Interest on Cenvat Credit Wrongly Taken And (Or) Utilised

The issue whether interest is leviable at the point in time when CENVAT credit is wrongly taken or at the point of time of utilisation has been a matter of debate for over many years and hence judicially dealt with at great length and breadth. In a welcome move to close the issue to the relevant rule viz. Rule 14 of the CENVAT Credit Rules, 2004 (CCR) is amended (w.e.f. 17th March, 2012) to read as follows:

Rule 14 of CCR 04:

 “Where CENVAT Credit has been taken and* utilised wrongly or has been erroneously refunded, the same along with the interest shall be recovered from the manufacturer or provider of the output service and the provisions of the sections 11A and 11AB of the Excise Act, or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

The amendment in the rule undoubtedly not only ends the undesirable litigation but is also indicative of intent of the legislation. The issue was discussed at length under this column in June 2010. However, considering judicial developments occurring in recent times, pending litigation on the issue and litigation that may come for the period till March 16, 2012, need is felt to revisit the issue.

When can a manufacturer or service provider ‘take’ credit?

For this, relevant statutory provisions are reproduced below:

Rule 4(1) of CCR 04:

“CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in factory of the manufacturer or premises of provider of output service . . . . . . . .” Rule 4(2)(a) of CCR 04: “The CENVAT Credit in respect of Capital goods . . . . at any point of time in a given financial year shall be taken only for an amount not exceeding 50% of duty paid on such Capital goods in the same financial year.”

Rule 4(7) of CCR 04:

“The CENVAT Credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and service tax paid or payable as indicated in Invoice . . . . . . . .”

To understand the difference, if any, between the terms, ‘taken’ and ‘utilised’, we examine below the dictionary meanings of these words used in Rule 14 ibid. ‘Taken’ means ‘to gain or receive into possession, to seize, to assume ownership’ (Black’s Law Dictionary).

To take, signifies to lay hold of, grab, or seize it, to assume ownership, etc. (Advance Law Lexicon — 3rd Edition).

‘Utilise’ means ‘to make practical and effective use of’ (Compact Oxford Dictionary Thesaurus). Utilise means to make use of, turn to use (The Chambers Dictionary).

In the context of CENVAT credit, generally it may mean that taking a CENVAT credit means committing an act of making an entry in the CENVAT credit register and/or return, etc. However, there is a fresh thought on the subject wherein a question arises as to whether merely making an entry in the register really means that credit is taken? This is because until credit is used for making a payment towards duty or tax, can it be said credit has been taken is an issue that requires thought-process. Whether the two terms — ‘taken’ and ‘utilised’ are interchangeable or almost similar or they are different is the issue discussed here in terms of judicial analysis.

“We see no reason why the assessee cannot make a debit entry in the credit account before removal of the exempted final product. If the debit entry is permissible to be made, credit entry for the duties paid on the inputs utilised in manufacture of the final exempted product will stand deleted in the accounts of the assessee.”

In CCE v. Bombay Dyeing & Mfg. Co. Ltd., (2007) 215 ELT 3 (SC) it was held that reversal of credit before utilisation amounts to not taking credit.

In CCE v. Maruti Udyog, (2007) 214 ELT 173 (P&H), agreeing with the Tribunal’s decision, observed as follows:

“Learned Counsel for the appellant is unable to show as to how the interest will be required to be paid when in absence of availment of Modvat credit in fact, the assessee was not liable to pay any duty. The Tribunal has clearly recorded a finding that the assessee did not avail of the Modvat Credit in fact and had only made an entry.”

Little after the above ruling again the P&H High Court in the case of Ind-Swift Laboratories Ltd. v. UOI, (2009) 240 ELT 328 (P&H) held as follows:

“CENVAT credit is the benefit of duties leviable or paid as specified in Rule 3(1) used in the manufacture of intermediate products, etc. In other words, it is a credit of the duties already leviable or paid. Such credit in respect of duties already paid can be adjusted for payment of duties payable under the Act and the Rules framed thereunder. Under section 11AB of the Act, liability to pay interest arises in respect of any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded from the first day of the month in which the duty ought to have been paid. Interest is leviable if duty of excise has not been levied or paid. Interest can be claimed or levied for the reason that there is delay in the payment of duties. The interest is compensatory in nature as the penalty is chargeable separately.” (emphasis supplied)

“We are of the opinion that no liability of payment of any excise duty arises when the petitioner availed CENVAT credit. The liability to pay duty arises only at the time of utilisation. Even if CENVAT credit has been wrongly taken, that does not lead to levy of interest as liability of payment of excise duty does not arise with such availment of CENVAT credit by an assessee. Therefore, interest is not payable on the amount of CENVAT credit availed of and not utilised.”

The High Court concluded in the following words:

“In our view, the said clause has to be read down to mean that where CENVAT credit taken and utilised wrongly, interest cannot be claimed simply for the reason that the CENVAT credit has been wrongly taken as such availment by itself does not create any liability of payment of excise duty. On a conjoint reading of section 11AB of the Act and that of Rules 3 and 4 of the Credit Rules, we hold that interest cannot be claimed from the date of wrong availment of CENVAT credit. The interest shall be payable from the date CENVAT credit is wrongly utilised.”

However, the above ruling was unsettled by the Supreme Court in UOI v. Ind-Swift Laboratories Ltd., (2011) 265 ELT 3 (SC). The important observations made by the Supreme Court in para 17 read as follows:

“Besides, the rule of reading down is in itself a rule of harmonious construction in a different name. It is generally utilised to straighten the crudities or ironing out the creases to make a statue workable. This Court has repeatedly laid down that in the garb of reading down a provision it is not open to read words and expressions not found in the provision/statute and thus venture into a kind of judicial legislation. It is also held by this Court that the Rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute.”

