Delayed duty payment alone does not trigger the enhanced liability under Rule 9’s seventh proviso.

The respondent manufactured notified pan masala/gutkha products under the Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008 (“Pan Masala Rules”). Although 22 packing machines were physically present in the factory, the respondent declared only four machines for operation, and the competent authority determined its monthly duty liability on that basis.

The respondent paid the determined duty belatedly, along with applicable interest under the second proviso to Rule 9. The Revenue treated the 22 machines as “available” in the premises and invoked the seventh proviso to Rule 9, demanding differential duty of Rs.97,20,38,438 for February 2010 to January 2013, besides interest and penalties.

The Commissioner (Audit) dropped the demand, holding that the respondent’s liability was governed by the second proviso and not the seventh proviso to Rule 9. The Revenue challenged that order before the Tribunal.

1. Whether delayed payment of the monthly duty determined on the basis of the declared operating machines automatically attracted the seventh proviso to Rule 9, thereby requiring duty to be recalculated on the basis of all machines allegedly available in the factory.

2. Whether sealed, uninstalled, or otherwise inoperative packing machines physically present in the factory could be treated as machines “found available” for production under the seventh proviso to Rule 9.

3. Whether the respondent was liable only for the duty determined under the second proviso to Rule 9, together with applicable interest, in the absence of proof that additional machines were actually operated or misdeclared.

The Tribunal applied Rule 9 of the Pan Masala Rules, particularly the second proviso, which requires payment of outstanding duty with interest where duty is not paid by the due date, and the seventh proviso, which applies where the manufacturer fails to pay duty by the due date and continues to operate a packing machine, requiring monthly duty based on the higher of the declared operating machines or machines found available in the premises.

The Tribunal held that the two provisos operate in distinct fields and that the seventh proviso cannot be triggered merely by delayed payment, as that would render the second proviso substantially redundant.

It relied on Sanket Food Products (P) Ltd. v. CCE, Aurangabad, 2015 (316) E.L.T. 501 (Tri.-Mumbai), which held that, absent misdeclaration or proof of operation of additional machines, liability remains governed by the second proviso.

It also relied on CBEC Circular F. No. 81/17/2007-CX-3 dated 20 April 2010, clarifying that “machines found available” means machines available for production and excludes machines sealed by the Department.

The Tribunal distinguished a mere delay in paying the duty already determined from the distinct statutory circumstance contemplated by the seventh proviso—continued operation of packing machines during the period of non-payment, coupled with a basis for applying the higher machine count.

The respondent had contemporaneously declared that only four machines would be operated, and the Department had accepted that declaration while determining the monthly liability; there was no cogent evidence that the respondent operated the remaining 18 machines or misdeclared its production capacity.

The physical presence of sealed or inoperative machines could not, by itself, establish that they were “available” for production, particularly in view of the CBEC clarification excluding Department-sealed machines.

Accordingly, the respondent’s belated payment attracted interest under the second proviso, but did not justify recomputation of duty on the basis of all 22 machines.

Since the Revenue failed to establish that the additional 18 machines were operational or available for production, the respondent was liable only for the duty determined on the declared operating machines, together with applicable interest under the second proviso.

The Revenue’s appeal was dismissed, and the Commissioner’s order dropping the demand of Rs.97,20,38,438, along with consequential interest and penalties, was upheld.