Whether subsequent show cause notices invoking Rule 8(3A) sustainable if the default made good in cash along with interest?

Case:- SHARP INDUSTRIES LTD. V/S COMMISSIONER OF CENTRAL EXCISE, THANE-II

Citation:- 2014 (304) E.L.T. 689 (Tri. – Mumbai)

Brief Facts:- The appellant are the manufacturers of printed and laminated plastic films which attracts Central Excise duty. The appellants are paying Central Excise duty and also availing credit of duty paid on inputs under Cenvat Credit Rules, 2004. During the month of October, 2010 they cleared excisable goods, on which, as per self-assessment made by them, duty of Rs.1,51,21,904/- was payable by them. As per Rule 8(1) of the Central Excise Rules, 2002 the said duty was required to be paid by 5-11-2010. The appellants adjusted Rs. 1,43,29,033/- from the credit account relating to inputs/input services/capital goods. The balance duty amounting to Rs. 7,92,871/- was required to be paid by them in cash through account current. In the monthly return filed by them, they have shown the said amount of Rs. 7,92,871/- as paid in cash through account current, even though no such amount was paid by them. On 25-11-2010, they adjusted the said amount from credit of inputs, etc., in contravention of first proviso to sub-rule (4) of rule 3 of Cenvat Credit Rules, 2004. As per rule 8 of Central Excise Rules, 2002, the appellant are also permitted to make the said payment within 30 days along with interest. However, the appellant failed to deposit the said amount in cash required under the Rules. The said amount was finally paid by them in cash vide GAR-7 challan on 4-6-2011 and interest on the said defaulted amount was paid on 5-7-2011. The department, during the scrutiny of the return for the month of October and November, 2010, detected the above mentioned irregularity and informed the appellant vide letter dated 31-1-2011 and also vide letter dated 15-2-2011.

As per the provisions of sub-rule (3A) of Rule 8 of Central Excise Rules,2002, introduced vide notification No. 13/2006-C.E. (N.T.), dated 1-6-2006, if the assessee defaults in payment of duty beyond 30 days from due date, 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. During the intervening period i.e. from 6-12-2010 to 4-7-2011, the appellants did not clear the consignment by paying the excise duty for each consignment at the time of removal without utilizing cenvat credit as stipulated in Rule 8(3A) of the central excise rules. The appellant, instead, continued to clear the goods without paying consignment wise duty. They continued paying duty on monthly basis. Moreover, they continued to utilize the cenvat credit of duty for such payments. Since the said act was in contravention of Rule 8(3A) of the Central Excise Rules, 2002 a show cause notice dt. 30-11-2011 was issued to them demanding duty of Rs. 8,00,09,346/- which was equivalent to the amount of cenvat credit utilized for clearance of goods during the period 6-12-2010 to 4-7-2011.

Another show cause notice dt. 23-7-2012 was issued to them demanding duty of Rs. 13,12,25,602/- in respect of the goods cleared during 5-7-2011 to 31-3-2012. The demand was made equivalents to the cenvat credit utilized by the appellant during the said period. The said demand was made on the grounds that the appellant have defaulted in payments of Rs. 8,00,09,346/- ( covered by the first show cause notice) through cash and therefore the provisions of Rule 8(3A) of Central Excise Rules continues to operate for the subsequent period viz. 5-7-2011 onwards.

Appellant’s Contention:- The contention of the appellant are as under :-

i. The appellant have paid an amount of RS. 7,92,871/- on 25-11-2010and therefore there was no defaults in making the payments;

ii. Even if it is presumed that there was a default, the same has been paid on 5-7-2011;

iii. during the period from 6-12-2010 to 4-6-2011, as per Rule 8(3A), they were required to pay the duty consignment-wise without utilizing the cenvat credit. Since they were required to pay the duty consignment-wise there is no question of defaults of duty for the month of December, 2010 to June, 2011;

iv. Rule 8(3A) itself stipulates that the duty is to be paid for each consignment at the time of removal without utilizing Cenvat credit and in the event of any failure it shall be deemed that such goods have been cleared without payment of duty. Since they have not paid the duty at the time of clearance of each consignment and they have utilize the cenvat credit, all their clearance during the period are deemed to have been cleared without payment of duty. In view of this position, the dutiability during the period 6-12-2010 to 4-7-2011 cannot be considered as “defaults” in payment of duty but it has to be considered as “arrears” in payment of duty for the goods cleared without payment of duty. Thus the amount during this period has to be considered as “arrears of duty”. On 5-7-2011 when they paid the defaulted amount along with interest, the credit earned during the earlier period is available to them for utilization. As per board’s circular no. 962/05/2012-CX.8, dt.28-3-2012, arrears of duty can be from the cenvat credit account. Thus the payment made during the period 6-12-2010 to 5-6-2011 in respect of the clearances made during the said period gets regularized . revenue can, at the most, ask for the interest form the date of clearance to 5-6-2011. In support of the said contention, the ld. Counsel quoted the following case laws:-

