Incorrect Understanding Of Law Can’t Automatically Be Treated As Tax Evasion Intention: CESTAT
Pranav B Prem
The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that an incorrect understanding or interpretation of law cannot, by itself, be equated with an intention to evade tax so as to justify invocation of extended limitation or imposition of penalty. The Tribunal further held that where a substantial portion of CENVAT credit has already been reversed prior to issuance of a show cause notice, recovery proceedings must be confined only to the balance amount, in accordance with statutory provisions. The decision was rendered by Dr. Suvendu Kumar Pati (Member – Judicial) in an appeal filed by Bhima Sahakari Sakhar Karkhana Ltd., a sugar manufacturing unit engaged in the production of sugar, molasses and allied by-products.
The appeal arose from an Order-in-Appeal dated 29 January 2021 passed by the Commissioner (Appeals), Pune, which had upheld denial and recovery of CENVAT credit amounting to ₹3.38 lakh, along with interest and an equal penalty under the CENVAT Credit Rules, 2004. The disputed credit related to the period from April 2013 to June 2017 and pertained to inputs and capital goods used by the appellant.
During an EA-2000 audit, the department pointed out certain wrong availments of CENVAT credit. On being apprised of the objections, the appellant voluntarily reversed a major portion of the disputed credit amounting to ₹2.87 lakh prior to issuance of the show cause notice, leaving a balance of ₹51,294. Despite this, the department issued a show cause notice seeking recovery of the entire amount of ₹3.38 lakh along with interest and penalty. The demand was confirmed by the adjudicating authority and later upheld by the Commissioner (Appeals).
Before the Tribunal, the appellant contended that issuance of a show cause notice for recovery of the entire amount, despite prior reversal of most of the credit, was contrary to Section 11A(2) of the Central Excise Act, 1944. It was argued that once credit is reversed voluntarily before issuance of notice, proceedings must be restricted only to the balance amount actually remaining unpaid. The appellant also submitted that the balance credit related to a composite contract covering design, supply, installation, commissioning and erection, and that credit had been availed under a bona fide belief based on interpretation of the CENVAT Credit Rules.
The department, on the other hand, maintained that credit was inadmissible specifically on the erection portion of the contract. It argued that the disputed invoice clearly reflected service tax paid on erection activity, which was excluded from the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004, and therefore recovery, interest and penalty were rightly confirmed.
After examining the records, the Tribunal noted that both the original authority and the Commissioner (Appeals) had themselves acknowledged that a substantial portion of the disputed credit had been reversed prior to issuance of the show cause notice. It held that in such circumstances, the demand ought to have been confined only to the balance amount of ₹51,294. Imposition of interest and equal penalty on the already reversed credit was found to be contrary to Section 11A(2) of the Central Excise Act.
The Tribunal also accepted the appellant’s contention that no interest was payable on the reversed amount, as the credit had been reversed from the CENVAT credit account where sufficient balance was available at the relevant time.
While the appellant ultimately conceded before the Tribunal that credit was not admissible on the erection portion of the service, the Tribunal emphasised that the contract was composite in nature and that the availment of credit arose from an erroneous interpretation of the CENVAT Credit Rules. It held that such an erroneous understanding of law cannot be equated with an intention to evade duty, nor can it justify invocation of extended limitation or imposition of penalty.
The Tribunal observed that issues involving interpretation of statutory provisions, especially in the context of composite contracts, do not automatically attract penal consequences. In the absence of mala fide intent or suppression of facts, penalty and extended limitation were held to be unsustainable.
Accordingly, the CESTAT allowed the appeal and set aside the order passed by the Commissioner (Appeals). While granting relief from interest and penalty, the Tribunal observed that the appellant was at liberty to voluntarily pay the inadmissible credit of ₹51,294 along with applicable interest, without any compulsion.
Case Title: M/S. Bhima Sahakari Sakhar Karkhana Ltd Versus The Commissioner CGST
Case No: Excise Appeal No. 85613 Of 2021
Coram: Dr. Suvendu Kumar Pati (Judicial Member)
