Interest liability on credit taken in terms of Rule 14 of CCR, 2004

PJ/Case Study/2011-12/36

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]
And Megha Jain, B. Com

Introduction:-

To err is human and human error is not uncommon. When an assessee takes credit of duty/service tax in their accounts, it is not always a certainty that credit was rightfully taken. The assessee can make an error also by taking credit wrongly and utilizing the same or he can also deliberately do so with mala fide intention to evade payment of duty take credit wrongfully. For wrongful taking and utilizing credit Rule 14 of the Cenvat Credit Rules, 2004 provides that the credit is to be recovered along with interest.

However, whether mere entry of credit in the Accounts records will amount to wrongfully taking of credit? Whether if the said credit entry is reversed without utilization of the credit taken wrongfully then also interest liability will arise?

In the case of Ind-swift Laboratories, the Punjab and Haryana High Court had held that the word ‘OR’ between words and phrases “Taken or utilized” in Rule 14 are to be read as ‘AND’. Therefore, when the credit is taken and utilized only then the interest liability will arise.

However, the Supreme Court has set aside the judgment of the High Court and held that the word ‘OR’ cannot be read down as “AND’ and interest liability will arise when credit is wrongly taken; or wrongly utilized or wrongly taken or utilized.

In the judgment under study, the High Court of Karnataka has interpreted the word “taken” in Rule 14 in a different way.

Commissioner of Central Excise & Service Tax, LTU, Bangalore v/s M/s Bill Forge Pvt Ltd, Bangalore
[2011-TIOL-799-HC-KAR-CX]

Relevant Legal Provisions:-

- Rule 14 of the Cenvat Credit Rules, 2004: -

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.

- Section 11AB of the Central Excise Act, 1944: -

SECTION 11AB. Interest on delayed payment of duty

(1) Where any duty of excise has not been levied or paid or has been short-levied or short- paid or erroneously refunded, the person who is liable to pay the duty as determined under sub- section (2), or has paid the duty under sub-section (2B), of section 11A, shall, in addition to the duty, be liable to pay interest at such rate not below ten per cent and not exceeding thirty-six per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first date of the month succeeding the month in which the duty ought to have been paid under this Act, or from the date of such erroneous refund, as the case may be, but for the provisions contained in sub-section (2), or sub-section (2B), of section 11A till the date of payment of such duty:

Provided that in such cases where the duty becomes payable consequent to issue of an order, instruction or direction by the Board under section 37B, and such amount of duty payable is voluntarily paid in full, without reserving any right to appeal against such payment at any subsequent stage, within forty-five days from the date of issue of such order, instruction or direction, as the case may be, no interest shall be payable and in other cases the interest shall be payable on the whole of the amount, including the amount already paid.

(2) The provisions of sub-section (1) shall not apply to cases where the duty had become payable or ought to have been paid before the date on which the Finance Bill, 2001 receives the assent of the President.
Explanation 1. - Where the duty determined to be payable is reduced by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, the interest shall be payable on such reduced amount of duty.

Explanation 2.- Where the duty determined to be payable is increased or further increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, the interest shall be payable on such increased or further increased amount of duty.

Brief Facts:-

- Assessee is engaged in the manufacture of accessories of motor vehicles falling under Chapter Sub Heading 87081090 of Central Excise Tariff. They are registered under the Central Excise Act, 1944. They availed Cenvat Credit of duty paid on the inputs, capital goods and the taxable services used in the manufacture of final product.

- During scrutiny of ER 1 Return for the month of June 2007, it was observed that the assessee had taken excess credit of Rs.98,77,446-00 on capital goods. The said fact was pointed out to the assessee. The assessee by their letter dated 12.09.2007 admitted the wrong committed by them and informed the Revenue that they have reversed the same in September, 2007. They have over drawn only an amount of Rs.11.691-00 in payment of Education Cess for the month of July 2007 and the interest liability calculated thereon at Rs.184-00 has since been debited in their PLA account on 27.09.2007.

- Revenue Department issued Show cause notice to the assessee for payment of interest and for imposition of penalty for wrongful availment of Cenvat Credit.

- In their reply, assessee submitted that the mistake of taking excess credit has occurred only in the capital goods credit account and not in the other account, namely input credit and service tax credit. That the availment of excess credit has not resulted in any over-drawal in the credit account. Therefore no interest is payable on such wrongly availed credit. In view of the reversal of the credit and interest paid for the overdrawn amount, they requested for dropping of further proceedings.

