Whether interest payable on Credit taken wrongly but reversed before utilisation ?

PJ/CASE LAW/2014-15/2551

Case:-COMMISSIONER OF C. EX. & CUS., VADODARA-II VERSUSDYNAFLEX PVT. LTD.

Citation:-2012 (25) S.T.R. 277 (Guj.)

Brief facts:- The respondent assessee i.e. DYNAFLEX PVT. LTD.is engaged in the manufacture of Polybags/flat films falling under Chapter 39 of Central Excise Tariff Act, 1985. During the course of audit, it was observed that the assessee had wrongly availed cenvat credit of Rs. 2,93,614/-. The assessee reversed the said credit from its cenvat credit account. However, it failed to pay interest of Rs. 4,919/- on the said credit availed by it. Pursuant to the aforesaid, Show Cause Notice dated 12th February, 2008 came to be issued to the assessee for recovery of the interest under Rule 14 of the said Cenvat Credit Rules, 2004 (the Rules) read with Section 11AB of the Act. Vide order dated 22nd May, 2008 made by the Adjudicating Authority, the show cause notice came to be dropped. Being aggrieved, the department filed appeal before the Commissioner (Appeals) who vide order dated 2nd March, 2009 dismissed the appeal. The department preferred second appeal before the Tribunal, who vide the impugned order dated 27th July, 2009 dismissed the appeal.

In this appeal under Section 35G of the Central Excise Act, 1944 (the Act), the appellant-Commissioner of Central Excise & Customs, Vadodara-II has challenged order dated 27th July, 2009 [2009 (248) E.L.T. 350 (Tri. - Ahmd)] made by the Customs, Excise and Service Tax Appellate Tribunal (the Tribunal) by proposing the following question:-

“Whether, in the facts and circumstances of the case, CESTAT is justified in holding that interest is not required to be paid when there is express provision in Rule 14 of the Cenvat Credit Rules, 2004, to the effect the interest is required to be paid in instances where cenvat credit has been taken wrongly?”

Appellant’s contention:- The appellant submitted that in the light of the provisions of Rule 14 of the Rules, the assessee was liable to pay interest on the credit taken wrongly, even if there was no malafide intent on the part of the assessee. According to the learned counsel, the express provision in respect of interest provided for in Rule 14 of the Rules cannot be disregarded. It was contended that in the light of the provisions of Rule 14 of the Rules, the Adjudicating Authority has no discretion to dwell upon such factors, that the wrongly taken credit was not utilised or that such credit was reversed voluntarily or that there was no malafide intent on the part of the assessee, so as to absolve it from the responsibility of paying interest. It was urged that the intention of legislature behind enacting such a provision is to strictly discourage the act of not only wrongly utilising the credit but of wrongly taking credit as well. It was submitted that the Tribunal has failed to appreciate that there is no scope of ambiguity in the text of Rule 14 of the Rules, and on a literal interpretation, it is apparent that in both the cases, that is, whether the credit is wrongly taken or utilized, the department is required to effect the recovery of cenvat credit along with interest. It was urged that if the restrictive interpretation adopted by the adjudicating authority is accepted for nor chargeability of interest then no recovery of interest on erroneous credit taken can be made under Rule 14 of the Rules and such a restrictive interpretation would lead to making the said provision purposeless and nugatory.

Respondent’s contention:- The respondent assessee pleaded for upholding the order of the Tribunal and contended that the appeal filed by the revenue should be dismissed.

Reasoning of judgment:- From the facts noted of the case heard from both the sides, the jury of the Hon’ble High Court stated that it was apparent that the Adjudicating Authority, the Commissioner (Appeals) as well as the Tribunal had held in favour of the assessee and against the revenue. The adjudicating authority had recorded that the assessee had not paid interest on the amount of cenvat credit which was admittedly availed wrongly but was, subsequently, reversed by it on being pointed out during the course of audit by the departmental officers. On behalf of the assessee, reliance had been placed upon a decision of the Supreme Court in the case of Maruti Udyog Ltd., 2007 (214) E.L.T. A-50 for the proposition that credit wrongly taken but not utilised does not amount to taking credit. The adjudicating authority was of the view that taking credit of 100% duty amount was only a bonafide mistake which had been corrected by reversing the wrongly availed amount of credit. Therefore, in the absence of any evidence to prove any malafide intention on the part of the assessee to take credit wrongly, imposition of penalty was not warranted.

They also stated the judgment of the Commissioner (Appeals) that after considering the material on record they were of the view that when credit was not utilised, the liability to pay interest did not arise. Further in the judgment of the Tribunal, in the impugned order, placed reliance upon various decisions of different High Courts and held that there was no infirmity in the view adopted by the Commissioner (Appeals).

In the light of the undisputed facts of the case, viz., the assessee had wrongly availed of cenvat credit, which came to be reversed from the cenvat credit account before utilisation, the short issue that arises for consideration is as to whether an assessee would become liable to pay interest under Rule 14 of the Rules when it has reversed the cenvat credit wrongly taken by it before utilizing the same.

In this regard it might be relevant to refer to the decision of the Apex Court in the case of Commissioner of C. Ex. Mumbai-I v. Bombay Dyeing & Mfg. Co. Ltd., 2007 (215)E.L.T. 3 (S.C.), wherein it had held been that when an entry had been reversed before utilization the same had amounted to not taking credit. Rule 14 of the Rules made provision for recovery of interest where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded. Thus, both, in case where CENVAT credit has been wrongly taken or wrongly utilized, interest, is recoverable under Rule 14 of the Rules. However, in the light of the aforesaid decision of the Supreme Court, when the entry had been reversed before utilization, the same had amounted to not taking credit. In the circumstances, where CENVAT credit was taken wrongly, but reversed before the same was utilized, it amounted to not taking credit. Accordingly, when no credit is taken, the provisions of Rule 14 of the Rules would not be attracted. The view adopted by the Tribunal as well as the authorities below was, therefore, in consonance with the view taken by the Supreme Court in the above referred decision.

In those circumstances, there was no infirmity in the impugned order of the Tribunal, so as to warrant interference. The impugned order of the Tribunal, did not give rise to any question of law, as proposed or otherwise, much less, a substantial question of law. The appeal was, accordingly, dismissed.

Decision:- Appeal dismissed.

Comment:-The gist of the case is that as per the judgment of the Supreme Court in the case of Bombay Dyeing & Mfg. Co. Ltd., it was held that when an entry has been reversed before utilization the same amounts to not taking credit & so when it is deemed that no credit was taken, then the liability to pay interest does not arise. Moreover, in the absence of any evidence to prove any malafide intention on the part of the assessee, it was concluded that the imposition of penalty was also not warranted.

Prepared by:- Kushal Shah

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PJ/CASE LAW/2014-15/2551

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