2016 (5) TMI 746 - AT - Central Excise

Tribunal overturns penalty for duty default, citing unconstitutionality of credit restriction

The Tribunal allowed the appeal in a case involving default in payment of duty and utilization of Cenvat credit. Relying on the Gujarat High Court's ... Withdrawal of CENVAT credit condition in Rule 8(3A) of the Central Excise Rules - Right to utilise CENVAT credit as a substantive vested right - Reasonableness and proportionality of restrictions under Article 14 - Right to carry on trade or business under Article 19(1)(g) - Demand and penalty under Rule 25 of CCR read with Section 11AC of the ActWithdrawal of CENVAT credit condition in Rule 8(3A) of the Central Excise Rules - Right to utilise CENVAT credit as a substantive vested right - Reasonableness and proportionality of restrictions under Article 14 - Right to carry on trade or business under Article 19(1)(g) - Validity of the portion 'without utilising the Cenvat credit' in sub rule (3A) of Rule 8 and whether the appellant could be denied utilisation of Cenvat credit for the defaults in Jan.2012 and Feb.2012. - HELD THAT: - The Tribunal followed the reasoning of the Honourable Gujarat High Court in Indsur Global and subsequent High Court decisions which declared the portion of sub rule (3A) requiring payment 'without utilising the Cenvat credit' to be unconstitutional as an unreasonable and disproportionate restriction violative of Article 14 and infringing the right under Article 19(1)(g). The Tribunal noted that Cenvat credit is a substantive right accrued on payment of duty on inputs and that withdrawing the facility to utilise such credit operates as a punitive measure disproportionate to the object of recovery; accordingly, utilisation of Cenvat credit could not be disallowed on the basis of the impugned portion of Rule 8(3A). The Tribunal applied these authorities to the facts of defaults in Jan.2012 and Feb.2012 and held that the disallowance premised on that portion of the rule was not sustainable.The disallowance of utilisation of Cenvat credit under the impugned portion of Rule 8(3A) is not sustainable and the appellant is entitled to the benefit of utilising Cenvat credit for the periods in question.Demand and penalty under Rule 25 of CCR read with Section 11AC of the Act - Withdrawal of CENVAT credit condition in Rule 8(3A) of the Central Excise Rules - Sustainability of the confirmed demand and equal penalty imposed on account of alleged improper utilisation of Cenvat credit for the periods Jan.2012 and Feb.2012. - HELD THAT: - The demand and the equal penalty were founded on the premise that utilisation of Cenvat credit was impermissible under sub rule (3A). Having held that the portion 'without utilising the Cenvat credit' is invalid and that the appellant was entitled to utilise Cenvat credit, the Tribunal found the demand and penalty confirmed on that basis to be unsustainable. The Tribunal therefore allowed the appeal and granted consequential relief to the appellant in respect of the demand and penalty which derived from the disallowance.The demand and the penalty confirmed on the basis of disallowing Cenvat credit are set aside and the appellant is granted consequential relief.Final Conclusion: Appeal allowed; following the High Court authorities, the Tribunal held that the portion of Rule 8(3A) disallowing utilisation of Cenvat credit is not sustainable, and accordingly the demand and equal penalty confirmed on that basis for Jan.2012 and Feb.2012 are set aside with consequential benefits to the appellant. Issues Involved:1. Default in payment of duty for January and February 2012.2. Utilisation of Cenvat credit during the default period.3. Imposition of penalty under Rule 25 of CCR read with Rule 8(3A) and Section 11AC of the Act.4. Validity of Rule 8(3A) of CER under Articles 14 and 19(1)(g) of the Constitution.Issue-wise Detailed Analysis:1. Default in Payment of Duty:The appellant assessee defaulted in paying the duty for January and February 2012 by the due dates. The duty was subsequently paid with interest on 4th March 2012. The table provided in the judgment indicates the amounts of duty payable, paid, and the dates of payment, highlighting the arrears and subsequent payments.2. Utilisation of Cenvat Credit:The revenue contended that the appellant could not utilise the Cenvat credit as per Rule 8(3A) of the Central Excise Rules (CER), 2002, which mandates that a defaulter must pay duty without availing Cenvat credit. The appellant argued that this rule was unreasonable and violative of Articles 14 and 19(1)(g) of the Constitution. The appellant cited the Gujarat High Court's decision in Indsur Global Limited vs. Union of India, which declared the condition of 'without utilising the Cenvat credit' in Rule 8(3A) as unconstitutional.3. Imposition of Penalty:The adjudicating authority confirmed the demand and imposed an equal amount of penalty under Rule 25 of CCR read with Section 11AC of the Act. The appellant contested this imposition, arguing that the rule itself was invalid.4. Validity of Rule 8(3A) of CER:The appellant relied on the Gujarat High Court's ruling in Indsur Global Limited, which held that the condition in Rule 8(3A) requiring payment of duty without utilising Cenvat credit was unreasonable and violative of Articles 14 and 19(1)(g) of the Constitution. The Gujarat High Court observed that the rule imposed a harsh and disproportionate restriction on assessees, preventing them from availing credit for duty already paid, thus affecting their right to carry on business. The court also noted that the rule did not distinguish between willful defaulters and those defaulting due to financial constraints.The appellant also cited similar rulings from the Madras High Court in Malladi Drugs & Pharmaceuticals Ltd. vs. Union of India and the Punjab & Haryana High Court in Sandley Industries vs. Union of India, which followed the Gujarat High Court's decision and held that the right to utilise Cenvat credit cannot be taken away by procedural rules.Conclusion:The Tribunal, considering the rival contentions and following the law pronounced by the Gujarat High Court, allowed the appeal. It held that the facts of the present case were squarely covered by the Gujarat High Court's ruling in Indsur Global Limited, thereby granting consequential benefits to the appellant. The Tribunal pronounced the judgment in the open court, allowing the appeal and setting aside the impugned order.