JULY 19, 2014

By Narendra Kumar Singhvi

THE much-awaited budget proposals of the new government have been announced in the Parliament. However, these proposals have invited hot-debates not only in the Parliament but also in the trade and industry. On the litigation front, the budget speech of the Hon'ble Finance Minister seemed relieving for assesses, indicating that amendments are made to free appellate authorities from hearing stay applications and to take up regular appeals for final disposal. However, the intention, as reflected in the budget speech, has not been carried out by the express provisions of the Finance Bill, 2014.

This article is focused on analyzing nuances of amendments made to Section 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962. Before discussing the effects of this amendment, let us first note down in brief the new provisions:

1) For entertainment of first appeal before Commissioner (Appeals) or Tribunal, the assessee shall deposit 7.5% of the duty demanded or penalty imposed or both.

2) For entertainment of second appeal before Tribunal, the assessee shall deposit 10% of the duty demanded or penalty imposed or both.

3.) In any case, the amount required to be deposited for entertainment of appeal shall not exceed Rs. 10 crores.

Pre-deposit, when to make?

The first implication of these amendments is that the entertainment of the appeals in disputes relating to Excise Duty, Customs Duty and Service Tax shall be subject to pre-deposit of specified percentage. A doubt may arise as to whether entertainment of appeal is equivalent to filing of appeal, i.e. whether the compulsory pre-deposit is required to be made prior to filing of appeal itself or that to when the appeal is put to consideration of the tribunal.

In this regard, it is important to note that there is a difference between appeal and memorandum of appeal. This difference is also recognized in Order 41 of the Code of Civil Procedure, 1908. Reliance is placed on the decision of the full bench of the Hon'ble Supreme Court in Lakshmi Rattan Engineering Works Limited v. Assistant Commissioner, AIR 1968 SC 488, wherein, while considering the interpretation of the term ‘entertain', it was held that entertainment is equivalent to admitting to consideration and thus pre-deposit shall be made prior to when the appeal is considered by the appellate authority. The Court held that appeal is judicial examination; while memorandum of appeal contains the grounds on which judicial examination is invited. For purposes of limitation, it is required that a written memorandum of appeal shall be filed. However, as far as pre-deposit for entertainment of appeal is concerned, it means that the appeal such as was filed will not be admitted to consideration unless there is satisfactory proof available of the making of the deposit of tax.

Considering the above observations, it is clear that the requirement of pre-deposit under new Section 35F shall be fulfilled prior to hearing of appeal/ application by the tribunal and not prior to filing of the appeal/application.

What about the balance demand?

At this juncture, another doubt arises as to if the requirement has been fulfilled and appeal has been entertained, would it result in automatic recovery of the balance demand.

To answer this question, it is necessary to first reiterate the position prevailing under the old provisions. Under old Section 35F, the assessee was required to deposit with the adjudicating authority the duty demanded or the penalty levied. However, the appellate authorities were empowered to dispense with such deposit subject to specified conditions and based on judicially and legislatively established principles. As a result of such provision, the prevailing practice was to file stay applications before the appellate authorities along with appeals, praying for waiver of pre-deposits and staying of recovery of balance demand. The need for filing of application for stay of recovery of balance demand arose due to the fact that the demand stood confirmed against an assessee as soon as the order was passed by the adjudicating authority.

It is also to be noted that the appeal is a statutory right. In the absence of the statute providing a right to file appeal to the assessee, no appeal can be filed. Being a statutory right, the person exercising it is also required to follow the conditions and fulfill the pre-requisites thereof. Reliance is placed on the decision of the Hon'ble Supreme Court in Vijay Prakash v. Collector of Customs, = 2002-TIOL-427-SC-CUS wherein it was held that the right to appeal is a statutory right and it can be circumscribed by the conditions of the grant.

It can be deduced from the above that the pre-deposit requirement is only a condition for entertainment of appeal by the appellate authorities and does not, in so many words, prohibit the departmental authorities to recover the balance demand, which, at this stage, stands confirmed and thus, due. Further, it has also been well settled that mere filing of appeal/ stay application does not operate as automatic stay of recovery.

The absence of statutory provisions prohibiting recoveries of confirmed demand by the departmental authorities has been recognized by the Hon'ble Allahabad High Court in Titawi Sugar Complex v. Commissioner of Customs, 2003 (159) ELT 101 (All). The absence of these provisions was also acknowledged by the Hon'ble Gujarat High Court in DCW Limited v. Commissioner (Appeals), 1998 (97) ELT 424 (Guj), wherein, in context of earlier Section 35F, it also observed that deposit of confirmed demand is a condition and dispensing of the same is an exception. Further, that the protection against coercive recovery should not be extended beyond the statutory time period for filing of appeals. This principle is also embodied in Order 41, Rule 5 of the Code of Civil Procedure, 1908.

These are amply clear to show that the fulfillment of the requirement of compulsory pre-deposit would not result in automatic prohibition of coercive recovery actions by department to recover the balance portion of the confirmed demand. The provisions of new Section 35F do not prohibit such recoveries. Considering the same, the circle of filing stay applications by Appellants for staying recovery of balance demand and grating of stay of the same by tribunal would continue. However, this circle would not be a vicious circle in as much as by substituting the provisions of Section 35F, the whole controversy revolving around inherent powers of tribunal to grant/ extend stay has been put to rest. In other words, there is no express, whether direct or indirect, prohibition on powers of tribunal to grant and extend stay of recovery for indefinite period.

How much to deposit in case of second appeal?

For entertainment of second appeal at tribunal stage, the Appellant shall be required to deposit 10% of duty demanded or penalty imposed or both. In such a case, a question arises as to whether such 10% is over and above the 7.5% already deposited as a requirement for entertainment of the first appeal.

On a close examination of the language of new Section 35F, it appears that 10% amount is to be deposited for entertainment of second appeal. In case of second appeal, the Appellant would already have deposited 7.5% amount, assuming both appeals are filed after commencement of the Finance Act, 2014. The said 7.5% amount is not deposited with the first appellate authority, but with the department. The 10% amount is also to be deposited with the department, and not with the registry of the tribunal. In such a case, when 7.5% amount already stands deposited, the Appellant would be required to deposit only remaining 2.5% for in toto, the Appellant would end up depositing 10% amount.

Answers to the questions discussed above seem simple, but these questions definitely have wider scope of interpretation and would necessarily invite a lot of litigation from both the sides. An example would be the amount of compulsory pre-deposit for entertainment of second appeal when the first appellate authority grants relief on one count but confirms order of the adjudicating authority on another count. In such a case, whether it would be determined on the basis of demand confirmed in the original order or that confirmed in the order-in-appeal. In any case, the appellate authorities would now be burdened with not only stay applications but also issues pertaining to interpretation of the new provisions. The intention of the government, thus, has evidently not been carried out and thus, one can expect amendments, whether statutory or by way of circulars.

(The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi)