By TIOL News Service

AHMEDABAD, DECEMBER 03, 2014 : VIDE notification 13/2006-CE(NT), dated 01.06.2006, sub-rule (3A) in rule 8 of the CER, 2002 was substituted with the following –

“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.”

The aforesaid sub-rule caused much anguish amongst the assessees so much so that the Board had to come out with an undated letter F. No.201/08/2013-CX-6 [See DDT 2191] where it was mentioned -

Trade has represented that the provisions of Rule 8(3A) needs to be reviewed as the rule does not make a distinction between cases of bonafide mistake which can lead to default in payment of duty and cases of willful default.

2. Examination of the issue shows that tribunal has in judgments such as Meenakshi Associates [para 15 and 16 in 2012-TIOL-587-CESTAT], Baba Viswakarma Engg Co [para 11, 12 and 13 in - 2011-TIOL-2010-CESTAT-DEL] and Bactolac Formulations [para 5 of 2012-TIOL-970-CESTAT] has allowed credit to be used even during the period of default .

3. Further, the enforcement of this rule for imposing penalty under rule 25 needs adjudication proceedings to be undertaken. In view of the above need for amending the rule is being examined. In this regard input from the field is needed on the following issues -

(i) Whether non-compliance of Rule 8(1) has become lesser by introduction of Rule 8(3A)?

(ii) Whether the rule is being enforced in all cases of default?

(ii) Whether goods cleared during the period of default are being seized as they are liable for confiscation?

(iii) In view of the judicial pronouncements listed at para 2, is the rule continuing to serve its purpose of timely and complete payment of duty?

(iv) Whether a rule of imposing automatic and mandatory penalty at the rate of 1% per month on the defaulted amount would better serve the purpose as it would reduce the grace period of 30 days given in the present rule, would do away with adjudication proceedings needed to impose penalty at present,

(v) Any other suggestion.

Apparently, the proposal mentioned at serial no. (iv) referred to above got the go ahead and, therefore, the said sub-rule (3A) again got substituted with a new sub-rule reflecting the sentiments of the Trade with effect from 11.07.2014 [Notfn. 19/2014-CE(NT) refers].

This is what the substituted rule reads -

"(3A) If the assessee fails to pay the duty declared as payable by him in the return within a period of one month from 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.

Explanation- For the purposes of this sub-rule, "month" means the period between two consecutive due dates for payment of duty specified under sub-rule (1) or the first proviso to sub-rule (1), as the case may be."

Be that as it may, in the present case,the sub-rule under discussion is the one which appeared on the scene on 01.06.2006.

Incidentally, the above amendment has been taken note of by the High Court in para 35 of its judgment in the following words - 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.

On to the case -

Brief facts:

+ For the months of August 2007 to November 2007, the assessee did not pay duty by the last date permitted under the said rule. Under such circumstances, by virtue of rule8(3A) of the CER, 2002, the assessee was required to clear the future consignments upon actual payment of duty in cash without utilizing CENVAT credit till the outstanding duty with interest was fully cleared.

+ The assessee cleared all their dues with interest by December 2008. However, during this period, the assessee did utilize the CENVAT credit for payment of excise duty.

+ For the defaults in the payment of duty by the due date and utilization of CENVAT credit for payment of duty thereafter, though prohibited under rule 8(3A) of the Central Excise Rules 2002, the jurisdictional authorities issued SCNs to the assessee.

+ These SCNs culminated into an order dated 27.2.2009 passed by the Additional Commissioner of Central Excise, Vadodara. He held that the assessee had defaulted in payment of central excise duty on the goods cleared and had not made the payments in the manner prescribed under rule 8(1) read with rule8(3A) of the CER, 2002. He also held that the duty paid by the petitioner from the CENVAT credit was not in terms of rule8(3A) of the CER, 2002.

+ The assessee preferred an appeal to the Commissioner (Appeals) who dismissed the appeal by his order dated 23.11.2009 on the ground that the appeal was filed 173 days beyond the period of limitation prescribed; that as per the statute, the appellate authority had power to condone the delay upto 60 days and no more and thus the extent of delay was beyond the Commissioner's power to condone.

