NOVEMBER 17, 2014

By Shailesh Sheth, Advocate

PART-I

Law must be stable, and yet it cannot stand still - Roscoe Pound

THE Union Budget presented on 10th July, 2014 by the 'First-time' Finance Minister, Shri Arun Jaitley contained a significant proposal providing for 'mandatory deposit' for the purpose of entertaining appeals relating to Central Excise, Customs & Service Tax by the Appellate Authorities - undisputedly, a 'First-of-its-kind' proposal in the history of Central Indirect Taxes !

With the enactment of the Finance (No.2) Bill, 2014 ("Bill") on 6th August, 2014, the proposal engrafted in Section 35F of the Central Excise Act, 1944 ("CEA") [made applicable to Service Tax vide Section 83 of the Finance Act, 1994 ("FA")] and Section 129E of the Customs Act, 1962 ("CA") have also come into effect from this date.

Simultaneously, Section 35FF of CEA and Section 129EE of CA [also applicable to Service Tax vide Section 83 of FA] have also been substituted with New Sections so as to provide for refund of deposit alongwith interest at the prescribed rate from the date of deposit till the date of refund. Again, a 'first-ever provision' of its kind in the history of Indirect Taxes!

CBEC ("Board") has issued a Circular No.984/08/2014-CX dated 16th September, 2014 clarifying various doubts/issues arising on the implementation of the new provisions. Interestingly, CESTAT has also issued two Circulars dated 28th August, 2014 and 14th October, 2014 clarifying certain issues regarding registration of appeals and mandatory deposit in the wake of new provisions.

In this Article, an attempt has been made to comprehensively analyse the various aspects of and issues arising from the new statutory dispensation relating to 'mandatory deposit'. It may however, be clarified here that since the amended provisions of Sections 35F and 35FF of CEA and corresponding provisions of Sections 129E and 129EE of CA are identically worded, the discussion that follows is made in the context of Sections 35F and 35FF of CEA only but would equally be relevant for Customs and Service Tax.

Mandatory deposit on "entertaining" or "filing" of the Appeal? - An "entertaining idea" but is it "worth entertaining"?

The opening words of the substituted Section 35F read: "The Tribunal or the Commissioner (Appeals), as the case may be, shall not entertain any appeal ……"

(emphasis provided)

The word 'entertain' used in the Section has created a doubt amongst many stakeholders as to whether the mandatory deposit is required to be made at the time of 'filing of appeal' or at the time when appeal is taken up for 'hearing by the appellate authority'? A strong view has been expressed by many that the mandatory deposit is required to be made only when appeal is taken up for consideration by the appellate authority and not at the time of filing of appeal. Reliance, in this regard, is placed on the judgment of the Supreme Court in the case of Lakshmi Rattan Engineering Works V/s. Asst. Commissioner - AIR 1968 SC 488 wherein it was observed by the Supreme Court :

"To begin with, it must be noticed that the proviso merely requires that the appeal shall not be entertained unless it is accompanied by satisfactory proof of the payment of the amount of tax admitted by the Appellant to be due. A question thus arises what is the meaning of the word 'entertained' in this context? Does it mean that no appeal shall be received or filed or does it mean that no appeal shall be admitted or heard and disposed of unless satisfactory proof is available? The dictionary meaning of the word 'entertain' was brought to our notice by the parties, and both sides agreed that it means either "to deal with or admit to consideration". We are also of the same opinion……"

The Supreme Court also recognized the distinction between the expression "entertain" vis-à-vis "file" or "receive" referring to the specific use of the latter expressions in certain provisions of different statutes.

Relying upon the above judgement, a view is expressed that as 'entertain the appeal' is not the same thing as 'filing the appeal' or 'accepting the appeal' or 'admitting the appeal', mandatory deposit can be made when the appeal is taken up for hearing or consideration by the appellate authority.

Though, the contention, based upon the above judgment of the Supreme Court, may be well-founded, the fall-out of any such stand, if adopted, needs to be carefully understood.

In the first place, by interpreting the words 'entertain the appeal' in this manner, the same are being impliedly put on an equal pedestal as the words 'pending the appeal' used in the erstwhile Section 35F of CEA (or erstwhile Section 129E of CA). These erstwhile provisions required that in respect of any appeal in which the goods are not in custody of the Central Excise/Customs authorities, the duty demanded or the penalty levied under the impugned order shall be deposited with the adjudicating authority pending the appeal. In Prestige Metals (P) Ltd. V/s. CEGAT - 2002 (141) ELT 335 (MP), it was held by the High Court that deposit under Section 35F is not a condition precedent for filing of appeal, but it is certainly a condition precedent for hearing the appeal on merits unless the pre-deposit requirements is dispensed with by the appellate authority.

