Rule 14 of CCR - Clarification not clarificatory in nature

RULE 14 OF CCR – CLARIFICATION NOT CLARIFICATORY IN NATURE

by- CA. Pradeep Jain,

CA. Preeti parihar and

sukhvinder kaur, llb (FYIC)

Introduction: -

Interest is the fine imposed for delay in payment of duty or for wrong availment of Cenvat Credit. There is no dispute in case of delay in payment of duty while in case of wrong availment of Cenvat Credit, but in case of wrong availment of Cenvat Credit - it has been a matter of litigation since a couple of years. The language contained in rule 14 of the Cenvat Credit Rules, 2004 which prescribes that interest will be levied in case of wrong availment of Cenvat Credit has been a matter of litigation since a couple of years. Now Board has issued a Circular to clarify the ambiguity contained in the language of rule 14. But is this clarification sufficient to put water on the fire of litigation? This article is all about the issue - since emergence till clarification given by Board.

Rule 14 of Cenvat Credit Rules, 2004: -

The Cenvat Credit Rules, 2004 provides that alongwith the Cenvat credit, interest will also be recoverable from the assessee if the Cenvat credit is taken or utilised wrongly or has been erroneously refunded. This Rule 14 reads as follows:-:

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

Where the CENVAT credit has been taken or utilized wrongly or has 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.”

Thus, if we literally interpret Rule 14, interest will be payable if Cenvat credit is wrongly taken and not utilised by the assessee. Thus, mere taking of Cenvat credit will also be exigible to interest. The presence of element of mens rea or malafide intentions is not consideration.

Conflict between Revenue and Assessees:-

The department has been interpreting the rule 14 literally and a no. of show cause notices have been issued to the assessees who have ever availed the Cenvat Credit wrongly – whether intentionally or unintentionally. Most of the assessees have gone in litigation against these issues invoked by the department. Their main contention has been the non utilization of the Cenvat Credit wrongly taken. It is always argued by the assessees that until the credit is utilized, it is mere a book entry as there is no loss of revenue to the government. The conflict reached the courts and a no. of decisions have been given, most of them are favouring the assessees.

Judicial Pronouncements:-

The High Court of Punjab & Haryana in the case of Commissioner of Central Excise, Delhi-III v/s Maruti Udyog Ltd [2007 (214) ELT 0173 (P & H)] has examined the issue that “whether interest was recoverable from a party on wrongly availed Modvat Credit taken by them in the year 1998 on the strength of certificate issued by the range Superintendent under Rule 57E on 29.03.95 under sub-rule 3 of Rule 57-I?”

The Hon’ble High Court held that it was not shown by the Revenue as how the interest was required to be paid when in absence of availment of Modvat credit in fact, the assessee was not liable to pay any duty. A clear finding had been recorded by the Tribunal that the assessee did not avail of the Modvat credit in fact and had only made an entry.

A Special Leave Petition to the Supreme Court was preferred by the Revenue against this decision of the High Court was dismissed.

In the case of Ind-Swift Laboratories Ltd v/s Union of India [2009-TIOL-440-HC-P&H-CX], the High Court of Punjab & Haryana had held that the relevant clause of Rule 14 that interest under Section 11AB of the Act is payable even if Cenvat credit has been taken or utilised wrongly

“………..is to be read down to mean that where Cenvat credit has been taken and utilised , interest should be payable on the 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 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.”[Para 11]

The Tribunal at Chennai in the case of Commissioner of Central Excise, Pondicherry v/s Superfil Products [2009-TIOL-428-CESTAT-MAD] has similarly held that

“……the wordings of Rule 12 of the Cenvat Credit Rules “taken or utilised” may deserve to be interpreted only as “taken and utilised”. [Para 6]

From these decisions it appears that the Courts have opted for harmonious interpretation of Rules, to avoid a situation leading to an anomaly.

Circular of the Board:-

The Central Board of Excise and Customs issued a Circular 897/17/2009-CX dated 3^rd September, 2009 on the issue of liability of interest where Cenvat credit was wrongly taken but reversed by assessee before utilization.

In the said Circular, they have clarified that the decision of Tribunal decision and the High Court judgement 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 judgement.

Thus, the Board is saying that the judicial decisions on interest where not applicable to present Rules in force i.e. The Cenvat Credit Rules, 2004. It was further held that

Since, the 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 utilized wrongly, it is clarified that the interest shall be recoverable when credit has been wrongly taken, even if it has not been utilized, in terms of the wordings of the present Rule 14.

