2026 (2) TMI 776 - AT - Central Excise

Payment by Cenvat credit during default constitutes valid duty payment, subject to interest; confiscation and Rule 25 penalty disallowed.

The decision declares the phrase requiring payment 'without utilising the Cenvat credit' in Rule 8(3A) ultra vires and holds that duty discharged by ... Validity of sub rule (3A) of Rule 8 of the Central Excise Rules, 2002 to the extent of prohibiting payment of duty by utilizing CENVAT credit - Payment of duty by utilizing CENVAT credit during the default period to be treated as valid payment - Liability to pay interest for delayed payment under sub rule (3) of Rule 8 - Confiscation and penalty under Rule 25(1) of the Central Excise Rules not invokable where duty was paid by CENVAT credit - Imposition of penalty under Rule 27 as alternative where wrong provision cited does not vitiate proceedings - Limitations on adjudicating authority going beyond scope of show cause notice - HELD THAT:- As discussed, provisions of Rule 8 have been contravened by the party for which we hold them liable to penalty under Rule 27 of the Central Excise Rules, 2002. Though, Rule 27 has not been invoked in this case, there are a number of decisions where it has been held that mentioning wrong provision or not mentioning provision does not vitiate the proceedings. Accordingly, we set aside penalty of Rs. 5 Lakh imposed on the appellant under Rule 25 of the Central Excise Rules, 2002 and instead, impose a penalty of Rs. 5000/- under Rule 27 of the said Rules. Coming to the department’s appeal, it has been pleaded that the learned adjudicating authority has failed to confiscate the excisable goods cleared by the respondent during the period of default which were without payment of duty. As discussed and as held by the Hon’ble Gujarat High Court in the case of M/s. Indsur Global Ltd.[2014 (12) TMI 585 - GUJARAT HIGH COURT] and further upheld by the Hon’ble Supreme Court, portion of Rule 8 (3A) of the Central Excise Rules, 2002 to the extent 'payment of duty without utilizing the Cenvat Credit till an assessee pays the outstanding amount including interest” is held to be ultra virus. This means that duty paid by the party by utilizing Cenvat Credit during default period is also to be considered as payment of proper Central Excise Duty. Therefore, Rule 25(1) is not invokable in this case for confiscating excisable goods cleared during the default period. Thus, appeal filed by Revenue is not allowable and hence, the same is dismissed. Similarly, when payment of duty by utilizing Cenvat Credit has been held proper as discussed above, allowing the credit by the Learned Commissioner has become infructuous. However, we agree with the view of the department that learned Commissioner should not have gone beyond the scope of the show cause notice. The appeal of the party is partially allowed and the appeal filed by the revenue is dismissed. Issues: (i) Whether duty paid by an assessee by utilising Cenvat credit during the alleged default period can be treated as valid payment in view of the decision in Indsur Global Ltd and consequent vires of the portion of Rule 8(3A) requiring payment 'without utilising the Cenvat credit'; (ii) Whether confiscation of goods and penalty under Rule 25 can be imposed where duty was paid by utilising Cenvat credit during the default period; (iii) Whether penalty under Rule 25 is sustainable or an alternative penalty under Rule 27 should be imposed and whether the adjudicating authority exceeding the show-cause notice vitiates proceedings.Issue (i): Whether duty paid by utilising Cenvat credit during the default period constitutes valid payment given judicial pronouncement regarding Rule 8(3A).Analysis: The Tribunal considered the Gujarat High Court ruling in Indsur Global Ltd declaring the portion of sub-rule (3A) of Rule 8 requiring payment 'without utilising the Cenvat credit' unconstitutional and noted that the Supreme Court dismissed Revenue's challenge on monetary grounds, rendering that view final. The Tribunal observed that sub-rule (3) imposing interest for delayed payment remains operative and that payment by Cenvat credit during default therefore constitutes payment of duty though interest for delay may still be payable.Conclusion: The portion of Rule 8(3A) mandating payment without utilising Cenvat credit is ultra vires; duty paid by utilising Cenvat credit during the default period is to be treated as valid payment, subject to liability for interest under sub-rule (3).Issue (ii): Whether confiscation of goods cleared during the default period and penalty under Rule 25 are invokable when duty was paid by utilising Cenvat credit.Analysis: Rule 25(1) provides for confiscation and penalty where goods are removed in contravention of rules or with intent to evade duty. Since payment by utilising Cenvat credit during the default period is deemed valid following the authoritative decision on Rule 8(3A), the foundational premise for confiscation under Rule 25(1) (i.e., clearance without payment of duty) does not arise. The Tribunal also examined the absence of intent to evade and the admitted payment under Cenvat credit.Conclusion: Confiscation of goods under Rule 25(1) is not sustainable where duty was paid by utilising Cenvat credit; penalty under Rule 25 cannot be imposed on that basis.Issue (iii): Whether the penalty imposed under Rule 25 should be set aside and whether an alternative penalty under Rule 27 is appropriate; and whether citation of incorrect provisions vitiates proceedings.Analysis: The Tribunal held there was no intent to evade duty and therefore Rule 25 penalty was not appropriate. Relying on settled jurisprudence, the Tribunal found that citing an incorrect provision in the show-cause notice does not vitiate proceedings where the authority has jurisdiction to impose an alternative penalty. In exercise of this principle the Tribunal set aside the Rs.5,00,000 penalty under Rule 25 and imposed a reduced penalty under Rule 27. The Tribunal noted that the learned Commissioner went beyond the scope of the show-cause notice when allowing credits, rendering that aspect infructuous.Conclusion: Penalty under Rule 25 is set aside for lack of intent; a penalty of Rs.5,000 under Rule 27 is imposed in substitution; incorrect citation of provisions in the show-cause notice does not invalidate the adjudication where jurisdiction exists.Final Conclusion: The appellant's appeal is allowed to the extent of setting aside the confirmed duty demand (as grounded on the unconstitutional portion of Rule 8(3A)) and setting aside the Rule 25 penalty; the appellant remains liable for interest for any delayed payment and is directed to pay a substituted penalty of Rs.5,000 under Rule 27; the Revenue's appeal against non-confiscation is dismissed.Ratio Decidendi: The portion of sub-rule (3A) of Rule 8 of the Central Excise Rules, 2002 requiring payment 'without utilising the Cenvat credit' is ultra vires; payment of duty by utilising Cenvat credit during the default period constitutes valid payment (subject to interest under sub-rule (3)), and consequently confiscation and Rule 25 penalties cannot be sustained where there is no intent to evade duty.