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M/s. Malladi Drugs & Pharmaceuticals Ltd. Versus The Union of India, The Commissioner of Central Excise

2015 (5) TMI 603 - MADRAS HIGH COURT

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 ass .....

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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 .....

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OURT] followed - Decided in favour of assessee. - W.P.Nos.2506 of 2011, 20938 of 2009, 20093 to 20103 of 2010, 22314 of 2010, 25236 of 2011, 28678 of 2011, 1864 of 2012, 4486 of 2009, 4487 of 2009, 19893 of 2010, 19894 of 2010, 27363 of 2012, 27364 of 2012, 15585 of 2013, 15586 of 2013, W.P.No.2506 - Dated:- 27-3-2015 - R. Sudhakar And T. Raja,JJ. For the Appellant : Mr. Arun Kurian Joseph For the Respondent : Mr. T Chandrasekaran Senior Panel Counsel ORDER (Order of the Court was delivered by R .....

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y for each consignment at the time of removal, without utilizing the CENVAT credit till the date the assessee pays the outstanding amount including interest thereon and in the event of any failure, it shall be deemed that such goods have been cleared without payment of duty and the consequences and penalties as provided in these rules shall follow.'' As a consequence, several proceedings were initiated, whereby show cause notices were issued for recovery of duty along with interest and p .....

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s the object and scope of Central Excise Act and the CENVAT Credit Scheme and ultra vires Explanation to Rule 8(4) of the said rules and contrary to the instruction of the Board in the CBEC Manual as well ultra vires Articles 14 & 19 of the Constitution of India. The petitioners-assessees in W.P.Nos.4487 of 2009, 20938 of 2009, 20093 to 20103 of 2010, 22314 of 2010, 25236 of 2011, 28678 of 2011 & 27364 of 2012 have challenged the show cause notices as arbitrary, illegal, null and void, u .....

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ral Excise Rules,2002 is unconstitutional, totally arbitrary, irrational, oppressive and contrary to the power delegated to the rule making authority. Several facets of the challenge to the said rule was considered by a Division Bench of the Gujarat High Court in the case of Indsur Global Ltd., v. Union of India, 2014 (310) E.L.T.833 (Guj.), wherein the Court declared that the condition contained in sub-rule (3A) of Rule 8 for payment of duty without utilizing the CENVAT credit till an assessee .....

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ered invalid.'' 3. The Gujarat High Court, while considering the challenge to the above rule in Indsur Global Ltd., primarily proceeded to hold so on the basis of two decisions of the Supreme Court, one in the case of Eicher Motors Ltd. v. Union of India, 1999 (106) E.L.T. 3(SC) and another in the case of Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., 1999 (112) E.L.T. 353 (SC). It also came to the view that the restriction imposed under sub-rule (3A) of Rule 8 to pay the e .....

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ntention, namely, that the condition attached by sub-rule (3A) of rule 8 is unreasonable and therefore violative of Article 14 of the Constitution and amounts to serious restriction on the petitioner's right to carry on trade or business of his choice guaranteed under Article 19(1)(g) of the Constitution. This contention requires a closer scrutiny. As noted earlier, the restrictions of sub-rule (3A) come in two folds. Firstly, a defaulter assessee has to clear the consignments on spot paymen .....

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of fraud or collusion or any willful misstatement or suppression of facts or contravention of any of the provisions of the Act or the rules made thereunder with an intent to evade payment of duty. Likewise, section 11A which pertains to recovery of duties not levied or not paid or short levied or short paid or erroneously refunded makes a clear distinction when it gives the period of limitation available to the department to institute proceedings, in such cases between such non-payment having b .....

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exercise of such powers, notification No.17/2006 was issued providing for withdrawal of facilities and for imposition of restrictions against who are prima facie found to be knowingly involved in any of the following: "(a) removal of goods without the cover of an invoice and without payment of duty; (b) removal of goods without declaring the correct value for payment of duty, where a portion of sale price, in excess of invoice price, is received by him or on his behalf but not accounted for .....

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." This rule 12CC as well as the notification issued by the Government would apply to special class of assessees who through their conscious act tried to evade duty. 30. It can be seen that the reasons for non-payment of excise duty can be manifold and not necessarily in all cases have to be willful default by an assessee despite availability of funds. Excise duty may remain unpaid due to economic reasons, due to slowness in the business or due to financial crunch temporarily felt by the ma .....

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the market reducing the profit margins, promised payments from the purchasers not coming forth or temporary labour disputes, would find it extremely difficult thereafter to raise further funds for payment of duty in addition to the duty which he has already paid. Cenvat credit is available to a manufacturer upon purchase of inputs which are duty paid. It is the duty element which the assessee has already suffered which is credited to his cenvat credit account available to him for adjustment for .....

