2025 (11) TMI 1694 - AT - Central Excise

Interest and penalty on reversed CENVAT credit for electricity unsustainable under sections 11AA, 11A and Rules 14, 6, 15(1)

M/s Hindustan Zinc Ltd Versus The Commissioner, Udaipur

The CESTAT set aside the demand of interest and penalty on the appellant regarding CENVAT credit attributable to electricity sold to the State Electricity ... Payment of interest under section 11AA of the Central Excise Act read with rule 14 of the 2004 Credit Rules - imposition of penalty equivalent to the amount of CENVAT credit reversed on inputs and input services attributable to that portion of electricity generated and sold to the State Electricity Board under rule 15(1) of the 2004 Credit Rules read with section 11AC of the Central Excise Act. Whether interest could have been charged under section 11AA of the Central Excise Act read with rule 14 of the 2004 Credit Rules on the amount of credit availed by the appellant towards the electricity sold to the State Electricity Board? - HELD THAT:- It would be clear from the provisions of section 11AA of the Central Excise Act that interest is payable if the amount of duty is paid by the person after the due date and is calculated from the date on which such duty becomes due up to the date of actual payment of the amount due - The show cause notice does not give any reason as to why interest is recoverable under section 11AA of the Central Excise Act. It merely alleges that as the appellant had wrongly availed CENVAT credit in contravention of the provisions of rule 3(1) of the 2004 Credit Rules, it appears that the amount is recoverable under rule 14 of the 2004 Credit Rules read with section 11A(1) of the Central Excise Act - It is, therefore, clear that the show cause notice does not even give the date on which the amount of duty was due and the date on which it was reversed. It appears that merely because credit had been wrongly availed, the show cause notice mentions that interest is also payable under section 11AA of the Central Excise Act. It was for the department to specifically allege in the show cause notice why interest was to be paid by the appellant under section 11AA of the Central Excise Act when the amount of CENVAT credit taken by the appellant towards sale of electricity to the State Electricity Board had been reversed. If there was any violation of rule 6 of the 2004 Credit Rules, then the same had to be specifically pointed out in the show cause notice. The show cause notice does not allege that since rule 6 of the 2004 Credit Rules had been violated, interest would become payable in terms of section 11AA of the Central Excise Act read with rule 14 of the 2004 Credit Rules. The order passed by the Commissioner confirming the demand of interest under section 11AA of the Central Excise Act, therefore, cannot be sustained and deserves to be set aside. Whether penalty could have been imposed upon the appellant under rule 15(1) of the 2004 Credit Rules on the portion of the electricity sold by the appellant to the State Electricity Board? - HELD THAT:- No duty was payable by the appellant under section 11A of the Central Excise Act as the amount of credit availed by the appellant on the sale of electricity sold to the State Electricity Board had been reversed as reversal of credit amounts to not taking credit at all. The Supreme Court in Chandrapur Magnet Wires (P) Ltd. vs. Collector of C. Excise, Nagpur [1995 (12) TMI 72 - SUPREME COURT] and Commissioner of Central Excise & Customs vs. M/s. Precot Meridian Limited [2015 (11) TMI 323 - SUPREME COURT] held that reversal of credit means that the party did not avail the input service credit. A Division Bench of the Tribunal in M/s. Star Agriwarehousing & Collateral Management Limited vs. Commissioner, Central Excise & Service Tax [2020 (10) TMI 198 - CESTAT NEW DELHI] also observed that once the proportionate reversal of CENVAT credit takes place, it tantamounts to non-availing of the input service credit. Levy of penalty u/r 15(1) of the 2004 Credit Rules - HELD THAT:- Rule 15(1) of the 2004 Credit Rules can be applied only when a person takes or utilizes CENVAT credit wrongly or in contravention of any of the provisions of the 2004 Credit Rules - the appellant had reversed CENVAT credit in respect of inputs and input services attributable to the power sold to the State Electricity Board on a monthly basis and this would amount to non-taking of CENVAT credit. It cannot therefore, be urged that the appellant had availed credit of input and input services wrongly. The finding recorded by the Commissioner regarding violation of rules 6(3) has not been established. Secondly, the Commissioner has applied rule 15(2) which relates to suppression of facts. Rule 15(1) does not deal with suppression of facts or fraud. Thus, rule 15(1) of the 2004 Credit Rules could not have been invoked for imposing penalty upon the appellant. