CESTAT Ahmedabad Sets Aside ₹45 Lakh Penalty, Holds Rule 26 Of Central Excise Rules Inapplicable Without Confiscation of Goods
Sangeetha Prathap
In a significant ruling on the legal prerequisites for imposing penalties under the Central Excise Rules, 2002, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad, has set aside a personal penalty of ₹45 lakh imposed on an individual employee alleged to have played a role in a rebate fraud involving transactions from 2003–04. The Tribunal held that imposing a penalty under Rule 26 was legally impermissible because no confiscation of goods had ever been proposed or ordered in the case. The matter was adjudicated by Somesh Arora (Judicial Member), who examined the extensive factual and legal material generated during multiple rounds of adjudication, including cross-examination evidence, departmental statements, and contemporaneous verification reports.
The dispute traces back to rebate claims filed by M/s Balaji Enterprises, Daman, which had exported wristwatches and clocks through merchant exporter M/s Shree Krishna Impex, Ahmedabad. Between November 2003 and September 2004, 221 rebate claims were filed and sanctioned after verification by jurisdictional excise authorities. The department later alleged that the transactions were paper-based, contending that M/s MSN Enterprises (Udaipur) issued excise invoices without actual supply of goods and that Balaji Enterprises incorrectly availed CENVAT credit on the strength of these invoices. It was further alleged that exports were fictitious and that inferior-quality articles were assembled from non-duty-paid inputs while claiming benefits meant for duty-paid exports.
The appellant, Shri Venkat R. Chari, worked as General Manager of the merchant exporting firm and was accused of playing a “key role” in coordinating and managing the flow of documents and finances. Based on this, a penalty of ₹45 lakh was imposed under Rule 26 of the Central Excise Rules, 2002.
The key legal issue before the Tribunal was whether a penalty could be imposed under Rule 26(1) when no goods were ever alleged to be available for confiscation. The appellant had argued that Rule 26 requires the existence of excisable goods that are liable to confiscation. If the department’s own case was that the entire series of transactions involved non-existent or paper goods, the necessary foundation for Rule 26 was absent. The appellant also contended that he acted merely as an employee with no personal gain and had not dealt with any goods himself.
The Tribunal undertook a detailed assessment of the factual record. Testimony from Central Excise officers, including Inspectors and Superintendents responsible for supervising the manufacture and export of goods, indicated that goods had been verified and rebate claims sanctioned through formal orders. Statements of job workers, suppliers and intermediaries recorded during cross-examination in 2021 showed that several of them had never met or interacted with the appellant and attributed business decisions to the proprietor, Shri Om Prakash Punjabi, and his family.
The Tribunal noted that even the department acknowledged that no confiscation had ever been proposed at any stage. Rule 26(1) mandates the presence of excisable goods liable to confiscation and requires proof that the person penalised had dealt with such goods knowing them to be liable for confiscation. Since the very foundation of the department’s allegation was that no inputs or finished goods existed, the Tribunal held that Rule 26(1) could not apply.
The Tribunal also found Rule 26(2) inapplicable, as the adjudicating authority had not demonstrated that the appellant issued or abetted the issuance of any fraudulent invoices or documents. The findings were general in nature and did not identify specific conduct attracting the provision.
The Bench relied on several earlier decisions, including Vijay Kumar Sharma v. CCE-Kutch, Nicholas D’Souza Garage v. CCE, Thane, AIA Engineering Pvt. Ltd. v. CCE, and other authorities that consistently held that Rule 26 cannot be invoked when no goods capable of confiscation exist. Additionally, the Tribunal observed that employees acting under instructions, without personal benefit or malicious intent, cannot be subjected to personal penalties without clear corroborative evidence.
After considering the testimonial inconsistencies and the extensive documentary evidence supporting the appellant’s claim of limited involvement, the Tribunal held that the penalty lacked legal basis. It emphasised that when departmental officers themselves had verified the goods and sanctioned rebate, and when there was no allegation of fabricated assessments, the foundation of the penalty was unsustainable.
Also Read: Penalty Not Justified Without Deliberate Suppression, Rules CESTAT in NIPFP Appeal
The Tribunal allowed the appeal and set aside the personal penalty of ₹45 lakh imposed on the appellant. It held that, in the absence of any proposal for confiscation of goods, Rule 26 could not be invoked. The appeal was accordingly allowed, and the penalty cancelled.
Appearance
Counsel For Appellant: Paresh M Dave
Counsel For Respondent: P. Ganesan
Cause Title: Shri Venkat R. Chari Versus C.C.E. & S.T. – Daman
Case No: Excise Appeal No. 10253 of 2022
Coram: Somesh Arora (Judicial Member)
