Condition Restricting Use Of CENVAT Credit For Duty Payment During Default Period Is Unconstitutional: Gujarat High Court

"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." Gujarat High Court, in a significant ruling, has reaffirmed that the portion of Rule 8(3A) of the Central Excise Rules, 2002, which prohibits an assessee from utilizing CENVAT credit for duty payment during a period of default, is unconstitutional.

A bench of Justice Bhargav D. Karia and Justice Pranav Trivedi observed that such a restriction is irrational, arbitrary, and violative of the fundamental right to carry on trade or business under Article 19(1)(g) of the Constitution of India.

The Revenue filed this Tax Appeal under Section 35G of the Central Excise Act, 1944, challenging an order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad. The CESTAT had ruled in favor of the assessee, Essar Heavy Engineering Services, by relying on the High Court’s earlier landmark decision in Indsur Global Ltd. v. Union of India. The matter had been kept pending for admission while the Revenue's challenge to the Indsur Global decision was pending before the Supreme Court.

The primary question before the court was whether the condition in Rule 8(3A) of the Central Excise Rules, 2002, which mandates the payment of excise duty without utilizing CENVAT credit during a default period, is constitutionally valid. The court also examined whether such a restriction constitutes an unreasonable hardship that impedes an assessee’s right to carry on business under Article 19(1)(g) and offends Article 14 of the Constitution.

Understanding The Scheme Of Deferred Payment Under Central Excise Rules

The court began by analyzing the statutory framework of Rule 4 and Rule 8 of the Central Excise Rules, 2002. It noted that while Rule 4 requires duty to be paid on removal, Rule 8(1) provides a facility for deferred payment, allowing an assessee to pay duty monthly. Under Rule 8(2), duty is deemed paid if the assessee follows this monthly schedule, entitling them to utilize CENVAT credit.

However, Rule 8(3A) introduced a stringent consequence for defaults exceeding thirty days. In such cases, the assessee was required to pay duty for each consignment at the time of removal without utilizing CENVAT credit. The court noted that this "spot payment" requirement in cash effectively withdrew the facility of using accumulated credit until all outstanding dues were cleared.

Restriction On CENVAT Credit Leads To A Cyclical Vicious Pattern

The bench emphasized the extreme hardship caused by this rule, particularly for manufacturers facing financial crunches or economic slowness. It observed that CENVAT credit is a right that accrues to a manufacturer upon the purchase of duty-paid inputs. By preventing the use of this credit, the rule forces an assessee to raise additional cash for duty payments precisely when they are struggling with liquidity.

"It can be appreciated that where a manufacturer falls behind the payment schedule on account of financial constraints... he would be 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."

Absence Of Distinction Between Willful And Bona Fide Defaulters

The court highlighted a critical flaw in Rule 8(3A): it fails to distinguish between a "willful defaulter" and an assessee who defaults due to genuine economic difficulties. While the Revenue argued that the rule was a recovery mechanism, the court found that by withdrawing the CENVAT facility, the delegated legislature had created a penalty that was out of proportion to the objective of tax collection.

Rule 8(3A) Declared Arbitrary And Violative Of Article 14

The bench held that the restriction is irrational because it prevents an assessee from availing credit of duty already paid by them to the government on inputs. This, the court found, is a serious affront to the right to carry on trade. The court noted that the government had itself recognized this severity by subsequently substituting Rule 8(3A) in 2014 with a simpler penalty of one percent per month on the unpaid amount.

"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... can be stated to be a reasonable restriction."

CENVAT Credit Is A Vested Right Accrued On Inputs

Relying on Supreme Court precedents like Eicher Motors Ltd. and Dai Ichi Karkaria Ltd., the High Court reiterated that a right to credit accrues the moment inputs are received in the factory. Suspending this right as a consequence of default in paying duty on final products was deemed unconstitutional. The court concluded that since the specific portion of the rule had already been struck down in Indsur Global Ltd., no substantial question of law remained for consideration.

The High Court dismissed the Revenue's appeal, confirming the CESTAT's order and upholding the invalidity of the restrictive portion of Rule 8(3A).

Date of Decision: 29 June 2026