2023 (8) TMI 657 - AT - Central Excise

Tribunal Upholds Order, Declares Rule 8(3A) Unconstitutional (3A)

Commissioner of Central Excise, Delhi-III Versus M/s Proform Interiors Pvt. Ltd.

The Tribunal upheld the impugned order, citing various High Court judgments declaring Rule 8(3A) unconstitutional. The Tribunal emphasized that no ... Constitutional Validity of Sub-Rule 3A of Rule 8 of the Central Excise Rules, 2002 - Recovery of short paid Central Excise duty alongwith interest and penalty - HELD THAT:- This issue is no more res-integra as the various Hon’ble High Courts have held that the provisions of Sub-Rule 3A of Rule 8 of the Central Excise Rules, 2002 are unconstitutional. In this regard, reliance upon the Jurisdictional High Court of Punjab and Haryana in the case of M/S SANDLEY INDUSTRIES VERSUS UNION OF INDIA AND OTHERS [2015 (10) TMI 2455 - PUNJAB & HARYANA HIGH COURT] wherein it has been held that we hold that Rule 8(3A) of the 2002 Rules to the extent it contains the words ‘without utilizing the Cenvat credit’ is held to be arbitrary and unreasonable and is struck down. In other words, the unamended Rule 8(3A) of 2002 Rules whereby the benefit of Cenvat credit for all the period till the actual payment was made, stands disallowed in the event of a minor default also is arbitrary and unreasonable. Thus, there is no infirmity in the impugned order which is upheld by dismissing the appeal of the Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether Sub-Rule (3A) of Rule 8 of the Central Excise Rules, 2002-specifically the words 'without utilizing the Cenvat credit'-is constitutionally valid or ultravires as arbitrary, unreasonable or disproportionate under Article 14 and insofar as it infringes the right to carry on business under Article 19(1)(g). 2. Whether a demand and penalty founded solely on contravention of Rule 8(3A) can survive where the provision has been declared unconstitutional by relevant High Courts and followed by Tribunal authorities. 3. Whether the Adjudicating Authority erred in dropping the demand for excise duty and allowing CENVAT credit where the assessee paid duty, interest and penalty subsequently (including payment from PLA), in light of the invalidity of Rule 8(3A). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Constitutional validity of the clause 'without utilizing the Cenvat credit' in Rule 8(3A) Legal framework: Rule 8 of the Central Excise Rules, 2002 governs payment and accounting of excise duty; Sub-Rule (3A) imposed mode/conditions of payment where duty default continued beyond prescribed period, stating the assessee shall pay duty 'without utilizing the Cenvat credit' until outstanding dues including interest were cleared. Fundamental rights considerations under Article 14 (equality/reasonableness) and Article 19(1)(g) (carry on any trade or business) were invoked. Precedent treatment: Multiple High Courts have considered and struck down the phrase 'without utilizing the Cenvat credit' in Rule 8(3A) as arbitrary and violative of Article 14 and (in effect) an unreasonable restriction under Article 19(1)(g). The Tribunal has applied those High Court rulings in subsequent adjudications, treating the specific impugned clause as invalid. Interpretation and reasoning: The impugned clause effectively disallowed availment of legitimately accumulated CENVAT credit for the period of default, even for minor or technical defaults, imposing a disproportionate consequence disproportionate to the objective of securing revenue. Courts applied principles of reasonableness and proportionality (including reliance on established tests for reasonable restrictions) and found the condition excessive and arbitrary because it wholly deprived an assessee of a statutory credit right for the period until payment, without proportionate nexus to the public interest served. Ratio vs. Obiter: The declarations invalidating the phrase 'without utilizing the Cenvat credit' constitute ratio decidendi in the cited High Court judgments and have been followed as binding persuasive authority by the Tribunal; such holdings address the core validity of the impugned provision and are not obiter. Conclusion: The specific provision disallowing utilization of CENVAT credit until outstanding duty is paid is unconstitutional to the extent that it contains the words 'without utilizing the Cenvat credit' and is therefore void; the unamended Rule 8(3A) cannot