Pleasant Amendment in Draconian Rule 8(3A)

Pleasant Amendment in Draconian Rule 8(3A)

An Article By:-
CA PRADEEP JAIN
CA NEETU SUKHWANI

Introduction:-This article is an attempt to analyse the impact of amendment made in the ghostly provision of Rule 8 (3A) that has haunted the minds of number of assessees since its inception. The harsh provisions of the erstwhile Rule 8(3A) had the potential to freeze the cenvat balance of the defaulting assessee so as to compel him to make clearances by paying duty consignment wise. The erstwhile provisions lead to worsening the situation of the assessee in cases where the default in payment of duty was on account of financial crunch because it disabled the assessees to utilise the cenvat credit balance available with them and pay duty in cash on each clearance. The earlier Rule 8(3A) confirmed the well known proverb “out of the frying pan into the fire”, wherein the assessee already suffering from financial crunch was further compelled to pay duty in cash rather than using the cenvat balance. Moreover, the demands issued by invoking the provisions of Rule 8(3A) have been under constant litigation with different interpretations and opinions and at present, the issue is being referred to the larger bench of the Tribunal. As such, amendment in the said Rule has brought new hopes for the assessees trapped by the continuous demands issued against them under Rule 8(3A).

Backdrop of the litigation as regards erstwhile provision of Rule 8(3A):-
The provision of Rule 8(3A) as contained in the Central Excise Rules, 2002 vide Notification no. 13/2006-C.E. (N.T.) dated 01.06.2006 is produced as follows:-
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 utilising the Cenvat Credit till the date the assessee pays the outstanding amount including the 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.
This provision was considered as a tool by the revenue department to recover excise duty in cash on each consignment for each and every default in payment of duty committed by the assessees where delay in payment was beyond the stipulated period of 30 days. The said harsh provisions wherein the cenvat credit balance of the assessee was freezed were invoked even if there was a genuine unintentional mistake in non-payment of duty. Therefore, whenever there was short payment in payment of duty beyond the prescribed period of 30 days, irrespective of the amount, the demands were raised thereby requiring assessees to pay the duty in cash for the cenvat credit utilised by them during the period of default. Not only this, the practice of issuing show cause notices for the subsequent period even after the default was made good by the assessee was being followed by the revenue department on the contention that as the assessee did not pay duty consignment wise during the default period and utilised the cenvat credit which they were not eligible to utilise, they also defaulted in making payment of duty during the defaulted period and so they are liable to pay duty in cash on consignment basis till they have paid duty in cash that is equivalent to the cenvat credit utilized during the defaulting period. Accordingly, the assessee was trapped in the web of Rule 8(3A) as soon as there was non payment of duty beyond the period of 30 days from the due date and it became impossible for the assessee to free himself from the continuous demands being issued against him. As it is not practically possible to pay such huge demands in cash, the assessee left with no option but to litigate the matter till it is decided in their favour.
It is also worth mentioning that the ambiguity as regards applicability of the harsh provisions of Rule 8(3A) in each and every case of non-payment is being a matter of continuous litigation because there are two different set of opinions by the courts. One set of court opines that it is futile exercise to implement the provisions of Rule 8(3A) and demand duty to be paid in cash equivalent to the cenvat credit utilised by the assessee during the defaulting period because even if the assessee pays the duty in cash, they would be eligible for re-credit of the duty already paid by them during the defaulting period and so the entire exercise is revenue neutral. Accordingly, it was concluded by a set of courts that the strict implementation of the provisions of Rule 8(3A) is not at all practically feasible and so the only issue is that assessee may be made liable to pay interest for the wrong utilisation of cenvat credit during the defaulting period. The following cases of CESTAT underlined the aforesaid analogy:-

