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Interest on differential duty consequent to final assessment

MARCH 30, 2015

By CS D Kalirajan

GENERALLY, assessees are not interested in‘interest' as it cannot be paid from CENVAT credit and it is an unnecessary cash outflow for him.Such uninterested assessees may proceed further with interest as the validity of the Customs circular insisting for payment of interest on differential duty paid voluntarily prior to passing of final assessment order under Section 18 of the Customs Act (for brevity ‘the Act') is discussed hereunder.

Under various circumstances given in Sec. 18 of the Act, either the importer or exporter or the proper officer of the customs, as the case may be, may resort to assessment of duty payable on importation or exportation of goods on provisional basis. Later, such provisional assessments would be finalized by the proper officer of Customs. Section 18(3) of the Act insists for payment of interest on any amount payable consequent to the final assessment order. Relevant portion of the Section 18(3) reads as follows.

"The importer or exporter shall be liable to pay interest, on any amount payable to the Central Government, consequent to the final assessment order or re-assessment order under sub-section (2), at the rate fixed by the Central Government under section 28AB from the first day of the month in which the duty is provisionally assessed till the date of payment thereof."

The CBEC has issued a Circular bearing No. 40/2011-Cus ., dated 09.09.2011 which insists for payment of interest on the differential duty ascertained and paid by the assessee prior to passing of order finalizing the provisional assessment. Relevant portions of the circular are reproduced hereunder.

"2. The issue has been examined by the Board, and accordingly it is clarified that whenever any importer or exporter intimates to the proper officer in writing that he desires to pay voluntarily certain amount of duty of customs, at any time before finalization of the provisional assessment , the following may be drawn to his attention, namely :-

(a) Such duty should be paid along with interest on the amount of duty so being paid, at the rate fixed by the Central Government under section 28B of the Customs Act, 1962, from the first day of the month in which the duty is provisionally assessed till the date of payment thereof; "

There is a similar provision as Rule 7 of the Central Excise Rules, 2002 (for brevity ‘Excise Rules') which deals with assessment of Central Excise duty on provisional basis and liability of the assessee to pay interest on differential duty payable consequent to finalization of such provisional assessment. For ease of reference relevant portion of the rule 7 is reproduced hereunder.

"4. The assessee shall be liable to pay interest on any amount payable to Central Government, consequent to order for final assessment under sub-rule (3), at the rate specified by the Central Government by notification issued under section 11AA of the Act from the first day of the month succeeding the month for which such amount is determined, till the date of payment thereof."

Interestingly, the aforesaid provision in the Excise Rules has been analyzed by the Hon'ble Bombay Tribunal in the case of Ispat Industries Ltd and it is held that provisions of rule 7(4) are clear that appellant/assessee is not liable to pay interest if the differential duty is paid prior to final assessment. Decision of the Tribunal has been upheld by the Hon'ble Bombay High Court and has also been affirmed by the Hon'ble Supreme Court by dismissing the SLP filed by the department and keeping the question of law open.

The said Rule 7(4) has been analyzed in detail by the Hon'ble Bombay High Court in the case of CEAT Ltd. - 2015-TIOL-397-HC-Mum-CX and it was observed that the assessee volunteered on its own to determine the liability of duty and paid the same before the finalization of the assessment and there resulted nothing consequent to finalizing of assessment. Therefore, it was held that there is no liability to pay interest as the duty is paid prior to finalization of provisional assessment.

Applying the ratio decidendi of aforesaid judgments to Section 18 of the Customs Act evidences that that where the differential duty is ascertained and paid by the importer or exporter prior to finalization of provisional assessment, there is no interest liability, as nothing is payable consequent to the final assessment order. However circular dated 09.09.2011 ( supra ) insists for payment of interest on the differential duty paid by the importer prior to finalization of provisional assessment. Keeping this on one side, the next worst situation is, in some cases department apportions some portion of differential duty paid by the importer to the applicable interest and demands balance duty due along with interest. This may be an indirect way of demanding interest on interest.

Even by assuming, there is an interest liability such liability may arise only after final assessment order comes into existence and not at time of voluntary payment of differential duty which is much prior to passing of final assessment order. Now it is evident that the circular travels beyond the provisions of Sec 18 of the Act atleast to the extent it insists for payment of interest when no final assessment order exists.

Conclusion

If we apply the decisions of the Bombay High Court (supra) on finalization of provisional assessment under Central Excise Law to the Customs Act, then there should not be any interest liability on importer or exporter where differential duty is paid prior to finalization of provisional assessment as there is no duty liability consequent to the final assessment order. It is evident that the said circular acts ‘out of box' to the extent that it demands interest on differential duty paid voluntarily and such interest is insisted for payment even much before the final assessment order comes into existence. Let us hope either the Parliament or the Supreme Court would put this circular into the box.

(Views expressed in this article are personal)

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