The issue of applicability of interest, in a situation of wrong availment of input tax credit which had not thereafter been utilised was discussed in this column on an earlier occasion when the Punjab & Haryana High Court had addressed the issue in its decision in Ind-Swift Laboratories Ltd. Vs Union of India [2009-240-ELT-328 (P&H)]. This article highlights the position post the Supreme Court’s decision on the matter in the departmental appeal filed against the above decision.
Before discussing the Supreme Court’s decision, however, it would be worthwhile to first understand the background. In terms of the erstwhile CENVAT credit rules that were in force prior to the enactment of the CENVAT Credit Rules, 2004 (CENVAT Rules), the Punjab and Haryana High Court, in CCE vs. Maruti Udyog Ltd. [2007 (214) ELT 173 (P&H)], had held that an assessee was not liable to pay interest where credits had only been availed erroneously but were not subsequently utilised. The Special Leave Petition filed by the Department against this order of the High Court with the Supreme Court was thereafter dismissed. All this was under the old Rules as indicated earlier. Rule 14 of the CENVAT Rules was worded differently from the erstwhile rules. This Rule states that where the CENVAT credit 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. In the light of this new Rule 14, the matter was again examined by the Punjab & Haryana High Court in the Ind-Swift Laboratories case (supra) where it again held that the interest was payable from the date of utilisation of the wrongly availed credits and not from the date of availment of such credit. While deciding the matter, the High Court referred to the decision of the Supreme Court in Pratibha Processors vs. UOI [2002-TIOL-273-SC-CUS], in which it was held that interest was compensatory in character and was imposed on assessees who had withheld the payment of any tax that was due or payable. That is how the High Court continued to hold that the interest was not chargeable unless the credit that was erroneously availed, had been utilized, despite the changed wordings of Rule 14.
Notwithstanding the above decision of the High Court, the CBEC issued Circular No. 897/17/2009-CX dated September 3, 2009 to clarify that interest would be recoverable from the date of availment of credit even if the credit has not been utilised. This contradictory circular had created a fair degree of concern and the matter has now been addressed by the Supreme Court in the case of Union of India Vs M/s Ind-Swift Laboratories Ltd. (2011-TIOL-21-SC-CX).
The Apex Court examined in detail new Rule 14. The issue before it was whether the word ‘OR’ appearing in Rule 14 of the CENVAT Rules could be harmoniously read as ‘AND’, as was interpreted by the Punjab & Haryana High Court in its decision. The Apex Court held that if the aforesaid provision was read as a whole there was no reason to replace the word "OR" occurring in between the expressions 'taken' or 'utilized wrongly' or Rs has been erroneously refunded' with the word "AND".
In other words, the Court clearly held that the credit became recoverable along with interest upon the happening of any of the three aforesaid circumstances. The Supreme Court emphasized that it was not required to obtain a harmonious construction of a provision which was clear and unambiguous as it stood all by itself. Reference was made to the Supreme Court’s decision in the case of Calcutta Gujarati Education Society and Another Vs Calcutta Municipal Corporation and others [2003-10-SCC-533], where it was held that where there are two possible interpretations, one invalidating the law and the other upholding it, the latter should be adopted. The Supreme Court also held that a taxing statute must be interpreted in the light of what was clearly expressed therein. Accordingly, the Supreme Court held that the High Court was erroneous in construing the word ‘OR’ as ‘AND’, so as to give relief to the assessee. Not surprisingly, subsequent to the Supreme Court’s decision, the CBEC has issued a Circular No. 942/03/2011-CX dated March 14, 2011 to clarify that interest was payable from the date of erroneous availment of credit even if the credit had not been utilized at all to discharge any tax liability on any account.
Although the above decision closes the matter, it is fair to suggest that both the decision and the recent Circular do seem to overlook the principle that interest is compensatory in character and accordingly its applicability should not be invoked in a situation of a mere incorrect availment of credit. Indeed, the Court appears to have not taken into account its earlier decision in Pratibha Processors (supra) based on which the Punjab and Haryana Court had arrived at its decision. It is a moot point as to whether the principle of sub silentiowould apply in such a situation. The complexities of not harmoniously interpreting the word “OR” can be understood by further examining a situation wherein an assessee takes CENVAT credit in month 1 and reverses such wrongly availed credit in say month 10, without utilising it. Based on the above decision, the assessee will be liable to pay interest from the time of wrong availment i.e. from Month 1.
However, if in the same situation, the assessee utilises the credit in month 8, the question arises as to whether the assessee will be liable to pay interest only from month 8 i.e. from the time of utilisation of the credit, based on the wordings of Rule 14. If it were so, the person who did not utilise the credit would end up paying more interest than the one who utilised the credit wrongfully.
This is clearly an erroneous interpretation. Alternatively, if, in both the cases, the interest is applicable from Month 1 i.e. from the time of wrong availment of credit, then it clearly becomes redundant to use the word “OR” between the words ‘credit availed’ and ‘credit utilised’. This could only mean that interest on erroneously utilized credit, as envisaged in Rule 14, would only apply in situations where such credit was correctly availed in the first instance. It is hard to visualize that such a situation could possibly occur, given that any credit is correctly availed, it is typically always available for utilization in whatever way possible. It is also interesting to note that very recently there have been changes in Rule 4(7) of the CENVAT Rules with respect to the availment of input service tax credit. This can now be availed only upon receipt of an invoice and not on the basis of a payment to the vendor. Further, if the payment is not made to the vendor within the prescribed time limit, the CENVAT credit so availed is required to be reversed. In such a scenario, interest would be payable from the date of availment of the credit. This is an interesting new twist to the debate.
The above decision of the Supreme Court will have wide applicability as there could be numerous situations where credits could be availed immediately upon receipt of an invoice but reversed subsequently upon the happening of certain events or as a result of a mere rectification of a mistake. It will be unreasonable and unfair to impose interest on credits wrongly availed in such situations. It is hoped therefore, that appropriate amendments or modifications to the relevant Rules would bring about a more reasonable regime on interest and, possibly, penalties.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd.
pwctls.nd@in.pwc.com
Supported by Rahul Renavikar and Abhishek A. Rastogi
