CESTAT upheld penalty on Philips Electronics in central excise undervaluation dispute under Rule 26.

May 14, 2026 : The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld the penalty imposed on Philips Electronics India Ltd under Rule 26 of the Central Excise Rules, 2002, in a long-running excise undervaluation dispute involving contract manufacturer M/s Quad Electronic Solutions Pvt. Ltd. The Tribunal ruled that a body corporate can be treated as a “person” for the purpose of imposing penalties under excise law, rejecting Philips’ argument that corporate entities cannot possess the “knowledge” required for penal liability.

The decision was delivered by a Division Bench comprising Justice Member Angad Prasad and Technical Member A.K. Jyotishi in Final Order No. A/30278/2026 dated May 14, 2026. The Tribunal dismissed Philips Electronics India Ltd’s appeal and affirmed the adjudicating authority’s order imposing penalty under Rule 26 of the Central Excise Rules.

The dispute arose from agreements executed on April 1, 2009 between Philips Electronics India Ltd and M/s Quad Electronic Solutions Pvt. Ltd for the manufacture and supply of certain electronic goods. The excise department alleged that both entities were “interconnected undertakings” and therefore “related persons” under Section 4(3)(b) of the Central Excise Act, 1944. Based on this allegation, the department concluded that the assessable value declared by Quad was artificially low and did not reflect the true transaction value for the purpose of central excise duty.

According to the department, Quad had cleared goods at undervalued prices while Philips sold those products to customers at higher prices. The authorities therefore invoked Rule 9 of the Central Excise Valuation Rules, 2000 and recalculated the assessable value using Philips’ downstream sale price. The adjudicating authority confirmed differential duty demands against Quad and also imposed equal penalties. Separate penalties were additionally imposed on Philips and Quad’s Managing Director, Raminder Singh Soin, under Rule 26 of the Central Excise Rules.

Philips challenged the penalty primarily on the ground that Rule 26 could not apply to a corporate entity. The company argued that the provision requires “knowledge” or “reason to believe” that goods are liable for confiscation, and such mental intent cannot be attributed to a juristic person. The company relied heavily on earlier Tribunal rulings, including the Larger Bench judgment in Steel Tubes of India Ltd v. CCE, which had held that penalties under the erstwhile Rule 209A could not be imposed on companies because corporations do not possess an independent state of mind like natural persons.

Philips also argued that Rule 26 could not be invoked because the goods themselves were not confiscated and, according to the company, the department had failed to establish valid grounds for confiscation under Rule 25 of the Central Excise Rules. The company contended that the show-cause notice did not even specify the exact sub-clause of Rule 25 allegedly violated.

The Revenue Department, however, countered that the expression “person” under Rule 26 includes juristic entities such as companies. The department relied on multiple judicial precedents, including the Supreme Court ruling in Aggarwal Trading Corporation v. Assistant Collector of Customs, which recognized that firms and corporate entities fall within the ambit of the term “person” under the General Clauses Act.

Before examining the merits, the Tribunal noted that connected appeals filed by Quad and its Managing Director had already been disposed of earlier. Quad’s appeal had abated after the Telangana High Court ordered the company’s winding up in 2018, while the Managing Director’s appeal had been dismissed for default due to non-prosecution. As a result, the Tribunal held that findings regarding undervaluation and duty evasion had already attained finality and could no longer be reopened in Philips’ appeal.

The Bench then focused exclusively on whether penalty under Rule 26 could legally be imposed on Philips. Interpreting Rule 26, the Tribunal observed that the provision penalizes “any person” dealing with excisable goods while knowing or having reason to believe that the goods are liable for confiscation.

Rejecting Philips’ defence, the Tribunal held that the term “person” under excise law includes body corporates as well as natural persons. Referring to the Supreme Court’s ruling in Aggarwal Trading Corporation, the Bench observed that in the absence of a separate definition in the Central Excise Act, the definition under the General Clauses Act becomes applicable. The Tribunal stated that the expression “person” “will include a body corporate also apart from natural person.”

The Tribunal further noted that Section 4(3)(b) of the Central Excise Act itself uses the term “person” broadly enough to include both relatives and interconnected undertakings, indicating that Parliament intended the expression to cover corporate entities as well.

On the issue of confiscation, the Bench ruled that actual confiscation of goods is not mandatory for invoking Rule 26. It clarified that the provision applies if goods are “otherwise confiscable” under the law. Since undervaluation and short payment of duty had already been established against Quad, the Tribunal held that the goods were indeed liable to confiscation under Rule 25.

The Tribunal also recorded strong findings regarding Philips’ conduct during the investigation. It observed that the adjudicating authority had found evidence of a “novel modus operandi” allegedly designed to evade excise duty liability. The Bench noted that Philips and Quad had delayed furnishing information to the department for nearly a year and that Philips was fully aware that technical know-how charges were excluded from the assessable value adopted by Quad, resulting in short payment of excise duty.

Importantly, the Tribunal observed that Philips had incorporated contractual clauses requiring Quad to bear any future excise liability arising from undervaluation disputes, which, according to the Bench, demonstrated prior awareness of potential legal exposure. The order states that there was “enough material on record” to show that Philips knew the valuation adopted by Quad was not legally correct and that the goods were liable for confiscation under excise law.

Dismissing the appeal, the Tribunal ultimately held that the impugned order imposing penalty under Rule 26 “does not suffer from any infirmity” and therefore deserved to be upheld.

The ruling carries wider implications for manufacturers, contract manufacturing arrangements, and corporate compliance under indirect tax laws. The judgment reinforces the principle that corporate entities can face penal consequences under excise and GST-era enforcement provisions where knowledge, involvement, or participation in undervaluation or tax evasion is established. It also signals that appellate forums may treat findings against co-noticees as final if related appeals are dismissed, abated, or not pursued diligently.

Case Reference : Philips Electronics India Ltd v. Commissioner of Central Tax, Medchal-GST, Excise Appeal No. 26858 of 2013, CESTAT Hyderabad, Final Order No. A/30278/2026, decided on 14 May 2026.