Hyderabad CESTAT Upholds Rule 26 Penalty On Philips For Knowledge Of Undervalued Excisable Goods

On 14 May, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) dismissed the appeal filed by Philips Electronics India Ltd. challenging the penalty imposed in connection with excisable goods manufactured by Quad Electronic Solutions Pvt Ltd.

Technical Member A.K. Jyotishi and Judicial Member Angad Prasad held that a company can be penalised under Rule 26 of the Central Excise Rules if it knowingly deals with goods cleared at undervalued prices that are liable for confiscation. The Bench held:

"The expression 'person' has not been defined in the CEA or Rules and therefore, the recourse has to be taken to General Clauses Act and according to which, the expression 'person' will include a body corporate also apart from natural person. Therefore, in view of the submission from both sides, we find that the grounds taken by the appellant that penalty cannot be imposed on a body corporate under Rule 26 is not tenable."

The dispute arose from agreements between Philips and Quad for the manufacture and supply of electronic products. The Department alleged that both entities functioned as interconnected undertakings and that Quad undervalued goods while discharging excise duty.

The Department further alleged that Quad did not reflect the real transaction value because Philips ultimately sold the products in the market at significantly higher prices. The adjudicating authority had already confirmed differential excise duty and imposed equal penalty on Quad, along with penalties on Philips and Quad's Managing Director Raminder Singh Soin.

Quad's appeal later abated due to winding-up proceedings, while the appeal filed by Soin was dismissed for default, leaving those findings final.

Before the Tribunal, Philips argued that it dealt with Quad on a principal-to-principal basis and that a corporate entity cannot possess the intent required for penalty under Rule 26. It further submitted that the goods were not liable for confiscation, making the penalty inapplicable.

The Bench rejected these arguments and held that the term “person” includes companies and corporate entities under the General Clauses Act and does not remain restricted to natural persons. It further clarified that statutory interpretation under the Central Excise Act supports inclusion of body corporates within the scope of “person”.

The Tribunal also held that the findings on undervaluation and short payment of duty by Quad had attained finality and could not be reopened in Philips' appeal. It noted material indicating that Philips was aware of the valuation arrangement and the exclusion of technical know-how charges, which led to short payment of duty.

It further recorded that Philips controlled supply terms and pricing under the agreements and delayed furnishing information during investigation, which reinforced knowledge of the valuation mechanism adopted. It also observed that the goods were cleared in violation of excise law and were liable for confiscation, concluding that Philips had knowledge of the improper valuation arrangement.

Accordingly, CESTAT upheld the penalty and dismissed the appeal.

For Appellant: Shri Prakash Shah, Advocate

For Respondent: Shri K. Sreenivasa Reddy, AR