1. The issue that survives for decision in this Appeal filed by General Manager, Diesel Locomotive Works, is whether in the facts and circumstances of the matter, a penalty under Rule 173Q of the Central Excise Rules is imposable on them.
2. Briefly stated the facts are that the Appellant, a Department of Government of India, manufacture Diesel Electric Locomotives mainly for use of Indian Railways, which are exempted from payment of Central Excise duty under Notification No. 197/87-C.E., dated 28-8-87. The Collector, Central Excise, under the impugned order confirmed the demand of duty amounting to Rs. 3,75,61,598/- and imposed a penalty of Rs. 75 lakhs on the ground that Diesel Electric Generating Sets/Power Packs emerged as intermediate Products, during the process of manufacture of Diesel Locomotives and which were classifiable under Heading 85.02 of the Schedule to the Cen-tral Excise Tariff Act. The matter was referred to the Committee on Disputes which in its meeting held on 9-8-2001 minuted as under : Appeal in CEGAT against Order in Original No. M.P. (50/92) 30 of 1993 regarding partial fulfillment of COD'S directions held on 27-4-95 (Item No. 7) in waiving off duty but imposition of penalty for not following the rules of Central Excise which is not warranted because DG Sets are not manufactured by DLW. The Committee having regard to the fact that the issue involves substantive questions of law and fact permitted Ministry of Railways to pursue the Appeal in CEGAT." 3. Shri R.V. Sinha, learned Advocate at the outset produced a letter No. 2000/FS (POL)/D4/2/HOC, dated 4-3-2002 of Ministry of Railways addressed to the Appellant in which it was mentioned that "in the instant case the demand of Excise duty has been settled and the only issue to be adjudicated by the CEGAT is with regard to imposition of penalty of Rs. 75 lakhs." The Learned Advocate submitted that the dispute is between the two Departments of the Central Government and as such there cannot be any intention to evade payment of duty by a Department of Central Government; that they had a bona fide belief that their final product was diesel locomotives and not D.G. sets; that as only a question of interpretation is involved in the present matter, no penalty is imposable; that as held by the Supreme Court in Hindustan Steel Ltd. v. State of Orissa, 1978 (2) E.L.T. (J 159), no penalty is imposable for technical or venial breach of legal provisions or in cases where the breach flows from the bona fide belief that the offender is not liable to act in the manner prescribed by the statute.
Reliance has also been placed on the following decisions -Akbar Badruddin Jiwani v. Collector of Customs - 1990 (47) E.L.T. 161 (S.C.)S.P. Kumaria & Sons v. CCE -1985 (22) E.L.T. 142 (T) Wherein it was held that if there was no intention to evade payment of duty, the imposition of penalty was not justifiedJ.B. Shah v. Collector of Customs 4. Finally, the learned Advocate referred to Ministry of Finance letter F. No. 354/117/99-TRU, dated 3-3-2000 wherein it was clarified to CCE, Allahabad that 'it will be incorrect to restrict the exemption only to parts falling under sub-heading No. 86.07 or to parts covered under Chapter 86. Accordingly, I.C. Engine falling under sub-heading 8408.00 or diesel generating sets falling under sub-heading 8502.90 manufactured and captively consumed as part of railway locomotives shall be eligible for exemption under Serial No. 252 of 6/2000-CE. and under earlier Notification No. 88/93-CE.". He, thus, contended that the exemption from payment of duty was available to D.G. Sets prior to 1-3-92 and from 4-5-93 and as such, no penalty is impos-able.
5. On the other hand, Shri M.P. Singh, learned Departmental Representative, submitted that D.G. Sets emerge as inter mediate products in the manufacture of Diesel Locomotives consisting of the generator and I.C. engine and afe classifiable under Heading 85.02 of the Tariff; that during the material period, no exemption from payment of Central Excise duty was available as there was no exemption notification in force; that as the Appellant did not discharge the duty liability, penalty is imposable on them under the provisions of Rule 173Q of the Central Excise Rules. He relied upon the judgment in the case of Zunjarrao Bhikaji Nagarkar v. Union of India, 1999 (112) E.L.T.772 (S.C.) wherein the Apex Court held, after considering the decision in the case of Hindustan Steel Ltd., that imposition of penalty, in the case adjudicated upon in that matter, was imperative. He, further, mentioned that the Supreme Court also observed that "We have noticed that Patna High Court while interpreting Section 325 IPC held that imposition of penalty was not mandatory which again we have said is not correct view"; that the Apex Court also held that "It is difficult to accept the argument of the Appellant that levy of penalty is discretionary. It is only the amount of penalty which is discretionary." He, therefore, contended that imposition of penalty is must and as the amount of duty not paid is more than Rs. 3.75 crores, imposition of penalty of Rs. 75 lakhs is reasonable.
6. We have considered the submissions of both the sides. As per provisions of Rule 9 read with Rule 49, Rule 173F and Rule 173G of the Central Excise Rules no excisable goods shall be removed from the place of manufacture without payment of Central Excise duty. As per Explanation to Rules 9 and 49, excisable goods manufactured in any place and utilized for the manufacture of any other commodity shall be deemed to have been removed from such place immediately before such utilization. In the present matter DG sets/Power Packs come into existence and are utilized for the manufacture of Diesel Locomotives which are exempted from payment of duty. The duty of excise is leviable on DG sets/Power packs manufactured and captively used by the Appellants. Rule 173Q provides that if any manufacturer removes any excisable goods in contravention of any of the provisions of Central Excise Rules, the manufacturer shall be liable to a penalty. In Z.B.Nagarkai's case, the Apex Court interpreted the provisions of Rule 173Q as under : "31. When we examine Rule 173Q it does appear to us that apart from the offending goods which are liable to confiscation the person concerned with that shall be liable to penally up to the amount specified in the rule. It is difficult to accept the argument of the Appellant that levy of penalty is discretionary. It is only the amount of penalty which is discretionary. Both things are necessary : (1) goods are liable to confiscation and (2) person concerned is liable to penalty." 7. The Apex Court even contra sted the provisions of Rule 173Q with Section 271 of the Income Tax Act, 1961 prior to its amendment in 1988 and observed that under provisions of Section 271 of the Income Tax Act there is a discretion with the assessing Authority whether to impose any penalty or not and if the assessing Authority finds that it is a case for imposition of penalty then it has no discretion in the matter and the certain amount of penalty depending on the facts and circumstances of each case has to be imposed subject to the maximum limit mentioned in the section. We are thus of the view that penalty is imposable on the Appellant as the impugned goods were removed without payment of duty. However, we are also of the view that penalty imposed is highly excessive in view of the fact that the goods in question were exempted prior to 1-3-92 and again became exempted from 4-5-93. It was only during the material period, there was no notification exempting the goods in question when captively utilized in the manufacture of Diesel Locomotives. Moreover, the Appellant is also a Government Department and Modvat credit of the duty paid on inputs would also be available to them. In view of all these facts and circumstances, we feel that ends of justice will be met if the penalty is reduced to Rs. 1 lakh only. We order accordingly. The Appeal is disposed of in the above terms. The cross objection also stands disposed of as no new averments have been made therein.