Mandatory pre-deposit for filing appeals under Service Tax, Excise and Customs – The Dilemma Continues

[Bimal jain]

  Dear Professional Colleagues,

Mandatory pre-deposit for filing appeals under Service Tax, Excise and Customs – The Dilemma Continues

We are sharing with you an important judgement of the Hon’ble High Court of Allahabad in the case of Ganesh Yadav Vs. Union of India [2015 (7) TMI 304 - ALLAHABAD HIGH COURT] on the following issue:

Issue:

Whether mandatory pre-deposit provision under Section 35F of the Central Excise Act, 1944 [as applicable for Service Tax vide Section 83 of the Finance Act, 1994 and for Customs vide Section 129E of the Customs Act, 1962] would be applicable to the cases where the lis commenced prior to August 6, 2014?

Facts & Background:

In the instant case, Ganesh Yadav (“the Petitioner”) had provided the services of construction of flats to Varanasi Development Authority under the Manyavar Kanshi Ram Saheri Garib Awas Yojna during the Financial Years 2007-08 to 2011-12. On September 19, 2013, a Show Cause Notice (“SCN”) was issued to the Petitioner demanding Service tax on stated services. Later on, the Department vide Adjudication Order dated March 31, 2015 confirmed the demand of Service tax along with interest and penalty (“Adjudication Order”).

Effective from August 6, 2014, Section 35F of the Central Excise Act, 1944 (“the Excise Act”) [as applicable for Service Tax vide Section 83 of the Finance Act, 1994 and for Customs vide Section 129E of the Customs Act, 1962] was substituted to provide for mandatory pre-deposit in the following manner:

1. 7.5% of the duty in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute for filing of appeal before the Commissioner(Appeals) or the Tribunal at the first stage; and
2. 10% of the duty in case where duty or duty and penalty are in dispute, or penalty, where such penalty is in dispute for filing second stage appeal before the Tribunal.

The amount of pre-deposit payable is subject to a ceiling of ₹ 10 Crore.

The Petitioner has filed Writ Petition before the Hon’ble High Court of Allahabad challenging the constitutional validity of substituted Section 35F of the Excise Act and for restraining the Department from enforcing the mandatory requirement of a pre-deposit of 7.5% of the duty demanded in pursuance of the Adjudication Order.

Held:

The Hon’ble High Court of Allahabad while upholding the constitutional validity of Section 35F of the Excise Act held as under:

• As a first principle of law, a right of appeal is a statutory right and it is open to fiscal legislation, which can stipulate a requirement of pre-deposit as a condition precedent to an appeal to be entertained. However, such condition must not be unduly onerous;
• The Parliament while substituting the provisions of Section 35F of the Excise Act by the Finance (No. 2) Act, 2014, has laid down that the Hon’ble Tribunal or the Hon’ble Commissioner (Appeals) 'shall not entertain any appeal' unless the pre-deposit is made to the stipulated extent;
• Further, the second proviso to Section 35F of the Excise Act, is a clear indicator that the Parliament has exempted the requirement of complying with the pre-deposit as mandated by Section 35F(1) of the Excise Act as amended only in the case of those stay applications and appeals which were pending before any Appellate Authority prior to the commencement of Finance (No. 2) Act, 2014;
• Consequently, both by virtue of the opening words of Section 35F(1) of the Excise Act as well as by the second proviso to the provision, it is clear that appeals which are filed on and after the enforcement of the amended provision on August 6, 2014 shall be governed by the requirement of pre-deposit as stipulated therein;
• The only category to which the provision will not apply that would be those where the appeals or, as the case may be, stay applications were pending before the Appellate Authority prior to the commencement of Finance (No. 2) Act, 2014;
• Nevertheless, under Article 226 of the Constitution, the Hon’ble High Court has jurisdiction, in an appropriate case, to dispense with requirement of pre-deposit and the said power is not taken away;

Thus, the Hon’ble High Court held that the Petitioner is not justified in urging that the amended provisions of Section 35F of the Excise Act would not apply merely on the ground that the SCN was issued prior to the enforcement of the Finance (No. 2) Act, 2014.

Important to Note:

Here, it would not be out of place here to mention the judgment of the Hon’ble Kerala High Court in the case of Muthoot Finance Ltd. Vs. Union of India [2015 (3) TMI 634 - KERALA HIGH COURT] (“Muthoot Finance case”), wherein, the Hon’ble High Court while referring to an interim order passed by the Hon’ble Andhra Pradesh High Court in the case of K Rama Mohanarao & Co. Vs. Union of India [2015 (4) TMI 813 - ANDHRA PRADESH HIGH COURT] held as under:

• Institution of a suit carries with it an implication that all rights of appeal then in force are preserved to parties thereto till rest of career of suit; hence, right of appeal is governed by law prevailing at date of institution of suit or proceeding, and not by law that prevails at date of its decision or at date of filing of appeal;
• Since lis in question had commenced in 2012 i.e., prior to introduction of amendment to Section 35F of the Excise Act effective from August 6, 2014, assessee's right of appeal as per erstwhile provisions of law would not be affected by amended provisions and the assessee would not be required to deposit amount of 7.5% as required pursuant to amendment made in Section 35F of the Excise Act.

Relying upon the decision in the Muthoot Finance Case, the Hon’ble High Court of Kerala in the case of Sea Breeze Courier Vs. Commissioner of Central Excise, Customs & Service Tax [2015 (4) TMI 952 - KERALA HIGH COURT], once again held that where lis between the assessee and the Department commenced prior to introduction of mandatory pre-deposit in Section 129E of the Customs Act, 1962 [i.e., before amendment made on August 6, 2014 by Finance (No. 2) Act, 2014], then same would be governed by erstwhile provisions and accordingly, mandatory pre-deposit would not apply thereto.

Here, it is pertinent to note that second proviso to substituted Section 35F of the Excise Act makes the legislative intent clear that in case of appeals filed on or after August 6, 2014, the substituted provisions are sought to be applied. If the right to appeal is a statutory right, it must be governed by the provisions of the Law/ Statute:

“Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014.”

However, such clear statement of law in aforesaid proviso was not brought before and/ or considered by the Hon’ble High Court of Kerala.

Moreover, on close perusal of Muthoot Finance case, it is revealed that the Petitioners therein did not challenge the substituted Section 35F of the Excise Act in that Writ Petition. It was a simple case of challenging the Commissioner's order on merits for which the Respondent sought dismissal of Petition on the ground of alternative remedy being available with mandatory requirement of pre-deposit. Thus, it may be said that this is a case where the matter was not fully argued properly before the Hon’ble High Court.

That’s why the Hon’ble Allahabad High Court in the above discussed case also expressed their view on the decision of Hon’ble Kerala High Court in the Muthoot Finance case by stating that:

“With great respect, the judgment of the learned Single Judge of the Kerala High Court has not considered the express language which has been used in the amended provisions of Section 35F(1) of the Act. The order of the Andhra Pradesh High Court which was relied upon in the judgment of the Kerala High Court is only an interim order.”

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.