CENVAT Credit Use During Default Is Invalid: Calcutta High Court Upholds Cash Duty Demand U/R 8(3A), Allows Credit Restoration

The Calcutta High Court while upholding the Cash Duty Demand under Rule 8(3A) of the Central Excise Rules, 2002 and allowing the credit restoration, held that the CENVAT credit use during default is invalid. The bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar has observed that the an assessee is under a specific, mandatory restrictive order of forfeiture passed under Rule 8(3A), prohibiting the utilization of CENVAT credit due to a persistent default, any subsequent discharge of excise duty through the credit account is a nullity in the eyes of the law. The statutory "deeming fiction" of non- payment is absolute and overrides general principles of substantial compliance. Consequently, the assessee must first satisfy the debt in the prescribed mode— namely, Cash/PLA—as a condition precedent, before seeking the equitable restoration or re-credit of the Cenvat amount previously utilized in contravention of the stay. The controversy centered on whether an assessee, during a period of default, could discharge duty using CENVAT credit despite a statutory restriction requiring payment only through cash (PLA). At the heart of the dispute was the interpretation of Rule 8(3A) of the Central Excise Rules, 2002. This provision restricts assessees who default in duty payment beyond 30 days from utilizing CENVAT credit and mandates payment on a consignment basis through cash. The appellant had defaulted in March 2006 and was subjected to a forfeiture order in June 2006, barring credit utilization. However, between August and October 2006, it cleared goods worth ₹4.36 crore by utilizing CENVAT credit amounting to ₹71.10 lakh, contrary to the restriction. The appellant argued that the duty liability had already been discharged through CENVAT credit, and insisting on cash payment again amounted to double taxation. CENVAT credit is a vested right, relying on the Supreme Court’s ruling in Eicher Motors Ltd. vs. Union of India. The breach was merely procedural (mode of payment), not substantive. There was no intent to evade duty, as all transactions were transparently disclosed in ER-1 returns. The Department contended that Rule 8(3A) imposes a mandatory condition, not a procedural requirement. Once default occurs, the law mandates payment only through cash, and any deviation renders the clearance as “deemed non-payment.” The assessee failed to challenge the forfeiture order and cannot later bypass its consequences. Payment through credit during the restriction period is legally invalid. The High Court upheld the Revenue’s position, holding that Rule 8(3A) is a substantive and mandatory provision, and not merely procedural. The “deeming fiction” of non-payment must be strictly applied—clearances made using credit during default are legally treated as if duty was never paid. Payment through CENVAT credit, in violation of a forfeiture order, is a nullity in law. The Court rejected the argument of “substantial compliance,” emphasizing that when a statute prescribes a specific mode of payment, deviation cannot be condoned. While affirming the demand, the Court carefully addressed concerns of double taxation it held that requiring payment in cash does not amount to double taxation because the earlier credit utilization is legally invalid. However, to prevent unjust enrichment of the State, the Court upheld the Tribunal’s direction to restore the CENVAT credit after the assessee makes payment in cash. Buy Now: Service Tax E-Compilation : March 2026 This balanced approach ensures compliance with statutory requirements while safeguarding constitutional protections under Article 265. On the issue of penalty the Court noted absence of fraud or suppression, as transactions were disclosed. However, it found willful defiance of a binding order, justifying penalty. The reduced penalty of ₹1 lakh imposed by the Tribunal was upheld. Interest liability was also held to be mandatory, as duty was not paid in the prescribed manner. The Court issued the following key directions the assessee must pay ₹71.10 lakh in cash along with applicable interest within 8 weeks. The reduced penalty of ₹1 lakh must also be paid. Upon payment, the Department must restore the equivalent CENVAT credit. No coercive recovery action to be taken during the compliance period. The ruling clarifies that during a Rule 8(3A) default period, CENVAT credit cannot be used—any such payment is invalid, and duty must first be paid in cash, with credit restoration allowed later. Case Details Case Title: M/S. Star Battery Limited Vs Commissioner Of Central Excise Citation: JURISHOUR-948-HC-2026(CAL) Case No.: CEXA 62 OF 2008 Date: 23rd April, 2026 Counsel For Petitioner: Anil Kumar Dugar Counsel For Respondent: Uday Sankar Bhattacharya Click Here To Read Order Read More: Writ: A Virtue of Extraordinary Relief

CENVAT Credit Use During Default Is Invalid: Calcutta High Court Upholds Cash Duty Demand U/R 8(3A), Allows Credit Restoration

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