Pre-deposit for GST Appeal allowed out of Electronic Credit Ledger: Madras HC

Ford India Private Limited Vs Joint Commissioner (ST) (Madras High Court)

In a significant judgment, the Madras High Court clarified the permissibility of using the Electronic Credit Ledger for the mandatory 10% pre-deposit required under Section 107(6) of the Tamil Nadu Goods and Services Tax (TNGST) Act, 2017, when filing an appeal. The case, Ford India Private Limited vs. Joint Commissioner (ST), brought to light the nuanced interpretation of provisions related to pre-deposit payments and their compliance through electronic ledgers.

Case Background

Ford India Private Limited, engaged in manufacturing and supplying passenger vehicles, faced a differential GST demand for discrepancies between GSTR-1 and GSTR-3B returns for the financial year 2017-2018. After a notice in Form DRC-01A and a subsequent reply by the petitioner, the authorities issued a show cause notice (SCN) in May 2023. The SCN culminated in a demand order imposing tax, interest, and penalties.

In response, Ford India filed an appeal before the GST Appellate Authority in October 2023, making the mandatory pre-deposit of ₹32,88,352 (10% of the disputed tax) through the Electronic Credit Ledger. However, the Appellate Authority issued a deficiency memo, asserting that the pre-deposit must be made via the Electronic Cash Ledger. This prompted Ford India to seek relief through a writ petition in the Madras High Court.

Petitioner’s Arguments

Counsel for Ford India contended that:

1. Statutory Provisions Allow Credit Ledger Use: Section 49(4) of the TNGST Act permits the utilization of the Electronic Credit Ledger for output tax payments. Rule 86(2) of the TNGST Rules supports this interpretation.
2. Pre-deposit Equals Output Tax: The mandatory pre-deposit under Section 107(6) qualifies as output tax, as clarified by the Central Board of Indirect Taxes and Customs (CBIC) Circular No. 172/04/2022-GST.
3. Judicial Precedents: Similar judgments from the Bombay and Patna High Courts (Oasis Realty vs. Union of India, Friends Mobile vs. State of Bihar) affirmed that pre-deposits can be adjusted via the Electronic Credit Ledger.

Respondent’s Counterarguments

The State contended that:

1. Cash Ledger Requirement: Section 49(3) mandates the use of the Electronic Cash Ledger for payments like interest, penalty, or fees.
2. Pre-deposit Not Output Tax: The pre-deposit under Section 107(6) is a procedural requirement for filing an appeal and does not fall within the ambit of “output tax” under Section 2(82).
3. Contrary Precedents: Judgments in Jyoti Construction vs. Deputy Commissioner of GST and Flipkart Internet Pvt. Ltd. vs. State of Bihar emphasized the limitation of credit ledger use for pre-deposit payments.

Court’s Observations and Decision

Justice XYZ examined the statutory provisions and precedents in detail. Key highlights from the judgment include:

1. Legislative Intent of Section 107(6): The court observed that the pre-deposit requirement ensures seriousness in appeals while enabling access to justice. Section 49(4) explicitly allows the utilization of the Electronic Credit Ledger for payment of output tax, which includes pre-deposit amounts, as clarified by CBIC Circular No. 172/04/2022-GST.
2. Definition of Output Tax: The court noted that payments arising out of disputes, including pre-deposit, can be categorized as output tax unless explicitly excluded, such as taxes under the reverse charge mechanism.
3. Role of Circulars: CBIC’s circular unequivocally supports the use of the Electronic Credit Ledger for pre-deposit payments, aligning with the statutory framework.
4. Relevance of Judicial Precedents: Decisions from other High Courts provided persuasive support for the petitioner’s position.
5. Interpretation of “May” in Section 49(4): The court ruled that the permissive “may” in Section 49(4) does not negate the right to use the Credit Ledger for pre-deposits, provided other statutory conditions are met.

Judgment

The Madras High Court allowed the writ petition, setting aside the deficiency memo issued by the appellate authority. It directed that Ford India’s appeal be processed without insisting on the use of the Electronic Cash Ledger for the pre-deposit.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

Since the issue involved in these Writ Petitions is one and the same, these Writ Petitions are taken up together and disposed of by way of this common order.