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether interest under section 11AA of the Central Excise Act read with rule 14 of the CENVAT Credit Rules, 2004 could be demanded on CENVAT credit attributable to electricity sold to the State Electricity Board when such credit had already been reversed prior to issuance of the show cause notices and the notices did not specify the basis for interest. (2) Whether penalty under rule 15(1) of the CENVAT Credit Rules, 2004 read with section 11AC of the Central Excise Act could be imposed in respect of CENVAT credit attributable to electricity sold to the State Electricity Board when that credit had been reversed; and whether, in such circumstances, the assessee could be said to have 'wrongly taken or utilized' credit or to have suppressed facts within the meaning of the applicable provisions. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Demand of interest on reversed CENVAT credit relating to electricity sold to the State Electricity Board Legal framework (as discussed) (a) Section 11AA of the Central Excise Act was reproduced and noted to provide for interest on delayed payment of duty, chargeable from the date on which such duty becomes due up to the date of actual payment. (b) Rule 14 of the CENVAT Credit Rules, 2004 was referred to as the provision under which recovery of wrongly availed CENVAT credit, together with interest, is proposed in the show cause notices. Interpretation and reasoning (c) It was undisputed on the record, and expressly acknowledged in the show cause notices and in the adjudication order, that CENVAT credit attributable to electricity sold to the State Electricity Board had been reversed by the assessee prior to issuance of the show cause notices, and that such amounts were proposed to be, and were, appropriated. (d) The show cause notices merely alleged that credit had been wrongly availed and, therefore, was recoverable under rule 14 read with section 11A(1) of the Central Excise Act, and stated in a bare, conclusory manner that 'interest on the said irregular Cenvat credit' was also recoverable under rule 14 read with section 11AA. The notices did not: - specify any date on which the duty/amount allegedly became due; - specify the date(s) of reversal by the assessee; or - state any factual or legal basis as to how the conditions for levy of interest under section 11AA stood attracted. (e) In the replies, the assessee specifically asserted that reversal of credit attributable to electricity sold to the State Electricity Board had been carried out on a monthly basis prior to issuance of the show cause notices. (f) In the impugned order, the Commissioner accepted that the amounts attributable to electricity sold to the State Electricity Board were correctly quantified and had been reversed by the assessee, and accordingly appropriated the same. However, the Commissioner proceeded to confirm interest on the ground that there was nothing on record to show whether the reversals had been made 'in accordance with rule 6' of the CENVAT Credit Rules, 2004. (g) The Tribunal held that this reasoning was unsustainable. If the department intended to proceed on the basis of any violation of rule 6, or on any other ground for levy of interest under section 11AA read with rule 14, it was incumbent that such basis be specifically alleged and set out in the show cause notices. The notices did not contain any allegation that rule 6 had been violated, nor did they disclose any foundational facts or dates necessary to attract section 11AA. (h) The Tribunal observed that interest under section 11AA is chargeable only where there is delayed payment of duty, i.e., from the date the duty becomes due till the date of payment. In the absence of any pleaded or established date when such 'duty' became due, and when it was paid/reversed, the statutory preconditions for levy of interest were not shown to exist. Conclusions (i) As the show cause notices did not contain any specific or adequate allegations justifying levy of interest under section 11AA read with rule 14, and as the credit attributable to electricity sold to the State Electricity Board had already been reversed and appropriated, the confirmation of interest by the Commissioner was held to be unsustainable. (j) The demand of interest under section 11AA of the Central Excise Act read with rule 14 of the CENVAT Credit Rules, 2004 in respect of the reversed credit was set aside. Issue (2): Imposition of penalty under rule 15(1) of the