Whether pre-deposit is required to pay on disputed interest and penalty for filing first appeal under CGST Act?

Introduction.

1. Section 107(1) of the CGST Act provide that aggrieved person, may file first appeal against any order or decision of adjudicating authority to the  Appellate Authority. However, such right of first appeal is subject to mandatory payment of prescribed amount of pre-deposit. Section 107(6)(a) provide for determination of pre-deposit in respect of admitted dues and section 107(6)(b) deals with disputed dues as per order passed under the provisions of Act. In this article issue  “ Whether pre-deposit is required to pay on disputed interest and penalty for filing of an first appeal to the Appellate Authority under CGST Act”  is discussed.

Concept of Pre-deposit.

2. The adjudicating authority initiate various proceeding under provisions of the Act and determine amount of tax, interest and penalty and issue order accordingly. In view of section 78 of the Act, if the taxable person fails to pay amount due as per such order, within three months, then  the proper initiate recovery proceeding to recover such dues. However, the taxable person may challenge the order by filing appeal  and stay be granted to such  remaining dues after payment of pre-deposit.Payment of pre-deposit is mandatory condition for admission of an appeal to the Appellate Authority. It is required to be determined as provided in section 107(6) of the Act. CBIC has clarified concept of pre-deposit under head of Appeal and Review Mechanism as under.

3. “The right to appeal is a statutory right which operates within the limitations placed on it by the law. One such limitation flows from the principle that an appellant must first deposit the adjudged dues before his further appeal can be heard. However, often an appellant may succeed in his appeal, and hence it would (in retrospect) be unfair to saddle him with this financial burden. To balance these factors, tax laws mandate some “pre-deposit” so as to discourage frivolous appeals and also safeguard the bona fide interests of both the taxpayers and the revenue. The CGST Act, 2017 require an appellant before AA to pre-deposit full amount of tax, interest, fine, fee and penalty, as is admitted by him, arising from the impugned order and a sum equal to 10% of the remaining amount of tax in dispute arising from the impugned order. In so far as appeals to the Tribunal is concerned, no appeal can be filed before the Tribunal unless the appellant has deposited 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 a sum equal to 20% of the remaining amount of tax in dispute, in addition to the amount deposited before the AA, arising from the said order, in relation to which appeal has been filed. If the pre-deposit made by the appellant before the AA or Tribunal is required to be refunded consequent to any order of the AA or of the Tribunal, as the case may be, interest at the rate specified in Section 56 shall be payable from the date of payment of the amount (and not from the date of order of AA or of the Tribunal) till the date of refund of such amount.”

Legal provisions for pre-deposit.

4. Section 107 Appeals to Appellate Authority.

(1) Any person aggrieved by any decision or order passed under this Act or the Central Goods and Services Tax Act by an adjudicating authority may appeal to such Appellate Authority as may be prescribed within three months from the date on which the said decision or order is communicated to such person.

(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, [subject to a maximum of twenty-five crore rupees,] in relation to which the appeal has been filed.

[Provided that, no appeal shall be filed against an order under sub-section (3) of section 129, unless a sum equal to twenty-five per cent. of the penalty has been paid by the appellant.]

(7) Where the appellant has paid the amount under sub-section (6), the recovery proceedings for the balance amount shall be deemed to be stayed.

Meaning  and scope of section 107(6).

5. Plain reading of the section 107(6) of the CGST Act, 2017  makes clear that no appeal shall be filed to the Appellate Authority against order or decision of adjudicating authority under sub-section (1), unless the appellant has paid pre-deposit full amount of admitted tax, interest, fine, fee and penalty, and a sum equal to 10% of the remaining amount of tax in dispute arising from the impugned order, subject to a maximum of twenty-five crore rupees. Thus, it is mandatory to pay full amount of admitted dues and ten percent of disputed tax due as per appealed against.  In other word, there is no need to pay any pre- deposit towards amount of disputed  interest, fine, fee and penalty arising from the impugned order. However, in case of appeal against penalty order u/s 129(3),  appellant  is required  to pay pre -deposit twenty-five per cent of the penalty. Where the appellant has paid the amount  of pre deposit under sub-section (6), the recovery proceedings for the balance amount shall be deemed to be stayed

Some  controversies on determination of  pre-deposit of  disputed interest, penalty etc.

