Pre-deposit u/s 35F - the confusion regarding additional 10% or differential 2.5% prevails even after CBEC Clarification!!!

[Manoj Agarwal]

The Finance (No. 2) Act, 2014 has substituted Section 35F of the Central Excise Act, 1994 (which is equally applicable to service tax appeals as per section 83 of the Finance Act, 1994) w.e.f. 06-08-2014. It provides for mandatory pre-deposit at 7.5% or 10% only on the disputed duty (and not on duty + penalty as proposed in budget) when ‘duty AND penalty’ is involved. If dispute is regarding the penalty only (no disputed duty involved), then pre-deposit shall be @ 7.5% or 10% of disputed penalty. The new section created confusion/ doubt that if an appellant has already deposited 7.5% in first stage of appeal, then whether he is required to deposit additional 10% in second stage of appeal or differential 2.5% only. The substituted section is quoted for ready reference.

“35F. The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal -

(i) under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of a decision or an order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise;

(ii) against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against;

(iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent of the duty, in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute, in pursuance of the decision or order appealed against:

Provided that the amount required to be deposited under this section shall not exceed rupees ten crores...”

I am of firm opinion that the 10% pre-deposit at the time of 2^nd stage appeal is in ADDITION to 7.5% deposited at the time of 1st stage appeal. Section 35F covers three different types of orders which can be appealed against by making mandatory pre-deposit.

(i) a decision or order passed by an officer of Central Excise lower in rank than the Commissioner of Central Excise u/s 35(1) i.e. adjudication order also know as Order in Original (OIO) passed by Assistant/Deputy Commissioner. This is the 1st Stage Appeal before Commissioner (Appeal)

(ii) a decision or order passed by the Commissioner of Central Excise as an adjudicating authority u/s 35B(i)(a). This is also the 1st Stage Appeal before the Tribunal.

(iii) an order passed by the (Commissioner (Appeals) under section 35A read with section 35B(i)(b). This is the 2nd Stage Appeal before the Tribunal.

It must be noted that the decision/order which are subject matter of appeal under sub-section (i), (ii) and (iii) of section 35F are different orders. So, each sub-section has to be read independent and in addition of other sub-section. At sub-section (iii), the language used is in unambiguous terms conveys that the Tribunal, for hearing 2^nd Stage appeal, shall not entertain any appeal against an order passed by the Commissioner (Appeals) u/s 35A, unless the appellant has deposited 10% of the duty (when duty + penalty is in dispute) or 10% of the penalty (when only penalty is in dispute), in pursuance of the order appealed against. Here, no one should doubt that the calculation of 10% shall be on the duty/penalty disputed in the impugned order i.e. the order passed by the Commissioner (Appeal). This calculation of 10% is in no way affected by the 7.5% deposited by the appellant for filing 1^st stage appeal before the Commissioner (Appeal) as that deposit was made in pursuance of Order in Original (OIO) passed by the Assistant/Deputy Commissioner. Hence, the deposit of 10% of the duty/penalty confirmed by the Commissioner (Appeal) shall be in addition to the deposit of 7.5% of the duty/penalty confirmed by the Assistant/Deputy Commissioner.

Example: The Deputy Commissioner has confirmed duty of ₹ 1,00,000/- and penalty of ₹ 50,000/-. The assessee shall pay 7.5% of 1,00,000 = 7,500/- before filing appeal before the Commissioner (Appeal). Now, suppose the Commissioner (Appeal) passes order u/s 35A reducing duty to ₹ 70,000/- and penalty at 35,000/-. The assessee shall pay additional deposit of 10% of reduced duty of 70,000 = 7,000. Also, if we interpret it otherwise and assume that 7.5% paid earlier can be adjusted, then in this example, the assessee is required to pay ₹ 7000 during 2^nd appeal but he actually paid ₹ 7500 during 1^st appeal, will he be allowed to claim refund of excess deposit of ₹ 500!!!

Recently, a national seminar was organised by ASSOCHAM on 03-09-2014 at Hotel Taj Bengal, Kolkata and the eminent panel was discussion the same issue. The eminent speakers included Mr. J.K. Mittal, Senior Advocate of Supreme Court of India, Chairman of Indirect Tax Committee of PHD Chamber of Commerce and Co-Chairman of NCIT of ASSOCHAM, CA Bimal Jain, Co-Chairman of Indirect Tax Committee of PHD Chamber of Commerce, CA Pulak Kumar Saha of M/s Saha and Associates and Mr. Bhaskar Thakkar, CEO of BT Associates. During the panel discussion, I had expressed my above views in brief and said that the pre-deposit of 10% was in addition to 7.5% as it referred to different order which were appealed against.

It should be noted that immediately after the presentation of Union Budget – 2014 on 10-07-2014, the Tax Research Unit has vide D.O.F.No.334/15/2014-TRU dated 10-07-2014 at Annexure IV, under the title 'Amendments in the Central Excise Act, 1944' at Para 13 has observed as below:

"13) Section 35F is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both for filing appeal with the Commissioner (Appeals) or the Tribunal at the first stage and ANOTHER 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of ₹ 10 crore."

Now, CBEC has vide Circular No 984/08/2014-CX dated 16-09-2014 has further clarified at Para 2.1 as quoted below:

“2.1 Doubts have been expressed with regard to the amount to be deposited in terms of the amended provisions while filing appeal against the order of Commissioner (Appeals) before the CESTAT. Sub-section (iii) of Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962 stipulate payment of 10% of the duty or penalty payable in pursuance of the decision or order being appealed against i.e. the order of Commissioner (Appeal). It is, therefore, clarified that in the event of appeal against the order of Commissioner (Appeal) before the Tribunal, 10% is to be paid on the amount of duty demanded or penalty imposed by the Commissioner (Appeal). This need not be the same as the amount of duty demanded or penalty imposed in the Order-in-Original in the said case.”

After this clarification, I was discussing this issue with some professional colleagues and friends in a group. However, many members who participated in the discussion in the group were still of the view that “when further appeal is filed against the order of Comm (A), the assessee shall deposit 10% of order amount which shall include the 7.5% paid earlier”. One member viewed that “10% is the total amount of pre-deposit required...Had the intention been additional 10%, words ‘further’, ‘another’, or ‘additional’ could have been used!”. I do agree that the clarificatory circular should have clearly expressed such words to convey its intention, which it has failed to do. So, it seems that the clarification issued by CBEC has failed to clarify the issue in totality. Therefore, I request my professional colleagues to give their expert comments on this issue.