Mandatory Pre-Deposit - Interpretative Challenges & Possible Outcomes
JULY 21, 2014
By Lakshmi Menon
THE concept of filing an appeal from the order of a lower authority to the next appellate authority is common across most enactments that provide for adjudication of rights and liabilities of persons covered under respective statutes. This provision also seems consistent with rights of natural justice that allow the order to be reviewed by a superior body. With respect to taxation, especially indirect taxation, most enactments require the disputed demand, either partly or in full, to be pre-deposited while filing the appeal. However, in order to balance interest of the department in safeguarding public revenue against those of the assessees, there are exceptions to this rule of pre-deposit. While hearing a stay application, the appellate authority can waive the requirement for pre-deposit if the assessee can prove existence of prima facie casebalance of convenience in his favour and that he would suffer irreparable harm if the pre-deposit is not waived and stay on the recovery of the amount demanded is not granted [per Dunlop India reported in 2002-TIOL-156-SC-CX-LB].
Concept of stay & pre-deposit under the Central Excise Act, 1944 and Finance Act, 1994 (Service Tax)
Section 35F of the Central Excise Act, 1944deals with the requirement of pre-deposits. Section 83 of the Finance Act, 1994 makes Section 35F of the Central Excise Act applicable to appeals under service tax regime as well.
Even, recently, the requirements for waiving pre-deposit under the section were discussed by the High Courts in SQL Star International Ltd. v. Commissioner of Cus ., Hyderabad, 2012-TIOL-146-HC-AP-ST, CC & CE, Salem v. Visaka Industries Ltd., 2012-TIOL-230-HC-MAD-CX and other cases.
Changes proposed by the Finance (No. 2) Bill, 2014
The change proposed to the Section 35F of the Central Excise Act, 1944 prescribes a mandatory fixed pre-deposit of -
(i) 7.5% of the duty demanded or penalty imposed or both, for filing appeal before the Commissioner (Appeals) or the Tribunal at the first stage and,
(ii) 10% of the duty demanded or penalty imposed or both, for filing the second stage appeal before the Tribunal.
(iii) The amount of such pre-deposit payable would be subject to a ceiling of Rs.10 Crore.
However, the clause 98 of the Bill makes it clear that all pending appeals/stay applications would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals. The changes are effective from the date of enactment of the Finance Bill, 2014.
The proposed change is likely to have stemmed out of an intention of the legislature to reduce the number of appeals filed before appellate authorities, particularly the Tribunal (CESTAT). The pendency of disputes before the Tribunal being a burning issue, the legislature could want more time to be allocated to matters of substantial importance, over the time allotted to hearing stay applications. It may also be recalled that in Benara Values Ltd. v. CCE 2006-TIOL-156-SC-CX, the Apex Court had expressed its dissatisfaction with the casual manner in which the authorities deal with stay applications.
Parallel provisions in other enactments mandating partial pre-deposit and reception by courts
The concept of mandatory pre-deposit, though new to excise and service tax laws, is already a prevalent practice in VAT laws. For instance, the Karnataka VAT Act, 2003, under Section 63(4) prescribes that 30 % of the tax demanded be paid and that only on proof of such payment being made available will the appeal be entertained.
Similarly, Section 62(5) of Punjab VAT Act, 2005 requires pre-deposit of 25% of additional demand before hearing any appeal.The explanation to the section defines "additional demand" as the tax imposed as a result of any order passed under any of the provisions of this Act or the rules made thereunder or under the Central Sales Tax Act, 1956.
This section was challenged and the Supreme Court in Dishnet Wireless Ltd v. The Commercial Tax Officer and Amrit Banaspati Limited v. State of Punjab granted stay on the operation and implementation of Section 62(5) of the Punjab VAT Act, 2005 on 31/01/2014. Later, the said stay was vacated in a subsequent hearing of Amrit Banaspati, howeverthe Apex Court noted that in the meantime, there shall not be any coercive recovery of the amount of tax.
Thus, the stand taken by the Court appears to be one of non-interference in essentially what are policy matters of the government.
Implications of Clause 98 of the Bill
Assuming that clause 98 of the Finance (No. 2) Bill of 2014 is enacted without any change, the following implications may arise -
1. There could be fewer applications of stay and waiver of pre-deposit being filed before appellate authorities in view of the requirement of mandatory pre-deposit, thus possibly reducing backlog of cases.
