NOVEMBER 21, 2014

By Shailesh Sheth, Advocate

PART-II

Quantum of deposit - A 'Quantum of Solace' or 'Quantum of Stress'?

THE quantum of deposit prescribed under the amended provisions is as follows:

++ 7.5% of the duty demanded where duty or duty and penalty are in dispute or penalty, where penalty is in dispute while filing an appeal before the Commissioner (Appeals) or Tribunal at first stage;

++ 10% of the duty demanded where duty or duty and penalty are in dispute or penalty, where penalty is in dispute while filing an appeal before the Tribunal at second stage i.e. against the Order-in-Appeal passed by the Commissioner (Appeals);

++ Maximum amount required to be deposited shall be Rs.10.00 crores.

One has to, even if grudgingly, accept that the quantum of deposit prescribed is certainly reasonable and one could not have asked for more kind treatment! At adjudication stage, as is well known, a monotonous, monstrous and mechanical confirmation of demand at the adjudication stage is almost a 'rule rather than exception'! The Appellant would therefore be always on his tenterhooks while seeking waiver/stay from the appellate authority and would suffer tremendous agony, harassment and hardships in securing such relief. Viewed in this light, FM has to be complemented for adopting a bold and pragmatic approach and prescribing such reasonable quantum of deposit. No doubt, cynics would say that the ceiling of Rs.10 crores prescribed would mean that higher the demand, lower will be the actual percentage of deposit and vice-versa and that this would indirectly encourage the large-scale evasion! The author however, feels that a general provision of this nature has to be made, keeping a broader perspective in mind and with a care to ensure that the appellate remedy does not become illusory or mirage for the Appellants at large. This is what the legislature appears to have done. If this benefits a few Appellants in some exceptional cases involving huge demand, the provision does not warrant any undue criticism or modification. After all, how many tax-payers would be routinely slapped with the demand of more than Rs.150 crores?

However, the contentious issue that has already arisen relates to the quantum of 10% prescribed for appeal at second stage i.e. before the Tribunal against the order passed by the Commissioner (Appeals). The issue is whether an Appellant, who has paid 7.5% as prescribed, at Commissioner (Appeal)'s stage, would be required to pay only balance 2.5% or be forced to shell out additional 10% at the Tribunal stage?

The confusion has probably arisen due to Letter DOF No. 334/15/2014-TRU dated 10 th July, 2014 of TRU-I, CBEC, wherein the word 'another' has been used for '10% deposit' meaning thereby, an additional 10% of duty demanded or penalty imposed is contemplated at second stage of appeal before the Tribunal.

Circular 984/08/2014-CX dated 16 th September, 2014 issued by the Board clarifies this doubt as under:

"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."

(Emphasis provided)

Board richly deserves kudos for this beautifully vague and non-committal clarification!

Leaving aside the Board's clarifications, let us take a critical look at the matter. The issue may first be examined applying the 'Doctrine of Merger'. Generally, when an order of a lower authority is challenged by way of an appeal and an order is passed by the appellate authority on such appeal, the order of the lower authority merges into the order of the appellate authority. This 'principle of merger' is based upon a sound footing that at the same time, there cannot be two orders for disposal of the same dispute. Some doubts had arisen as to whether the Doctrine is applicable only with reference to the orders passed by the Court or it also applies to the orders passed by the Tribunal. This doubt was set at rest by the Larger Bench (7 Judges) of the Supreme Court in the case of S. S. Rathore vs. State of M. P. - 2002-TIOL-398-SC-LMT-CB wherein, at para 11, the Court observed:

"11. The distinction adopted in Mohammad Nooh's case between a court and a tribunal being the appellate or the revisional authority is one without any legal justification. Powers of adjudication ordinarily vested in courts are being exercised under the law by tribunals and other constituted authorities. In fact, in respect of many disputes the jurisdiction of the court is now barred and there is a vesting of jurisdiction in tribunals and authorities. That being the position, we see no justification for the distinction between courts and tribunals in regard to the principle of merger. On the authority of the precedents indicated, it must be held that the order of dismissal made by the Collector did merge into the order of the Divisional Commissioner when the appellant's appeal was dismissed on 31.8.1966."