M/s MEENAKSHI ASSOCIATES VS COMMISSIONER OF CENTRAL EXCISE, NOIDA [2012-TIOL-587-CESTAT-DEL]
M/s BACTOLAC FORMULATIONS PVT LTD VS CCE, HYDERABAD [2012-TIOL-970-CESTAT-BANG]
ALLIANZ STEEL LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, INDORE [2012 (286) E.L.T. 633 (Tri. - Del.)]
BABA VISWAKARMA ENGG. CO. (P) LTD. VS COMMR. OF C. EX., GHAZIABAD, [2012 (278) E.L.T. 68 (Tri. - Del.]
SOLAR CHEMFERTS PVT. LTD. VS COMMISSIONER OF CENTRAL EXCISE, THANE-I, [2012 (276) E.L.T. 273 (Tri. – Mumbai)]

Moreover, as it was stated in the Rule 8(3A) that “the consequences and penalties as provided in these rules shall follow”, it was common by the revenue department that harsh penal provisions under Rule 25 read with section 11AC were being invoked against the assessees. However, it was concluded by Gujarat High Court in the case of COMMISSIONER OF C. EX. & CUSTOMS VS SAURASHTRA CEMENT LTD. [2010 (260) E.L.T. 71 (Guj.)] and maintained by the Apex Court as 2013 (292) E.L.T. A98 (S.C.) that for defaults under Rule 8(3A), the only penalty that can be imposed on the assessee is under Rule 27 upto a maximum of Rs. 5000/-. This in itself indicated that one set of courts took a lenient approach while implementing the harsh provisions of Rule 8(3A) and opined that the said provisions are not to be implemented strictly so as to harass assessees.
On the other hand, there was another set of courts that opined that the provisions of the statue are to be implemented strictly and unconditionally even if it amounts to revenue neutral situation. It was held by another set of courts that when the provisions required the assessee to pay duty in cash during the defaulting period, the assessee was required to pay the same in cash irrespective of the fact that they were eligible to avail the re-credit of the duty paid by them during the defaulting period by utilising the cenvat credit.
Amidst the prevalent controversy as regards strict implementation of the provisions of Rule 8(3A), there also included a group of harassed assessees wherein demands were raised against them even for the period subsequent to the period when the default was made good by the assessee. If we carefully read the provision of the erstwhile Rule 8(3A), we find that it is stated that “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 utilising the Cenvat Credit till the date the assessee pays the outstanding amount including the interest thereon.The above Rule clearly states that once the provisions of Rule 8(3A) have been invoked, they were prevalent till the date the assessee pays the outstanding amount along with interest thereby meaning that if say there was default in payment of duty for the month of April, 2014 of an amount of Rs. 10,000/- beyond 05.06.2014, the assessee would be liable to pay duty in cash on consignment basis from 05.06.2014 till the amount of Rs. 10,000/- is paid in cash along with interest. However, the revenue department has interpreted the “outstanding amount” as also including the wrong utilisation of credit during the default period wherein the assessee was required to make duty payment in cash for each clearance. Accordingly, it has been interpreted by the revenue in certain cases that since the assessee failed to discharge duty liability in cash even during the defaulting period, the provisions of Rule 8(3A) would be effective till the entire credit utilisation is paid in cash by the assessee along with interest. We can imagine the level of ruthless application of the provision of Rule 8(3A) by the revenue department whereby the revenue department proposes to freeze the cenvat credit balance of the defaulting assessee for indefinite period of time because it is practically not possible to deposit huge duty demand running into crores of rupees in cash by the assessee pertaining to credit utilisation during the defaulting period. As such, the adverseness of the provision can be anticipated by the interpretation taken by the revenue department.
The fact of ambiguity and conflicting views on the strict implementation of Rule 8(3A) is reflected by the following decisions wherein the matter has been referred to the larger bench/third member for reaching concrete conclusion:-

BAKEWELL AGRO LTD FEROZ MALIK Vs COMMISSIONER OF CENTERL EXCISE & SERVICE TAX, MEERUT I[2014-TIOL-138-CESTAT-DEL]
M/s SNE INDIA PVT LTD Vs COMMISSIONER OF CENTRAL EXICSE, DELHI-II [2014-TIOL-272-CESTAT-DEL]

