RECOVERY OF CENVAT CREDIT

Dr. Sanjiv Agarwal

FCA, FCS

 

The provisions of recovery of Cenvat credit are contained in Rule 14 of Cenvat Credit Rules, 2004 which provides for recovery of cenvat credit which has been wrongly taken or has been erroneously refunded.

 

Recovery of Cenvat Credit Wrongly taken/Erroneously Refunded (Rule 14)

Where the CENVAT Credit has been taken or utilised wrongly or [and w.e.f. 17-3-2012] 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 Section 11A and 11AB of the Excise Act or Section 73 and Section 75 of the Finance Act shall apply mutatis mutandis for effecting such recoveries.

According to the judgment of Supreme Court in the case of M/s. Ind-Swift Labs, liability to pay interest arises from the date when irregular credit was availed. However it led to ambiguity regarding the question as to what refers to “availment”. The amendment in Rule 14 w.e.f. 17.03.2012 clears the position and hence liability to pay interest arises when Cenvat credit is wrongly utilized.

In Union of India v. Ind-Swift Laboratories Ltd. (2011) 265 ELT 3; (2011) 30 STT 461 (SC), it was held that Rule 14 of Cenvat Credit Rules 2004, specifically provide for interest when Cenvat Credit is taken or utilised wrongly or erroneously refunded and as such interest on irregular credit arises from the date of taking such credit. While the Punjab & Haryana High Court in [(2009) 240 ELT 328] held that interest is payable from the date of utilisation of irregular credit and credit availiment by itself does not create liability to pay duties, apex court held that the high court misread and misinterpreted rule 14 and wrongly read it down without properly appreciating scope and limitation thereof. Rule 14 is clear and unambiguous.  There is no reason to read the word ‘or’ appearing in Rule 14 between expression ‘taken’ or ‘utilised wrongly’ or ‘has been erroneously refunded’ as ‘and’ by way of reading it down. Credit is recoverable with interest on happening of any of the these specified circumstances.

Based on Ind swift judgment (supra), CBEC has issued Circular No. 942/03/2011-CX dated 14.3.2011 advising field staff to recover interest in such cases (Refer Annexure 32.3). Earlier, vide Circular No. 897/17/2009-CX dated 3.9.2009, it was clarified that in a situation where cenvat credit is wrongly taken even without being utilized towards payment of duty, interest is payable.

As explanation has been added in Rule 3(5B) to provide that if the manufacturer of good or the provider of output service fails to pay the amount payable under sub-rules 5, (5A) and (5B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT Credit wrongly taken.

Rule 14 has since been amended vide Notification No. 6/2015-CE(NT) dated 01.03.2015 which  provides for recovery of Cenvat credit taken but not utilized and prescribes the manner of determining utilization of credit. W.e.f. 1.3.2015, Central Government shall also recover Cenvat credit which is only wrongly taken and not utilized. Recovery can be thus made in the following situations –

(a) Cenvat Credit taken wrongly but not utilized.

(b) Cenvat Credit wrongly taken and utilized.

(c) Cenvat Credit erroneously refunded.

 

Accordingly, recovery shall be made in the following manner –

Action

Recovery of

Recovery from

How

 

For Cenvat credit wrongly taken but not utilized

 

Amount of credit taken

 

Manufacturer

Section 11A of Central

Excise Act, 1944

Output service provider

 

Section 73 of Finance Act, 1944

For Cenvat credit taken and utilized wrongly

 

Amount of credit and interest

 

Manufacturer

Section 11A and 11AA of

Central Excise Act, 1944

Output service provider

 

Section 73 and 75 of

Finance Act, 1944

For Cenvat credit which has been erroneously refunded

 

Amount of refund and interest

 

Manufacturer

Section 11A and 11AA of

Central Excise Act, 1944

Output service provider

 

Section 73 and 75 of

Finance Act, 1994.

 

 

In Rule 14, it has been provided that all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely: - (i) the opening balance of the month has been utilised first; (ii) credit admissible in terms of these rules taken during the month has been utilised next; (iii) credit inadmissible in terms of these rules taken during the month has been utilised thereafter, i.e. in the following order –

  • First from opening balance
  • Then from admissible credit used during the month
  • Lastly from inadmissible credit used during the month

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