Udyog Tax Journal Dec 2011

UDYOG TAX JOURNAL
December- 2011

Pre-deposit of disputed duties: is it law, much later. The department will urge
the court that the person is liable to
fair, just or necessary?
punishment, the person will contend that
he is not liable to punishment, and the
Different views have been taken by the
court will decide. However, the citizen is
judiciary recently on the issue of bail on
deprived of his liberty and subjected to
the one hand and the issue of pre-deposit
ignominy much prior to determination of
of disputed amounts pending appeal, on
guilt or innocence. He thus stands “pre-
the other hand. Below I contend that the
punished”.
two issues are not very different in
principle. There can be a view that pre-
Bail
deposit is not just or even necessary.
4. In the matter of personal liberty there is
a provision for bail. After many judicial
Jail, pre-deposit: two instances of pre-
flip-flops on the issue, the Supreme Court
punishment
recently held that bail is mandatory in
2. Assessees in central excise and customs
customs and excise cases. (Om Prakash
dread two eventualities in case of a dispute
Choith Nanikram Harchandani v Union of
with the department. One is arrest and a
India, order dated 30 September 2011 in
sojourn in jail. The other is a case alleging
WP Crl 66 of 2011 and others)
an outrageous amount of „evasion‟, and an
order of predeposit of this amount or at
least a large part of it. Either or both can
happen in customs or excise without any
real evasion. In service tax also, while Visit
there is mercifully no prior arrest, pre- www.udyogsoftware.com
deposit of disputed amounts is an issue.
Call us on
Jail 9320124365
3. A central excise officer can arrest, under or
section 13 of the Central Excise Act, any 022-67993535
person who he has reason to believe to be
liable to punishment under the Act.
Similarly, a customs officer can arrest, Update Written
under section 104 of the Customs Act, any By Radha Arun,
person who he has reason to believe is
liable to punishment under specified Consultant To
sections of the Act. It is noteworthy here Udyog Software ( India) Ltd
that the arrest is made on the basis of the
officer‟s perception, and the determination
of whether the person really is liable to
punishment will be made by a court of
Udyog Software (India) Ltd (www.udyogsoftware.com) Phone: 022-67993535
Email: sales@udyogsoftware.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that
such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should
act on such information without appropriate professional advice after a thorough examination of the particular situation.
Page 1

UDYOG TAX JOURNAL
December- 2011

Pre-deposit contain a proviso that pre-deposit may be
5. Pre-deposit of disputed amounts is also waived if the appellant demonstrates that it
a kind of pre-punishment, except that it is would cause him undue hardship. A
made after the stage of fist determination jurisprudence of undue hardship has grown
of liability. The pre-deposit happens at the up, which guides the appellate authority in
appellate stage, as follows. The determining whether he may waive the
adjudication and appellate processes in deposit. Some of these cases are
customs, excise and service tax are almost mentioned below.
identical. If the first adjudication
(„original‟ adjudication) is by the 7. In the case of Benara Valves Limited v
Commissioner, appeal lies to the Customs, CCE, 2006 (204) ELT 513 (SC), the
Excise & Service Tax Appellate Tribunal. Supreme Court endorsed the Tribunal‟s
If the first adjudication is by an officer view that rival contentions need to be
lower in rank than Commissioner, appeal examined in detail in deciding a stay
against this order lies to the jurisdictional application. The factual scenario in each
Commissioner (Appeals), and then from particular case must be considered, and
his order to the Tribunal. At each stage of disposal of stay applications in a general
appeal, the disputed duties / tax and manner by reference to precedent is to be
penalties have to be deposited as a avoided. Revenue interest also had to be
condition of hearing the appeal. If such safeguarded.
„pre-deposit‟ is not made, the appeal is
summarily dismissed. (Section 35F of the
Central Excise Act 1944, applicable to
service tax also, under section 83 of the
Finance Act 1994, and Section 129E of the
Customs Act 1962). The government is not
required to deposit any amount with the
assessee in a converse case, as when the
assessee appeals against denial of refund. iTAX is combo of Indirect

“Undue hardship” Taxation For Gobal &
6. The only way out of the “pre-
punishment” of a pre-deposit is to Local ERP’s vendors or
convince the appellate authority that it
would be an “undue hardship”. The customers who desire a
appellant invariably files a stay application
in which he prays for waiver of pre-deposit
local taxation modules
and stay of the operation of the original
order. This can be done because the legal
for their ERPs
provisions that require pre-deposit also

