2025 (4) TMI 1535 - AT - Central Excise

Appeal allowed against recovery of Central Excise duty for alleged default under Rule 8(3A) of Central Excise Rules 2002

CESTAT Chandigarh allowed the appeal challenging recovery of Central Excise duty with interest and penalty for alleged default in payment beyond ... Recovery of Central Excise duty with interest and penalty - alleged default in payment of duty beyond the stipulated due dates by violating Rule 8(3A) of the Central Excise Rules, 2002 - HELD THAT:- The issue is similar to the relevant findings of the jurisdiction High Court of Punjab & Haryana in the case of Sandley Industries [2015 (10) TMI 2455 - PUNJAB & HARYANA HIGH COURT], wherein the jurisdiction High Court of Punjab & Haryana has held 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.' Conclusion - The portion of sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002, that prohibits utilization of CENVAT credit during default is declared unconstitutional and invalid. The appellant is entitled to utilize CENVAT credit for payment of duty even during the default period, subject to payment of outstanding amounts and interest as per law. The impugned order is not sustainable in law, and is set aside - appeal allowed. The core legal questions considered by the Tribunal are:1. Whether the demand of Central Excise duty along with interest and penalty under Sections 11A, 11AA, 11AB and 11AC of the Central Excise Act, 1944, read with Rule 8 of the Central Excise Rules, 2002, is sustainable in view of the appellant's alleged default in payment of duty beyond the stipulated due dates.2. Whether the proviso in sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002, which prohibits utilization of CENVAT credit for payment of excise duty during the default period, is valid and enforceable.3. Whether the imposition of penalty under Section 11AC of the Central Excise Act, 1944, on the appellant for the alleged default is justified.4. Whether the extended period of limitation under the proviso to Section 11A(1) and Section 11A(4) can be invoked for recovery of duty in this case.Issue-wise detailed analysis:1. Validity of demand of duty, interest and penalty under Central Excise Act and Rules:The appellant was engaged in manufacturing excisable goods and was found to have defaulted in payment of Central Excise duty beyond the due dates for multiple months during the financial year 2011-12. The audit revealed that the appellant had paid interest at 13% instead of the prescribed 18%, resulting in a short payment of interest. Further, the appellant had utilized CENVAT credit to pay duty during the default period, which the department alleged was impermissible under sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002.The department issued a show cause notice demanding recovery of duty amounting to Rs.11,96,95,120/- along with interest and imposed penalty of an equal amount under Section 11AC. The appellant challenged the demand, contending that the proceedings were contrary to Rule 8(4) and Board's Circular No. 766/82/2003-CX and relied on judicial precedents that declared the relevant provision unconstitutional.The Tribunal noted that the issue was no longer res integra and had been settled by various High Courts and the Tribunal itself. The relevant provisions invoked by the department were Sections 11A, 11AA, 11AB, and 11AC of the Central Excise Act, 1944, and Rule 8 of the Central Excise Rules, 2002. Section 11A deals with recovery of duty not levied or short paid, Section 11AA and 11AB relate to interest on delayed payment, and Section 11AC prescribes penalty for non-payment or short payment of duty. Rule 8 prescribes the manner of payment of duty and conditions for utilization of CENVAT credit.2. Validity of sub-rule (3A) of Rule 8 of Central Excise Rules, 2002:Sub-rule (3A) of Rule 8 mandates that if the assessee defaults in payment of duty beyond thirty days from the due date, they must pay excise duty in cash without utilizing CENVAT credit until the outstanding amount, including interest, is paid. The department relied on this provision to deny utilization of CENVAT credit during the default period and to demand duty payment in cash.The appellant challenged this provision as arbitrary, unreasonable, and violative of Articles 14 and 19(1)(g) of the Constitution. The Tribunal extensively examined judicial precedents, particularly the Gujarat High Court's decision in Indsur Global Ltd, which held that the restriction on utilization of CENVAT credit was unreasonable and disproportionate to the objective sought to be achieved. The Court emphasized that the provision made no distinction between wilful defaulters and others, thereby imposing a harsh and arbitrary restriction on all assessees in default.The Punjab & Haryana High Court in Sandley Industries reiterated this reasoning, observing that excise duty may