Cenvat credit payment during default period remains valid; confiscation and major penalty cannot survive under invalid Rule 8(3A)

Rule 8(3A) of the Central Excise Rules, 2002, to the extent it barred utilisation of Cenvat credit during the default period, had already been declared unconstitutional, so duty paid through Cenvat credit during that period could not be treated as non-payment of duty. Interest liability for delayed payment nevertheless continued. On that footing, confiscation and penalty under Rule 25 could not survive where the duty stood discharged, while a nominal penalty under Rule 27 could still be imposed for the procedural breach, and a wrong reference to the penal provision did not by itself vitiate the penalty.

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Issues: (i) whether duty paid during the default period by utilising Cenvat credit could be treated as valid payment despite the restriction in Rule 8(3A) of the Central Excise Rules, 2002; (ii) whether confiscation and penalty under Rule 25 of the Central Excise Rules, 2002 were sustainable, and whether penalty could be sustained under Rule 27 of the Central Excise Rules, 2002.

Issue (i): whether duty paid during the default period by utilising Cenvat credit could be treated as valid payment despite the restriction in Rule 8(3A) of the Central Excise Rules, 2002.

Analysis: The restriction in Rule 8(3A) requiring payment of duty without utilising Cenvat credit till the outstanding dues with interest were paid had already been declared unconstitutional. The invalidated portion could not sustain a demand treating duty paid through Cenvat credit during the default period as non-payment of duty. Interest liability for delayed payment, however, continued under the rule framework.

Conclusion: Duty paid through Cenvat credit during the default period was held to be valid payment, and the duty demand based on the unconstitutional portion of Rule 8(3A) was set aside in favour of the assessee.

Issue (ii): whether confiscation and penalty under Rule 25 of the Central Excise Rules, 2002 were sustainable, and whether penalty could be sustained under Rule 27 of the Central Excise Rules, 2002.

Analysis: Since duty payment through Cenvat credit during the default period was treated as proper payment, confiscation of the goods cleared during that period under Rule 25 was not invocable. The penalty imposed under Rule 25 was also unsustainable for want of intent to evade. At the same time, breach of the rule remained liable to a nominal penalty under Rule 27, and incorrect mention of the provision in the proceedings did not by itself invalidate the exercise of power.

Conclusion: Confiscation and penalty under Rule 25 were set aside, and a reduced penalty under Rule 27 was sustained.

Final Conclusion: The assessee succeeded on the principal demand and confiscation issues, while the penalty stood modified to a nominal amount. The revenue's challenge failed.

Ratio Decidendi: Once the portion of Rule 8(3A) barring utilisation of Cenvat credit was held unconstitutional, duty paid through Cenvat credit during the default period could not be treated as non-payment of duty; confiscation and major penalty founded on that invalid restriction could not survive, though a separate nominal penalty for procedural breach could still be imposed.

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