Proceedings under rule declared unconstitutional by HC in invalid

Brief of the case:

The CESTAT Mumbai in the case of Vipul-S Plasticrafts P. Ltd. vs. Commissioner of Central Excise held that when the rule under which duty is sought to be demanded itself has been struck down as unconstitutional by various High Courts, the show-cause notice which are based upon rule 8(3A) cannot survive and are liable to be set aside.

Facts of the case:

♣ The assessee is engaged in manufacturing of plastic and automobile parts falling under Chapter heading 87 in first schedule of Central Excise Tariff Act, 1985 and they are availing Cenvat Credit on inputs/capital goods and input services and paying Central Excise duty on finished goods.

♣  During the period Nov.2007 to Feb.2008 the assessee cleared excisable goods for which duty liability should have been cleared on 5th of Dec.2007 to March 2008. But due to financial crisis it could pay only part of the duty liability from Cenvat account. The balance amount payable through account current remained unpaid mainly due to heavy financial crunch and recession in the market and non-receipt of payment from customers.

♣  This short payment of duty was reflected in monthly returns filed with the department. A show cause notice was issued dated asking the assessee to show-cause why duty of Rs. 20,45,371/- paid on 05.02.2008 be not appropriated against the duty defaulted for the month of October 2007 and also the duty amounting to Rs. 46,43,509/- paid by assessee on various dates be not adjusted against the clearances for the period Dec. 2007 to March 2008 and also demanding the interest and penalty. Such appropriation would result in restricting assessee to pay duty through cenvat credit as it defaulted payment of duty.

♣  Commissioner also upheld the order of lower authority. Aggrieved assessee is in appeal before the tribunal.

Contention of the Assessee:

♣ The learned counsel for the assessee submitted that the provisions of Rule 8(3A) of the Central Excise Rules, 2002 which require payment of duty only through account current and prohibits payment of duty through Cenvat account have been struck down as unconstitutional by the Hon’ble High Court of Gujarat, Madras and Punjab & Haryana by the following judgments:

a) Indsur Global Ltd. -2014 (310) ELT 833 (Guj)

b) Shreeji Surface Coatings P. Ltd. 2015 (320) ELT 764

c) Malladi Drugs & Pharmaceuticals P. Ltd. 2015 (323) ELT 489 (Mad)

♣ When the rule under which duty is sought to be demanded itself has been struck down as unconstitutional by various High Courts, the show-cause notice, Order-in-Original and Order-in-Appeal which are based upon rule 8(3A) cannot survive and are liable to be set aside.

Held by the CESTAT Mumbai:

♣  CESTAT observed that the show-cause notice, Order-in-Original and Order-in-Appeal are based on the violation of Rule 8(3A) of the Central Excise Rules, 2002 which require the payment of duty only through account current in case of violation of payment of duty in time as prescribed in Rule 8.

♣  However, the said rule 8(3A) has been struck down by Hon’ble High Court of Gujarat, Madras and Punjab & Haryana. Since the rule under which the entire proceedings have been initiated have been declared unconstitutional, no liability arises under the said Rules.

♣  Therefore, the order of commissioner was set aside and assessee’s appeal was allowed.