remain unpaid due to various reasons including financial constraints, and that denial of CENVAT credit in such circumstances would exacerbate the assessee's difficulties, creating a vicious cycle of default. The Court held that the restriction was violative of Article 14 as it was arbitrary and unreasonable, and also infringed on the right to carry on trade or business under Article 19(1)(g).The Tribunal also referred to decisions of the Madras High Court and other High Courts that concurred with this view, striking down the relevant portion of sub-rule (3A) as ultra vires. It was noted that the Government itself amended Rule 8(3A) w.e.f. 11-7-2014 to remove the words 'without utilizing the CENVAT credit' and introduced a penalty of 1% per month on defaulted amounts, thereby acknowledging the unreasonableness of the original provision.3. Treatment of competing arguments:The department argued in support of the impugned order and the validity of the Rule 8(3A) proviso. However, the Tribunal found the appellant's reliance on judicial precedents persuasive and noted that the issue had been consistently decided against the department's stance by various High Courts and the Tribunal itself. The Tribunal distinguished the department's reliance on other Supreme Court and High Court decisions which upheld reasonable taxation measures, clarifying that those cases did not deal with the specific issue of denial of CENVAT credit in default situations.4. Application of law to facts and conclusions:Given the admitted facts of default in payment of duty beyond due dates and the department's demand under the challenged provisions, the Tribunal held that the denial of CENVAT credit under Rule 8(3A) was not sustainable. The appellant's liability to pay duty and interest remained, but the restriction on credit utilization was arbitrary and unconstitutional. Consequently, the demand for duty with interest and penalty based on the disallowance of CENVAT credit was set aside.Significant holdings:The Tribunal preserved the following crucial legal reasoning verbatim from the Punjab & Haryana High Court in Sandley Industries:'The condition attached by sub-rule (3A) of rule 8 is unreasonable and therefore violative of Article 14 of the Constitution and amounts to serious restriction on the petitioner's right to carry on trade or business of his choice guaranteed under Article 19(1)(g) of the Constitution... It can be appreciated that where a manufacturer falls behind the payment schedule on account of financial constraints... Cenvat credit is available to a manufacturer upon purchase of inputs which are duty paid... If such facility is withdrawn, it could be appreciated, his ability to continue the business under such adverse financial climate would further diminish... This rule thus imposes a wholly unreasonable restriction which is not commensurate with the wrong sought to be remedied.''By no stretch of imagination, the restriction imposed under sub-rule (3A) of Rule 8 to the extent it requires a defaulter irrespective of its extent, nature and reason for the default to pay the excise duty without availing Cenvat credit to his account can be stated to be a reasonable restriction... It is irrational and arbitrary and therefore, violative of Article 14 of the Constitution.''The condition contained in sub-rule (3A) of Rule 8 for payment of duty without utilizing the Cenvat credit till an assessee pays the outstanding amount including interest is declared unconstitutional.'Core principles established include:The denial of CENVAT credit during the default period under Rule 8(3A) is an unreasonable and arbitrary restriction violating Articles 14 and 19(1)(g) of the Constitution.The provision fails the test of proportionality as it imposes a harsh burden on all defaulters without distinguishing wilful defaulters from others.The right to utilize CENVAT credit, which represents duty already paid on inputs, is a legitimate accrued right and cannot be arbitrarily withdrawn.The liability to pay excise duty and interest remains, but the mechanism for recovery cannot impose unconstitutional restrictions.The Government's amendment of Rule 8(3A) to remove the disallowance of CENVAT credit and introduce a penalty reflects recognition of the original provision's unreasonableness.Final determinations:The impugned order demanding duty with interest and penalty based on the denial of CENVAT credit under Rule 8(3A) is set aside.The portion of sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002, that prohibits utilization of CENVAT credit during default is declared unconstitutional and invalid.The appellant is entitled to utilize CENVAT credit for payment of duty even during the default period, subject to payment of outstanding amounts and interest as per law.The penalty imposed under Section 11AC on the basis of the disallowance of CENVAT credit is not sustainable.