Rule 8(3A) of CER, 2002 fades into oblivion
YESTERDAY we reported the Gujarat High Court decision in Indsur Global Ltd. holding that the portion "without utilizing the CENVAT credit" of sub-rule (3A) of rule 8 of the Central Excise Rules, 2002, [as it existed prior to its substitution from 11.07.2014] shall be rendered invalid.
The reasoning given by the High Court is as culled below:
+ 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.
+ If such facility is withdrawn his ability to continue the business under such adverse financial climate would further diminish.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 be remedied. 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.
+ 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.
+ 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.
+ 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.
Incidentally, the CESTAT in the cases of 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-BANG) had allowed CENVAT credit to be used even during the period of default thus putting to naught the restriction sought to be imposed by rule 8(3A) of CER, 2002.
Nonetheless, the erstwhile sub-rule (3A) to rule 8 would be remembered (next only to rule 6 of CCR, 2004) for its ability to generate a mountain of litigation during its lifetime and one would have wished for such a decision to have come earlier.