Rightly availed but wrongly utilized?

[Shilpa G.]

Considerable opinion has been expressed about the statutory mandate in the Central Excise Act (“CEA”) regarding the utilization of CENVAT credit by manufacturing companies and service providers. Some months ago, the picture was this: Rule 3(4) of the CENVAT Credit Rules (“CCR”) allowed the assessee to utilize available credit for the payment of any excise duty, and/or for clearance purposes, and service tax on output service, and such credit, if utilized wrongly, was liable to be recovered from the assessee along with interest as per Rules 14 of the CCR. The conjunction ‘or’ occurring in the phrase “taken or utilized wrongly” in Rule 14 was construed to mean that wrongly utilized credit was liable to be recovered irrespective of whether same was availed in accordance with the provisions of the CCR or not. Also, the judiciary has been categorical in holding that the interest charged on such wrongly utilized credit shall be calculated from the date of utilization of the credit and not from the date of its availment. Nonetheless, that interpretation had a huge impact on the manufacturing companies, especially on the small and medium size industries, where default in statutory compliance is caused primarily due to the ignorance of the mandate of Rule 3(4) more than anything else.

In such a crisis, the notification of March 2012 (No.18 of 2012) substituting the word “and” with “or” by way of an amendment in Rule 14 comes as a sigh of relief. The law, as it currently stands, follows thus: CENVAT credit taken and utilized wrongly shall be recovered from the manufacturer of excisable goods and provider of output service alongwith interest. This can be interpreted to mean that the available credit has to be both taken and utilized wrongly to attract Rule 14. In other words, wrongly utilized credit is not subject to recovery provisions if same has been availed rightly i.e. according to the provisions of the CCR. But does this interpretation not mar the provisions of Rule 3(4)? In this backdrop let us revisit the prerequisites of utilizing credit contained in that Rule. Rule 3(4) provides for seven instances where CENVAT credit can be utilized by the assessee subject to certain exceptions provided in the same Rule. The effect of non-compliance with Rule 3(4) is the recovery provision under section 11AA of the CEA which is applied mutatis mutandis to Rule 14. But again the new Rule 14 authorizes recovery of credit only if same has been taken and utilized wrongly and not in cases where credit has been availed rightly. In other words, the law frowns only on the irregular availment of CENVAT credit and not on wrong utilization of rightly availed credit.

Two propositions can be carried forward from here. First, the amended Rule 14 attracts only those cases where credit has been availed wrongly irrespective of whether same has been utilized rightly or not. Secondly, in the absence of any locus standi under Rule 14, the consequential provision of section 11AA of the CEA shall also not attract wrong utilization of rightly availed credit. These two propositions lead to only one conclusion: the amendment in Rule 14 has left Rule 3(4) redundant in as much as the recovery of wrongly utilized credit alongwith interest in derogation with the manner specified in that Rule has become at best illusory. This has left the Department with two options: either it should cease to pursue cases of wrong utilization of credit or bring about further amendment in the CCR to harmoniously apply the two Rules. While the final say rests with the Department, we can only hope that it does not let the grass grow under its feet till the judiciary finally steps in.

Shilpa G. is a lawyer at Trinity Law Partners, Kolkata. The comments made in this article are those of the author and not of the firm. Please send comments or queries at tlp@tlplegal.com.