Clarity On Pre-Deposit Before CESTAT

Dr. Sanjiv Agarwal

Though we have moved on to a new Goods and Services Tax (GST) regime w.e.f. July 1, 2017 and appeals in GST regime are a distant reality, appeals under Central Excise / Service Tax regime are still live and are expected to continue for next few years as fresh adjudications are still being done and most of them would lead to appeals as quality of adjudication has not improved and the orders are generally being passed without proper application of mind and at times mis-interpretation of statutory provisions besides ignoring the precedents and judicial discipline. That being the order of the day, appeals are imperative and so is the need to make pre-deposit before filing appeal in terms of section 35F of the erstwhile Central Excise Act, 1944 applicable to Finance Act, 1994 also (Service Tax).

Pre-deposit means the deposit of amount of duty (service tax) and penalty pending the disposal of the appeal. According to Section 35F of the Central Excise Act, 1944, any person desirous of appealing against the order shall pending the appeal, deposit the duty demanded or penalty levied thereon. It may be noted that pre-deposit is of service tax and penalty and not of the interest, because interest has to be paid, in any case, for the delayed period. The right to appeal or filing of appeal itself does not waive the requirement of payment of pre-deposit and it must be paid unless it is waived or stayed.

Finance Act, 2014 had substituted section 35F of the Central Excise Act, 1944 to provide for deposit of certain percentage of duty demanded or penalty imposed or both before filing an appeal. All pending stay applications in relation to appeals filed prior to Finance Act, 2014 would continue to be governed by statutory provisions prevailing at the time of filling such stay applications/appeals.

Summary of Pre-deposit Provisions w.e.f. 06.08.2014 as presently applicable

Delhi High Court recently had an occasion to examine the provisions of section 35F of Central Excise Act, 1944 in Santani Sales Organization v. Cestat, New Delhi  on the issue as to whether as per Section 35F of the Central Excise Act, 1944 (C.E. Act, for short) the petitioner-assessee on filing of second appeal before the Central Excise, Customs and Service Tax Appellate Tribunal (Tribunal, for short) is required to make an additional pre-deposit of 10% of the duty and penalty in dispute, over and above 7.5%  pre-deposit made for filing of first appeal before the Commissioner (Appeals).

The validity of Circular dated 27th April, 2017 issued by the Tribunal, based on the Larger Bench decision of the Tribunal in In Re: Quantum of Mandatory Deposit, reported as 2017 (349) E.L.T. 477 (Cestat-LB), stipulating that while preferring an appeal against an order of Commissioner (Appeals), whereby the appellants are required to deposit 10% of the amount of duty and penalty imposed and confirmed separately and over and above pre-deposit of 7.5% for filing first appeal before Commissioner (Appeals) was also challenged.

The High Court observed / held as follows :

a) Charging provision of the taxing law must be strictly construed. In taxing enactment one should normally look at what is said in the provision, without reading anything into it impliedly or on the basis of presumption, for there is no room for any intendment [Federation of A.P. Chambers of Commerce of Industry v. State of A.P., (2001) 247 ITR 36 (SC)].

b) An appeal, whether first or second, is continuation of original proceedings. Further, appeal being a substantive right created by the statute can be circumscribed by the conditions imposed by the Legislature, including condition of pre-deposit. However, there are rulings that condition of pre-deposit should not be so onerous and harsh so as to amount to an unreasonable restriction, thereby rendering and making the right of appeal illusory and delusive.

c) In law and practice, appeals are remedial right of critical importance because it empowers the superior forum or court to come to the aid and redress error and mistakes of the authority or courts below.

d) Language of section 35F of the Central Excise Act, 1944 is unchallenging and meaning of words and conditions placed is plain and lucid. Requirement is to pre­ deposit 7.5% of the duty and penalty in dispute and in case of the second appeal pre-deposit of 10% of the duty and penalty in dispute is mandated.

e) Section 35F of the Central Excise Act, 1944 should not be construed by adding or substituting words to clarify and iron out assumed doubts. Intent as cogently reflected in simple words is that the assessee on second appeal should pre-deposit 10% of the total tax and penalty subject matter of the appeal. It is not to ignore the pre-deposit of 7.5% already made to file first appeal. There is logic in increasing pre-deposit by 2.5% when second appeal is filed, but we would be adding words to the plain and unambiguous provision if we stipulate that 10% pre-deposit will be over and above 7.5% pre-deposit made at the time of the first appeal. Expression or words 17.5% or an additional 10% deposit instead of using mere 10% pre-deposit have not been used. Appropriateness of the meaning attached to 10% pre-deposit in the context is apparent.

f) The success rate of departmental cases before the Tribunal is very poor. This was the reason why pre-deposit of 7.5% in case of first appeal, and 10% in case of second appeal, was required to be made. Higher deposit of 10% was justified as the demand had survived test of first appeal. Reasoning observes that the assessee would not be at loss even if they were asked to pay an additional amount of 10%, for the amount would be refunded to the assessee with applicable interest in case they succeed.

g) Refunds are always paid when tax, duty or penalty is not due and payable. It is not a grace or peculiar. Interest is compensatory in character, as the compulsory pre-deposit denies and deprives the assessees of the right to utilize his money.

h) As clarified in CBEC Circular No. 984/8/2014-CX dated 16.09.2014, deposits made during the pendency of the proceedings, or even after the order-in-original is passed, have to be taken into consideration for determining and deciding whether condition of pre-deposit of 7.5% or 10% has been satisfied. Earlier deposits do not get obliterated and are not to be treated as inconsequential.

Vide Cestat Circular No. 1/5/Circular/Cestat/2015-CR dated 5.7.2018, in compliance to the High Court of Delhi vide order dated 31-5-2018 passed in Writ Petition (Civil) No. 4551/2017 (M/s. Santani Sales Organization v. CESTAT, Delhi & Ors.) [2018 (13) G.S.T.L. 144 (De.), wherein it has been decided that the appellants while preferring second appeal before the Tribunal are required to deposit 10% of the amount of duty/penalty as confirmed by the Appellate Authority inclusive of 7.5% pre-deposit made for the first appeal and that 10% would not be in addition to and over and above 7.5% of pre-deposit made for the first appeal, the Cestat has withdrawn its Circular dated 27-4-2017 stands rescinded.

Based on the Delhi High Court judgment and subsequent Cestat Circular, mandatory pre-deposit shall be only 7.5 percent for first appeal, either before Cestat or before Commissioner (Appeals) and additional 2.5 percent only over and above 7.5% making a total of Rs. 10 percent for second stage appeal before Tribunal. The issue of quantum of mandatory pre-deposit is no longer res judicata.

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