Not only this, representations have also been made by assessees to the Commissioner for resolving the issues but till date no appropriate guideline has been issued.
Notification no. 19/2014-CE (N.T.) dated 11.07.2014- The other side of a coin
With apparent objective to resolve all the controversies in the past pertaining to Rule 8(3A), the amended notification no. 19/2014-C.E. (N.T.) dated 11.07.2014 comes with new hopes to defeat sheer harassment to the assessee. The substituted Rule 8(3A) reads as follows:-
“(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.”
This Rule appears to end the controversies created by the erstwhile Rule as regards credit utilisation and seeks to provide a straight away method of paying “one per cent” as penalty for the amount of duty not paid which was declared as payable in the return. Therefore, the new Rule 8(3A) cannot be invoked for the defaults in non-payment of duty within a period of one month with respect to amounts not declared as payable in the return. Hence, one relief that has been provided to the assessees is that the penalty as provided in Rule 8(3A) is not required to be paid if the amount of duty that was not paid was not declared or reflected in the return. Hence, the assessee cannot be penalised for delay in payment of duty for mistakes like invoices not accounted for on which there was duty liability and the same is also not reflected in the return. As such, this rule seeks to provide indirect benefit to the assessee.
It is also worth observing that unintentionally, this Rule 8(3A) also creates a new ambiguity as regards the grace period of 30 days allowed to the assessee so as to save themselves from invocation of the provision of Rule 8(3A). In the notification no. 19/2014-CE (N.T.) dated 11.07.2014, there is an explanation also which reads as follows:-
“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 .”
It is submitted that in the earlier Rule 8(3A), the provisions were attracted if there was default in payment of duty beyond thirty days from the due date while in the amended Rule, the penal provisions under Rule 8(3A) are attracted if the assessee fails to pay duty as declared in the return within a period of one month from the due date. The above explanation clarifies that one month is the period between two consecutive due dates for payment of duty specified under Rule 8 (1) or the first proviso therein. It is worth observing that such a slight amendment seeks to provide unnecessary ambiguity as regards the grace period of 30 days given to assessee so as to prevent invocation of the Rule 8(3A). To better understand the same, an example is stated as follows:-
If we take month of March, the assessee could at the most pay the duty reflected in the return upto 05.05.2014 along with interest so as to save himself from the penal provisions under this rule. (One month would be counted from 31.03.2014 to due date of next month, i.e., 05.05.2014). However, if the earlier Rule 8(3A) only provided grace period of 30 days i.e., upto 30.04.2014. Accordingly, in the amended provisions, the assessee is being unintentionally getting extra 5 days in the grace period for making payment of duty reflected in the return. However, if we observe the month of January, 2014, the assessee is getting less time of grace period as compared to the earlier Rule 8(3A).
Thus, although, apparently it appears that the amended Rule 8(3A) seeks to simplify the provisions but on the contrary, it creates ambiguity as regards settled position of grace period of 30 days allowed to the assessee so as to prohibit invocation of Rule 8(3A).
Before Parting:-
It is submitted that the kind of dispute being created by the revenue department by interpreting the amended Rule 8(3A) would be known in the time to come. However, at the same time we should also observe that the naming the payment of “one per cent” as penalty is surely going to be a great controversy because is it possible for an assessee to deposit penalty suo motto without being adjudged by way of issuing of a show cause notice because we cannot expect an assessee to adjudicate its penalty liability himself. Moreover, the provision also states that penalty is leviable for one per cent for “each month or part thereof” thereby meaning that penalty for the whole month would be leviable even if the default is for a period of one month and one day. One may also question that when penal provisions are contained in the Central Excise Rules, 2002 from Rule 25 onwards, then what is the reason for inserting specific penal provision under Rule 8 (3A)? Well, lets keep our fingers crossed and hope that the amended Rule 8(3A) serves the purpose of reducing the litigation rather than adding fire to the already existing controversies on the issue.

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Pleasant Amendment in Draconian Rule 8(3A)

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