By TIOL News Service

NEW DELHI, DEC 18, 2013: THE Central Government issued a Notification on 16th March, 1995 whereby MODVAT credit of the duty paid on the HSD Oil as an input, had been withdrawn. It is not in dispute that the MODVAT credit of the duty paid on the use of the HSD Oil was available in the past but the same had been withdrawn by the said Notification issued in 1995.

The respondent as well as other assessees-respondents, whose cases are decided by this common judgment, had availed the MODVAT credit of the duty paid on the HSD Oil, which was used as an input even though it was not permissible. So it is not in dispute that though MODVAT credit was not to be availed in respect of the duty paid on the HSD oil used as an input, all the assessees who are respondents, had availed the MODVAT credit.

Show cause notices had been issued to all the respondents calling upon them as to why the MODVAT credit availed by them during the period for which they were not entitled to such a credit, should not be withdrawn and why interest at the rate of 24% p.a. be not charged on the amount of credit already availed by them.

It is pertinent to note that in the meantime Section 112 of the 2000 Finance Act had been enacted and by virtue of which, interest at the rate of 24% p.a. had to be paid on the MODVAT credit wrongfully availed by the respondents in respect of the duty paid on the HSD Oil used as an input for a particular period. Similarly, Rule 57 (I) of the Rules also enables the Revenue to recover interest on the amount of MODVAT credit wrongfully availed by the assessee.

The case of the Revenue is that by virtue of the provisions of Section 112 of the 2000 Act, interest becomes payable on such wrongfully availed MODVAT credit after 30 days from the date on which the 2000 Act received the assent of the President. On the other hand, according to the respondents, the amount of interest becomes payable only after determination of the amount through an adjudication order or an order-in- original after issuance of a show cause notice to the concerned assessee and if the amount of the MODVAT credit availed is not repaid within 30 days from the date of the order.

In the case of Maharaja Shree Umaid Mills , the Assistant Commissioner, Central Excise, Jodhpur, vide an order dated 27.05.2002, called upon the said assessee to pay interest at the rate of 24% p.a. with effect from 30 days from the date on which the 2000 Act had received the assent of the President.

Being aggrieved by the order passed by the Assistant Commissioner, an appeal had been filed before the Commissioner (Appeals), Central Excise, Jodhpur, which had been dismissed and therefore, the assessee had filed an appeal before the Customs, Excise & Service Tax Appellate Tribunal, New Delhi ( the CESTAT ). The said appeal had also been dismissed by the CESTAT and therefore, the assessee was constrained to approach the High Court of Rajasthan by way of Central Excise Appeal No. 3 of 2003, which has been allowed by the impugned order and therefore, the Revenue has filed the present appeal.

Similarly, in all other cases, the assessees had succeeded before the High Court in their respective cases and therefore, the Revenue has filed the present appeals before this Court.

So as to understand and appreciate the issue, it would be pertinent to look at the relevant provisions of Section 112 of the 2000 Act reproduced below:

(b) recovery shall be made of all the credit of duty, which have been taken or utilised but which would not have been allowed to be taken or utilised, if the provisions of sub-section (1) had been in force at all material times, within a period of thirty days from the date on which the Finance Act, 2000 receives the assent of the President and in the event of non-payment of such credit of duty within this period, in addition to the amount of credit of such duty recoverable, interest at the rate of twenty four per cent. per annum shall be payable, from the date immediately after the expiry of the said period of thirty days till the date of payment.

The Supreme Court observed, "one might have an impression that the Revenue has become harsh in imposing interest at the rate of 24% p.a. on the amount of MODVAT credit availed on the HSD oil used as an input without any adjudication of the amount payable or without even issuance of a show cause notice. In fact if we look at the provisions of Section 112 of the 2000 Act along with other notifications which had been issued earlier in 1995 and 1994, whereby availment of MODVAT credit on the HSD oil used as fuel in generation of electricity had been ordered to be discontinued, we would feel that the first impression that one would gather upon perusal of Section 112 of the 2000 Act would not be correct."

The background : The Supreme Court looked at the background and the circumstances in which Section 112 of the 2000 Act had been enacted. By virtue of the Notifications issued on 01.03.1994 and 16.03.1995 issued under Rule 57A of the Rules, the Central Government had specifically declared that MODVAT credit on the HSD oil used as an input would not be available as the said item had been specifically excluded from the list of eligible inputs. In spite of the said fact, several assessees were claiming MODVAT credit in respect of the HSD oil used as an input and therefore, Section 112 of the 2000 Act had to be enacted. Thus, it is clear that the said Section had been enacted so as to see that no one claims MODVAT credit in respect of the HSD Oil used as an input and those who had wrongfully availed MODVAT credit in respect of the HSD oil used as an input and those who had claimed the credit wrongfully, return the said amount within 30 days from the date the President gives assent to the 2000 Act. This clearly denotes that by virtue of the provisions of Section 112 of the 2000 Act, MODVAT credit availed on the HSD oil used as an input had not been withdrawn for the first time but it was declared that if anybody had availed MODVAT credit on the HSD oil used as an input, will have to return it within 30 days and in case the amount being not refunded within 30 days, the amount of the MODVAT credit wrongfully availed by the concerned assessee had to be returned with interest at the rate of 24% p.a.

This factual aspect would clarify that Section 112 of the 2000 Act is in fact not having any retrospective effect but it only enables the Government to get back the wrongly availed MODVAT credit on the HSD oil used as an input.

A somewhat similar issue had arisen before this Court in the case of Sangam Spinners Limited (2011-TIOL-31-SC-CX) and after considering earlier Notifications issued by the Government, it had been held that Section 112 of the 2000 Act did not take away any right of any assessee with retrospective effect. This court held in the said case that the HSD oil had been specifically excluded from the list of eligible inputs with effect from 16th March, 1995 and therefore, no assessee had any vested right to avail benefit of MODVAT credit on the HSD oil used as an input and therefore, if any benefit, which had been wrongly availed by any manufacturer, the benefit wrongfully availed had to be returned.

It is also pertinent to note that the validity of Section 112 of the 2000 Act had not been challenged in the petitions filed by the respondents and therefore, the Court need not go into the legality of the said Section.

So, the Supreme Court was of the opinion that there was no issue with regard to any adjudication because the respondents had availed MODVAT credit on the HSD oil used as an input though it was not permissible. Once it is certain that the MODVAT credit had been wrongly availed by the respondents, the Revenue cannot be blamed, if the amount wrongly availed by way of MODVAT credit by the respondents is recovered with interest thereon. It is also pertinent to note that the Revenue had given 30 days-time to return the said amount to the respondents who had wrongly availed MODVAT credit on the HSD oil used as an input. If anyone who had repaid the amount wrongly availed within 30 days from the date on which Section 112 of the 2000 Act got the President's assent, that assessee had not to pay any interest on the amount of duty availed by him wrongly. But those who had availed the MODVAT credit on the HSD oil used as an input and did not return the said amount even within 30 days from the date on which the President had given assent to the enactment of Section 112 of the 2000 Act, had to return the amount wrongfully retained by them with interest at the rate of 24% p.a. Such a course, adopted by the Revenue for recovery of the amount which was legitimately claimed by the Revenue, cannot be said to be bad in law.

In the circumstances and for the reasons recorded Supreme Court is of the view that the High Court committed an error by not considering these factors and therefore, the Supreme Court quashed and set aside the impugned judgment by allowing these appeals.

(See 2013-TIOL-66-SC-CX)