Volume VIII Part 2 July 25, 2014 16 Business Advisor

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.

Volume VIII Part 2 July 25, 2014 17 Business Advisor

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.

Volume VIII Part 2 July 25, 2014 18 Business Advisor

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)