Unutilised irregular Cenvat credit reversed before use does not attract interest; separate penalty for the same default is barred

Unutilised irregular Cenvat credit reversed before being used to pay service tax did not attract compensatory interest, because the credit remained a book entry and caused no delay in payment of tax; the interest demand was therefore not sustainable. Penalty under the rule governing the return was upheld on the basis of the later operative revised return, but a separate penalty for the same default was not justified once that specific penalty had already been imposed; the additional penalty was therefore set aside.

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Issues: (i) Whether interest was payable on irregularly availed Cenvat credit that had been reversed without being utilised for payment of service tax; and (ii) whether penalty under Rule 7(C) of the Service Tax Rules, 1994 was sustainable and whether an additional penalty under Section 77 of the Finance Act, 1994 could also be imposed.

Issue (i): Whether interest was payable on irregularly availed Cenvat credit that had been reversed without being utilised for payment of service tax.

Analysis: The credit, though taken irregularly, had not been utilised for discharging service tax liability on output services. In that situation, the credit remained only a book entry and did not cause any loss of revenue. Interest being compensatory in nature is attracted only where there is delay in payment of the principal amount. As there was no delay in payment of service tax and the unused credit was reversed, Rule 14 of the Cenvat Credit Rules, 2004 could not be invoked for recovery of interest.

Conclusion: The interest demand was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether penalty under Rule 7(C) of the Service Tax Rules, 1994 was sustainable and whether an additional penalty under Section 77 of the Finance Act, 1994 could also be imposed.

Analysis: The return filed later was treated as the operative revised return for the purpose of determining the penalty under Rule 7(C) of the Service Tax Rules, 1994, and the penalty imposed on that basis was upheld. However, once penalty had been imposed under Rule 7(C), an additional penalty under Section 77 of the Finance Act, 1994 for the same default was not justified.

Conclusion: The penalty under Rule 7(C) was upheld, while the penalty under Section 77 was set aside in favour of the assessee.

Final Conclusion: The appeal succeeded only to the extent of deleting the interest demand and the additional penalty under Section 77, while the penalty under Rule 7(C) was sustained.

Ratio Decidendi: Unutilised irregular Cenvat credit reversed before utilisation does not attract compensatory interest, and a separate penalty cannot be imposed where the default is already penalised under the specific rule governing the return.

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