2. The facts that led to the filing of all these Writ Petitions are one and the same. Therefore, it is worth taking a case of W.P.No.35448 of 2023 alone for discussion.

3. The petitioner is engaging in the business of manufacturing and supplying passenger cars, parts, components and engines. He has duly filed GST returns periodically and discharged appropriate tax liability under the provisions of CGST Act. While being so, on 24.03.2023, he was issued with a notice in Form DRC-01A, proposing to demand the differential GST on account of tax liability difference between Form GSTR-1 and GSTR-3B Returns filed by him for the period of 2017 to 2018, for which, he, vide letter dated 05.04.2023, has filed a detailed reply along with relevant documents. Thereafter, on 30.05.2023, he was issued with a show cause notice in Form DRC-01(‘SCN’). Consequently, the 2^nd respondent confirmed the demand proposed in the SCN along with interest and penalty vide Order-in-Original No.ZD330723115801Q, dated 26.07.2023.

4. Aggrieved by the same, the petitioner filed an appeal before the 1st respondent through the GST portal on 24.10.2023 by paying 10% of the dispute tax demand of RS.32,88,352/- as pre-deposit, which is mandatory as per Section 107(6) of the Tamil Nadu Goods and Service Act, 2017 (hereinafter referred to as ‘ TNGST Act’) and also filed a physical copy of the said appeal on 27.10.2023. The petitioner had opted to pay the pre-deposit by debiting their Electronic Credit Ledger. However, the 1^st respondent issued a Deficiency Memo dated 27.11.2023, directing the petitioner to make the payment of pre-deposit only by way of debiting the Electronic Cash Ledger within 7 days from the date of receipt of the Deficiency Memo. Challenging the same, the petitioner has filed this Writ Petition.

5. The learned counsel appearing for the petitioners would submit that Section 107(6)(b) of TNGST Act mandates payment of a sum equal to 10% of the remaining amount of tax in dispute as pre-deposit, while filing an appeal under Section 107 of TNGST Act. There is an express provision in Section 49(4) of TNGST Act, which allows utilization of the amount available in the Electronic Credit Ledger for payment of output tax. Further, Rule 86(2) of the TNGST Rules, 2017 allows debiting of Electronic Credit Ledger for discharge of liability in accordance with Section 49 of TNGST Act. Section 2(82) of TNGST Act defines the phrase ‘output tax’ in relation to a taxable person, as the tax chargeable under this Act on taxable supply of goods or service or both made by him or by his agent but excludes tax payable by him on reverse charge mechanism. Therefore, any payment towards output tax, whether self-assessed in the Return or payable as a consequence of any proceedings instituted under TNGST Act, can be made by utilization of the amount available in the Electronic Credit Ledger.

6. He would further submit that as per the circular issued by the Central Board of Indirect Taxes and Customs (CBIT & C) in Circular No.172/04/2022-GST, dated 06.07.2022, the Electronic Credit Ledger can be utilized for payment of 10% of tax in dispute as pre-deposit under Section 107(6)(b) of TNGST Act. The only restriction on the usage of Electronic Credit Ledger for payment of pre-deposit is in respect of the tax payable under reverse charge mechanism, as the same is outside the ambit of Section 2(82) of TNGST Act. There is no demand under reverse charge mechanism on the petitioners in these proceedings. The statutory appeal form in APL-01 provides for the mechanism to pay the pre-deposit using the Electronic Credit Ledger as well, which is evident from Sl.No.15(b) therein. Therefore, the impugned deficiency memo has to be set aside.

7. In support of his contention, he has relied upon the following judgments:-

(i) Oasis Realty Vs. Union of India reported in 2023 (71) GSTL 158 (Bombay High Court);

(ii) Friends Mobile through its Proprietor Md.Quadir Khan Vs. State of Bihar and other reported in 2023(12) TMI 469 (Patna High Court); and

(iii) Raiyan Traders Vs. State of Bihar reported in 2024-VIL-978 (Patna High Court).

