2026 (1) TMI 424 - AT - Central Excise

Using CENVAT credit to pay excise duty despite default: Rule 8(3A) 'no credit' bar struck down, demand set aside.

The dominant issue was whether Rule 8(3A) of the Central Excise Rules, 2002 could mandate an assessee in default to discharge duty 'without utilizing ... Requiring payment of Central Excise duty without utilizing CENVAT Credit - sub-rule (3A) of rule 8 of the 2002 Rules has been struck down by the Gujarat High Court in Indsur Global Ltd. vs Union of India [2014 (12) TMI 585 - GUJARAT HIGH COURT] - HELD THAT:- The issue involved in this appeal is covered by the decision of the Gujarat High Court in Indsur Global where it was held that insisting on an assessee in default to clear all consignments on payment of duty would be a perfectly legitimate measure. However, to insist that he must pay such duty without utilising CENVAT credit which is nothing but the duty on various inputs already paid by him would be a restriction so harsh and out of proportion to the aim sought to be achieved, the same must be held to be wholly arbitrary and unreasonable. We may recall, the delegated legislature in its wisdom now dismantled this entire mechanism and instead has provided for penalty at the rate of 1% per month on delayed payment of duty. In the result, 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. Therefore, the portion “without utilizing the Cenvat credit” of sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002, shall be rendered invalid As sub-rule (3A) of rule 8 of the 2002 Rules has been struck down being unconstitutional, the demand raised in this appeal under sub-rule (3A) of rule 8 of the 2002 Rules cannot be sustained and is set aside. The impugned order dated July 10, 2018 is, accordingly, set aside - appeal is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether a demand of central excise duty (and consequential penalty) confirmed by invoking rule 8(3A) of the Central Excise Rules, 2002 (as applied to the relevant default period) can be sustained when the condition in rule 8(3A) requiring payment of duty 'without utilizing the CENVAT credit' has been held unconstitutional. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Sustainability of demand/penalty raised under rule 8(3A) after the rule's relevant condition was struck down Legal framework (as discussed by the Court): The Court examined rule 8(3A) of the Central Excise Rules, 2002 in its pre-amendment form (prior to July 11, 2014), which provided that upon default beyond the prescribed period the assessee must pay duty for each consignment at the time of removal 'without utilizing the CENVAT credit' until the outstanding dues were paid, failing which clearances would be deemed without payment of duty with consequences and penalties. The Court also noted the amendment effective July 11, 2014, under which the consequence for delayed payment was structured as a penalty at a specified monthly rate for the period of failure, and recorded that the demand was reduced in view of this amendment. Interpretation and reasoning: The Court proceeded on the basis that the specific mechanism under rule 8(3A) which barred utilization of CENVAT credit had been judicially invalidated as unconstitutional. The Court treated the unconstitutionality finding as determinative for demands raised 'under rule 8(3A)', and also recorded that the departmental representative fairly accepted that the controversy was covered by that binding determination. In these circumstances, the Court held that a demand confirmed by invoking rule 8(3A) could not stand once the rule's operative condition (denying CENVAT credit utilization as a consequence of default) had been struck down. Conclusions: Since rule 8(3A) (to the extent applied for raising the impugned demand) had been struck down as unconstitutional, the Court concluded that the duty demand raised in the appeal under rule 8(3A) could not be sustained. The impugned order was set aside and the appeal was allowed, with the demand (and the penalty confirmed along with it) being set aside.