Recovery of Interest on mere wrong availment of Cenvat Credit
By Ashok Batra, B.Com (Hons), LLB, FCA
According to Rule 14 of CENVAT Credit Rules, 2004, where the CENVAT credit has beentaken or utilized wronglyor has been erroneously refunded, the same along with interest shall be recoveredfrom the manufacturer or the provider of the output service and the provisions of sections 11A & 11 AB of the Central Excise Act 1944 or sections 73 and 75 of the Finance Act 1994, shall apply mutatis mutandis (i.e. with necessary changes) for effecting such recoveries. The moot question which has been examined in this article is whether the interest can be recovered from an assessee who firstly wrongly takes and subsequently reverses Cenvat Credit before its utilisation. In order to arrive at unbiased conclusion of this debatable issueall its ins and outs have been examined in depthin ensuing paragraphs.
In the first instance since theentire controversy emanates from the use of two words “taken” and “utilized”, it becomes desirable to have an appropriate understanding of meanings of these two critical words. Accordingly, the following two tables showcase the meanings of these two words as given in the well-known dictionaries:-
It is common knowledge that term “taken” is the past participle of word “take”. -
Sl. No. / Source / Meaning(s) of term “Take”1 / Oxford English Dictionary (6th Edition) / Get, Obtain, Receive, Acquire, Seize, Catch, Capture, Win
2. / English Thesaurus / Steal (i.e. Rob, Appropriate, Pocket, Grab, Misappropriate), Presume, Undertake(i.e. Adopt, Accept)
3. / Encarta Dictionary of North America / (a) Claim or assume something especially credit, glory or blame.
(b) Accept something (i.e. to accept something as valid, true or satisfactory)
(c) Do something (i.e. to carry something out).
(d) Interpret something in a particular way (i.e. to interpret, recognize/understand something especially somebody’s words/actions in a particular way).
4. / Black’s Law Dictionary (6th Edition) / To lay hold of, to gain or receive into possession, to seize, to assume ownership.
The underlined meanings in the above table help in getting fair idea of meaning of term ‘take’ in the present context. Thus, it can be safely inferred that the term ‘take’ means availment of Cenvat Credit i.e. taking credit of available Cenvat Credit.
On the other hand, the following table exhibits the dictionary meaning(s) of term ‘utilize’:-
Sl. No. / Source / Meaning(s) of term ‘Utilize”1. / Oxford English Dictionary (6th Edition) / Use, make use of, Exploit, consume.
2. / Encarta Dictionary of North America / Making use of something or find a practical or effective use for something.
3. / The Pocket Oxford Dictionary / Use, turn to account
In the context under contemplation the term ‘utilize’ can be interpreted as actual use of Cenvat Credit at the time of making the payment of output liability.
Nature of Interest
Before proceeding further,the author would like to invite the attention of readers towards nature of interest which will help them in understanding topic under reflection in a better way. It has been observed in a number of judicial pronouncements that interest is characteristically compensatory in nature. However, it would be suffice here to give a reference of Supreme Court Case in Pratibha Processor V Union of India-1996(88) ELT 12 (SC) wherein the Hon’ble Apex Court has brilliantly distinguished among the three terms i.e. “Tax”, “Interest” and ‘Penalty”. In respect of “Interest” it has been observed 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 geared to actual amount of tax withheld and the extent of delay in paying the tax on due date. The Apex Court went on to add that whereas interest is compensatory, the penalty is penal in character.
Next, in the following paragraphs both the sides of the topic under consideration have been microscopically examined:-
(I)Case Laws & Departmental Circular supporting the view that the interest is NOT recoverable if the assessee merely wrongly avails Cenvat Credit but does not utilise the same:-
According to one viewpoint interest is not recoverable from the assessee if he in the first instance unintentionally takes Cenvat Credit but subsequently reverses the same before its utilisation. In order to support this perspective following case laws are being given:-
(A) In CCE, Delhi III Vs Maruti Udyog Ltd [2007 (214) E.L.T. 173 (P & H)]upholding the decision of the Tribunal it was held that assessee was not liable to pay interest on Cenvat Credit which was taken as an entry in the Modvat Record but was not in fact utilised. The Hon’ble High Court perfectly agreed with the reasoning of the Tribunal that in the absence of utilisation of Cenvat Credit, the assessee was not liable to pay interest.
(B)The above view has also been upheld in CCE V Bombay Dyeings & Manufacturing Co. Ltd. (2007) 10 STT 286 (SC) it was inter alia held that reversal of credit by the assessee before utilisation implies that Cenvat Credit has not been taken.
