CENVAT Credit Reversed Before Use Excludes Interest Liability: CESTAT Sets aside Interest Demand against BHEL [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT),Hyderabad Bench, while modifying a demand against BHEL (Bharat HeavyElectricals Ltd.) , held that CENVAT credit reversed prior to its utilization does not attract interest liability. The Tribunal also ruled that the quantity of misappropriated goods, already settled in a prior order, could not be increased on remand.

The appellant is a major public sector undertaking engaged in heavy engineering and manufacturing. The dispute originated from the misappropriation of duty-paid nickel by BHEL's employees, for which the company had availed CENVAT credit. An internal committee identified a shortage of 5,411 kgs of nickel, and BHEL suo moto reversed the corresponding credit of Rs. 21,15,313 in May 2010.

The Revenue initiated proceedings, and in a remand order, the Adjudicating Authority increased the demand to cover 15,594 kgs of nickel (Rs. 58,66,606), imposed a penalty, and demanded interest. The department contended that the Tribunal's remand was 'open,' allowing for a fresh quantification of the misappropriated goods.

Z.U. Alvi, counsel for the appellant, argued that the quantity of misappropriated nickel was conclusively settled at 5,411 kgs in the first adjudication order, which the Revenue had not challenged. He submitted that the remand was confined to the issue of interest. He further contended that since the credit was reversed before its utilization and there was a sufficient credit balance, no interest was leviable.

K. Raji Reddy, Authorised Representative for the Revenue, reiterated the findings of the impugned order, justifying the increased quantity based on the 'open remand' and the findings of non-accounted nickel.

The bench of A.K. Jyotishi (Member, Technical) and Angad Prasad (Member, Judicial) observed that since the Department had not appealed the initial order fixing the shortage at 5,411 kgs, that figure had become final. The remand's purpose was solely to address the interest payable.

The Tribunal held that as the credit was reversed before utilisation and the assessee had a surplus credit balance, it amounted to a scenario where the credit was never effectively used, thus precluding the levy of interest.

However, the Tribunal found that the company had suppressed facts by not informing the department about the misappropriation, thereby justifying the invocation of the extended limitation period and the imposition of a penalty.

The Tribunal modified the impugned order, restricting the demand to Rs. 21,15,313. The demand for interest was set aside, while the invocation of the extended period and the penalty were upheld. The appeal was allowed partly.

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