RECENT AMENDMENTS: INTEREST ON CENVA T CREDIT WRONGLY TAKEN

“Where CENVAT credit has been taken or utilized 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.”

[Note – The words “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly” vide Notification No. 18/2012 – CE(NT) dated 17/03/2012].

Supreme Court Ruling overruling High Court Ruling

Attention is particularly drawn to the ruling of the Punjab & Haryana High Court in the case of Ind – Swift Laboratories Ltd. vs. UOI (2009) 240 ELT 328 (P & H) (which was subsequently set aside by the Supreme Court), relevant extracts from which, are reproduced hereafter for reference :

Para 9

“The Scheme of the Act and the CENVAT credit Rules framed thereunder permit a manufacturer or producer of final products or a provider of taxable service to take CENVAT credit in respect of duty of excise and such other duties as specified. The conditions for allowing CENVAT credit are contained in Rule 4 of the Credit Rules contemplating that CENVAT credit can be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Such CENVAT credit can be utilized in terms of Rule 3(4) of Credit Rules for payment of any duty of excise on any final product and as contemplated in the aforesaid sub-rule. It, thus, transpires that 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.”

Para 10

“In Pratibha Processors vs. Union of India, 1996 (88) ELT 12 (SC) = (1996) 11 SCC 101, it was held that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. Similarly, in Commissioner of Customs vs. Jayathi Krishna & Co. – 2000 (119) ELT 4(SC) (2000) 9 SCC 402, it was held that interest on warehoused goods is merely an accessory to the principal and if principal is not payable, so is it for interest on it. In view of the aforesaid principle, 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 utilization. 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 utilized.”

Para 11

“Reliance of respondents on Rule 14 of the Credit Rules that interest under section 11AB of the Act is payable even if CENVAT credit has been taken. In our view, said clause has to be read down to mean that where CENVAT credit taken and utilized 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 utilized.”

In an important ruling the Supreme Court, in the case of Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (S.C.)], set aside the order passed by the Punjab & Haryana High Court (2009) 240 ELT 328 (P & H)] on the question of charging interest on CENVAT credit wrongly taken but not utilised. By interpreting the expressions and words used in the provisions of Rule 14 of CCR, the Supreme Court concluded that interest is payable on CENVAT credit wrongly taken even if such credit has not been utilised.

The issue for consideration was whether an assessee can be made liable to pay interest for taking wrong credit if such credit has not been utilised in as much as he has not derived any benefit out of his wrong action.

The more important observations of the Supreme Court are reproduced hereafter for ready reference:

Para 17

“…………….. In our considered opinion, the High Court misread and misinterprets the aforesaid Rule 14 and wrongly read it down without properly appreciating the scope and limitation thereof. A statutory provision is generally read down in order to save the said provision from being declared unconstitutional or illegal. Rule 14 specifically provides that where CENVAT credit has been taken or utilized would be recovered from the manufacturer or the provider of the output service. The issue is as to whether the aforesaid word “OR” appearing in Rule 14, twice, could be read as “AND” by way of reading it down as has been done by the High Court. If the aforesaid provision is read as a whole we find no reason to read the word ‘OR’ in between the expression ‘taken’ or “utilized wrongly” or has been erroneously refunded’ as the word ‘AND’. On the happening of any of the three aforesaid circumstances such credit becomes recoverable along with interest.”

Para 18

“We do not feel that any other harmonious construction is required to be given to the aforesaid expression / provision which is clear and unambiguous as it exists all by itself. So far as section 11AB is concerned, the same becomes relevant and applicable for the purpose of making recovery of the amount due and payable. Therefore, the High Court erroneously held that interest cannot be claimed from the date of wrong availment of CENVAT credit and that it should only be payable from the date when CENVAT credit is wrongly utilized. Besides, the rule of reading down is in itself a rule of harmonious construction in a different name. It is generally utilized 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.”

The interpretation made by the Honorable Supreme Court considering the specific circumstances of a case involving evasion of duty, has been a matter of extensive deliberation by experts and rightly so in as much as if the same is applied generally, it would mean unsettling the settled law.

