The Customs, Excise & Service Tax Appellate Tribunal has clarified that an erroneous understanding of Cenvat Credit eligibility, even when resulting in improper availing of credit, cannot be equated with fraudulent intent to evade duty. This ruling reinforces the principle that penal consequences under Rule 15(2) require proof of deliberate deception, not mere legal misinterpretation.
Background & Facts
The Dispute
The appellant, M/s. Bhima Sahakari Sakhar Karkhana Ltd., a sugar molasses manufacturer, availed Cenvat Credit on inputs and capital goods during the period April 2013 to June 2017. An audit by the Department identified alleged inadmissible credit amounting to Rs. 3,38,796/-. The appellant voluntarily reversed Rs. 2,87,502/- prior to the issuance of a show-cause notice, leaving a balance of Rs. 51,294/- related to a specific invoice dated 02.07.2012.
Procedural History
- 2019: Department initiated audit and identified alleged inadmissible Cenvat Credit
- 2020: Adjudicating Authority issued show-cause notice for recovery of Rs. 3,38,796/-, including interest and penalty
- 2021: Commissioner (Appeals-II) upheld the demand, rejecting appellant’s contention that reversal negated mala fide intent
- 2025: Appeal filed before the Customs, Excise & Service Tax Appellate Tribunal
Relief Sought
The appellant sought quashing of the penalty and interest imposed under Rule 14 and Rule 15(2) of the Cenvat Credit Rules, 2004, arguing that the reversal of credit precluded any inference of dishonest intent and that the demand for the entire amount violated Section 11A(2) of the Central Excise Act, 1944.
The Legal Issue
The central question was whether Rule 15(2) of the Cenvat Credit Rules, 2004, which authorizes penalty for fraudulent or dishonest conduct, can be invoked when the assessee has reversed the inadmissible credit before notice and acted on an erroneous but non-malicious interpretation of the law.
Arguments Presented
For the Appellant
The appellant’s counsel, Shri Abhiram S. Apte, relied on Mundra Port & Special Economic Zone Ltd. v. CCE, Rajkot and Sarita Hand Exports Pvt. Ltd. to argue that: (1) reversal of credit prior to notice negates any presumption of dishonesty; (2) Section 11A(2) limits recovery to the un-reversed balance; and (3) the invoice pertained to a composite contract involving design, supply, and erection, where only the erection component was ineligible for credit. He emphasized that the appellant’s conduct reflected a legal misunderstanding, not intent to evade.
For the Respondent
The Department’s representative, Shri Rajiv Ranjan, contended that the appellant had availed credit on an ineligible service (erection), and that the reversal was merely a post-audit corrective step. He argued that the initial availing of credit without proper apportionment constituted a violation warranting penalty under Rule 15(2), regardless of subsequent reversal.
The Court's Analysis
The Tribunal examined the nature of the transaction and the statutory framework governing Cenvat Credit. It noted that the invoice in question (Page 47) covered a composite contract including design, supply, installation, commissioning, and erection. Under Rule 2(l) of the Cenvat Credit Rules, 2004, credit is explicitly denied on inputs used for erection services. However, the Tribunal found no evidence of deliberate misrepresentation or concealment.
"...such erroneous understanding or erroneous interpretation of the provision can never be equated with intention to evade payment of duty so as to invoke the extended period."
The Court emphasized that Section 11A(2) mandates that recovery proceedings be confined to the un-reversed amount. Since Rs. 2,87,502/- had been reversed before notice, the Department’s demand for the entire Rs. 3,38,796/- was procedurally flawed. Further, the Tribunal held that the Rs. 51,294/- in question arose from a legitimate but mistaken application of the law, not from any fraudulent design. The fact that the appellant had cooperated, disclosed the transaction, and reversed the credit demonstrated good faith. The Tribunal distinguished this from cases involving falsified invoices or deliberate concealment.
The Verdict
The appellant prevailed. The Tribunal set aside the order of the Commissioner (Appeals) and held that Rule 15(2) penalty cannot be imposed where credit is reversed before notice and the error stems from a bona fide misinterpretation of the law. The appellant was permitted, but not compelled, to voluntarily pay the Rs. 51,294/- with interest to maintain its compliance record.
What This Means For Similar Cases
Erroneous Interpretation Is Not Fraud
- Practitioners must now argue that Rule 15(2) penalties require proof of mens rea - not just a technical violation
- Reversal of credit prior to notice is a strong indicator of good faith and negates the presumption of fraud
- Tax authorities cannot treat legal ambiguity as intentional evasion
Section 11A(2) Limits Recovery Scope
- Recovery proceedings must be confined to the un-reversed balance only
- Demanding the full amount despite prior reversal violates statutory procedure
- This principle applies across all indirect tax regimes, including GST
Composite Contracts Require Apportionment, Not Disqualification
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When an invoice covers multiple services, only the ineligible portion is disallowed
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The entire invoice cannot be invalidated merely because one component is ineligible
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Taxpayers must document apportionment clearly to avoid disputes
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Always maintain internal audit trails showing reversal of ineligible credits before any notice
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In composite contracts, clearly segregate eligible and ineligible components in invoices and accounting records
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Do not assume that any credit reversal is sufficient - timing matters: reversal must precede notice to avoid penalty exposure
