JANUARY 31, 2009

By A Departmental Netizen

THERE are four categories of assessees as mentioned below in my range -

Category I : A manufacturer who avails Cenvat Credit of '

Category II : An Output Service Provider who avails Cenvat credit of '

Category III: A manufacturer who avails Cenvat Credit of '

Category IV : An Output Service Provider who avails Cenvat credit of '

Due to some CERA objection, Cenvat Credit taken by each of these assessees is found to be wrong on some ground or the other.

The first Question that cropped up in my mind was: What are the recovery and penal provisions to be applied in each of these cases?

I am a bit confused due to the wording of the recovery provisions and hence this poser. Unable to find any answer anywhere with even the Tribunal preferring to remain silent in the case of Vikram Ispat vs. CCE, Navi Mumbai 2008-TIOL-1904-CESTAT-Mum, I set out to find an answer .

Incidentally, the Tribunal in the said case observed '

' It is however made clear that no view is being expressed on the merits of the case as to whether a demand relating to denial of credit on input services is required to be raised under section 11A of Central Excise Act, 1944 or section 73 of the Finance Act, 1994.'

For easy reference, the relevant Cenvat Credit Rules, 2004 are reproduced below -

14. Recovery of CENVAT credit wrongly taken or erroneously refunded .- Where the CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AB of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.

15. Confiscation and penalty .- (1) If any person , takes CENVAT credit in respect of input or capital goods , wrongly or in contravention of any of the provisions of these rules in respect of any input or capital goods, then, all such goods shall be liable to confiscation and such person , shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or two thousand rupees, whichever is greater.

(2) In a case, where the CENVAT credit in respect of input or capital goods has been taken or utilized wrongly on account of fraud, willful mis-statement, collusion or suppression of facts , or contravention of any of the provisions of the Excise Act or the rules made there under with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

(3) If any person , takes CENVAT credit in respect of input services , wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person , shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees.

(4) In a case, where the CENVAT credit in respect of input services has been taken or utilized wrongly by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention of any of the provisions of the Finance Act or of the rules made there under with intention to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act.

(5) Any order under sub-rule (1), sub-rule (2), sub-rule (3) or sub-rule (4) shall be issued by the Central Excise Officer following the principles of natural justice.

This is my interpretation of the above rules.

Firstly, what is mutatis mutandis ?

DDT-289 dated 24.01.2006 explains this term thus -

Greek and Latin ' DDT's new feature

Today's phrase: mutatis mutandis

A friend who is a leading lawyer and noted writer called up the other day to compliment DDT for the new feature Greek and Latin. I asked him the meaning of the phrases 'mutatis mutandis'. He told me that it means identical application. Unfortunately it does not mean that. On the contrary it actually means with necessary changes. It means 'The necessary changes having been made; having substituted new terms; with respective differences taken into consideration'; ' With the necessary changes in points of detail; with such change as may be necessary '.

In the above background of the meaning of the terms ' mutatis mutandis ', a plain reading of rule 14 of the Cenvat Credit Rules, 2004 would lead one to infer that '

Although the recovery provision is so clear, yet somewhere an objection is gaining foothold and is alarmingly gaining popularity and rising to the top of the charts on account of the uniquely worded rule 15 of the Cenvat Credit Rules, 2004 and with disastrous effect.

We now go to Rule 15 of CCR, 2004 which speaks of Penalty and Confiscation and analyze each of its provisions independently.

Rule 15(1) of CCR, 2004:

Rule 15(1) says that if 'any person' takes Cenvat Credit on 'inputs and capital goods' wrongly or in contravention of the provisions of the CCR, 2004, then all such goods are liable for confiscation and such person is liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or two thousand rupees, whichever is greater.

When the words used are 'any person', it can be construed to mean a manufacturer and even an output service provider. Secondly, the rule covers only a situation where a credit is 'TAKEN' but not 'UTILIZED'.

So, if a manufacturer or an output service provider 'TAKES' the Cenvat Credit on 'inputs and capital goods' and which is not proper, he/they are liable for penalty under this sub-rule 15(1) albeit the fact remains that for recovery, the provisions of s.11A or s.73 applies as the case may be.

Rule 15(2) of CCR, 2004:

Rule 15(2) is apparently a sub-set of Rule 15(1) and visualizes a situation where a 'Manufacturer' takes or utilizes CENVAT credit fraudulently etc. on 'inputs and capital goods' and the rule prescribes a penalty in terms of section 11AC of the CEA'44 viz. penalty equivalent to the credit so taken/utilized.

Rule 15(3) of CCR, 2004:

This rule is almost akin to rule 15(1) in the sense it speaks of a situation where 'any person' takes CENVAT credit in respect of input services , wrongly or in contravention of any of the provisions of these rules in respect of any input service, then, such person , shall be liable to a penalty which may extend to an amount not exceeding two thousand rupees.

So, if a manufacturer or an output service provider 'TAKES' the Cenvat Credit on 'input services' and which is not proper, he/they are liable for penalty under this sub-rule 15(3) albeit the fact remains that for recovery, the provisions of s.11A or s.73 applies as the case may be. However, there is a subtle difference between rule 15(1) and 15(3) and which is that the maximum penalty envisaged is only two thousand rupees.

Rule 15(4) of the CCR, 2004 :

This sub-rule is akin to rule 15(2) of the CCR, 2004 except for the fact that it applies exclusively to a 'provider of output service' and who takes or utilizes CENVAT credit fraudulently etc. on ' input services ' except that the rule prescribes a penalty in terms of section 78 of the Finance Act, 1994 viz. penalty which can extend to twice the amount of credit so taken/utilized.

So, to conclude, I answer my own poser for the four different situations as illustrated at the beginning.

Hope with these conclusions, I do not invoke the wrath of the powers to be.

(Editor: The writer wishes to remain anonymous and we respect his wishes.)