1% interest penalty when cenvat credit reversed without utilising

[P Ovhal]

Dear Expert,

We are manufacturer of exciseble goods. We have taken CENVAT credit on our Input services consumed in manufacturing process. But still we have not utilized that CENVAT credit since 2006. One of part of our Input service is not covered as an input service. We have reversed CENVAT credit as per asked by the Auditor. But they also asked to 1% penalty on reversed CENVAT credit. Please suggest me rule/Notification on which basis Auditor has asked to us for pay 1% penalty in above condition.

regards,

Provhal

[YAGAY andSUN]

Dear P Ovhal,

In our opinion, this matter is barred by limitation. Please check Section 73 of the Finance Act, 1994 read with Section 11A of the Central Excise Act, 1944 in this regard. Further, never reverse or pay any amount on the verbal request/demand or coming under the undue pressure of Audit Team or Range Superintendent without analysis of settled legal position.

Now the issue is that you have already reversed the CENVAT credit amount which was availed on input services. You may negotiate with them that this matter was barred by limitation.

 

Regards

YAGAY and SUN

(Management and Indirect Tax Consultants)

[Rajagopalan Ranganathan]

Sir,

You have stated that you had taken credit of service tax paid on input service and had not utilized since 2006. but you have not mentioned the date on which the Auditor asked you to reverse the credit. if that date falls in the year 2012, then the demand is clearly time barred. Since the credit taken by you would have reflected in your ST-3 return you cannot be accused by the department of suppression of fact etc., under Section 73 of finance Act, 1994.

Rule 14 of Cenvat Credit Rules, 2004 states that-

14. Recovery of CENVAT credit wrongly taken or erroneously refunded.-

Where the CENVAT credit has been taken and utilised wrongly or 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 sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.

Interest is payable under Section 11 AA. The rate of interest is 18% per annum vide Notification No. 5/2011-CE (N.T) dated 1.3.2011.

A reading of the above mentioned provision reveals that only when cenvat credit is wrongly taken and utilised then you have to reverse the wrongly taken and utilised credit along with interest. The words "taken and utilised" was inserted in rule 14 of Cenvat Credit Rules, 2004 vide Notification No. 18/2012 CE(NT) dated 17-3-2012. If the department asked you to reverse the credit on or after 17.3.2012 you need not pay any interest since you had not utilised the credit for payment of duty or service tax.

I have not come across any provision under Finance Act, 1994 or Service Tax Rules, 1994 for payment of 1% interest penalty. Only under Rule 8 (3 A) of Central Excise rules, 2002 if the assessee fails to pay the duty declared as payable by him in the return within a period of one month from the due date, then the assessee is liable to pay the penalty at the rate of one per cent on such amount of the duty not paid, for each month or part thereof calculated from the due date, for the period during which such failure continues . The period of one month is calculated from 5th or 6th of the month to 5th or 6th of the next month.

[Mahir S]

Sir,

The auditor have asked you to pay up the 1% penalty under sub section 6 of section 11A of the Central Excise Act, 1944.

From your query, it appears that you had been regularly availing wrong input service credit and all such total wrong input credit has been reversed by the auditors. You are also required to pay interest till 16.03.2012 for such wrongly availed credit.

[Arun Kumar Singh]

Penalty can be waived but interest will be applicable. Before the 1.4.2012 if cenvat credit was taken or utilized but after this period is taken and utilized. Now only taken and reversed before utilized then interest will not be applicable.

AI Summary

Reversal of CENVAT credit: penalty exposure depends on whether credit was utilised and on timing of statutory amendments. Whether a one percent monthly penalty applies when CENVAT credit on input services is reversed without having been utilised hinges on the distinction between credit 'taken' and credit 'taken and utilised.' Rule 14 of the Cenvat Credit Rules and cross referenced statutory recovery and interest provisions govern recovery; amendments inserting 'taken and utilised' limit interest exposure for reversals after the amendment. No clear service tax provision prescribes a flat one percent monthly penalty for reversing unused credit, though certain central excise return-payment rules impose a one percent monthly charge for declared but unpaid duty.