DECEMBER 21, 2015

By Rajesh Ostwal, Adv.

1. WHERE the provisional assessment is finalized and assessee pays the differential duty before finalization order is passed by the Assessing Officer, there was a doubt as to whether the interest is payable from the due date till the date of payment or no interest is payable as there was no determination of duty by Assessing Officer.

2. Above doubt arose due to peculiar language employed by Rule 7(4) of the Central Excise Rules, 2001 which is reproduced hereunder:

"7(4) The assessee shall be liable to pay interest on any amount payable to Central Government, consequent to order for final assessment under sub-rule (3), at the rate specified by the Central Government by notification issued under Section 11AA or Section 11AB of the Act from the first day of the month succeeding the month for which such amount is determined, till the date of payment thereof."

3. A plain reading of Rule 7(4) would show that interest is payable on the amount payable consequent to finalization order. But, if there is no amount payable consequent to the finalization order, no interest would be payable in terms of the aforesaid Rule 7(4). There is no liability to pay interest since there is no amount payable at the time of finalization order. If interest is payable on the differential duty (which stands deposited prior to finalization order) then the language of Rule 7(4) should be appropriately & differently worded.

4. As per Central Excise department, interest is payable on the amount from the date from the first day of the month succeeding the month for which such amount is determined, till the date of payment, in case of finalization of provisional assessment.

5. At this juncture, the difference between liability to pay and liability to be assessed has to be understood. This concept was sharply & pithily explained by the judgement rendered by Constitution Bench of Supreme Court in State of Rajasthan Vs. Ghasilal [AIR 1965 SC 1454] -. The decision turned on the following facts. The Act had come into force on 1-4-1955 while the rules framed thereunder were published in the Rajasthan Government Gazette on 28-3-1955. Ghasilal challenged the making of assessments on his turnover for the year 1955-56 on the ground that the rules were invalid. The High Court in the writ petition filed by Ghasilal made an interim order on 9-1-1958 that Ghasilal will maintain proper accounts and file the prescribed returns and the Revenue will not assess him till further orders. During the pendency of the writ petition, the rules were validated by Ordinance No. 5 of 1959 (which later became an Act). Thereupon Ghasilal withdrew his writ petition. Thereafter on 4-12-1959, the Sales Tax Officer, Kota City Circle, sent him a show-cause notice asking him to deposit the tax due up to date within a week, failing which he threatened to take necessary action permissible in law. On receipt of the notice, Ghasilal filed a return in respect of the 4th quarter ending on 22-10-1957 and deposited tax. On 25-4-1960, the Sales Tax Officer made an assessment in respect of the accounting period from 3-11-1956 to 22-10-1957 and imposed a penalty under Section 16(1)(b) of the Act on the ground that the assessee had not deposited the tax for the earlier quarters on the due dates and the tax for the 4th quarter was deposited after a lapse of two years. His appeal was dismissed by the Deputy Commissioner of Sales Tax who endorsed the view that the interim order of the High Court had not precluded the assessee from paying the tax and filing the returns. On the same line of reasoning, penalty was also levied for the subsequent periods. Ghasilal challenged the levy of penalty by a writ petition and the High Court allowed the same. The penalty was levied under Section 16(1)(b) as it then stood which inter alia provided for imposition of penalty if the tax due was not paid within the time allowed. The submission made on behalf of Ghasilal was that there was no breach of Section 16(1)(b) inasmuch as no tax was due till the assessee filed his returns under Section 7(1) of the Act because the tax to be deposited as required by Section 7(2) was to be calculated on the basis of the return. There cannot be non-compliance of Section 7(2) unless a return is filed without depositing the tax due on the basis of the return. Hence, Ghasilal contended that there was no violation of Section 7(2) and so long as the tax was not assessed and determined as required under Section 10 , the liability for payment of penalty did not arise. On the other hand, the Revenue contended that the liability to pay tax had arisen under Sections 3 and 5 of the Act and the delay in complying with the demand notice entailed imposition of penalty. This Court held :

"10. In our opinion, there has been no breach of s. 16(1)(b) of the Act, and consequently, the orders imposing the penalties cannot be sustained. According to the terms of s. 16(1)(b), there must be a tax due and there must be a failure to pay the tax due within the time allowed. There was some discussion before us as to the meaning of the words ‘time allowed' but we need not decide in this case whether the words ‘time allowed' connote time allowed by an assessing authority or time allowed by a provision in the Rules or the Act, or all these things, as we are of the view that no tax was due within the terms of s. 16(1)(b) of the Act. Section 3, the charging section, read with s. 5, makes tax payable, i.e., creates a liability to pay the tax. That is the normal function of a charging section in a taxing statute. But till the tax payable is ascertained by the assessing authority under S. 10, or by the assessee under s. 7(2), no tax can be said to be due within s. 16(1)(b) of the Act, for till then there is only a liability to be assessed to tax."

