RELEVANT DATE FOR INTEREST WHEN CENVAT CREDIT WRONGLY TAKEN

[Mr. M. GOVINDARAJAN]

Rule 14 of CENVAT Credit Rules, 2004 provides that Where the CENVAT credit has been taken and utilized (before 17.03.2012 ‘taken or utilized) wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AA (before 17.03.2012 ‘11AB’) of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.

Thus when credit is wrongly taken interest is inevitable.   What is the relevant date for calculation of interest?   The case law ‘Balmer Lawrie & Co., Limited V. Commissioner of Central Excise, Belapur’ – 2014 (2) TMI 545 - CESTAT MUMBAI gives answer for the same.  The facts of the case run as follows:

The appellant is a manufacturer of lubricating oil availing CENVAT credit on various inputs and capital goods as provided for under the Rules. They availed credit amounting to Rws.1,61,04,675/- of CVD paid on imported base oil under 10 bills of entry during the year 2003 and 2004.   The goods were imported and the entire goods were transferred to the appellant for storage purposes.   The bills of entries were endorsed in favor of the appellant for taking CENVAT credit on the said goods by the appellants.  The said oil was returned by the appellants and paid excise duty equivalent to the credit taken on such base oil returned. 

The Department that the appellants were not eligible to take credit on the oil since the same was not intended for use in manufacture of excisable goods.  A show cause notice was issued to the appellant for the recovery of the credit taken along with interest under Rule 14 of CENVAT Credit Rules, 2004 read with Section 11A and Section 11AB of the Central Excise Act and also penalty under Rule 15 read with Section 11AC of the Central Excise Act.  The demand was confirmed along with interest and equal penalty was imposed. 

The appellants submitted the following:

• The appellants had reversed the credit taken at the time of clearance of the base oil the question of reversal of credit once again does not arise;
• The entire demand is time barred inasmuch as the show cause notice was issued only in June 2008 whereas the credit was taken during 2003-04;
• The appellant had reflected the taking of CENVAT credit in their monthly ER-1 return and therefore the department was aware of the fact of taking of CENVAT credit by them;
• No suppression of facts on the part of the appellant;
• The appellant never utilized the said credit;
• The question of liability to pay any interest thereon would not arise at all;
• Vide Notification No. 18/2012-CE (NT), dated 17.3.2012 the phrase ‘Cenvat credit has been taken or utilized wrongly’ was substituted by the words ‘CENVAT credit has been taken and utilized wrongly’.  Since the words have been substituted the substitution will have retrospective effect;
• Unless the credit is utilized the appellant is not liable to pay interest;
• Therefore the impugned order is not sustainable in law and therefore merits to set aside.

The Department submitted the following before the Tribunal:

• The appellant suppressed the fact of taking ineligible credit on base oil received which was never intended for use in or in relation to the manufacture of any final products by the appellants;
• Since credit was permissible only on inputs intended for use in the manufacture of excisable goods on which excise duty is payable, taking of credit by the appellant on the base oil is ab initio void and the impugned order is correct;
• The interest demand is also correct;
• Inasmuch as the appellant suppressed the fact the imposition of penalty is also sustainable in law.

The Tribunal considered the arguments put forth by both the parties.  The Tribunal held that the appellant had obtained duty paid base oil and took credit of the duty paid under the provisions of CENVAT Credit Rules, 2004.  The credit taken was reversed as and when the base oil was returned.   Therefore the base oil on which credit was taken was never intended for any use by the appellant in or in relation to the manufacture of any dutiable excisable goods.  The CENVAT Credit scheme envisages availing of CENVAT credit on inputs and capital goods intended for use in or in relation to the manufacture of excisable goods or in relation to providing any taxable services.  In this case, the Tribunal held, the base oil was never intended for use in or in relation to the manufacture of any dutiable final products, the appellant was ab initio ineligible for taking CENVAT credit.  Further the appellant reversed the credit when the oil was returned.  It is a settled position in law that reversal of CENVAT credit taken would amount to discharge of duty liability. Therefore the confirmation of demand once again on base oil is not sustainable in law.

In respect of interest payable by the appellant the Tribunal relied on the judgment of Supreme Court in the case of ‘Union of India V. Ind-Swift Laboratories Limited’ – 2011 (2) TMI 6 - Supreme Court in which the Supreme Court held that Rule 14 of the CENVAT Credit Rules, 2004 specifically provides for interest on CENVAT credit taken or utilized wrongly or erroneously refunded.  Therefore interest on irregular credit arises from the date of taking of such credit.  Accordingly it was held that if CENVAT credit taken is irregularly, though not utilized, liability to pay interest would arise from the date of taking the credit till the date of reversal of the credit.  The Tribunal further held that the Notification No.18/2012-CE (NT), dated 17.3.2012 substituting the words ‘taken or utilized wrongly’ by ‘taken and utilized wrongly’ is effective from 17.3.2004 and not before.  In view of the express provisions the argument of the appellant that the amendment in the nature of substitution would have retrospective effect cannot be accepted.   It is a trite law that every statutory provision is prospective only unless it is explicitly provided that it is retrospective in nature and the legislature provides for such retrospective operation. In this case no such effect has been provided by the legislature.