Interest on un-utilised CENVAT Credit - The litigation continues …
IS an assessee required to pay interest when the irregular credit was never utilized and reversed later? It is now almost a routine matter for the Tribunal to dismiss the appeals filed by the assessee by relying on the decision of the Supreme Court in case of Ind-Swift Laboratories Ltd - 2011-TIOL-21-SC-CX. In swift disposal of the appeals, all that the Tribunal has to do is to simply follow the ratio of Supreme Court and dismiss the appeals. Even after Ind-Swift , many assessees believe that if the Credit is not utilized and is reversed, demand of interest is unjustified. And their view gets support from the decision of the High Court of Karnataka in Bill Forge Pvt Ltd , distinguishing the ratio of Ind-Swift - 2011-TIOL-799-HC-KAR-CX. This raises a fundamental question about the facts of Ind-Swift case, especially whether Ind-Swift had reversed the Credit without utilizing it.
In case of Ind Swift, the assessee was alleged to have availed/taken CENVAT credit on fake invoices and utilized it. The assessee approached Settlement Commission. The Settlement Commission ordered for payment of interest at the rate of 10%. The assessee while computing the interest on CENVAT Credit, did the most unusual thing. They computed the interest from the date of utilization of the credit till the date of payment/reversal. The department objected to this and demanded interest from the date of taking credit. The assessee contested this and the High Court of Punjab and Haryana held that ‘Reliance of respondents on Rule 14 of the Credit Rules that interest under Section 11AB of the Act is payable even if CENVAT credit has been taken. In our view, said clause has to be read down to mean that where CENVAT credit has been taken and utilized wrongly, interest should be payable on the Cenvat credit taken and utilized 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 a 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 utilized.'
However, the Supreme Court reversed the above ratio by holding that “the High Court misread and misinterpreted Rule 14 and wrongly read it down without properly appreciating the scope and limitation thereof. A statutory provision is generally read down in order to save the said provision from being declared unconstitutional or illegal. Rule 14 specifically provides that where CENVAT credit 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. The issue is as to whether the aforesaid 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 we find 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”.
Rule 14 has been amended with effect from 17.03.2012 to replace the words ‘taken OR utilized' with ‘taken AND utilized OR erroneously refunded'. In the changed scenario with effect from 17.03.2012, the following issues make an interesting reading.
Is the ratio of Ind-Swift is still applicable for the cases from 17.03.2012? If one has to interpret the amended Rule 14 in the light of Supreme Court's observation that OR appearing in Rule 14 cannot be read as AND, now the Rule itself reads AND, the ratio is not applicable. So, if Ind-Swift repeats the same offence after 17.03.2012, they will be liable to pay interest only from the date of utilizing credit. Let us analyse further with the help of two different situations.
Case 1: An assessee takes credit in 2010. Utilizes the same in 2012 (No doubt, CENVAT account is maintained as common pool for all credits and it is difficult to establish this, but let us assume that this is the only credit that this assessee had availed). In 2013, department finds it irregular. So he pays back this in 2013. Now, interest is applicable only from 2012, being the date of utilization.
Case 2: An assessee takes credit in 2010, does not utilize it. In 2013, the department finds it irregular, and the assessee reverses it. He is not liable to pay any interest.
Perhaps the intention behind the amendment in 2012 was only to take care of case 2, but inadvertently, case 1 is also getting the benefit of interest exemption from 2010 to 2012.
Maybe there should be two separate sub-rules in Rule 14 to prescribe liability to pay interest in two different situations above.
It is also interesting to note the High Court of Karnataka in case reported in while distinguishing the ratio of Ind-Swift held that ‘It (CENVAT Credit) 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 remains to be seen how the Supreme Court will decide the appeal that must have been filed by the revenue against the above order. But the CESTAT has viewed the Karnataka High Court decision as per incuriam and held Supreme Court Judgement in Ind-Swift is applicable. Please see 2013-TIOL-934-CESTAT-BANG, which we are carrying today
MODVAT was introduced in the year 1986 and even today, the lawmakers are not able to properly draft a rule to deal with applicability of interest and are burdening the judiciary!