Court declares CENVAT Credit Rule proviso unconstitutional, sets aside show cause notice

The Court held that the first proviso to Rule 3(4) of the CENVAT Credit Rules, 2004, was ultra vires and unconstitutional as it imposed unreasonable restrictions on the utilization of CENVAT Credit. The impugned show cause notice demanding duties, interest, and penalties was set aside. The Court directed the appropriate authority to adjudicate the matter in line with the ruling, declaring the proviso unconstitutional. The jurisdictional objection raised by the respondents was overruled, affirming the Gujarat High Court's jurisdiction in the case.

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Issues Involved: Constitutionality of the first proviso to Rule 3(4) of the CENVAT Credit Rules, 2004; Validity of the impugned show cause notice and demand of duties, interest, and penalties.

Issue 1: Constitutionality of the first proviso to Rule 3(4) of the CENVAT Credit Rules, 2004

The petitioners challenged the first proviso to Rule 3(4) of the CENVAT Credit Rules, 2004, claiming it to be ultra vires of Rule 3(1) of the CENVAT Credit Rules and Section 37 of the Central Excise Act, 1944. The petitioners argued that the proviso imposes an unreasonable restriction on the utilization of CENVAT Credit, which is not supported by Section 37 of the Central Excise Act. They contended that the proviso contradicts the principle that CENVAT Credit is indefeasible and should be utilized as soon as it is legally availed, without any correlation to the specific month of manufacture.

The Court referred to Section 37 of the Central Excise Act and Rule 3 of the CENVAT Credit Rules, highlighting that Rule 3 allows manufacturers to take credit of excise duty and service tax paid on inputs, capital goods, and input services. The first proviso to Sub Rule (4) of Rule 3 restricts the utilization of CENVAT Credit to the extent available on the last day of the month or quarter for payment of duty relating to that period. This restriction was found to be contrary to Rule 8(1) of the Central Excise Rules, 2002, which allows manufacturers to discharge excise duty liability by the 5th or 6th day of the following month. The Court held that the proviso to Sub Rule (4) of Rule 3 is ultra vires to Rule 3(1) of the CENVAT Credit Rules and Section 37 of the Central Excise Act, as it does not have any nexus with the object sought to be achieved by the Rules and runs contrary to the principles of the CENVAT Credit Scheme.

Issue 2: Validity of the impugned show cause notice and demand of duties, interest, and penalties

The petitioners also challenged the impugned show cause notice dated 18/09/2015, which proposed to recover an amount of Rs. 83,52,354/- as short payment of central excise duty and Rs. 94,89,22,059/- as excise duty in cash, invoking Rule 8(3) of the Central Excise Rules read with Section 11A of the Central Excise Act. The notice was based on the proviso to Rule 3(4) of the CENVAT Credit Rules, which the petitioners argued was unconstitutional.

The respondents opposed the petition, arguing that the cause of action arose in Silvasa, within the Union Territory of Dadra & Nagar Haveli, and therefore, the Gujarat High Court lacked territorial jurisdiction. They also contended that Section 37 of the Central Excise Act empowers the Central Government to frame the CENVAT Credit Rules, including the impugned proviso.

The Court overruled the jurisdictional objection, stating that the impugned orders were passed by the authority at Vapi, which falls within the jurisdiction of the Gujarat High Court. The Court further held that the proviso to Sub Rule (4) of Rule 3 of the CENVAT Credit Rules is ultra vires and unconstitutional. Consequently, the appropriate authority was directed to adjudicate the show cause notice accordingly, treating the proviso as unconstitutional.

Conclusion

The first proviso to Rule 3(4) of the CENVAT Credit Rules, 2004, was declared ultra vires and unconstitutional. The impugned show cause notice and the demand of duties, interest, and penalties were set aside. The appropriate authority was directed to adjudicate the matter in accordance with the Court's findings. The rule was made absolute to this extent, with no order as to costs.

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