Eligibility of taking and utilizing credit during defaulting period when duty being paid by PLA on each consignment

PJ/Case Study/2012-13/08

CASE STUDY

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

Introduction:-

In case an assessee commits default in payment t of duty by the due date prescribed, he is required to clear the consignments by paying the duty from PLA and he is not allowed to use cenvat credit to discharge the duty liability. However, whether the assessee is eligible to take credit on duty paying inputs received during the defaulting period and whether credit so taken can be utilized after default has been rectified are the issues dealt with in this case.

M/s Meenakshi Associates v/s Commissioner of Central Excise, Noida
[2012-TIOL-587-CESTAT-DEL]

Relevant Legal Provisions:-

- Rule 8 of the Central Excise Rules, 2002 (As applicable at the relevant period): -

8. Manner of payment.-

(1) The duty on the goods removed from the factory or the warehouse during a month shall be paid by the 5th day of the following month:

Provided that in case of goods removed during the month of March, the duty shall be paid by the 31st day of March:

Provided further that where an assessee is availing of the exemption under a notification based on the value of clearances in a financial year, the duty on goods cleared during a calendar month shall be paid by the 15th day of the following month, except in case of goods removed during the month of March.

(3) If the assessee fails to pay the amount of duty by due date, he shall be liable to pay the outstanding amount along with interest at the rate specified by the Central Government vide notification under Section 11AB of the Act on the outstanding amount, for the period starting with the first day after due date till the date of actual payment of the outstanding amount.

(3A) If the assessee defaults in payment of duty beyond thirty days from the due date, as prescribed in sub-rule (1), then notwithstanding anything contained in said sub-rule (1) and sub-rule (4) of rule 3 of CENVAT Credit Rules, 2004, the assessee shall, pay excise duty for each consignment at the time of removal, without utilizing the CENVAT credit till the date the assessee pays the outstanding amount including interest thereon; and in the event of any failure, it shall be deemed that such goods have been cleared without payment of duty and the consequences and penalties as provided in these rules shall follow.

(4) The provisions of section 11 of the Act shall be applicable for recovery of the duty as assessed under rule 6 and the interest under sub-rule (3) in the same manner as they are applicable for recovery of any duty or other sums payable to the Central Government.

Brief Facts:-

- Appellants are manufacturers of excisable goods and they were paying excise duty as per provisions of Rule 8 of Central Excise Rules, 2002, on monthly basis before due date and were regularly filing ER-1 returns with the department.

- From the ER-1 returns, it appeared to the department that the default in payment of duty remained continue beyond 30 days of the said due dates. During the period from June 2006 to March, 2007 and April, 2007 to March, 2008, appellant paid an amount of Rs. 61, 07, 965/- and Rs. 55, 16, 681/- respectively through PLA and the rest amount of Rs. 67, 88, 315/- and Rs. 1, 00, 55, 614/- respectively through cenvat credit account as Central Excise duty.

- Department alleged that this appeared in contravention of the provisions of Rs. 8(3A), as the payment of Central Excise duty from the cenvat account in previously mentioned circumstances could not be treated as payment of Central Excise duty in respect of clearances could not be treated as payment of Central Excise duty in respect of clearance affected during the previously mentioned period. Detail of Central Excise duty deposited vide TR6 challans during the period June 2006 to March, 2007 and April, 2007 to March, 2008 are shown in respective notices by which demand was raised.

- It appeared that the appellant had not yet made payment of central Excise duty amounting to Rs. 67, 88, 315/- payable on the goods cleared during the month of June, 2006 to March, 2007 and Rs. 1, 00, 55, 614/- payable on the goods cleared during the month of April, 2007 to march, 2008. Since the default in payment of duty was continued beyond 30 days from the due date, the provisions of Rule 8(3A) appeared applicable and mandatory in this case. As per the said sub-rule, it was required to pay excise duty for each consignment at the time of removal without utilizing cenvat credit until the date of outstanding amount including interest due thereon be paid by them. Thus, it was alleged that in terms of Rule 8(3A), all such removals are deemed to be made without payment of duty so central excise duty of Rs. 1, 28, 96, 280/- involved on such removals during the period June 2006 to March 2007 and of Rs. 1, 55, 72, 295/- involved on such removals during the period April, 2007 to march, 2008 appeared demandable under Section 11A read with Rule 8(3A) alongwith interest under Section 11AB of the said Act. As the party deliberately contravened the provisions of Rule 4, 6, 8 of the said Rules with intent to evade payment of duty in as much as they did not consciously discharged duty liability in the manner as provided in the said rules, they rendered themselves liable for penal action under Rule 25 of said Rules, they rendered themselves liable for penal action under Rule 25 of the said rules read with Section 11AC of the said Act.

- Accordingly, two show cause were issued demanding excise duty in respect of removals of excisable goods deemed to have been cleared without payment of duty as mandated by Rules 8(3A) of the said rules, effected during the relevant period respectively already debited against the amount of duty so payable with interest. Penalty under Rules 25 of the said rules read with Section 11AC of the said Act for deliberate contravention of the Rules.

