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2016 (6) TMI 770 - MADRAS HIGH COURT

2016 (6) TMI 770 - MADRAS HIGH COURT - 2016 (338) E.L.T. 652 (Mad.) - Default in payment of excise duty - restriction on utilizing Cenvat Credit - Rule 8(3A) of the Central Excise Rules, 2002 - they were directed to pay the duty amount, on consignment basis. They paid the duty liability through CENVAT Credit and subsequently, there was change in law. The Department contended that the punishment would continue, till the default is fully discharged and during that period, duty has to be paid throu .....

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sed - Decided against the revenue. - C. M. A. No. 897 of 2016 - Dated:- 6-6-2016 - S. Manikumar And D. Krishna Kumar, JJ. For the Appellant : Mr. T. Chandrasekaran JUDGMENT ( Judgement of this Court was made by S. Manikumar, J. ) Civil Miscellaneous Appeal is directed against the Final Order No.41253 of 2015, dated 25.09.2015, passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), South Zonal Bench, Chennai 600 006, setting aside the demand of duty and penalty. 2. Before the .....

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They paid the duty liability through CENVAT Credit and subsequently, there was change in law. The Department contended that the punishment would continue, till the default is fully discharged and during that period, duty has to be paid through Personal Ledger Account (in short PLA ) on consignment basis. 3. Before CESTAT, Madras, a contention has been made by the 1st respondent-assessee that change of law would not apply to them. According to them, the deferred monthly payment facility was withd .....

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s withdrawn and the extent of the debit to be calculated. Amount was directed to be paid in PLA within 15 days, from the date of receipt of the order. Being aggrieved by the order in Original, dated 21.06.2001, the 1st respondent-assessee has filed an appeal, which was dismissed on 28.05.2002. Further appeal filed with a delay has been dismissed by the CESTAT, Chennai, on 27.10.2004. 4. Whileso, on 19.06.2003, the 1st respondent-assessee was served with a show cause notice, dated 16.06.2003, whe .....

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aid in CENVAT, amounting to ₹ 51,95,144/-, from April' 2002 to March' 2003, should not be demanded, as arrears for having contravened Rule 8(4) of the Central Excise Rules, 2002 and the goods cleared under payment of duty in CENVAT, should not be construed to have been cleared, without payment of duty and why interest and penalty be not levied. A reply, dated 04.08.2003 has been sent, to putforth their objections. Written submissions were also made. The appellant-department has rej .....

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s in Indsur Global Ltd., v. UOI reported in 2014 (310) ELT 833 (Guj.), Precision Fasteners Ltd., v. CCE reported in 2014 (12) TMI 655 and CCE, Madurai v. Kaleeswarar Mills [2013-TIOL-1209-CESTAT-MAD]. Added further, the assessee has also contended that when this Court in M/s.Malladi Drugs & Pharmaceuticals Ltd., v. UOI and others reported in 2015 (323) ELT 489 (Mad.), held Rule 8(3A) as ultra vires of Article 14 of the Constitution of India, the same is binding on the Department. 6. Per cont .....

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planation is only for making the position clear. Reliance has been made to a decision in Unirols Airtex v. CCE, Coimbatore reported in 2013 (296) ELT 449. 7. After hearing the parties and perusal of the records, the CESTAT, Chennai, vide Final Order No.41253 of 2015, dated 25.09.2015, at Paragraph 7, ordered as follows: We find that this being a small scale unit, the appellant assessee was paying excise duty on monthly basis, as per Rule 173G of CER, 1944 from 01.04.2000. SCN No.692/2003, dated .....

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ssee by the decision of the Hon'ble Kerala High Court in the case of Thanikkudam Bhagawati Mills Ltd., v. CCE, Calicut in Central Excise Appeal No.22/2005, dated 26.10.2005, wherein, the Hon'ble High Court held that during the period forfeiture of the facility of payment of duty on fortnightly basis, the assessee can discharge the liability either out of PLA or by utilizing CENVAT credit and failure to do so, would not attract interest and penalty. Further, the Hon'ble Madras High Co .....

