Rule 14’s ‘Interest’ forgiven, amendment in ‘interest’ of assessee!!!

[Pradeep Jain]

The much anticipated “2015-2016 Finance Budget” is here. It was presented by Hon’ble Finance Minister, Arun Jaitley on 28^th February 2015. Was it in favour of the common man or of the revenue? Has it brought the reforms as were promised? Whether the dreams shown by NDA Government last year fulfilled? Have the good days arrived? Answers to these questions will be closely spotted when the modifications so brought will be made applicable in the days to come…

From the reading of finance bill it emerges that budget did not bring the big reforms but has aimed to initiate the journey for reforms and easing the taxonomy. The announcement of application of GST next year is one such indicator. Further the consolidation of excise and service tax rates in one single rate and abolishing the ‘cess’ showcase the same. The Prime minister in his live Lok Sabha Session on 27 February said that they aim to eradicate the ‘grey area’ in the nomenclature so that the ambiguity in law can be eradicated and shackles of litigation can be clogged.

One such amendment has been brought in Rule 14 which now finally brings a full stop to the yearlong battle between the revenue and assessee. By this articulation we wish to throw light on the same.

Testimony of Rule 14:- Rule 14 of the Cenvat Credit Rules, 2004 in earlier times read as under:

“4. Recovery of CENVAT credit wrongly taken or erroneously refunded.-

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 or the provider of the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

In the said Rule the use of “OR” in phrase ‘taken or utilized’ was the root problem. The revenue, as always considering the law in its natural form, issued a no. of show cause notices where the assessee erroneously had taken the credit, although the same was not utilized. The department mechanically interpreted the word ‘or’ and contented that interest was to be paid even if the credit was just a slip-up,. On the other hand the assessees pleaded that the word “or” should be read as “and” and interest should be payable only if the credit so taken was utilized by them. As by this only the revenue shall attract the loss of revenue and hence should be liable for interest.

Due to different elucidation, there were huge rounds of litigations. The following were the judicial pronouncements delivered on the issue:-

Judicial pronouncements all over the nation:-

A number of cases were decided on the issue, some favoured the Revenue and some assessees. When the matter came before the Hon’ble High Court of Punjab and Haryana in the case of Ind-Swift Laboratories Ltd v/s UOI [2009 (7) TMI 98 - PUNJAB & HARYANA HIGH COURT], the High Court held that in case credit was taken wrongly, interest is payable only from the date of utilizing the credit, but not from the date of taking of credit. That Rule 14 of the CCR, 2004 should be read to mean that interest is chargeable only from the date of utilizing of credit. No interest can be claimed from the date of wrongly taking the credit.

Revenue being not satisfied with the outcome of this judgment filed appeal before the Apex Court. The Apex Court in its judgment in UNION OF INDIA Vs. IND-SWIFT LABORATORIES LTD [2011 (2) TMI 6 - Supreme Court ] overruled the judgment of the High Court. It was held that the word "OR" appearing in Rule 14, twice, could not be read as "AND" as has been done by the High Court. If the aforesaid provision is read as a whole the Supreme Court found no reason to read the word "OR" in between the expressions `taken' or `utilized wrongly' or `has been erroneously refunded' as the word "AND". It was concluded that on the happening of any of the three aforesaid circumstances, such credit becomes recoverable along with interest.

Thus, the Apex Court interpreted the provision of Rule 14 and held that Interest liability under Rule 14 of CCR, 2004 will arise from the date of taking credit and not from the date of utilization of credit.

Thereafter, the judgment of the Karnataka High Court in the case of Commissioner of Central Excise and Service Tax, LTU, Bangalore v/s M/s Bill Forge Pvt Ltd, Bangalore [2011 (4) TMI 969 - KARNATAKA HIGH COURT ] was delivered wherein the interpretation of the word ‘taken’ in Rule 14 was done in a different way. It was held that the actual taking of credit happens at the time of removal of excisable product. It is in the nature of a set off or an adjustment. Before that time it will amount to making a book entry in accounts. Thus, merely by making book entry which can be reversed before the removal of goods, the interest liability will not arise. Accordingly, the Karnataka High Court departed from the view taken by the Apex Court in the case of Ind-Swift Laboratories Ltd.

Amendment in Rule 14 vide Budget, 2012: -

After the series of contrary verdicts, the government bought in a change in Rule 14 of the Cenvat Credit Rules, 2004 vide Notification No. 18/2012-CE(NT) dated 17.03.2012 to clarify the haziness contained in drafting of rule. The words “taken or utilized wrongly” were substituted by the words “taken and utilized wrongly”.

This amendment surely favored the assessee and the assessee who otherwise would be on his tenterhooks while taking credit as he could magnetize any interest liability in future if he has wrongly taken the credit, was relaxed after the amendment. This was an appreciable step taken by the government which almost ended the long battle.

And the budget 2015 was here!!!

In the said rules, for rule 14, the following rule has been substituted, namely:-

“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. -

(1) (i) Where the CENVAT credit has been taken wrongly but not utilised, the same shall be recovered from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;

(ii) Where the CENVAT credit has been taken and utilised wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.

(2) For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: -

(i) the opening balance of the month has been utilised first;

(ii) credit admissible in terms of these rules taken during the month has been utilised next;

(iii) credit inadmissible in terms of these rules taken during the month has been utilised thereafter.”.

Introduction of this substitution further shows direction to the adjudicating authority for the steps to be implemented by them while judging the issue of “credit wrongly taken” and “not utilized” or “not utilized.” The rule now says that:-

1. If the assessee has wrongly taken credit and has not utilized yet then all he has to do is reverse the same and the department can recover from him only the amount of tax but cannot levy any interest.
2. If the assessee has wrongly taken the credit and has utilized also or the cenvat credit has been erroneously refunded to the assessee then the adjudicating authority will recover the amount of service tax along with interest under the applicable section.

This amendment unambiguously rules out the provision which now cannot be unnecessarily brought into litigation anyhow by the revenue with a view to hassle the assessee.

This substitution further also provides the authority to take it deemed that assessee had followed the following procedure for taking the credit that is:-

1. It shall be taken that the opening balance of the credit in beginning of month has been utilised first i.e. ‘first in fist out method’ has been followed.
2. Thereafter the credit which was admissible has been utilized.

(iii) Lastly, the credit which was inadmissible has been utilized.

With insertion of this proviso, the government has further provided assessee a pleasant benefit as by this interest liability on assessee shall be computed from the end of the month and not from the beginning of the month, providing slight relief to the assessee. This provision further wipes out the grey area as the department now cannot pester the assessee by levying the interest on assessee from the beginning of the month.

This is an appreciatory step taken by the ministry providing a simplified procedure removing all the doubts and uncertainties and cutting out the root of the litigation only, leaving no scope of further litigation.

While parting away:-

The introduction of this provision is indeed a gratified step taken by the Finance Minster; however a glitch is still present as the abovementioned relaxation has not been extended to the penal provisions of Rule 15. The penal provision still uses the phrase “takes or utilizes” which means that penalty is still imposable in the case where the credit was wrongly taken but not utilized. Its an appeal to the government to kindly extent the benefit of amendment in Rule 14 to Rule 15 also and alter this glitch too.