CESTAT Hyderabad Rules on Rule 25 Penalty & Adjustment of Duty Already Paid

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Little Star Foods Pvt Ltd Vs Commissioner of Central Tax Medchal – GST has delivered an important decision on two focused issues under Central Excise law:

  1. Whether Central Excise duty and interest already paid by the assessee must be formally appropriated against the confirmed demand, and
  2. Whether penalty imposed under Rule 25 of the Central Excise Rules, 2002 can survive and remain valid in the absence of fraud, suppression or intent to evade, especially where penalty under Section 11AC has been set aside in earlier proceedings.

The decision clarifies the interplay between Rule 25 and Section 11AC of the Central Excise Act, 1944, and provides guidance on how authorities should treat amounts of duty and interest that have already been discharged during the course of litigation.

Factual Background

Nature of Business and Dispute

  • The assessee, M/s Little Star Foods Pvt Ltd, was manufacturing “Cadbury Perk with Glucose Energy” as a job worker for M/s Cadbury India Ltd, receiving conversion charges for its processing activity.
  • A dispute emerged concerning:
    • Classification of the finished product, and
    • Eligibility for concessional rate of duty under Notification No. 03/2006-CE and subsequently under Notification No. 12/2012-CE dated 17.03.2012.

Classification and Original Demand

  • The adjudicating authority classified the product under Chapter sub-heading 19053290 as “coated wafers – other than wafer biscuits”.
  • On this basis, the authority:
    • Denied the concessional duty benefit under Notification No. 12/2012-CE dated 17.03.2012,
    • Confirmed a duty demand of Rs. 4,19,55,168/-, and
    • Imposed an equivalent penalty.

Over multiple rounds of litigation, the matter ultimately reached the Hon’ble Supreme Court, and on remand the adjudicating authority passed an Order-in-Original dated 03.06.2022, which again confirmed the duty and interest and imposed penalty under Rule 25.

The present appeal before CESTAT was limited in scope to two aspects:

  • Appropriation of the duty and interest already paid, and
  • Validity of penalty under Rule 25 of the Central Excise Rules, 2002.

Issues Before the Tribunal

The assessee chose not to challenge either:

  • The classification under Chapter sub-heading 19053290, or
  • The denial of exemption under Notification No. 12/2012-CE.

The contest was confined to:

  1. Why the department had not appropriated the duty and interest admittedly paid by the assessee and acknowledged by the authorities; and
  2. Whether the penalty under Rule 25 could be sustained in law given the earlier findings that Section 11AC was not attracted and that there was no fraud, collusion, or suppression.

Assessee’s Arguments

1. Non-appropriation of Duty and Interest Already Paid

Counsel for the assessee contended that:

  • The entire amount of Central Excise duty and interest demanded had already been discharged voluntarily.
  • The department itself confirmed receipt of these amounts, as evidenced by:
    • An email/communication from Medchal GST Commissionerate, confirming payment of:
      • Rs. 4,19,55,167/- towards duty, and
      • Rs. 5,37,07,126/- towards interest.
  • Despite such acknowledgment, the adjudicating authority failed to formally appropriate these payments against the confirmed demand, taking the stand that:
    • The matter was under second appeal; and
    • Penalty remained unpaid, so the dues could not be treated as closed.

The assessee’s position was that, once duty and interest liability had been accepted and fully paid, and there was no further dispute on quantum or merits, the department was duty-bound to adjust/appropriate such amounts against the confirmed liability, and no further demand could be raised on that score.

2. Challenge to Penalty under Rule 25

On the penalty front, the assessee raised several legal contentions:

1.