In a recent decision of significant import, in Commissioner of Central Excise vs. SKF India Ltd. (2009 (239) ELT-385), the Supreme Court has answered the question of whether interest is payable on differential excise duties paid consequent to agreement on retrospective price revisions relating to past supplies of excisable goods. This is an important decision which has implications for all situations where price revisions are negotiated and agreed between manufacturers and their customers, typically OEMs, with regard to past supplies of goods.
The facts of the case were straightforward and admitted by both sides. M/s. SKF India were engaged in the manufacture and sale of ball bearings and textile machine parts and sold such goods to customers based on certain prices on the basis of which excise duties were discharged. Subsequently, the company negotiated and successfully concluded agreements with its customers for an upward revision of these prices with retrospective effect. Consequently, it raised supplementary invoices for recovery of differential consideration, based on such higher negotiated prices, and duly discharged differential duties relating to such past supplies. While the payment of differential duties was therefore not in dispute, the Revenue took the view that interest was liable to be paid on such differential duties under Section 11AB of the Central Excise Act (the Act). The Department also took the view that penalty was imposable under certain other sections of the Act. The company took the plea that the differential duties were only determined upon agreement on the revised prices and since such duties had been paid immediately upon such agreement, based on the supplementary invoices under reference, there could not be a charge of interest, much less the imposition of any penalty.
At the first stage of adjudication, both interest and penalty were confirmed and upon appeal both the Commissioner (Appeals), Central Excise as well as the Tribunal held that no interest was chargeable as there was no time gap between the time of the agreement on revised prices and the issuance of the supplementary invoices to the customers, evidencing the payment of duties. The Tribunal relied on three different decisions of the Mumbai High Court which had held that no interest was chargeable in the circumstances described above. The Revenue went on appeal to the Supreme Court against the order of the Tribunal. The Supreme Court took note of four different Sections of the Act that were, in its reckoning, applicable to the case in point. These were Section 11A regarding recovery of duties, Sections 11AA and 11AB regarding interest on delayed payment of duty and Section 11AC regarding penalty for short or non levy of duty. In particular, the Court analysed the provisions of Section 11AB which was with regard to interest on delayed payment of duty.
The relevant portion of this section, which is germane to the decision, is as follows:
Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person who is liable to pay duty as determined under sub-section (2), or has paid the duty under sub-section 2(B), of Section 11A, shall, in addition to the duty, be liable to pay interest at such rate not below (10 per cent) and not exceeding 36 per cent per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette, from the first date of the month succeeding the month in which the duty ought to have been paid under this Act, or from the date of such erroneous refund, as the case may be, but for the provisions contained in sub-Section (2), or sub-section (2B), of Section 11A till the date of payment of such duty:
The Court read Section 11AB in conjunction with Section 11A(2B) and in particular the Explanation 2 thereto which stated that the interest under Section 11AB was payable on the amount of duty not levied or paid or short levied or short paid under Section 11A. The Court came to a determination that while Section 11A distinguished between duties which were not paid or short paid on purely inadvertent or bonafide reasons and duties which were non paid or short paid for reasons of mala fide conduct such as fraud, collusion etc. it was nevertheless the position in law that in the first situation under reference i.e. non-payment or short payment of duty due to entirely bona fide reasons, interest was payable in terms of the plain meaning of Section 11AB.
In coming to this conclusion, the Supreme Court has overruled the decision of the Bombay High Court in Commissioner of C.EX. vs. Rucha Engineering (2008 (223) ELT-161) which had held, in a situation where differential duty had been paid by an assessee as soon as it had reached agreement with its customers regarding an upward revision of prices of goods sold earlier to such customers, there was no application of either Explanation 2 to Section 11(2B) or of Section 11AB itself since in such a situation it could not be said that the assessee had either not paid or short paid any excise duties at all, whether for bona fide reasons or otherwise. The Apex Court has not agreed with this view and has held that where the assessee was able to demand from its customers differential prices by virtue of the retrospective upward revision of prices of excisable goods, it followed that the original sale of such goods carried higher prices and that such goods had hence been cleared upon short payment of duty at the time of their original dispatch. It was thus clearly a case of short payment of duty and hence covered under Section 11AB. The Apex Court however held that in such facts and circumstances, there was no question of imposition of any penalty. The Court has also opined that the four Sections under reference were unhappily worded and has hence suggested a complete reorganisation and rewording of these Sections. The Court has also held that this particular decision can, in terms, be seen as a logical sequel to its recent decision in UOI vs. Rajasthan Spinning & Weaving Mills (2009 (238) ELT-3), which has been analysed in an earlier article in this column and which was in regard to the provisions of Section 11AC, pertaining to imposition of penalty. There is now thus a set of two landmark decisions of the Supreme Court on the interest and penalty provisions under the Act.
This decision of the Supreme Court has upturned what was understood to be a settled law on the point of the applicability of interest on retrospective price revisions. The point to be noted is that whereas the differential duties that are payable on such price revisions are available as CENVAT credits to the customers on whom the supplementary invoices are raised, the interest that is now held payable in regard to such price revisions is obviously not available as an offset and the question of who would bear such interest, which could be significant, could be a point of contention between the manufacturers and their OEM customers. This decision could therefore require a fundamental rethinking on how the tax consequences of such upward price revisions are typically understood and addressed in a variety of situations.
The author is leader, Indirect Tax Practice, PricewaterhouseCoopers
pwctls.nd@in.pwc.com