Gujarat High Court
The Commissioner Of Central Excise & … vs Essar Heavy Engineering Services on 29 June, 2026
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/709/2015 ORDER DATED: 29/06/2026
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 709 of 2015
====================================================
THE COMMISSIONER OF CENTRAL EXCISE & CUSTOMS,SURAT-2
Versus
ESSAR HEAVY ENGINEERING SERVICES
====================================================
Appearance:
SHASHVATA U SHUKLA(8069) for the Appellant(s) No. 1
====================================================
CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
Date : 29/06/2026
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned advocate Mr. Shashvata U. Shukla appearing
for the appellant.
2. This Tax Appeal is filed under Section 35G of the Central
Excise Act, 1944 (for short ‘the Act’) by the appellant – Revenue
raising the substantial questions of law arising from the order dated
16.01.2015 passed by the Customs, Excise and Service Tax Appellate
Tribunal, West Zonal Bench, at Ahmedabad (For Short “the
CESTAT”) in Appeal No. E/11021/2013-DB.
3. This Tax Appeal was kept pending for admission because the
CESTAT while passing the impugned order had referred to and relied
upon the order passed by this Court in case of Indsur Global Ltd.
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v. Union of India reported in 2014 (310) ELT 833 (Guj), the
CESTAT in the impugned order has held that the portion without
utilizing the CENVAT Credit of sub-rule (3A) of Rule 8 of the Central
Excise Rules, 2002, shall be rendered invalid and observed as
under :-
“2. After hearing both the sides and on perusal of the records,
we find that the appellants were engaged in the manufacture of
Meter Gauge classifiable under Chapter 73 & 84 of Central
Excise Tariff Act. 1985. The appellants were discharging duty
on monthly basis under Rule 8 of Central Excise Rules, 2002.
There was a delay in discharging of duty on monthly basis. The
appellant paid duty partly from CENVAT account during the
defaulted period. By the impugned order, the Adjudicating
Authority disallowed the atilization of the amount from
CENVAT account during the period from 05.07.2010 to
29.09.2010 in terms of provisions of Rules 8(3A) of Central
Excise Rules, 2002 and confirmed the demand of duty along
with interest and penalty partly for not paying the amount by
cash from PLA. We find that the Hon’ble Gujarat High Court in
the case of Indsur Global Ltd. Vs. Union of India 2014 (310)
ELT 833 (Guj.) held that the portion “without utilizing the
CENVAT Credit” of sub-rule (3A) of Rule 8 of Central Excise
Rules 2002, shall be rended invalid.” The relevant portion of
the said decision is reproduced below:-
“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 outstaning 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.”
3. In view of the decision of Hon’ble Gujarat High Court. We
find that the impugned order is not sustainable. The impugned
order is set aside and the appeal is allowed with consequential
relief.
4. At this stage, the learned Authorized Representative for the
Revenue submits that they have not paid duty for each
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consignment at the time of removal of goods and therefore,
they are liable to pay interest. In our view, the appellant shall
pay excise duty for each consignment at the time of removal of
goods till the date the assessee pays outstanding amount
including interest. Revenue is at liberty to demand the interest,
if any, in accordance with law.”
3.1. The decision in case of Indsur Global Ltd. (supra) was
challenged before the Hon’ble Apex Court. Learned advocate Mr.
Shukla submitted that by order dated 29.07.2024 passed in Civil
Appeal No(s) 6652 of 2018 in case of Union of India v. Indsur
Global Ltd., the appeal was disposed of by the Hon’ble Apex Court
on the ground of low tax effect.
4. Learned advocate Mr. Shukla has also candidly submitted that
similar issue has been decided by various Courts in favour of the
assesee which was also challenged before the Hon’ble Apex Court
and the Hon’ble Apex Court in the case of Commissioner of
Central Excise v. Vikrant Auto Industries reported in 2024 (388)
E.L.T. 5 (SC) dismissed the Special Leave to Appeal (SLP) keeping
the question of law open on account of low tax effect.
5. This Court in the case of Indsur Global Ltd. (supra), on the
same issue has held as under :-
“17. Having thus heard the learned counsel for the parties, we may
peruse the statutory provisions more closely. To enable an assessee
to avail of credit of the duty paid on raw material and capital goods
used for manufacture of the excisable goods, detail provisions havePage 3 of 16
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been made in the Cenvat Credit Rules, 2004. Rule 3 thereof pertains
to cenvat credit. Sub-rule (1) thereof allows a manufacturer or
purchaser of final products or provider of output service to take
credit of cenvat of the various duties specified in clauses (i) to (xi)
contained therein. Rule 4 of the Cenvat Credit Rules, 2004 lays
down conditions for allowing cenvat credit. Sub-rule (1) thereof
provides that cenvat credit in respect of inputs may be taken
immediately on receipt of the inputs in the factory of the
manufacturer or in the premises of the provider of output service.
