Mandatory pre-deposit introduced in service tax - Dr Sanjiv Agarwal. - Article published in Business Advisor, dated July 25, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Mandatory pre-deposit introduced 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.
Pre-deposit as a condition to appeal
While right to appeal is a statutory right, it does not mean that it is an
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 the Finance Act, 2013 (w.e.f. 10.05.2013)
The 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
While right to appeal is a statutory right, it does not mean
that it is an absolute right and no conditions could be
attached to it.
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2. 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 delay in 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 the 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 a 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 Rs 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
Clause 98 of the Finance Bill, 2014, seeks to substitute
section 35F of the Central Excise Act to provide for deposit of
a certain percentage of duty demanded or penalty imposed or
both before filing an appeal.
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3. introduction of provisions for interest on delayed payment of duty came into
effect from 1995-96 in view of sections 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) 295 E.L.T. 498 (A.P.), 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 – the assessee
as well as the 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 at least 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.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur)
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