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ding tax was set at naught. Both Hon'ble Gujarat High Court and Madras High Court have held that condition contained in Rule 8(3A) of CER, 2002 for payment of duty 'without utilization of CENVAT credit is contrary to the scheme of availment of CENVAT credit under CCR and the said Rule 8(3A) is arbitrary and violative of Article 14 of the Constitution. Accordingly, the Hon'ble High Court was struck down the Rule 8(3A) as unconstitutional. The jurisdictional Madras High Court's rul .....

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rule which is applicable to the issue on hand, ie., Rule 8(3A) clearly defined that the duty should be paid only in account current (PLA) if the assessee defaults in payment of duty beyond the time limit prescribed therein. (b) Whether in the facts and circumstances of the case, the payment of duty utilizing CENVAT credit during default period is a valid discharge of duty liability under the Excise Law. 9. Reiterating the facts and the issues raised before the CESTAT, Chennai, arguments were adv .....

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ntral Excise Rules, 2002, as follows: (3A) If the assessee defaults in payment of duty beyond thirty days from the due date, as prescribed in sub-rule (1), then notwithstanding anything contained in said sub-rule (1) and sub-rule (4) of rule 3 of CENVAT Credit Rules, 2004, the assessee shall, pay excise duty 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 fa .....

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department has contended that the assessee has contravened Rule 173G(1)(e) of the Central Excise Rules. The said Rule is extracted hereunder: (e). If the manufacturer defaults on account of any of the following reasons, namely:- (i) full payment of any one installment is discharged beyond a period of thirty days from the date on which the installment was due in a financial year, or (ii) the due date on which full payment of installments are to be made is violated for the third time in a financi .....

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event of any such failure it will be deemed as if such goods have been cleared without payment of duty and the consequences and penalties as provided in the Central Excise Rules shall follow." 12. After following the principles of natural justice and by observing that payment through CENVAT Credit Account was not proper; such payments through credit account were null and void; those clearances of goods were clearances without payment of duty; duty involved therein should be paid through Acc .....

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d by the Department, invoking the said Rule, were also put to challenge. Arguments have been advanced that the said Rule is ultra vires to Explanation to Rule 8(4) of the said rules and contrary to the instructions of the Board in the CBEC Manual and also as well ultra vires of Articles 14 and 19 of the Constitution of India. Reliance has been placed on the judgment of Gujarat High Court in Indsur Global Ltd., v. UOI reported in 2014 (310) ELT 833 (Guj.), wherein, at Paragraphs 29 to 35, held as .....

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rstly, a defaulter assessee has to clear the consignments on spot payment of excise duty and secondly, that such excise duty has to be paid in cash without availing cenvat credit. This rule does not make any distinction between the willful defaulter and the others. Though term 'willful defaulter' has not been defined in the statute, the concept is not an unknown one. Section 11AC of the Central Excise Act provides for penalty in case of non-levy, short levy or non-payment or short paymen .....

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o institute proceedings, in such cases between such non-payment having been occasioned due to fraud, collusion, etc. in which case a longer period of limitation is available as against rest of the cases. Likewise, under rule 12CC of the Central Excise Rules as it stood at the relevant time, power was given to the Government by notification to withdraw facilities from the manufacturers, registered dealers or exporters under certain circumstances having regard to the extent of evasion of duty, nat .....

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invoice price, is received by him or on his behalf but not accounted for in the books of account; (c) taking of CENVAT credit without the receipt of goods specified in the document based on which the said credit has been taken; (d) taking of CENVAT credit on invoices or other documents which a person has reasons to believe as not genuine; (e) issue of excise duty invoice without delivery of goods specified in the said invoice; (f) claiming of refund or rebate based on the excise duty paid invoic .....

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ss in the business or due to financial crunch temporarily felt by the manufacturer who though might have cleared the finished goods and also sold the goods in the market may not have received the payment as promised. All such cases of defaults willful or otherwise are clubbed together for the same treatment and a stringent condition of payment of excise duty without availing Cenvat credit is imposed. It can be appreciated that where a manufacturer falls behind the payment schedule on account of .....