6. In some cases appeals , where full amount of tax is disputed, are rejected by the Appellate Authority , on the reason that appellants has not paid amount of ten percent of corresponding disputed interest and penalty. Some taxable persons has challenged the orders of the Appellate Authority.

Relevant judgment

7. In the case of M/s Tejas Arceanuts Traders High Court Karnataka (2024-TIOL-09-HC-KAR-GST) the Appellate Authority declined to admit the appeal on the ground that the petitioner has paid only  ten percent of  disputed tax against ten present of total disputed dues  as per order and not paid ten percent of consequential interest and penalty. Important observations of said  judgment of Hon High Court Karnataka are as under..

8. Para 8. Section 107(6) of the CGST Act outlines the conditions for filing an appeal mandating the appellant to fulfill certain financial obligations. Notably, the provision stipulates that the petitioner, in challenging a tax decision, is obliged to pre-deposit the entire amount admitted by him comprising tax, interest, fine, fee and penalty. In the context of disputing the entire tax amount, the 10% pre-deposit requirement pertains exclusively to the remaining disputed tax amount as articulated in the statutory language. Consequently, there exists a statutory basis for asserting that 10% pre-deposit obligation is confined to the contested tax quantum excluding penalty, fee and interest. This interpretation aligns with the legal principle that penalties are consequential to the determination of the underlining tax liability. Therefore, when petitioner disputes the entire tax amount, the focus on the pre-deposit obligation remains on the contested tax, recognizing the subsequent nature of penalty, fee, interest in the adjudicative process.

9. Para 9. The intentional exclusion of disputed interest, fine, fee, and penalty from sub-clause (b) of Section 107(6) of the CGST Act signifies a crucial legislative distinction. Analysing this deliberate separation provides insights into the lawmaker’s clear intent regarding the nature and scope of the pre-deposit obligation in appeals. In legal interpretation, statutes are construed to give effect to the legislative intent. The absence of any reference to disputed interest, fine, fee, and penalty in sub-clause (b) suggests a meticulous legislative choice. If the intention were to impose a 10% pre-deposit on these consequential elements, the legislator could have explicitly included them in sub-clause (b).

10. Para 10. By isolating “a sum equal to ten per cent of the remaining amount of tax in dispute ” in sub-clause (b), the legislator conveys a focused pre-deposit requirement specifically related to the disputed tax amount. This implies that the legislative design prioritizes the financial commitment associated directly with the primary tax liability being contested. This approach aligns with the legal principle that penalties, fines, fees, and interest are subsequent to the determination of tax. In essence, the legislative intent, as inferred from the wording of the provision, leans towards requiring a pre-deposit of 10% solely on the disputed tax amount, reflecting a clear understanding that these consequential elements are inherently linked to the imposition of tax and, therefore, do not warrant a separate pre-deposit under sub-clause (b).

11. In view of the above judgement said controversy is settled and now it is crystal clear  that appellant has to pre-deposit  10% of the  disputed tax and  there is no need  to deposit any percentage of corresponding disputed interest, fine, fee and penalty arising from the impugned order. Thus, in view of section 107(6)(b) of the CGST Act aggrieved party has to pre-deposit  10% of the  tax liability and it does not extend to penalties, fees or interest when the  appellant  has contested the entirety of the tax liability arising from the said order. This is in addition to the admitted tax and interest, penalty, fine, fees.

Mandatory pre-deposit of admitted dues.

12. As per section 107 (6) (a) the appellant is required to pay full amount of admitted tax, interest, fine, fee and penalty arising from the impugned order. No appeal shall be filed unless the pre-deposit  of  aforesaid admitted dues. This is in addition to pre-deposit prescribed under section 107(6)(b).

Determination of pre-deposit where full dues are disputed.

13. Where the appellant has  disputed  full amount of dues as per order,  he is require to pay  pre-deposit as 10% of the  disputed tax only  and  there is no need  to pay  any percentage of corresponding disputed interest, fine, fee and penalty arising from the impugned order.