+ The Tribunal by its order dated 11.4.2013 dismissed the appeal refusing to condone the delay of 3 years and 7 days caused in preferring such appeal before the Tribunal. The Tribunal also noted that the appeal before the Commissioner itself was beyond the period of limitation by 173 days which period the Commissioner in terms of section 35(1) of the CEA, 1944 could not have condoned and, had, therefore, rightly not entertained such appeal.

+ The assessee petitioner there upon filed Special Civil Application before the High Court challenging the order passed by the adjudicating authority. Such petition was withdrawn on 20th November 2013, stating that the petitioner wanted to challenge the vires of rule 8(3A) of the CER, 2002.

Before the High Court:

The grounds taken by the Petitioner–

(1) The rule making authority did not have the power to frame such rules.

(2) The rule is discriminatory and makes an artificial distinction amongst the class of assessees, one who is permitted to avail CENVAT credit for payment of excise duty and another who is denied such facility.

(3) The rule is wholly arbitrary and unreasonable. An assessee who for genuine financial constraints is unable to pay even a part of the excise duty by the due date is required to clear all future consignments not only on payment of excise duty but without availing CENVAT credit. This restriction is unreasonable and arbitrary. The CENVAT credit flows from excise duty already suffered by an assessee. Merely because there has been some delay in payment of full excise duty by the due date, imposing such restriction on future clearances without availing CENVAT credit is so harsh as to cripple the manufacturing unit for all times to come.

(4) The rule (3A) does not distinguish between a willful defaulter and an assessee who on account of genuine financial hardship is unable to pay full excise duty. Even in such a situation, to withdraw the facility of paying excise duty through CENVAT credit is an unreasonable restriction which would fall foul of not only Article 14 of the Constitution but also would seriously hamper the petitioner's right to carry on trade or business under Article 19(1)(g) of the Constitution.

A long narrative of submissions coupled with a mixture of case laws occupied the proceedings. The Revenue side too was equally adept in placing its Arguments.

Observations of High Court:

After considering the submissions aplenty, the High Court observed -

++ Clause (ib) of sub-section 2 of section 37 of CEA, 1944 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 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 there after in a particular manner. Very clearly, the said provision is not beyond the rule making power of the sub-ordinate legislature.

++ The second contention of the petitioner that the provision creates a hostile discrimination treating equals as un-equals needs to be rejected out of hand. Sub-rule (3A) of rule 8 recognizes two distinct and different classes of assessees. 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. 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.

Whether condition attached by sub-rule (3A) of rule 8 is unreasonable and, therefore, violative of Article 14 of the Constitution?

+ 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.

+ 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 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 wholly unreasonable restriction which is not commensurate with the wrong sought to beremedied.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 withdraw, his right to take credit of the duty already paid to the Government. It is true that such a provision is made be cause 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.

+ 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 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. [Chintamanrao AIR 1951 SC 118]

+ 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. 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.

+ 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 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.

Held: 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.

Further prayer by petitioner:

The petitioner has prayed for setting aside the order dated 27.2.2009 passed by the adjudicating authority.

The High Court held that the same cannot be granted because –

+ Against the order of the adjudicating authority, the appeal was preferred after 173 days on expiry of the limitation and the Commissioner (A), therefore, could not have condoned the delay.

+ Against such order of the Commissioner, the petitioner approached the Tribunal with further delay of three years; the Tribunal was not convinced about the grounds of delay and was also of the opinion that in any case,the Commissioner's order being legal, even if the delay was condoned, no relief could be granted to the petitioner.

+ If now we grant the relief as prayed for by the petitioner, we would be rendering the entire mechanism of appeal to the Commissioner and the further appeal to the Tribunal nugatory. Such statutory prescription cannot be rendered meaningless by entertaining the petitioner's challenge directly now before the High Court once when the petitioner failed in his attempt before the Commissioner and thereafter also before the Tribunal.

The petitioner's second prayer, therefore, is rejected.

The High Court added - This would, however, not have any effect on our declaration of invalidity of portion of sub-rule (3A)of rule 8 insofar as the petitioner's remaining pending proceedings at various stages are concerned.

The petition was disposed of accordingly.

At the request of the counsel for the department, the judgment was stayed till 15th January 2015.

(See 2014-TIOL-2115-HC-AHM-CX)