2014 (12) TMI 585 - HC - Central Excise

Court declares Rule 8(3A) restriction on CENVAT credit unconstitutional, upholds duty demand.

The Court declared the condition in Rule 8(3A) prohibiting utilization of CENVAT credit for excise duty payment as unconstitutional and invalid, citing it ... Constitutional validity of Rule 8(3A) of the Central Excise Rules 2002 - Prohibition on assessee from utilising cenvat credit for payment of excise duty for default in payment of duty - Power of Authority to frame Rules - Discrimination between assessee who could avail credit and those who could not avail it - Arbitrariness of Rule - Violation of Art. 14 by withdrawing the facility of paying excise duty through CENVAT credit - Bar of limitation - Held that:- Clause (ib) of sub-section 2 of section 37 gives ample power to the Government to make rules for providing a mechanism for assessment and calculation of duties of excise, the authorities who would carry out such functions, the manner of payment of duty and most importantly, recovery of duty not paid. The fact that sub-rule (3A) of rule 8 provides for the mechanism of duty unpaid is beyond cavil. Very clearly, the said provision is not beyond the rule making power of the sub-ordinate legislature. - Decided against the assessee. Hostile discrimination - Held that:- An assessee who for whatever reasons is unable to pay the duty within the time prescribed by the statute cannot complain of being differently treated from those who fulfill the statutory requirements. The provisions contained in sub-rule (3A) have a purpose to achieve relatable to the class of assessees who failed to pay the duty in time is also equally clear. It is only when the condition of payment of duty by the 5th or the 6th day of month following the previous month of clearance is not fulfilled by an assessee that the stringent requirement of collection of duty on each consignment and withdrawal of the facility of cenvat credit follows. These are undoubtedly stringent provisions provided to deal with the class of assessees who are unable to pay the duty in time. - Decided against the assessee. Unreasonable condition imposed under Rule 8(3A) - Held that:- It can be appreciated that where a manufacturer falls behind the payment schedule on account of financial constraints, such as, slowing down of business, competition in the market reducing the profit margins, promised payments from the purchasers not coming forth or temporary labour disputes, would find it extremely difficult thereafter to raise further funds for payment of duty in addition to the duty which he has already paid. Cenvat credit is available to a manufacturer upon purchase of inputs which are duty paid. It is the duty element which the assessee has already suffered which is credited to his cenvat credit account available to him for adjustment for payment of excise duty liability upon clearance of the finished product. If such facility is withdrawn, it could be appreciated, his ability to continue the business under such adverse financial climate would further diminish. This would be a cyclical vicious pattern where in every month he would fall behind by the due date unable to raise cash flow for payment of duty for the clearance which he desires to make and is therefore further saddled with the burden of paying such duty in cash without availing CENVAT credit. Rule thus imposes a wholly unreasonable restriction which is not commensurate with the wrong sought to be remedied. The phrase 'reasonable restriction' connotes that the limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive nature, beyond what is required in the interests of the public. By no stretch of imagination, the restriction imposed under sub-rule (3A) of rule 8 to the extend it requires a defaulter irrespective of its extent, nature and reason for the default to pay the excise duty without availing cenvat credit to his account can be stated to be a reasonable restriction. It leads to a situation so harsh and a position so unenviable that it would be virtually impossible for an assessee who is trapped in the whirlpool to get out of his financial difficulties. This is quite apart from being wholly reasonable, being irrational and arbitrary and therefore, violative of Article 14 of the Constitution. It prevents him from availing credit of duty already paid by him. It also is a serious affront to his right to carry on his trade or business guaranteed under Article 19(1)(g) of the Constitution. On both the counts, therefore, that portion of sub-rule (3A) of rule must fail. Insisting on an assessee in default to clear all consignments on payment of duty would be a perfectly legitimate measure. However, to insist that he must pay such duty without utilising CENVAT credit which is nothing but the duty on various inputs already paid by him would be a restriction so harsh and out of proportion