Thursday, 8 December 2011

Karnataka High Court explains the meaning of “taking” or “utilisation” of CENVAT credit and when interest provisions will get attracted

Background facts
The assessee is a company engaged in the manufacture of accessories of motor vehicles.. During the scrutiny of the central excise returns, it was observed that the assessee had taken excess CENVAT Credit on capital goods. Upon this fact being pointed out by the audit the assessee reversed the CENVAT Credit wrongly taken in the books. Quite apart the assessee also paid interest on the amount of education cess which was over utilized by them. A show cause notice was issued to them seeking to impose interest and penalty on the excess CENVAT credit taken and subsequently reversed and also on the excess of education cess availed.
Appellant’s contentions
 The Department was in appeal in this case against the order of the CESTAT. The Department, contended that in light of the decision of the Hon‟ble Supreme Court in IND-Swift Laboratories1, interest is payable once credit is taken as the assessee would be at liberty to utilize the same immediately thereafter
It was a clear case of taking the credit wrongly with an intention to avoid payment of duty which attracted penalty and hence the Tribunal was incorrect to set aside the penalty imposed on the assessee
1 Union of India v. Ind-Swift Laboratories – 2011-TIOL-21-SC-CX [2011 (265) ELT 3 (S.C)

Respondent’s contentions
 Section 11AB provides that interest is payable from the date duty is payable in order to compensate the revenue for the loss arising on account of the delayed payment of duty
 The clause particular clause in Rule 14 namely “taken or utilized wrongly”, does not mean that the assessee is benefitted when an entry is made in the books of accounts showing that the assessee is entitled to take credit of the duty paid on inputs, input services and capital goods.
 The benefit to the assessee arises only when the credit is taken or utilized towards the discharge of liability to pay duty.
 In the present case, as the entry (taking of credit) made in the books of accounts was reversed on being intimated by audit there is no benefit that the assessee obtained.
 The Supreme Court in Ind-Swift (supra) was concerned about the interpretation placed by the Punjab and Haryana High Court and this situation was not applicable to the instant case.
Question of law formulated by the Hon’ble High Court
 “The words CENVAT Credit has been taken” does it mean making an entry in the books of accounts showing the entitlement of the said credit or does it mean the said credit is found in the books of accounts taken while clearing the finished products”?
Observations of the Hon’ble High Court
Interpretation of section 11 AB of the Central Excise Act, 1944
 Section 11AB deals with the payment of interest on duty of excise which not been paid, levied or short paid or short levied or erroneously refunded.
 A person who is liable to pay duty in any one of those cases is liable to pay interest from the first date of the month succeeding the month in which the duty ought to have been paid.
 The Supreme Court in Indi-Swift was mainly concerned with the interpretation placed by the Hon‟ble Punjab and Haryana High Court where High Court had held that rule 14 of the Cenvat Credit Rules, 2004 had to be read down to mean that where credit has been taken and utilized wrongly, interest should be payable on the credit from the date the said credit had been utilized wrongly and the interest cannot be claimed simply for the reason that credit had been wrongly „taken‟. The Punjab and Haryana High Court further held that the word „OR‟ appearing in Rule 14 could be read as AND by way of reading down.
 The Supreme Court, while disagreeing with the reasoning of the Hon‟ble High Court said that as the Rule expressly employed the phrase „taken or utilized‟ wrongly, there is no reason to read the word „OR‟ in between the expression „taken‟ or “ utilized wrongly‟ or „has been erroneously refunded‟ as the word „AND”.
 The Supreme Court further said that on the happening of either of the three circumstances, interest is recoverable along with interest..
 In Rule 14 of the CENVAT Credit Rules, 2004, the word „avail‟ is not used
 Credit of excise duty in the register maintained for the said purpose is only a book entry, it might be utilized later for payment of excise duty at any-time thereafter when making payment of excise duty.
 The credit matures when the excisable product is received from the factory and the stage for payment of duty is reached. Instead of paying excise duty, the credit is utilized and hence set off against the duty payable and a debit entry is made in the register.
 Before the utilization of credit, the entry has been reversed, which amounts to not taking credit.
 Interest is compensatory in character and is imposed when payment of tax is withheld. If there is no liability to pay tax then there is no liability to pay interest. Section 11AB is attracted only on delayed payment of duty. In other words, the section does not stipulate that interest is payable from the date of the book entry. Interest cannot be claimed from the date of wrongful taking of CENVAT Credit and that the interest would be payable from the date CENVAT Credit is utilized wrongly.
Final Order
 When the assessee has reversed the entry, there is no benefit gained from the wrong entry of credit, in other words, the assessee did not take the credit or utilize the credit.
 Before the credit was taken it was reversed; it is as if the credit was not available hence the decision of Ind-Swift is not applicable in such cases.
 It is only when the assessee had taken credit, i.e. if he had not paid the duty which is legally due to the Government, the Government would have sustained loss. Then the liability to pay interest under section 11AB would arise in order to compensate the Government which was deprived of duty from the date it became due.
Source: Karnataka High Court Central Excise Appeal No. 96/ 2010 M/s Commissioner of Central Excise & Service Tax v.Bill Forge Pvt. Ltd
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