CENVAT credit rights during excise default cannot be curtailed by an arbitrary payment restriction under Rule 8(3A).

A defaulting excise assessee could still utilise validly accrued CENVAT credit to discharge duty during the default period. Applying Malladi Drugs & Pharmaceuticals Ltd. and the principle that accrued CENVAT credit is an indefeasible legal right, the Court held that the portion of Rule 8(3A) barring utilisation of credit until outstanding duty and interest were paid was unconstitutional as arbitrary and violative of Article 14. The demand and penalty founded solely on that restriction therefore could not survive, and the Tribunal's order setting them aside was left undisturbed.

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Issues: Whether, for the period of default in payment of excise duty, the assessee could discharge duty liability by utilising CENVAT credit and whether Rule 8(3A) of the Central Excise Rules, 2002, to the extent it compels payment without utilising CENVAT credit, could sustain the demand and penalty.

Analysis: The dispute was governed by the regime under Rule 8(3A) of the Central Excise Rules, 2002, read in the light of the earlier payment-default mechanism under Rule 173G(1)(e) of the Central Excise Rules, 1944. The Court followed the binding decision in Malladi Drugs & Pharmaceuticals Ltd. and the reasoning adopted therein, which in turn approved the principle that validly accrued CENVAT credit is an indefeasible right and cannot be denied except according to law. The Court also noted that the relevant portion of Rule 8(3A), which prohibits utilisation of CENVAT credit until outstanding duty and interest are paid, had already been declared unconstitutional as arbitrary and violative of Article 14 of the Constitution of India. On that basis, the departmental demand founded solely on such restriction could not survive.

Conclusion: The assessee was entitled to utilise CENVAT credit during the default period, and the demand and penalty based on Rule 8(3A) could not be sustained.

Final Conclusion: The appeal failed and the Tribunal's order setting aside the duty demand and penalty was left undisturbed.

Ratio Decidendi: A rule that disables a defaulting assessee from utilising valid CENVAT credit for payment of duty, without a legally sustainable basis and in the face of accrued credit rights, is arbitrary and unconstitutional under Article 14.

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