2025 (4) TMI 1111 - AT - Central Excise

Rule 8(3A) Struck Down: CENVAT Credit Rights Affirmed, Partial Compliance Penalties Maintained for Revenue Protection

Krishnanad Textiles Pvt Ltd Versus Commissioner of C.E & S.T. -Valsad, Kapil Tiwari Versus Commissioner of C.E & S.T. -Valsad, KM Shrivastava Versus Commissioner of C.E & S.T. -Valsad

The SC/HC/Tribunal examined the constitutional validity of Rule 8(3A) of Central Excise Rules, 2002 regarding CENVAT credit utilization during duty ... Failure to discharge central excise duty within the stipulated time disqualifies them from availing CENVAT credit under Rule 8(3A) of the Central Excise Rules, 2002 - Constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002 - HELD THAT:- Hon’ble Jurisdictional High Court of Gujarat in its decision in the matter of Indusr Global Ltd Vs. Union of India [2014 (12) TMI 585 - GUJARAT HIGH COURT], has already declared that part of Rule 8(3A) which prescribes “payment of duty without utilizing the Cenvat Credit till an assessee pays the outstanding amount including interest” as unconstitutional. As far as liability to pay interest for the default period is considered, the Hon’ble Court held that this liability continues as per subrule (3) of Rule 8. Also, consignment wise payment of duty during the default period has not been declared unconstitutional. No Contrary decision of the Apex Court has been bought to knowledge. This being the position, demand having been made under the authority of unconstitutional provision declared as such by Hon’ble Gujarat High Court, cannot be sustained. Appeals are allowed to the extent of utilising Cenvat Credit for payment of duty. Penalty on Shri Kapil Tiwari the Director of the company and Shri K M Shrivastava General Manager of the company & Authorised signatory are also set aside. However, liability of interest due to delayed payment of duty if any and penalty on account of delayed filing of returns sustains. Conclusion - i) Demand having been made under the authority of unconstitutional provision declared as such by Hon'ble Gujarat High Court, cannot be sustained. ii) Penalty on the Director of the company and General Manager & Authorised signatory are also set aside. iii) Liability of interest due to delayed payment of duty if any and penalty on account of delayed filing of returns sustains. Appeal allowed in part. The core legal questions considered in this case include:1. Whether the appellant's failure to pay central excise duty within the stipulated time disqualifies them from availing CENVAT credit under Rule 8(3A) of the Central Excise Rules, 2002.2. The constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002, particularly the provision mandating payment of duty without utilizing CENVAT credit until outstanding dues including interest are cleared.3. The legality of utilizing CENVAT credit for payment of duty during the period of default and whether such utilization renders the goods liable for confiscation under section 11 read with Rule 25 of the Central Excise Rules, 2002.4. The applicability and extent of penalties on the directors and authorized signatories for contravention of the said rules.5. The continuing liability to pay interest on delayed duty payments despite any declaration of unconstitutionality of Rule 8(3A).Issue-wise Detailed Analysis:Issue 1: Disqualification from CENVAT Credit due to delayed duty payment under Rule 8(3A)The relevant legal framework is Rule 8(3A) of the Central Excise Rules, 2002, which stipulates that if duty for any month remains unpaid beyond thirty days, the assessee must discharge duty consignment-wise through PLA/cash without utilizing CENVAT credit until the outstanding duty and interest are paid.The appellant was found to have cleared goods worth over Rs. 8 crore between January 2010 and March 2012, charging excise duty but failing to pay it by the due dates. Despite this, they continued to utilize CENVAT credit for payment of duty, contrary to Rule 8(3A). The department issued a show cause notice and confirmed duty demand with interest and penalties.The appellant argued that Rule 8(3A) was declared ultra vires by the Gujarat High Court in Indusr Global Ltd, a decision upheld by the Supreme Court on procedural grounds. They relied on multiple High Court and CESTAT decisions supporting the invalidity of the relevant portion of Rule 8(3A).The department relied on precedents upholding Rule 8(3A) and the statutory provisions mandating consignment-wise duty payment without CENVAT credit utilization during default.The Tribunal noted that the Gujarat High Court had specifically declared unconstitutional the part of Rule 8(3A) requiring payment of duty without utilizing CENVAT credit until payment of outstanding dues including interest. However, the obligation to pay interest under subrule (3) of Rule 8 remained valid, as did the requirement for consignment-wise duty payment during default. No contrary Supreme Court ruling had been brought to its attention.Applying the law to facts, the Tribunal held that since the demand was based on the unconstitutional portion of Rule 8(3A), it could not be sustained. However, the liability to pay interest and the requirement for consignment-wise payment during default continued to apply.Issue 2: Legality of utilizing CENVAT credit during the default period and confiscation liabilityThe department contended that the appellant's continued use of CENVAT credit to pay duty during the default period violated Rule 8(3) and 8(3A), rendering the goods liable to confiscation under section 11 read with Rule 25 of the Central Excise Rules, 2002.The appellant countered that the relevant provisions were unconstitutional, and thus no confiscation could be imposed.The Tribunal, relying on the constitutional invalidity of the impugned portion of Rule 8(3A), rejected the confiscation claim arising from CENVAT credit utilization during the default period. The Tribunal did not find sufficient basis to impose confiscation where the legal provision mandating such penalty was declared void.Issue 3: Penalties on directors and authorized signatoriesPenalties were imposed on the directors and authorized signatories for contravention of the provisions. The appellant challenged these penalties on the same grounds as above.The Tribunal held that since the demand itself could not be sustained due to the invalidity of the relevant rule, the penalties imposed on the individuals also had to be set aside. However, penalties related to delayed filing of returns and interest liability were upheld.Issue 4: Liability to pay interest despite invalidity of Rule 8(3A)The Tribunal observed that the Gujarat High Court had maintained the liability to pay interest under subrule (3) of Rule 8, which was not declared unconstitutional. Therefore, the appellant remained liable to pay interest on delayed duty payments.Significant Holdings:'The Hon'ble Jurisdictional High Court of Gujarat in its decision in the matter of Indusr Global Ltd Vs. Union of India, has already declared that part of Rule 8(3A) which prescribes 'payment of duty without utilizing the Cenvat Credit till an assessee pays the outstanding amount including interest' as unconstitutional.''As far as liability to pay interest for the default period is considered, the Hon'ble Court held that this liability continues as per subrule (3) of Rule 8.''Consignment wise payment of duty during the default period has not been declared unconstitutional.''Demand having been made under the authority of unconstitutional provision declared as such by Hon'ble Gujarat High Court, cannot be sustained.''Penalty on the Director of the company and General Manager & Authorised signatory are also set aside.''Liability of interest due to delayed payment of duty if any and penalty on account of delayed filing of returns sustains.'The Tribunal thus clarified that while the unconstitutional portion of Rule 8(3A) cannot be enforced, the obligation to pay interest and penalties related to delayed returns remain valid. The judgment balances the constitutional invalidity of a statutory provision with the continuing applicability of related legal obligations, thereby protecting revenue interests without enforcing ultra vires rules.