Wrong Credit Taken, but not Utilised - No Interest is payable, but Penalty is
THIS may look illogical and perverse, but Law is stranger than horror fiction and the level of logic especially in tax laws is slightly lower than what you find in Bollywood movies. Where else can you find a law which says that if Tribunal is not able to decide your case within one year, you have to pay the demand made in the Show Cause Notice faithfully reproduced in the Adjudication Order?
Well,this issue of interest on "credit taken and/or utilised" must be fresh in our memory.The Apex Court in the case of Ind Swift Labs had held that "interest is payable from the date of taking credit,not utilizing it". You can get more details in our story Irregular CENVAT Credit - Interest Payable from date of taking credit, not utilizing it: Supreme Court.
It must be admitted that in spite of a favourable order from no less an authority than the Supreme Court of India,the benign Government of India saw reason and logic and amended the Rule 14 of the CENVAT Credit Rules with effect from 17.03.2012 to spare the assessees from payment of interest in cases where wrong credit was taken but not utilised.
Relevant portion of Rule 14 prior to its amendment read as:
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………….
This was amended with effect from 17.03.2012,to read as
Where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded,the same along with interest shall be recovered from the manufacturer………
No to interest but yes to penalty
: while the Government amended this Rule 14 in respect of interest,it chose not to amend the Rule 15 relating to Penalty.It failed to substitute ‘ or' ‘ with ‘ and' in similar phraseology appearing in Rule 15 of CCR:
15.Confiscation and penalty.- (1) If any person, takes or utilises CENVAT credit in respect of input or capital goods or input services,wrongly or in contravention of any of the provisions of these rules,then,all such goods shall be liable to confiscation and such person,shall be liable to a penalty not exceeding the duty or service tax on such goods or services,as the case may be,or two thousand rupees,whichever is greater.
(2) In a case,where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud,collusion or any wilful mis-statement or suppression of facts,or contravention of any of the provisions of the Excise Act,or of the rules made thereunder with intent to evade payment of duty,then,the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.
(3) In a case,where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud,collusion or any wilful mis-statement or suppression of facts,or contravention of any of the provisions of these rules or of the Finance Act or of the rules made thereunder with intent to evade payment of service tax,then,the provider of output service shall also be liable to pay penalty in terms of the provisions of Section 78 of the Finance Act.
(4) Any order under sub-rule (1),sub-rule (2) or sub-rule (3)shall be issued by the Central Excise Officer following the principles of natural justice.
So,if you take CENVAT credit wrongly and do not utilise it,there is no interest payable,but you can still be liable to a penalty.Now there can be two penalties under Rule 15(1) and 15(2) above,which can amount to twice the credit taken!
Do you smell a rat? Did the Government forget to amend Rule 15 or was it left alone intentionally?
We understand that the Department in several places are activated on this subject. Already Audit points are raised and Show Cause Notices are being conceived.And with great capacity for quick conceptions,delivery may take place soon.
The Department's view is plain and simple.As per Rule 15,if you take credit wrongly,whether you utilise it or not,you are liable for confiscation of the goods and penalty.It is immaterial that Rule 14 does not demand interest if the credit is not utilised.
When I am not liable to pay interest,why penalty?,you ask logically.Read Rule 15,would be the humble reply of the adjudicator.
Interestingly, even some experts hold the view that even though interest is not leviable, penalty can be imposed.One of them argues,"as both penalty and interest were harsh, interest was deleted,but the assessee should be penalised for taking wrong credit and that is why penalty is imposed."
It will be in the interest of all concerned,if the Board can clarify this issue before it reaches the Supreme Court. Maybe the Government should amend Rule 15 in the ensuing budget.
The Twist in the Tale: The JSTRU in his Budget Letter in D.O.F.No.334/ 3/2012-TRU,dated 16.03.2012,clarified as,"Rule 14 is being amended to substitute the word "or" with "and" so that interest is not payable on credit wrongly taken unless the same is utilized. However, penalty provisions for such cases have not been amended."