FEBRUARY 26, 2016

By Nirav S Karia & Saurabh Malpani

TODAY'S business arrangements call for revision of prices of goods after they are supplied by the manufacture to the buyer on various counts either due to pre-embedded escalation clause in the contract or due to revision in cost of goods sold. In such a scenario, a supplementary invoice is issued by the manufacturer to the customer for differential amount plus the appropriate taxes on the same.

The discussion in present article is focused on the levy of interest under existing Section 11AA of the Central Excise Act 1944 as amended by Section 64 of the Finance Act, 2011, on the excise duty charged on that portion of differential amount in the supplementary invoice.

Section 11AA of the Central Excise Act, 1944 effective from 8.04.2011 provides for charging interest on delayed payment of duty. The relevant part of the provision is extracted as follows-

SECTION 11AA- Interest on delayed payment of duty. - (1) Notwithstanding anything contained in any judgment, decree, order or direction of the Appellate Tribunal or any court or in any other provision of this Act or the rules made thereunder, the person, who is liable to pay duty, shall, in addition to the duty, be liable to pay interest at the rate specified in sub-section (2), whether such payment is made voluntarily or after determination of the amount of duty under section 11A.

(2) Interest, at such rate not below ten per cent and not exceeding thirty-six per cent per annum, as the Central Government may, by notification in the Official Gazette, fix, shall be paid in terms of section 11A after the due date by the person liable to pay duty and such interest shall be calculated from the date on which such duty becomes due up to the date of actual payment of the amount due.

--------- [Emphasis Supplied]

One can argue that, the expression "date when the duty becomes due" in present Section 11AA of the Central Excise Act, 1944 be the date on which the differential price to be paid to the goods is determined as per the contract and the supplementary invoice is issued to the customer. Thus, the Central Excise department cannot demand interest from the date of original supply of goods by the manufacturer.

The above issue was examined by the Supreme Court in case of CCE, Pune Vs. SKF India Ltd. reported at - 2009-TIOL-82-SC-CX. In that case, the Supreme Court has held that where a supplementary invoice is issued for differential excise duty in case of subsequent price revision on upward side, the excise duty becomes due from the date of original supply and hence interest is chargeable from that date. In other words, the date of issue of supplementary invoice is not relevant for the purpose of levying interest under then Section 11AB of the Central Excise Act, 1944. The relevant part of the judgment is extracted hereunder-

"12. The Bombay High Court, Aurangabad Bench, in its decision in The Commissioner of Central Excise, Aurangabad v. M/s. Rucha Engineering Pvt. Ltd., (First Appeal No. 42 of 2007) that was relied upon by the Tribunal for dismissing the Revenue's appeal took the view that there would be no application of Section 11A (2B) or Section 11AB where differential duty was paid by the assessee as soon as it came to learn about the upward revision of prices of goods sold earlier. In M/s. Rucha Engineering the High Court observed as follows:

"It is evident that the Section (11AB) comes into play if the duty paid/levied is short. Both, the Commissioner (Appeals) and the CESTAT have observed that the Assessee paid the duty on its own accord immediately when the revised rates became known to them from their customers. The differential duty was due at that time i.e. when the revised rates applicable with retrospective effect were learnt by the Assessee, which was much after the clearance of the goods and therefore, question of payment of interest does not arise as the duty was paid as soon as it was learnt that it was payable. Finding that provisions of Section 11A (2) and 11A (2B) were not applicable as the situation occurred in the instant, case was quite different, Section 11AB (1) was not at all applicable, and therefore, the Assessee was not required to pay interest."

…

14. We are unable to subscribe to the view taken by the High Court. It is to be noted that: the assessee was able to demand from its customers the balance of the higher prices by virtue of retrospective revision of the prices. It, therefore, follows that at the time of sale the goods carried a higher value and those were cleared on short payment of duty. The differential duty was paid only later when the assessee issued supplementary invoices to its customers demanding the balance amounts. Seen thus it was clearly a case of short payment of duty though indeed completely unintended and without any element of deceit etc. The payment of differential duty thus clearly came under sub-section (2B) of Section 11A and attracted levy of interest under Section 11AB of the Act.

(emphasis supplied)

The above decision of Supreme Court in case of SKF India was reviewed in the case of Steel Authority of India Ltd. Vs. Commissioner of Central Excise, Raipur reported at - 2015-TIOL-292-SC-CX. The Supreme Court in SAIL dealt with the issue, whether interest is leviable under then Section 11AB of the Central Excise Act, 1944on the differential excise duty paid on retrospective price increase underprice escalation clause in the sale contract. The Supreme Court in case of SAIL observed that the decision in case of SKF India has being passed by considering the effect of the expression "ought to have been paid" under then Section 11AB of the Central Excise Act, 1944. The above expression means the time when the price is agreed upon by the buyer and seller. As per Supreme Court, in the case of price revision subsequent to clearance, differential duty ought to be paid only in the month when the revised price is agreed between the buyer and seller.

Further the Supreme Court in SAIL also observed that in case of price revision, the quantum of duty would be the escalated price but the time for payment of differential duty is from the date the differential duty is due, i.e., the date of agreement of escalated prices and not before. Thus, the Division bench of the Supreme Court in case of SAIL has held that the decisions in SKF India Ltd. requires a re-look and has referred the matter to a larger bench for re-consideration.

From the above discussions, it is clear that both the decisions in case of SKF and SAIL were pertaining to the period prior to 8.04.2011 when erstwhile Section 11AB was in force.

Although, the new Section 11AA which substituted Section 11AB w.e.f. 8.04.2011, does not contain the words, "ought to have been paid" and "duty short paid", whether the above decision in case of SKF and SAIL would still have any impact on the cases falling under new Section 11AA post 8.04.2011?

The reason for the above view is that under existing Section 11AA of the Central Excise Act, 1944 the expressions "interest shall be paid after the due date…" and "interest shall be calculated from the date on which such duty becomes due…" are used which clearly indicates the relation of the payment and computation of interest with the date on which duty becomes due.

Reference is also invited to the amendment made to Explanation - 1 to Section 11Aof the Central Excise Act, 1944 by the Finance Act, 2015 (w.e.f 14.05.2015) in the definition of "relevant date" which adds a clause that relevant date means in case where only interest is to be recovered, then the relevant date is the date of payment of duty to which such interest relates to. So, the nexus between interest and 'duty to which interest relates to' continues.

Conclusion:

Thus, in the light of the above discussion, we can conclude that, if the Larger Bench of Supreme Court upholds the observations made in case of SAIL, then the manufacturer-assessee would need to pay interest on an amount equal to excise duty paid at the time of issuance of supplementary invoice from the due date of payment of excise duty in respect of original supply of manufactured goods. Such decision would have negative impact in the Industry as the manufacturers would have to shell out huge sum from the profit to pay interest in case where supplementary invoices are issued for price revision in upward case.

It is hoped that the chaos, confusion and ambiguity on the above issue will be clarified and the same will get settled by way of a clarification by CBEC or the same should be reviewed for consideration in the upcoming Union Budget 2016 to provide a legislative amendment in Section 11AA providing suitable clarification for such business scenarios.

[The authors are Principal Associate & Associate at Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal.]