EXCISE DUTY | 10% Penalty Valid U/s 25 Despite Interpretational Dispute And Not Fraud: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal, Hyderabad Bench, has upheld the imposition of penalty under Rule 25 of the Central Excise Rules, 2002, even in the absence of fraud, suppression, or wilful misstatement, in a significant ruling involving Little Star Foods Pvt Ltd. The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member), partly allowed the appeal while confirming that the penalty to the extent of 10% of duty is legally sustainable under Section 11AC(1)(a) read with Rule 25. The appellant, Little Star Foods Pvt Ltd, was engaged in manufacturing “Cadbury Perk with Glucose Energy” on a job work basis for Cadbury India Ltd. A classification dispute arose regarding the product, with the department denying concessional duty benefits under exemption notifications and classifying the product under tariff heading 19053290 as “coated wafers.” Following adjudication, a duty demand of over ₹4.19 crore was confirmed along with interest exceeding ₹5.37 crore, and an equivalent penalty was imposed. However, the assessee did not challenge the classification or duty liability before the Tribunal in the present round, limiting the dispute to two key issues—non-appropriation of already paid duty and interest, and the legality of penalty under Rule 25. The Tribunal took note of the fact that the appellant had already discharged the entire duty and interest liability, which was also acknowledged by the department. Despite this, the department had not appropriated the amount, citing pending litigation and non-payment of penalty. Rejecting this approach, the Tribunal held that once duty and interest have been paid and confirmed, such amounts must be appropriated against the demand. It clarified that no further demand can be raised on this count. A crucial legal issue before the Tribunal was whether penalty under Rule 25 can be imposed in the absence of fraud, suppression, or intent to evade duty—especially when penalty under Section 11AC had already been set aside in earlier proceedings. The assessee argued that Rule 25 is subject to Section 11AC and therefore cannot survive independently once the element of mens rea is absent. It relied on judicial precedents to contend that penalty cannot be imposed without invoking specific clauses or establishing intent. The Tribunal undertook a detailed analysis of Rule 25 and Section 11AC and observed that Rule 25(1)(d) requires intent to evade duty; however, clauses (a), (b), and (c) do not explicitly require mens rea. Section 11AC(1)(a) specifically covers cases where no fraud, collusion, or suppression is present and still permits imposition of penalty up to 10% of duty. The earlier Tribunal order had already held the issue to be interpretational, thereby ruling out extended limitation and serious penal consequences. However, this does not completely bar imposition of a lesser penalty under the statutory framework. The Bench clarified that the phrase “subject to Section 11AC” does not eliminate penalty altogether but aligns the quantum and conditions of penalty with statutory provisions. Applying the above interpretation, the Tribunal held that in cases involving interpretational disputes falling within the normal limitation period, and where no malafide intent is established, a penalty up to 10% of the duty is still legally permissible under Section 11AC(1)(a), read with Rule 25. Accordingly, the penalty imposed by the adjudicating authority was upheld as legally valid and proportionate. The Tribunal upheld the duty demand along with interest. Amount already paid by the appellant towards duty and interest shall stand appropriated. Penalty under Rule 25, restricted to 10% of duty, was upheld. The appeal was partly allowed. Case Details Case Title: M/s Little Star Foods (P) Ltd Versus Commissioner of Central Tax Medchal - GST Citation: JURISHOUR-772-CES-2026(HYD) Case No.: Excise Appeal No. 30291 of 2022 Date: 13.04.2026 Counsel For Appellant: Arihant Tater, Advocate Counsel For Respondent: V.R. Pavan Kumar, AR Click Here To Read Order Read More: CENVAT Credit Allowed on Business-Related Services Pre-2011; Construction Services Hit by Post-Amendment Exclusion: CESTAT

EXCISE DUTY | 10% Penalty Valid U/s 25 Despite Interpretational Dispute And Not Fraud: CESTAT

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