Unconstitutional Cenvat credit restriction under default rule struck down as arbitrary and disproportionate, invalidating consequent demands.

The Gujarat High Court held that the words in Rule 8(3A) of the Central Excise Rules, 2002 requiring a defaulter to pay duty on subsequent clearances without using Cenvat credit were unconstitutional. Applying the tests of reasonableness and proportionality under Articles 14 and 19(1)(g), the Court found the restriction arbitrary, excessive, and disproportionate because it treated every default alike, regardless of whether the default was wilful or caused by financial difficulty. As the show-cause notice and consequential adjudication and appellate orders rested entirely on that invalid condition, they could not survive and were set aside.

---

---

Issues: Whether the condition in Rule 8(3A) of the Central Excise Rules, 2002 requiring a defaulter to clear subsequent goods without utilizing Cenvat credit was valid, and whether the orders based solely on that condition could survive after the condition was struck down.

Analysis: The Court followed its earlier ruling that the words requiring payment of duty "without utilizing the Cenvat credit" in Rule 8(3A) were unconstitutional. The provision treated all defaults alike, regardless of whether the default was wilful or arose from financial difficulty, and imposed a harsh restriction by disabling use of credit already earned on duty-paid inputs. Applying the tests of reasonableness and proportionality under Articles 14 and 19(1)(g) of the Constitution of India, the Court held that the restriction was arbitrary, excessive, and disproportionate. Since the show-cause notice and the consequential adjudication and appellate orders rested entirely on that invalid portion of Rule 8(3A), they could not stand.

Conclusion: The impugned orders were liable to be set aside and the petitioners succeeded.

Ratio Decidendi: A statutory condition that withdraws Cenvat credit from every defaulting assessee, irrespective of the nature of default, is an unreasonable and disproportionate restriction and is liable to be struck down as unconstitutional; consequential demands founded exclusively on that invalid condition cannot survive.

---