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availing CENVAT credit. This rule thus imposes a wholly unreasonable restriction which is not commensurate with the wrong sought to be remedied. 31. This extreme hardship is not the only element of unreasonableness of this provision. It essentially prevents an assessee from availing cenvat credit of the duty already paid and thereby suspends, if not withdraws, his right to take credit of the duty already paid to the Government. It is true that such a provision is made because of peculiar circum .....

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ch was introduced in the Central Excise Rules, 1944 under which credit lying unutilized in the Modvat credit account of an assessee on 16th March 1995 would lapse. Such provision was questioned. The Supreme Court held that since excess credit could not have been utilized for payment of the excise duty on any other product, the unutilised credit was getting accumulated. For the utilization of the credit, all vestitive facts or necessary incidents thereto had taken place prior to 16.3.1995. Thus t .....

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s adjusted which are finished subsequently. Thus a right had accrued to the assessee on the date when they paid the tax on the raw materials or the inputs and that right would continue until the facility available thereto gets worked out or until those goods existed. We may also recall that in the case of Dai Ichi Karkaria Ltd (supra) it was reiterated that a manufacture obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable produce immediatel .....

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on which arbitrarily or excessively invades the right cannot be said to contain the quality of reasonableness and unless it strikes a proper balance between the freedom guaranteed in Article 19(1)(g) and the social control permitted by clause (6) of Article 19, it must be held to be wanting in that quality. 33. In the case of Om Kumar (supra), the Supreme Court recognized the applicability of the principle of proportionality in judging the validity of a provision on the touchstone of reasonablen .....

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riction or whether the Administrator has not properly balanced the fundamental right and the need for the restriction or whether he has imposed the least of the restrictions or the reasonable quantum of restriction etc. In such cases, the administrative action in our country, in our view, has to be tested on the principle of 'proportionality,' just as it is done in the case of the main legislation. This, in fact, is being done by our Courts.'' 34. By no stretch of imagination, th .....

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nable, being irrational and arbitrary and therefore, violative of Article 14 of the Constitution. It prevents him from availing credit of duty already paid by him. It also is a serious affront to his right to carry on his trade or business guaranteed under Article 19(1)(g) of the Constitution. On both the counts, therefore, that portion of sub-rule (3A) of rule must fail. 35. The situation can be looked at slightly different angle. With or without the provisions of sub-rule (3A), liability to pa .....

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duty without utilising CENVAT credit which is nothing but the duty on various inputs already paid by him would be a restriction so harsh and out of proportion to the aim sought to be achieved, the same must be held to be wholly arbitrary and unreasonable. We may recall, the delegated legislature in its wisdom now dismantled this entire mechanism and instead has provided for penalty at the rate of 1% per month on delayed payment of duty. 36. In the result, the condition contained in sub-rule (3A .....

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ver, would also like to add our view as to why such a restriction imposed under sub-rule (3A) of Rule 8 of the Central Excise Rules is totally untenable. 4. The availment of CENVAT credit is a right that accrues to an assessee and denial of such credit can be made only by procedure prescribed by the law. The implication of CENVAT credit and the utilisation thereon has been clearly highlighted by the Supreme Court in paragraph-17 of the judgment in Collector of Central Excise, Pune v. Dai Ichi Ka .....

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which provides for a reversal of the credit by the excise authorities except where it has been illegally or irregularly taken, in which event it stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that has been validly taken, and its benefit is available to the manufacturer without any limitation in time or otherwise unless the manufacturer itself chooses not to use the raw material in its excisable product. The credit is, therefore, indefeasible. It s .....

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s have 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 outs .....

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nding amount including interest thereon. 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 supra). 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 on .....

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8(3A) is ultra vires of Article 14 on the ground of arbitrariness. 6. Now coming to the challenge to the proceedings initiated by the Department by invoking Rule 8(3A) of the Central Excise Rules, 2002 and the consequential orders passed by the original authority or appellate authority, as the case may be, in demanding duty along with interest, the Gujarat High Court in the case of Precision Fasteners Ltd., v. Commissioner of Central Excise, 2014-TIOL-2211- HC-AHM-CX, has held as follows:- ' .....

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ortion of Sub Rule (3A) of Rule 8, did not disturb the orders passed by the revenue authorities as upheld by the Tribunal, since such dispute had achieved finality. Counsel would urge that in the present case also the same course should be adopted. 6. In our opinion, however, there is vital difference between the two sets of facts. In the present case, the petitioner had raised the challenge to the statutory provisions even before the adjudicating authority had taken a final decision. He had, al .....

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