Payment via CENVAT credit during statutory forfeiture is a nullity, necessitating cash payment before credit restoration.

The Appellant, a manufacturing unit, defaulted on Central Excise duty payments for March 2006. On June 5, 2006, the Revenue issued a 'forfeiture order' under Rule 8(3A) of the Central Excise Rules, 2002, prohibiting the Appellant from using CENVAT credit and requiring 'consignment-wise' cash payments

Between August and October 2006, the Appellant cleared goods worth ₹4.36 crores by debiting ₹71,10,894/- from its CENVAT account instead of paying in cash

The Revenue, invoking the 'legal fiction' that such clearances were made 'without payment of duty,' demanded a fresh payment in cash

The CESTAT affirmed the demand but ordered that credit be restored once the cash was paid; the Appellant challenged this 'pay-first-restore-later' mandate as double taxation

1. Whether the restrictive mandate of Rule 8(3A) is a mandatory substantive condition or a mere procedural directory that can be cured by a subsequent credit debit

2. Whether the 'legal fiction' of 'deemed non-payment' can be invoked to demand duty in cash a second time when the debt was already satisfied via CENVAT credit, without violating Article 265 of the Constitution

3. Whether the imposition of a penalty under Rule 25 is sustainable in the absence of mens rea and where transactions were transparently disclosed

The court primarily applied Rule 8(3A) of the Central Excise Rules, 2002, noting that the 2005/2006 Amendment created a 'deeming fiction' where clearances via credit during a default period are treated as removals without payment

It relied on Vidushi Wires Pvt. Ltd. vs. Union of India, which established that statutory "manners" of payment are mandatory for defaulters

The court distinguished Eicher Motors Ltd. vs. Union of India, noting that while CENVAT credit is a 'vested right' under Article 300A, the State may regulate the timing and mode of its utilization as a punitive measure

Finally, it applied Section 11AB regarding mandatory interest and Rule 25 regarding penalties for defiance of statutory orders

The court reasoned that Rule 8(3A) is not merely procedural; the legislature’s 'deeming fiction' elevated the 'mode' of payment to a substantive condition precedent for lawful removal

Because the Appellant failed to challenge the original forfeiture order, it remained bound by the 'cash-only' mandate

Applying the law to the facts, the court found that debiting the CENVAT account was a nullity in the eyes of the law, meaning the duty was never legally 'paid'

To resolve the potential for 'double taxation' or 'unjust enrichment,' the court determined that the Appellant must first satisfy the debt in the prescribed mode (Cash/PLA) to comply with the statutory fiction, after which the previously utilized credit must be restored to the account

Regarding the penalty, the court found that while there was no 'clandestine intent' due to disclosure in ER-1 returns, the 'willful defiance' of a departmental order justified a reduced deterrent penalty

It held that demanding cash payment while restoring later credit does not violate Article 265

The court confirmed the duty demand of ₹71,10,894 plus interest and upheld a reduced penalty of ₹1.00 lakh

Specifically, the court ordered the Appellant to pay the amount in cash within eight weeks, after which the Revenue must permit the re-credit/restoration of the identical amount to the Appellant’s CENVAT account

The appeals were disposed of on these terms