2025 (6) TMI 589 - AT - Central Excise

Rule 8(3A) Struck Down: Cenvat Credit Denial Invalidated, Demand for Reversal and Penalties Quashed

M/s Deo Ispat Alloys Ltd. Versus Commissioner of CGST & Central Excise, Rourkela

The SC disposed of related appeals concerning Rule 8(3A) of Central Excise Rules, 2002, effectively rendering the rule ultra vires. The Tribunal held that ... Utilization of Cenvat credit for payment of Excise duty during the period of default contravenes Rule 8(3A) of the Central Excise Rules, 2002 - validity of Rule 8(3A) of the Central Excise Rules, 2002 - HELD THAT:- The issue in the case of Indsur Global Ltd. [2024 (7) TMI 1559 - SC ORDER (LB)] has already been decided by the Hon’ble Supreme Court. In these circumstances, the issue is presently not pending before the Hon’ble Supreme Court. Thus, there is no bar in taking up the issue for a decision based on the available documents. Considering the fact that the provisions of Rule8 (3A) of Central Excise Rules, 2002 have been declared ultra vires by the Hon’ble Gujarat High Court in the case of Indsur Global Ltd, the CENVAT Credit cannot be denied to the appellant for utilization in payment of duty during the defaulted period. Conclusion - The demand of duty along with interest confirmed in the impugned order is not sustainable and accordingly, the same is set aside. As the demand for recovery of CENVAT Credit during the defaulted period is not sustainable, consequently, no penalty is imposable on the appellant. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether Rule 8(3A) of the Central Excise Rules, 2002 (the Rules) validly permits denial of CENVAT credit utilization for payment of duty on clearances made during a period when earlier duty was unpaid beyond the statutory timeline. 2. Whether demand for reversal of CENVAT credit utilized for payment of duty during the alleged default period, together with interest and penalty under Section 11AC of the Act, is sustainable where Rule 8(3A) has been judicially held to be ultra vires. 3. Whether reliance on prior High Court and Tribunal decisions invalidating Rule 8(3A) warrants setting aside confirmed demands and penalty in an independent adjudication when the Supreme Court has disposed of related appeals. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity and effect of Rule 8(3A) of the Rules Legal framework: Rule 8(3A) purportedly restricts utilization of CENVAT credit for payment of duty where duty for an earlier period was not paid within 30 days of the due date for filing returns, directing duty for subsequent clearances to be paid to the Personal Ledger Account (PLA) and not from CENVAT balance. Precedent treatment: Multiple High Courts (including the Gujarat High Court and Punjab & Haryana High Court) have declared Rule 8(3A) ultra vires. The Tribunal has applied those decisions in earlier orders to hold that CENVAT credit cannot be denied on this basis. Interpretation and reasoning: The Tribunal accepts the holdings that Rule 8(3A) is not part of the statutory scheme because it was judicially declared ultra vires. Given such determinations, the rule cannot operate to create a statutory bar on utilization of CENVAT credit for payment of duty during the alleged defaulted period. The Tribunal also notes that the Supreme Court disposed of related appeals (including withdrawal by the Department and reference to Lok Adalat/CBIC threshold), meaning the issue is not presently pending before the apex forum and may be adjudicated on the available authority. Ratio vs. Obiter: The conclusion that Rule 8(3A) is inoperative in the present facts, and therefore cannot justify denial of CENVAT credit, is applied as ratio based on binding decisions of higher fora and consistent Tribunal precedent. Observations about the Supreme Court disposal and administrative thresholds are contextual and do not form the core ratio but influence admissibility of relying on precedent. Conclusions: Rule 8(3A) cannot be invoked to deny utilization of CENVAT credit for payment of duty on clearances in the relevant period; the rule is treated as ultra vires and therefore ineffective to sustain a demand based solely on its provisions. Issue 2 - Sustainment of demand for reversal of CENVAT credit, interest and penalty where Rule 8(3A) is declared ultra vires Legal framework: The adjudicatory demand sought recovery of CENVAT credit allegedly wrongly utilised, along with interest and levy of equivalent penalty under Section 11AC of the Act, premised on contravention of Rule 8(3A). Precedent treatment: Tribunal and High Courts have held that if Rule 8(3A) is ultra vires, denial or reversal of CENVAT credit on that ground and consequent imposition of penalty are unsustainable. Interpretation and reasoning: Since the foundational rule underpinning the demand is invalidated, the consequent demand for recovery and penalty lacks legal basis. The Tribunal applied existing authoritative decisions and its own prior ruling to conclude that the demand for duty recovery (to the extent based on alleged improper utilization of CENVAT during the defaulted period) cannot be sustained. Given the unsustainability of the primary demand, imposition of penalty under Section 11AC also falls away because penalty presupposes a legally tenable demand or culpable breach grounded in valid statutory rule. Ratio vs. Obiter: The holding that neither duty recovery nor penalty is sustainable where Rule 8(3A) is ultra vires is treated as ratio for adjudicating similar demands predicated solely on that rule. Any mention of the particulars of payment dates, amounts, or administrative communications are factual recitals and not central to the legal ratio beyond establishing the factual predicate. Conclusions: The demand for reversal of CENVAT credit, along with interest and penalty under Section 11AC, cannot be upheld where the only legal foundation (Rule 8(3A)) has been judicially declared ultra vires; accordingly, such demands and penalties are set aside. Issue 3 - Reliance on precedent and effect of Supreme Court disposition of related appeals on maintainability of the challenge Legal framework: Administrative and judicial decisions are to be followed where binding; the status of higher court proceedings may affect whether lower fora should await apex adjudication or proceed. Precedent treatment: The Tribunal references prior High Court and Tribunal rulings invalidating Rule 8(3A) and notes that the Supreme Court disposed of related special leave petitions and appeals (with Department withdrawing and matter referred to Lok Adalat/threshold considerations), meaning no live Supreme Court pronouncement is pending that would overrule earlier High Court findings. Interpretation and reasoning: Where higher court authority has invalidated a rule and there is no binding contrary order from the Supreme Court (the related appeals having been disposed of and not pressed), the Tribunal is entitled to decide the matter on the basis of available authoritative decisions. The Tribunal deems there is no bar to adjudication on the present record and reliance on existing precedents is appropriate. The Tribunal thus follows the precedent rather than refraining from decision pending potential higher court determination. Ratio vs. Obiter: The procedural determination that the Tribunal may proceed in light of the Supreme Court's disposal of related matters and the Department's withdrawal is an applied reasoning step rather than a novel legal ratio; the core legal ratio remains the invalidity of Rule 8(3A) and its consequences. Conclusions: Reliance on the cited High Court and Tribunal precedents is appropriate and sufficient to decide the present appeal; there is no procedural impediment to adjudication given the Supreme Court's disposal of the related appeals. Cross-references and consequential determinations 1. The Tribunal's conclusion on Issues 1-3 are interdependent: invalidation of Rule 8(3A) (Issue 1) removes the legal foundation for the demand and penalty (Issue 2), and the disposal of related Supreme Court matters permits reliance on existing authority to decide the appeal (Issue 3). 2. Consequent practical ruling: confirmed demand of duty and interest as well as penalty under Section 11AC are set aside because the reversal of CENVAT credit during the defaulted period is unsustainable in law where Rule 8(3A) is inoperative.