Taking of credit would
imply an act of availment of credit/benefit under CCR 04. [This could be
demonstrated by making entry in records, returns, etc.]
It is possible that an assessee makes entries for ‘CENVAT Credit taken’ in their records but does not actually utilise it. [He may have some doubts about the entitlement of the credit taken or for other reasons like no service tax payable to enable set-off]
- Taking or utilising credit wrongly both could be offences. ‘Taking’ can be compared to ‘attempt to commit an offence’ while ‘Utilise’ would mean actually committing of an offence.
- The word ‘wrongly’ is stronger than ‘mistakenly’ or ‘erroneously’ and would usually imply an intention to take CENVAT Credit which an assessee was not entitled in terms of CCR 04.
3. Reversal of CENVAT Credit before utilisation — Settled position:
In a landmark ruling in Chandrapur Magnet Wires (P) Ltd. v. CCE, (1996) 81 ELT 3 (SC) it has been held by the Supreme Court that when MODVAT Credit taken is reversed, it would mean that MODVAT Credit was not taken at all. This principle is relevant for CENVAT Credit as well. Relevant observations of the Supreme Court are reproduced hereafter?:
Para 7
In view of the aforesaid clarification by the Department, we see no reason why the assessee cannot make a debit entry in the credit account before removal of the exempted final product. If this 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 such a situation, it cannot be said that the assessee has taken credit for the duty paid on the inputs utilised in the manufacture of the final exempted product under Rule 57A. In other words, the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken credit of the duty paid on the inputs used in manufacture of these goods.
The above-stated principle laid down by the Su-preme Court has been followed in large number of cases.
In CCE v. Bombay Dyeing & Mfg. Co. Ltd., (2007) 215 ELT 3 (SC) also it has been held that reversal of credit before utilisation amounts to not taking credit.
In view of the Supreme Court ruling in the Bombay Dyeing case, CBEC has in the context of Textiles
Textile Articles vide its Circular No. 858/16/2007 –CX, dated 8-11-2007, clarified as under?:
Para 3
…..it is clarified that para 2 of the said Circular stands amended to the extent that in case, credit taken on inputs used in the manufacture of the said goods cleared under Notification No. 141/2002–C.E. or Notification No. 30/2004–C.E., has been reversed before utilisation, it would amount to credit not having been taken.
c) However, it needs to be noted that rulings of the Supreme Court in Chandrapur Magnet & Bombay Dyeing, have been distinguished by the Bombay High Court in CCE v. Nicholas Piramal (India) Ltd., (2009) 244 ELT 321 (Bom.) while interpreting Rule 6 of CCR 04.
4. Recent clarification of the Board
CBEC, vide Circular No. 897/17/2009–CX, dated 3-9-2009 has clarified as under:
“The Tribunal decision and the High Court judgment referred to above, was delivered in the context of erstwhile Rule 57I of the Central Excise Rules, 1944 and that the Supreme Court order under reference is only a decision and not a judgment. Since, Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT Credit is taken or utilised wrongly, it is clarified that the interest shall be recoverable when credit has been wrongly taken, even if it has not been utilised, in terms of wordings of the present Rule 14.”
It may be noted that erstwhile Rule 57I of the Central Excise Rules, 1944 did not specifically provide for any interest payment along with reversal of wrongly taken credit while present Rule 14 of CCR 04 provides for payment of interest along with reversal of wrongly taken credit.
5. Interest:
In Pratibha Processors v. UOI, (1996) 88 ELT 12 (SC), it was observed by the Supreme Court as under:
“In fiscal statutes, the import of the words-, — ‘tax’, ‘interest’, ‘penalty’, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purpose, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or a deliberate violation of the provisions of the particular statute. 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. The levy of interest is geared to actual amount of tax withheld and the extent of delay in paying the tax on due date. Essentially, it is compensatory and different from penalty — which is penal in character.” (p. 20).
Thus, interest is not a penalty but is essentially compensatory in nature. If CENVAT Credit is taken in books but not actually utilised, it would appear that since there is no loss of revenue to the Government, it may not be required to be compensated by a taxpayer.
6. Interest on credit taken but not utilised — Judicial views:.
In CCE v. Maruti Udyog Ltd., (2007) 214 ELT 173 (P & H)], the Punjab & Haryana Court agreed with the views of the Hon’ble CESTAT that the assessee was not liable to pay interest as the credit was only taken as entry in the MODVAT record and was in fact not utilised. SLP filed by the Revenue against this order of the P & H High Court has been dismissed by the Supreme Court (2007) 214 ELT A 50 (SC) on 10-10-2006.
