s Law Dictionary (sixth edition), the word "liable" means "bound or obliged in law or equity; responsible; chargeable, answerable, compellable to make satisfaction, compensation, or restitution... Obligated; accountable for or chargeable with. Condition out of which a legal liability might arise... Justly or legally responsible or answerable.

Apex Court therefore endorsed the view that the levy of penalty is not discretionary, but the quantum - of penalty to be imposed is always discretionary. The court held that penalty to be imposed is to be commensurate with the gravity of offence and the extent of evasion. The apex court in State of Madhya Pradesh and others Vs. Bharat Heavy Electricals, while interpreting the provisions of Section 7 (5) of the Madhya Pradesh Sthaniya Kshetra Me Mai Ke Pravesh Par Kar Adhiniyam, 1976 held that the penalty mentioned therein is only the maximum amount which can be levied depending upon the facts and circumstances of each case. The Gujarat High Court followed the above mentioned decision in Ambuja Synthetics Mills v. Union of India ( 2004 (175) E.L.T. 85) holding that Rule 95 ZQ (5)(ii) shows that the penalty equivalent to duty liability is the maximum amount to the levied and the authority has the power to the meaning of the expression "penalty" as held by the apex court in State of U.P. and Others Vs. Sukhpal Singh Bal etc. etc., which is as follows:

"Penalty" is a slippery, word and it has to be understood in the context in which it is used in which it is used in a given statute. A penalty may be the subject matter of a breach of statutory duty or it may be the subject matter of a complaint. In ordinary parlance, the proceedings may cover penalties for avoidance of civil liabilities which do not constitute offences against the State. This distinction is responsible for any enactment intended to protect public revenue. Thus all penalties do not flow from an offence as is commonly understood but all offences lead to a penalty. Whereas the former is a penalty which flows from a disregard of statutory provisions, the latter is entailed where there is mens rea and is made the subject matter of adjudication. In our view, penalty u/s 10(3) of the Act is compensatory. It is levied for breach of a statutory duty for non-payment of tax under the Act. Section 10(3) is enacted to protect public revenue. It is enacted as a deterrent for tax evasion. If the statutory dues of the State are paid, there is no question of imposition of heavy penalty. Everything which is incidental to the main purpose of a power is contained within the power itself. The power to impose penalty is for the purpose of vindicating the main power which is conferred by the statute in question. Deterrence is the main theme or object behind the imposition of penalty u/s 10(3).

When we look at the provisions based on which penalties were imposed in these cases, we are not prepared to say that the assessing authorities are obliged to impose maximum penalty. In a case where offence has been committed under the various provisions of the Central Excise Act, imposition of penalty on the basis of the above mentioned provisions may be mandatory and the person may be liable to pay the penalty. But the mere fact that person may be liable to pay penalty does not mean that he is liable to pay the maximum penalty. Fixing the quantum of penalty is always discretionary and is to be imposed commensurate with the gravity of the offence and the extent of evasion. Looking at the facts of these cases which we have already dealt with in the earlier part of the judgment, we are not prepared to say that the authorities have exercised the discretion arbitrarily or mechanically except in the cases in which review petitions have been filed. So far as C.E. Appeal Nos. 8 and 27 of 2004 against which review petitions were preferred, we find imposition of penalty is excessive. In C.E. No. 8 of 2004 penalty imposed was Rs. 1,94,446/- in terms of Rule 96 ZO(ii)(c)(ii). Considering the facts and circumstances of the case it does not appear to be commensurate with the gravity of offence. So also the maximum penalty of Rs. 1,94,446/- was imposed in terms of Rule 96 ZO(ii)(c)(ii) so far as C.E.No. 27 of 2004 is concerned, which in the facts and circumstances of the case appears to be on the higher side. In such circumstances, we are inclined to allow both the review petitions and set aside the orders passed by the Tribunal and other authorities with regard to the imposition of penalty in terms of Rule 96 ZO (ii)(c)(ii) of the Rules, with the direction that the original authority shall reconsider the imposition of penalty taking note of the gravity of offence and other attendant circumstances with notice to the assessee. Rest of the appeals call for no interference since we do not find any infirmity in the orders passes by the authorities in fixing the quantum of penalty. Appeals preferred by the Commissioner therefore would stand dismissed. Review petitions are allowed as above.