The erstwhile Sections contained a proviso that empowered the appellate authority to waive the condition of deposit in deserving cases. In Navin Chandra Chhotelalvs. CBEC - 2002-TIOL-323-SC-CUS, when it was contended before the Supreme Court that dismissal of appeal cannot be ordered for failure to make deposit as required under Section 129 of CA (as it then stood), the Apex Court observed:

"18. No doubt Section 129 does not expressly provide for the rejection of the appeal for non-compliance with the requirement regarding the deposit of penalty or duty; but when sub-Section (1) of Section 129 makes it obligatory on an appellant to deposit the duty or penalty pending the appeal and if a party does not comply either with the main sub-Section or with any order that may be passed under the proviso the appellate authority is fully competent to reject the appeal of non-compliance with the provisions of Section 129(1). That is exactly what the first respondent had done in this case. Accepting the contention of Mr. Trivedi will mean that the appeal will have to be kept on file for ever even when the requirement of Section 129(1) has not been complied with. Retention of such an appeal on file will serve no purpose whatsoever because unless Section 129(1) is complied with, the appellate authority cannot proceed to hear an appeal on merits. Therefore, the logical consequence of failure to comply with Section 129(1) is the rejection of appeal on that ground".

In Shoor Industries Vs. Collector - 1999 (105) ELT 249 (Tribunal), the Appellant had filed an appeal in 1990, but moved the waiver/stay application only in 1998, presumably when the appeal was listed or about to be listed for hearing. The Tribunal dismissed the application without going into its merits, observing as under:

"2. Heard both sides with reference to the application. Without going into the merits of the stay application, we find that appeal was filed as early as on 30-11-1990. Neither stay application was filed nor amount in question has been deposited and the party enjoyed this benefit for a period of about 8 years without bringing it into the notice of the Tribunal or of the department. We find it is unfair on part of the party to enjoy this benefit without filing any stay application. On this ground alone, the stay application is liable to be rejected."

Even if one may harbor some reservations about the justifiability of the approach adopted by the Tribunal, the same needs to be viewed in a larger perspective.

It is, however, significant to note that though the erstwhile provisions explicitly provided for making the deposit 'pending the appeal', the application for waiver of condition of deposit and stay against the recovery was invariably being filed alongwith the appeal itself or as soon as possible thereafter and hardly any Appellant used to wait for appeal to come up for hearing. This has been such a routine practice that the word 'deposit' itself acquired the nuance of 'pre-deposit', though the statutory provisions reflected otherwise!

Let us also remember that the ever-increasing number of stay applications and the compulsion on part of the Tribunal to devote substantial time in disposing the same, ultimately leading to the huge pendency of appeals, is the main reason why FM has introduced the provisions for mandatory deposit at appellate stage.

Viewed in the context of the past provisions and practice, the contention based upon the interpretation of the words 'entertain the appeal' now being advanced appears to be bit specious, inappropriate and self-serving in nature!

There is also a serious and far more damaging consequence that may follow if the above line of argument is adopted and making of mandatory deposit is resisted till the time appeal is taken up for consideration by the appellate authority. The Appellant will have probably no protection against the recovery action initiated by the department during the intervening period. After all, it is a settled law that mere filing of an appeal does not operate as stay or suspension of the order appealed against. See, CC Vs. Krishna Sales (P) Ltd. - 2002-TIOL-428-SC-CUS. The provisions relating to filing of waiver/stay applications have been omitted and therefore, the Tribunal cannot be approached for any relief against such recovery. It is extremely debatable -, and I am equally skeptical- whether the inherent powers vested in the Tribunal under Rule 41 of the CESTAT (Procedure) Rules, 1982 can be invoked in such a situation and it is doubtful whether the Tribunal would be inclined to oblige the Appellant by exercising such powers vested in it. After all, the germane cause for the whole dispute is the stage at which mandatory deposit is to be made - whether before or at the time of filing of appeal or before the appeal is taken up for hearing or consideration? Consequently, can the Tribunal be expected to stay the recovery action by exercising its inherent powers under Rule 41 and thereby gifting 'best of both the worlds' to the Appellant?

No doubt, an aggrieved person may always approach the High Court for appropriate relief if he has any other genuine reason for not making the mandatory deposit while filing the appeal.

It however, appears that unfortunately, the contention as aforesaid is already being raised and exemption/waiver of making mandatory deposit while filing appeal is being sought on that count. But, the Hon'ble President of the Appellate Tribunal is apparently not amused! As stated vide CESTAT's Circular dated 14th October, 2014, the contention of the Appellants/Consultants/Counsels apparently has not been found acceptable and the Registry of all Benches has been directed that if no evidence in support of mandatory deposit is produced while filing the appeal, such appeals, after providing three opportunities/reminders, be numbered and listed on Fridays before the Court presided by the Senior Member, for appropriate orders.

