SEPTEMBER 11, 2019

By Vijay Kumar

THE interest policy of the Government, especially that of the Indirect Taxes Department has always been on the theme, "heads I win; tails you lose". If the assessee owes money, it is tried to be realised with usurious rates of interest, but if the government owes money to the taxpayer, it is the effort of all officers to try hard not to refund, but if it is beyond them to reject refund, then the next step would be to avoid interest and if interest is unavoidable, what is paid is a pittance. Sometimes it looks like the departments are not tax collecting offices but interest collecting agencies. Interest is obviously far more interesting than the principal tax itself.

Can you fathom the logic of interest on input tax (MODVAT, CENVAT, GST) just taken into your books, but not used? They ran a huge litigation show on this issue right up to the Supreme Court, without getting much clarity.

A peep into the kaleidoscopic history.

Rule 57 I of the Central Excise Rules, 1944 came into existence on 1.3.1986, which read as;

RULE 57-I. Recovery of credit wrongly availed of or utilised in an irregular manner. - (1) If the credit of duty paid on inputs has been taken wrongly, the credit so taken may be disallowed by the proper officer and the amount so disallowed shall be adjusted in the credit account or the account-current maintained by the manufacturer or if such adjustments are not possible for any reason, by cash recovery from the manufacturer of the said goods :

Provided that such manufacturer may make such adjustments on his own in the credit account or the account-current maintained by him under intimation to the proper officer.

The above rule was amended on 6.8.1988 to read as:

Where credit of duty paid on inputs has been taken on account of an error, omission or misconstruction, on the part of an officer or a manufacturer, or an assessee, the proper officer may, within six months from the date of such credit, serve notice on the manufacturer or the assessee who has taken such credit requiring him to show cause why he should not be disallowed to such credit and where the credit has already been utilised, why the amount equivalent to such credit should not be recovered from him :

In 2000, this became -

57-I. Recovery of credit wrongly taken. - (1) Where the CENVAT credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of sections 11A, 11AA and 11AB of the Act shall apply mutatis mutandis for affecting such recoveries.

This position continued for over a decade of turbulent litigation and through several Cenvat Credit Rules, when in 2012 the then Rule 14 of the Cenvat Credit Rules, 2004 was amended to make it 'taken and utilized 'instead of 'taken or utilized'. The 'and 'or 'or 'dispute was settled by the Supreme Court in favour of the Revenue.

The Board in CBEC Circular No. 897/17/2009-CX: Dated 3rd September, 2009 clarified,

Since, the Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT credit is taken  or  utilized wrongly, it is clarified that the  interest shall be recoverable when credit has been wrongly taken, even if it has not been utilized, in terms of the wordings of the present Rule 14.

The Supreme Court in case of  Ind-Swift Laboratories Ltd  -  2011-TIOL-21-SC-CX, held that Rule 14 specifically provides that where CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest would be recovered from the manufacturer or the provider of the output service. The issue is as to whether the aforesaid word "OR" appearing in Rule 14, twice, could be read as "AND" by way of reading it down as has been done by the High Court. If the aforesaid provision is read as a whole we find no reason to read the word "OR" in between the expressions 'taken 'or 'utilized wrongly 'or 'has been erroneously refunded's the word "AND".

This held the field for some time during which time the High Court of Karnataka in  Bill Forge Pvt Ltd, distinguished the ratio of Ind-Swift  -  2011-TIOL-799-HC-KAR-CX.

However the government put a lid to the "P AND OR A" box by the 2012 amendment when the 'or 'was replaced by 'and'. Still litigation continued for the previous period. Modvat was introduced in 1986 and till 2017, doubts were not cleared as to which event, taking credit or utilizing it triggered interest liability.

The GST regime

Come GST and the problem is very much alive. We are not sure when the interest clock will start ticking. The GST law is almost silent on this. Section 50(3) of the CGST Act requires:

(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.

If you think this means that interest is payable only when the wrong credit is utilised, please see Section 73(1):

73. (1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilised for any reason, other than the reason of fraud or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of this Act or the rules made thereunder.

The OR has come back. A new Pandora's box. What is taking of credit, what is availing of credit and what is utilizing credit? The same doubt as in 1986! The Government was fully aware of the whole history of litigation and legislation on this issue when they brought out the GST law. Why couldn't they make the position clear. What is the difference between availing and utilising. Why can't they make it clear. Why? Should this issue again go all the way to the Supreme Court, the GST Council, Parliament and State legislatures?

It has already reached at least one High Court. Recently in the Patna High Court - 2019-TIOL-1585-HC-PATNA-GST, Revenue pleaded that the reflection on the electronic credit ledger is a confirmation of a wrong availment even if, the said credit was not utilized and which act is liable for proceeding under section 73. The High Court observed,

The legislative intent present in these provisions is eloquent and I am in no confusion to hold that be it a charge of wrong availment or utilization, each is a positive act and it is only when such act is substantiated that it makes the dealer concerned, liable for recovery of such amount of tax as availed from the input tax credit or utilized by him but in each of the two circumstances, the tax available at the credit of the dealer concerned must have been brought into use by him thus, reducing the credit balance. A plain reading of Section 73 would confirm that it is only on such availment or utilization of credit to reduce tax liability, which is recoverable under section 73(1) read alongside the other provisions present thereunder.

Despite the legal intent being so loud and clear, it is on absolute mis-appreciation of the statutory prescriptions and even when the amount of Rs.42 lacs and odd yet remains to the credit of the petitioner which is also confirmed from the credit ledger status available at Annexure 7 that the Assistant Commissioner of State Taxes by treating the said amount to be a tax outstanding on wrong availment by the petitioner, initiates proceeding for recovery of the said tax amount…

The Assistant Commissioner of State Taxes has somewhere got confused to treat the transitional credit claimed by the dealer as an availment of the said credit when in fact an availment of a credit is a positive act and unless carried out for reducing any tax liability by its reflection in the return filed for any financial year, it cannot be a case of either availment or utilization.

The legislative intent reflected from a purposeful reading of the provisions underlying section 140 alongside the provisions of section 73 and Rules 117 and 121 is that even a wrongly reflected transitional credit in an electronic ledger on its own is not sufficient to draw penal proceedings until the same or any portion thereof, is put to use so as to become recoverable.

This important aspect of the matter has eluded the wisdom of the respondent no.3 while passing the order. In fact it is on a complete misappreciation of legal position which lies at the foundation of the demand raised by the impugned order whereby the credit amount reflected in the credit ledger to the tune of Rs.42,73,869.00 has been treated as an outstanding tax liability against the petitioner to order for its recovery together with interest and penalty even when the electronic credit ledger status at Annexure 7 confirms to a credit in favour of the petitioner i.e. a negative tax liability.

Will judicial wisdom be allowed to prevail over bureaucratic brilliance? In a recent judgement, the Gujarat High Court noted, 2019-TIOL-2094-HC-AHM-GST.

The power under the Act should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee.

In this electronic age, there should not be any wrong credit - taken, availed or/and utilized. Credit should be automatic, instant, electronic and CORRECT.

PS: somewhere down the line 'utilized 'became 'utilised'.

Until next week