In the case of Maruti Udyog, the assessee claimed Modvat Credit which was not allowable in absence of requisite certificate under Rule 57E of the Central Excise Rules, 1944, being produced within six months but still the assessee claimed the same and credited the amount in RG – 23A Part II. The authorities disallowed the Modvat Credit relying upon judgment of the Supreme Court in Osram Surya (P) Limited v. Commissioner of Central Excise, Indore, (2002) 142 ELT 5 (SC).
The Tribunal, however, had held that the assessee was not liable to pay interest as the credit was only taken as an entry in the Modvat record and was not in fact utilised. The Tribunal held that in absence of utilisation of credit, the assessee was not liable to pay interest.
The P&H High Court held as under:
“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.
In view of this factual position, we are unable to hold that any substantial question of law arises.”
b) Attention is particularly drawn to the ruling of the Punjab & Haryana High Court in the case of Ind–Swift Laboratories Ltd. v. UOI, (2009) 240 ELT 328 (P & H), 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 utilised 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. U/s.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 v. Union of India, 1996 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. The levy of interest is geared to actual amount of tax withheld and the extent of the delay in paying the tax on the due date. It is compensatory and different from penalty which is penal in character. Similarly, in Commissioner of Customs v. 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 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.
Para 11
Reliance of respondents on Rule 14 of the Credit Rules that interest u/s.11AB of the Act is payable even if CENVAT Credit has been taken. 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 S. 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.
Though the above ruling was pronounced on 3-7-2009 (i.e., before the issue of Circular by CBEC on 3-9-2009), it is very relevant for interpretation of Rule 14 of CCR 04.
Conclusion:
a) Under the Scheme of CCR 04 there is a clear mismatch as to time of availment of credit and time of utilisation of credit. In case of Service Providers rendering multiple services through loca-tions spread across the country, it becomes very difficult, to ascertain whether credit availed has been actually utilised or not.
However, the principle laid by the Supreme Court in a landmark ruling CCE v. Dai Ichi Karkaria Ltd., (1999) 112 ELT 353 (SC) that, MODVAT does not envisage one to one correlation between ‘Inputs’ and ‘Outputs’ and credit once availed is indefeasible, is very much relevant in the context of CCR 04 as well.
Under the scenario of timing mismatch between credit availment and credit utilisation, at a practical level, issues would remain as to how do service tax authorities monitor correctness of CENVAT Credit availed & its subsequent utilisation.
b) Under CCR 04, the onus for availment of credit is on the person taking credit. Hence, it would appear that a person taking the credit may have to satisfy with reasonable certainty as to the credit entitlement and its subsequent utilisation in terms of conditions stipulated under CCR 04.
In cases where, there is a very remote possibility of entitlement to credit availment & utilisation of credit [e.g., credit of Input services availed by a retailer] Rule 14 of CCR 04 could be invoked, despite subsequent reversal by such retailer, on the ground that there was no entitlement to credit inasmuch as a retailer is not a beneficiary under CCR 04.
There could also be cases where there is a genuine error in availing CENVAT Credit (e.g., simultaneous availment of CENVAT benefit on Capital Goods & depreciation under income-tax). However, subsequently on its own but before utilisation of credit, the same is rectified by filing revised return before IT Authorities. This could be a good case for non-recovery of interest.
c) As regards clarifications issued by CBEC vide Circular dated 3-9-2009, it would appear that interpretation of Rule 14 of CCR 04 by the Punjab & Haryana High Court [discussed in para 6(b) earlier] to the effect that Rule has to be read down to mean ‘credit taken and utilised wrongly’ reflects a correct view. Hence, if bona fides of credit availment can be established, there may not be a case for interest recovery on account of subsequent reversal of credit. However, this would depend on the facts and circumstances, of each case.
It needs to be expressly noted that though correctness of CBEC Circular dated 3-9-2009 would be judicially tested, the field formations are likely to follow the Circular resulting in extensive litigations.
d) To end, since under CCR 04 the onus as to the availment of CENVAT Credit is on the service provider, it is felt that, due diligence need to be exercised at the point of availment of credit through a good system in place.