8. The learned Additional Advocate General appearing for the respondents would submit that as per Section 107(6) of TNGST Act, 10% of the tax liable amount has to be paid for filing an appeal by the petitioners as pre-deposit. It does not state that the pre-deposit amount is the tax amount. The petitioners paid the pre-deposit through Electronic Credit Ledger, which has to be paid only through Electronic Cash Ledger as contemplated under Section 49 of TNGST Act. Under Section 49(3) of TNGST Act, the payments from the Electronic Cash Ledger are for the payment towards tax, interest, penalty, fees or any other amount payable under the provisions of the Act or the Rules. Further in terms of Section 49(4) of TNGST Act, the payment from the Electronic Credit Ledger are for the payment towards output tax under the Act. This clearly establishes that the Electronic Credit Ledger should only be used for the payment of output tax and cannot be misconstrued and the payment of pre-deposit for filing an appeal should only be made from the Electronic Cash Ledger. Further, the payment towards the output tax cannot be equated with pre-deposit.

9. He would further submit that in Oasis Reality’s case referred to by the learned counsel for the petitioners, the dispute is that output tax can be paid from Electronic Credit Ledger. However, in the instant case, the question of dispute involved is pre-deposit for filing the appeal against the order with regard to the input tax credit. As per Section 41(2) of TNGST Act, the input tax credit can be utilized for payment of “self-assessed output tax as per the return”. In the circular issued by the CBIT & C dated 06.07.2022, it has been said that any amount towards output tax payable as a consequence of any proceedings instituted under the provisions of GST Laws, can be paid by utilization of the amount available in the Electronic Credit Ledger of a registered person and in sub paragraph (5) of paragraph 6 it is stated that “It is further reiterated that as output tax does not include tax payable under reverse charge mechanism, implying thereby that the electronic credit ledger cannot be used for making payment of any tax, which is payable under reverse charge mechanism.”. The said circular stipulates that Electronic Credit Ledger can be used only for making payments towards tax, interest, penalty, fees or any other amounts and not the tax in dispute. Hence, he opposed these Writ Petitions.

10. In support of his contention, he has relied upon the judgments rendered in the case of Jyoti Construction Vs. Dy.Commissioner of Cnetral Tax & GST, Jaipur reported in 2021 (54) GSTL 279 (Orissa HC) & Flipkart Internet Pvt. Ltd., Vs. State of Bihar reported in 2023-VIL-927 (Patna HC).

11. I have given due consideration to the submissions made on either

12. The issue to be decided in this matter is whether the petitioners are entitled to pay 10% of the disputed amount as a pre-condition in filing appeal by way of debiting the amount available in the Electronic Credit Ledger.

13. Admittedly, in terms of Section 107(6) of TNGST Act, it is mandatory to deposit 10% of the disputed amount as a pre-condition to file an appeal before the appellate authority. At this juncture, it is necessary to extract Section 107(6) of TNGST Act hereunder:-

“(6)-No Appeal shall be filed under sub-section (1), unless the appellant has paid-

(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and

(b) a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, in relation to which the appeal has been filed.”.

14. The petitioners filed appeals by paying 10% of the disputed tax, utilizing the amount available in the Electronic Credit Ledger. However, the 1st respondent has dismissed the appeals filed by the petitioners on the ground that the pre-deposit has to be paid through Electronic Cash Ledger and not through Electronic Credit Ledger and the amount available in the Electronic Credit Ledger can be utilized only for the purpose of payment towards output tax in terms of Section 49(4) of TNGST Act. It is necessary to extract Section 49(4) of TNGST Act hereunder:-

“49(4)The amount available in the electronic credit ledger may be used for making any payment towards output tax under thisAct or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions within such time as may be prescribed.”

15. A reading of the above Section would show that the amount available in the Electronic Credit Ledger may be used for making any payment towards output tax. The word used in the above provision is ‘may’ and it is not ‘shall’. In the event if the word ‘shall’ is used, the amount available in the Electronic Credit Ledger shall be utilized only for the purpose of payment of output tax. Further, in terms of Section 107(6) of TNGST Act, if 10% of the disputed tax has to be paid, it means that the deposit is made only towards discharging liability of output tax. In the event if the appellants are not succeeding, the amount paid by utilizing the Electronic Credit Ledger will be taken as output tax alone. Therefore, at no stretch of imagination, one can arrive at a conclusion that 10% of the amount paid as pre-condition for filing an appeal can be utilized other than the discharge of output tax. Rule 86(2) of TNGST Rules provides that Electronic Credit Ledger shall be debited to the extent of discharge any liability in accordance with the provisions of Section 49 or 49A or Section 49B. It is also relevant to extract Section 49A and 49B hereunder:-

“Section 49A-Utilisation of input tax credit subject to certain conditions.-

Notwithstanding anything contained in section 49, the input tax credit on account of central tax, State tax or Union territory tax shall be utilized towards payment of integrated tax, central tax, State tax or Union territory tax, as the case may be, only after the input tax credit available on account of integrated tax has first been utilized fully towards such payment.

