Rule 14 of the Cenvat Credit Rules reads as,
“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 the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”
The issue was examined by CBEC, which said in Circular No.897/17/2009 dated 03.09.2009, wherein it said,
“1. Representation has been received from the field formation stating that the decision of Hon’ble High Court of P&H in the case of CCE, Delhi III V/s Maruti Udyog Ltd. 2007(214) ELT173(P&H)], has upheld the order of Tribunal wherein it was held that assessee is not liable to pay interest in the case where credit was only taken and not utilized. The SLP against this order has been dismissed by the Hon’ble Supreme Court. On the other hand, Rule 14 of The CENVAT Credit Rules, 2004, provides for recovery of credit taken or utilized wrongly with interest. In view of this conflict in legal provisions
and the decision of Hon’ble Supreme Court, a clarification has been requested from the Board.
2. The matter has been examined. It is seen that the Tribunal decision and the High Court judgement referred to above, was delivered in the context of erstwhile Rule 57I of the Central Excise Rules, 1944 and that the Supreme Court order under reference is only a decision and not a judgement. Since, the Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT credit is taken or utilized wrongly, it is clarified that the interest shall be recoverable when credit has been wrongly taken, even if it has not been utilized, in terms of the wordings of the present Rule 14.”
The circular is legally not sustainable.
The first thing which is to be understood that Central Government is not entitled to levy interest burden under Rule making power. Further, no interest is being imposed under Rule 14, but it merely make Section 11AB applicable in a particular circumstance. Interest is being imposed through Section 11AB only.
When we read Section 11AA or 11AB, the primary requirement of imposing any tax is “short payment/non payment of duty”. When cenvat credit was illegally taken and utilized, it can be argued that there was short/non payment of duty. But when illegally taken Cenvat was not utilized, there is no short payment or non payment of duty, and therefore no interest can be demanded under Section 11AA or Section 11AB. In view of this interest is not payable when credit was only taken and not utilized.
It is further to understand that interest is never penal in nature, it is merely compensatory. If some person has taken irregular credit, penalty can be imposed as per law- but that does not mean he should pay interest also. When a person utilizes the credit, he gets a benefit and such benefit should be returned in the form of interest. When such credit is utilized, government does not get the tax it could have got had wrongful credit was not taken, and therefore government should be compensated in terms of interest. However, if credit was only taken in books and not utilized, neither the assessee gets anything nor the government looses anything. In such situation there is no question of any interest.
The issue has been examined in numerous cases notably in Page apparels [2007 (208) ELT 108], Rajlakshmi [2008 (231) ELT 489], Maruti [2006 (196) ELT 173], Bidhata [2008 (12) STT 189], Midas care [2008 (226) ELT 412] and numerous other cases.
In any case the circular issued is not binding on the assessee. It will only increase some dispute and add to the harassment of the assessee, but will not do substantial harm. But the worst part of the circular is the statement, “Supreme Court order under reference is only a decision and not a judgement”. Such statement has been issued in a circular (in fact circular writing person does not know the spelling of judgment), is apart from being grossly unconstitutional and outright violation of Article 141 of the Constitution of India, it is in bad taste. It shows the arrogance of tax administration.
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on [email protected] , Web: www.rajeshkumar.co.in