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UDYOG TAX JOURNAL
December- 2011

8. In the case of United Telecom v C.Cus,
2010 (259) ELT 322 (Kar), the Karnataka service tax by the Revenue is
High Court observed that, in the facts of barred by limitation and in
support of this contention he
that case, insistence on pre-deposit would
relied on the Judgement of a
cause not only undue hardship but also learned Division Bench of
untold misery. Bombay High Court in Bajaj Auto
Limited vs. Union of India. 2003-
9. In many cases the courts also required TIOL-330-HC-MUM-CX Since the
that not only a strong case on merits but question of limitation is a
also financial hardship must be question of fact under
appropriate law, it is always
demonstrated, in order to qualify for
open to the respondent to
waiver of pre-deposit on the grounds of urge the point of limitation
„undue hardship‟. In general, the courts before the Tribunal in its
have achieved a fine balance by appeal.”
safeguarding the interests of revenue while
avoiding blatant injustice to the assessee. 12. On hardship, the court recorded the
contention of the party that deposit of a
huge amount may result in closure of the
Safeguarding revenue: AP High Court educational institutions in question:
10. Recently, however, the AP High Court
passed an order on pre deposit of disputed “Sri. Rajendra Prasad, the
service tax, which has become a precedent learned Counsel for the
for heavy predeposit orders at the first respondent would submit that
appellate level. In an order dated 19 having regard to the huge
quantum of service tax and
October in the case of CCE v Sri
penalty determined, it would be
Chaitanya Educationa Committee, (Central impossible for the assessee to
Excise Appeal no. 110 of 2011), the High deposit 50% of the amount and
Court of Andhra Pradesh, for reasons of the respondent being an
safeguarding revenue, ordered pre deposit institution running educational
of Rs 80 lakhs, which was one third of the institutions would face the
disputed amount, and declined to go into prospectus of closure of those
institutions collaterally impacting
the issues of limitation or merits at the pre
the students' studies as well.
deposit stage.
13 Having recorded the party‟s plea
11. On limitation, the court recorded as
regarding the possible consequence of a
follows (emphasis has been added):
large pre-deposit, the court then records its
decision as follows (emphasis has been
“The learned Counsel for the
respondent would contend that added):
the attachment of property of the
respondent for recovery of

Page 3

UDYOG TAX JOURNAL
December- 2011

The Counsel for the respective respondent shall deposit 1/3 rd of
parties have also presented the amount of service tax and
competing contentions on the penalty, which comes about Rs.
service tax liability of the 80.00 crores as pre-deposit
respondent.We however under Section 35-F of the 1944
decline to record those Act in its appeal preferred under
contentions or the Section 86 of the Service Tax Act.
consequences thereon since On such deposit, the Tribunal
the substantive appeal of the shall entertain the appeal of the
respondent against the order respondent preferred against the
of the Primary Authority is order of the Commissioner of
potentially pending Customs, Excise and Service Tax,
adjudication before the dated 11.6.2009.”
Tribunal. Suffice it to record that
in view of the explanation to
Section 65 (105) (zzc), the
expression „commercial training
or coaching centre' occurring in
this sub-clause and in clauses
(26) (27) and (90a) shall include
any centre or institute, by
whatever name called, where
training or coaching is imparted
for consideration, whether or not
such centre or institute is
registered as a trust or a society
or similar other organisation
under any law for the time being
in force and carrying on its
activity with or without profit
motive and the expression
„commercial training or coaching
centre' shall be construed
accordingly.

Having carefully considered the
competing interests of the
Revenue and the hardship that is
likely to be occasioned to the
respondent/assessee in case the
entire amount of service tax and
penalty as determined by the
Primary Authority by the order
dt. 11.6.2009 is directed to be
deposited, we direct that the
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UDYOG TAX JOURNAL
December- 2011

