2023 (5) TMI 296 - AT - Central Excise

Appeal success: Interest chargeability dispute resolved under CENVAT Credit Rules.

Franke Faber India Pvt. Ltd. Versus Commissioner of Central GST & Central Excise, Aurangabad

The appeal focused on the chargeability of interest under rule 14 of CENVAT Credit Rules, 2004. The appellant contested the demand for interest following ... Chargeability of interest under rule 14 of CENVAT Credit Rules, 2004 - period from June 2012 to December 2016 - erasure of demand was finalised - appellant contended that it is settled law that with demand set aside, there is no scope for charging of interest thereof - HELD THAT:- In terms of rule 14 of CENVAT Credit Rules, 2004, interest liability arises only upon credit taken and utilized wrongly. Furthermore, rule 3 and rule 4 of CENVAT Credit Rules, 2004 make it abundantly clear that credit is to be taken upon receipt of the invoice for the service procured. In this particular instance, tax liability arose by deeming the recipient of the service to be the provider and having discharged the tax liability that accrued on receipt of service, credit would be available from such date irrespective of payment not being made immediately to the actual provider of service - It is also to be noted that with the original authority having been held to have travelled beyond the show cause notice, the first appellate authority was also bound within the framework of that finding. Instead, the impugned order has based its outcome on an order which had already been set aside during the first round of litigation and relied upon non-existent material to confirm the leviability of interest. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest under Rule 14 of the CENVAT Credit Rules, 2004 can be charged where the substantive demand for recovery of wrongly availed CENVAT credit has been set aside. 2. Whether interest under Rule 14 can be levied on credit availed before payment to a foreign service provider where tax liability arose on the recipient under the Place of Provision of Services Rules and Finance Act, 1994. 3. Whether an appellate authority may base a demand for interest on findings or material that the original adjudicating authority exceeded the scope of the show cause notice and which findings were subsequently set aside. ISSUE 1 - Liability to pay interest under Rule 14 where substantive demand is set aside Legal framework: Rule 14 CENVAT Credit Rules, 2004 prescribes liability to pay interest where CENVAT credit has been taken and utilized wrongly. Rule 3 and Rule 4 govern conditions for taking credit, including invoicing and receipt of service. Precedent treatment: Reference was made to judicial statements on the nature of interest as a consequence of liability (e.g., Supreme Court exposition on interest as incident to demand), and to tribunal decisions permitting interest where monetary benefit was enjoyed during interim period; however, such precedents apply only when an underlying recovery/duty liability is maintained. Interpretation and reasoning: The Tribunal held that interest under Rule 14 attaches only upon a subsisting liability for wrongly taken and utilized credit. If the substantive demand for recovery of credit is set aside (i.e., no liability is established), there is no foundational basis for charging interest. The appellate authority's imposition of interest despite setting aside the recovery was inconsistent with Rule 14's contingent operation. Ratio vs. Obiter: Ratio - interest under Rule 14 cannot be charged where the underlying demand for recovery of credit has been set aside; Obiter - commentary on general principles of interest as incident to demand cited from higher court decisions. Conclusion: Interest under Rule 14 is not leviable once the substantive recovery of credit has been set aside; the demand for interest must stand or fall with the liability for recovery of credit. ISSUE 2 - Date of tax liability, taking of credit, and payment to foreign service provider Legal framework: Finance Act, 1994 and Place of Provision of Services Rules, 2012 can render the recipient liable to discharge service tax where services are procured from overseas; CENVAT Rules permit credit from the date conditions (invoice/receipt) are satisfied. Precedent treatment: Tribunal authority cited in the impugned order held that where payment and service tax are subsequently discharged to the provider, credit may be available and interest can be charged for the interim benefit; such precedents applied where facts supported a finding that credit was wrongly availed prior to satisfaction of requisite conditions. Interpretation and reasoning: The Tribunal found that where tax liability is deemed to arise on the recipient and the recipient discharges that tax, credit is available from the date the liability accrues irrespective of immediate payment to the actual overseas provider. Thus, mere timing disparity between invoicing/payment to the foreign supplier and taking of credit does not ipso facto create interest liability unless credit was in fact wrongly taken and utilised in breach of Rule 3/4. Ratio vs. Obiter: Ratio - where tax liability arises on the recipient and is discharged accordingly, entitlement to credit attaches from that date even if payment to the overseas provider is later; Obiter - application of specific tribunal precedent depends on factual parity (i.e., actual date of invoice/payment must be shown). Conclusion: Interest cannot be sustained solely on the basis that credit was taken prior to payment to the overseas service provider where law deems the recipient to be the provider and credit is otherwise available from the date liability was discharged; factual proof of invoice/payment dates is necessary to uphold an interest demand. ISSUE 3 - Limits on appellate authority when original order exceeded show cause notice and was earlier set aside Legal framework: Principles of adjudication bound authorities to the scope of the show cause notice and to material legitimately before the adjudicating authority; appellate authority must respect findings set aside in earlier proceedings and cannot rely upon vacated findings or non-existent material. Precedent treatment: Established administrative-law principles constrain fact-finding and reliance on material outside the adjudicatory record; appellate confirmation of errors made by the original authority is impermissible where those errors have been judicially set aside. Interpretation and reasoning: The Tribunal held that the appellate authority was bound by the earlier finding that the original authority had travelled beyond the show cause notice. By basing its decision to demand interest on that vacated order and on material that had been set aside, the appellate authority acted outside the permissible framework. An authority cannot confirm a levy of interest founded on findings already discredited. Ratio vs. Obiter: Ratio - an appellate authority cannot sustain a demand (including interest) by relying on findings or material that were set aside as beyond the scope of the show cause notice; Obiter - discussion of the limits of admissible material on remand. Conclusion: The appellate authority's confirmation of interest, grounded on findings which had been set aside for exceeding the show cause notice, was impermissible; interest so imposed must be vacated. OVERALL CONCLUSION The Tribunal concluded that because the substantive recovery of CENVAT credit was set aside and because the appellate authority relied on vacated findings and non-existent material, the demand for interest under Rule 14 could not be sustained; the impugned order charging interest was therefore set aside and the appeal allowed.