6. The judgement in Ghasilal's case was affirmed by the Constitution Bench of the Supreme Court in the case of J.K. Synthetics Ltd. Vs. Commercial Taxes Officer [1994 (4) SCC 276]. The factual matrix in this case are as follows. The question related to payment of interest on tax on the amount of freight charged in respect of sale of cement under the relevant Cement Control Order. The returns were filed by the dealer on the premiss that the amount of freight charged in respect of sale of cement under the said Control Order did not form part of the sale price for the payment of sales tax. The dealer's contention was rejected by Supreme Court by its judgment and order dated 22-8-1978 in the case of Hindustan Sugar Mills Ltd. whwreinthe Supreme Court held that the freight element formed part of the price of cement and sales tax was leviable on the sale price inclusive of the freight amount. The assessee was, therefore, required to pay sales tax on the sale price inclusive of the freight. There was no dispute on the question of computation of the sale price for calculating the sales tax. The dispute was limited to whether the dealer was required to pay interest on the additional sales tax which had to be paid on the inclusion of the freight amount in calculating the sale price. According to the dealer, interest under Section 11 B of the Act can only be charged for the period subsequent to the determination of sales tax under the final assessment and that too after the expiry of the period allowed under the Notice of Demand issued on finalisation of the assessment. However, as per Revenue, interest becomes payable from the date on which the original return was filed under Section 7(2) or 7(2- A) of the Act , as the case may be. The dealer supported its contention relying upon the decision in State of Rajasthan Vs. Ghasilal whereas the Revenue placed reliance on the decision rendered by Supreme Court in Associated Cement Co. Ltd. Vs. CTO[1981 (4) SCC 578] wherein it was held that where a return is filed under Section 7(2) of the Act, interest runs from the date of filing of the return. The Constitution Bench held as under:

"7. As the relevant Assessment Years in question are from 1975-76 to 1977-78 we are concerned with Section 11-B as it stood before its substitution by Act 4 of 1979 w.e.f. 7-4-1979. Section 11 -B then provided that if the amount of any tax payable under sub-sections (2) and (2-A) of Section 7 is not paid within the time allowed or if the tax amount specified in any notice of demand is not paid within the period specified, the dealer shall be liable to pay simple interest on such amount at one per cent per month for a period of three months and thereafter at one and a half per cent per month during the time he continues to make default in the payments. However, according to Section 11 -B substituted by Act 4 of 1979 w.e.f. 7-4-1979, the liability to pay interest accrues (a) where the dealer has furnished returns but has failed to pay the tax as per the said returns or within the time allowed; (b) where a dealer has furnished a revised return under Section 7(3) whereunder the amount of tax payable is larger than that already paid; (c) where a dealer has filed his return after expiry of the prescribed period but has not paid the tax as per return or within the time allowed; (d) where a dealer is required to pay tax without furnishing a return for any period and such tax is not paid in full by the due date; (e) where a dealer required to furnish returns pays tax for any period without furnishing returns; and (f) where the liability to pay tax is quantified in respect of a dealer who had submitted returns for the period for which the tax is quantified. It will thus be seen that under Section 11 -B before the 1979 Amendment the liability to pay interest on unpaid tax amount accrued on the dealer in two situations only, viz., (i) failure to pay the tax due under sub- sections (2) And (2-A) of Section 7 and (ii) failure to pay the tax within the time allowed by the notice of demand or 30 days from the receipt of the notice by the dealer. Section 11 -B before its amendment nowhere provided for payment of interest on the unpaid tax amount as found on final assessment from the date of the filing of the return under Section 7 of the Act. If the amount of tax payable under sub-section (2) is paid on the basis of return, not on the basis of final assessment, there can be no question of payment of interest under clause (a) of Section 11 -B. Similarly, if the tax is paid according to the return as required by sub-section (2-A), in other words, if the full amount of tax due 'shown' in the return is paid, there can be no question of charging interest under clause (a) of Section 11 -B. So far as clause (b) is concerned it is a post assessment situation. Where tax is found due on final assessment and the dealer is required to make good the difference, a notice of demand will issue. If the dealer fails to pay the tax within the time specified in the notice, and if no time is specified within 30 days from the receipt of notice, he is required to pay interest at the rates prescribed by the sub-section. But if he pays the difference of tax within the prescribed time, there is no question of charging interest. If such an interpretation is not placed and if the Revenue's plea is accepted serious anomalies would surface. Firstly, if the liability to pay interest on the balance tax amount accrues from the date of submission of returns under Section 7, clause (b) of Section 11 -B read with Section 1 1(2) would be rendered nugatory. Otherwise one would be required to hold that interest would be payable from the date of submission of the return till the date of issuance of notice of demand and thereafter no interest would have to be paid till the expiry of the specified period or 30 days, as the case may be, and thereafter interest would have to be paid at a given rate for the first three months and thereafter at a higher rate. Such could not be the legislative intent. Secondly, take the case of a dealer who has failed to submit a return and is subjected to assessment of tax on the basis of best judgment. Pursuant to the said assessment he deposits the tax. Such a dealer would not be liable to pay interest on the balance tax if the tax assessed under Section 10 is higher than what was provisionally assessed. He can always claim that he cannot be made liable to pay interest for the error of the authority in making the provisional assessment under Section 7-A. The defaulter would be in a better position than a dealer who complies with the requirement of Section 7(1). And if he can show reasonable cause, he would also escape the penalty clause in Sections 7-AA and 16(1). More or less a similar situation may arise in the matter of payment of interest where provisional assessment is made under Section 7-B. Of course such a dealer may become liable to penalty but that is a different matter altogether. Take also the case of a dealer who submits a return without depositing the tax on the basis thereof. Under Rule 25(4) the authority may or may not take cognizance of the return. If cognizance is not taken the dealer would be treated on a par with one who has not submitted a return but if cognizance is taken he must be treated as one who is liable to pay interest under clause (a) of Section 11-B of the Act. Therefore, the view canvassed by the Revenue leads to incongruous situations which can never be the legislative intent. This is how the situation emerges on a plain reading of the provisions of the Act as they stood before Act 4 of 1979 came into force. After the substitution of Section 11-B by Act 4 of 1979 the situation has changed altogether. What we have said earlier has nothing to do with Section 11-B as introduced by Act 4 of 1979. We may now examine the case law on which reliance was placed."

