OCTOBER 01, 2014

By B N Gururaj, Advocate

THE latest judgment of the Hon'ble CESTAT, Bangalore, in Apotex Research Pvt Ltd & Others v. CCE, 2014-TIOL-1836-CESTAT-BANG, the tribunal has laid to rest many irksome problems faced per assessees who were claiming refund of unutilised cenvat credit under rule 5 ibid . At least from the assessee's view point, there is very little to be unhappy about the judgment. One of the important pronouncements of the judgment that the refund claims under rule 5 are governed by Section 11B is also unexceptionable.

However, the view taken by the Hon'ble Bench while deciding Issue No. 6 dealing with nexus between input services and output services raises certain issues, which are important, but have not been argued before the Hon'ble Bench. The purpose of this article is to address these issues.

There can be no two opinions about the Bench's view that the claimant of refund must establish the nexus between the output service and the input services. The question is at what stage should this be done? Secondly, should the assessee who claims refund voluntarily prove this nexus, or does the Revenue have the initial burden of proof to satisfy itself that the credit taken by the assessee is within four corners of laws? Rule 14 of Cenvat Credit Rules, 2004 answers this question.

Under the existing law and procedure governing taking of credit, the burden to prove his entitlement to a given credit is on the assessee. Before taking a given input service credit, the assessee has to satisfy himself that the input service at least has broad nexus with the output service, if not proximate and direct nexus with it. This will enable the assessee to defend the credit taken, if ever the Revenue challenges a given credit as ineligible. One who cannot justify the credit taken has done so at his own peril. At present, the forms of various returns prescribed by the Central Government do not allow the assessee to explain and defend the credits taken by him. In the returns, an assessee can show only consolidated sums of credit taken by him in each category such as input, input services, capital goods, purchases from dealers etc.

Ordinarily, challenge to input credit arises by way of audit objections,who have the opportunity to see the documents evidencing payment of duty and examine its validity against the backdrop of the assessee's business activity. This drill ultimately culminates in a show cause notice. Usually, the assessee replies to the notice justifying the credit taken both on facts and based on judicial precedents. Ultimately, the credit taken may be sustained or denied by the appellate forum. This is the scope of rule 14 of the Cenvat Credit Rules 2004, a specific legal tool available to the Revenue if it wants to deny and recover doubtful credits. Most assessees, and certainly all the professionals practising in this field are familiar with this drill.

The Revenue has a duty to examine the returns filed by the assessees. Though the returns are filed on self-assessment basis, the responsibility to scrutinise the returns has not been obviated. One may refer to CBEC Circular No. 224/37/2005-CX.6 dated 24.12.2008 and Circular No. 87/7/2009-CX dated 11.5.2009 which clearly cast a duty on the Range Officer to scrutinize the ER1 returns filed by the appellant within the prescribed time limit. But, these circulars have been studiously ignored by one and all.

However, in Apotex judgment, this legal procedure enshrined in Rule 14, available for denial of credit has not been taken into consideration. Instead, this judgment implicitly allows the Revenue officer to defer this responsibility to examine the correctness of credit taken, until a refund claim is filed by the assessee under rule 5. At that stage, the Revenue officer sits up and examines the eligibility of each credit in respect of which refund has been claimed. This may happen more than one year after the credit has been taken. Thus, the assessee is also deprived the right to plead time bar.

An Inspector of Superintendent or AC/DC, sitting athis desk, without any further material before him, concludes that a given credit is eligible or ineligible. At the stage of refund claim, there will be implicit arm twisting of the assessee to accept the disallowance of credit so that he can obtain refund of rest of the undisputed credit. Or else, the assessee has to face rejection of entire refund claim, which has to be litigated. Experience has shown that for the next four to five years, the assessee won't see this money. Assessees justifiably think that a bird in hand is worth two in the bush.

In this process, the procedural safeguard provided in rule 14 is totally lost to the assessee. There are no clear cut allegations for denying the credit, no opportunity to examine the allegations and file the reply to the notice, no opportunity of personal hearing and no appellate remedy against an order denying the credit. However, this aspect of disputing the validity of credit at refund claim stage was not argued before the Bench. All the sides have proceeded on the implicit assumption that it is legal and proper to raise dispute about correctness of credit taken, at the refund claim stage, de hors Rule 14.

A refund claim under section 11B or Rule 5 is not a forum for raising disputes about the correctness of the credit taken. The scope of these provisions is limited to sanctioning of refund or rejecting it within the legal parameters of the provisions. That is, for instance, the Revenue can reject refund claim on the ground that the accumulation is not on account of exports. A refund claim under section 11B can be rejected on the ground of unjust enrichment, or time bar, or claim being untenable on facts, such as no excess payment of duty. These provisions do not allow conversion of a refund claim into a demand and recovery proceeding. But, when the Revenue is empowered to dispute the correctness of credit taken at the stage of refund claim, it results in denial of credit (demand) without the process of law. Such denial also results in effectively recovering the credit, if the assessee is not at all in a position to use the balance credit on the domestic transactions.

It is submitted that in Apotex judgment, it would have been most appropriate if the Hon'ble Bench had held that the Revenue is entitled to dispute the credits in accordance with rule 14, instead of casting the burden to prove the nexus between input services and output service on the refund claimant. One hopes that sometime in near future, there will be another appropriate case, where correct law on this issue can be laid down by the Tribunal.