There have been two recent developments in regard to interest liability in cases of erroneously availed CENVAT credits on inputs. The question of law is whether in terms of the CENVAT Credit Rules 2004 (the Rules), the liability to interest is triggered upon the erroneous or incorrect availment of input tax credits or whether such liability is only applicable where such erroneously availed CENVAT credits are utilised to discharge duties on output products in which such inputs are used.
In terms of the erstwhile CENVAT credit rules that were in force prior to the above Rules, the Punjab and Haryana High Court, in its decision in CCE vs. Maruti Udyog Ltd. [2007 (214) ELT 173 (P&H)], had upheld the order of Tribunal that in such a situation, the assessee was not liable to pay interest in a case where credits were only taken erroneously but not utilised. The Special Leave Petition filed against this order of the High Court by the department with the Supreme Court was thereafter dismissed.
However, when the erstwhile rules were replaced by the Rules, the issue once again came into prominence for the reason that Rule 14 of the Rules was worded differently from the erstwhile rules and accordingly stated that where the CENVAT credits had been taken or utilised wrongly or had been erroneously refunded, the credit along with the interest shall be recovered from the manufacturer or the service provider under the relevant provisions of Section 11AB of the Central Excise Act, relating to payment of interest on excise duty payments.
The matter hence once again came up to the Punjab and Haryana High Court upon a writ filed against the order of the Commissioner, Central Excise pertaining to an order passed by the Settlement Commission in that particular matter. In Ind-Swift Laboratories Ltd. vs. UOI [2009-TIOL-440-HC-P&H-CX], the Court had to inter-alia once again determine the issue of whether interest was to be paid from the date that CENVAT credits were admittedly erroneously availed or it was payable from the date that such credits were utilised to actually pay the duties on the finished product. The court took into account the relevant provisions of Rule 14 read in conjunction with Section 11AB relating to interest on delayed payment of duty.
The court went into the CENVAT Credit Scheme in detail and noted that the rules permitted a manufacturer or a service provider to take CENVAT credit in respect of relevant inputs and that such credits could be utilised in order to discharge the liability of duty on finished products in relation to which such CENVAT credits pertained. Thereafter, the High Court took note of the decision of the Supreme Court in Pratibha Processors vs. UOI [2002-TIOL-273-SC-CUS], which held that interest was compensatory in character and was imposed on assessees who had withheld the payment of any tax that was due orpayable.
The levy of interest was geared to the actual amount of tax withheld and the extent of the delay in paying the tax on the due date. Accordingly, interest was different from penalty, which was penal in character. The court accordingly read down Rule 14 of the Rules to hold interest was payable where CENVAT credits had been taken and utilised wrongly and interest could not be claimed simply for the reason that CENVAT credits were wrongly taken since availment by itself did not create a liability to excise duty.
The Court read Section 11AB of the Act and the Rules conjointly and came to the above conclusion. The point to be noted is that this decision of the High Court was based on Rule 14 of the Rules and had taken note of the fact that while it did envisage payment of interest even on erroneous availment of credits, the fact that interest was compensatory in nature and would hence only apply from the date of utilisation of such erroneously availed credit towards payment of excise duty on output had to be kept in mind as well and hence erroneous availment of input credits by itself could not trigger an interest payment. The distinction between a compensatory measure and a penal measure has been very well brought.
As opposed to this salutary decision of the High Court, the Department, in a recently issued Circular No. 897/17/2009-CX dated 03.09.2009, has, without taking note of the aforesaid decision, stated that Rule 14 of the CENVAT Credit Rules is clear and unambiguous and that in a situation where CENVAT credit is wrongly taken or utilised interest does become payable. Accordingly it clarifies interest is payable where credit had been wrongly taken, even without being utilised towards payment of duty.
This Circular of September 2009, which is a full two months subsequent to the passing of the order of the High Court, is clearly contrary to the legal position as enunciated in the aforesaid order. The point that interest is compensatory in character and hence could not apply in a situation of incorrect availment of credit has not been considered at all. Indeed, the most surprising point is that the decision of the Punjab and Haryana High Court, which was on new Rule 14 of the Rules, has not been taken into account at all in arriving at the conclusion contained in the Circular. The Circular does however take note of the earlier decision of the High Court in the Maruti Udyog case which was, as indicated earlier, based on the erstwhile rules and distinguishes it on that basis without noting the subsequent decision based on the current Rules.
It is hoped that the Department would take note of the correct position in law, as per the decision of the High Court in Ind Swift Laboratories, and withdraw the above Circular under reference.
(The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers)
