Critical issues in Interest & Penalties presented by CA Manmohan khemka

1. Critical issues in Interest & Penaltiespresented byCA Manmohan khemka at 4thAnnual Service Tax Workshop2nd, 9th, 16th, & 23rd July 2011 All India Chartered Accountants’ Society

2. Interest is Mandatory • CCE&C, Calicut v GM Telecom BSNL 2009 (14) STR 450 (Ker): • Provision of interest u/s 75 is mandatory in nature and liable to be paid on delayed payment of tax. • CST, Ahmedabad v Pepsi Cola India Marketing Co. 2007 TIOL 1417 CESTAT AHM: • No specific notice is required to be given • CIT Lucknow v kanhai Ram Thekedar 2005 (185) ELT 5 (SC): • Even if there is no specific demand of interest in the assessment order, it form part of it. CA Manmohan Khemka SAMYNK & CO

3. Interest is payable even for stay period • CCE, Chennai v R K Swamy Bbdo Advertising (P) Ltd:2009-TIOL-1480-CESTAT-MAD • Interest is payable for delay in payment of tax for the period for which operation of provision was stayed by the High Court • Suri & Co. v CCE Coimbatore 2005 (187) ELT 242 (Tri.-Chennai):2005-TIOL-1214-CESTAT-MAD • Demand of interest for period of stay ( CA case) is not authorised • S C Ajmera & Co. v CCE, Jaipur 2005-TIOL-920-CESTAT-DEL • Appellants are liable to pay statutory interest even for the period levy of service tax on CAs was stayed by HC. CA Manmohan Khemka SAMYNK & CO

4. Interest on Wrong Availment of CENVAT Credit • Position before CENVAT Credit Rule, 2004 CCE v Maruti Udyog Ltd. [2007 (214) ELT 173 (P & H)]: • Not liable to pay interest where credits had only been availed erroneously but were not subsequently utilized. • Special Leave Petition filed by the department against this order of HC with the SC dismissed. CA Manmohan Khemka SAMYNK & CO

5. Interest on Wrong Availment of CENVAT Credit • Position after CENVAT Credit Rule, 2004 Rule 14: Recovery of CENVAT Credit wrongly taken or erroneously refunded: “Where the CENVAT Credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or provider of the output services and the the provision of sections 11A and 11B of the Excise Act or section 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting recoveries.” CA Manmohan Khemka SAMYNK & CO

6. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • Ind-Swift Laboratories Ltd. v Union of India 2009 (240) ELT 328 (P&H): • Interest is payable from the date of utilization of wrongly availed credits & not from the date of availment of such credit. • HC referred to the decision of SC in Pratibha Processors v. UOI 1996 (88) ELT 12 (SC) where in it was held that interest is compensatory in character and is imposed on assessees who had withheld the payment of any tax that was due or payable. • Again held that the interest is not chargeable unless the credit that was erroneously availed, had been utilized, despite the change in wordings of Rule 14. CA Manmohan Khemka SAMYNK & CO

7. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • Circular No. 897/17/2009-CX dated 03.09.09: • Interest would be recoverable from the date of availment of credit even if the credit has not been utilised. • Avail: v. (avail oneself of) use or take advantage of. n. use or benefit. • Take: v. reach for and hold, carry or bring with one, subtract, consume. … CA Manmohan Khemka SAMYNK & CO

8. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • UOI v. Ind-Swift Laboratories Ltd. 2011 (265) ELT 3 (SC): • Q. whether the word ‘OR’ appearing in Rule 14 of the CENVAT Credit Rules, 2004 could be harmoniously read as ‘AND’, as was interpreted by the P&H HC. • Held that if the aforesaid provision was read as a whole there was no reason to replace the word ‘OR’ occurring in between the expression ‘taken’ or ‘utilized wrongly’ or ‘has been erroneously refunded’ with the word ‘AND’. • Credit become recoverable along with interest upon happening of any of the three aforesaid circumstances CA Manmohan Khemka SAMYNK & CO

9. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • Circular No. 942/03/2011-CX dated 14.03.11 • Interest is payable from the date of erroneous availment of credit even if the credit had not been utilized CA Manmohan Khemka SAMYNK & CO

10. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 Case 1 : CENVAT Credit wrongly availed but not utilised: whether tax would also be recovered along with interest as required under Rule 14. Case 2: CENVAT Credit wrongly availed reversed after 6 months without utilization: whether interest is to be paid for 6 months i.e. for the period of availment in books only. Case 3: CENVAT Credit wrongly availed & utilised after 6 months: whether interest is to be made only from month 6 i.e. from the time of utilization of credit. CA Manmohan Khemka SAMYNK & CO

11. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • If in both case 2 & 3, the interest is payable from month 1 i.e. from the time of wrong availment of credit, then it clearly becomes redundant to use word “OR” between the words taken or utilized wrongly or has been erroneously refunded, CA Manmohan Khemka SAMYNK & CO

12. Interest on wrong availment of CENVAT Credit after CENVAT Credit Rule, 2004 • New Rule 4(7): • CENVAT Credit is now allowed on receipt of invoice. • If payment of input service and tax there on is not made with in 3 months of the date of invoice, CENVAT Credit so availed is to be paid by debiting to CENVAT Credit or otherwise on or before 5th day of the following month / 31st March, & • if the assessee fails to so pay, the amount is to be recovered @ Rule 14. Whether in this situation interest would be payable from the date of availment of the credit? CA Manmohan Khemka SAMYNK & CO

13. Penalties • Penal provision have no retrospective effect • Penalty can be levied only when there is deliberate defiance of law • Mens rea is essential for imposing penalty • Penalty can be leviable only under the provisons existence at the time of issuance of SCN • Assessee to be put on notice as to exact nature of contravention for which penalty is levied • No penalty can be levied without issuing a SCN CA Manmohan Khemka SAMYNK & CO

14. Penalties • No penalty can be levied, when issue is entirely one of interpretation of Law • No penalty is leviable for only procedural lapses • No penalty is leviable when the assessee acts in bona fide • Penalty can not be imposed merely on the basis of statement of co-accused CA Manmohan Khemka SAMYNK & CO

15. Penal Provision have no retrospective effect • BOC India Ltd v CCE 2004 (173) ELT 140 (Tri-Kolkata) : 2006 (3) STR 316 (Tri.-Kolkata) • Any penal provision cannot be made effective from retrospective date. Kody Teck Ltd. v Commissioner of Customs, Chennai 2007 (212) ELT 428 (Tri.-Chennai) A Penal provision has no retrospective effect, unless otherwise specified in the provision itself. CA Manmohan Khemka SAMYNK & CO

16. Penalty can be leviable only when there is deliberate defiance of law • Hindustan Steel Ltd v State of Orissa AIR 1970 SC 253: • Penalty will not ordinarily be imposed, unless the party obliged either acted deliberately in defiance of law or was found guilty of conduct. • CST, Division-I, Kolkata v Krishna Sale Agency 2007-TIOL-87-CESTAT KOL : 2007(6) STR 371(Tri-Kolkata) • Pardonable breach being technical in nature does not call for imposition of penalty. CA Manmohan Khemka SAMYNK & CO

17. Penalty can be leviable only under the provisions existence at the time of issuance of SCN • CCE, Coimbatore v Elgi Equipments Ltd. 2001(128) ELT 52 (SC) Illegality committed prior to the insertion of the provisions cannot be subject matter of penalty. • West Minister International (P) Ltd v CCE, New Delhi 2002(140) ELT 244 (Tri-Del) Penalty can be imposed only under the provisions which are in existence at the time of issuance of SCN. CA Manmohan Khemka SAMYNK & CO