In its celebrity judgment delivered in the case of Kunhayammed vs. State of Kerala - 2002-TIOL-50-SC-LMT-LB the Supreme Court, at para 12, observed as under:

"12. The logic underlying the doctrine of merger is that there cannot be more than one decree or operative orders governing the same subject-matter at a given point of time. When a decree or order passed by inferior court, tribunal or authority was subjected to a remedy available under the law before a superior forum them, though the decree or order under challenge continues to be effective and binding, nevertheless its finality is put in jeopardy. Once the superior court has disposed of the lis before it either way - whether the decree or order under appeal is set aside or modified or simply confirmed, it is the decree or order of the superior court, tribunal or authority which is the final, binding and operative decree or order wherein merges the decree or order passed by the court, tribunal or the authority below. However, the doctrine is not of universal or unlimited application. The nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or which could have been laid shall have to be kept in view."

See also, Goier Brothers Pvt. Ltd. Vs. Shri Ratanlal - AIR 1974 SC 1380.

Thus, even when the Commissioner (Appeals) upholds the adjudication order in its entirety, the order of the adjudicating authority, on the 'principle of merger' merges in the order of the Commissioner (Appeals). It is only the order of the Commissioner (Appeals) that survives and which is subject to appeal before the Tribunal. It is also a settled legal position that an appeal is not a fresh suit or cause but only a continuation of the original proceedings and a stage in the original suit or proceedings themselves. See Mahavir Metal Industries Vs. CCE - 1987 (31) ELT 739 (Tribunal).

Consequently, a view that an additional 10% shall be deposited at the second stage of appeal before the Tribunal is neither proper nor maintainable. When the order of the Commissioner (Appeals) is challenged before the Tribunal, the Appellant, in author's opinion, shall be required to deposit only the balance amount after adjusting the deposit of 7.5% made by him at the first appellate stage.

Aside from the above, an anomalous, absurd and piquant situation would arise where the Commissioner (Appeals) modifies the adjudication order and sets aside part of the demand confirmed against the Appellant who has already deposited 7.5% of the original demand and who is still asked to deposit additional 10% at the Tribunal stage, notwithstanding the partially favourable order of the Commissioner (Appeals). Here, it is also difficult to comprehend what Board intends to convey vide its clarification reproduced above and the highlighted portion thereof.

Lastly, the expression 'another' or 'additional' is not used in the amended Sections and therefore, the extrapolation of this expression through TRU Circular is neither justified nor valid.

Let us hope that Board will, at the earliest, issue an explicit clarification on this issue.

Let all the laws be clear; uniform and precise; to interpret laws is almost always to corrupt them. - Voltaire

Payment made during investigation/audit - "Such magnanimity; such misery!

Board has, vide its Circular dated 16 th September, 2014, clarified at para 3.1 that payment made during the course of investigation or audit, prior to the date of filing of appeal, can be considered to be deposit towards 7.5% or 10%, subject to limit of Rs.10 crores, in terms of the amended provisions of Section 35F of CEA or Section 129E of CA.

After being so magnanimous, the Board suddenly turns miser and goes on to further clarify that any amount paid over and above the stipulated amounts shall not be treated as deposit under the said Sections. Not only this, the Board further states that since the amount paid during investigation/audit takes the colour of deposit under the said Sections only when the appeal is filed, the date of filing of appeal shall be deemed to be the date of deposit made in terms of the said Sections.

The Board's attitude is inexplicable and inexcusable and the view expressed is unfortunate. It does not need any explaining that the view as expressed above is aimed at merely saving the interest payable in terms of Section 35FF on the refund of the amount deposited when the Appellant finally succeeds in his battle. Board ought to have appreciated that the recovery of any amount on any count whatsoever during investigation/audit without following the due process of law by the department from the hapless Assessees ('spot recovery' in the departmental jargon) is patently illegal and without authority of law. Such amount remains and ought to be considered as 'deposit' only till the dispute is finally resolved by the competent authority in accordance with law. Incidentally, the show cause notice that follows such investigation/audit invariably seeks to 'appropriate' the amount 'voluntarily deposited'(?) by the Assessee. Board, therefore, ought not to have gone hyper-technical and taken a stand that the amount paid during investigation/audit takes the colour of deposit in terms of the said Sections only from the date of filing of the appeal. After all, it is anybody's guess as to how many years may pass before the matter reaches the appellate stage and during this entire period, the amount collected, mostly through coercion and threat during investigation/audit, would remain with the Government and that also, without interest, if one goes by the Board's view ! Does the Board really want the Assessees to approach the High Court for claiming the interest on such amount for the period starting from the date of its recovery during investigation/audit till the date of filing of appeal when it is branded as 'deposit' as per Board's view? Fortunately, High Courts have time and again intervened in such matters and ordered interest, sometimes at the rate even much higher than 6% p.a., on such amounts recovered from the Assessee.

