PRE-DEPOSIT OF SERVICE TAX: JUDICIAL PRINCIPLES

[Dr. Sanjiv Agarwal]

Pre-deposit means the deposit of amount of duty (service tax) and penalty pending the disposal of the appeal. According to Section 35F of the Central Excise Act, 1944, any person desirous of appealing against the order shall pending the appeal, deposit the duty demanded or penalty levied thereon. It may be noted that pre-deposit is of service tax and penalty and not of the interest, because interest has to be paid, in any case, for the delayed period. The right to appeal or filing of appeal itself does not waive the requirement of payment of pre-deposit and it must be paid unless it is waived or stayed.

According to section 35F of Central Excise Act, 1944 which applies to service tax also, a person desirous of appealing against the order shall, pending the appeal, deposit the duty demanded or penalty levied. It may be noted that right to appeal is neither an absolute right nor an ingredient of natural justice. It is a statutory right and can be circumscribed by the conditions of grant. Though the pre-deposit is required to be made pending the appeal, the appellate authority is empowered to dispense with it if it may cause undue hardship to the person concerned. Mere filing of appeal or admitting the appeal does not amount to grant of stay. Pre-deposit is only of a duty (service tax) and penalty. Thus, pre-deposit of interest is not required only tax and penalty are required to be pre-deposited. So where demands are huge, it is advisable to simultaneously seek grant of stay and/or waiver of pre-deposit.

Supreme Court in Dunlop India reported in 1984 (11) TMI 63 - SUPREME Court , opined that the relevant factors in granting the stay of recovery of the duty demanded and penalty levied are as follows :

1. Prima facie case,
2. Balance of convenience,
3. Possibility of irreparable injury,
4. Safeguarding public interest.

Andhra Pradesh High Court in SQL Star International Ltd. v. Cestat 2011 (7) TMI 868 - Andhra Pradesh High Court stipulated the following six principles to be borne in mind while dealing with pre-deposit/ stay applications -

1. Three aspects to be focused while dealing with the applications for dispensing of pre-deposit are:

1. prima facie case,
2. balance of convenience, and
3. irreparable loss;

2. Interim orders ought not to be granted merely because a prima facie case has been shown;
3. The balance of convenience must be clearly in favour of making of an interim order and there should not be the slightest indication of a likelihood of prejudice to the interest of public revenue;
4. While dealing with the applications, twin requirements of consideration i.e., consideration of undue hardship and imposition of conditions to safeguard the interests of Revenue, must be kept in view;
5. When the Tribunal decides to grant full or partial stay it is has to impose such conditions as may be necessary to safeguard the interests of the Revenue. This is an imperative requirement; and
6. An Appellate Tribunal, being a creature of the statute, cannot ignore the statutory guidance while exercising general powers of expressly conferred incidental powers.

In SKOL Breweries Ltd. v. CCE & C 2012 (11) TMI 527 - CESTAT MUMBAI , it was held that while deciding a stay application, it is to be borne in mind -

1. Whether assessee is having any prima facie case
2. Whether balance of convenience lies in their favour or not, and
3. Whether irreparable loss of revenue will be caused to either sides.

These three basic principles need to be considered.

In CC & CE, Salem  v. Visaka Industries Ltd. 2014 (2) TMI 357 - MADRAS HIGH COURT, on appeal and pre-deposit, high court observed that Section 35F of the Central Excise Act, 1944, mandates that the person desirous of appealing against the decision of a lower authority shall deposit with the adjudicating authority the duty demanded or the penalty levied. The proviso to Section 35F gives discretion to the Appellate Authority to waive the deposit in case it is demonstrated that it would cause undue hardship to such person.

The appeal is a creature of statute. The statutory right could be invoked only in case the condition precedent for invoking the appeal remedy is satisfied. The payment of duty is a pre-condition for entertaining the statutory appeal. In case, the Appellate Authority is of the view that such pre-deposit would cause undue hardship to the appellant, it is open to the said authority to dispense with the pre-deposit, of course, with conditions, as it would deem fit and proper to impose, so as to safeguard the interest of the Revenue. The burden is clearly on the appellant to show that in case he is made to pay the duty or penalty, it would cause undue hardship to him.

In case the appellant invokes the proviso to Section 35F to dispense with the requirement regarding pre-deposit, necessarily, the essential conditions should be satisfied. The Appellate Authority is expected to consider the relevant materials for the purpose of dispensation of pre-deposit. The Tribunal must consider the prima facie case, balance of convenience and undue hardship. Undue hardship cannot be decided without making an attempt to consider the prima facie case. The Tribunal is expected to safeguard the interest of the Revenue also.