Here, the following observations of the Supreme Court in Lakshmi Rattan's case (supra) are worth noting:

"… If one holds that by 'entertainment' is meant the time of admission of appeal, satisfactory proof may be furnished at the time of admission of the appeal. We are of the opinion that by the word "entertain" here is meant the first occasion on which the Court takes up the matter for consideration. It may be at the admission stage or if by the rules of the Tribunal the appeals are automatically admitted, it will be the time of hearing of the appeal. But on the first occasion, when the Court takes up the matter for consideration, satisfactory proof must be presented that the tax was paid within the period of limitation available for the appeal."

Reference, in this regard, is also invited to the judgement in Municipal Corporation of Delhi -AIR 1992 SC 2279 & Uniworth Textiles Ltd. V/s. CCE - 2010-TIOL-708-CESTAT-DEL.

In fine, even though the issue involving the interpretation of the words 'entertain the appeal' and consequential debate may be 'entertaining' enough, the contention may not be 'worth entertaining', particularly when the Appellant would find it difficult to 'entertain' the departmental officers who would be knocking at his doors for recovery!

Time is the best interpreter of ever doubtful law - Dionysius

Applicability of the provision to the demands raised prior to 06.08.2014 - "Past(im)perfect, Future tense !"

Yet another controversy that has arisen relates to the applicability of the provision for mandatory deposit to the demands that have been raised prior to 06th August, 2014 whether confirmed before or after this date. A view is being expressed - and apparently the contention is also being raised at CESTAT level - that the amended provisions are not applicable to the cases where show cause notices are issued and confirmed prior to 06.08.2014. It is even being contended in some quarters that the provisions would not apply even in those cases where show cause notice was issued prior to 06.08.2014 notwithstanding the fact that demand is confirmed after this date.

These arguments are probably based upon the ruling of the Supreme Court in the case of Hoosein Kasam Dada (India) Ltd. Vs. State of M. P. & Others - 2002-TIOL-363-SC-CT. However, a close reading of the judgment would reveal that the principles laid down therein may not be applicable so far as the provisions presently under discussion are concerned.

In fact, a similar dispute had arisen when Chapter VIA containing a series of Sections 35, 35A to 35P and 36 of the CEA in substitution of the-then existing Sections 35, 35A and 36 was inserted in the Act w.e.f. 11.10.1982 vide the Finance (No.2) Act, 1980. With these amendments, the right of appeal was made subject to the condition of prior deposit of the amount of duty or penalty. The issue that arose was whether the amended provisions would apply to the appeals filed before the Tribunal on or after 11.10.1982 where the initiation of original proceedings or the Order appealed against has been passed prior to this date. The matter reached the Larger Bench of the Tribunal in Amin Chand Payarelal Vs. CCE - 2002-TIOL-301-CESTAT-DEL-LB and vide a majority order (4:1) it was held that the provisions of Section 35F making the right of appeal subject to the condition of prior deposit of the amount of duty or penalty would invariably apply to all appeals filed before the Tribunal on or after 11.10.1982 irrespective of whether the original proceedings were initiated or the order appealed against was passed prior to this date. The majority order took due note of the judgment of the Supreme Court in Hoosein Kasam Dada's case (supra), amongst other judgments of the Supreme Court, and distinguished the same.

It is also pertinent to note that the Legislature has been careful in not giving any retrospective effect to the amended provisions. This is evident from the second proviso to substituted Section 35F that reads as under:

"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".

Here, one may take note of the Board's Circular dated 16.09.2014 that clarifies as under:

"1.2 The amended provisions apply to appeals filed after 6th August, 2014. Sections 35F of the Central Excise Act, 1944 and Section 129E of the Customs Act, 1962 contain specific saving clause to state that all pending appeals/stay applications filed till the enactment of the Finance Bill shall be governed by the erstwhile provisions."

CESTAT's Circular dated 14.10.2014 also disapproves the contention that the amended provisions are not applicable to the cases where show cause notice was issued and demand confirmed earlier to 06.08.2014.

Last, but not the least, even if one is inclined to take this aggressive and somewhat adventurous stand, it may only lead to further complications. As discussed above, the provisions for filing waiver/stay applications no longer exist in the statute. Consequently, the Appellants will have no remedy against the recovery action if it is contended that provisions for mandatory deposit do not apply to those cases where show cause notice is issued prior to 06.08.2014, whether demand is confirmed before or after this date.

It is, therefore, felt that the pros and cons of the stand to be taken on both the above issues need to be weighed carefully and a pragmatic, practical and reasonable approach ought to be adopted. Otherwise, there is every possibility that any aggressive stand in the matter may lead to chaos, conflicts and complications resulting into the derailment of the process set in motion by the FM for relieving the tax-payers of the burden of obtaining the stay and for the expeditious disposal of the appeals!

Law is an alliance of those who have foresight and insight against shortsighted - Rudolf von Jhering, German Jurist

(The author is Sr. Advisor (Indirect Tax), BDO India LLP.)

To be continued…

PART-II: Mandatory Deposit - Love it or hate it, but learn to live with it!