MANDATORY DEPOSIT UNDER SECTION 35F OF EXCISE ACT CANNOT BE MADE BY WAY OF DEBIT IN ELECTRONIC CREDIT LEDGER MAINTAINED UNDER CGST ACT, 2017

[Mr. M. GOVINDARAJAN]

Appeal under Central Excise Act

Section 35F of the Central Excise Act, 1944 provides that the Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal-

• under sub-section (1) of section 35, unless the appellant has deposited 7.5%  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 Principal Commissioner of Central Excise or Commissioner of Central Excise;
• against the decision or order referred to in clause (a) of sub-section (1) of section 35B [appeal to Commissioner (Appeals) against a decision or order passed by the Principal Commissioner of Central Excise or] Commissioner of Central Excise as an adjudicating authority], unless the appellant has deposited 7.5% 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;
• against the decision or order referred to in clause (b) of sub-section (1) of section 35B  [Appeals to Appellate Tribunal against an order passed by the Commissioner (Appeals) under section 35A)], unless the appellant has deposited 10%  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.

The amount required to be deposited under this section shall not exceed Rs.10 crores.

GST regime

GST was introduced with effect from 01.07.2017 subsuming all indirect taxes including Central Excise.  The Act provides transitional provisions for utilizing the credit available at the time of transition to GST from the erstwhile indirect taxes regime. 

Section 41 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) provides that every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger.  The credit of input tax availed by a registered person in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed. 

The provisions of GST laws also require for the pre deposit before filing appeal to appellate authorities. 

Issue

The issue to be discussed is as to whether for filing appeal under the erstwhile Central Excise Act, 1944 pre deposit can be made by reversing the electronic credit ledger in the GST regime with reference to decided case law.

The CESTAT, Allahabad in M/S. JOHNSON MATTHEY CHEMICAL INDIA PVT. LTD. VERSUS ASSISTANT COMMISSIONER CGST, AND CENTRAL EXCISE, KANPUR - 2022 (9) TMI 44 - CESTAT ALLAHABAD held that the electronic credit ledger of GST regime cannot be reversed for the payment of pre deposit to file appeal under the erstwhile Central Excise Act.

In the above case the appeal has been filed by the appellant against the order of Commissioner (Appeals) which rejected the appeal on the ground that the appellant did not paid the pre-deposit @ 10%  as required under Section 35F of the Central Excise Act, 1944.  

The appellant filed the present appeal before the CESTAT against the order of Commissioner (Appeals).    The appellant submitted the following before the Tribunal-

• Before the first appellate authority, 7.5% of disputed amount was deposited by way of reversal in GSTR-3B and an additional amount of 2.5% was deposited vide DRC-03 challan. The appellant has submitted copies of the relevant GSTR-3B and DRC-03.
• The appellant was not put to notice of any defect, with respect to the pre-deposit, by the learned Commissioner (Appeals).
• The total disputed amount in the appeal filed before the Commissioner (Appeals) was Rs. 48,38,725/-; the appellant had accordingly, made pre-deposit of 7.5%, i.e. Rs 3,62,905/- by way of reversal of CGST credit and the same was noted in the impugned order.
• Section 35F of the Central Excise Act, 1944 does not specify any method for payment of pre-deposit and various Courts have upheld the eligibility to utilize CENVAT credit balance for payment of mandatory pre-deposit.
• The payment by credit is an accepted mode of payment of pre-deposit. Further, as the old credit lying in balance has been transitioned to GST regime and forms part of GST credit pool, there should be no restriction in utilization of that credit.
• As per the GST transition provisions of Section 142(7) of the CGST Act, the present appeal should be disposed of in accordance with provisions of the erstwhile laws.
• The payment of mandatory pre-deposit using the electronic credit ledger balance should be permitted in line with the position under the erstwhile regime as upheld in various High Court decisions and the Circular no. 15/CESTAT/General/2013-14, dated 28.08.2014 which clarified that credit reversal is a proper mode for payment of mandatory pre-deposit.
• Debit Entry in input tax credit should be treated as compliance by payment in cash.

The Department submitted the following before the Tribunal-

• Commissioner (Appeals), by order dated 21.01.2022, has correctly held that no such option of making pre-deposit by way of reversing CGST credit is provided under section 35 of the Central Excise Act, 1944. 
• Clause (f) of sub-section (2) of section 174 of CGST Act, 2017 envisages continuation of proceedings of past cases of erstwhile repealed Central Excise Act as if such Act had not been repealed; pre-deposit should be made under section 35F of the Central Excise Act, 1944 and not under the Act.
• The appellant already has central excise registration and there is no valid reason to make payment under the Act.
• The purpose of such reversal is not mentioned anywhere which makes the said reversal doubtful.
• In case the appeal is allowed, refund of ECRL/ ITC reversal may not be possible because there is no provision for refund of input tax credit under section 54(3) of the Act, except on account of zero rated supply and input tax credit accumulated due to inverted duty structure.
• The Orissa High Court held that held that it is not possible to accept that 'output tax', as defined under section 2(82) of the   Act could be equated to the pre-deposit required to be made in terms of section 107(6) of the Act. 
• The proviso to section 41(2) of the Act limits the usage to which the ECRL could be utilized; it cannot be debited for making payment of pre deposit at the time of filing of the appeal in terms of Section 107 (6) of the Act.

The Tribunal heard the submissions of the appellant and the respondent department. The issue that requires to be considered by the Tribunal in this case is as to whether the appellant assessee is entitled to make the pre-deposit of duty, payable under the old Central Excise regime, as per the requirement of section 35F of the Central Excise Act, 1944 by debiting the Electronic Cash Ledger and Electronic Credit Ledger, under the CGST regime.  The Tribunal analyzed the provisions of Section 41 of the Act.  The provisions of the Act have no provision for utilization of CENVAT Credit, other than for payment of self-assessed output tax. The Tribunal observed that the appellant has relied upon various cases. The Tribunal found that all the cases relied on by the appellant are about debit of pre-deposit amount from CENVAT Credit Register. The same are not applicable to the facts of the present case.

The Tribunal held that mandatory deposit under section 35F of Central Excise Act, 1944 cannot be made by way of debit in the Electronic Credit Ledger maintained under the Act. To that extent, the Tribunal held that the defect is not cured.  However the Tribunal directed the appellant to make the mandatory pre-deposit within four weeks, so as to remove the defect.