Rule 8(3A) Bar on Using CENVAT Credit During Default Period Unconstitutional: CESTAT

The Ahmedabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has set aside a central excise duty demand of Rs. 26.74 lakh holding that recovery based on the now-invalidated portion of Rule 8(3A) of the Central Excise Rules, 2002 cannot be sustained. However, the Tribunal imposed a nominal penalty of Rs. 5,000 under Rule 27 for procedural contravention. The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh (Technical Member) observed that restriction was arbitrary, violative of Articles 14 and 19(1)(g) of the Constitution, and disproportionately harsh. It ruled that while liability to pay interest for delayed payment continues, denial of CENVAT utilization amounts to an unreasonable restriction. Ruchi Power & Steel Industries Ltd, based in Gandhidham, Gujarat, is engaged in the manufacture of sponge iron, MS billets, TMT bars and other steel products under Chapter 72 of the Central Excise Tariff Act, 1985. The company was availing area-based exemption under Notification No. 39/2001-CE dated July 31, 2001. During audit scrutiny, it was observed that the company had delayed payment of central excise duty for December 2008 and January 2009. The payments were eventually made on March 30, 2009 and April 27, 2009, beyond the timeline prescribed under Rule 8 of the Central Excise Rules, 2002. Invoking Rule 8(3A), the Department alleged that during the default period, the assessee was required to pay duty consignment-wise without utilizing CENVAT credit until outstanding dues along with interest were cleared. Since the company had utilized CENVAT credit for payment of duty, a show cause notice dated February 17, 2011 demanded ₹26,74,513 under Section 11A of the Central Excise Act, 1944, along with interest and equivalent penalty under Rule 25 read with Section 11AC. The adjudicating authority confirmed the demand and imposed equal penalty. The Commissioner (Appeals), Rajkot upheld the order, prompting the assessee to approach the Tribunal. Before the Tribunal, the appellant relied heavily on the landmark judgment of the Gujarat High Court in Indsur Global Ltd v. Union of India, wherein the High Court declared unconstitutional the portion of Rule 8(3A) that mandated payment of duty “without utilizing CENVAT credit” during the default period. The appellant further pointed out that the Revenue’s appeal against the Gujarat High Court judgment was dismissed by the Supreme Court of India on July 24, 2024, in a Lok Adalat proceeding on the ground of low tax effect, thereby allowing the High Court ruling to attain finality. The Departmental Representative fairly conceded that the legal position regarding Rule 8(3A) had become final following the Supreme Court’s dismissal. The CESTAT observed that once the relevant portion of Rule 8(3A) had been declared unconstitutional, any demand raised solely on that basis could not survive. The Tribunal noted the restriction on utilizing CENVAT credit during the default period stands invalidated. Consequently, duty demand confirmed under the authority of the unconstitutional provision is unsustainable. However, liability to pay interest for delayed payment under Rule 8(3) continues to remain valid. Accordingly, the Tribunal set aside the excise duty demand of ₹26.74 lakh. On the issue of penalty, the Tribunal held that imposition of penalty under Rule 25 read with Section 11AC was not justified, as there was no intention to evade duty. The goods had been cleared under proper invoices, and the default related only to delayed payment. However, the Bench acknowledged that the assessee had contravened procedural provisions of Rule 8 by not paying duty consignment-wise during the default period. It therefore held that the penalty was imposable under Rule 27 of the Central Excise Rules, 2002. Rejecting the argument that Rule 27 was not invoked in the show cause notice, the Tribunal relied on multiple Supreme Court judgments affirming that quoting a wrong provision or omitting the correct one does not invalidate proceedings if the authority has jurisdiction. The Tribunal set aside the penalty of ₹26,74,513 imposed under Rule 25 read with Section 11AC and imposed a reduced penalty of ₹5,000 under Rule 27. The appeal partially allowed the excise duty demand of ₹26.74 lakh set aside, upheld interest liability for delayed payment, and penalty reduced from equal duty amount to Rs. 5,000. Case Details Case Title: Ruchi Power & Steel Industries Ltd. Versus Commissioner, Central Excise & Customs– Rajkot Case No.: EXCISE Appeal No. 742 of 2012- DB Date: 12.02.2026 Counsel For Petitioner: Dhaval K Shah, Advocate Counsel For Respondent: P Ganesan, Superintendent (AR) Click Here To Read Order

Rule 8(3A) Bar on Using CENVAT Credit During Default Period Unconstitutional: CESTAT

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Rule 8(3A) Bar on Using CENVAT Credit During Default Period Unconstitutional: CESTAT

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