The recovery of interest on short payment or non-payment of tax is an effective tool of tax administration by the revenue department. Levying interest on CENVAT credit wrongly taken or utilised is no exception to this practice.
Rule 14 of the CENVAT Credit Rules, 2004, outlines the events that enable the revenue authorities to recover interest in terms of the provisions under service tax and excise laws. For the period up to March 17, 2012, Rule 14 of the Credit Rules specified that interest is to be recovered in the case CENVAT credit is ‘taken or utilised wrongly’. Effective March 17, 2012, the phrase ‘taken or utilised wrongly’ has been substituted with ‘taken and utilised wrongly’—a step that appears to be indicative of the legislative intent that mere incorrect availment of credit would not trigger interest liability for the taxpayer.
Given the ongoing litigation regarding interpretation of the aforesaid phrase, the erstwhile rule continues to be of relevance for the taxpayer. Especially since recovery proceedings for interest can be initiated for credit incorrectly availed in the year 2009 even if such credit is yet to be utilised. It is noteworthy that the Supreme Court in the matter of Union of India vs Ind Swift Laboratories Ltd, 2011, and the Central Board of Excise and Customs through its circulars have clarified that interest is required to be paid on mere incorrect availment of credit. However, interpretation of the phrase ‘credit taken or utilised wrongly’ continues to be a grey area for the past period, with instances of the same court giving divergent views. Notwithstanding the uncertainty, the revenue authority is continuing to issue notices for recovery of interest in cases where credit has been merely wrongly availed.
Strict interpretation of Rule 14 has conspicuously faced resistance on the basis that Rule 14 places the otherwise distinct events, i.e. ‘taking’ and ‘utilising’ credit on the same footing. This view has been upheld by the Karnataka High Court in Commissioner of C Ex & ST, LTU, Bangalore vs Bill Forge Pvt Ltd, 2012. In this case, the High Court dealt with the issue of whether interest liability can be fastened in a scenario where book entry of incorrect credit is made by the taxpayer in the CENVAT account but reversed prior to utilisation. The High Court held that interest is not payable in such a case. Further, applicability of the ratio in the Ind Swift case