[By Dhwanil Tandon]
The author is a student of Gujarat National Law University, Gandhinagar.
Introduction
Section 35F of the Central Excise Act, 1944 mandates that the Tribunal or the Commissioner (Appeals), as applicable, shall not entertain any appeal under the act unless the required pre-deposit is made, terming its absence as a defect. With the introduction of the Goods and Services Tax (GST) on 01.07.2017, incorporating all indirect taxes including Central Excise, transitional provisions were enacted to utilize credits available during the transition from the erstwhile indirect taxes’ regime to GST. Section 41 of the Central Goods and Services Tax Act, 2017, stipulates that every registered person, subject to prescribed conditions and restrictions, is entitled to avail the credit of eligible input tax, as self-assessed in their return, credited to their Electronic Credit Ledger (ECL). The reversal of input tax credit for supplies where the supplier defaulted on tax payments, along with applicable interest, is mandated by the said person in the manner prescribed. Furthermore, GST laws necessitate pre-deposit before filing appeals to appellate authorities. The issue at hand pertains to whether pre-deposit for filing appeals under the erstwhile Central Excise Act, 1944, can be accomplished by reversing the ECL in the GST regime, drawing insights from established case laws.
Statutory Regime of Pre-deposit under Service Tax
Section 35F of the Central Excise Act, 1944, stands as a pivotal provision providing for the procedural requisites preceding the filing of an appeal. Under the ambit of the amended Section 35F, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) is vested with the authority to enforce a mandatory pre-deposit, fixed at either 7.5% or 10% of the duty demand, pertaining to all appeals that were pending as of the seminal date of 06.08.2014.
It is noteworthy that subsequent to the amendment, the CESTAT’s discretion to assess and accommodate instances of financial hardship, thereby tailoring the pre-deposit amount commensurate with the appellant’s circumstances, has been unequivocally rescinded. However, amidst this procedural rigor, a recourse to the judiciary for such hardship remains, notably the Delhi High Court’s jurisdiction conferred under Article 226 of the Constitution.
This judicial authority, while sparingly exercised, retains the prerogative to intercede in matters concerning pre-deposit, albeit with a stringent caveat that such intervention should be relegated to rare and compelling instances, wherein a cogent justification unequivocally substantiates the necessity for such leniency. Thus, amidst the statutory rigidity of Section 35F and its amendments, the judicial echelons stand as custodians of equity and redressal, ensuring that the scales of justice weigh judiciously in matters of fiscal exigency and legal recourse.
Pre-GST Position
The statutory provision encapsulated within Section 35F of the Excise Act does not specify any method for making pre-deposit while filing appeals under the act. According to the circular issued by the CESTAT on 28th August 2014, subsequent to the amendment in the same year, it was stipulated that appeals could be registered under certain conditions. Among these conditions, it was specified that a mandatory pre-deposit could be made from the Central Value Added Tax (CENVAT) account, and supporting evidence must be furnished. In the case of Cadila Health Care Pvt. Ltd. v. Union of India, the Gujarat High Court delivered a significant directive regarding pre-deposits under Section 35F of the Excise Act. The court ruled that pre-deposits made by utilizing CENVAT credit should be duly accepted. It elucidated that the credit available in an assessee’s CENVAT account represents a duty already borne, which can be utilized for specified purposes, subject to the conditions prescribed under the Rules. The High Court underscored the absence of any prohibitive provisions within the Rules, affirming the legitimacy of availing CENVAT credit for the purpose of pre-deposits.
Post-GST Discussion
Under Section 49(4) of the CGST Act 2017, it is stipulated that the ECL is eligible for settling payments related to output tax liabilities governed by the Act or the Integrated Goods and Services Tax Act. This provision underscores that the utilization of the ECL is contingent upon prescribed conditions, restrictions, and timelines. Notably, the term ‘may’ within Section 49(4) suggests that the usage of the ECL is not exclusively confined to the settlement of output tax liabilities.
