2011 (4) TMI 969 - HC - Central Excise

Interest and penalty for taking the Cenvat credit wrongly - assessee had availed wrongly the Cenvat credit on capital goods - Before the credit was taken or utilized the mistake was brought to its notice. The assessee accepted the mistake and immediately reversed the entry - assessee did not take the benefit of the wrong entry in the account books - claim of the Revenue was though the assessee has not taken or utilized this Cenvat credit because they admitted the mistake the assessee is liable to pay interest from the date the entry was made in the register showing the availment of credit Held that - once the entry was reversed it is as if that the Cenvat credit was not available. Therefore the said judgment of the Apex Court has no application to the facts of this case. It is only when the assessee had taken the credit in other words by taking such credit if he had not paid the duty which is legally due to the Government the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises under Section 11 AB in order to compensate the Government which was deprived of the duty on the date it became due. Without the liability to pay duty the liability to pay interest would not arise. The liability to pay interest would arise only when the duty is not paid on the due date. If duty is not payable the liability to pay interest would not arise Order of Tribunal upheld substantial question of law framed is answered against the Revenue and in favour of the assessee

The core legal questions considered by the Court in this appeal revolve around the interpretation and application of provisions relating to Cenvat credit under the Central Excise regime, specifically:

1. Whether the phrase "Cenvat Credit has been taken" means merely making an entry in the account books showing entitlement to such credit, or whether it means actual utilization of the credit while clearing finished products.

2. Whether interest under Section 11AB of the Central Excise Act is payable from the date of making the credit entry in the books (wrong availment) or only from the date the credit is actually utilized wrongly.

3. Whether penalty can be imposed for taking excess Cenvat credit when the assessee reverses the credit before utilization and admits the mistake promptly.

4. The applicability and interpretation of Rule 14 of the Cenvat Credit Rules, 2004, especially the significance of the word "or" between "taken" and "utilized wrongly" and whether it can be read as "and".

Issue-wise Detailed Analysis:

1. Meaning of "Cenvat Credit has been taken" - Entry vs. Utilization

The Court examined the nature of Cenvat credit as a book entry that may or may not mature into actual utilization against excise duty payable on finished goods. The Court relied extensively on authoritative precedents, including the Apex Court's decisions in Collector of Central Excise, Pune vs. Daichi Karkaria Ltd. and Chandrapur Magnet Wires (P) Ltd., which clarified that the credit is a contingent right that matures only upon utilization at the time of removal of excisable goods.

The Court noted that the credit is "actually taken" or availed when it is utilized to discharge excise duty liability, not merely when it is recorded in the books. The reversal of credit before utilization amounts to non-taking of credit. This interpretation aligns with the accounting treatment under the Modvat/Cenvat scheme, where the credit is a set-off against duty payable and does not reduce the cost of inputs unless utilized.

Thus, mere entry in the account books does not amount to taking credit for the purpose of liability under the statute.

2. Liability to Pay Interest under Section 11AB - From Date of Entry or Utilization?

Section 11AB imposes interest on delayed payment of excise duty from the date the duty ought to have been paid. Interest is compensatory, meant to compensate the Revenue for deprivation of duty amount that was due and payable but withheld by the assessee.

The Court analyzed the Apex Court's decision in Union of India vs. Ind-Swift Laboratories Ltd., which interpreted Rule 14 of the Cenvat Credit Rules and Section 11AB. The Apex Court rejected the High Court's reading that interest should be payable only from the date of wrongful utilization of credit, holding that interest is payable from the date the credit is "taken" wrongly, not only when utilized. The Apex Court emphasized that the word "or" in Rule 14 cannot be read as "and" to limit liability.

However, the present case facts differ from Ind-Swift. Here, the assessee reversed the excess credit entry promptly before utilization, thereby not actually taking or utilizing the credit. The Court held that since the credit was reversed before utilization, the assessee did not benefit or withhold duty, and hence no interest liability arises under Section 11AB.

The Court distinguished the Apex Court's ruling by highlighting that the liability to pay interest arises only when duty is withheld or short paid. Where credit is reversed before utilization, no duty is withheld, and no compensatory interest is payable.

3. Imposition of Penalty for Wrongful Availment of Credit

The Assessing Authority had imposed penalty on the ground that the assessee intentionally took excess Cenvat credit to avoid duty payment. The Tribunal, on reappreciation of facts, found no material to conclude that the excess credit was taken with fraudulent intent. The assessee admitted the mistake and reversed the credit promptly.

The Court endorsed the Tribunal's finding, holding that penalty cannot be imposed without evidence of contumacious or deliberate violation. The mere wrongful entry without utilization or benefit does not attract penalty. The Court emphasized the distinction between penalty (punitive) and interest (compensatory).

4. Interpretation of Rule 14 of the Cenvat Credit Rules, 2004

Rule 14 provides that where Cenvat credit has been "taken or utilized wrongly or has been erroneously refunded," the amount along with interest shall be recovered. The Court relied on the Apex Court's ruling that the word "or" must be given its natural meaning and not read as "and." Thus, liability arises on any one of these conditions being satisfied.

However, the Court clarified that "taken wrongly" means actual availment of credit, not mere book entries reversed before utilization. The rule is to be read harmoniously with Section 11AB, which imposes interest only on delayed payment of duty.

Application of Law to Facts and Treatment of Competing Arguments

The Revenue contended that once the credit entry is made, interest and penalty must follow, relying on the Apex Court's Ind-Swift judgment. The Court rejected this submission on facts, emphasizing that the assessee reversed the credit before utilization and paid interest on a minor amount that was actually utilized.

The assessee's counsel argued that interest is compensatory and arises only where duty is actually withheld. The Court accepted this view, noting that the assessee did not benefit from the wrong entry and promptly reversed it when pointed out.

The Court found the Tribunal's approach consistent with statutory provisions, judicial precedents, and the compensatory nature of interest. The Court held that the Revenue suffered no loss and the assessee did not gain any wrongful benefit, negating the basis for interest or penalty.

Significant Holdings:

"The liability to pay interest under Section 11AB arises when the assessee is liable to pay duty on the date which is prescribed under sub-section (1), fails to pay the same. Then the liability to pay interest arises from the date the duty is payable till the date it is paid. By such late payment or delayed payment, the Revenue is deprived of the duty."

"The credit of excise duty in the register maintained for the said purpose is only a book entry. It might be utilised later for payment of excise duty on the excisable product. It matures when the excisable product is received from the factory and the stage for payment of excise duty is reached. Actually, the credit is taken, at the time of the removal of the excisable product."

"Reversal of cenvat credit amounts to non-taking of credit on the inputs."

"Rule 14 specifically provides that where CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest would be recovered. We find no reason to read the word 'OR' in between the expressions 'taken' or 'utilized wrongly' or 'has been erroneously refunded' as the word 'AND'."

"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."

"Where the credit was reversed before utilization, the assessee did not take the benefit of the wrong entry in the account books. Hence, there is no liability to pay interest."

"Penalty is ordinarily levied on an assessee for some contumacious conduct or for a deliberate violation of the provisions of the particular statute. Mere wrongful entry without utilization or benefit does not attract penalty."

In conclusion, the Court answered the substantial question of law against the Revenue and in favour of the assessee, holding that mere wrongful entry of Cenvat credit reversed before utilization does not attract interest or penalty under the excise law provisions. Parties were directed to bear their own costs.

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