Clause (1) of sub-rule (2) pertains to availability of cenvat credit in
respect of capital goods and provides that in respect of capital goods
received in a factory or in the premises of the provider of output
service at any point of time in a given financial year shall be taken
only for an amount not exceeding fifty per cent of the duty paid on
such capital gods in the same financial year. There are provisos to
this clause with which we are not concerned. Clause (b) of sub-rule
(2) provided that balance of cenvat credit may be taken in any
financial year subsequent to the financial year in which the capital
goods were received in the factory of the manufacturer or in the
premises of the provider of output service.
18. In exercise of powers conferred under section 37 of the Central
Excise Act, 1944, the Central Government has framed the Central
Excise Rules, 2002. Rule 4 of the said Rules pertains to duty payable
on removal. Sub-rule (1) thereof provides that every person who
produces or manufactures any excisable goods, or who stores such
goods in a warehouse, shall pay the duty leviable on such goods in
the manner provided in rule 8 or under any other law, and no
excisable goods, on which any duty is payable, shall be removed
without payment of duty from any place where they are produced or
manufactured or from a warehouse unless otherwise provided. Rule
5 of the Central Excise Rules, 2002, pertains to date of
determination of duty and tariff valuation. Sub-rule (1) thereof
provides the rate of duty or tariff value applicable to any excisable
goods other than khandsari molasses shall be the rate or value in
force on the date when such goods are removed from a factory or a
warehouse, as the case may be. As per rule 6, an assessee has to
himself assess the duty payable on any excisable goods. As per rule
7, if an assessee is unable to determine the value of excisable goods
or determine the rate of duty applicable, he may request the
Assistant Commissioner of Central Excise or the Deputy
Commissioner in writing giving reasons for payment of duty on
provisional basis upon which such authority would make an order
allowing payment on provisional basis at such rate or on such value
as may be specified.
19. Rule 8 of the Central Excise Rules pertains to the manner of
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payment. Sub-rule (1) of rule 8 requires that the duty of the goods
removed from the factory or the warehouse during a month shall be
paid by the 6th day of the following month, if the duty is paid
electronically through internet banking and by the 5th day of the
following month, in any other case. First proviso to sub-rule (1)
provides that in case of goods removed during the month of March,
the duty shall be paid by the 31st day of March. Relevant portion of
sub-rule (1) of rule 8 reads as under:
“Rule 8. Manner of payment – (1) The duty on the goods
removed from the factory or the warehouse during a month shall
be paid by the 6th day of the following month, if the duty is paid
electronically through internet banking and by the 5 th day of the
following month, in any other case:
Provided that in case of goods removed during the month of
March, the duty shall be paid by the 31st day of March. ……….”
Sub-rule (2) of rule 8 provides that the duty of excise shall be
deemed to have been paid for the purposes of these rules on the
excisable goods removed in the manner provided under sub-rule (1)
and the credit of such allowed, as provided by or under any rule.
Sub-rule (3) of rule 8 requires the assessee who fails to pay the duty
by due date to pay the same along with interest. Sub-rule (3) reads
as under:
“(3) If the assessee fails to pay the amount of duty by due
date, he shall be liable to pay the outstanding amount along
with interest at the rate specified by the Central Government
vide notification under section 11AA of the Act on the
outstanding amount, for the period starting with the first
dayafter due date till the date of actual payment of the
outstanding amount.”
Sub-rule (3A), a portion of which is under challenge before us, as it
stood at the relevant time, reads as under:
“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 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.”
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As per this sub-rule, in case of an assessee who has defaulted in
payment of duty beyond thirty days from the due date, has to pay
excise duty for each consignment at the time of removal without
utilizing the cenvat credit till he pays the outstanding amount
including interest. In the event of failure, it would be deemed that
such goods have been cleared without payment of duty and the
consequences and penalties as provided in the rules would follow.
20. We may record that sub-rule (3A) which was introduced with
effect from 1.6.2006 has since been substituted by notification dated
11th July 2014 and the current applicable sub-rule (3A) reads as
under:
“(3A) If the assessee fails to pay the duty declared as payable
by him in the return within a period of one month fro the due
date, then the assessee is liable to pay the penalty at the rate
of one per cent, on such amount of the duty not paid, for each
month or part thereof calculated from the due date, for the
period during which such failure continues.”