While the CGST Rules 2017 may offer interpretations that appear to limit the scope of Section 49(4) of the CGST Act 2017, it is imperative to recognize that the CGST Rules, as subordinate legislation, cannot supersede the statutory provisions laid down in the CGST Act. Rule 85(3) emphasizes that the payment of any liability by a registered individual, as per their return, must be carried out by debiting either the electronic credit ledger maintained in accordance with Rule 86 or the electronic cash ledger as per Rule 87. This rule is subject to the provisions outlined in Section 49, Section 49A, and Section 49B. Additionally, Rule 86(2) specifies that the ECL should be debited to the extent necessary for discharging any liability as per the provisions of Section 49, Section 49A, or Section 49B of the CGST Act. Circular No. 172/04/2022-GST issued on 06.07.2022 delineates that the balance available within the ECL can be utilized for settling any payment of output tax arising from proceedings initiated under the provisions of the GST Law.Top of Form
There exists a divergence in judicial opinions regarding the permissibility of utilizing the Electronic Credit Ledger (ECL) as a pre-deposit for filing appeals within the new GST regime. In the case of Jyoti Construction v. Dy. Commissioner of CT & GST, the Orissa High Court rendered a decision deeming appeals defective due to the pre-deposit of 10% of disputed IGST, CGST, and CGST payments being made through the ECL, rather than the electronic cash ledger. The High Court justified its stance by referencing Section 107(6) of the OGST Act, which mandates payments to be debited from the electronic cash ledger in accordance with Section 49(3) read with Rule 85(4) of the OGST Act. Moreover, it argued that ‘output tax’ cannot be equated to the pre-deposit required under Section 107(6) of the OGST Act. The court also highlighted the proviso to Section 41(2) of the OGST Act, which restricts the usage of the ECL by referring to “self-assessed output tax as per the return.” Notably, a distinguishing factor arose with the enactment of the Finance Act, 2022 (effective from 1st October 2022), wherein Section 41 of the CGST Act was amended, removing the phrase “self-assessed output tax as per the return” from the provision.
The Bombay High Court, in the case of Oasis Realty v. Union of India, sanctioned the payment of the pre-deposit amount for filing appeals under the Maharashtra Goods and Services Tax Act 2017 through the ECL. The court’s rationale rested on the premise that any payment pertaining to output tax, whether self-assessed in the return or payable due to instituted proceedings under the Act, could be facilitated by utilizing funds available in the ECL. Notably, Oasis Realty rendered its judgment within the framework of the MGST Act 2017, wherein Section 107(6)(b) mandates the payment of 10% of disputed tax as a prerequisite for filing an appeal. The High Court emphasized that this tax could encompass integrated tax, central tax, UT tax, or state tax, and underscored that the amount of Input Tax Credit (ITC) available in the ECL could be leveraged for tax payment purposes. Interestingly, the Bombay High Court did not draw upon the precedents set by the Jyoti Construction case. This change in the stance was clarified by the circular of the Central Board of Indirect Taxes and Customs dated 06.07.2022. The clarification specified that the ECL could be used for settling payments linked to output tax, except for payments governed by the reverse charge mechanism or liabilities beyond output tax as per the GST laws.
The Allahabad High Court, in the case of Tulsi Ram and Company v. Commissioner, and the CESTAT, Bangalore, in Dell International Services India (P) Ltd. v. CCT, have both delivered judgments in the context of GST appeals that align with previous decisions. The Allahabad High Court ruled similarly, while the CESTAT in Bangalore permitted appellants to fulfil mandatory pre-deposits using CGST Credit. Additionally, the CESTAT allowed appellants to reverse 7.5% of the duty demanded through CGST Credit.
Conclusion
At present, the clarity regarding the permissibility of utilizing the ECL for pre-deposit remains elusive within the legal landscape. The absence of a definitive stance has precipitated conflicting judgments, adding layers of complexity to this matter. However, drawing parallels from the precedent set in the utilization of CENVAT credit for pre-deposit obligations under the erstwhile Service Tax regime, a cogent argument emerges advocating for analogous treatment of the ECL. Given that the ECL serves as the functional successor to CENVAT credit within the ambit of the GST regime, a logical extension posits that similar principles should govern its applicability for pre-deposit requirements. Consequently, a myriad of cases pertaining to this unresolved issue populate various CESTATs across the nation, emblematic of the prevailing ambiguity surrounding this nuanced facet of GST jurisprudence.