1. CC &CE, Indore v/s Deepak silicate (P) ltd. 2010 (258) E.L.T. 127 (Tri. – Del.)
2. Meenakshi Associates v/s CCE, Noida-2012-TIOL-587-CESTAT-DEL;
3. Solar Chemferts Pvt. Ltd. v/s CCE, Thane-I-2012(276) E.L.T. 273 (Tri.- Mumbai);
4. F.S. Engineers v/s CCE, Ahmedabad-II -2013 (293) E.L.T. 61 (Tri.- Ahmd.)
5. Baba Viswakarma Engg. Co. Ltd. v/s CCE, Ghaziabad-2012(278) E.L.T. 68 (Tri.- Bang.)

v. as far as the show cause notice dt. 23-7-2012 is concerned ,The ld. Counsel’s contention was that during this period there was no amount outstanding due to defaults in monthly payment. Therefore, this show cause notice is not at all sustainable. What was payable on 5-7-2011 can, at the most, be considered as arrears of revenue and Rule 8(3A) is not applicable in respect of arrears of revenue.

vi. with reference to imposition of redemption fine, it was stated that in view of the larger bench decision in the case of Shiv Kripa Ispat Pvt. Ltd. v/s CCE &C Nashik -009 (235) E.L.T. 623 (Tri.- LB), since no goods have been seized or confiscated no redemption fine is imposable.

vii. as far penalty is concerned, the contention was that the Hon’ble Gujrat High Court in the case of CCE& C v/s Saurashtra Cement ltd. -2010 (260) E.L.T. 71 (Guj.), has held that no penalty can be imposed under Rule 25 is required to be set aside.

Respondent’s Contention:- ld. Commissioner (A.R.) on the other hand opposed the contention of the appellant. Ld. A.R. argued that earlier under the central Excise rules, duty was required to be paid before removal of the goods. Rules were liberalized and a scheme of fortnightly was introduced which was later on made monthly payment of excise duty. As there were large no. of instances where various manufacturers defaulted in payment of duty, rules were amended to check the situation. Rules have undergone no. of changes and Rule 8 (3A) is the rule as of now. The ld. A.R. argued that a plain reading of the sub-rule would indicate that if an assessee defaults in making the monthly payment including further payment of 30 days during which he can pay the defaulted payment along with interest, the manufacturer assessee is required to clear each consignment on payment of duty and also without utilizing the cenvat credit. In the present case, the admitted position is there was default in payment of duty. Not only there was a default but the ER-1 return for the month of October gave the impression that the said amount was paid through account current even though such amount was never deposited in the bank. Under the rules, cenvat credit as available on the last day of the particular month can only be utilized for payment of duty liability of that month. As is clear from the monthly return filed by the appellant, they did not have the balance so as to make the payment of defaulted amount. The department noticed the discrepancies and took up with them in January, 2011 itself and further replied to their letter dated 7-2-2011 on 15-2-2011. In spite of these communication and persuasions, appellant continues to default and it is only on 5-7-2011 that they made good for the default. In the intervening period they continue to clear the goods without making Payment for each consignment and also utilizing the cenvat credit in violation of Rule 8(3A) of the Central Excise Rules,2002. The ld AR further stated that the issues has been settled by the judgment of Hon’ble Madras high Court in the case of Unirols Airtex v/s Assistant commissioner of Central Excise, Coimbatore 2003(296) E.L.T. 449 (Mad.). in view of the said decision, the earlier judgment of the tribunal quoted by the ld. Counsel are no longer good laws. The judgment of the Hon’ble Madras High Court is binding on the tribunal. The ld. AR also stated that similar view is taken by Hon’ble Karnataka High Court thought at the stay stage in the case of the M/s. Manjunatha Ind. v/s CCE, Bangalore -2013-TIOL-285 HC-KAR-CX. Ld. DR also further stated that since the appellant have not cleared the goods consignment-wise even during the period Dec.2010 to June, 2011, these clearance have been made without payment of duty and this is nothing but default in payment of duty and therefore, second show cause notice has been correctly issued. The penalty and fine has been correctly imposed.

Reasoning of Judgment:- After considering the rival submission and going through various case laws including that of Hon’ble Madras High Court and Hon'ble Karnataka High Court as also various decisions of the Tribunal, the admitted fact is that there was default in payment of duty pertaining to the month of October, 2010. First contention of the appellants is that they have made good default by debiting in Cenvat Credit account on 25^th Nov. 2010. This contention of the appellants is rejected in view of first proviso to Rule 3(4) of the Cenvat Credit Rules, 2004. The said proviso reads as-

"Provided that while paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be".

