2026 (2) TMI 667 - AT - Central Excise

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 ... Vires of Rule 8(3A) of the Central Excise Rules, 2002 - payment of duty by utilizing CENVAT credit during default period - liability to pay interest for delayed payment under Rule 8(3) - penalty under Rule 25 read with Section 11AC vs penalty under Rule 27 of Central Excise Rules - HELD THAT:- We find that Hon’ble High Court of Gujarat in its decision in the case of Indsur Global Ltd. [2014 (12) TMI 585 - GUJARAT HIGH COURT] has declared that part of sub-Rule (3A) of Rule 8 which prescribes 'payment of duty without utilizing the Cenvat Credit till an assessee pays the outstanding amount including interest” as unconstitutional. This decision has attained finality after dismissal of Revenue’s appeal against this order, by Hon’ble Apex Court on monetary grounds. Therefore, payment of duty by the appellant by using Cenvat credit during the default period is no more in dispute after the order dated 24.07.2024 of the Hon’ble Apex Court. This being the position, demand of duty having been made under the authority of unconstitutional provision declared as such by Hon’ble Gujarat High Court, cannot be sustained. As far as, liability to pay interest for the default period is concerned, Hon'ble Gujarat High Court has held that this liability continues as per sub-rule (3) of Rule 8 of the said Rules. Hon’ble Court also validated Revenue’s stand that an assessee in default has to clear all consignments on payment of duty during the default period. The appeal is therefore allowed to the extent of duty demand confirmed by the lower authorities. We however add that the appellant would be liable to pay interest in case there is any delay in payment of excise duty. Contravention of the provisions of Central Excise Rules - HELD THAT:- As discussed, provisions of Rule 8 have been contravened, for which we hold the appellant liable to pay penalty under Rule 27 of the Central Excise Rules, 2002. The appellant has pleaded that Rule 27 has not been invoked in this case for imposing penalty. However, there are a number of decisions where it has been held that mentioning wrong provision or not mentioning provision does not vitiate the proceedings. Thus, in view of above judicial pronouncements, mentioning of a wrong provision i.e. Rule 25 and not mentioning of correct rule 27 does not vitiate the proceedings as the adjudicating authority has power to pass an order which is unquestionably present with the adjudicating authority. Accordingly, we set aside penalty of Rs. 26,74,513/- imposed under Rule 25 read with Section 11AC of the Central Excise Act, 1944 and instead impose a penalty of Rs. 5000/- under Rule 27 of the Central Excise Rules, 2002. 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.