Interest payable on Cenvat Credit taken and/or utilised

Interest payable on Cenvat Credit taken and/or Utilised

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur, LLB [FYIC]

Introduction:-

In the case of economic defaults, if a mistake is made under inadvertently under bona fide belief, then no penalty can be imposed. But interest was payable by the assessees who have wrongly taken the credit, though the same was not utilized. This was mere an error while drafting the provision, which has lead to litigation that continued for the years. Now, this has been settled by amending the relevant provision. This piece of articulation is all about the journey of this litigation.

Rule 14 of Cenvat Credit Rules, 2004:-

Rule 14 of the Cenvat Credit Rules, 2004 before its amended levied interest even in the case credit was wrongly taken but was not utilized. The said Rule before budget, 2012 read as under:

“4. Recovery of CENVAT credit wrongly taken or erroneously refunded.-

Where the CENVAT credit has been taken or utilized wrongly orhas been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of 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 use of “OR” in phrase ‘taken or utilized’ created the root problem. The department had issued a no. of show cause notices in the cases where the assessee had by mistake taken the credit, although the same was not utilized. The word “or” was the root of disputes and department mechanically interpreted the same that even if the credit was taken by mistake, interest is payable. However, the assessees pleaded that the word “or” should be read as “and” and interest is payable only if the credit so taken is utilized by them. Since loss of revenue only arise when the credit is utilized, this contention was logical also. Due to different interpretations, the issue was set for the litigation.

Judicial Pronouncements:-

A number of cases were decided on the issue, some favouring the Revenue and some in favour of the assessees. After a huge round of litigation, the matter came before the Hon’ble High Court of Punjab & Haryana in the case of Ind-Swift Laboratories Ltd v/s UOI [2009-TIOL-440-HC-P&H-CX]. The High Court held that in case credit is taken wrongly, interest is payable only from the date of utilizing the credit, but not from the date of taking of credit. That Rule 14 of the CCR, 2004 should be read to mean that interest is chargeable only from the date of utilizing of credit. No interest can be claimed from the date of wrongly taking the credit.

Revenue being not satisfied with the outcome of this judgment filed appeal before the Apex Court. The Apex Court in its judgment in UNION OF INDIA Vs. IND-SWIFT LABORATORIES LTD [2011-TIOL-21-SC-CX] overruled the judgment of the High Court. It was held that the 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 the Supreme Court found no reason to read the word "OR" in between the expressions `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.

Thus, the Apex Court interpreted the provision of Rule 14 and held that Interest liability under Rule 14 of CCR, 2004 will arise from the date of taking credit and not from the date of utilization of credit.

Thereafter, came the judgment of the Karnataka High Court in the case of Commissioner of Central Excise & Service Tax, LTU, Bangalore v/s M/s Bill Forge Pvt Ltd, Bangalore [2011-TIOL-799-HC-KAR-CX] wherein the interpretation of the word ‘taken’ in Rule 14 was done in a different way. It was held that the actual taking of credit happens at the time of removal of excisable product. It is in the nature of a set off or an adjustment. Before that time it will amount to making a book entry in accounts. Thus, by merely making book entry which can be reversed before the removal of goods when the opportunity of utilization of credit arises, the interest liability will not arise. The Supreme Court has held that interest will be payable when credit is taken or utilized wrongly but the High Court has specified when the event of “Taking” of credit will occur.

Amendment in Rule 14 vide Budget, 2012: -

Rule 14 of the Cenvat Credit Rules, 2004 has now been amended vide Notification No. 18/2012-CE(NT) dated 17.03.2012 to clear the ambiguity. Now, the words “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly”.

Thus, one and for all, the ambiguity is cleared. And the assessee who otherwise would be on his tenterhooks while taking credit that whether any interest liability may not arise in future if he has wrongly taken the credit can relax. If only a mere book entry is made wrongly without utilizing the credit, then no interest liability will arise.

Before parting:-

This is a welcome step which will benefit the assessees. However, there is a glitch. The said change in Rule 14 is specified to come into effect only from 17.03.2012 onwards. And no retrospective effect is given. Thus, the assessee who have in the past taken the credit wrongly but have not utilized the same, will have to pay interest. However, here only slight relief will be available to them brought by the judgment of Karnataka High Court in the case of M/s Bill Forge Pvt Ltd, Bangalore that the Cenvat credit will be said to wrongly taken when the liability to pay the duty arises on the assessee that is at the time of removal of excise goods. Further, this relaxation to the assessees is limited upto interest only as the penalty is still imposable in the cases where the credit is wrongly taken but not utilized.

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Interest payable on Cenvat Credit taken and/or utilised

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