2025 (4) TMI 1322 - HC - Central Excise

High Court Invalidates Rule 8(4) of Central Excise Rules, Quashing Demands and Ensuring Procedural Fairness for Taxpayers

Salem Textiles Limited Versus The Superintendent of Central Excise, The Superintendent of Central Excise, Union of India

HC ruled Rule 8(4) of Central Excise Rules, 2001 and 2002 ultra vires and unconstitutional. The court set aside demands and recovery notices arising from ... Prayer for a declaration to the effect Rule 8(4) of the Central Excise Rules, 2002 and 2001 respectively are inconsistent with Rules 3 and 4 of Cenvat Credit Rules, 2001 - HELD THAT:- Since there is no dispute on the position that the above reasoning would apply on all fours to the challenge in the present case as well, Rules 8(4) of 2001 and 2002 Central Excise Rules also, as a consequence, will be liable to be set aside. A portion of the demand thereunder would stand covered by the decision that are taken in the Writs of Declaration that have been allowed. To this extent, the demand under order-in-original dated 16.05.2005 and recovery notice dated 24.06.2004 are set aside. Since the Department is agreeable to a hearing of the above afresh, the petitioner is directed to appear before 1st respondent, who now carries the designation The Commissioner of Central Excise, Office of the Commissioner of CGST and Customs, Central Excise and Service Tax, No.1, Foulk's Compound, Anai Road, Salem – 636 001 on 17.04.2025 at 11 a.m. without expecting any further notice in this regard. Petition disposed off. 1. ISSUES PRESENTED and CONSIDERED- Whether Rule 8(4) of the Central Excise Rules, 2001 and 2002 is inconsistent with Rules 3 and 4 of the Cenvat Credit Rules, 2001.- Whether Rule 8(4) of the Central Excise Rules, 2001 and 2002 is ultra vires the provisions of the Central Excise Act, 1944.- Whether Rule 8(4) of the Central Excise Rules, 2001 and 2002 is arbitrary and violative of Article 14 of the Constitution of India.- Whether the demands and recovery orders issued under the challenged provisions are sustainable in light of the above issues.- The procedural question of whether the petitioner is entitled to a fresh hearing on the remaining demands not covered by the declaration.2. ISSUE-WISE DETAILED ANALYSISIssue 1 & 2: Validity of Rule 8(4) of the Central Excise Rules, 2001 and 2002Relevant legal framework and precedents: The challenge is directed at Rule 8(4) of the Central Excise Rules, 2001 and 2002, which govern certain procedural aspects relating to the Cenvat Credit mechanism. The petitioners contend that these Rules are inconsistent with Rules 3 and 4 of the Cenvat Credit Rules, 2001, which set out the substantive provisions for availing and utilizing Cenvat Credit. The petitions also assert that Rule 8(4) is ultra vires the Central Excise Act, 1944, and violates Article 14 of the Constitution due to arbitrariness.A key precedent relied upon is the Division Bench decision in the case concerning Rule 8(3A) of the Central Excise Rules, 2002, which is in pari materia with Rule 8(4) of the 2001 and 2002 Rules. In that decision, the Court quashed the Rule 8(3A) provisions as being inconsistent with the Cenvat Credit Rules and beyond the legislative competence under the Central Excise Act.Court's interpretation and reasoning: Both parties agree that the reasoning in the precedent applies identically to Rule 8(4) challenged here. The Court notes that the earlier decision held that Rule 8(3A) was ultra vires and inconsistent with the Cenvat Credit Rules. Since Rule 8(4) is materially similar, it must also be set aside.Application of law to facts: The Court applies the earlier ruling to the present petitions, concluding that Rule 8(4) of the Central Excise Rules, 2001 and 2002, is liable to be struck down for the same reasons.Conclusions: Rule 8(4) of the Central Excise Rules, 2001 and 2002, is declared ultra vires the Central Excise Act, 1944, inconsistent with the Cenvat Credit Rules, and arbitrary, thus violating Article 14 of the Constitution. The petitions challenging these provisions are allowed.Issue 3: Validity of demands and recovery orders issued under the challenged provisionsRelevant legal framework and precedents: The demands and recovery notices challenged arise from application of the impugned Rule 8(4). The Court references the principle in the precedent case that even when a rule is struck down, final orders passed by revenue authorities during the pendency of litigation may not be disturbed if they have attained finality.Court's interpretation and reasoning: The Court holds that part of the demand under the orders-in-original dated 16.05.2005 and recovery notice dated 24.06.2004 is covered by the declaration that Rule 8(4) is ultra vires. That portion of the demand and recovery is therefore set aside.However, for the remaining demands and orders not covered by the declaration, the Court permits the petitioner to make submissions before the assessing authority afresh.Application of law to facts: The Court directs the petitioner to appear before the Commissioner of Central Excise for a fresh hearing on the remaining demands, thereby ensuring procedural fairness and an opportunity to contest the outstanding claims.Treatment of competing arguments: The revenue agrees to the fresh hearing, and the Court conditions the benefit of setting aside the impugned orders on the petitioner's appearance and submissions. Failure to appear will result in withdrawal of the benefit without further reference.Conclusions: The Court sets aside the demands and recovery notices to the extent they arise from the invalid Rule 8(4). For the balance, a fresh hearing is ordered, with clear directions and timelines.3. SIGNIFICANT HOLDINGS'Since there is no dispute on the position that the above reasoning would apply on all fours to the challenge in the present case as well, Rules 8(4) of 2001 and 2002 Central Excise Rules also, as a consequence, will be liable to be set aside and we do so.''A portion of the demand thereunder would stand covered by the decision that we have taken in the Writs of Declaration that have been allowed. To this extent, the demand under order-in-original dated 16.05.2005 and recovery notice dated 24.06.2004 are set aside.''Let the petitioner be heard on 17.04.2025 and orders passed within a period of four weeks therefrom.'Core principles established include the reaffirmation that procedural rules inconsistent with substantive Cenvat Credit provisions and beyond the legislative competence under the Central Excise Act are liable to be struck down as ultra vires. Additionally, even where rules are invalidated, final orders passed may not be disturbed if they have attained finality, but fresh hearings must be afforded where appropriate to ensure fairness.Final determinations are that Rule 8(4) of the Central Excise Rules, 2001 and 2002 is ultra vires and invalid; demands and recovery notices arising therefrom are set aside to the extent covered by the invalid rule; and the petitioner is entitled to a fresh hearing on the remaining demands within a stipulated time frame.