Judgment Update – Applicability of interest on differential excise duty paid due to retrospective increase in price of goods

This is to apprise you regarding a controversy on applicability of interest on differential excise duty paid due to retrospective increase in price of goods and recent decision of Larger Bench of Supreme Court in this regard [Civil Appeal No. 2150 of 2012 (Decision dated May 08, 2019)]

Background

Under the erstwhile regime, excise duty on the goods was payable at the time of their clearance from the factory and based on the transaction value of goods as reflected in the invoice. In certain cases, the purchase orders given to the manufacturers also contained a price escalation clause which enabled the manufacturer to claim price increase in future in certain situations.

A longstanding dispute in this context has been the applicability of interest on differential excise duty payable on retrospective price increase in such cases. The department had been contending that full excise duty (including excise duty on price increase) was payable on the initial removal of goods. Accordingly, the taxpayer should pay interest from the date of initial removal of goods till the payment of differential excise duty.

In the case of SKF India Ltd. v. CCE, 2009 (239) ELT 385 (SC) and International Auto Ltd. v. CCE, 2010 (250) ELT 3 (SC), the Supreme Court held that interest is payable in such cases. In the case of Steel Authority of India Ltd. v. CCE, 2015 (326) ELT 450 (SC), the Supreme Court doubted the correctness of these judgments and was of the view that interest should not be payable in such cases. Consequently, the issue was referred to the Larger Bench of Supreme Court for consideration.

Decision of Larger Bench of Supreme Court

The Larger Bench of Supreme Court upheld the earlier judgments of the Apex Court and affirmed the applicability of interest on excise duty paid on retrospective price increase. The Court inter-alia made the following observations:

* The interest will apply only where there was a price escalation clause in the purchase order at the time of removal and to that extent, price of goods are provisional. As a corollary, interest will not be payable where price escalation was not agreed at the time of removal of goods but agreed post-facto.

* The excise duty on price increase, will qualify as ‘short paid’ tax under Section 11A of the Central Excise Act, 1944 (‘Excise Act’). As a corollary, it shall be considered that excise duty on price increase that ‘ought to have been paid’ at the time of removal of goods for the purpose of Section 11AB of the Excise Act, was not paid.

* The instant situation is comparable to a scenario where the assessment of goods is provisional and the taxpayer is required to pay differential excise duty along with interest at the time of finalization of assessment. The interest implications in case of retrospective price increase should be identical either for self-assessment or provisional assessment.

NITYA Comments:

The correctness of the decision of the Larger Bench of the Supreme Court is questionable as it defies all logics to the extent that it demands payment of interest on excise duty on retrospective price increase which cannot be foreseen by the taxpayer at the time of removal of goods. This is expecting a taxpayer to do an impossible act which no law can compel. However, being judgment of the Larger Bench of Apex Court, it seems to have put the whole controversy to rest for the time being.

Fortunately, the similar dispute will not arise under GST law since Explanation 1 to Section 12 of the Central Goods and Services Tax Act, 2017 states that supply under GST law shall be considered to the extent it is covered under an invoice. This will make the recovery of differential price towards a fresh supply with GST to be payable thereto based on date of issuance of debit note / supplementary invoice thereof and not on date of original supply. Hence, the question of payment of interest on GST on retrospective price increase will not arise.