Cenvat credit prohibition declared unconstitutional, duty demands under that restriction invalid while interest remains payable and lesser procedural penalty applies.

The article concludes that a rule requiring payment of excise duty without utilizing Cenvat credit is an arbitrary, disproportionate restriction and therefore unconstitutional, rendering duty demands founded solely on that prohibition unsupportable; however, interest for delayed payment remains payable under the residual rule on interest. It further clarifies that where goods were cleared on invoices and duty was ultimately paid without intent to evade, a penal provision for procedural contraventions is the appropriate sanction rather than a penalty provision reserved for evasion, resulting in substitution of a reduced penalty under the procedural rule.

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Issues: (i) Whether the portion of Rule 8(3A) of the Central Excise Rules, 2002 requiring payment of duty "without utilizing the Cenvat credit" is valid; (ii) Whether penalty under Rule 25 read with Section 11AC of the Central Excise Act, 1944 is imposable or penalty under Rule 27 of the Central Excise Rules, 2002 is the appropriate provision where duty payment was delayed but goods were cleared on invoices.

Issue (i): Whether the provision in sub rule (3A) of Rule 8 of the Central Excise Rules, 2002 requiring an assessee in default to pay duty "without utilizing the Cenvat credit" is constitutionally valid.

Analysis: The Tribunal relied on the Gujarat High Court's decision in Indsur Global Ltd which held that the requirement to pay duty without utilizing Cenvat credit is an unreasonable and arbitrary restriction violating Articles 14 and 19(1)(g) of the Constitution, and noted that the Supreme Court dismissed Revenue's appeal on monetary grounds, rendering that decision final. The Tribunal observed that liability to pay interest under Rule 8(3) continues and that sub rule (3A) served as a recovery mechanism rather than creating new liability.

Conclusion: The portion "without utilizing the Cenvat credit" of Rule 8(3A) of the Central Excise Rules, 2002 is unconstitutional and the duty demand made under that provision is not sustainable; however interest under Rule 8(3) remains payable for delay.

Issue (ii): Whether penalty under Rule 25 read with Section 11AC is sustainable, or whether penalty should be imposed under Rule 27 where there was delay in payment but goods were removed on invoices and there was no intention to evade duty.

Analysis: The Tribunal accepted the appellant's contention that there was no intention to evade duty as goods were removed on invoices and duty was ultimately paid. It found that invoking Rule 25/Section 11AC was inappropriate in the facts. Relying on authorities that incorrect citation of provisions does not vitiate proceedings where the authority has power, the Tribunal held that penalty under Rule 27 is the correct provision for contravention of the Rules in such cases.

Conclusion: Penalty imposed under Rule 25 read with Section 11AC is set aside and a penalty of Rs. 5,000 is imposed under Rule 27 of the Central Excise Rules, 2002.

Final Conclusion: The appeal is allowed in part: the duty demand founded on the unconstitutional portion of Rule 8(3A) is set aside, interest for delay (if any) remains payable under Rule 8(3), and a reduced penalty under Rule 27 is imposed in place of the penalty under Rule 25/Section 11AC.

Ratio Decidendi: A statutory provision that mandates payment of excise duty "without utilizing the Cenvat credit" is an arbitrary and disproportionate restriction and is unconstitutional; delayed payment attracts interest under Rule 8(3) and contraventions of procedural rules without intent to evade are punishable under Rule 27 rather than Rule 25/Section 11AC.

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