Admittedly, they did not have balance in Cenvat Credit account as on 31^st Oct. 2010 to pay the defaulted amount of Rs.7,92,871/-. In view of this provision, we reject this contention of the appellants. The default period is from 6.12.2010 to 4.7.2011. Rule 8(3A) of the Central Excise Rules very specifically provides that the assessee shall pay excise duty for each consignment at the time of removal without utilizing Cenvat credit till the date the assessee pays the outstanding amount, interest thereof and penalty. The said sub-Rule reads as under:-

(3A) "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."

It is admitted position that the appellants have not paid excise duty for each consignment and without utilizing the Cenvat Credit. The main contention of the appellants is that after 5.7.2011 (i.e. when they had paid the defaulted amount along with the interest), they are eligible to utilize the cenvat credit accumulated during the intervening period. Ld. Counsel further argued that as per Rule 8(3A), the consignments which have been cleared by them utilizing Cenvat credit during default period are deemed to be cleared without payment of duty, the duty amount for this period is required to be recovered as arrears of revenue and they can utilize the accumulated cenvat credit for payment of such arrears. Ld. Counsel also quoted Board's Circular No. 960/05/2012-CX.8 dated 28.3.2012 in support of his contention. We find force in the first part of this contention that after 5.7.2011 when they paid the defaulted duty along with interest, they are eligible to utilize the accumulated Cenvat credit. We also find force in the appellant's contention that since the clearances made by them during the periods 6.12.2010 to 4.7.2011 were on consignment basis, there is no stipulation of making monthly payment of duty as envisaged under Rule 8(1) of the Central Excise Rules. As the goods cleared during 6.12.2010 to 4.7.2011 are deemed to be cleared without payment of duty, the duty amount will be required to be recovered as arrears of revenue. The question is whether accumulated credit can be used for payment of duty during this period which is otherwise prohibited in view of Rule 8(3A). We note that the Hon'ble High Court of Madras in the case ofUnirols Airtex (supra) has observed as under:-

"Factual Analysis :

The petitioner committed default in payment of excise duty. The worksheet produced by the petitioner indicates that the duty was paid belatedly. The petitioner appears to have paid interest on the delayed payment. The worksheet also indicates that the petitioner used Cenvat credit for payment of duty amount.

The moot question is whether the petitioner was correct in making use of the Cenvat credit for the purpose of discharging the duty liability.

The Central Excise Rules, more precisely, Rules 8 deals with the manner of payment of excise duty. Rule 8(3A) reads thus :

"Rule 8, Manner of Payment . - (1) The duty on the goods removed from the factory or the warehouse during a month shall be paid by the 6th day of the following month, if the duty is paid electronically through internet banking and by the 5th day of the following month, in any other case :

Provided that in case of goods removed during the month of March, the duty shall be paid by the 31st day of March:
……….
(3A) 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.

(4) The provisions of Section 11 of the Act shall be applicable for recovery of the duty as assessed under rule 6 and the interest under sub-rule (3) in the same manner as they are applicable for recovery of any duty or other sums payable to the Central Government.

Explanation - For the purposes of this rule, the expressions 'duty' or 'duty of excise' shall also include the amount payable in terms of the Cenvat Credit Rules, 2004.]"

The petitioner paid the duty amount partly by utilising Cenvat credit. The petitioner is now placing reliance on the explanation appended to sub-rule (3A) to Rule 8 in support of the contention that payment made by utilising Cenvat credit is a valid payment and the same also should be recognised for the purpose of computing the total amount paid towards excise duty. The petitioner placed reliance on the judgment of this Court dated 29 October, 2011 in W.P. No. 19909 of 2011 in support of the contention that this Court has already arrived at a finding that the payment made by utilizing Cenvat credit should be recognised as a mode of payment of duty.

It is true that this Court in Techno Rubber and Plastics was pleased to refer Rule 8(3A) and the explanation appended thereto. The learned Judge found that the Settlement Commission failed to consider the effect of the explanation appended to Rule 8(3A) and therefore, directed the authority to consider the matter afresh. The said judgment is not an authority for the proposition that the excise duty can be paid beyond the statutory period by utilising Cenvat credit. There was no positive finding in the said order. The learned Judge directed the Settlement Commission to consider the effect of explanation appended to Rule 8(3A) of the Central Excise Rules, 2002 and to pass orders accordingly.

Rule 8(3A) categorically states that the assessee shall pay excise duty for each consignment at the time of removal, without utilising the Cenvat credit till the assessee pays the outstanding amount including interest thereon. The consequence for non-payment of excise duty is also indicated in the very same section as it provided that in case of failure to pay the amount, it shall be deemed that such goods have been cleared without payment of duty and the consequence of penalties as provided in the rules would follow. Rule 8(3A) does not permit the assessee to pay the excise duty by using the Cenvat credit. The provision restrained the assessee from using Cenvat credit till the entire outstanding amount including interest is paid. The explanation is only for the purpose of making the position clear.