It can thus be seen that with the substitution of sub-rule (3A) of rule
8, the requirement of the defaulter to clear the goods on payment
without availing cenvat credit has been done away with. Instead,
such an assessee would invite penalty at the rate of one per cent for
each month or part thereof calculated from the due date.
21. From the statutory provisions, it can be seen that ordinarily as
per rule 4, duty on excisable goods is payable on removal. Such
payment is to be made in the manner prescribed in rule 8. Sub-rule
(1) of rule 8 provides for a facility of deferred payment of excise
duty. Instead of an assessee paying duty on removal of each
consignment, the duty is to be paid for the entire month by the due
date which is the 6th day of the following month if the duty is paid
electronically through internet banking and in all other cases, it
would be the 5th day of the following month. It is in this context,
therefore, under sub-rule (2) of rule 8, it is provided that the duty of
excise shall be deemed to have been paid for the purpose of the
rules on the excisable goods removed in the manner provided under
sub-rule (1) and the credit of such duty shall be allowed as provided
under the rules. Combined reading of rule 4 with rule 8(1) and 8(2)
of the Central Excise Rules would demonstrate that ordinarily excise
duty is payable on removal. In terms of sub-rule (1) of rule 8,
deferment is granted by the Legislature and if duty is paid
accordingly, as per sub-rule (2) of rule 8, the same would be deemed
to have been paid on removal and the assessee would be entitled to
credit of such duty as allowed under any rule.
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22. Sub-rule (3) of rule 8 attaches a liability of paying interest on
delayed payment of excise duty. Any assessee who fails to pay duty
by the due date would be liable to pay outstanding amount with
interest at the rate specified by the Central Government under a
notification. The period of computation of interest would be the first
day after the due date till date of actual payment of the outstanding
amount.
23. As noted, the Cenvat Credit Rules 2004 permit an assessee liable
to pay excise duty to avail cenvat credit for such purpose on various
duties paid on the inputs which may either be raw material or
capital goods in the manner provided in the said rules. In this
context, sub-rule (3A) of rule 8 makes two fold departure in case of
an assessee who has been unable to pay the duty by the due date
and such default continues for a further period of 30 days from the
due date. If an assessee who was required to pay the entire months
of excise duty by the 5th or 6th of the following month, does not do
so for a further period of 30 days, the unpleasant consequences
envisaged in sub-rule (3A) would follow. Such consequences would
be that he would no longer enjoy the facility of payment of excise
duty on monthly basis and he would have to clear each consignment
on actual payment of duty and secondly that he would not be
entitled to avail of cenvat credit for such purpose.
24. We may recall that the petitioner has challenged only that
portion of sub-rule (3A) of rule 8 which requires a defaulter to clear
the finished product on payment of excise duty without availing the
cenvat credit. We may consider the petitioner’s challenge to the
vires of such rule in the background of the statutory scheme. Before
doing so, however, we may examine the parameters on which a
delegated legislation can be called in question. It is by now well
settled that a legislation enacted by the Union or the State
Legislature enjoys a presumption of constitutionality. Heavy burden
is one who questions its constitutionality to establish the same
through cogent materials. A reference in this respect can be made to
a Constitution Bench decision of the Supreme Court in the case of
State of Jammu & Kashmir v. Triloki Nath Khosa, AIR 1974 SC 1. It
is also well settled that the principle of presumption of
constitutionality also applies to a delegated legislation. In the case
of St. Johns Teachers Training Institute v. Regional Director,
National Council for Teacher Education, (2003) 3 SCC 321, it was
observed that “it is also well settled that in considering the vires of
of subordinate legislation one should start with the presumption that
it is intra vires and if it is open to two constructions, one of which
would make it valid and other invalid, the Courts must adopt that
construction which makes it valid….”
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25. As held by the Supreme Court in case of A.P. v. McDowell & Co.,
(1996) 3 SCC 709, a law made by the Parliament or the State
Legislature can be struck down on two grounds only,
namely, lack of legislative competence or violation of any of the
fundamental rights guaranteed in part III of the Constitution or any
other constitutional provisions. However, the subordinate
legislation does not enjoy the same level of immunity from the
court’s scrutiny. In addition to the two grounds available for
challenge to a legislation by the Parliament or the State Legislature,
a delegated legislation can be struck down also on other grounds
such as, that it is ultra vires the parent Act, the provisions are in
conflict with the parent Act or that the same is unreasonable or
wholly arbitrary or irrational. In the case of Indian Express
Newspapers (Bombay) Pvt. Ltd. v. Union of India, (1985) 1 SCC
641, the Supreme Court observed as under:
“75. A piece of subordinate legislation does not carry the same
degree of immunity which is enjoyed by a statute passed by a
competent legislature. Subordinate legislation may be
questioned on any of the grounds on which plenary legislation is
questioned. In addition it may also be questioned on the ground
that it does not conform to the statute under which it is made. It
may further be questioned on the ground that it is contrary to
some other statute. That is because subordinate legislation must
yield to plenary legislation. It may also be questioned on the
ground that it is unreasonable, unreasonable not in the sense of
not being reasonable, but in the sense that it is manifestly
arbitrary. In England, the Judges would say “Parliament never
intended authority to make such rules. They are unreasonable
and ultra vires”.The present position of law bearing on the
above point is stated by Diplock L. J. in Mixnam. Properties Ltd.