- Demand was confirmed. In appeal, the Tribunal remitted the matter for de-novo adjudication vide order dated 19.01.2009 since that order was passed without complying with principles of natural justice.

- The de-novo adjudication was done vide impugned order wherein the demand of Rs. 1, 28, 96, 280/- and Rs. 1, 55, 72, 295/- alongwith interest and also imposed penalty of equivalent to duty under Section 11AC of the Central Excise Act apart from appropriating some deposits made by the appellants towards this liability.

- Aggrieved by the said order, appellants have filed appeal before the Tribunal.

Appellant’s Contentions:-

- Appellants submitted that total duty payable for the relevant period, certain amount remained payable. And interest remaining was also paid.

- Appellant contended that short payment of interest for defaulting period occurred due to calculation error and was a bona fide mistake. The appellant’s themselves brought this to the notice of the department and paid the differential interest involved.

- The appellants contests that this short payment of interest and this matter has been condoned by the Commissioner himself vide para 5.7 of the order dated 31.12.2010 brought on record through Misc E/700/2011 Ex. So this cannot be a reason to demand duty afresh for time till this small differential payment in interest was made.

- According to appellants, the real default was only for the following period

(i) 04.08.2006 to 19.12.2006 because all payments to be made through PLA upto this date was paid.

(ii) Thereafter there was a default in payment of dues for Jan 2007 which default starts from 08.03.2007. The defaulted amount was paid on 13.03.07 but there was no clearance of goods during the defaulting period of 08.03.07 to 13.03.2007.

- It was contended that Revenue has demanded duty on all clearances from June 2006 to March 2008 totally ignoring the rules. The reason why the defaulting period is stated to start from June 06 is not clear when they defaulted for duty payable for the month of June 06 and under the Rule 8 (3A) the defaulting period started from 04-08-2008 that is 30 days after 05-07-2006 when the payment was due. The demand raised by Revenue is maintainable only if the Cenvat credit taken during the defaulting period is denied. The Rule 8(3A) actually does not negate taking of credit; it only negates utilization of credit during defaulting period. The impugned order does not specify what happens to the credit of duty paid on raw materials used in the manufacture of goods during the impugned period apparently because once this issue is dealt with the demand made collapses. It is only because of such calculated silence that the demand from the impugned order are disproportionately high considering the manufacturing activity done by the appellants during the said period, the payments made through PLA and the credit available to them. The Appellants submit that there was some default on their part which was declared to the department through monthly returns and they have paid penalties by way of interest for the defaulting period. If it all any further penalty is payable it cannot be equal to the duty which they have already paid. They argue that provisions of section 11AC of the Ac t is not applicable for the situation because they had no intention to evade payment of duty but they had declared the duty liability and there was only delay in payment of duty and that cannot be equated with duty evaded maliciously.

Respondent’s Contentions:-

Revenue submitted that they have collected the duty on the goods from their customers but did not deposit with the government. Rule 8 (3A) provided for stringent punishment for such practices and the consequences of the sub-rule should be enforced. He submits that as per the rule the appellants could not have utilized Cenvat credit during the defaulting period and duty paid during the defaulting period using Cenvat credit is no payment at all and that is why the duty is now demanded in c ash. He interprets Rule 8(3A) to mean that the Appellants are not eligible for the credit itself. However he is not able to give a proper reasoning for the faulty determination of the defaulting period starting from the very beginning of the month for which payment of duty has been defaulted.

Reasoning of the Tribunal:-

- The Tribunal noted that facts of default as presented by the appellant have not been contradicted in the impugned order by the Adjudicating Authority. It was noted in the impugned order that the appellant continued default from June 2006 to March 2008 without explaining without explaining which submission on facts or law made by the appellant.

- The Tribunal observed that the provisions in Rule 8(3A) it is clear that the provisions of the sub-rule will apply only after 30 days from the due date for payment of duty for any calendar month. Going by this, the default by the appellants were only for two periods namely,-

(i)                  04-08-2006 to 19-12-2006
(ii)                08-03-2007 to 13-03-2007

- Rule 8(3A) puts restriction on utilization of credit and not on taking of credit of duty paid on raw materials used. There can be an ingenious argument that as per rule 8 (3A) of Central Excise Rules, the goods cleared during defaulting period are deemed to be cleared without payment of duty and when goods are cleared without payment of duty a manufacturer cannot take credit of duty paid on raw materials used. This argument has not been raised by revenue but we have considered this argument also. Actually Rule 8 (3A) says that the goods will be deemed to be cleared without payment of duty and all the consequences under "these Rules" will follow. The reference is only to the C. E. rules and not to the Cenvat Credit Rules, 2004. The deeming fiction will apply only for applying penal consequences under Central Excise Rules 2002. The major consequence is that such goods would have been liable to seizure and confiscation under Rule 25 of C. E. Rules. In fact Rule 8(3A) is drafted to enable this as a means to compel the assesse to pay his declared dues promptly by the due date or at least within thirty days thereafter. Revenue has not c hosen to use this deterrent of seizure and confiscation but has c hosen to fasten huge liabilities through Show Cause Notices issued after considerable period of time. Once seizure is not adopted as a coercive measure for the impugned situation, the only other penal consequences that the Revenue can enforce are interest and penalties as per C. E. Rules and not denial of taking of Cenvat credit available under Cenvat Credit Rules 2004. The argument that the appellants collected the duty from customers but did not remit it to government is not quite appropriate because the Rules are made knowing fully well that the situations under Rule 8, and not just under Rule 8 (3A) are of that nature. Further even if assessee does not receive payments of the sale proceeds from the buyers then also payments of duty are to be made as provided in Rule 8.

