2011 (4) TMI 969 - HC - Central Excise

Interest and penalty for taking the Cenvat credit wrongly - assessee had availed wrongly the Cenvat credit on capital goods - Before the credit was taken or utilized, the mistake was brought to its notice. The assessee accepted the mistake and immediately reversed the entry - assessee did not take the benefit of the wrong entry in the account books - claim of the Revenue was, though the assessee has not taken or utilized this Cenvat credit, because they admitted the mistake, the assessee is liable to pay interest from the date the entry was made in the register showing the availment of credit Held that - 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. It is only when the assessee had taken the credit, in other words 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 11 AB 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, Order of Tribunal upheld, substantial question of law framed is answered against the Revenue and in favour of the assessee

Summary

Issues Involved:
1. Liability of the assessee to pay interest for wrongful availment of Cenvat credit.
2. Imposition of penalty on the assessee for wrongful availment of Cenvat credit.
3. Interpretation of the term "Cenvat Credit has been taken" under Rule 14 of the Cenvat Credit Rules, 2004.

Issue-Wise Detailed Analysis:

1. Liability of the Assessee to Pay Interest for Wrongful Availment of Cenvat Credit:

The core question was whether interest is payable from the date of making an entry in the account books showing entitlement to Cenvat credit or from the date of actual utilization of such credit. The Tribunal set aside the levy of interest, relying on the judgment of the Punjab and Haryana High Court in CCE Delhi Vs. Maruthi Udyog Ltd., holding that interest is not payable if the credit was not actually utilized. The Revenue, however, argued based on the Supreme Court judgment in UNION OF INDIA Vs. IND-SWIFT LABORATORIES LTD., that interest is payable once the credit is taken, as the assessee would be at liberty to utilize it immediately thereafter.

The High Court explained that interest is compensatory in nature, imposed on an assessee who withholds payment of tax when it is due. It compensates the Revenue for the loss sustained due to delayed payment. The Court noted that in this case, the assessee reversed the wrong entry before utilizing the credit, thus not benefiting from it. Therefore, the liability to pay interest did not arise as the duty was not withheld.

2. Imposition of Penalty on the Assessee for Wrongful Availment of Cenvat Credit:

The Assessing Authority imposed a penalty, asserting that the mistake was intentional to avoid payment of duty. However, the Tribunal found no material evidence suggesting that the irregular credit was taken with an intention to evade duty. The Tribunal concluded that the imposition of a penalty was unsustainable and set aside the penalty.

The High Court upheld the Tribunal's decision, emphasizing that penalty is penal in character and is levied for contumacious conduct or deliberate violation of statutory provisions. Since the assessee reversed the wrong entry promptly upon being notified and did not utilize the credit, the imposition of a penalty was not justified.

3. Interpretation of the Term "Cenvat Credit has been taken" Under Rule 14 of the Cenvat Credit Rules, 2004:

The substantial question of law was whether "Cenvat Credit has been taken" means making an entry in the account books showing entitlement to the credit or actually utilizing the credit while clearing the finished products. The High Court referred to the Supreme Court's interpretation in UNION OF INDIA Vs. IND-SWIFT LABORATORIES LTD., which clarified that the word "OR" in Rule 14 should not be read as "AND". The rule stipulates that interest is recoverable when Cenvat credit is taken or utilized wrongly or erroneously refunded.

The High Court concluded that making an entry in the account books does not by itself create a liability for interest unless the credit is utilized. In this case, the assessee reversed the entry before utilizing the credit, thus not taking the benefit of the wrong entry. Therefore, the liability to pay interest did not arise.

Conclusion:

The High Court upheld the Tribunal's decision, ruling that the assessee was not liable to pay interest as the wrong entry was reversed before utilization. The imposition of a penalty was also set aside, as there was no evidence of intentional wrongdoing. The interpretation of "Cenvat Credit has been taken" was clarified to mean actual utilization of the credit, not merely making an entry in the account books. The substantial question of law was answered in favor of the assessee, and the appeal by the Revenue was dismissed.