PRE-DEPOSIT OF DEMAND BEFORE APPEAL IN SERVICE TAX

[Dr. Sanjiv Agarwal]

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.

According to section 35F 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.

Finance Act, 2014 had amended provision relating to pre-deposit w.e.f. 06.08.2014. This section had been substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the duty, in case where duty or duty and penalty are in disputes or penalty, where such penalty is in dispute for filing of appeal before the Commissioner (Appeal) or the Tribunal at the first stage, and 10% of the duty, in case where duty or duty and penalty are in disputes or penalty, where such penalty is in dispute for filing second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of ₹ 10 Crore.

Section 35F states that the appeal should not be entertained unless the following amount is pre-deposited –

Order passed by	Appellate Authority	% of duty and/or penalty required as pre-deposit
Any officer of a rank lower than Commissioner of Central Excise	Commissioner (Appeals)	7.5 (maximum of ₹ 10 Crores)
Commissioner of Central Excise	CESTAT	7.5 (maximum of ₹ 10 Crores)
Commissioner (Appeals)	CESTAT	10 (additional) (maximum of ₹ 10 Crores)

The issue of constitutional validity of pre-deposit and deposit of pre-deposit before both the appellate authorities was before the courts and Tribunal recently.  Jharkhand high court in Satyanand Jha v. Union of India [ 2016 (7) TMI 1307 - JHARKHAND HIGH COURT ]held that earlier Section 35F of Central Excise Act, 1944 required that duty demanded and penalty has to be deposited in full before filing appeal with exception that appellate authority had discretion to waive off pre-deposit partially or fully taking into consideration prima facie merits, financial hardship and keeping Revenue's interest. Under new provision assessee has been given more benefit inasmuch as now full deposit of duty and penalty is not required to be made. Now from beginning 92.5% or 90% of tax is not required to be deposited and appeal can be filed just by paying 7.5% or 10% of duty or penalty. Thus, in all cases assessees get this benefit and that too, the maximum amount to be deposited has a ca of ₹ 10 crores. Thus, the earlier provision of Section 35F of the Act, 1944, has been much diluted by the substituted Section 35F which cannot be called arbitrary.

No two classes are created by this substituted Section 35F of the Act, 1944. It is assessees themselves, who are creating these two classes by not wanting to deposit the tax at the rate of 7.5% or 10% of the duty demanded or penalty levied, as the case may be, for filing appeal. Otherwise the statute permits everyone to prefer an appeal.

The right of appeal has not been taken away per se. It is settled law that legislature while granting the right of appeal, can always impose conditions for exercise of such right. In absence of any special reason, there is no legal or constitutional impediment to the imposition of such conditions. Under new provisions ex facie 92.5% or 90% of dues is already waived by the Statute itself. Accordingly, condition of 7.5% or 10% payment as pre-deposit cannot be called illegal. There is no reason to quash Section 35F of the Act, 1944. On the contrary, this percentage of amount to be deposited could have been enhanced by the legislature. Supreme Court dismissed the special leave petition against the said order [as reported in Satya Nand Jha Versus Union of India and Others - 2017 (6) TMI 166 - SUPREME COURT ].

Further, larger bench of Cestat in its order dated 20 April, 2017 as reported in (2017) 349 ELT 477 has confirmed that the appellant is required to make a separate pre-deposit of 10 percent of amount of duty against duty confirmed or penalty imposed for preferring a second appeal to tribunal against an order of Commissioner (Appeals). As regards the second appeal preferred against the first appellate authority's order, the quantum of pre-deposit has been set at 10% instead of 7.5% of the duty confirmed or penalty imposed, In its view both the appellate proceedings i.e. before the first appellate authority and before the Tribunal, it is to be treated as an independent provisions then deposits as mandated needs to be made. In short, in order to prefer an appeal before the Tribunal, an assessee/ appellant needs to deposit 10% of the amount of duty confirmed or the penalty imposed as the case may be irrespective of the amounts equivalent to 7.5% deposited by them for preferring an appeal to the first appellate authority.

The appellant is required to deposit separately 10% of the amount of the duty  confirmed/penalty imposed, for preferring of appeal before the Tribunal against the order of Commissioner (Appeals).