By TIOL News Service

BANGALORE, JUNE 20, 2013: THE issue before CESTAT was the demand of interest on CENVAT Credit taken but not utilised and reversed before issue of Show Cause Notice.

The Supreme Court in UOI Vs. Ind-Swift Laboratories Ltd- 2011-TIOL-21-SC-CX had held that interest is payable from the date of taking credit and not utilisation. The Karnataka High Court had in Commissioner, LTU Bangalore Vs. Bill Forge Pvt. Ltd. Bangalore - 2011-TIOL-799-HC-KAR-CX distinguished the Apex Court judgement and held that interest being compensatory cannot be demanded when the credit was not utilised. The assessee relied on this judgement while the Department relied on the Supreme Court judgement and argued that the Karnataka High Court judgement was per incuriam and the Tribunal need not follow it. The Tribunal found great force in the argument of the Department.

The Tribunal observed,

“The doctrine of per incuriam is applicable against a judgment rendered in ignorance of any statutory provisions. It is applicable even in a case where the court which passed the judgment was aware of the statute but the precise terms of the statute were not present to its mind. Even a lower court can treat a precedent as per incuriam .”

The Tribunal analysed the Bill Forge case and noted,

“After taking cognizance of the apex court's ruling that the question of reading the word ‘and' in the place of ‘or' would not arise, the Hon'ble High Court proceeded to consider the implications of “taking” and “utilization” of credit. In para 20 of its judgment, the Hon'ble High Court observed thus:

“Actually, the credit is taken at the time of the removal of the excisable product. It is in the nature of a set off or an adjustment”.

The Hon'ble High Court also observed that the reversal of CENVAT credit before its utilization amounted to non-taking of credit. The finding of the Hon'ble High Court that CENVAT credit is taken at the time of removal of the final product does not take into account Rule 3(1) of the CCR 2004 which provides for the “taking” of CENVAT credit by a manufacturer of excisable goods or a provider of taxable service upon receipt of inputs, input service and capital goods in the factory/premises. Sub-rule 4 of Rule 3 provides for utilization of the credit so taken, which happens at the time of removal of excisable products by a manufacturer or at the time of payment of service tax on a taxable service by a service provider, which stage is far removed from the initial stage of taking of credit. In other words, there is no question of set off or adjustment at the time of taking of credit. The provisions of Rule 3 are clear to this effect but the same did not enter into reckoning when the Hon'ble High Court decided the case of Bill Forge Pvt. Ltd. “Reversal of CENVAT credit amounting to non-taking of credit” is a concept which has been applied by this Tribunal, High Courts and the Supreme Court in cases where the benefit of some exemption notification (stipulating a condition to the effect that MODVAT/CENVAT credit on inputs shall not be taken) was claimed by manufacturers after reversing MODVAT/CENVAT credit already taken on inputs. If the same principle is applied to a case where a manufacturer or service provider was required by the Revenue to pay interest on an amount of CENVAT credit taken (though inadmissible) and later on reversed without utilization, for the period from the date of credit-taking to the date of reversal, Rule 14 would be rendered otiose, which is definitely not the legislative intent. In other words, a finding, in the context of examining interest liability under Rule 14, to the effect that reversal of CENVAT credit amounts to non-taking of credit militates against the rule itself. In this view of the matter, the doctrine of per incuriam is applicable against the decision in Bill Forge case.”

The Tribunal held:

At this stage, there is only one ruling that is applicable to the instant case and the same is the one handed down by the apex court after interpreting the provisions of Rule 14. The ruling is to the effect that the word ‘or' appearing between the words “taken” and “utilized” cannot be read as ‘and'. The effect of this ruling is unambiguously clear. Where an amount of inadmissible CENVAT credit was taken by a manufacturer of excisable products or a provider of output service but later on reversed, he has to pay interest under Rule 14 for the period from the date of taking of credit to the date of its reversal, whether or not the credit was utilized. This is the clear result of the interpretation given by the apex court to the provisions of Rule 14. It is binding on this Tribunal under Article 141 of the Constitution of India.

In the result, it has to be held that the short question (whether the appellant is liable to pay interest under Rule 14 of the CCR 2004 on the amounts of CENVAT credit in question) has to be settled in favour of the Revenue in view of the Hon'ble Supreme Court's ruling in Ind-Swift Laboratories case.

(See 2013-TIOL-934-CESTAT-BANG)