2. Notwithstanding this, there could be a good number of questions and interpretation issues that could lead to further litigation.
To substantiate, an analysis of the clause as it stands at present could lead to the following queries in the minds of assessees -
1. Whether the mandatory pre-deposit is to be treated as an amount to be paid at every stage of the appeal or is it sufficient that an assessee who pays 7.5% of the duty demanded at the Commissioner (Appeals) stage, need only pay the remaining 2.5% on appeal to the Tribunal? Here, it is pertinent to mention that the Joint Secretary of CBEC vide his letter, D.O.F. No. 334/15/2014-TRU dated 10-7-2014 has used the word "another" while referring to the mandatory pre-deposit of 10% at the second stage of appeal. Thus, in his view, the deposit amounts of 7.5% and 10% are independent of each other and at every stage, they must be calculated and paid afresh.
2. Whether the mere fact of paying the mandatory pre-deposit amount as prescribed by the clause automatically give the assessee relief from recovery proceedings by the department? This question arises from a reading of the clause that suggests that the mandatory pre-deposit is only for the purposes of the appeal being entertained. Further, we may recall decisions to the effect that waiver of pre-deposit by discretion exercised by the authority and grant of stay are not the same; while the former is s form of discretion allowed by the statute, the latter is exercised by way of a combined reading of Section 35C of the Central Excise Act, together with the inherent right of theforum hearing the appeal.
3. Whether the payment of the mandatory pre-deposit would entail an automatic waiver as regards deposit of the remaining amount until the disposal of the appeal? To illustrate, if a demand of Rs.1,00,000 as per the Show Cause Notice is confirmed by the Commissioner (Appeals) and on second appeal to the Tribunal Rs.10,000 is paid as mandatory pre-deposit, then should the assessee expressly seek for a waiver of the remaining Rs.90,000 in his stay application or not. If this is the case, would the present conditions of financial hardship, balance of convenience etc. still need to be proved
4. Interestingly, the clause also reads that the calculation of the 7.5 % or the 10 % respectively would be on "the duty demanded or penalty imposed or both". Does this mean that it is open to the assessee or the revenue to choose on what sum the pre-deposit percentage is to be calculated - the duty demanded or penalty or both?
5. In a case where the appeal to the Commissioner (Appeals) is filed before the enactment of the Finance (No. 2) Bill, 2014 and under the earlier provisions, the requirement of pre-deposit has been waived by the Commissioner (A) exercising his discretion and the appeal from the order of the Commissioner (A) is subsequently filed post the enactment of the new provision, would the appeal to the Tribunal be treated as an existing matter or as a fresh appeal attracting 10% pre-deposit?
6. In another scenario, let us assume that the Commissioner (Appeals) has directed pre-deposit of 100% of duty demanded and 50% of penalty, does it mean that if the assessee prefers an appeal to the Tribunal subsequently, he need not pay any pre-deposit at all since he has paid such an amount over and above the statutory minimum pre-deposit demanded?
The above are only illustrative questions that may arise on a bare reading of the provision as it is proposed presently.
Apart from the interpretative issues raised above, there are several other drawbacks in the proposed change. The aspect of personal penalties imposed mostly on persons such as directors of defaulting companies is one such problem area. Insistence of mandatory pre-deposit from individuals could lead to immense financial burden on such individuals, discouraging them from approaching statutory appellate authorities.
The only respite sought to be brought about from the proposed amendment is in terms of the definition of "duty demanded". Theamendment seeks to remove the inclusion of interest on the duty demanded, which as per the current provision, is included in the pre-deposit amount.
The way ahead
Inferring from the approach of the courts so far on the validity of mandatory pre-deposits, it is unlikely that the clause, if passed and challenged as harsh on the assessee, would be struck down by the judiciary, in view of the same being a policy matter.
Given the above scenario of doubt, it would be to the benefit of all concerned if representations are made to the government either to amend the clause or to issue clarifications on points of ambiguity, to afford more clarity and boost confidence in the sphere of litigation.
(The author is an Associate, Lakshmikumaran & Sridharan (Bangalore)
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