While considering the applicability of the proviso to Section 35F of the Act in a given case, necessarily, the Tribunal should consider the interest of the Revenue also. In case the available materials are sufficient to arrive at a finding that the assessee has no prima facie case and the pre-deposit would cause undue hardship, necessarily, pre-deposit should be insisted. There is an element of discretion available to the Appellate Tribunal in such matters. The discretion should be exercised in accordance with the settled legal principles. The materials available on record should suggest a prima facie case in favour of the appellant besides undue hardship. When a finding is recorded with respect to prima facie case and undue hardship by CESTAT, in exercise of the power conferred under the proviso to Section 35F or the Act, such finding should be given due weight unless there are materials to show that the finding was perverse and no reasonable person would have arrived to such a finding on the basis of available materials. Each case has to be decided on its own peculiar facts.

The proviso to Section 35F makes it mandatory that the Appellate Tribunal should impose necessary conditions to safeguard the interest of Revenue in case the authority is of the view that pre-deposit would cause undue hardship to the appellant.

In a welfare state, the Government have to spend money on various welfare schemes. The Government requires money to undertake such activities. The Government cannot run on Bank Guarantees. Therefore, production of Bank Guarantee as against pre-deposit of money would not serve any purpose, in case it is made out that the assessee has not established a prima facie case of undue hardship, necessarily, they should be directed to make pre-deposit. There is no via media in such cases.

The court relied upon the apex court judgment in Benara Values Ltd. v. CCE 2006 (11) TMI 6 - SUPREME COURT OF INDIA, wherein apex court was not happy with the casual disposal of stay application and emphasized that the twin conditions of the provisions of Section 35F must be satisfied i.e., consideration of the aspect of undue hardship and imposition of conditions to safeguard the interests of the revenue. 'Undue hardship' has been used in the provision of Section 35F. The apex court held as follows:

"This is a matter within the special knowledge of the applicant for waiver and has to be established by him. A mere assertion about undue hardship would not be sufficient. It was noted by apex Court in S. Vasudeva v. State of Karnataka that under Indian conditions expression 'undue hardship' is normally related to economic hardship. 'Undue' which means something which is not merited by the conduct of the claimant or is very much disproportionate to it. Undue hardship is caused when the hardship is not warranted by the circumstances.

For a hardship to be 'undue' it must be shown that the particular burden to observe or perform the requirement is out of proportion to the nature of the requirement itself, and the benefit which the applicant would derive from compliance with it.

The word 'undue' adds something more than just hardship. It means an excessive hardship or a hardship greater than the circumstances warrant.

The other aspect relates to imposition of condition to safeguard the interests of the Revenue. This is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to safeguard the interests of the Revenue. Therefore, the Tribunal while dealing with the application has to consider materials to be placed by the assessee relating to undue hardship and also to stipulate conditions as required to safeguard the interests of the Revenue.”

In Metal Weld Electrodes v. Cestat, Chennai 2013 (11) TMI 240 - MADRAS HIGH COURT, the provisions of pre-deposit under section 35F of Central Excise Act, 1944 were analyzed. It was held that the prime intention of provision to safeguard interest of revenue. If appellant pleads some hardship, then it can be dispensed with conditionally. Further, it is not in all cases of appeals that pre-deposit is mandatory. Pre-deposit is not required in respect of appeals where subject goods are under control of the Department.

Court further held that while passing the interim orders, the Tribunal would certainly go into the prima facie case and based on such factual consideration and also by taking note of the hardship pleaded and proved by the appellant as well as by considering the interests of the Revenue, it would pass orders on the waiver application. Therefore, if a party is aggrieved against such order passed by the Tribunal, it is always open to such party to challenge the same by filing an appeal. Whether a substantial question of law would arise in such cases or not would depend upon the facts and circumstances of each case and therefore, there cannot be any general or uniform presumption that no substantial question of law would arise in all pre-deposit orders.

On pre deposit order, it was held as  under –

"Once an order of pre-deposit is passed, it is for the party aggrieved either to comply with the said order within the time stipulated therein or to file an appeal before the High Court under Section 35G or Section 130. Further, as we have already observed earlier that the Tribunal being the final fact finding authority has to render its finding on facts, though prima facie, while considering the application seeking for stay or waiver of pre-deposit. If a conditional order is made on pre-deposit application and when the same has not been complied with, it may result in dismissal of the appeal itself as observed by the Apex Court reported in 1971 (1) TMI 52 - SUPREME COURT OF INDIA (Navin Chandra Chhotelal v. Board of Excise & Customs). Therefore, the parties are not precluded from questioning the order passed in the pre-deposit application either by way of filing an appeal against such an order itself or against the final order made in the appeal by raising the substantial question of law on both occasions, since dismissal of the appeal for not complying with the conditional order in effect, is a final order passed in the appeal."

If pre-deposit order is conditional and not complied with, it may result in dismissal of appeal itself.