18. Assessee to be put on notice as to the exact nature of contravention for which penalty is levied. • Amrit Foods v CCE, U.P. 2005-TIOL-164-SC-CX : 2005 (190) ELT 433 (SC) Rule 173Q contains six clauses, the contents of which are not same. Therefore, necessary for assessee to be put on notice as to exact nature of contravention. The penalty was set aside. • Shri Vikram Jain v CC, Bangalore 2006-TIOL-1169-CESTAT-BANG : 2006(205) ELT 735 (Tri-Bang) Once a relevant section for imposing the penalty is not invoked in the SCN, penalty under the said section cannot be imposed in order-in-original. CA Manmohan Khemka SAMYNK & CO

19. No penalty can be leviable without issuing a SCN • CCE v Suraj Ratan Mohta (1999) 113 ELT 260 (Tri) • Penalty cannot be levied straightaway without giving an opportunity or any show-cause notice. • JSW Steel Ltd. v CCE, Belgaun 2008-TIOL-444-CESTAT-Bang: 2008(225) ELT 520 (Tri – Bang) • No Penalty is imposable when no confirmation of duty demanded. CA Manmohan Khemka SAMYNK & CO

20. Leviabilty of Penalty when amount paid before issuance of SCN • Circular No. 889/09/2009-CX dated 21.05.2009 The circular has taken note of Supreme Court decision in the case of UOI v Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC-CX : 2009 (238) ELT 3 (SC) and clarified that even though duty has been paid before the issuance of SCN, there is no discretion to reduce the mandatory penalty if conditions spelt out under Section 11AC (or Section 78) are fulfilled. As per the provisions of Sec 73(3), assessee has the option to pay either at his own ascertainment or at the ascertainment of the CEO, the amount of service with interest before SCN, the law has envisaged that in such a situation, no SCN shall be issued by CEO CA Manmohan Khemka SAMYNK & CO

21. Leviabilty of Penalty when amount paid before issuance of SCN • Amendment in Sec 73(3) by inserting Explanation 2 by FA 2010 w.e.f 08.05.2010 • “Explanation 2 – For the removal of doubts, it is hereby declared that no penalty under any of the provisions of this Act or the rules made thereunder shall be imposed in respect of payment of service-tax under this sub-section and interest thereon.” However, aforesaid provisions shall not be applicable where the tax has not been paid or refund has been erroneosly granted because of the reasons stated under proviso to sub-section (1) of section 73 i.e. fraud, suppression of facts, etc CA Manmohan Khemka SAMYNK & CO

22. No penalty can be levied, when issue is entirely one of interpretation of law. • Rajhans Metals (P) Ltd v CCE, Rajkot 2007-TIOL-1491-CESTAT-AHM : 2007 (8) STR 498 (Tri.-Ahm) • If it is an issue of interpretation, there is no justification for imposition of penalty. CA Manmohan Khemka SAMYNK & CO

23. No penalty leviable when the assessee acts in a bona fide • Catalyst Capital Services Pvt Ltd v CCE, Mumbai-IV 2005 (184) ELT 34 (Tri.-Mumbai) : 2006(3) STR 415 (Tri.-Mumbai) • As appellants had already deposited ST and there was no mala fide intention in making delayed payment so penalty u/s 76 was set aside. • Flyingman Air Courier (P) Ltd v CCE, jaipur 2004 (170) ELT 417 (Tri-Del): 2006(3) STR 283 (Tri.-Del) • Appellant contended that they were under bona fide belief that they are not covered under the definition of courier, the Tribunal held imposition of penalty is not sustainable. CA Manmohan Khemka SAMYNK & CO

24. Penalty cannot be imposed merely on the basis of statement of co-accused • Jalal Mahaldar and Ors. V CC (Prev.), W.B. 2002 (52) RLT 475 (CEGAT-Kolkata) • One of the persons retracted his statement – no other corroborative evidence found – penalty set aside. CA Manmohan Khemka SAMYNK & CO

25. Thank You CA Manmohan Khemka SAMYNK & CO