Cenvat credit restriction found unconstitutional; demand and penalty based on cash-only duty payment rule were set aside.

CESTAT Allahabad held that Rule 8(3A), which barred utilisation of valid Cenvat credit and required duty payment only in cash after default, was unsustainable where the assessee had cleared the default by paying duty and interest. Applying High Court authority and the constitutional standards of reasonableness under Articles 14 and 19(1)(g), the Tribunal treated the restriction as arbitrary and disproportionate. It recognised the right to use legitimately earned credit as a substantive entitlement that could not be taken away by a procedural payment mechanism. The demand and penalty founded on the restriction were set aside, and consequential relief was granted to the assessee.

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Issues: Whether the denial of utilisation of Cenvat credit under Rule 8(3A) of the Central Excise Rules, 2002, and the consequential demand and penalty, could be sustained when the assessee cleared the default by payment of duty and interest.

Analysis: The restriction in Rule 8(3A) was examined in the light of the constitutional guarantees under Articles 14 and 19(1)(g). The Tribunal applied the prevailing High Court decisions holding that the condition compelling payment of duty only in cash, without utilising Cenvat credit, was arbitrary and disproportionate. It was also noted that the right to utilise legitimately earned credit is a substantive right and cannot be taken away by a procedural payment mechanism. Following the binding view adopted from the High Court rulings, the challenged portion of the rule was treated as invalid for the controversy before the Tribunal.

Conclusion: The restriction on utilising Cenvat credit was held unsustainable, and the demand and penalty founded on that restriction were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the appellant obtained consequential relief.

Ratio Decidendi: A rule that bars utilisation of valid Cenvat credit for delayed duty payment, without distinguishing between defaults and without meeting the test of reasonableness and proportionality, is unconstitutional and cannot support recovery or penalty.

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