14. The court thus declined to entertain Is it really revenue?
contentions about merits and limitation,
leaving these to be brought before the
Tribunal in the course of the appeal. In the 16. The governmental perception of
normal course an appeal takes about four revenue locked up in appeals is based on
to five years to come up for hearing in the the fact that the amounts represent what is
Tribunal. The amount pre-deposited thus called „confirmed demands‟. „Confirmed
represents curtailment of funds of a demands‟ are amounts demanded in first
corporate entity for a long period. It is level decisions (“orders-in-original”) on
noteworthy that the court did not respond show cause notices. Three months after the
to the party‟s plea about the consequences order-in-original is passed, these begin to
of a heavy pre-deposit, beyond putting it in be internally reported as arrears due for
the balance against the „competing recovery. The fact is that an overwhelming
interests of the Revenue‟. majority of first level orders blindly
confirm the demands raised in the show
cause notice. The reasons for this lie partly
Rationale for pre-deposit: revenue locked in the pressures created by the internal and
up in litigation external anti-corruption (“vigilance”)
15. The rationale for pre-deposit is that tax agencies that have targets to meet and lack
evaders take undue advantage of delays the knowledge or discernment to judge
caused in the appellate process and that whether an order is correct – their only
they should be foiled in this. The amount criterion is whether it is pro-revenue and
involved in pending appeals is described in therefore acceptable, or pro-assessee and
government circles as revenue locked up therefore suspect. The officer who dares to
in litigation. The perception is that while make a fair order in favour of the assessee
the revenue authorities diligently book runs the risk of investigation and
cases and demand the taxes evaded, the harassment by these agencies. Another
amount does not actually come into the source of pressure to decide a demand
coffers of revenue on account of the notice in favour of revenue is the internal
unduly lenient as well as dilatory culture of the department, in which the
processes involved in appeal. Therefore it officer is expected to bat for the side and
is considered necessary to provide for a not betray it by deciding for the assessee.
pre-deposit, so that at least some part of Given these pressures, it is almost a
the amount that rightfully should come to foregone conclusion that if a show cause
the government is made available to the notice is issued to demand duty / tax, the
government. demand will be confirmed in adjudication.
It thus becomes a „confirmed demand‟,
and upon appeal it comes to be described
as „revenue locked up in litigation‟. This is

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UDYOG TAX JOURNAL
December- 2011

the nature of the amount that is called person of liberty, that procedure must be
upon to be pre-deposited in appeal. right and just and fair.

Constitutional mandate regarding liberty,
taxation Article 265 of the Constitution: taxation
17. Coming back to the comparison of jail 19. Parallel to Article 21 of the
without bail and pre-deposit before Constitution, which requires a procedure
hearing, let us look at the respectively established by law for depriving a person
relevant constitutional provisions. The of liberty, is Article 265, which requires
Constitution of India provides in Article the authority of law for collection of tax.
21 as follows: However, while Article 21 has been
“No person shall be deprived of his life or enriched in content and meaning by the
personal liberty according to procedure interpretations given by courts, Article 265
established by law.” is yet to be endowed with substantial
In Article 265 the Constitution provides as content beyond its mere wording.
follows: Nevertheless we may draw the parallel that
“No tax shall be levied or collected except is suggested by the similar wording of the
by authority of law.” two Articles, and conclude that not only
We shall look below at the development of should there be a law and procedure for
interpretation of these two quite similar collecting tax, it must be right and just and
articles of the Constitution and their fair. Certainly the Supreme Court was
bearing on the issue of pre-deposit of tax suggesting this in Benara Valves (supra),
pending appeals. when it said:

“It is true that on merely
Article 21 of the Constitution: liberty establishing a prima facie case,
18. The jurisprudence of Article 21 is well interim order of protection should
developed. Numerous judgments have not be passed. But if on a cursory
filled content into the concept of glance it appears that the demand
„procedure established by law‟ in that raised has no leg to stand, it would
Article. Beginning with viewing the phrase be undesirable to require the
as referring to a formal provision in law, assessee to pay full or substantive
only requiring a procedure under law, the part of the demand. Petitions for
courts progressed to looking for justice in stay should not be disposed of in a
the content of the law, to uphold the spirit routine matter unmindful of the
of the Constitutional mandate. Thus in the consequences flowing from the
case of Maneka Gandhi v Union of India, order requiring the assessee to
AIR 1978 SCC 597, the Supreme Court ( a deposit full or part of the demand.
seven member bench) held that not only There can be no rule of universal
should there be a procedure for depriving a application in such matters and the