See -

1. Foods, Fats & Fertilizers Ltd. V/s. CC & CEX - 2010-TIOL-1138-CESTAT-BANG.

2. Gokak Patel Volkart Ltd. V/s. CCE - 2002-TIOL-508-SC-CX

3. UOI Vs. MadhumilanSyntex Pvt. Ltd. - 2002-TIOL-512-SC-CX

4. Century Metal Recycling Pvt. Ltd. vs.UOI - 2008-TIOL-711-HC-P&H-CX

5. NOCIL V/s. UOI - 2005-TIOL-114-HC-MUM-CX

It is rather high time that the interest is made payable on the refund of the amount deposited/paid by the Assessee from the first date of its deposit/payment only, irrespective of at which stage - whether investigation or audit or appellate - such deposit/payment is made. This would also hopefully curb the tendency on part of the investigating/audit officers to recklessly indulge into 'spot recoveries' in total disregard of law.

It is hoped that a Government that has come so far would take few more steps in this direction.

Nobody has a more sacred obligation to obey the law than those who make the law - Jean Anouilh

No recovery of the amounts during pendency of appeal - "Much obliged, Sir!"

Vide para 4.2 of its Circular dated 16 th September, 2014, Board has clarified that no coercive measures for the recovery of the balance amounts shall be taken during the pendency of the appeal when the amount as stipulated is deposited in terms of the amended provisions and a proof of such deposit and filing of appeal is produced.

The clarification by the Board could not have come a day sooner! There were all round apprehensions about the likelihood of recovery action for the balance amounts and doubts were also prevailing about the necessity to file stay applications to ward off such recovery. Though, there was really no cause for alarm on this count, the clarification issued by the Board itself will set any doubts and apprehensions at rest. The swiftness with which the Board has issued this bold and benevolent clarification is also highly commendable!

The good of the people is the chief law - Cicero

Mandatory deposit from CENVAT Account - No Objection, Sir!

Doubts also prevailed as to whether the mandatory deposit of the stipulated amounts can be made through CENVAT Credit Account or not. The Board Circular dated 16 th September,2014 of the Board was silent on this aspect. However, the legal position is well settled that such deposit can be made from the CENVAT Credit Account, though penalty has to be made in cash through E-challan only. The following judgments, to cite a few, rendered in the context of the erstwhile provisions of Section 35F would continue to be relevant even in the context of the amended provisions:

1. Birla Yamaha Ltd. Vs. CCE - 2002-TIOL-456-CESTAT-DEL-SB

2. MorarjeeBrembanaVs. CCE - 2003-TIOL-72-CESTAT-MUM

3. ManakMoti Forgings Vs. CCE - 2010-TIOL-1863-CESTAT-MUM

Thankfully, the CESTAT Circular dated 28 th August, 2014 clarifies this by mentioning that -

"In the absence of any clarificatory Circular on the issue, all the DRs/ARs/TOs are directed that the appeals received on or after 06.08.2014 may be registered in the following cases:

(i) …

(ii) If mandatory deposit of duty confirmed is made from CENVAT account and evidence thereof is produced."

Undue hardship - "A concept of a bygone era…!"

The most significant departure made vide the amended provisions from the erstwhile provisions relates to the divesting the appellate authorities of the powers to dispense with the requirement of mandatory deposit in case the same is likely to cause undue hardship to the Appellant. The amended provisions are inflexible in this regard and do not provide any discretionary powers to the appellate authorities to waive the mandatory pre-deposit even in deserving cases. It is also pertinent to note here that unlike the erstwhile provisions, the mandatory deposit under the amended provisions will still be required even if the goods are in custody of the Central Excise/Customs authorities. Obviously, the new provisions, only for this reason, have been branded harsh, unfair, unjust, et al.

