2025 (5) TMI 1991 - AT - Central Excise

Interest for the irregularly taken and utilized cenvat credit for the intervening period - interpretation of Rule 14 of the CENVAT Credit Rules 2004 (CCR) - HELD THAT - Before the amendment brought was with effect from17.3.2012 this issue of cenvat credit being taken or utilized was subject matter of litigation and was resolved by Tribunals and Courts that so long as the cenvat remains in the balance it cannot be taken as utilized and accordingly no interest is required to be paid. The Karnataka High Court in the case of CCE ST LTU Bangalore Vs Bill Forge Pvt Ltd. 2011 (4) TMI 969 - KARNATAKA HIGH COURT has held that 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 11AB 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. In the present case for the period subsequent to 1.3.2015 the appellants are covered by the amendment brought in. For the period prior to this date the cited case law of Bill Forge would be applicable. The legislative intent gets clarified by the amendment brought in with effect from 1.3.2015 wherein the decision is to refrain from charging the interest if the amount remains unutilized even after being taken. In order to come to this conclusion the factual details have to be considered as to whether the cenvat credit balance carried is sufficient to meet the reversal requirement. In the present case as per the Table given above it is seen that the amount being carried forward as Cenvat Credit is much more than the reversed amount. The Revenue has not brought to the contrary. No interest is required to be paid by the first appellant for the Cenvat Credit already reversed by them before issue of SCN. The impugned order is set aside. Consequently the penalties imposed on the appellants 1 2 and 3 are also set aside. Conclusion - The interest liability for wrongly availed CENVAT credit arises only upon utilization of such credit and mere wrongful availment followed by prompt reversal does not attract interest or penalty absent fraud or suppression. Appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the recovery of CENVAT credit wrongly availed by the appellant and the consequent liability for interest and penalty. Specifically, the issues include: (i) whether interest is payable on irregularly availed CENVAT credit that was reversed before utilization and prior to issuance of the show-cause notice (SCN); (ii) the interpretation of Rule 14 of the CENVAT Credit Rules, 2004 (CCR) as it stood during the relevant periods, especially concerning the words "taken" and "utilized" and the effect of subsequent amendments; (iii) the applicability and justification of penalties imposed under Rule 15(2) of CCR read with Section 11AC of the Central Excise Act, 1944 (CEA), and Rule 26 of the Central Excise Rules, 2002; and (iv) the liability of individuals (Appellants 2 and 3) for penalties in the absence of mens rea.

Regarding the first issue on interest liability, the relevant legal framework includes Rule 14 of CCR and Sections 11A and 11AA of the CEA, which govern recovery of wrongly taken or erroneously refunded CENVAT credit along with interest. The interpretation of Rule 14 underwent significant changes: prior to 17.03.2012, the rule used the word "or" between "taken" and "utilized" wrongly; from 17.03.2012, the word "or" was replaced by "and"; and from 01.03.2015, a further amendment clarified that interest is payable only if the credit has been both taken and utilized wrongly, while mere wrongful taking without utilization attracts recovery without interest.

The Court analyzed these provisions in light of authoritative precedents. The Apex Court had held that the word "or" in Rule 14 prior to 2012 must be given its natural meaning and not read down to "and," thereby entitling the Revenue to recover interest from the date the credit was either taken or utilized wrongly. However, subsequent amendments and judicial decisions clarified that interest is compensatory and payable only when the credit is utilized wrongly, as mere booking of credit without utilization does not deprive the Revenue of duty. The Karnataka High Court in CCE & ST LTU Bangalore v. Bill Forge Pvt. Ltd. and a Larger Bench decision in J.K. Tyre & Industries Ltd. v. Asst. Commr. of C.Ex., Mysore, along with other Tribunal decisions, emphasized that interest liability arises only upon utilization of the credit, not on mere availment.

Applying these legal principles to the facts, the Court noted that the appellant had availed irregular CENVAT credit during October 2014 to August 2015 but had reversed the same promptly before issuance of the SCN. The reversal was done in the CENVAT credit ledger, not by cash payment, indicating that the credit was never utilized. The appellant also maintained a sufficient balance in the CENVAT credit ledger throughout the period, which was not disputed by the Revenue. The Court examined detailed monthly balances and irregular credits, finding that the appellant's unutilized credit balance exceeded the irregular credit reversed.

The Court further distinguished the period before and after the amendment effective 01.03.2015. For the period from March 2015 onwards, the appellant was clearly covered by the amendment exempting interest liability on unutilized credit. For the prior period, the Court relied on the Bill Forge judgment and other precedents to hold that no interest is payable if the credit was reversed before utilization. The Court emphasized the compensatory nature of interest under Section 11AB of the CEA, which is payable only when there is delayed payment of duty causing deprivation to the Revenue. Since the appellant did not utilize the irregular credit, no deprivation occurred, and hence no interest liability arose.

Regarding the penalty issue, the appellant contended that penalty under Rule 15(2) of CCR read with Section 11AC of the CEA requires proof of fraud, suppression, or willful misstatement, none of which existed here. The appellant had disclosed the credit in returns, reversed the irregular credit promptly, and committed a bona fide mistake. The Court noted that penalties cannot be imposed merely for inadvertent errors without mens rea. The appellant also relied on recent judgments holding that penalties are not sustainable in cases of bona fide mistakes without suppression. The Court found no justification for penalties on Appellants 2 and 3, who had no mens rea, and observed that the Revenue's contention that penalties were justified because these individuals were responsible for day-to-day activities was unsupported by evidence of intent or collusion.

The Court also addressed the Revenue's argument that the irregularity came to light only due to investigation, justifying interest and penalty. The Court rejected this on the ground that the appellant had reversed the credit before SCN and maintained sufficient balance, negating any loss to the Revenue. The issuance of SCN after deposit of the disputed amount was also held to be improper under Section 11A(1)(b) read with Section 11A(2) of the CEA.

In conclusion, the Court held that interest is not payable on CENVAT credit that was wrongly taken but not utilized and was reversed before issuance of SCN. The Court set aside the demand of interest for the entire period, including the pre-amendment period, relying on authoritative judgments and the appellant's factual position of maintaining sufficient credit balance. Consequently, penalties imposed on all appellants were also set aside due to absence of fraud or suppression. The Court allowed the appeals with consequential relief.

Significant holdings include the following verbatim excerpts capturing the core legal reasoning:

"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 on the actual amount which is withheld and the extent of delay in paying tax on the due date. If there is no liability to pay tax, there is no liability to pay interest."

"Before utilization of such credit, the entry has been reversed, it amounts to not taking credit. Reversal of cenvat credit amounts to non-taking of credit on the inputs."

"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."

"Penalty under the said provisions is imposable only when the elements of fraud, suppression, etc. are proved against the appellant. In the absence of any positive act reflecting suppression, merely for inadvertent excess availment due to bona fide mistake, penalty cannot be confirmed."

"No interest is required to be paid by the first appellant for the Cenvat Credit already reversed by them before issue of SCN. The impugned order is set aside. Consequently, the penalties imposed on the appellants 1, 2, and 3 are also set aside."

The Court thus established the principle that interest liability for wrongly availed CENVAT credit arises only upon utilization of such credit, and mere wrongful availment followed by prompt reversal does not attract interest or penalty absent fraud or suppression. The judgment clarifies the interpretation of Rule 14 of CCR in light of legislative amendments and judicial precedents, emphasizing the compensatory nature of interest and the requirement of mens rea for penalty imposition.