Interest on Wrong availment of Cenvat Credit but not utilised – a tale of never ending litigation and interpretational issues

Over the years, Rule 14 of the Credit Rules has always been the matter of concern/ litigation for both the Revenue and the Assessee. Even the Courts have taken divergent views while interpreting the provisions of Rule 14 of the Credit Rules. Before we proceed to understand the changes made in Rule 14 of the Credit Rules vide the Union Budget, 2015, it is imperative here to understand the erstwhile provisions therein which had been a tale of never ending litigations.

Rule 14 of the Credit Rules as it existed prior to April 1, 2012: Taken OR Utilized

Prior to April 1, 2012, Rule 14 of the Credit Rules provided for recovery of Cenvat credit taken or utilized wrongly or had been erroneously refunded along with interest from the manufacturer or the provider of output service. Erstwhile Rule 14 of the Credit Rules is reproduced hereunder:

 “14. Recovery of CENVAT credit wrongly taken or erroneously refunded.-

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.”

As observed from above, the use of the word “OR” in erstwhile Rule 14 of the Credit Rules was constantly disputed as regards its interpretation on account of chargeability of interest in case the Assessee has taken but not utilized the Cenvat credit and if at all, the interest is leviable at the starting point to reckon the same.

The Hon’ble Supreme Court in the case of Union of India Vs. Ind-Swift Laboratories Ltd. [2011 (2) TMI 6 – Supreme Court] has held that the word “or” used in Rule 14 of the Credit Rules should not be interpreted as “and” and thus, interest would be payable even if the Cenvat credit is wrongly taken but the same is not utilized.

Rule 14 of the Credit Rules w.e.f April 1, 2012 till February 28, 2015: Taken AND Utilized

Above discussed lack of clarity paved way to enormous litigations, which was at last addressed by the amendment made in erstwhile Rule 14 of the Credit Rules in the year 2012 vide Notification No. 18/2012-CE(NT) dated March 17, 2012 (Effective from April 1, 2012). The relevant extract of Rule 14 of the Credit Rules since April 1, 2012 is reproduced hereunder:

“Recovery of CENVAT credit wrongly taken or erroneously refunded.

14. Where the CENVAT credit has been taken and 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 of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

Inferred from above, Rule 14 since April 1, 2012 was in favour of Assessee as it explicitly conveyed that interest would not be charged in cases where Cenvat credit has been taken but not utilized. Further, interest was chargeable in case of Cenvat credit taken and utilized but, again the question of starting point to reckon the interest amount was still ambiguous.

Rule 14 of the Credit Rules post amendment vide the Union Budget, 2015:

Effective from March 1, 2015, the Union Budget, 2015 has substituted Rule 14 of the Credit Rules to provide separate treatment of recovery of Cenvat credit wrongly availed when utilized and when not utilized as under:

“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. –

(1) (i) Where the CENVAT credit has been taken wrongly but not utilised, the same shall be recovered from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;

(ii) Where the CENVAT credit has been taken and utilised wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be, and the provisions of sections 11A and 11AA of the Excise Actor sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.

(2)   For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: –

(i) the opening balance of the month has been utilised first;

(ii) credit admissible in terms of these rules taken during the month has been utilised next;

(iii) credit inadmissible in terms of these rules taken during the month has been utilized thereafter.”

As observed from above, in terms of substituted Rule 14 of the Credit Rules, if the Assessee has wrongly taken Cenvat credit but has not utilized the same, then interest is not leviable but the Department can recover from the amount of tax. However, in case of Cenvat credit wrongly taken and utilized or where the Cenvat credit has been erroneously refunded to the Assessee then such tax along with interest is recoverable from the Assessee.

To the extent of afore stated provisions, substituted Rule 14 of the Credit Rules seems to remove the mist surrounding the aspect of interest. But Rule 14 of the Credit Rules does not end here. Sub-Rule (2) of substituted Rule 14 of the Credit Rules further provides that all credits taken during a month shall be deemed to have been taken on the last day of the month and a deeming procedure shall be followed for determining utilization of Cenvat credit, which is as under:

(i) The opening balance of the Cenvat credit in beginning of month has been utilized first i.e. ‘first in fist out method (FIFO)’ has been followed.

