CENVAT credit restriction after duty default struck down as arbitrary, excessive and disproportionate under constitutional equality and trade freedom

Rule 8(3A) of the Central Excise Rules, 2002, insofar as it required a defaulter to pay duty in cash without using CENVAT credit, was held unconstitutional. The HC found the restriction arbitrary, excessive and disproportionate because it imposed the same burden regardless of the cause or extent of default and deprived assessees of an accrued credit facility. The condition was therefore invalid under constitutional guarantees of equality and freedom of trade, and the challenge to it failed.

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Issues: Whether the condition in Rule 8(3A) of the Central Excise Rules, 2002 requiring payment of duty without utilizing CENVAT credit after default in payment of duty is constitutionally valid.

Analysis: The Court followed its earlier view that Rule 8(3A), to the extent it compelled a defaulter to clear consignments only on cash payment without using CENVAT credit, imposed a restriction that was arbitrary, excessive, and disproportionate. It held that the rule created an unreasonable burden on assessees irrespective of the cause or extent of default, and that such deprivation of the accrued CENVAT credit facility could not survive scrutiny under the constitutional guarantees of equality and freedom of trade.

Conclusion: The impugned condition in Rule 8(3A) requiring payment of duty without utilizing CENVAT credit was held unconstitutional and invalid, and the appeal failed.

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