There is no question of invoking the Cenvat Credit Rules, 2004 in its entirety except for understanding the meaning of the term 'duty' or 'duty of excise'. In fact, the rigour of Section 8(3A) operates notwithstanding anything contained in sub-rule (1) and (4) of Rule 3 of Cenvat Credit Rules. Sub-rule 4(b) of Cenvat Credit Rules permits utilisation of Cenvat credit for payment of duty of excise on any final product. This provision makes the position very clear that Cenvat credit cannot be used as a matter of right for payment of duty of excise, in case the assessee defaults in payment of duty before the cut off period under Rule 8(3A) of Central Excise Rules, 2002.

The purpose of explanation that the expression 'duty' or 'duty of excise' shall also include the amount payable in terms of the Cenvat Credit Rules, 2004, would not amount to a permission for utilising the Cenvat credit for paying the excise duty. Rule 8(3A) is very specific when it provided that the entire duty should be paid without utilising the Cenvat credit. There is no question of utilising the explanation for the purpose of using the Cenvat credit for paying the outstanding duty amount.

The Law is, therefore, clear that the assessee is liable to pay the excise duty in accordance with the Central Excise Rules, 2002 with interest for the belated period and there is no provision for utilising the Cenvat credit for such belated payment.

The fact that the Assessing Authority took a different view in Techno Rubber and Plastics after remand would not stand in the way of this Court examining the statutory provisions and arriving at a finding with regard to the legislative intention."

In view of the above decision of the Hon'ble Madras High Court and also the fact that Rule 8(3A) is specifically prohibits utilization of cenvat credit during the period in which default continues, we are of the view that even when the said amount is required to be paid as arrears of revenue the same have to be paid in cash without utilization of the cenvat credit. Any other interpretation will make the restriction relating to utilization of credit meaningless. It is settled law that what is not allowed directly cannot be allowed /claimed indirectly. Board's circular dated 28^th March, 2012 will not be applicable in view of reasons stated earlier. We, therefore, hold that the appellants are required to pay an amount of Rs. 8,00,09,346/- which is equivalent to the cenvat credit utilized during the period 6.12.2010 to 4.7.2011 in cash. They will, however, be free to take cenvat credit of equivalent amount and utilize it for future clearances. Learned Counsel has cited certain judgments of this Tribunal. In view of the above analysis as also the fact that these were delivered before the Hon'ble Madras/Karnataka High Court judgments, we do not consider it necessary to discuss these.

The Commissioner's order regarding interest of the first show-cause notice is also upheld. As far as the confiscation and imposition of redemption fine are concerned, in view of the Larger Bench decision in the case of Shiv Kripa Ispat Pvt. (supra), the same is not sustainable and is, therefore, set aside. Similarly, in view of the Hon'ble Gujrat High Court's judgment in the case of Saurashtra Cement Ltd. (supra) penalty under Rule 25 is also not sustainable.

As far as the second show-cause notice dated 23.7.12 is concerned, since we have held that non-payment of duty as stipulated under Rule 8(3A) during the period December 2010 to 4.7.2011 is not default in monthly payment of duty as envisaged under Rule 8(1) of the Central Excise Rules, the demand under the said show-cause notice is to be considered as recovery of arrears. There is no restriction to utilize the Cenvat credit in respect of goods cleared subsequent to making good of default. Accordingly, we set aside the demand raised in the demand notice dated 23.7.2012. Consequently, interest, penalty, redemption fine are also set aside. The two appeals are disposed of in the above terms.



Decision:-Appeal allowed.


Comment:- The substance of this case is that if the assessee has made default under Rue 8(3A) of Central Excise Rules, 2002 for payment of excise duty on due date then he shall be liable to pay outstanding amount along with interest at the rate prescribed by the govt. on each consignment at time of removal without utilizing the CENVAT credit till the date on which defaulted amount has been paid off. However, once the defaulted amount has been made good in cash along with interest, the provisions of Rule 8(3A) cannot be invoked for the subsequent periods because the provisions of Rule 8(3A) continue upto the date when the default has been made good. Moreover, the contention that the utilisation of credit during the defaulting period amounts to default under Rule 8(3A) is not at all tenable because during the defaulting period, the monthly facility to pay excise duty is withdrawn and so improper credit utilisation cannot be termed as default under Rule 8(1) so as to invoke the provisions of Rule 8(3A). This decision may serve very important to a number of assessees to whom demand have been raised by invoking the provisions of Rule 8(3A) even when the default being committed by them has been made good. Further, it is worth observing that in light of the amended provision of Rule 8(3A), the disputes as regards freezing of cenvat credit and its utilisation during the defaulting period have come to an end.

Prepared by: Madhav Rathi

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