There is no denial of the fact that the inflexibility of the amended provisions may cause 'heart-burns' and 'hardships' to the Appellants in cases where mandatory deposit would not be justifiable at all. Few of such instances are-

++ Order of the lower authority passed in gross violation of the principles of natural justice;

++ Goods are in the custody of the department and as such, interest of revenue is secured;

++ Order of the lower authority is in total disregard of the binding judicial precedent;

++ Financial incapacity of the Appellant;

++ Favourable decision on stay/appeal obtained by the Appellant in case of the demands based on identical grounds for the earlier periods;

++ Strong prima-facie case on merits and/or on limitation;

++ Exorbitant and highly inflated demand and/or penalty; etc.

However, considering the fact that the sole aim for introducing these provisions appears to be freeing the Tribunal from the burden of disposing stay applications and paving way for expeditious disposal of appeals, one may have to 'grin and bear' with the adverse fall-out of the amended provisions in some cases. On the other hand, one can only fervently hope that the Board will also impress upon the adjudicating/appellate authority i.e. Commissioner (Appeals) to follow the principles of natural justice and also abide by the binding judicial precedent, if nothing more, while deciding any dispute and that any breach on this count would be viewed seriously and dealt with sternly. This will also reduce the No. of appeals being filed as the demand would not be routinely confirmed. The recent Circular F. No. 201/01/2014-CX6 dated 26.06.2014 of the Board may also be seen in this regard.

In any event, the aggrieved person can always approach the High Court for suitable relief if he feels that the mandatory deposit is not at all warranted or justified in a given case.

The life of the law has not been logic; it has been experience - Oliver Wendell Holmes

Validity of the provisions - Is it open to challenge? A Million-Dollar question…!

Finally, a question that must be uppermost in the minds of all stakeholders and that is, whether the constitutional validity of the amended provisions is open to challenge before the Court? Quite a few arguments are being advanced in support of the view that the validity of the amended provisions can certainly be challenged in the Court.

However, the issue needs to be critically evaluated and it may not be advisable to 'jump the gun' in this matter. It shall be noted that majority of the Sales Tax/VAT enactments contain a provision mandating the deposit of entire amount or a portion of the disputed tax liability before filing appeal. The validity of such provisions have been, time and again, challenged before the various High Courts, but with no success. A few of such judgments are cited below:

1. Jindal Stainless Ltd. Vs. State of Orissa - (2012) 54 VST 1 (Orissa)

2. HPCL Vs. Asst. Commr. of Commercial Taxes - (2011) 37 VST 567 (Kerala)

3. K.M. Corporation Vs. State of Tamil Nadu -(2008) 11 VST 782 (Madras)

4. D. V. C. Bukaru Co-op. Stores Ltd. Vs. State of Bihar -(2000)119 STC 138 (Patna)

5. Ellora Construction Co. Vs. MCGB - AIR 1980 BOM 162

6. Judgment dated 16.01.2014 of the Bombay High Court in the case of Walchandnagar Industries Ltd. Vs. Municipal Corporation of City of Pune & Others (W.P. No. 9588/2013) = 2014-TIOL-323-HC-MUM-MISC

The High Courts, while upholding the constitutional validity of the similar provisions in the relevant statutes, have mainly relied upon one or more of the following judgments, amongst others, of the Supreme Court:

1. Vijay Prakash D. Mehta Vs. Collector of Customs - 2002-TIOL-427-SC-CUS

2. Gujarat Agro Industries Co. Ltd. Vs. Municipal Corporation of the City of Ahmedabad - AIR 1999 SC 1818

3. Anant Mills Co. Ltd. Vs. State of Gujarat - AIR 1975 SC 1234

4. Ravi Gupta Vs. CST - 2009-TIOL-47-SC-CT

5. Govt. of AP Vs. Smt. P. Laxmi Devi - (2008) 4 SCC 720

In Anant Mills' case (supra), the Supreme Court (4 Judges' Bench) observed as under:

"The right of appeal is the creature of a statute. Without a statutory provision creating such a right, the aggrieved is not entitled to file an appeal. We fail to understand as to why the legislature while granting the right of appeal cannot impose conditions for the exercise of such right. In the absence of any special reasons there appears to be no legal or constitutional impediment to the imposition of such conditions….".