Effect of the Board’s Circular: -

The effect of the Board’s Circular is that even if an assessee takes Cenvat credit wrongly he is liable to pay interest on wrongly taking Cenvat credit. As a result, if an assessee even mistakenly takes credit without knowing that he is not entitled to do so, the Department will swoop in on them with the power of Rule 14 and demand interest. This would lead to a mountain of unnecessary and avoidable litigation.

Principle of Harmonious Construction:-

“Principle of Harmonious Construction” – also known as principle of literal interpretation means where the plain reading of any statute does not convey the intended meaning or it leads to hardship or contradicts the ultimate purpose of framing the provision; it should be avoided and rather a liberal interpretation conveying the intended meaning should be taken.

In Maxwell on Statutes (10the Edn.) at page 229, the following passage is found:

“Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence ....Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsman’s unskillfulness or ignorance of the law, except in a case of necessity, or the absolute intractability of the language used.”

Even the hon’ble Apex Court of the country has held that if the principle of literal construction gives absurd result, it should be avoided. It is held in the case of I.T.C. Ltd. vs Commissioner of Central Excise, New Delhi [2004 (171) ELT 0433 (S.C.)]. The verdicts of hon’ble supreme court are produced as follows:-

“...if strict literal construction leads to an absurd, result i.e. result not intended to be subserved by the object of the legislation found in the manner indicated before, and if another construction is possible apart from strict literal construction then that construction should be preferred to the strict literal construction. Though equity and taxation are often strangers, attempts should be made that these do not mean always so and if a construction results in equity rather than in injustice; then such construction should be preferred to the literal construction.”

As such, even the Apex court is also of the view that while interpreting a provision “Principle of harmonious construction” should be kept in view.

Board circular – In contradiction to “Principle of Harmonious Construction”:-

In the instant case, if we go to principle of literal construction, rule 14 of the Cenvat Credit Rules, 2004 will convey the meaning that whether one wrongly takes or utilizes the Cenvat Credit, interest will be payable. Since the words used in the language are Cenvat Credit wrongly “taken or utilized” – it conveys a simple meaning interest is also payable even if we takes the credit, its utilization or otherwise is immaterial. This literal meaning is being affirmed by the Board circular.

However, this interpretation is of course very stringent as until the credit is utilized, it is merely a book entry and there is no loss of revenue. As such, a liberal meaning should be taken. Therefore, looking to the decisions given by various Courts in the similar issues and principle of harmonious interpretation as explained by the Apex Court; the Board Circular is of course a contradictory one.

WHAT ELSE THE BOARD CIRCULAR IS LACKING:-

The Board Circular has been issued solely on the basis of decision of Punjab and Haryana High Court in the case of Maruti Udyog Limited. The circular says that this decision 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. But as on the date of issue of Circular, there are a number of decisions in this matter that relate to the rule 14 of the Cenvat Credit Rules, 2004. The Circular does not speak a word on these decisions. Of course, Board Circular cannot be issued on the basis of only one decision while there are a number of decisions on the even issue.

Moreover, there is decision of hon’ble Supreme Court in case of Bombay Dyeing & Mfg. Co. Ltd. [2007 (215) ELT 3 (SC)] which says that reversal of Cenvat Credit before utilizing the same amounts to non taking of Cenvat Credit. Let’s think upon the verdicts of the highest court of India – reversal amounts to non taking of Cenvat Credit, i.e., if someone reverses the Cenvat wrongly taken before utilizing the same, department cannot proceed for recovering the Cenvat Credit so taken and debited before utilizing. In other words, no demand can be raised for recovery of the Cenvat Credit. When demand itself is not tenable in the eyes of hon’ble Supreme Court, where come the question of interest? We have thought upon, had the Board thought of it - the Circular would have clarified something else.

HERE BEGINS A NEW CHAIN OF LITIGATION:-

Board Circulars are issued for clarifying an ambiguous provision. But very often, these clarifications are issued blindly without considering the existing judicial pronouncements. As such, these do not serve the intended purpose for which they are meant. Similar situation is here. The Board has issued Circular which was meant for clarifying the ambiguity contained in the language of rule 14 of the Cenvat Credit Rules, 2004. But while issuing clarification, neither the judicial pronouncements nor the principle of harmonious construction have been taken care of. As such, situation is like as it was prior to issuance of this circular. Rather, the way will be tougher for the assessees as the department is now ready with this new weapon against the assessees. In the nutshell, the latest Board clarification is not clarificatory in nature and it will lit fire to a new chain of litigation.

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Rule 14 of CCR - Clarification not clarificatory in nature

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