Running line for Electric Water Heater
You are always allowed to use larger wire than is required. 

The breaker must be appropriate for the load.  If you're upsizing wire, don't upsize the breaker too! 

NEC 110.3b requires you install the equipment according to instructions, so if a 20A breaker is called out, a 20A breaker it is! 

The instructions call out 12 AWG wire.  Upsizing wire is always OK, so #10 wire is just fine on any part of the wiring run. 

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The only place instructions or labeling can deter a wire size bump is if the terminals are not rated for the larger wire.  Then you simply pigtail a short bit of the specified size wire (e.g. #12) and then splice it to the larger wire (e.g. #10) right there.  

There are rules on junction box fill (number of wires) but pigtails are "free" in these rules.