FINDING ON UNDUE HARDSHIP WHILE DIRECTING PRE-DEPOSIT IN AN APPEAL IS MANDATORY

[Mr. M. GOVINDARAJAN]

              Section 85 of the Finance Act, 1994 ('Act' for short) provides for filing appeal to the Commissioner of Central Excise (Appeals) against any decision or order passed by an adjudicating authority subordinate to the Commissioner of Central Excise in the prescribed form and verified in the prescribed manner within thirty days from the date of receipt of decision or order of such adjudicating authority.

              Section 86 of the Act provides for filing appeal against an order passed by a Commissioner of Central Excise under Section 76 or Section 83A (adjudication) or Section 84 (Revision of orders) or an order passed by a Commissioner of Central Excise (Appeals) under Section 85, to Appellate Tribunal within three months from the date on which the order sought to be appealed against is received by the assessee.

              Section 83 provides that Section 35F of the Central Excise Act, 1944 is applicable in relation to service tax.  Section 35F of the Central Excise Act, 1944 provides-

"Where in any appeal, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of Central Excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded or the penalty levied:

              Provided that where in any particular case, the Commissioner (Appeals) or the Appellate Tribunal is of the opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.

              Provided further that where an application is filed before the Commissioner (Appeals) for dispensing with the deposit of duty demanded or penalty levied under the first proviso, the Commissioner (Appeals) shall, where it is possible to do so, decide such application within thirty days from the date of its filing.

Explanation:- For the purposes of this section 'duty demanded' shall include-

Amount determined under Section 11D;

Amount of erroneous CENVAT credit taken;

Amount payable under rule 57CC of Central Excise Rules, 1944;

Amount payable under Rule 6 of CENVAT Credit Rules, 2001 or CENVAT Credit Rules, 2002 or CENVAT Credit Rules, 2004;

Interest payable under the provisions of this Act or the rules made there under. 

In 'Banara Valves Ltd., V. Commissioner of Central Excise' - [2007 -TMI - 866 - SUPREME COURT OF INDIA], the Supreme Court held that in Section 35F two significant expressions are used which are-

Undue hardship to any person; and

To safeguard the interest of revenue 

and therefore while dealing with the application for appeal the above requirements are kept in view.

In 'Devi Constructions V. Commissioner of Central Excise (Appeals), Salem' - [2008 -TMI - 31830 - HIGH COURT MADRAS], the Madras High Court gave a ruling that finding on undue hardship while directing the pre-deposit is mandatory.  The facts of the case run as follows:

              The petitioner was awarded with the work order by M/s Indian Oil Corporation for construction of Dykes, Internal Roads and other misc. civil works for the upcoming Marketing Terminal at Trichy and Sankari as a part of Chennai - Trichy - Madurai Pipeline Project has confirmed the demand of service tax of Rs.7,30,429/- which has been arrived at on the basis of gross amount received by the petitioner during the period from 10.09.2004 to June 2006 as per the services provided by it under Section 73(2) of the Act.

              The petitioner agreed that as far as the construction of Dyes is concerned, the same shall fall under construction service and paid an amount of Rs.1,38,400/- The Original authority adjusted the same against the tax amount arrived at Rs.7,30,429/- In addition to this the original authority has also imposed-

Penalty which is equal to the amount of service tax under Section 76 of the Act;

A similar amount of penalty under Section 78 of the Act;

Penalty of Rs.1000/- under Section 77 of the Act.

The petitioner filed appeal against the order of the Original Authority before Commissioner (Appeals), Salem. The Commissioner (Appeals) passed an interim order pending final decision in the appeal filed by the petitioner against the order of original authority by issue of powers conferred under proviso 1 to Section 35F of the Central Excise Act, 1944. In the impugned order, for the purpose of filing appeal, the Commissioner (Appeals) has directed the petitioner -

To make pre deposit of the entire service tax Rs.5,92,029;

50% of penalty amount of Rs.7,30,429/- imposed under Section 76 of the Act;

50% of the penalty amount of Rs.1000/- imposed under Section 77 of the Act;

50% of the penalty of Rs.7,30,429/- imposed under Section 78 of the Act

Within 30 days.

              This writ petition is filed against the order of Commissioner (Appeals), Salem. The High Court observed that in the impugned order the Commissioner (Appeals) shows that the petitioner has not raised any point about the financial hardship and even at the time of hearing the appeal any such hardship had not been contended.  Therefore, taking note of the conduct of the petitioner in conceding that as regard Dykes, the construction is to be termed as construction service, the Commissioner (Appeals) held that it should be deemed to be a construction by the petitioner besides other construction activities and in view of the matter passed the interim impugned order. 

The petitioner put forth the following contentions before the Court:

Even though in the grounds of appeal there was no averment about the undue hardship that is being caused to the petitioner by virtue of imposition of service tax with penalty, it is not correct to state that such hardships was not argued at the time when the appeal was posted for hearing;

The Commissioner (Appeals) ought to refer to the entire aspects as a whole and since the issue involved in this case is based on the building contract at different stages, unless the respondent has taken the whole case into consideration, the hardship may not be possibly entertained;

While passing the order the Commissioner (Appeals) has not taken into consideration the entire aspects to find out the prima facie case. 

The following arguments are put forth on behalf of the Commissioner (Appeals)- 

In the absence of any pleading of undue hardship by the petitioner there was no occasion for the appellate authority to take into consideration of the said aspect at all;

It is well settled that unless hardship is pleaded, there cannot be any presumption of hardship by the appellate authority;

It is not correct to state that the petitioner being a builder has not earned any profit based on the construction agreement.

The Madras High Court, after considering the arguments, held that-

The appellate authority has only decided about the construction of Dykes that it would attract the service tax and without deciding about other construction works, directed payment of entire service tax due for the purpose of admitting the appeal by which the appellate authority has not properly appreciated the issue prima facie involved;

For the purpose of arriving at a finding as to undue hardship, certainly the case as a whole should have been considered by the appellate authority;

Section 35F - provision 1 makes it very clear that the Commissioner (Appeals) or the Appellate Tribunal before passing any interim order, shall consider whether the decision for deposit as pre-deposit condition would cause undue hardship to the person against whom such direction is issued. Such a finding is not available in the impugned order nor did the Appellate Authority decided the prima facie issue;

A reference to the letter dated 26.04.2006 stated to have been submitted by the petitioner as referred to in the impugned order makes it very clear that what was conceded by the petitioner was only in respect of Dykes wall construction work, which is liable for payment of service tax.

The Court held that the above is no sufficient to set aside the impugned order since final adjudication has to be made by the appellate authority. The Court directed the petitioner to deposit 50% of the remaining service tax of Rs.5,92,029/- with the Central Excise Department to hear the appeal by the Commissioner (Appeals).