REFUND OF CENVAT CREDIT: OTHER THAN ON EXPORTS

“Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilised by the manufacturer or provider of output service towards payment of,

• duty of excise on any final product cleared for home consumption or for export on payment of duty; or
• service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Services Rules, 2005 in respect of such tax:

Provided further that no credit of the additional duty leviable u/ss.(5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service.

 Explanation — For the purposes of this rule, the words ‘output service which is exported, means the output service exported in accordance with the Export of Services Rules, 2005.”

Refunds in situations other than export — A contentious issue

Rule 5 under CCR is the only provision which permits refund of CENVAT credit, essentially in case of exports. Refunds of unutilised CENVAT credit are often claimed in situations, other than export. For example, discontinuance of business, payments in case of disputes made in cash due to insistence by the Department instead of debit to CENVAT credit, Pre Deposits pending appeal made in cash instead of debit to CENVAT credit, etc.

Interpretation of the words ‘where for any reason such adjustment is not possible . . . .’ in Rule 5 has resulted in extensive litigations between the tax Department and the taxpayers.

Entitlement to refund in situations other than exports has been a very contentious issue and divergent judicial views have been expressed. There are very limited cases directly relating to service tax. However, there are extensive judicial precedents under Central Excise, principles in regard to which are relevant for service tax and which serve as a useful guide while dealing with issues of refunds relating to service providers.

The same are analysed hereafter along with the latest Larger Bench Ruling.

Mumbai Tribunal ruling holding that refund is inadmissible in situations other than exports

In the case of National Leather Cloth Mfg. Co. v. CCE, (2006) 198 ELT 400 (Tri-Mumbai) followed the ratio of the judgment in case of CCE, v. Rajashree Cements, (2001) 132 ELT 724 (Tri-Chennai) and denied the refund of MODVAT credit observing as under:

“The decision in the cases of Bombay Burmah, Arcoy Industries and Omkar Textile have been rendered contrary to the earlier decision of the Tribunal in the case of Rajashree Cements, which was delivered at an earlier point of time on 9-9- 2001. Moreover, Rajashree Cements also correctly notices the provisions of law which allow cash refund only in the case of unutilised credit in respect of export of final products. Hence, the decision in the said case is binding and the same requires to be followed until reversed by either Larger Bench or by any superior court”.

In the case of Rajashree Cements referred above, the Tribunal had held as under:

Para 5

In the case of National Leather, though it was an admitted fact that the appellants were not in a position to utilise the credit as they have closed down, legitimate refund was denied.

The three decisions of the Tribunal cited by the appellants and not followed in the above case of National Leather (supra) as the same were considered contrary to the decision in the case of Rajashree Cements are given below.

• Assessee’s factory closing before allowance of Modvat credit by the Tribunal and utilisation of credit was prevented due to initiation of proceedings by the Department. It was held that the assessee was entitled to cash refund. [CCE v. Omkar Textile, (2002) 148 ELT 461 (Tri-Mum.)]
• Amount originally paid by the assessee by debiting RG23A. Part II. The assessee moved out of Modvat credit scheme when dispute finally settled — It was held that the assessee is not able to utilise credit, the very basis of refund is defeated, in which case amount is to be given in cash. [CCE v. Arcoy Industries, (2004) 170 ELT 507 (Tri-Mum.)]
• Section 11B contains no bar against payment of refund by cheque/cash in cases where original payment of duty was from Modvat/Cenvat account. Moreover, the assessee ceased to exist as a manufacturing unit and has no Cenvat account into which refund can be credited. [CCE v. Bombay Burmah Trading Corpn., (2005) 190 ELT 40 (Tri-Del.)]

Larger Bench Ruling in Gauri Plasticulture (P) Ltd. v. CCE, (2006) 202 ELT 199 (Tri-Mumbai) (LB)

In this case duty debit was made in CENVAT (MODVAT) account. However, the appellants could not utilise the credit due to departmental objections and insistence of payment from PLA Account. Thereafter the appellants surrendered their licence due to discontinuance on business and applied for refund of unutilised CENVAT credit.