Section 49B. Order of utilisation of input tax credit.-

(1) Notwithstanding anything contained in this Chapter and subject to the provisions of clause (e) and clause (f) of sub section (5) of section 49, the Government may, on the recommendations of the Council, prescribe the order and manner of utilisation of the input tax credit on account of integrated tax, central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax.”

16. A reading of the above would show that the Government on recommendation of the Council prescribe the order and manner of utilization of the input tax credit on account of integrated tax, Central tax, State tax or Union territory tax, as the case may be, towards payment of any such tax. After due compliance of the provisions, which is also an admitted position, the Central Board of Indirect Taxes and Customs in its circular dated 06.07.2022 in paragraph 4 of Sl.No.6, stated as follows:-

“4.Accordingly, it is clarified that any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the provisions of GST Laws, can be made by utilization of the amount available in the electronic credit ledger of a registered person.”

17. A reading of the said circular shows that input tax credit can be utilized not only for payment of the self assessed output tax but also payable as a consequence of the proceeding instituted under the provisions of GST Laws. This circular also clarifies the position that to discharge the liability of 10% of the output tax liability in terms of Section 107(6) of TNGST Act, the amount can be remitted through Electronic Credit Ledger. Further, as contended by the petitioners that the only restrictions on the usage of Electronic Credit Ledger for payment of pre-deposit is in respect of tax payable under reverse charge mechanism, as the same is outside the ambit of Section 2(82) of TNGST Act. In the present case, there was no remark under reverse charge mechanism on the petitioners in these proceedings.

18. It is to be noted that the statutory appeal form APL-01 provides for the mechanism to pay pre-deposit by utilizing Electronic Credit Ledger as well. Further, vide circular dated 02.11.2023 the CBI & C prescribed special procedure for filing appeals beyond the time period specified under Section 107 of TNGST Act on condition that out of 12.5% of the prescribed mandatory deposit, 20% ie., (2.5%) has to be paid by debiting the Electronic Cash Ledger. Therefore, it is evident that the remaining statutory mandatory pre-deposit (10% of the disputed tax) under Section 107(6) of TNGST Act can be very well made by using the amount available in Electronic Credit Ledger.

19. In Jyothi Construction’s case referred to by the respondents, the Orissa High Court has not accepted the plea of the petitioner therein that ‘output tax’, as defined under Section 2(82) of the OGST Act could be equated to the pre-deposit required to be made in terms of Section 107(6) of the OGST Act. However, subsequent to the said judgment, the Patna High Court in Friends Mobile’s case, Raiyan Traders’ case and the Bombay High Court in Oasis Realty’s case, held that 10% of the statutory deposit can be paid through Electronic Credit Ledger.

20. Further, it is brought to the notice of this Court that the judgment rendered in Flipkart Internet Pvt Ltd.,’s case relied on by the respondents has been stayed by the Hon’ble Supreme Court in Special Leave Application to Appeal No.25437 of 2023, order dated 04.12.2023.

21. Therefore, for all these reasons, this Court has no hesitation to come to the conclusion that the pre-deposit can be made through Electronic Credit Ledger. Therefore, the impugned orders passed by the 1^st respondent are liable to be quashed, accordingly, quashed. These Writ Petitions are allowed with a direction to the 1^st respondent to take up the appeals filed by the petitioners on record, in the event if the appeals are dismissed only on the ground that pre-deposit has been made through Electronic Credit Ledger. It is made clear that the pre-deposit can be made by filing appeal under Section 107 of TNGST Act by utilizing the Electronic Credit Ledger. No costs. Consequently, connected miscellaneous petitions are closed.