Rule 14 of the CENVAT Credit Rules, 2004, outlines the events that enable the revenue authorities to recover interest in terms of the provisions under service tax and excise laws. For the period up to March 17, 2012, Rule 14 of the Credit Rules specified that interest is to be recovered in the case CENVAT credit istaken or utilised wrongly. Effective March 17, 2012, the phrase taken or utilised wrongly has been substituted with taken and utilised wronglya step that appears to be indicative of the legislative intent that mere incorrect availment of credit would not trigger interest liability for the taxpayer.
Given the ongoing litigation regarding interpretation of the aforesaid phrase, the erstwhile rule continues to be of relevance for the taxpayer. Especially since recovery proceedings for interest can be initiated for credit incorrectly availed in the year 2009 even if such credit is yet to be utilised. It is noteworthy that the Supreme Court in the matter of Union of India vs Ind Swift Laboratories Ltd, 2011, and the Central Board of Excise and Customs through its circulars have clarified that interest is required to be paid on mere incorrect availment of credit. However, interpretation of the phrase credit taken or utilised wrongly continues to be a grey area for the past period, with instances of the same court giving divergent views. Notwithstanding the uncertainty, the revenue authority is continuing to issue notices for recovery of interest in cases where credit has been merely wrongly availed.
Strict interpretation of Rule 14 has conspicuously faced resistance on the basis that Rule 14 places the otherwise distinct events, i.e. taking and utilising credit on the same footing. This view has been upheld by the Karnataka High Court in Commissioner of C Ex & ST, LTU, Bangalore vs Bill Forge Pvt Ltd, 2012. In this case, the High Court dealt with the issue of whether interest liability can be fastened in a scenario where book entry of incorrect credit is made by the taxpayer in the CENVAT account but reversed prior to utilisation. The High Court held that interest is not payable in such a case. Further, applicability of the ratio in the Ind Swift case was distinguished on the basis that the Supreme Court in that case had dealt with a factual matrix which entailed incorrect availment and utilisation of credit. It was further observed that the term avail is not used in Rule 14 of Credit Rules, instead taken or utilised wrongly are indicated as the events which trigger the liability to pay interest. Therefore, availment is not an event which triggers interest liability. Also, interest is compensatory in nature and the provisions for recovery of interest under the excise and service tax laws are triggered only if there is loss of revenue.
The decision in Bill Forge has been followed by various High Courts and Tribunals in cases involving reversal of credit prior to utilisation. These cases by implication distinguish Ind Swift on the premise that credit taken is synonymous with credit utilised. Alternatively, the decision is being distinguished by the courts on the basis that it would only apply in cases where the credit taken wrongly is reversed prior to due date for discharge of duty liability. In one of the decisions of CESTAT Bangalore it was also observed that the doctrine of per incuriam is applicable to the Bill Forge decision.
Given the sundry interpretations accorded by the judicial fora to the subject, it appears that one has to wait and watch the fate of the decisions that do not follow the decision in Ind Swift. Needless to mention that the revenue authorities, meanwhile, will continue to issue show-cause notices for recovery of interest and it will be up to the taxpayers to contest that reversal of credit is akin to non-availment of credit and mere incorrect entry in the CENVAT account of the taxpayer does not trigger any interest liability.
Judicial verdict is therefore awaited on whether the term taken should be interpreted as availed or utilised to conclude on this issue. Also, given that the purpose for recovering interest is to compensate for the loss of revenue, we believe that the Supreme Court should consider this aspect in the next round of litigation.
Rohit Jain, Smita Roy & Ankita Bhasin
Rohit Jain is partner, Smita Roy is senior associate and Ankita Bhasin is associate, Economic Laws Practice