On reading the above judgment, a question may arise whether ‘or’ can be interpreted as ‘and’. As a matter of fact, there was no finding as to why the word OR used between ‘taken’ and ‘utilised’ could not be interpreted to mean ‘AND’ as in some situations, the Courts have found it necessary or desirable to do so. For instance, the expression ‘established or incorporated’ used in sections 2(f), 22 and 23 of the University Grants Commission Act was read as ‘established and incorporated’ having regard to the constitutional scheme and in order to ensure that the Act was able to achieve its objective and the UGC was able to perform its duties and responsibilities. [Prof. Yashpal v. State of Chattisgarh, AIR 2005 SC 2026 (para 40)]. However, in the context of Rule 14 ibid, as per the Supreme Court, recovery with interest is required to be made under three circumstances viz. on wrongfully taking credit, on wrongfully utilising it and on erroneously refunding CENVAT credit. Whether the judgment given by the Supreme Court in the case of Ind-Swift Laboratories Ltd. (supra) required reconsideration as some felt or whether the facts of the case (in this case, the credit was claimed based on fake invoices and application was filed with Settlement Commission) necessitated the decision in the manner it is pronounced, is a matter of opinion.

A recent decision:

However, observation of the Karnataka High Court in a very recently reported case of CCE & ST LTU, Bangalore v. Bill Forge Pvt. Ltd., 2012 (279) ELT 209 (Kar.)/2012 (26) STR 204 (Kar.) is important to discuss here mainly on account of the fact that not only has it distinguished facts of the case of UOI v. Ind-Swift Laboratories Ltd., 2011 (265) ELT 3 (SC) but it has made a fine distinction between making an entry in the register and credit being ‘taken’ to drive home the point that interest is payable only from the date when duty is legally payable to the Government and the Government would sustain loss to that extent. This judgment has placed reliance and discussed at a fair length the following decisions

•     Chandrapur Magnet Wires (P) Ltd. v. Collector, (1996) 81 ELT 3 (SC)

•     Collector v. Dai Ichi Karkaria Ltd., (1999) 112 ELT 353 (SC)

•     Commissioner v. Ashima Dyecot Ltd., (2008) 232 ELT 580 (Guj.)

•     Commissioner v. Bombay Dyeing and Mfg. Co. Ltd., (2007) 215 ELT 3 (SC)

•     Pratibha Processors v. Union of India, (1996) 88 ELT 12 (SC)

In para 18 of the said judgment (supra), the High Court referring to the Apex Court’s judgment in case of UOI v. Ind-Swift Laboratories Ltd., (supra) observed:

“In fact, in the case before the Apex Court, the assessee received inputs and capital goods from various manufacturers/dealers and availed CENVAT credit on the duty paid on such materials. The investigations conducted indicated that the assessee had taken CENVAT credit on fake invoices. When proceedings were initiated, the assessee filed applications for settlement of proceedings and the entire matter was placed before the Settlement Commission. The Settlement Commission held that a sum of Rs.5,71,47,148.00 is the duty payable and simple interest at 10% on CENVAT credit wrongly availed from the date the duty became payable as per section 11AB of the Act till the date of payment. The Revenue calculated the said interest up to the date of the appropriation of the deposited amount and not up to the date of payment. Therefore, it was contended that interest has to be calculated from the date of actual utilisation and not from the date of availment. Therefore, an application was filed for clarification by the assessee. The said application was rejected upholding the earlier order, i.e., interest is payable from the date of duty becoming payable as per section 11AB. Therefore, the Apex Court inter-fered with the judgment of the Punjab and Haryana High Court and rightly rejected by the Settlement Commission as outside the scope and they found fault with the interpretation placed on Rule 14.”

The High Court of Karnataka further observed:

“It is also to be noticed that in the aforesaid Rule, the word ‘avail’ is not used. The words used are ‘taken’ or ‘utilised wrongly’. Further the said provision makes it clear that the interest shall be recovered in terms of section 11A and 11B of the Act……….”

“20……… From the aforesaid discussion what emerges is that the credit of excise duty in the register maintained for the said purpose is only a book entry. It might be utilised later for payment of excise duty on the excisable product…..Before utilisation of such credit, the entry has been reversed, it amounts to not taking credit.”

The judgment concluded in the following words:

Extracts from para 22:

“Therefore interest is payable from that date though in fact by such entry the Revenue is not put to any loss at all. When once the wrong entry was pointed out, being convinced, the assessee has promptly reversed the entry. In other words, he did not take the advantage of wrong entry. He did not take the CENVAT credit or utilised the CENVAT credit. It is in those circumstances the Tribunal was justified in holding that when the assessee has not taken the benefit of the CENVAT credit, there is no liability to pay interest. Before it can be taken, it had been reversed. In other words, once the entry was reversed, it is as if that the CENVAT credit was not available. Therefore, the said judgment of the Apex Court* has no application to the facts of this case. It is only when the assessee had taken the credit, in other words by taking such credit, if he had not paid the duty which is legally due to the Government, the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises under section 11AB, in order to compensate the Government which was deprived of the duty on the date it became due.”

Conclusion:

Despite the amendment in Rule 14 of CCR, the above judgment of the Karnataka High Court would be of great use to all those manufacturers and service provider organisations which are facing litigation for the period prior to the date of amendment of March 17, 2012 on account of making book entries of credit in the CENVAT register and keeping utilisation consciously pending on account of uncertainty of eligibility of credit. However, the facts of each case and time would determine its persuasive value.