14. Example – Where amount of Rs 1,60,000/ (Tax 1,00,000/, Interest 50,000/ and penalty 10,000/) is payable as per order passed under section 73 of the Act and the appellant has filed first appeal to the Appellate Authority by disputing  full  amount  tax, interest and penalty.  In  this  case amount of pre- deposit will be Rs 10,000/ ( S 107(6)(a) – Nil & S 107(6)(b) Rs 10,000)

Determination of pre-deposit where partial dues are disputed.

15. Where the appellant has  disputed   part amount of dues as per order, he is require to pay full admitted dues and amount of pre-deposit as 10% of the  disputed tax. There is no need  to pay  any percentage of corresponding disputed interest, fine, fee and penalty arising from the impugned order.

16. Example – Where amount of Rs 1,60,000/ ( Tax 1,00,000/, Interest 50,000/ and penalty 10,000/) is payable as per order passed under section 73 of the Act and the appellant has filed first appeal to the Appellate Authority by disputing  Rs 80,000/ ( Tax 50,000/, Interest 25,000/ & penalty 5000/) and admitted remaining liability due as per order. In this case amount of pre- deposit will be Rs 85,000/ ( S 107(6)(a) – 80,000/ & S 107(6)(b) Rs 5000/)

Determination of pre-deposit where only interest and penalty dues are disputed.

17. Where , during the course of proceeding u/s 73 the taxable person has paid only full  amount of  tax  as per notice issued u/s  73(1) within prescribed period   and order is passed only for interest and penalty. The  appellant has  filed first appeal to the Appellate Authority by   disputing  full amount of interest and penalty ,  then   the appellant  is  not require to pay  any amount of  pre-deposit  in view of section 107(6) (b) .

18. Example – Where amount of tax of Rs 1,00,000/ paid during course of proceeding under section 73  and  amount of Rs 60,000/  ( Interest 50,000/ and penalty 10,000/) is payable as per order passed under section 73 of the Act. The appellant has filed  first appeal to the Appellate Authority by  disputing  full  amount of  interest and penalty.  In this case amount of pre- deposit will be Rs Nil. in view of section 107(6)(b)  of the Act.

Determination of pre-deposit where full penalty u/s 129(3) is disputed.

19. It is clear from the proviso   to section  129(3) of the Act that  no appeal shall be filed against an order under  said section , unless a pre-deposit  equal to twenty-five per cent. of the penalty has been paid by the appellant.

Quantum of pre deposit  where independent  order for levy of  interest, penalty, fine, late fee under provisions of the Act.

20. In some cases independent orders are being passed for levy of  interest, penalty, fine, late fee under provisions of the Act. In such case generally corresponding tax has been already  paid by the taxable persons. In order to file appeal in such cases, the appellants  are  not required to pay any pre-deposit.

Stay to recovery of remaining disputed dues.

21. Where the appellant has paid the amount of pre deposit under sub-section (6), the recovery proceedings for the balance amount shall be deemed to be stayed.

Refund of pre-deposit,

22. Pre-deposit of prescribed amount is nothing but part payment of dues payable as per impugned order. It is an amount for admission of an appeal and adjustable to the dues of impugned order. Where appeal result in refund after considering relief granted in appeal and amount of pre-deposit, the appellant is entitled for such refund along with interest.

Conclusion

23. In view of aforesaid judgment controversy on determination of pre-deposit of disputed interest, penalty is settled. The appellants are not required to pay any  pre-deposit  on disputed interest and penalty for filing of an first appeal to the Appellate Authority under CGST Act if the full tax dues are disputed. In essence, the legislative intent as construed from Section 107(6)(b) of the CGST Act is that aggrieved party has to pre-deposit 10% of the tax liability and it does not extend to penalties, fees or interest when the petitioner has contested the entirety of the tax liability.

*****

Motiram Kanadje | Retired Joint Commissioner of State Tax

Author can be reached via email Email- momakanadje@gmail.com

Disclaimer: Nothing contained in this document is to be construed as legal opinion or view of author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any action taken in reliance thereon.

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