2015 (3) TMI 1124 - AT - Service Tax

Adjustment of Refund of service tax with interest liability - Interest was arisen as per EA-2000 Audit Objection - Refund was allowed under Notification No. 41/2007-S.T - Held that - when the audit pointed out that they were not eligible for the credit, the appellant had simply reversed the credit. Once such a reversal was made, and when the audit pointed out that interest was liable to be paid on 29-9-2008, the appropriate procedure to follow was to issue a show cause notice as per sub-section (2B) of Section 11A of Central Excise Act, 1944 which can be applied to service tax also. As a result of audit objection arrears cannot arise even if it is accepted and paid. If the full amount is not paid by an assessee, recovery proceedings have to be started in accordance with law. Adjustment from the amount available with the department is not one of the recognized mode of recovery of arrears which is not confirmed and no demand has been issued. - Refund allowed - Decided in favor of assessee.

Issues:
1. Appropriation and adjustment of refund towards interest amount.
2. Liability for interest on reversed Cenvat credit.
3. Procedure for demanding interest under Section 11A of Central Excise Act, 1944.
4. Validity of adjustment for confirmed demand.
5. Requirement of a confirmed demand for adjustment under Section 11 of Central Excise Act, 1944.

Analysis:
1. The appellant contested the adjustment of refund towards interest amount without a specific order confirming demand and interest. The lower authorities upheld the adjustment, citing the appellant's admission of liability and reversal of Cenvat credit, leading to automatic interest liability. However, the absence of a formal demand or show cause notice raised concerns regarding the legality of the adjustment.

2. The AR argued that the appellant's admission of liability for reversed Cenvat credit implied the automatic accrual of interest, justifying the adjustment. The audit report highlighted the non-payment of interest despite credit reversal. The Commissioner (Appeals) supported the lower authority's decision, emphasizing the appellant's acknowledgment of liability, which, in their view, obviated the need for a separate demand or notice.

3. The Tribunal examined the statutory provisions under Section 11A of the Central Excise Act, 1944, emphasizing the necessity of issuing a show cause notice for demanding interest on admitted liabilities. The failure to follow the prescribed procedure, including issuing a notice within one year of the audit objection, rendered the interest liability unenforceable.

4. Regarding the adjustment for a confirmed demand, the Tribunal noted the absence of explicit confirmation or reference to a confirmed demand in the order-in-original. The lack of a formal confirmation order meant that the adjustment from the refund was not legally justified, as arrears arising from audit objections do not automatically constitute confirmed demands.

5. The AR's reliance on Section 11 of the Central Excise Act, 1944, to support the adjustment was deemed insufficient without a specific order confirming the demand. The Tribunal emphasized the necessity of referencing a recognized confirmation order to validate adjustments against amounts due, which was lacking in this case.

In conclusion, the Tribunal allowed the appeal, ruling that the adjustment of the refund towards the interest amount and the absence of a confirmed demand did not align with legal requirements. The judgment highlighted the importance of following statutory procedures, including issuing formal notices and referencing confirmed demands for adjustments, to ensure the legality of financial transactions and liabilities.

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