- It was held that during the defaulting period payments should have been made through cash. If it is not so but through cenvat credit is not an appropriate payment. So interest on duty due on each clearance from the date of clearance to the date on which default was made goods will be payable at rate specified under Section 11AB of the Act till the defaulted amount is paid filly alongwith interest. That is to say there are two interest components to be paid – 1. interest on the defaulted amount till it is paid. 2. interest on duty payable on all the clearances during the defaulted period which duty is not through cash but paid through cenvat credit. If there was any short levy of interest which was not pointed out by the department when interest was paid such shortfall by itself cannot be reason for considering the assessee to be in default till the payment of interest correctly. So interest for the amounts on duty due on clearances for the month of June 06 to September 06 is payable. Further interest on duty due on clearances from 04.08.2006 to 19.12.2006 and also from 08.03.2007 to 13.03.2007 is payable by the appellants. Revenue directed to check the calculation of interest if found not to be done properly.

- The Tribunal added the observation on the issue: - Non payment of excise duty arises often in administration of excise levy. Show cause notices are issued in such cases as per provisions of Section 11A of the central Excise Act to recover duty short paid. Normally such short payment can be made goods by paying duty through cenvat credit as authorized by Central Excise Rules, 2002 and Cenvat Credit Rules, 2004. So there should be a reason why such payment cannot be accepted in this case. The reason behind this is that this is a situation covered by Rule 8(3A) and the Rule prescribes that so long as the assessee is in default for any previous month payment through cenvat credit is not a proper discharge of duty liability. This prohibition gets lifted the moment the default is made good along with appropriate interest on defaulted amount and normal situation is restored. So payments made through cenvat credit during the defaulting period also becomes good payment once the default is made good by paying the defaulted amount along with interest. Interest on deemed non-payment of duty on clearances during the period of default is a separate consequence but not critical in deciding whether the assesses continues to be in default.

- With regard to penalty, the Tribunal held that argument that Section 11AC will not apply to the situation is trite as the appellant himself declares the default while filing the return and there is no suppression in the matter. It was observed that the only question to be decided is the validity of imposition of penalty under Rule 25/26/27, reliance was placed on decision of Gujarat high court in CCE v.s SAuarashtra Cement Ltd [2010-TIOL-889-HC-AHM-CX and it was held that penalty under Rule 27 is the apperopriate penalty and reduce the penalty on appellants to Rs. 5000/-.

- Demand of duty set aside and penalty to Rs. 5000/-. It is recorded that if there is any short payment of interest in payment already made, either on defaulted amounts or on unauthorized use of Cenvat Credit, by the Appellants the same will be payable if properly calculated and communicated.

Decision of the Tribunal:-

Appeal partially allowed.

Conclusion:-

This is very good decision. If there is default in payment of duty beyond one month then the cenvat is freezed and payment is to be made in cash for each invoice in bank. Then you can dispatch the goods. Such type of provision does not exist in any other tax laws. The default happens when the manufacturer is in financial problem. You can ask him to pay the same along with interest. But we are adding fuel to fire by not allowing to use the Cenvat credit and paying everything in cash. A manufacturer who is already in financial problem, this rule leads to factory closure.

This decision is very good where he can use the cenvat credit. We have also come across certain cases where the manufacturer defaulted in payment for more than one month. But he did not pay the duty for each consignment in PLA. But he paid the duty within a week. The department came to know after one year and said that the default is still continued as you did not clear the goods in that week through PLA. Hence, the duty for the whole year should be paid from PLA and cenvat cannot be used. To our utter surprise, they maintained that the default is still continued and the demand for subsequent period was also issued. The manufacturer told us that if these demands are confirmed then we would handover the keys to the department. Field formations have their own fashion of working.

Moreover, if a manufacturer is regular clearing the goods through invoice, there is default in payment of duty but there is clandestine removal but he will not be allowed to take the credit. But a person clandestinely removes the goods and demand is confirmed then cenvat will be allowed as per various judicial pronouncements. This rule is not applicable in this case. Hence, who is better placed. One who is law abiding and clearing the goods on payment of duty and undertakes to pay the duty or the other who is involved in clandestine removal and does not pay the duty.

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PJ/CASE STUDY/2012-13/08
26 May 2012

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PJ/CASE STUDY/2012-13/08 26 May 2012

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PJ/CASE STUDY/2012-13/08
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