The Larger Bench, under the peculiar facts of the case held that credit can be given in MODVAT Account, but if an assessee is not able to utilise, cash refund can be granted. The important observations made by the Larger Bench are as under:

Para 8

“Detailed reading of the above judgments, leads into the fact that wherever the assessee was unable to utilise the credit on account of objection raised by the Department or actions taken by them by way of initiation of proceedings or paid duty out of Modvat account at the Department’s insistence, and for that reason, he had to pay duty in cash or out of the PLA, they would be entitled to refund of that credit in cash, on the dispute being ultimately settled in their favour. In the decisions holding that such refund in cash is not possible, it has been observed that there is no provision allowing refund of such credit in cash. However, we are not in agreement with the above proposition for the simple reason that there is also express no bar in the Modvat Rules to that extent. We have to keep in mind that it is not the refund of unutilised credit, but the credit which has been used for payment of duty at the insistence of the Revenue or has been reversed because the Department was of the view that the same is not available for utilisation. This is a simple and basic principle of equity, justice and goods conscience. Had the Department not prevented the assessee from utilising the credit otherwise available to him, they would have been in a position to use the same towards payment of duty on their final product, which obligation they had to discharge from their PLA account. As such, on the success of their claim subsequently, if the assessee is maintaining Modvat credit and is in a position to use the same for future clearances, it should normally be credited back in the same account from where it was debited i.e., RG23A Part account. However, if an assessee is not able to use the credit on account of any reasons, whatsoever (which may be closure of his factory or final products being exempted, etc.) the refund becomes admissible in cash or by way of credit entry in PLA to the extent duty paid in cash or out of PLA during the relevant period.

Para 9

On the same basic principles of equity, justice and good conscience, if such refund in cash makes the assessee enrich because during the period when the dispute was pending, they had not paid any duty in cash and as such, the debit entry in Mod-vat account would have made no difference, as the credit would have been lying unutilised only in the account, such credit, cannot be refunded in cash.”

Karnataka High Court ruling in UOI v. Slovak India Trading Co. Pvt. Ltd., (2006) 201 ELT 559 (Kar.) [Confirmed by the Supreme Court (2008) 223 ELT A 170

In this case, the assessee was engaged in manufacture of shoes for M/s. Bata India Ltd. and was registered under the Central Excise. They surrendered their registration and a refund application was made on 14-5-2003 claiming a refund of Rs.4,15,057. During the Internal Audit, it was noticed that the assessee had availed CENVAT credit of the materials received by them during the past and had availed the credit to the tune of Rs.3,09,390. On scrutiny, it was noticed that there was neither production, nor clearance of finished goods. CENVAT credit availed by the assessee was irregular. A show-cause notice was issued in the matter with regard to irregular availment and also with regard to rejection of refund claim. Thereafter, an order was passed ordering allowance of CENVAT credit of Rs.3,72,405 availed. Refund claim was rejected in terms of section 11B of the Act. It was stated that there is no provision in Rule 5 of the CENVAT Credit Rules, 2002 with regard to refund. An unsuccessful appeal was filed by the assessee. Thereafter, the Tribunal was moved and the Tribunal allowed the appeal in terms of the impugned order.

The High Court held that Rule 5 of the CENVAT Credit Rules, 2002 does not expressly prohibit refund of unutilised credit where there was no manufacture in light of the closure of factory. Further, since the assessee has come out of the MODVAT Scheme, refund of unutilised credit has to be granted.

The Department’s appeal against the afore-said Court ruling was rejected by the Supreme Court.

Recent Larger Bench Ruling in the case of Steel Strips v. CCE, (2011) 269 ELT 257 (Tri.-LB)

The following question was referred to the Larger Bench regarding refund of unutilised amount of MODVAT credit in cash for the period from December, 1997 to September, 1999:

“Whether in cases where either on account of coercion by the Department or otherwise, the assessee pays the duty through PLA account, in spite of having sufficient balance in the MODVAT/CENVAT credit, on the factory or unit becoming inoperative and there being no likelihood of restarting the production, can such assessee be entitled for refund of the credit amount under the provisions of law in force?

Though, the Larger Bench ruling is with reference to section 11B of Central Excise Act, 1944, the observations are very relevant in the context of Rule 5 of CCR.

The Larger Bench distinguished the rulings of Larger Bench in Gauri Plasticulture (P) Ltd., Karnataka High Court in Slovak India as well as other rulings and held that refund of unutilised credit is only permissible in case of exports and for no other reason whatsoever that may be.