v. Chertsey U.D. C., (1964) 1 QB 214 thus:-
“The various grounds upon which subordinate legislation has
sometimes been said to be void …………..can, I think, today
be properly regarded as being particular applications of the
general rule that subordinate legislation, to be valid, must be
shown to be within the powers conferred by the statute. Thus
the kind of unreasonableness which invalidates a bye-law is
not the antonym of “reasonableness” in the sense of which
that expression is used in the common law, but such
manifest arbitrariness, injustice or partiality that a court
would say : ‘Parliament never intended to give authority to
make such rules; they are unreasonable and ultra vires ……’ If
the courts can declare subordinate legislation to be invalid
for ‘uncertainty,’ as distinct from unenforceable …………thisPage 8 of 16
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must be because Parliament is to be presumed not to have
intended to authorise the subordinate legislative authority to
make changes in the existing law which are
uncertain ……….”
xxxx
“77. In India arbitrariness is not a separate ground since it
will come within the embargo of Article 14 of the
Constitution. In India any enquiry into the vires of delegated
legislation must be confined to the grounds on which plenary
legislation may be questioned, to the ground that it is
contrary to the statute under which it is made, to the ground
that it is contrary to other statutory provisions or that it is so
arbitrary that it could not be said to be in conformity with the
statute or that it offends Article 14 of the Constitution.”
26. With these parameters in mind, we may consider the
petitioner’s ground for challenge. Adverting to the question of
lack of power to frame such rule, we may notice that section 37
of the Central Excise Act, 1944 is the rule making power
contained in the said Act. Sub-section (1) thereof provides that
the Central Government may make rules to carry into effect the
purposes of the Act. Sub-section (2) of section 37 lists the
various purposes for which such rules may provide. It begins
with the expression “in particular and without prejudice to the
generality of the foregoing power, such rules may —“. Relevant
clauses of sub-section (2) of section 37, for our purpose, are the
following :
“(ib) provide for the assessment and collection of duties of
excise, the authorities by whom functions under this Act are
to be discharged, the issue of notices requiring payment, the
manner in which the duties shall be payable, and the
recovery of duty not paid’(ibb) provide for charging or payment of interest in the
differential amount of duty which becomes payable or
refundable upon finalisation of all or any class of provisional
assessments;
xxxx
xxxx
(xiiia) provide for withdrawal of facilities or imposition of
restrictions (including restrictions on utilisation of CENVAT
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credit) on manufacturer or exporter or suspension of
registration of dealer, for dealing with evasion of duty or
misuse of CENVAT credit;”
27. According to Shri Parikh, when clause (xiiia) of sub-
section (2) of section 37 circumscribes the rule making
power in case of evasion of duty, the sub-ordinate legislation
cannot fall back on the general provisions of sub-section (1)
of section 37 and therefore, any power to frame sub-rule (3A)
of rule 8 must be seen to have been by necessary implication
taken away. This contention, however, for various reasons
cannot be accepted. Firstly clause (xiiia) was introduced in
the statute with effect from 8.5.2010. Sub-rule (3A) of rule 8
was introduced in the year 2006. No guidance, therefore, can
be had from clause (xiiia) in the context of discretion of the
power of the rule making authority under the delegated
legislation. Further, quite apart from sub-section (1) of
section 37 itself giving sufficiently wide powers to the
Central Government to frame rules to carry into effect the
purposes of the Act, sub-section (2) of section 37 further
clarifies that the purposes enumerated in various clauses
under the said sub-section are without prejudice to the
generality of the powers flowing from sub-section (1). If,
therefore, any rule is framed which would be otherwise
within the legislative competence in view of the authority
given to the Government under sub-section (1) to carry into
effect the purposes of the Act, such rule cannot be targeted
as being outside of a particular clause contained in sub-
section (2) of section 37. We must notice that rule 8 and sub-
rule (3A) thereof is not a charging provision. It is a
mechanism for collection of tax already become due and
payable. Had any new tax been levied or charge or penalty
created under such rule, the question of falling back on the
general power where specific provisions excluded, such a
power would arise. Further, clause (ib) of sub-section 2 of
section 37 authorizes the Government to frame rules to
provide for the assessment and collection of duties of excise,
the authorities by whom functions under the Act would be
discharged, the issue of notices requiring payment, the
manner in which the duties shall be payable and the recovery
of duty not paid. This clause thus gives ample power to the
Government to make rules for providing a mechanism for
assessment and calculation of duties of excise, the
authorities who would carry out such functions, the manner
of payment of duty and most importantly, recovery of duty
not paid. The fact that sub-rule (3A) of rule 8 provides for the
mechanism of duty unpaid is beyond cavil. It is precisely
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when an assessee who was given the facility of deferring the
payment of duty beyond the clearance has not been able to
pay the same by the due date and further defaults by another
30 days thereafter that sub-rule (3A) of rule 8 would apply. It
enforces the recovery to be made thereafter in a particular
manner. Very clearly, the said provision is not beyond the
rule making power of the sub-ordinate legislature.