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UDYOG TAX JOURNAL
December- 2011

order has to be passed keeping in taking and keeping of money from the
view the factual scenario involved. assessee in the name of revenue, is not just
Merely because this Court has or fair. Further, it may not even be
indicated the principles that does necessary, as we see below.
not give a license to the
forum/authority to pass an order Is pre-deposit necessary?
which cannot be sustained on the 21. The pre-deposit provisions were in
touchstone of fairness, legality and existence in central excise and customs
public interest. Where denial of much before interest was made statutorily
interim relief may lead to public payable on delayed payment of duties. At
mischief, grave irreparable that time there was no other way of
private injury or shake a securing payment of at least part of the
citizens’ faith in the impartiality disputed amounts. In 1995, interest
of public administration, interim became chargeable. Thereafter, in 1996,
relief can be given.” (paragraph 8 the provisions for mandatory penalty equal
of the order: emphasis added) to duty were also enacted. In 2000, the
option to pay the duty with interest and
Is the pre-deposit provision right and just penalty and close the case became
and fair? available. These provisions have the effect
20. With the test of the constitutional of encouraging the assessee towards
provisions before us, and the observations maximum compliance in taxes, and to pay
of the Supreme Court to guide us, let us up quickly if a demand of duties is made.
return to sections 35F of the Central The assessee would contest the matter only
Excise Act and section 129E of the if he has a good chance in appeal. It is this
Customs Act. These sections provide a post-2000 appellant, who almost by
formal procedure under law for pre-deposit definition has a strong case, who is being
and the waiver thereof. But the procedure made to predeposit the disputed amounts.
under law must also be right and just and
fair. We have seen that governmental Is statutory pre-deposit good for
authorities justify the pre-deposit in terms anybody?
of mitigating the effects of „revenue 22. Paradoxically, the provision for pre-
locked up in litigation‟. At a departmental deposit leads to delay in realization of
conference earlier this year, such „locked revenue. The pre-deposit provision
up‟ „revenue‟ was quantified at over Rs necessarily has a loophole in the form of
62,000 crores. But the so-called revenue is the „undue hardship‟ waiver. This means
in most cases not really revenue. At the that almost every appeal is accompanied
Tribunal the department‟s rate of success by an application for waiver of pre-deposit
is less than 30 per cent. So, it may turn out (commonly called „stay application‟).
that much of what is „locked up in
litigation‟ is the assessees‟ money. This

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UDYOG TAX JOURNAL
December- 2011
Some Commissioners (Appeals) combined subject to imposition of conditions to
the hearing of the stay application with the safeguard the interests of revenue. By far
hearing of the main appeal by waiving the the most common interpretation of this is
pre-deposit and proceeding with the main that part of the pre-deposit is waived,
issue. The Board objected to this and subject to pre-deposit of the remainder to
instructed the appellate authorities that safeguard the interests of revenue.
they were not to hear cases without However, there could be other methods of
deciding on the pre-deposit issue first. The safeguarding the interests of revenue,
Commissioner (Appeals) now had to hear which do not necessitate deposit of cash by
the same matter twice, and his rate of the assessee. Without prejudice to the
disposal halved. More matters remained foregoing contentions that pre-deposit may
„locked up‟ for longer periods. The same not at all be required in most cases, it is
dynamic is seen in the various benches of desirable to explore these alternative
the Tribunal. Hearing of stay applications methods.
takes up about 70 per cent of the time of
the bench, and the final disposal of the 25. Only in the case of a fly-by-night
cases is correspondingly delayed. operator, like a smuggler, on whom the
department has no handle whatsoever, is it
23. In effect, pre deposit provisions are fair to impose a stringent safeguard of pre-
counter productive, because they delay deposit, after scrutiny of the merits of the
disposal of the main appeal. They also case against him.
result in money being locked up. If the
amount confirmed was really due to the
government, the portion that was not
ordered to be pre-deposited is revenue
locked up in litigation, and the litigation
has got prolonged. If the amount
confirmed was not due to the government,
the amount pre-deposited has probably
caused tremendous financial hardship and
may even have caused an industry to shut
down.

Safeguarding the interests of Revenue
24. The pre-deposit clauses (section 35F of
the Central Excise Act and section 129E of
the Customs Act) provide that the
appellate authority may dispense with the
pre-deposit in cases of undue hardship,

Page 8

Udyog Tax Journal Dec 2011

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