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redited to his cenvat credit account available to him for adjustment for payment of excise duty liability upon clearance of the finished product. If such facility is withdrawn, it could be appreciated, his ability to continue the business under such adverse financial climate would further diminish. This would be a cyclical vicious pattern where in every month he would fall behind by the due date unable to raise cash flow for payment of duty for the clearance which he desires to make and is there .....

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ent. It is true that such a provision is made because of peculiar circumstances the assessee lands himself in. However, when such provision makes no distinction between a willful defaulter and the rest, we must view its reasonableness in the background of an ordinary assessee who would be hit and targeted by such a provision. As held by the Supreme Court in the case of Eicher Motors Ltd (supra) an assessee would be entitled to take credit of input already used by the manufacturer in the final pr .....

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r necessary incidents thereto had taken place prior to 16.3.1995. Thus the assessees became entitled to take the credit of the input instantaneously once the input is received in the factory of the manufacturer of the final product and the final product which had been cleared from the factory was sought to be lapsed. The Supreme Court struck down the rule further observing that if on the inputs the assessee had already paid the taxes on the basis that when the goods are utilized in the manufactu .....

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l to be used by him in the production of an excisable produce immediately it makes the requisite declaration and obtains an acknowledgment thereof. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. 32. As held by the Supreme Court in the case of Chantamanrao (supra), the phrase "reasonable restriction" connotes that the limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive n .....

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in judging the validity of a provision on the touchstone of reasonableness under Article 14 of the Constitution. It was observed: "53. Now under Art.19(2) to (6), restrictions on fundamental freedoms can be imposed only by legislation. In cases where such legislation is made and the restrictions are reasonable yet, if the concerned statute permitted the administrative authorities to exercise power or discretion while imposing restrictions in individual situations, question frequently arise .....

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eing done by our Courts.'' 34. 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 .....

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angle. With or without the provisions of sub-rule (3A), liability to pay interest for the default period as per sub-rule (3) of rule 8 continues. Sub-rule (3A) is basically a mechanism for stringent recovery and does not create a new liability unless this mechanism itself is breached. In such a mechanism to provide for withdrawal of CENVAT credit facility for paying the duty borders to creating a penalty. Insisting on an assessee in default to clear all consignments on payment of duty would be a .....

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ent of duty. 36. In the result, the condition contained in sub-rule (3A) of rule 8 for payment of duty without utilizing the cenvat credit till an assessee pays the outstanding amount including interest is declared unconstitutional. Therefore, the portion "without utilizing the cenvat credit" of sub-rule (3A) of rule 8 of the Central Excise Rules, 2002, shall be rendered invalid.'' The relevant portion of Rule 8(3A) has been held to be ultra vires by the Gujarat High Court. We .....

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the law and on that aspect, the Hon'ble Division Bench extracted Paragraph 17 of the Apex Court judgment in Collector of Central Excise, Pune v. Dai Ichi Karkaria Ltd., reported in 1999 (112) E.L.T.353 (SC) and the same reads as follows: 17. It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise duty paid on raw material to be used by him in the production of an excisable product immediately it makes the requisite declaration and obtains an acknowle .....

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mitation 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 should also be noted that there is no co-relation of the raw material and the final product; that is to say, it is not as if credit can be taken only on a final product that is manufactured out of the particular raw material to which the credit is related. The credit may be taken against the excise duty on a final product manufactur .....

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n of Gujarat High Court in Precision Fasteners Ltd., v. CCE reported in 2014 (12) TMI 655, wherein, at Paragraphs 4 to 7, the Court held as follows: 4. When the statutory basis for issuance of a show cause notice and raising tax demand is knocked down, the very proceedings would have to be struck down. 5. Learned counsel Shri Oza for the revenue, however, submitted that during the pendency of this petition, the adjudicating authority passed the final order which has not been challenged. He drew .....

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he petitioner had raised the challenge to the statutory provisions even before the adjudicating authority had taken a final decision. He had, along with rule, also challenged the show cause notice. In the case of Indsur Global Ltd. (supra) the petitioner had unsuccessfully challenged the order of the adjudicating authority. The appeal was dismissed by the Commissioner on the ground of delay beyond his power to condone. The Tribunal had dismissed further appeal on the ground of gross delay of thr .....

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