MARCH 11, 2015

By Kabir Rishi & Shivam Mehta

THE Government has announced several radical steps in this Union Budget which include increasing the standard rate of excise duty to 12.5%, proposal to increase the rate of service tax to 14%, and imposition of penalty even in cases not involving fraud, suppression etc. One such major change introduced in this budget was replacement of the existing Rule 14 of the Cenvat Credit Rules, 2004 ("Credit Rules"). Over the years, there have been prolonged litigations in respect of Rule 14 of the Credit Rules and the Courts have taken divergent views while interpreting the provisions of Rule 14 of the Credit Rules.

Prior to 1.4.2012, 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. Constant dispute in relation to this provision was regarding the date from which the liability of interest on irregular credit arises i.e. from date of availing such credit or from the date of utilization of such credit.

T he Supreme Court in the case of Ind-Swift Laboratories Ltd. has held that the word "or" used in Rule 14 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. The above dispute was put to rest by the amendment in Rule 14 of the Credit Rules by which the word 'or' used in Rule 14 of the Credit Rules was replaced by the word 'and'. As a result of the said amendment, the interest and recovery provisions prescribed under Rule 14 of the Credit Rules were applicable only if the Cenvat credit which was wrongly availed had been utilized by the assessee.

Budget amendment in Rule 14

Recently, Rule 14 of the Credit Rules has been amended again w.e.f. 1.3.2015. After the said amendment, the provisions regarding recovery of Cenvat credit have been made applicable even in those cases where Cenvat credit is wrongly taken but not utilized. However, interest will continue to be chargeable only in those cases where the Cenvat credit wrongly availed has been eventually utilized by the assessee.

Further, the manner of utilization of Cenvat credit has also been provided under Rule 14(2) of the Credit Rules. As per the said Rule, out of the balance of Cenvat credit available with an assessee in a particular month, the opening balance of the month is deemed to be utilized first, the admissible amount of Cenvat credit is deemed to be utilized next and thereafter, the inadmissible amount of Cenvat credit. Consequently, an assessee will be liable to pay interest under Rule 14 only if it utilizes the inadmissible amount of Cenvat credit.

Let us understand the sub-rule with help of an illustration.

Amount (in crores)

Prior to the introduction of this sub-rule, the assessees used to avail Cenvat credit even where the eligibility of Cenvat credit was in dispute. As long as the balance of Cenvat credit in the books of assessees was more than the amount of the disputed Cenvat credit (20 crores), it was successfully argued by the assessees that the disputed amount of Cenvat credit availed by them had not been utilized and consequently, the proceedings under Rule 14 of the Credit Rules for recovery of credit and interest thereon could not be initiated against it.

However, after the above amendment, the manner prescribed therein will have to be applied to determine the utilization of ineligible credit or otherwise. One way to read the provision which appears to be innocent in appearance is that in case the amount of inadmissible Cenvat credit (20 crores) is not utilized in a particular month (March, 2015), then such inadmissible Cenvat will become a part of the opening balance of Cenvat credit of the next month (April, 2015). In April, 2015, under Rule 14(2) of the Credit Rules, as the opening balance of Cenvat credit is utilized first (50 crores), the inadmissible amount of Cenvat credit which forms part of the opening balance can be said to have been utilized first before the utilization of the admissible Cenvat credit (80 crores) which was availed during the subsequent month. Consequently, even if the inadmissible credit (20 crores) is less than the closing balance in the subsequent month (50 crores), the same will become part of opening balance and will result into payment of interest in the subsequent month when the said opening balance is so utilized.

Another possible view which may be adopted while interpreting 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 case, 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 betaken 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 inadmissible Cenvat credit available with it is less than the credit utilized in a month. Justification for said view is that since the earlier rule was silent regarding manner of utilization, the amendment in the said rule has been made as a matter of trade facilitation exercise. Such a view is also consistent with the leniency shown in the past when the provision of Rule 14 was amended to overcome the impact of Supreme Court decision in case of Ind-Swift (discussed supra).

Time Limit for availment of Cenvat credit

In what could be said as a welcome change, the time limit for availment of Cenvat credit on inputs and input services has been increased from six months to one year. However, even where the eligibility of Cenvat credit on the inputs and input services is under dispute, Cenvat credit has to be availed within a period of one year from the date of the relevant document. Going by the literal interpretation of Rule 14(2) of the Credit Rules discussed above, 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 credit. Accordingly, with time limit imposed on availment of credit, only feasible option available with the assesse is to take such disputable credit and reverse the same in the same month to avoid payment of interest if the same is considered as inadmissible by subsequent judicial precedents. However, in such a scenario, question which can haunt the assessee is that unless the amount is taken and left open in the Cenvat records, how the same can be contested by him and reversal of credit may close the doors for redressal by the courts.

Though this year Budget has aimed at making India an easier place to do business and has unveiled a number of facilitation measures such as acceptance of digital invoices and quick registration as automation of tax compliances, introducing an amendment of such a nature which itself lacks clarity poses serious question on the real intent of the Government.

[The authors are associated with Lakshmikumaran & Sridharan and the views expressed are personal]