28. The second contention of the petitioner that the provision
creates a hostile discrimination treating equals as unequals
needs to be rejected out of hand. Sub-rule (3A) of rule 8
recognizes two distinct and different classes of assessees. As
long as an assessee abides by the time-frame provided in
sub-rule (1) of rule 8 and pays the duty monthly on 5th or 6 th
day of the month for the previous month, he does not incur
any further liability. It is only when he not only misses the
crucial date but is unable to or chooses not to pay
the duty for another 30 days that sub-rule (3A) of rule 8
would apply. In such a case, the facility of monthly payment
and adjustment of cenvat credit is taken away. The fact that
two sets of assessees form different and distinct class
identifiable and differentiated by intelligible differentia
cannot be disputed. In one class, we have those assessees
who complied with the requirements of the rules and made
payment of excise duty by the due date and the other class
forms of those assessees who missed the due date by at least
30 days. If the Legislature, therefore, treats these two
distinct classes differently, this would certainly not a case of
hostile discrimination. An assessee who for whatever reasons
is unable to pay the duty within the time prescribed by the
statute cannot complain of being differently treated from
those who fulfill the statutory requirements. The provisions
contained in sub-rule (3A) have a purpose to achieve
relatable to the class of assessees who failed to pay the duty
in time is also equally clear. It is only when
the condition of payment of duty by the 5th or the 6th day of
month following the previous month of clearance is not
fulfilled by an assessee that the stringent requirement of
collection of duty on each consignment and withdrawal of the
facility of cenvat credit follows. These are undoubtedly
stringent provisions provided to deal with the class of
assessees who are unable to pay the duty in time.
29. This brings us to the last limb of the petitioner’s
contention, 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
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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 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 payment or erroneous refund of the
duty where the same is occasioned by reason 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 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, nature and
type of offences or such other factors as has been relevant.
In 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 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;
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C/TAXAP/709/2015 ORDER DATED: 29/06/2026
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(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 invoice or other documents which a person has reason
to believe as not genuine.”
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 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 financial constraints such as, slowing down of business,
competition in 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 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 therefore
further saddled with the burden of paying such duty in cash
without availing CENVAT credit. This rule thus imposes a
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NEUTRAL CITATION
C/TAXAP/709/2015 ORDER DATED: 29/06/2026
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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 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 product. In the said case, the Supreme
Court was dealing with rule 57F which 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
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 manufacture of further products as inputs
thereto then the tax on those goods gets 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 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
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be arbitrary or of an excessive nature, beyond what is required in
the interests of the public. Legislation 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 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 arises whether a wrong
choice is made by the Administrator for imposing restriction 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, the restriction imposed under sub-
rule (3A) of rule 8 to the extend 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. 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 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
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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 perfectly legitimate measure. However, to insist
that he must pay such 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) 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.”
6. In view of aforesaid dictum of law, we are also of the opinion
that the condition contained in sub-rule (3A) of Rule 8 of the Central
Excise Rules, 2002, the payment of duty without utilizing the
CENVAT Credit till an assessee pays the outstanding amount
including the interest is unconstitutional and, therefore, the portion
“without utilizing the CENVAT Credit” of sub-rule (3A) of Rule 8 of
the Central Excise Rules, 2002 having been held invalid, no question
of law would survive.
7. We, therefore, dismiss this Tax Appeal.
(BHARGAV D. KARIA, J)
(PRANAV TRIVEDI,J)
phalguni
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