be the legal basis for disallowing credit or sustaining demands/penalties for defaults covered by that clause. Issue 2 - Sustainment of demand and penalty predicated solely on Rule 8(3A) Legal framework: Recovery of short-paid central excise and disallowance of Cenvat credit were sought under Section 11A(1) and Rule 14 read with Rule 8(3A); penalties were proposed under applicable rules. Validity of the underlying regulatory precept (Rule 8(3A)) is determinative of whether liabilities founded exclusively thereon can be sustained. Precedent treatment: Tribunal decisions have held that where proceedings are based exclusively on Rule 8(3A) and that rule (or its operative words) has been declared unconstitutional by High Courts, no liability can be sustained under that rule. The Tribunal follows and applies those High Court rulings. Interpretation and reasoning: If the rule on which the show-cause notice and consequent demand are based is void, the legal foundation of the demand collapses. The Tribunal examined whether any independent legal provision or factual basis outside Rule 8(3A) supported the demand; where none exists, continuation of demand or penalty would amount to enforcing an invalid rule. Ratio vs. Obiter: The principle that proceedings founded solely on a declared-invalid statutory provision cannot stand is ratio as applied by the Tribunal; references to other decisions are used as binding or persuasive precedent and not mere obiter. Conclusion: A demand and penalty based solely on Rule 8(3A) cannot be sustained where relevant High Courts have declared the offending portion of the rule invalid; such proceedings must be dropped absent an independent legal basis. Issue 3 - Lawful effect of subsequent payment of duty, interest and penalty (including use of PLA/Cash) where Rule 8(3A) is invalid Legal framework: Sub-Rule (3) of Rule 8 and other provisions permit payment of duty and interest; Rule 8(3A) had sought to require payment through account-current and disallow use of CENVAT credit-now severed to the extent invalid. The question is the consequence of an assessee's subsequent compliance (payment of duty, interest and penalty) on liability claims initiated under the invalid provision. Precedent treatment: Tribunal and High Courts have recognized that where the impugned rule is invalid, payments made by an assessee (including through PLA or in cash) and acceptance by authorities disentitles the department from sustaining a demand that rests on the invalid provision. Where payment and interest have been tendered, no continuing default under the invalid provision survives to justify disallowance of credit. Interpretation and reasoning: The Court/Tribunal examined the record showing that the assessee paid outstanding duty, interest and penalty and that the adjudicating authority accepted such payments. Given the invalidity of the clause preventing CENVAT utilization, the subsequent curing of the default (payment of dues) removes any residual basis to disallow credit or maintain demand; the departmental reliance on a struck-down provision cannot resurrect liability. Ratio vs. Obiter: The conclusion that payment of duty and interest extinguishes liability where proceedings were predicated on an invalid rule is applied as ratio in the present decision; observations on modes of payment (PLA vs. account-current) are reflective of the legal consequence rather than obiter. Conclusion: Where the assessee has paid the duty, interest and penalty and the rule that would have prevented utilization of CENVAT credit has been declared invalid, the adjudicating authority was correct to drop the demand and allow CENVAT credit; Revenue's appeal lacks merit. Cross-references and Final Determination 1. Issue 1 and Issue 2 are interlinked: invalidation of the specific clause in Rule 8(3A) (Issue 1) directly defeats demands and penalties premised solely on that clause (Issue 2). 2. Issue 3 follows from Issues 1-2: acceptance of post-default payments by the assessee, coupled with the invalidity of the disallowance clause, justifies upholding the adjudicating order dropping the demand and allowing credit. Disposition: The Tribunal upheld the adjudicating authority's order dismissing the demand and permitting CENVAT credit, relying on the ratio of High Court judgments and Tribunal precedent declaring the operative portion of Rule 8(3A) invalid; Revenue's appeal was dismissed.