The Madras High Court has dismissed two appeals filed by the Revenue concerning the validity of payment of Central Excise duty through CENVAT credit during a period of default, holding that the statutory restriction under Rule 8(3A) of the Central Excise Rules, 2002 could not be enforced after the provision had been declared unconstitutional.

The Bench of Justice Anita Sumanth and Justice C. Kumarappan has observed that where the assessee had challenged the statutory provision and the consequential show cause notice before the adjudicating proceedings had attained finality, the benefit of the declaration of invalidity could not be denied.

Buy Now: 100+ Judgements On Customs Classification

The litigation concerned the question whether an assessee who had defaulted in payment of Central Excise duty within the prescribed time could nevertheless discharge its duty liability by utilising accumulated CENVAT credit.

The Revenue’s appeals arose from orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which had rejected the Department’s challenge against the relief granted to the assessee.

The core issue was the interpretation and legal effect of Rule 8(3A) of the Central Excise Rules, 2002. The provision required an assessee who failed to pay duty within the prescribed period to pay subsequent duty through the Personal Ledger Account (PLA), without utilising CENVAT credit, until the outstanding duty and interest were paid.

In CMA No. 2104 of 2017, the Revenue specifically questioned whether payment of duty by utilising CENVAT credit during the default period constituted a valid discharge of duty liability under the Central Excise law.

The Department’s case was founded on the restrictions contained in Rule 8(3A), particularly the non-obstante clause introduced into the provision with effect from April 1, 2005.

According to the statutory mechanism, where an assessee failed to discharge duty within the prescribed period and the default continued beyond 30 days, the assessee was required to pay excise duty at the time of removal without utilising CENVAT credit until the outstanding amount, together with interest, had been paid.

The Revenue therefore contended that payment made through CENVAT credit during such default period could not be treated as a valid payment of duty.

During the hearing, the Revenue’s counsel fairly brought to the Court’s attention that the very statutory provision relied upon for initiating recovery proceedings had already been struck down by the Madras High Court in Malladi Drugs and Pharmaceuticals Ltd. v. Union of India, reported at (2015) 323 ELT 489 (Mad).

The Court noted that the Madras High Court’s earlier decision had followed the reasoning of the Gujarat High Court in Indsur Global Ltd. v. Union of India, reported at 2014 (310) E.L.T. 833 (Guj.), where the restriction contained in Rule 8(3A) requiring payment without utilisation of CENVAT credit had been declared unconstitutional.

The earlier Madras High Court ruling proceeded on the basis that validly accrued CENVAT credit constituted a legitimate right of the assessee and could not be arbitrarily denied through a rule dealing primarily with the manner of payment of duty.

A significant aspect of the judgment concerns the nature of CENVAT credit.

The Court referred to the Supreme Court’s observations in Dai Ichi Karkaria Ltd., emphasising that once credit had been validly taken, the manufacturer was entitled to utilise it for payment of excise duty. The credit was described as an indefeasible benefit, subject to the statutory framework governing valid availment and utilisation.

The earlier Madras High Court judgment had specifically observed that the Department was not alleging that the assessees had illegally or irregularly taken the CENVAT credit.

Against that background, Rule 8(3A), by prohibiting utilisation of otherwise validly accrued CENVAT credit merely because of a payment default, was found to operate in a manner inconsistent with the scheme of CENVAT credit.

The Court further recorded the reasoning that the right to utilise validly accrued CENVAT credit could not be defeated unless the credit itself had been illegally or irregularly taken.

The earlier ruling concluded that the restriction imposed by Rule 8(3A) was arbitrary and consequently violative of Article 14 of the Constitution.

The reasoning was that CENVAT credit represented duty already paid on inputs and constituted a legitimate right accrued to the assessee. A provision that merely prescribed the manner and method of payment of duty, and provided for interest in case of default, could not arbitrarily take away that accrued benefit.

The Madras High Court had therefore concurred with the Gujarat High Court’s conclusion that the relevant portion of Rule 8(3A) was ultra vires Article 14 on the ground of arbitrariness.

The Court also relied upon the Gujarat High Court’s decision in Precision Fasteners Ltd. v. Commissioner of Central Excise. The Gujarat High Court had held that where the statutory foundation for issuing a show cause notice and raising a tax demand was struck down, the proceedings founded upon that statutory provision would also have to be struck down.

The judgment distinguished this situation from cases where an assessment or demand had already attained finality and could not subsequently be reopened merely because the underlying provision had been declared invalid.

The Gujarat High Court had consequently set aside the tax demands and show cause notices in such circumstances, along with subsequent actions based upon them.

Applying the above principles, the Madras High Court held that proceedings initiated by the Department under Rule 8(3A), seeking recovery of duty and interest by denying the benefit of CENVAT credit, could not be sustained.

The Court categorically recorded that all such proceedings had to be set aside. Accordingly, the impugned proceedings were quashed.

The substantial questions of law were consequently answered in favour of the respondent and against the Revenue.

The Madras High Court dismissed both CMA Nos. 354 and 2104 of 2017.

The Court held that the department could not sustain the demand founded upon Rule 8(3A) when the provision had already been declared ultra vires. The appeals were dismissed in terms of the judgment, with no order as to costs, and the connected miscellaneous petition was closed.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: DRC-01 Can’t Replace Mandatory SCN: GSTAT