The Larger Bench made the following important observations while passing the order:

Para 5.7

“A distinction between provisions of the statute which are of substantive character and are built in with certain specific objectives of policy on the one hand, and those which are merely procedural and technical in their nature on the other hand, must be kept clearly distinguished. An eligibility criteria to get refund calls for a strict construction, although construction of a condition thereof may be given a liberal meaning if the same is directory in nature. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can be reasonably expected of it, but fails in or faults in some minor or inconsequent aspects which cannot be described as the ‘essence’ or the ‘substance’ of the requirement. Like the concept of ‘reasonableness’, the acceptance or otherwise of a plea of ‘substantial compliance’ depends upon the facts and circumstances of each case and the purpose and object to be achieved and the context of the prerequisites which are essential to achieve the object and purpose of the rule or the regulation. Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the purpose of the statute has not been met. Certainly, it means that the Court should determine whether the statute has been followed sufficiently, so as to carry out the intent for which the statute was enacted and not a mirror image type of strict compliance. Substantial compliance means ‘actual compliance in respect to the substance essential to every reasonable objective of the statute’ and the Court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and to accomplish the reasonable objectives for which it was passed.

Para 5.8

Fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause, substantial compliance of an enactment is insisted upon, where mandatory and directory requirements are lumped together, for in such a case if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements. In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non-compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted.

Para 5.9

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. Quite often, the critical question to be examined is whether the requirements relate to the ‘substance’ or ‘essence’ of the statute; if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory, in that they are not of the essence of the thing to be done, but are given with a view for the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempt at compliance may not be sufficient, but actual compliance of those factors which are considered as essential. In the cases of refund substantial compliance with the law granting refund is sine qua non.

Para 5.11

No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner laid down by law. He has no right other than to proceed according to the mandate of the statute governing the subject. Claim of refund is not a matter of right unless vested by law. That would depend upon the object of the statute and eligibility. The purpose for which law has been made and its nature, the intention of the Legislature in making the provision, the relation of the particular provision to other provisions dealing with the subject including the language of the provision are considerable factors in arriving at the conclusion whether a particular claim is in accordance with law. No injustice or hardship plea can be raised to claim refund in the absence of statutory mandate in that behalf and no equity or good conscience can influence fiscal courts without the same being embedded in the statutory provisions.

Para 5.13

It is well-settled principles of law that what cannot be done directly should not be allowed to be done indirectly. On surrendering of their licence, the appellants were not allowed to claim the refund of the unutilised credit in the Modvat account, and the same would have lapsed. As such, utilisation of the same towards payment of disputed demand of duty, after surrendering of their registration, had not led to a situation where the assessee was compelled not to use the

credit for regular clearances and had to make payment through PLA accounts. As such, in the instant refund in cash was not to be allowed.

Para 5.16

Modvat law has codified the procedure for adjustment of the duty liability against the Modvat account. That is required to be carried out in accordance with law and unadjusted amount is not expressly permitted to be refunded. In the absence of express provision to grant refund, that is difficult to entertain except in the case of export. There cannot be presumption that in the absence of debarment to make refund in other cases that is permissible. Refund results in outflow from treasury, which needs sanction of law and an order of refund for such purpose is sine qua non. Law has only recognised the event of export of goods for refund of the Modvat credit as has been rightly pleaded by the Revenue and instant reference was neither the case of ‘otherwise due’ of the refund, nor the case of exported goods. Similarly, absence of express grant in statute does not imply ipso facto entitlement to refund. So also absence of express grant is an implied bar for refund. When right to refund does not accrue under law, claim thereof is inconceivable. Refund of unutilised credit is only permissible in case of export of goods and for no other reason, whatsoever that may be. Thus, where the assessee pays duty through the PLA account, in spite of having sufficient balance in the Modvat/Cenvat credit account on the factory or unit becoming inoperative and there being no likelihood of re-starting the production, such an assessee cannot be entitled to refund of the credit amount under the provisions of law in force.”

Conclusion

The Department authorities are following the aforesaid Larger Bench ruling and denying refunds, though in many cases, the reasons could be genuine.

With due respects to the Larger Bench, it would appear that refund provisions being in the nature of beneficial provisions ought to be construed liberally rather than strictly in accordance with the settled principles laid down by the Supreme Court from time to time.

It is suggested that appropriate amendment need to be made in Rule 5 of CCR, whereby powers may be granted to CBEC to prescribe circumstances under which refunds may be permitted subject to appropriate revenue safeguards.