CENVAT Credit Rules, 2004 in respect of reversed credit relating to electricity sold to the State Electricity Board Legal framework (as discussed) (k) Rule 15(1) of the CENVAT Credit Rules, 2004 was reproduced. It provides for confiscation and penalty where any person 'takes or utilizes CENVAT credit in respect of input or capital goods or input services, wrongly or in contravention of any of the provisions of these rules', with the penalty not exceeding the duty or service tax on such goods or services, or two thousand rupees, whichever is greater. (l) The Tribunal referred to the decisions of the Supreme Court in: - Chandrapur Magnet Wires (P) Ltd. v. Collector of C. Excise, Nagpur; and - Commissioner of Central Excise & Customs v. Precot Meridian Limited, as well as a Division Bench decision of the Tribunal in Star Agriwarehousing & Collateral Management Limited v. Commissioner, Central Excise & Service Tax, holding that reversal of CENVAT credit amounts to the position that no credit was taken; once proportionate reversal takes place, it tantamounts to non-availment of credit. Interpretation and reasoning (m) It was not in dispute that the assessee had reversed, on a monthly basis, CENVAT credit relating to inputs and input services attributable to electricity sold to the State Electricity Board, and that this reversal was accepted and appropriated by the adjudicating authority. (n) Applying the above Supreme Court and Tribunal precedents, the Tribunal held that such reversal has the legal effect that the assessee cannot be treated as having taken or utilized that CENVAT credit at all. Consequently, the essential precondition under rule 15(1)-that credit must have been 'taken or utilized' wrongly or in contravention of the rules-is not satisfied. (o) The Commissioner, in paragraph 14.10 of the order, recorded a finding that there was a deliberate act of 'willful suppression' by the assessee in not furnishing details in ER-1 returns and allegedly not reversing the amount 'timely' in accordance with rule 6(3). On this basis, the Commissioner invoked rule 15(1) read with section 11AC of the Central Excise Act to impose penalty equivalent to the reversed credit. (p) The Tribunal examined and rejected this approach for two reasons: - First, the alleged violation of rule 6(3) was neither specifically established nor supported in the show cause notices; as already observed in the context of interest, the adjudicating authority's inference of non-compliance with rule 6(3) had no pleaded foundation. - Secondly, the finding of 'suppression of facts' is conceptually referable to rule 15(2), which specifically deals with cases involving fraud, collusion, willful mis-statement or suppression of facts, etc. Rule 15(1) itself does not contain any requirement or element of suppression or fraud; it only covers wrongful taking or utilization of credit. The Commissioner, however, purported to rely on allegations characteristic of rule 15(2) while imposing penalty under rule 15(1), thereby misapplying the statutory scheme. (q) In view of the established fact of prior reversal and the legal position that such reversal is equivalent to non-availment of credit, the Tribunal held that the assessee could not be said to have 'wrongly taken or utilized' credit for the purposes of rule 15(1), nor could penalty under that provision be justified on allegations of suppression which belong, if at all, to rule 15(2). Conclusions (r) Since reversal of credit relating to electricity sold to the State Electricity Board amounted in law to non-taking of credit, the foundational requirement of rule 15(1)-that credit must have been taken or utilized wrongly-was not met. (s) The Commissioner's reliance on alleged 'willful suppression' and supposed non-compliance with rule 6(3), without specific pleading or proof and while invoking only rule 15(1), was held to be legally untenable. (t) The penalty imposed under rule 15(1) of the CENVAT Credit Rules, 2004 read with section 11AC of the Central Excise Act, in respect of the reversed credit attributable to electricity sold to the State Electricity Board, was set aside. Overall disposition relevant to the issues (u) The Tribunal noted that, in light of earlier binding decisions which had been accepted by the department, CENVAT credit proportionate to electricity wheeled to sister concerns was admissible and demand thereon, along with attendant interest and penalty, was rightly dropped by the adjudicating authority. (v) Insofar as the six show cause notices sought interest and penalty in relation to CENVAT credit attributable to electricity sold to the State Electricity Board, the impugned order was set aside and all six appeals were allowed.