Important Ruling of Karnataka High Court in CCE & ST vs. Bill Forge Pvt. Ltd. (2012) 26 STR 204 (KAR) [Bill Forge Case]

    The observations of the Karnataka High Court in the Bill Forge case are very important, in as much as not only has it distinguished facts of the case of UOI vs. Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (SC) but it has made 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.

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

Para 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 utilized later for payment of excise duty on the excisable product………Before utilization of such credit, the entry has been reversed, it amounts to not taking credit.”

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 utilized 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.”

•     The ruling in Bill Forge case has been followed in a large number of subsequently decided cases. For example:

    CCE vs. Pearl Insulation Ltd. (2012) 27 STR 337 (KAR)

    CCE vs. Gokuldas Images (P) Ltd (2012) 28 STR 214 (KAR)

    CCE vs. Strategic Engineering (P) Ltd (2014) 45 GST 662 (MAD)

    Sharvathy Conductors Pvt. Ltd. vs. CCE (2013) 31 STR 47 (Tri – Bang)

    CCE vs. Sharda Energy & Minerals Ltd. (2013) 291 ELT 404 (Tri – Del)

    Gary Pharmaceuticals (P) Ltd vs. CCE (2013) 297 ELT 391 (Tri – Del)

    CCE vs. Balrampur Chinni Mills Ltd (2014) 300 ELT 449 (Tri – Del)

    Gurmehar Construction vs. CCE (2014) 36 STR 545 (Tri – Del)

•     However, in many cases, Bill Forge case has not been followed and instead the position held by the Supreme Court in the Ind Swift case has been followed. For example:

    Dr Reddy Laboratories Ltd vs. CCE (2013) 293 ELT 89 (Tri)

    Bharat Heavy Electricals Ltd vs. CC & CCE (2014) 303 ELT 139 (Tri – Bang)

    CCE vs. Sundaram Fasteners Limited (2014) 304 ELT 7 (MAD)

    Balmer Lawrie & Co. Ltd vs. CCE (2014) 301 ELT 573 (Tri – Mumbai)

Important amendment in Rule 14 of CCR

In a very significant amendment in Rule 14 of CCR, with effect from 17/03/2012, the words CENVAT credit has been “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly”.

This amendment strongly reinforces the interpretation placed by the Punjab & Haryana High Court in Maruti Udyog Ind Swift Laboratories and Karnataka High Court in Bill Forge case to the effect that, no interest can be recovered in cases where CENVAT credit has been wrongly taken but not utilized by an assessee.

    Recent Amendment: Analysis

In the recent Budget, Rule 14 of CCR has been amended vide Notification No. 6/2015-Central Excise (NT) dated 01/03/2015. The amended Rule 14 reads as under:

“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. –

“(1) (i) Where the CENVAT credit has been taken wrongly but not utilized, the same shall be recovered from the manufacturer or the provider of output service, as the case may be and the provisions of section 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;

(ii) Where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.

    For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilization thereof shall be deemed to have occurred in the following manner, namely: –

    i)the opening balance of the month has been utilized first;
    ii)credit admissible in terms of these rules taken during the month has been utilized next;
    iii)credit inadmissible in terms of these rules taken during the month has been utilized thereafter.”
The amended Rule 14(1) of CCR deals with two distinct situations viz.

•     one where credit has been wrongly taken but not utilised and

•     the other where credit has been wrongly taken and also utilised.

Further, to deal with a scenario, where credit has been utilised, a deeming provision has been brought in through new sub-rule 14(2), to lay down the manner in which the utilisation shall be deemed to have occurred.

•     Prior to the introduction of this sub-rule, the assessee used to avail CENVAT credit even where the eligibility of CENVAT credit was in dispute. As long as the balance of CENVAT credit in the books of the assessee was more than the amount of the disputed CENVAT credit, it was construed that the disputed amount of CENVAT credit availed by the assessee had not been utilised and consequently, the proceedings under Rule 14 of CCR for recovery of credit and interest thereon could not be initiated against it.

However, after the above amendment, the manner prescribed therein will have to be applied to determine the utilisation of ineligible credit or otherwise.