(ii) Thereafter the Cenvat credit which was admissible during the month has been utilized next.

(iii) Lastly, the Cenvat credit which was inadmissible during the month has been utilized.

Apparently, with the introduction of Rule 14(2) of the Credit Rules, the recourse adopted by the Assessee for avoiding payment of interest by stating that since, balance of Cenvat credit in the books of Assessee was more than the amount of the disputed Cenvat credit, hence the disputed amount of Cenvat credit availed has not been utilized, has now come to an end.

Albeit, substituted Rule 14 of the Credit Rules appears to have redressed the ambiguities and apprehensions surrounding erstwhile Rule 14 thereof, yet such an the endeavor is futile to the extent it will crop certain another issues in future warranting clarification. Some of them are:

• Different interpretations of the procedure for determining utilization of Cenvat credit provided under newly inserted Rule 14(2) of the Credit Rules

One way to read the provisions of the Rule 14(2) of the Credit Rules is that in case the amount of inadmissible Cenvat credit is not utilized in a particular month, then such inadmissible Cenvat will become a part of the opening balance of Cenvat credit of the Next month. In Next month, since the opening balance of Cenvat credit is deemed to be utilized first, the inadmissible amount of Cenvat credit which forms part of the opening balance can be said to have utilized first before utilization of the admissible Cenvat credit which was availed during the subsequent month. Consequently, even if such amount of the inadmissible Cenvat credit is less than the closing balance in the subsequent month, the same will become part of opening balance and therefore will result in interest liability in the subsequent month when the said opening balance is so utilized.

On the other hand, another view which can be adopted to interpret Rule 14(2) of the Credit Rules is that the opening balance of Cenvat credit should only include the admissible amount of Cenvat credit and the inadmissible amount of Cenvat credit should be recorded separately. In such a scenario, while computing the amount of Cenvat credit utilized in a particular month, the total admissible amount of Cenvat credit available with the Assessee will have to be taken into account first and the inadmissible amount of Cenvat credit will be said to be utilized only after the admissible Cenvat credit is exhausted. In such a case, an Assessee will become liable to pay interest only in those cases where the balance of admissible Cenvat credit available with the Assessee is less than the Cenvat credit utilized in a month.

• Time limit of 1 year for availing Cenvat credit – another stumbling block

In terms of amended Rule 4(7) of the Credit Rules with effect from March 1, 2015, the time limit for availment of Cenvat credit on Inputs and Input services has been increased from 6 months to 1 year. Therefore, even where the eligibility of Cenvat credit on Inputs and Input services is under dispute, Cenvat credit has to be availed within a period of 1 year from the date of the relevant document under Rule 9 thereof. Now substituted Rule 14 of the credit Rules read with Rule 4(7) thereof will emerge as stumbling block. If Cenvat credit amount is taken within 1 year then in terms of Rule 14(2) of the Credit Rules, the disputable amount of Cenvat credit availed by the Assessee will become a part of the opening balance of the Cenvat credit in the next month and may be said to be utilized by it in the month subsequent to the month of availment of Cenvat credit, resulting in payment of tax along with interest.

• Congruence required under Rule 15 of the Credit Rules – Still uses the words taken OR utilized

Though this year Budget has segregated treatment for recovery of Cenvat credit wrongly availed when utilized and when not utilized, penalty provisions under Rule 15 of the Credit Rules needs to be amended in congruence with substituted Rule 14 thereof. Rule 15 of the Credit Rules still uses the phrase “taken or utilized” which means that penalty is still imposable in the case where the Cenvat credit is wrongly taken but not utilized.

Conclusion: As observed from above, the substituted Rule 14 of the Credit Rules demands clarification from the Board for its successful implementation.

 (Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)