The aforesaid principle was taken due note of by the Apex Court (5 Judges' Bench) subsequently in the case of Seth Nandlal& Another Vs. State of Haryana - AIR 1980 SC 2097 and was re-stated by the Court, albeit, with a rider, as follows:

"It is well settled by several decisions of this Court that the right of appeal is a creature of a statute and there is no reason why the legislature while granting the right cannot impose conditions for the exercise of such right so long as the conditions are not so onerous as to amount unreasonable restrictions rendering the right almost illusory……".

(Emphasis provided)

In this case, the Supreme Court upheld the validity of the relevant provision after critically examining whether the conditions imposed for exercising the right of appeal was unreasonable or not and after recording a categorical finding that the conditions imposed were not onerous.

It may be possible to discuss at length the various judgements of the High Court as well as the Supreme Court cited hereinabove and distinguish the same on facts. However, this exercise is not intended to be undertaken here. Suffice to say, the validity of any such provision may better be tested on the touch-stone of the 'reasonableness' as observed by the Supreme Court in Seth Nandlal's case (supra). If the amended provisions of Section 35F of CEA/ Section 129E of CA are critically examined, applying the yardstick as to whether the condition of mandatory deposit as prescribed therein is so 'onerous' or 'unreasonable' so as to render the right of appeal illusory, it seems the challenge to the constitutional validity of the provisions may fail.

Here, the following observations of the Supreme Court in the case of Fatehchand Himmatlal Vs. State of Maharashtra - (1977) 2 SCC 670 and quoted with approval in Walchandnagar Industries' case (supra) = 2014-TIOL-323-HC-MUM-MISC are worth-noting:

"Every cause claims its martyr and if the law, necessitated by practical considerations, makes generalizations which hurt a few, it cannot be helped by the Court. Otherwise, the enforcement of the Debt Relief Act will turn into an enquiry into scrupulous and unscrupulous creditors, frustrating through endless litigation, the instant relief to the indebted which is the promise of the legislature."

Lastly, those who are disappointed with the amended provisions may find a glimmer of hope in the pending challenge to the validity of the somewhat analogous provisions of Section 62(5) of the Punjab VAT Act, 2005 before the Supreme Court in the case of Dishnet Wireless Ltd.Vs. CTO (SLP No. 37727/2013) and Amrit Banaspati Ltd, Vs. State of Punjab (W.P. (C) 69/2014). The Supreme Court had, on 31.01.2014, initially granted the stay of operation and implementation of sub-section (5) of Section 62 of Punjab VAT Act, 2005. However, vide Order dated 19.03.2014, the stay granted on implementation and operation of the said Section 62 (5) of Punjab VAT Act, 2005 was vacated by the Supreme Court, but with the directions that there shall not be any coercive steps for recovery of the amount in question.

The final decision of the Supreme Court in this batch of Petitions is awaited with keen interest by all concerned.

But, amidst this intense legal battle of myriad nature, it may be advisable to be prudent and pragmatic and to not 'fire a salvo' in an undue haste against the constitutional validity of the amended provisions. To reiterate, in a deserving cases, the High Court can always be approached for the appropriate relief against the condition of mandatory deposit.

The layman's Constitutional view is that what he likes is constitutional and that which he doesn't like is unconstitutional. That about measures up the constitutional acumen of the average person - Hugo L. Black

To sum up…

The provisions introduced by FM providing for mandatory deposit at appellate stage may have its own share of controversies. But then this is inevitable. Isn't it? What is important is the lofty aim with which the provisions are introduced and one must give it sufficient time so as to see how it impacts the appellate mechanism. It is, however, strongly felt that the provisions would prove to be a blessing for large number of Appellants. It may also hold together, to some extent, the crumbling infrastructure of the appellate machinery, particularly that of various Benches of the Tribunal. No doubt, the professional fraternity may resent these provisions but then it shouldn't really matter or should it?

Part - I: Mandatory Deposit - Love it or hate it, but learn to live with it!

(The author is Sr. Advisor (Indirect Tax), BDO India LLP.)

Concluded