- The Assessing Authority held that the mistake is an intentional one, made with an intention of avoiding payment of duty and therefore the assessee are liable to pay penalty. It also held that the interest is payable from the date of availment of the credit and accordingly confirmed the demand.

- Assessee filed appeal to the Tribunal. The Tribunal held that when the assessee had wrongly taken the credit to the extent of Rs.98,77,446-00 in their cenvat account without receipt of capital goods in June 2007 and the same was reversed in September 2007, there is no dispute that the assessee had not utilized the said credit except to the extent of Rs.11,691-00 towards education cess. The material on record does not give rise to a conclusion that the assessee had taken irregular credit with an intention to avoid payment of duty. Therefore the Tribunal held that imposition of penalty is unsustainable and accordingly set aside the said portion of the order. In so far as payment of interest is concerned, they relied on the judgment of the Punjab and Haryana High Court in the case of CCE Delhi Vs. Maruthi Udyog Ltd., [2007 (214) ELT A 50)] and held that as the assessee had only made an entry in the records and actually not taken or utilized such credit, the question of payment of any interest would not arise. Therefore, the levy of interest was also set aside.

- Aggrieved by the said order, the Revenue is in appeal before the High Court.

Appellant’s Contention:-

- Revenue contended that in view of the judgment of the Apex Court in the case of UNION OF INDIA Vs. IND-SWIFT LABORATORIES LTD [2011-TIOL-21-SC-CX], interest is payable once the credit is taken as the assessee would be at liberty to utilize the same immediately thereafter subject to the Credit Rules and therefore the Tribunal committed a serious error in setting aside the levy of interest from the date of taking credit.

- Revenue also contended that it is a clear case of taking the credit wrongly with an intention of avoiding payment of excise duty which attracts penalty and therefore the Tribunal committed a serious error in setting aside the penalty imposed by the Commissioner.

Respondent’s Contention: -

- Assessee pointed out that Section 11-AB expressly provides that the interest is payable from the day the duty is payable, in order to compensate the Revenue for the loss sustained on account of delayed payment of duty. Even in Rule 14 on which reliance is placed, the word used is "taken or utilized wrongly". It does not mean that when an entry is made in the account book showing that assessee is entitled to take credit of the duty paid on inputs or capital goods or input services the assessee is benefited to any extent. It is only, when that credit is taken or utilized to discharge the liability to pay duty he is benefited. If the said credit is taken wrongly, the liability to pay interest arises. In their case, though the entry was made in the account book showing availment of credit on being pointed out, the said entry was reversed. Thus, the assessee did not take or utilize the benefit of the said credit and therefore there is no liability to pay interest.

- Therefore Assessee submitted that even in the judgment relied on by the Revenue, in the facts of this case, the interest was levied from the date the duty was payable and not from the date the entry of Cenvat credit made in the books of account. That the Supreme Court was concerned about the interpretation placed by Punjab and Haryana High Court while interpreting "OR" as to be read as "AND" found in the Cenvat Rules. It has no application, to this case.

Issue: -

Whether mere entry made in the accounts book of credit availed will amount to taking of "Cenvat Credit” or it will be taking of credit clearing the finished products?

Reasoning of the High Court:-

- The High Court noted that the payment of interest on delayed payment of duty is provided under Section 11AB and perused the same. It was noted that Section 11AB deals with payment of interest on any duty of excise which has not been levied or paid or has been short levied or short paid or erroneously refunded. A person who is liable to pay duty in any one of those cases is liable to pay interest at such rate not below 10% and not exceeding 35% p.a. from the first date of the month succeeding the month in which the duty ought to have been paid under this Act or from the date of such erroneous refund, as the case may be. However, the proviso to said Section makes an exception in cases where no interest shall be payable.

- The High Court perused the judgment of the Apex Court in PRATHIBA PROCESSORS vs. UNION OF INDIA [2002-TIOL-273-SC-CUS] wherein the term tax, interest and penalty in Fiscal Statute were explained. The High Court held that it is clear that the liability to pay interest under Section 11AB arises when the assessee is liable to pay duty on the date which is prescribed under sub-section (1), fails to pay the same. Then the liability to pay interest arises from the date the duty is payable till the date it is paid. By such late payment or delayed payment, the Revenue is deprived of the duty. The said amount would be in possession of the assessee who would have the benefit of the said amount. It is to compensate the loss sustained by the Revenue, the interest is imposed, i.e. interest is payable for the period during which the Revenue is deprived of the duty, which it was legitimately entitled to and as the assessee had the benefit of the duty by not paying the duty payable on the due date. In other words it is compensatory in character, and is imposed on the assessee who has withheld payment of any tax as and when it due and payable.

