2015 (5) TMI 603 - HC - Central Excise

Rule 8(3A) of Central Excise Rules struck down for denying lawful CENVAT credit, violating Article 14

M/s. Malladi Drugs & Pharmaceuticals Ltd., M/s. Hari Alloys Pvt. Ltd., M/s. A.R. Mettallurgicals Pvt. Ltd., M/s. Titan Industries Limited Versus The Union of India, The Additional Commissioner of Central Excise and The Commissioner of Central Excise

The HC held Rule 8(3A) of the Central Excise Rules, 2002 unconstitutional as violative of Art 14 due to arbitrariness. The petitioners, assessees, ... Constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002 - Violation of Article 14 - Held that:- Petitioners-assessees have not illegally or irregularly taken the CENVAT credit. It is to be mentioned herein that sub-rule (1) of Rule 8 provides for the manner of payment of duty on the goods removed from the factory or the warehouse as provided thereunder. Sub-rule (2) of Rule 8 extends the benefit of duty to the third party purchaser, who buys the excisable goods removed by the assessee and such goods are deemed to have suffered duty of excise. Under sub-rule (3) of Rule 8, interest is liable to be paid on the outstanding amount, if the assessee fails to pay the duty by the due date. The right to pay duty by utilising the CENVAT credit that had accrued cannot be defeated, unless it is a case of illegal or irregular credit (See the decision of the Supreme Court in Dai Ichi Karkaria Ltd., referred [1999 (8) TMI 920 - SUPREME COURT (LB)]). To that extent, we find this sub-rule (3A) arbitrary and therefore violative of Article 14. The right that has accrued to an assessee by way of CENVAT credit, that is duty paid on the inputs, cannot be taken away under a rule, which only provides for the manner and method of payment of duty and for levying of interest, if there is a default - It is a legitimate right that has accrued to an assessee and that cannot be denied arbitrarily under the provision under challenge. We, therefore, have no hesitation to concur with the reasoning of the Gujarat High Court in INDSUR GLOBAL LTD. [2014 (12) TMI 585 - GUJARAT HIGH COURT] that Rule 8(3A) is ultra vires of Article 14 on the ground of arbitrariness. - all the proceedings initiated by the Department in respect of the respective assessees, invoking the said rule by demanding duty along with interest by denying the benefit of CENVAT credit have to be necessarily set aside - Decision in the case of Precision Fasteners Ltd., v. Commissioner of Central Excise [2014 (12) TMI 655 - GUJARAT HIGH COURT] followed - Decided in favour of assessee. ISSUES: Whether Rule 8(3A) of the Central Excise Rules, 2002, which mandates payment of excise duty without utilizing CENVAT credit upon default beyond thirty days, is constitutionally valid.Whether the restriction imposed by Rule 8(3A) is arbitrary, irrational, and violative of Articles 14 and 19(1)(g) of the Constitution of India.Whether the denial of CENVAT credit under Rule 8(3A) is permissible in the absence of illegal or irregular availing of such credit.Whether proceedings and show cause notices issued under Rule 8(3A) demanding duty without allowing utilization of CENVAT credit are sustainable in law.Whether the imposition of pre-deposit of entire duty along with interest as a condition for entertaining appeals under the impugned rule is justified. RULINGS / HOLDINGS: The condition in sub-rule (3A) of Rule 8 requiring payment of excise duty 'without utilizing the CENVAT credit' until outstanding amounts including interest are paid is declared unconstitutional and ultra vires Article 14 of the Constitution, as it imposes an arbitrary and unreasonable restriction.The restriction under Rule 8(3A) is arbitrary and irrational because it does not distinguish between willful defaulters and others, and it 'prevents an assessee from availing credit of duty already paid by him,' thereby violating the right to carry on trade or business under Article 19(1)(g).The right to avail CENVAT credit is a legitimate and indefeasible right accruing to an assessee upon payment of duty on inputs, and denial of such credit can only be made through prescribed legal procedure, not by a rule prescribing manner of payment.Proceedings initiated and show cause notices issued under Rule 8(3A) that deny the benefit of CENVAT credit and demand duty along with interest are set aside as unsustainable in law.The imposition of pre-deposit of entire duty along with interest as a condition for entertaining appeals under Rule 8(3A) is not upheld in light of the invalidity of the rule's core restriction. RATIONALE: The Court relied on the constitutional principles of reasonableness and non-arbitrariness under Article 14 and the right to carry on trade or business under Article 19(1)(g), applying the doctrine of proportionality to assess the validity of the restriction.Precedents from the Supreme Court, including decisions in Eicher Motors Ltd. v. Union of India and Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., establish that CENVAT credit is an indefeasible right once duty on inputs is paid and acknowledged, and can only be reversed if illegally or irregularly taken.The Court noted that Rule 8(3A) imposes a blanket restriction without distinguishing between willful defaulters and others, thereby failing the test of reasonableness and proportionality.The Gujarat High Court's reasoning was adopted, emphasizing that while recovery of excise duty on default is legitimate, the mechanism of denying utilization of CENVAT credit is excessively harsh and tantamount to a penalty, which is not authorized by the delegated legislation.The Court highlighted that the denial of CENVAT credit under Rule 8(3A) conflicts with the statutory scheme and the object and scope of the Central Excise Act and CENVAT Credit Rules, rendering the impugned provision ultra vires.In respect of proceedings initiated under the invalid provision, the Court followed the principle that when the statutory basis is struck down, consequential actions must be set aside unless finality has been achieved in prior adjudications, which was not the case here.