to the aim sought to be achieved, the same must be held to be wholly arbitrary and unreasonable. We may recall, the delegated legislature in its wisdom now dismantled this entire mechanism and instead has provided for penalty at the rate of 1% per month on delayed payment of duty. Condition contained in sub-rule (3A) of rule 8 for payment of duty without utilizing the cenvat credit till an assessee pays the outstanding amount including interest is declared unconstitutional. Therefore, the portion 'without utilizing the cenvat credit' of sub-rule (3A) of rule 8 of the Central Excise Rules, 2002, shall be rendered invalid. However order passed by the adjudicating authority sustained on the ground that if now we grant the relief as prayed for by the petitioner, we would be rendering the entire mechanism of appeal to the Commissioner and the further appeal to the Tribunal nugatory. - Decided partly in favour of assessee. Issues Involved:1. Constitutionality of Rule 8(3A) of the Central Excise Rules, 2002.2. Validity of the order dated 27.2.2009 confirming the demand of central excise duty with interest and penalty.3. Power of rule-making authority under Section 37 of the Central Excise Act, 1944.4. Discrimination and arbitrariness of Rule 8(3A).5. Impact of Rule 8(3A) on the right to carry on trade or business under Article 19(1)(g) of the Constitution.6. Procedural aspects of appeal and condonation of delay.Detailed Analysis:1. Constitutionality of Rule 8(3A) of the Central Excise Rules, 2002:The petitioner challenged Rule 8(3A) on the grounds that it prohibited an assessee from utilizing CENVAT credit for payment of excise duty, arguing that it was beyond the power of the rule-making authority and violated Articles 14 and 19(1)(g) of the Constitution. The Court examined the statutory provisions and the rule-making powers under Section 37 of the Central Excise Act, 1944, and found that the rule was within the legislative competence. However, the Court held that the condition in Rule 8(3A) requiring payment of duty without utilizing CENVAT credit was unconstitutional as it imposed an unreasonable restriction and was arbitrary and violative of Article 14.2. Validity of the Order Dated 27.2.2009:The petitioner sought to quash the order confirming the demand of central excise duty with interest and penalty. The Court noted that the petitioner had a statutory right of appeal but failed to file the appeal within the prescribed time limit. The Commissioner and the Tribunal had rightly dismissed the appeal due to the delay. The Court refused to grant relief for setting aside the order as it would render the statutory appeal mechanism nugatory.3. Power of Rule-Making Authority Under Section 37 of the Central Excise Act, 1944:The petitioner argued that the rule-making authority did not have the power to frame Rule 8(3A). The Court analyzed Section 37 and concluded that the rule-making power was sufficiently wide to include the provisions of Rule 8(3A). The Court rejected the contention that clause (xiiia) of Section 37(2) introduced in 2010 limited the power to frame such rules, as Rule 8(3A) was introduced in 2006.4. Discrimination and Arbitrariness of Rule 8(3A):The petitioner contended that Rule 8(3A) created an artificial distinction among assessees and was discriminatory. The Court found that the rule recognized two distinct classes of assessees: those who paid duty on time and those who defaulted. The differentiation was based on intelligible differentia and had a rational relation to the object sought to be achieved. However, the Court held that the condition of paying duty without utilizing CENVAT credit was unreasonable and arbitrary.5. Impact of Rule 8(3A) on the Right to Carry on Trade or Business Under Article 19(1)(g) of the Constitution:The petitioner argued that Rule 8(3A) imposed unreasonable restrictions on the right to carry on trade or business. The Court agreed, stating that the rule imposed a harsh and disproportionate restriction by preventing the utilization of CENVAT credit, which could cripple the manufacturing unit. The rule was held to be violative of Article 19(1)(g).6. Procedural Aspects of Appeal and Condonation of Delay:The Court noted that the petitioner failed to file the appeal within the prescribed time limit and the Commissioner could not condone the delay beyond 30 days. The Tribunal also dismissed the appeal due to a delay of three years. The Court upheld the dismissal of the appeal, emphasizing the importance of adhering to statutory time limits for appeals.Conclusion:The Court declared the condition in Rule 8(3A) requiring payment of duty without utilizing CENVAT credit as unconstitutional and invalid. However, it refused to set aside the order dated 27.2.2009 due to the procedural delays in filing the appeal. The petition was disposed of accordingly, with a stay on the judgment till 15th January 2015.