7. The difference between liability to pay tax and liability to be assessed was once again beautifully explained by Bombay High Court in ICICI Bank Ltd. Vs. Union of India - 2015-TIOL-1164-HC-MUM-ST.

8. Coming to central excise, the issue came up before CESTAT in the cases of CCE Vs. Ispat Industries - 2006-TIOL-1994-CESTAT-MUM & Tata Motors Limited Vs. CCE - 2011-TIOL-721-CESTAT-MUM wherein the CESTAT held that interest is not payable when the differential duty is paid before the finalization order. Both the cases were separately affirmed by the Bombay High Court.

9. The Karnataka High Court in the case of CCE Vs. J K. Industries Limited - 2011-TIOL-798-HC-KAR-CX - without referring to the judgments of Bombay High Court held that interest is payable even on the differential amount paid prior to finalization of provisional assessment.

10. Subsequently, the CESTAT in the case of Ceat Ltd. - 2014-TIOL-447-CESTAT-MUM held that interest is payable on the amount of differential duty paid prior to finalization of provisional assessment order. It was inter alia held that the interpretation of Rule 7 by the Bombay High Court while affirming the decisions in Ispat Industries (supra) & Tata Motors (supra) is not correct and interpretation of the said Rule by Karnataka High Court in CCE Vs. J.K. Industries Limited (supra) is correct. The CESTAT in CeatLtd. also relied upon the judgments of Hon'ble Supreme Court in the case of CCE Vs. SKF Ltd. - 2009-TIOL-82-SC-CX & CCE Vs. International Auto - 2010-TIOL-05-SC-CX to hold that interest is payable from the due date till the date of payment even in the cases where duty is paid on the subsequent price escalation.

11. The Bombay High Court in the case of Ceat Ltd. Vs. CCE - 2015-TIOL-397-HC-MUM-CX reversed the aforesaid CESTAT decision by holding that interest is not payable on the amount which is paid prior to finalization order of provisional assessment. However, the Hon'ble Allahabad High Court in the case of BHEL Vs. CCE - 2015-TIOL-1949-HC-ALL-CX held that they are not in agreement with the judgment of Hon'ble Bombay High Court in the case of Ceat Limited. Therefore, there were conflicting judgments of High Court on this point.

12. The Revenue filed SLP before the Supreme Court against the order of the Bombay High Court in the case of Ceat Limited. The Hon'ble Supreme Court held that there is no merit in the petition of Revenue and therefore SLP is dismissed. The Supreme Court has dismissed SLP of Revenue on merit and, therefore, the Judgment of Hon'ble Bombay High Court has been affirmed. With this Order of Supreme Court in Ceat Limited, the aforesaid controversy should resolve in favour of assessee.

13. In the light of above legal position and judicial pronouncements, the law is now settled that interest is not payable on the differential duty paid prior to order finalizing provisional assessment.

(The author is Principal Associate & Advocate, Lakshmi kumaran & Sridharan, Mumbai.)