•     The larger view of trade & industry and tax payers generally is that the amended Rule 14 of CCR continues to be in line with Government’s consistent view to the effect that:

•     recovery of interest along with CENVAT credit would be applicable only in those situations where the assessee takes credit and also utilises the same; and

•     in those cases, where the assessee takes CENVAT credit but does not utilise such credit for specified reasons, recovery would be only of credit wrongly taken and the question of any recovery towards interest does not arise at all.

•     A better view which may be adopted while interpreting Rule 14(2) of CCR is that the opening balance of CENVAT credit should only include the admissible amount of CENVAT credit and the inadmissible amount of CENVAT credit should be recorded separately. In such a case, while computing the amount of CENVAT credit utilized in a particular month, the total admissible amount of CENVAT credit available with the assessee will have to be taken into account first and the inadmissible amount of CENVAT credit will be said to be utilised only after the admissible CENVAT credit is exhausted. In such a case, an assessee will become liable to pay interest only in those cases where the balance of inadmissible CENVAT credit available with it is less than the credit utilised in a month.

This view can be supported by the following reasons :

•     the earlier rule was silent regarding manner of utilisation, the amendment in the said rule has been made as a matter of trade facilitation exercise.

•     it is consistent with the leniency shown in the past when the provision of Rule 14 was amended to overcome the adverse impact of Supreme Court decision in case of Ind-Swift.

It is a need of every business and tax payer to keep some amount of CENVAT credit on hold without utilizing the same for excise duty payment or payment of service tax.

Eligibility to CENVAT credit is prone to extensive litigations. Hence, in many cases where credit eligibility is of a doubtful and disputable nature and could often involve substantially high amount, tax payers often opt to avail credits to protect their rights but choose not to utilize the credits pending clarity & judicial evolvement, so as to avoid any interest liability in case the matter is decided adversely.

However, in the amended Rule 14 (2) of CCR, due to employment of the words “For the purposes of sub-rule
(1)”, there is an apprehension that the field formations may erroneously interpret that the deeming provisions laid down in Rule 14(2) would also apply to the cases covered under Rule 14 (1) (i).

Further, to arrive at the due date for interest payable the Rule 14(2) is creating a deeming fiction that all the credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely:-

    the opening balance of the month has been utilised first;
    ………………..

    ………………..
It is apprehended by trade and industry that credits kept on hold during any month form part of the opening balance of the next month, the field formations may interpret the same to be deemed utilised and thus liable for interest. This could result in unnecessary litigations and hardships to trade and industry and tax payers generally.

Conclusion:

The amendment in Rule 14 of CCR vide Notification dated 01/03/2015 needs to be understood, in the backdrop of introduction of time limits for availment of credit under CCR, for the first time with effect from 01/09/2014. In cases where availment of CENVAT credits was of a doubtful nature/under litigations, substantial amounts of credits were availed by tax payers prior to 01/09/2014 (but kept unutilised) in order to protect their interest in a scenario where matter gets decided in their favour at a future point of time and at the same time, avoiding any interest liability in case the matter is decided against them.

Further, in the absence of specific provisions under CCR or clarification by CBEC, in practice, no systematic records are maintained by assessees with regard to CENVAT credits utilised but not availed. This would create practical difficulties for the audit team/field formations to ascertain correctness of credit utilisation and interest liability on wrong utilisation. It appears that though legislative intent behind the amendment is laudable, there is a clear disconnect in the fine print that has emerged. This leaves room for doubts and possible hardships to trade and industry and tax payers from the field formations.

Suggestions:

Appropriate amendment should be made in Rule 14(2) of CCR to avoid unnecessary litigations.

Alternatively, CBEC should issue suitable clarifications / instructions to the effect that :

the deeming provisions in Rule 14(2) would apply only in those cases where inadmissible credit has been taken and also utilised; and

On lines with Instructions under erstwhile MODVAT Rules, [Ref – Circular No. 4/91 – Cx 8 dated 14/02/91 (File No. 263/5/91-CX – 8)] lay down detailed procedure to be followed by assessees who desire not to utilise the credit taken by them in order to ensure that they are covered under Rule 14(1)(i) of CCR.