FEBRUARY 16, 2016

By K R Ramankutty, FCA

Cenvat Credit and litigations

THE objective of National Litigation Policy formulated by Government of India is to reduce the litigation to give comfort for doing business in India. Apart from the various facts leading to issue of show cause notices, the provisions in law are also instrumental in initiating litigation. The law relating to Modvat scheme was evolved through a process of litigation. In the past when the Modvat scheme was introduced, the manufacturing sector used to avail the credit without utilising the same, when the availment of credit was disputed by the Central Excise Department. The practice was continued and both manufacturing as well as service sector had the freedom of keeping the utilisation of credit in abeyance where the same was disputed. However, the amendment in rule 14 introduced vide notification 6/2015– CE(NT) dated 01.03.2015 read with the amendment in rule 4(1) third proviso and rule 4(7) fifth proviso with effect from 01.03.2015 goes against the Government's objective of creating an atmosphere of ease of doing business in as much as the manufacturer or the service provider cannot avail Cenvat credit if the same is disputed by the Department as show cause notice follows even if the credit is not utilised by virtue of the amendment introduced in rule 14 of the Cenvat Credit Rules 2004, effective 01.03.2015. To avoid litigation if credit is not availed, the same gets time barred for availment within a period of one year from the date of the document specified under Rule 9(1) of the Cenvat Credit Rule. If the eligibility of a credit is disputed by the department, the same is not getting resolved within a period of one year is known to the department. In the case of recurring credits to be availed periodically, the above amendments introduced with effect from 01.03.2015 leads to a situation of availing the credit knowingly that show cause notice is inevitable. Liability for interest is not attracted, if credit is not utilized in view of the amendment introduced in rule 14 of the CCR 2004with effect from 01.04.2012. However, penalty under rule 15 is unavoidable due to the language provided in the rule 15. The above provisions are really penal in nature and do not give comfort to the business as invariably, for the alleged wrong credit equal amount of penalty under sub rule (2) of rule 15 CCR 2004 is invoked. The industry should have the freedom to avail the credit and not to utilize if the same is disputed by the Central Excise department. The amendment introduced vide notification 6/2015 – CE(NT) dated 01.03.2015 may be withdrawn and rule 15 also may be amended retrospectively not to impose penalty where the credits are availed but not utilized. The suggested said amendments if made , will go a long way in implementing the Government's National Litigation Policy.

Reduction in rate of interest whether will increase tax collection.

According to the practice followed by the Central Excise Department, where there is non-payment or short payment of tax it is the result of a calculated effort to evade tax. There are situations where the entire financial transactions are recorded in the books of accounts and the show cause notice is framed on the basis of entries in the books of accounts or service tax liability accounted in the books of accounts or in the ST-3 service tax is shown as tax un-paid. There are situations where traces of transactions are not recorded in the books of accounts. The former case non-payment could be due to financial difficulties arising out of non-realization of the amount of services billed or it could be due to ignorance of law relating to service tax. As far as penal provisions under 75 section 78 are concerned, there is no discrimination between a tax payer who has accounted the financial transactions completely in the books of accounts and a tax evader who has left no traces of transactions in the books of accounts. The rigor of penalty under section 78 as well as the interest at the rate of 24 % and 30 % has to be reduced in the case of tax payers who disclose the transactions in the books of accounts. The 24 to 30% interest liability may be restricted to real tax evaders who do not account for the transactions in their books of accounts. With retrospective amendment of reduced interest or no interest and no penalty , opportunity must be given to the defaulters who have completely accounted the transactions in the books of accounts to come forward and clear the arrears. Such a step from the Government's side is bound to increase the tax collection and tax compliance by the defaulters.

Section 86 of the Finance Act read with section 73A

Section 86 of the Finance Act which deals with the appeal to the Tribunal covers only an order passed by the Commissioner under section 73 of the Finance Act or section 83A of the Finance Act and an order passed by the Commissioner (Appeals) under section 85 of the Finance Act . An order passed by the Commissioner under section 73A of the Finance Act is not covered by the section meaning thereby that no appeal procedure if the order under section 73A is passed by the Commissioner but there is appeal procedure if 73A order is passed by an authority subordinate to Commissioner.

As per the existing provision for an order passed by the Commissioner under section 73A, the only rel ief is to approach jurisdictional High Court for appropriate relief .It appears the above situation is only a drafting error as for an order passed by an adjudicating authority lower to Commissioner can file appeal to Commissioner Appeals and against the Commissioner Appeals order appeal can be filed in Tribunal . The anomaly may be rectified by amending section 86 to an order passed by Commissioner under section 73A also.

Interestingly, similar issue does not raise its hood under the Central Excise law, namely section 11D of the CEA, 1944 as section 35B [Appeals to the Appellate Tribunal] covers within its ambit a decision or order passed by the Commissioner of Central Excise as an adjudicating authority. There is no reference to the section under which the Commissioner passes the order as in the case of Section 86 of the FA, 1994.