It is also worthwhile toadd here that taking a cue from this judgment CBEC issued a Circular No. 858/16/2007-CX dated 8-11-2007. In the foregoing Circular it has been clarified that if an assessee reverses Cenvat Credit before its utilization it would tantamount to Cenvat Credit not having been taken .The relevant extract of this Circular is given below for ready reference:-
“In para 8 of above referred Supreme Court Decision (i.e. CCE V Bombay Dyeings & Manufacturing Co. Ltd. (2007) 10 STT 286 (SC) it has been held that even when credit is taken, if the entry is reversed before utilization, it would amount to not taking Cenvat Credit.”
As a resultDepartment cannot proceed for recovery of Cenvat credit wrongly taken and debited before utilizing. Thus, when demand itself is not tenable the question of interest does not arise.
(C) In the same way inInd. Swift Laboratories Ltd. v. Union of India, 2009 (240) E.L.T. 328 (P & H),it has been held that interest liability arises when duty is not levied or paid or there is delay in payment of duties. No liability to pay interest arises at the time of availment of Cenvat Credit. In different words, interest can not be claimed simply taking credit wrongly as availment by itself does not create any duty liability. Interest becomes payable from the date of wrong utilisation of Cenvat Credit.Liability to pay interest arises only at the time of utilisation of Cenvat Credit. The pertinent observations of this case are reproduced below:-
“Reliance of respondents on Rule 14 of Cenvat Credit Rules 2004is 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 co joint reading of Section 11AB of the Act and that of Rules 3 and 4 of aforementioned 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.”
Thus, according to Hon’ble High Court in a situation of mere wrongful availment of Cenvat Credit interest is not payable.
(D)In support of above standpoint inCommissioner of Central Excise v. Superfil Products, 2009 (237) ELT 552 (Tri-Chennai)it has been, inter alia, observed that the wordings of Rule 14 of the CENVAT Credit Rules 2004 “taken or utilized” may deserve to be interpreted only as “taken and utilized.”
(E) Finally in Commissioner of C.EX. Ahmadabad Vs Bodal Chemicals Ltd 2009(243) v E.L.T. (Tri-Ahmd.)the concerned assessee wrongly availed Cenvat Credit in the first instance. However, later on the impugned credit was reversed on being pointed out by assessee’s internal audit. It was held in interest was not payable in respect of credit wrongly availed if balance available in Cenvat account was more than amount of irregular credit throughout the period. In different words, it would tantamount to non-utilisation of Cenvat Credit. It was held that Interest was not payable because Cenvat Credit was not utilised.
(II) Departmental Circular supporting the view the interest is recoverable even if the assessee unintentionally takes but does not utilize Cenvat Credit:-
(A) CBEC vide its Circular No. 897/17/2009-CX., dated 3-9-2009pointed out thatsince, the Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT credit is taken or utilized wrongly, it isclarified that the interest shall be recoverable when credit has been wrongly taken, even if it has not been utilized, in terms of the wordings of the present Rule 14.Thus, according to aforementioned Departmental Circular interest is payable by an assessee if he wrongly takes Cenvat Credit despite the fact that he has not actually utilised the Cenvat Credit.
Practical Suggestion
After taking into account the pros and cons of crucial issue under concern, the readers are suggested as under:-
(A) If amount of interest involved is meager:-In view of the above mentioned Circular No. 897/17/2009-CX., dated 3-9-2009the assessee who inadvertently takes the Cenvat Credit (but reverses the same before utilisation) will have to pay interest because the Department will be relying of foregoing Circular. Accordingly, if the amount of interest on the Cenvat Credit wrongly availed is comparatively insignificant it is advisable to deposit the same with a view to avoid expensive, time-consuming litigation besides purchasing piece of mind.
(B) If amount of interest involved is substantial:-On the contrary if substantial amount of interest is involved on the Cenvat Credit wrongly availed but not utilized the concerned assessee maygo for the option of contesting the CBEC Circular No. 897/17/2009-CX. dated 3-9-2009 on the basis of the following:-
(i) Basic Nature of Interest
(ii) Foregoingjudicial pronouncements
(iii) Circular No. 858/16/2007-CX dated 8-11-2007.
CONCLUSION
The issue which appears to be settling down in view of above judicialpronouncements has again been unsettled by the Department by virtue of issuing a circular which is contrary to judicial pronouncements. In the well considered opinion of the author the Department should shun the practice of issuing circulars against judicial pronouncements which create unnecessary & non-recoverable demandsbesides damaging the reputation of the Department.
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