The Customs Appellate Tribunal has delivered a pivotal ruling affirming that the denial of Cenvat credit during a duty payment default violates constitutional rights under Articles 14 and 19(1)(g). The decision invalidates the operational enforceability of Rule 8(3A) of the Central Excise Rules, 2002, and redefines the scope of penalty imposition in excise defaults.
Background & Facts
The Dispute
Ruchi Power & Steel Industries Ltd., engaged in manufacturing steel products under Chapter 72 of the Central Excise Tariff Act, 1985, availed area-based exemption under Notification 39/2001-CE. During audit, it was found that the company had delayed payment of Central Excise duty for December 2008 and January 2009, paying only on 30.03.2009 and 27.04.2009 respectively - beyond the stipulated timeline under Rule 8 of the Central Excise Rules, 2002.
Procedural History
- 2011: Show cause notice issued under proviso to Section 11A of the Central Excise Act, 1944, demanding duty of Rs. 26,74,513/-, interest under Section 11AB, and penalty under Rule 25 read with Section 11AC.
- 2012: Additional Commissioner confirmed the demand and penalty.
- 2012: Commissioner (Appeals) upheld the order.
- 2026: Appeal filed before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), West Zonal Bench, Ahmedabad.
Relief Sought
The appellant sought quashing of the duty demand, interest, and penalty, arguing that: (1) Rule 8(3A) was unconstitutional; (2) duty paid via Cenvat credit should be valid; and (3) penalty under Rule 25 was misapplied since no intent to evade existed.
The Legal Issue
The central question was whether Rule 8(3A) of the Central Excise Rules, 2002, which mandates payment of excise duty without utilizing Cenvat credit during default, is constitutionally valid, and whether penalty under Rule 25 can be imposed when duty is eventually paid with interest but through Cenvat credit.
Arguments Presented
For the Appellant
The appellant relied on Indsur Global Ltd v. UOI (2014) and the Supreme Court’s dismissal of the Revenue’s appeal in 2024, which rendered Rule 8(3A) ultra vires. They cited Noble Drugs Ltd, Arjay Apparel Industries, and Saurashtra Cement to argue that payment via Cenvat credit is revenue-neutral and cannot trigger penalty under Rule 25. They further contended that Rule 27, not Rule 25, applies where goods are cleared on invoice with intent to pay, and only delay exists.
For the Respondent
The Revenue initially defended the demand and penalty but conceded after the Supreme Court’s 2024 order that Rule 8(3A) had attained final invalidity. However, they maintained that the default in timely payment warranted penalty, albeit without specifying the correct provision.
The Court's Analysis
The Tribunal examined the constitutional validity of Rule 8(3A) in light of Indsur Global Ltd and reproduced key paragraphs from the Gujarat High Court’s judgment:
"By no stretch of imagination, the restriction imposed under sub-rule (3A) of Rule 8 to the extent it requires a defaulter irrespective of its extent, nature and reason for the default to pay the excise duty without availing Cenvat credit to his account can be stated to be a reasonable restriction. It leads to a situation so harsh and a position so unenviable that it would be virtually impossible for an assessee who is trapped in the whirlpool to get out of his financial difficulties... This is quite apart from being wholly reasonable, being irrational and arbitrary and therefore, violative of Article 14 of the Constitution."
The Tribunal held that the denial of Cenvat credit during default is an unreasonable restriction on trade under Article 19(1)(g) and a violation of equality under Article 14. The provision was declared non-enforceable.
Regarding penalty, the Court distinguished between Rule 25 (for evasion or non-payment) and Rule 27 (for procedural defaults like delayed payment). Since the appellant cleared goods on invoices and paid duty with interest, no intent to evade existed. Thus, Rule 25 was inapplicable.
The Tribunal then addressed the procedural flaw: the penalty was imposed under Rule 25, not Rule 27. Citing Karnawat International, P.K. Palanisamy, and MERINO PANEL PRODUCTS, the Court held that citing the wrong provision does not vitiate proceedings if the authority possesses inherent jurisdiction. The adjudicating officer had power under Rule 27 to impose penalty for procedural non-compliance.
The Verdict
The appellant prevailed. The Tribunal set aside the duty demand and penalty under Rule 25/Section 11AC, holding them invalid. However, the appellant remains liable for interest under Rule 8(3). A reduced penalty of Rs. 5,000/- was imposed under Rule 27 of the Central Excise Rules, 2002.
What This Means For Similar Cases
Cenvat Credit Is Protected During Default
- Practitioners must now argue that Rule 8(3A) is unenforceable and cannot be invoked to deny Cenvat credit.
- Any demand based on non-utilization of Cenvat credit during default is legally unsustainable post-Indsur Global.
- Taxpayers may file refund claims or appeals against past demands based on this provision.
Penalty Must Be Imposed Under Rule 27, Not Rule 25
- Rule 25 applies only where there is intent to evade or non-payment.
- Rule 27 governs procedural defaults such as delayed payment, even if duty is later paid with interest.
- Practitioners should challenge penalties under Rule 25 in all cases where duty was paid eventually, and argue for substitution under Rule 27.
Procedural Errors Do Not Invalidate Orders
- Authorities may correct their own errors by invoking the correct provision, even if initially misstated.
- Appeals based solely on incorrect citation of provisions (e.g., Rule 25 instead of Rule 27) will fail if jurisdiction exists.
- Practitioners must focus on substantive merits, not technical misreferences, when defending penalty orders.
