PRE-DEPOSIT MADE MANDATORY IN SERVICE TAX

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PRE-DEPOSIT MADE MANDATORY IN SERVICE TAX

				By: Dr. Sanjiv Agarwal
				August 1, 2014
All Articles by: Dr. Sanjiv Agarwal View Profile

Contents

Pre-deposit of Service Tax

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.

Pre-deposit as a Condition to Appeal

While right to appeal is a statutory right, it does not mean that it is a absolute right and no conditions could be attached to it. If such right to appeal is subject to condition of pre-deposit of duty or service tax or penalty, whether in full or part, the appeal could be considered only upon fulfillment of such conditions.

Amendment made by Finance Act, 2013 (w.e.f. 10.05.2013)

Finance Act, 2013 has amended section 35C (2A) of the Central Excise Act, 1944 to provide for a maximum ceiling of 365 days upto which the Tribunal can grant stay of recoveries. It has been stipulated that after 365 days from the stay order, the stay shall stand vacated even if the disposal of the case is pending for no fault of the assessee. By virtue of stipulation under section 86(7) of the Finance Act, 1994, the provisions of the Central Excise Act, 1994 would be applicable for dispute in Service Tax matters.

It thus stipulates that on an application made by a party and on being satisfied that the delayin disposing of the appeal is not attributable to such party, the Appellate Tribunal shall have the power to extend the period of stay to such further period, as it thinks fit, not exceeding one hundred and eighty-five days, and in case the appeal is not so disposed of within the total period of three hundred and sixty-five days from the date of order referred to in the first proviso, the stay order stands vacated.

Amendment proposed by Finance Bill, 2014

Clause 98 of the Finance Bill, 2014 seeks to substitute section 35F of the Central Excise Act to provide for deposit of certain percentage of duty demanded or penalty imposed or both before filing an appeal. It also seeks to provide that the provisions of this section shall not be applicable to stay applications and appeals before the Appellate Authorities prior to the enactment of the Bill.

Section 35F of the Central Excise Act which already been made applicable to Service Tax is going to be drastically revamped. This section is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both for filing of appeal before the Commissioner(Appeal) or the Tribunal at the first stage, and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of ₹ 10 Crore. All pending appeals/stay application would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals. This new provisions would, mutatis mutandis, apply to Service Tax.

It may be noted that the provision of section 35F was relevant when it was inserted in the Central Excise Act, 1944. When Section 35F came into effect, there was no provision to recover interest from the appellants. The introduction of provisions for interest on delayed payment of duty came into effect from 1995-96 in view of section 11AA and 11AB of the Central Excise Act, 1944. Thus, by delaying appeal in Cestat, one would not gain by unduly with holding the payment of duty since interest is payable from the date when the duty becomes payable. If the appeal is delayed for years together, it is the appellant who will suffer more, rather to the greatest extent without any danger to the Government revenue, since interest will be payable on duty demand up to the time, the appeal is finally decided by the Tribunal against the appellants. Whereas, if the appellant succeeds in CESTAT, they are only entitled for interest after 3 months from final disposal of case in their favour and no interest is allowed for the interim period i.e., from the date of payment against Stay order to 3 months from final disposal of appeal.

In Neotech Rubber Products reported in 2013 (11) TMI 484 - ANDHRA PRADESH HIGH COURT, the Andhra Pradesh High Court observed that "in our opinion, this is nothing short of arm-twisting the petitioner. On one hand, the application for pre-deposit was not taken up for no fault of the petitioner, and on the other hand, the revenue takes steps to recover the amount, if necessary through coercive methods."

It is also a fact that in Tribunal, over 50% of pendency is on account of stay applications.

Impact of New Section 35F

The new provision of section 35F shall be beneficial to both –assessee as well as Government. Moreover, it will eliminate the arbitrariness in the decisions in granting the pre-deposit or otherwise. The issue of alleged corruption shall also be addressed. Since not all the stay applications are rejected against the assessee (more than 60 percent go in appellant's favour), in case of mandatory pre-deposit, Government will get the pre-deposit, through 7.5% or 10% only, which will be much more than what is collected on the basis of orders. In many cases, full waiver is granted. Such pre-deposit bears no interest and as such, Government may not be at loss. So far as appellant is concerned, it would save him from avoidable litigation atleast at stay stage and reduce time for disposal of appeal significantly. Then, 10% amount as pre-deposit is also nominal whereas Tribunals have been granting deposit of upto 100 percent in many cases.

By: Dr. Sanjiv Agarwal - August 1, 2014

Discussions to this article

Respected Sir,

I have learned a lot and will continue to do so from your articles coupled with thorough analysis of judicial case laws on the subject. So, thanks for posting such excellent articles.

Regarding mandatory pre-deposit u/s 35F, I would like to bring to your notice that the provision originally contained at the time of presentation of Union Budget on 10-07-2014 has been substituted at the time of passing of the same by the Lok Sabha on 25-07-2014. The substituted section 35F is as below:

“35F. The Tribunal or the Commissioner (Appeals), as the case may be, shall
not entertain any appeal -

(i) under sub-section (1) of section 35, unless the appellant has deposited seven and a half per cent 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 Commissioner of Central Excise;

(ii) against the decision or order referred to in clause (a) of sub-section (1) of section 35B, unless the appellant has deposited seven and a half per cent 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;

(iii) against the decision or order referred to in clause (b) of sub-section (1) of section 35B, unless the appellant has deposited ten per cent. 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:

Provided that the amount required to be deposited under this section shall not exceed rupees ten crores:

Provided further that the provisions of this section shall not apply to the stay applications and appeals pending before any appellate authority prior to the commencement of the Finance (No.2) Act, 2014."

Secondly, Section 35FF has also been amended providing that where an amount deposited by the appellant under section 35F is required to be refunded conseqent upon the order of the appellate authority, there shall be paid to the appellant interest at such rate, not below five per cent. and not exceeding thirty-six per cent p.a. as notified. The current rate is 6% p.a.

So, good sense has prevailed upon the Central Government and now poor assessee is required to pre-deposit 7.5%/10% on only disputed tax instead of disputed tax + penalty. And if the appellate decision is in his favor, he is entitled to interest on pre-deposit.