It is in this context, the High Court saw judgments of the Apex Court dealing with the Modvat Scheme, where an assessee is liable to pay the duty when he wants to have the benefit of the said scheme. The High Court perused the judgment of the Apex Court in the case of COLLECTOR OF CENTRAL EXCISE, PUNE vs. DAICHI KARKARIA LTD [2002-TIOL-79-SC-CX].

- The High Court also perused judgments of the Apex Court in the cases of CHANDRAPUR MAGNET WIRES (P) LTD. V. CCE [2002-TIOL-41-SC-CX]; COMMISSIONER OF CENTRAL EXCISE VS. BOMBAY DYEING & MFG. CO. LTD [2007-TIOL-141-SC-CX]. As well as the judgment of the Gujarat High Court in the case of COMMISSIONER OF CEAITRAL EXCISE Vs. ASHIMA DYECOT LTD [2008-TIOL-659-HC-AHM-CX].

- The High Court then perused the judgment of the Apex Court in the case of UNION OF INDIA vs. M/s. IND-SWIFT LABORATORIES LTD [2011-TIOL-21-SC-CX]. The High Court noted that the Apex Court was essentially concerned with the interpretation placed by the Punjab and Haryana High Court where it had held that Rule 14 of the Cenvat Credit Rules, 2004 had to be read down to mean that where Cenvat credit has been taken or utilized wrongly interest should be payable on the Cenvat credit from the date the said credit had been utilized wrongly and that interest cannot be claimed simply for the reason that Cenvat credit has been wrongly taken as such availment by itself does not create any liability of payment of excise duty. Further they held that the word 'OR' appearing in Rule 14 twice could be read as 'AND' by way of reading it down.

Disagreeing with the said reasoning, the Apex Court held that Rule 14 specifically provides that where Cenvat has been taken or utilized wrongly or has been erroneously refunded, the same along with interest would be recovered from the manufacturer or the provider of the output service. If the aforesaid provision is read as a whole we find no reason to read the word 'OR' in between the expression '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. Therefore the High Court erroneously held that interest cannot be claimed from the date or wrong availment of Cehvat credit, that they should be payable from the date when the Cenvat credit is wrongly utilized. Therefore the attempt on the High Court to read down the provision by way of substituting the word 'OR' by an 'AND' so as to give relief to the assessee is found to be erroneous.

- The High Court held that in view of the aforesaid authoritative pronouncement of the Apex Court, the word 'OR' found in Rule 14 cannot be read as 'AND'. Further, once the credit is taken or utilized wrongly or has been erroneously refunded, such credit becomes recoverable along with interest.

In fact, in the case before the Apex Court, the assessee received inputs and capital goods from various manufacturers/ dealers and availed Cenvat credit on the duty paid on such materials. The investigations conducted indicated that the assessee had taken Cenvat credit on fake invoices. When proceedings were initiated, the assessee filed applications for settlement of proceedings and the entire matter was placed before the Settlement Commission. The Settlement Commission held that a sum of Rs.5,71,47,148-00 is the duty payable and simple interest at 10% on Cenvat credit wrongly availed from the date the duty became payable as per Section 11 AB of the Act till the date of payment. The Revenue calculated the said interest up to the date of the appropriation of the deposited amount and not up to the date of payment. Therefore, it was contended that interest has to be calculated from the date of actual utilization and not from the date of availment. Therefore, an application was filed for clarification by the assessee. The said application was rejected upholding the earlier order, i.e., interest is payable from the date of duty becoming payable as per Section 11-AB. Therefore the Apex Court interfered with the judgment of the Punjab and Haryana High Court and rightly rejected by the Settlement Commission as it was outside their scope and they found fault with the interpretation placed on Rule 14.

