Unjust denial of CENVAT credit deemed illegal by High Court, Rule 8(3A) unconstitutional

The High Court held that the denial of CENVAT credit to the petitioner, based on default in payment of duty, was unjust and arbitrary after Rule 8(3A) was declared unconstitutional. The Court found the denial illegal and directed the respondent to adjust the claimed amount towards duty and interest, as the assessee had paid the duty and interest. The impugned order denying the credit was quashed, and the Court allowed the writ petition in favor of the petitioner.

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Issues:
Challenge to final order denying CENVAT credit claimed by the assessee for the period November 2012 to December 2013.

Analysis:
The petitioner, a company engaged in manufacturing excisable goods, was served with a show cause notice proposing a demand for excise duty. The Settlement Commissioner rejected the claim of the assessee for CENVAT credit amounting to Rs. 16,43,129, citing the reason that the assessee was a defaulter and not entitled to the credit under Rule 8(3A) of the Central Excise Rules, 2002. However, the Department's stance changed after relevant invoices were produced, as Rule 8(3A) was declared unconstitutional in a previous case. The High Court noted that the denial of CENVAT credit based on the default was unjust, especially when the duty and interest were paid by the assessee. The Court held that the denial of credit was illegal and arbitrary, directing the respondent to consider and adjust the claimed amount towards duty and interest.

The Revenue justified the denial of CENVAT credit, stating that the burden lies on the assessee to prove the receipt and use of goods in manufacturing, which was not adequately demonstrated. The jurisdictional Commissioner opined that the credit was inadmissible due to lack of proper records and non-compliance with Rule 10 of the Central Excise Rules, 2002. The Settlement Commission upheld this decision, denying the CENVAT credit claimed by the assessee for the specified period.

The High Court observed that the denial of CENVAT credit was solely based on the default in payment of duty, which was not a valid reason after the Rule 8(3A) was declared unconstitutional. The Court emphasized that the Settlement Commission cannot introduce new grounds for denial beyond what was stipulated in the show cause notice. As the assessee was legally entitled to the credit, the impugned order denying the credit was quashed, directing the respondent to consider and adjust the claimed amount towards duty and interest. The Court allowed the writ petition accordingly.

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