The Customs, Excise & Service Tax Appellate Tribunal has clarified a critical procedural requirement under Rule 26 of the Central Excise Rules, 2002: a penalty cannot be imposed unless the adjudicating authority first establishes that the goods in question are liable to confiscation. This ruling reinforces the principle that penalties under this provision are contingent upon a foundational finding of confiscatory liability, not merely asserted in conclusory terms.
Background & Facts
The Dispute
The five appeals before the Tribunal arise from a common adjudicatory order dated 31.01.2025 passed by the Additional Director General (Adjudication), New Delhi, under the Central Excise Rules, 2002. The order imposed penalties under Rule 26 against five appellants - individuals associated with the transportation and handling of excisable goods - without making any independent determination that the goods were liable to confiscation under the Act or Rules.
Key Facts
- The appellants were named in proceedings initiated by the Directorate General of GST Intelligence (Adjudication Cell)
- The adjudicating authority did not confiscate any goods in the impugned order
- No separate order or finding was issued declaring the goods liable to confiscation under Section 11 or Rule 21 of the Central Excise Rules
- The penalty order merely stated, without analysis, that "the goods are liable to confiscation" as a basis for invoking Rule 26
- The total penalty imposed across all five appeals was not quantified in the judgment, but the legal validity of the imposition was the sole issue
- The appellants had no prior history of violations and were not alleged to have evaded duty or falsified documents
Procedural History
- 31.01.2025: Order-in-Original No. 181/2025-CE passed by Additional Director General (Adjudication), New Delhi, imposing penalties under Rule 26
- 05.02.2026: Oral arguments heard before the Principal Bench of CESTAT, New Delhi
- 29.04.2026: Final Order Nos. 50810-50814/2026 issued by the Tribunal
The Parties' Positions
For the Appellant
The appellants, represented by Shri Monish Panda, Shri Anmol Jassal, Ms. Amrita Singh, and Shri Jayant Kumar, contended that:
- Rule 26 requires a prior and independent finding that the goods are liable to confiscation
- The impugned order failed to make any such finding
- The mere assertion that goods are "liable to confiscation" without reasoning or evidence is legally insufficient
- The Tribunal’s precedent in Shri Ramesh Garg directly supports this position
For the Respondent
The Department, represented by Shri Mihir Ranjan (Special Counsel) and Shri Bhagwat Dayal (Authorised Representative), argued that:
- The nature of the transaction indicated potential evasion
- The imposition of penalty under Rule 26 was justified as a deterrent
- The absence of a separate confiscation order should not invalidate the penalty if the underlying conduct was suspicious
Relief Sought
The appellants sought the setting aside of the penalty order dated 31.01.2025 on the ground that it was legally unsustainable for failing to satisfy the mandatory precondition under Rule 26.
The Legal Issue
The central question was whether Rule 26 of the Central Excise Rules, 2002 permits the imposition of penalty against a person for dealing with excisable goods solely on the assertion that the goods are "liable to confiscation," without a prior, reasoned finding that such liability exists.
Arguments Presented
For the Appellant
The appellants relied on the plain language of Rule 26(1), which conditions liability on the person having knowledge that the goods are "liable to confiscation under the Act or these rules." They argued that this is not a self-executing provision; it requires an antecedent determination of confiscatory liability. Citing Shri Ramesh Garg v. Commissioner, CGST, Customs & Central Excise, they emphasized that the Tribunal has consistently held that without a finding of confiscatory liability, Rule 26 penalties cannot be sustained. They further contended that the adjudicating authority’s failure to analyze the nature of the goods, their origin, or the legal basis for confiscatory liability rendered the order arbitrary and violative of natural justice.
For the Respondent
The Department argued that the conduct of the appellants - handling goods without proper documentation - was inherently suspicious and that the penalty under Rule 26 served as a necessary deterrent. They contended that the requirement of a separate confiscation order was procedural rather than substantive, and that the adjudicating authority’s reference to confiscatory liability was sufficient in the context of the overall investigation. However, they did not cite any precedent or statutory provision to support the proposition that a conclusory statement could substitute for a reasoned finding.
The Court's Analysis
The Tribunal undertook a textual and contextual analysis of Rule 26(1). It observed that the rule does not create an independent penalty regime but is expressly tied to the concept of confiscation. The phrase "liable to confiscation under the Act or these rules" is not a mere formality - it is a jurisdictional precondition. The Court noted that the impugned order contained no discussion on whether the goods were imported illegally, evaded duty, or violated any specific provision that would render them confiscable under Section 11 of the Central Excise Act or Rule 21 of the Rules.
"It clearly transpires from the impugned order that there is no discussion in the order that the goods are liable to confiscation and it is only while imposing penalties under rule 26 of the Central Excise Rules that it has been observed that the goods are liable to confiscation."
The Tribunal further relied on its own precedent in Shri Ramesh Garg, where it held:
"In the impugned order, goods have not been confiscated nor have any goods been held liable to be confiscated. We, therefore find, the essential ingredient to impose penalty under Rule 26, namely, confiscation of the goods or goods are liable for confiscation, has not been fulfilled in this case. Therefore, the penalty could not have been imposed under Rule 26."
The Court emphasized that administrative agencies cannot bypass statutory conditions by relying on conclusory assertions. The absence of a finding on confiscatory liability meant the authority lacked jurisdiction to impose the penalty under Rule 26. The Tribunal rejected the Department’s argument that the nature of the transaction alone justified the penalty, noting that procedural compliance is non-negotiable in penal proceedings.
The Verdict
The appellants succeeded. The Tribunal set aside the penalty order dated 31.01.2025 in its entirety, holding that the imposition of penalty under Rule 26 of the Central Excise Rules, 2002 was legally unsustainable due to the absence of a finding that the goods were liable to confiscation. All five appeals were allowed. No monetary penalty was reinstated, and no new directions for reassessment were issued.
What This Means For Similar Cases
Penalty Under Rule 26 Requires Independent Confiscation Finding
- Practitioners must now challenge any penalty order under Rule 26 that lacks a separate, reasoned determination of confiscatory liability
- Adjudicating authorities must explicitly reference the specific provision of the Act or Rules that renders the goods confiscable (e.g., Section 11(1)(a), (b), or (c))
- A mere reference to "goods liable to confiscation" without analysis is legally invalid
Procedural Defects Invalidate Penal Orders
- The Tribunal reaffirmed that penal provisions must be strictly construed
- The burden lies on the department to establish the foundational condition before invoking Rule 26
- In future proceedings, appellants may file applications under Section 129A of the Customs Act or Rule 11 of the Central Excise Rules to demand a specific finding on confiscatory liability
Precedent Now Binding Across Adjudicatory Forums
- The Ramesh Garg precedent, reaffirmed here, is now binding on all adjudicating authorities under the Central Excise regime
- Similar penalties imposed under analogous provisions in GST or Customs law may now be challenged on identical grounds
- Legal notices issued under Rule 26 must now include a clear articulation of the basis for confiscatory liability, or risk being set aside