- The High Court perused the provisions of Rule 14 of the Cenvat Credit Rules, 2004 and noted that the same makes it very clear that the said provision is attracted where the Cenvat Credit has been taken or utilized wrongly or has been erroneously refunded. In view of the aforesaid judgment of the Apex Court, the question of reading the word 'and' in place of 'or' would not arise. It is also to be noticed that in the aforesaid Rule, the word 'avail' is not used. The words used are 'taken' or 'utilized wrongly'. Further the said provision makes it clear that the interest shall be recovered in terms of Section 11A and 11B of the Act.

- It was held that from the aforesaid discussion what emerges is that the credit of excise duty in the register maintained for the said purpose is only a book entry. It might be utilised later for payment of excise duty on the excisable product. It is entitled to use the credit at any time thereafter when making payment of excise duty on the excisable product. It matures when the excisable product is received from the factory and the stage for payment of excise duty is reached. Actually, the credit is taken, at the time of the removal of the excisable product. It is in the nature of a set off or an adjustment. The assessee uses the credit to make payment of excise duty on excisable product. Instead of paying excise duty, the cenvat credit is utilized, thereby it is adjusted or set off against the duty payable and a debit entry is made in the register. Therefore, this is a procedure whereby the manufacturers can utilize the credit to make payment of duty to discharge his liability. Before utilization of such credit, the entry has been reversed, it amounts to not taking credit. Reversal of cenvat credit amounts to non-taking of credit on the inputs.

- It was held that Interest is compensatory in character, and is imposed on an assessee, who has withheld payment of any tax, as and when it is due and payable. The levy of interest is on the actual amount which is withheld and the extent of delay in paying tax on the due date. If there is no liability to pay tax, there is no liability to pay interest, Section 11AB of the Act is attracted only on delayed payment of duty i.e., where only duty of exercise has not been levied or paid or has been short levied or short paid or erroneously refunded, the person liable to pay duty, shall in addition to the duty is payable from the date of book entry, showing entitlement of Cenvat credit. Interest cannot be claimed from the date of wrong availrnent of CENVAT credit and that the interest would be payable from the date CENVAT credit is taken or utilized wrongly.

- The High Court held that in the instant case the facts are not in dispute. The assessee had availed wrongly the Cenvat credit on capital goods. Before the credit was taken or utilized, the mistake was brought to its notice. The assessee accepted the mistake and immediately reversed the entry. Thus the assessee did not take the benefit of the wrong entry in the account books. As he had taken credit in a sum of Rs.11,691-00, a sum of Rs.154-00 was the interest payable from the date the duty was payable, which they promptly paid. The claim of the Revenue was, though the assessee has not taken or utilized this Cenvat credit, because they admitted the mistake, the assessee is liable to pay interest from the date the entry was made in the register showing the availment of credit.

According to the Revenue, once tax is paid on input or input service or service rendered and a corresponding entry is made in the account books of he assessee, it amounts to taking the benefit of Cenvat credit. Therefore interest is payable from the date, though, in fact by such entry the Revenue is not put to any loss at all. When once the wrong entry was pointed out, being convinced, the assessee has promptly reversed the entry. In other words, he did not take the advantage of wrong entry. He did not take the Cenvat credit or utilized the Cenvat Credit. It is in those circumstances the Tribunal was justified in holding that when the assessee has not taken the benefit of the Cenvat credit, there is no liability to pay interest. Before it can be taken, it had been reversed. In other words, once the entry was reversed, it is as if that the Cenvat credit was not available.

Therefore, the said judgment of the Apex Court has no application to the facts of this case. It is only when the assessee had taken the credit, in other words by taking such credit, if he had not paid the duty which is legally due to the Government; the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises under Section 11 AB in order to compensate the Government which was deprived of the duty on the date it became due. Without the liability to pay duty, the liability to pay interest would not arise. The liability to pay interest would arise only when the duty is not paid on the due date. If duty is not payable, the liability to pay interest would not arise.

- In the end the High Court held that no error in order of the Tribunal. Substantial question of law answered in favour of assessee and against the Revenue.

Decision of the High Court:- Appeal rejected.

Conclusion:-

The Karnataka High Court has 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.

This judgment will really help the hapless assessee who has by mistake made a book entry of credit which was not admissible to him and has not utilized the same but reverses the entry before clearances of excisable goods. They will not have to pay interest for a mere book entry.

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PJ/CASE STUDY/2011-12/36
14 December 2011

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PJ/CASE STUDY/2011-12/36
14 December 2011