INTEREST IS NOT LIABLE TO PAY WHEN CENVAT CREDIT WAS REVERSED ON SAME DAY OF AVAILMENT

[Mr. M. GOVINDARAJAN]

                        Rule 14 of CENVAT Credit Rules, 2004 deals with the recovery of CENVAT credit wrongly taken or erroneously refunded.  The said Rule provides that where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of output service and the provisions of Sec. 11A and 11AB of the Central Excise Act or Sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recovery.   Rule 7(6) of Cenvat Credit Rules, 2002 which was repealed deals with the same.  But it is not applicable for the service tax credit since at that time Service Tax Credit Rules, 2002 was prevailing.

                        The question to be discussed in the article is whether interest is liable to be paid when CENVAT credit wrongly taken or utilized was reversed on same day of availment with reference to decided case law.

                        In ‘A.R. Metallurgicals Private Limited V. Commissioner of Central Excise, Chennai’ – 2011 (263) ELT 411 (Tri. Chennai) the appellant is the manufacturer of cotton yarn and synthetic yarn of various counts chargeable to Central Excise duty under the sub heading 5205.11 and 5509.90 respectively of the Central Excise Tariff.  The appellant availed CENVAT credit of duty paid on inputs and capital goods used or in relation to the manufacture of the finished products under CENVAT Credit Rules, 2002.   The appellant is 100% EOU.  It had undergone de-bonding on the basis of Assistant Development Commissioner, Noida Export Processing Zone, Noida’s Final De-bonding Order dated 05.12.2002.   On that basis at the time of de-bonding the appellant paid duty on capital goods, finished goods, semi finished goods and raw material lying in the factory on the date of de-bonding.  After de-bonding the appellant’s unit started functioning as a DTA unit.

                        The Department scrutinized the ER-1 return filed by the appellant for the month of December 2002.  The Department noticed that the appellant had taken CENVAT credit on the cotton yarn and synthetic yarn as inputs on the strength of their own invoice No. 321 dated 26.11.2002  under which at the time of de-bonding they had paid duty on finished goods, semi-finished goods, raw material etc., lying in the factory on the date of de-bonding.  The Department came to the conclusion that the appellant was not eligible for the CENVAT credit taken.  A show cause notice was issued to the appellant by the Department for demand of wrong CENVAT credit along with interest and imposition of penalty under Rule 13 of CENVAT Credit Rules.  The Adjudicating Authority confirmed the demand of excise duty and interest as indicated in the show cause.  A penalty of Rs.2 lakhs was also imposed on the appellant under Rule 13 of CENVAT Credit Rules, 2002.

                        Aggrieved against the order of the Adjudicating Authority the appellant filed an appeal before the Tribunal.  The appellant conceded that they were not eligible for the CENVAT credit of the duty paid on cotton yarn and synthetic yarn at the time of de-bonding.  But the appellant pleased that since on the same day i.e., 26.11.2002, the entire stock of cotton yarn and synthetic yarn has been cleared on payment of duty.  The entire CENVAT credit was reversed and hence there was no question of interest on the CENVAT credit under dispute, as the entire CENVAT credit has been reversed on the same day on which day it had been taken.  In respect of penalty the appellant pleased that since CENVAT credit was taken due to misunderstanding and that availment of CENVAT credit had been declared in the ER -1 return as well as in the CENVAT credit, there is no case for imposition of penalty.

                        The Tribunal held that the appellants are manufacturers of cotton yarn and synthetic yarn.  Earlier they were 100% EOU and had de-bonded on 26.11.2002.  At the time of de-bonding they had paid duty and there is no dispute that this duty included the duty on the stock of cotton yarn and synthetic yarn lying their factory at that time.   After becoming a DTA unit they took CENVAT credit of the duty paid on the yarn lying in their stock at the time of de-bonding which is incorrect and the yarn was not going to be used by them as input in or in relation to the manufacture of the finished products.  Therefore the appellants were not eligible to take or utilize CENVAT credit.  The Tribunal found that the entire stock of cotton yarn and synthetic yarn was cleared on the same day on payment of duty and thus entire amount of CENVAT credit stood reversed on the day on which the same has been taken.   In view of this, while CENVAT credit demand has been rightly confirmed by the Commissioner, there would be no occasion to charge interest as CENVAT credit has been stood reversed on the same day on which the same has been taken.  In regard to penalty the Tribunal held there is no justification for imposition of penalty and the same was set aside by the Tribunal. 

Discussions to this article

[Balasubramanian K]

Interest is basically compensatory in nature. Government is at a loss only when wrongly availed credit is used. Unfortunately, Rule 14 is not correctly framed and even Supreme Court is taking a stand that interest is payable from date of availment