2015 (5) TMI 603 - HC - Central Excise

Constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002 - Violation of Article 14 - Held that - Petitioners-assessees have not illegally or irregularly taken the CENVAT credit. It is to be mentioned herein that sub-rule (1) of Rule 8 provides for the manner of payment of duty on the goods removed from the factory or the warehouse as provided thereunder. Sub-rule (2) of Rule 8 extends the benefit of duty to the third party purchaser, who buys the excisable goods removed by the assessee and such goods are deemed to have suffered duty of excise. Under sub-rule (3) of Rule 8, interest is liable to be paid on the outstanding amount, if the assessee fails to pay the duty by the due date. - The right to pay duty by utilising the CENVAT credit that had accrued cannot be defeated, unless it is a case of illegal or irregular credit (See the decision of the Supreme Court in Dai Ichi Karkaria Ltd., referred 1999 (8) TMI 920 - SUPREME COURT OF INDIA ). To that extent, we find this sub-rule (3A) arbitrary and therefore violative of Article 14. The right that has accrued to an assessee by way of CENVAT credit, that is duty paid on the inputs, cannot be taken away under a rule, which only provides for the manner and method of payment of duty and for levying of interest, if there is a default - It is a legitimate right that has accrued to an assessee and that cannot be denied arbitrarily under the provision under challenge. We, therefore, have no hesitation to concur with the reasoning of the Gujarat High Court 2014 (12) TMI 585 - GUJARAT HIGH COURT that Rule 8(3A) is ultra vires of Article 14 on the ground of arbitrariness. - all the proceedings initiated by the Department in respect of the respective assessees, invoking the said rule by demanding duty along with interest by denying the benefit of CENVAT credit have to be necessarily set aside - Decision in the case of Precision Fasteners Ltd., v. Commissioner of Central Excise 2014 (12) TMI 655 - GUJARAT HIGH COURT followed - Decided in favour of assessee.

Summary

Issues Involved:
1. Constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002.
2. Legitimacy of proceedings initiated under Rule 8(3A) for recovery of duty, interest, and penalty.
3. Challenge to show cause notices and final orders issued under Rule 8(3A).

Detailed Analysis:

1. Constitutional Validity of Rule 8(3A):
The primary issue in this batch of writ petitions is the challenge to the constitutional validity of Rule 8(3A) of the Central Excise Rules, 2002. The petitioners argue that this rule is "unconstitutional, totally arbitrary, irrational, oppressive and contrary to the power delegated to the rule-making authority." Rule 8(3A) mandates that if an assessee defaults in payment of duty beyond thirty days from the due date, they must pay excise duty for each consignment at the time of removal, without utilizing the CENVAT credit until the outstanding amount including interest is paid. The Gujarat High Court in Indsur Global Ltd. v. Union of India declared this condition unconstitutional, particularly the portion "without utilizing the CENVAT credit." The Court found this restriction unreasonable, as it prevents an assessee from availing credit of duty already paid, creating an undue burden and effectively acting as a penalty. The Madras High Court concurs with this reasoning, emphasizing that the right to CENVAT credit is a legitimate right that cannot be arbitrarily denied unless the credit is illegally or irregularly taken.

2. Legitimacy of Proceedings Initiated Under Rule 8(3A):
The proceedings initiated under Rule 8(3A) for recovery of duty, interest, and penalty are also challenged. The Gujarat High Court in Precision Fasteners Ltd. v. Commissioner of Central Excise held that when the statutory basis for issuing a show cause notice and raising tax demand is invalidated, the proceedings must be struck down. The Madras High Court agrees with this view, noting that the impugned proceedings initiated by the Department under Rule 8(3A), which deny the benefit of CENVAT credit, must be set aside. Therefore, all subsequent actions taken by the Department based on these proceedings are nullified.

3. Challenge to Show Cause Notices and Final Orders:
Several petitioners have challenged the show cause notices and final orders issued under Rule 8(3A), arguing that they are "arbitrary, illegal, null and void, unsustainable, without authority and bad in law." The Court finds that since Rule 8(3A) has been declared unconstitutional, the show cause notices and final orders issued under this rule lack a valid statutory basis. Consequently, these notices and orders are set aside. The Court emphasizes that the right to utilize CENVAT credit, which is a legitimate right accruing to the assessee, cannot be arbitrarily denied under the rule in question.

Conclusion:
In conclusion, the Madras High Court declares Rule 8(3A) of the Central Excise Rules, 2002, unconstitutional and sets aside all proceedings initiated under this rule. The Court concurs with the Gujarat High Court's reasoning that the rule imposes an unreasonable restriction, violating Articles 14 and 19(1)(g) of the Constitution. Consequently, all writ petitions are allowed, and the impugned proceedings are nullified.