Bharat Bhushan, Associate

Sumit Wadhva, Managing Partner

Meaning of “Pre-Deposit Mandate”:

It is a statutory provision, introduced via Finance Act No. 2 of 2014 enacted with effect from August 06, 2014, acting as a prerequisite to avail the right to appeal by the aggrieved appellant, mandating to deposit a certain percentage, ranging from 7.5% to 10%, of duty, in case where duty or duty and penalty are in dispute, and of penalty, in case where penalty is in dispute, provided under erstwhile applicable respective indirect taxation statutes of Central Excise, and Service Tax. 

(A)      Limit of Pre-Deposit Mandate: 

The position of the provisions of pre-deposit mandate under respective indirect taxation enactments of pre-GST and GST regime are hereinbelow succinctly discussed. To digress, it is worthwhile to mention hereby that the provisions with respect to pre-deposit mandate as are applicable to Central Excise were mutatis mutandis extended to Service Tax Law as well. 

Pre-GST Regime:

Prior to Finance Act No. 2 of 2014, the mandate of pre-deposit mechanism was provided u/s 35F of the Central Excise Act, 1944 and u/s 129E of the Customs Act, 1962, however, such mandate was subject to dilution by virtue of a proviso thereto, providing thereby that considering the hardship, if any, to the concerned appellant with simultaneous safeguarding of the Revenue’s interests, such mandate, at the discretion of the concerned appellate authority, could be dispensed with, on an application being made in this behalf to the concerned appellate authority.

Later on, with the introduction of Finance Act No. 2 of 2014 incorporating the amendments to the respective sections of Excise, Customs and Service Law with a view to eliminate such dilution of pre-deposit mandate, the following percentage limits, subject to a maximum cap of Rs. 10 crores, of mandatory pre-deposit were statutorily introduced:

(I)        in case of appeal before Commissioner (Appeals): 7.5% of the following: 

(a)        duty, where duty or duty and penalty are in dispute;

(b)       penalty, where penalty is in dispute.

(II)      in case of appeal before CESTAT against the order of Commissioner (Appeals): 10% of the following: 

(a)        duty, where duty or duty and penalty are in dispute;

(b)       penalty, where penalty is in dispute.

(III)    in case of appeal before CESTAT against the order passed by Commissioner as original adjudicating authority: 7.5% of the following: 

(a)        duty, where duty or duty and penalty are in dispute;

(b)       penalty, where penalty is in dispute.

Also, a saving clause by way of proviso to the amended sections was also provided therein to make the amendment applicable prospectively. 

Post-GST Regime:

With a minor tweak and increase in limit of maximum cap, the GST law also obligates the appellant concerned, prior to filing an appeal before the first appellate authority u/s 107(6) and before the tribunal u/s 112(8) of the CGST ACT, 2017, to fulfill the prescribed pre-deposit mandates specified under respective provisions thereof, which are hereinbelow provided: 

(I)        in case of appeal before the prescribed first appellate authority:

(a)        100% of such part of the amount of tax, interest, fee, fine and penalty arising from impugned order and admitted by the appellant; and 

(b)       10% of the remaining amount of tax in dispute, subject to a maximum of Rs. 25 crores.

(II)      in case of tribunal:

(a)        100% of such part of the amount of tax, interest, fee, fine and penalty arising from impugned order and admitted by the appellant; and

(b)       20% of the remaining amount of tax in dispute, subject to a maximum of Rs. 50 crores.

(B)      Mode of Pre-Deposit Payment:

Since the regime of erstwhile indirect taxation laws, the manner of pre-deposit has been remained one of the most contentious grey areas for the reason being that no specific statuary provision as such, under the concerned indirect taxation enactments, was incorporated therein with respect to it. Moreover, with the introduction of GST regime as well, the situation seems to have not altered and rectified.  

Pre-GST Regime:

The mechanism to fulfill the mandate of pre-deposit as a prerequisite to file an appeal under erstwhile respective indirect taxation statutes has been a hot potato since the original MODVAT credit scheme, with the predominant matter-in-issue being: whether the pre-deposit can be made through RG-23 Part-II (the credit ledger) or the same is to be made from the PLA (the cash ledger). However, by way of various Tribunal orders, for instance Haryana State Electricity Board vs CCE, New Delhi, and Jhalani Tools Ltd. vs CCE, New Delhi, the dispute was put to rest by holding that MODVAT or, as the case may be, CENVAT Credit can also be used to comply with the provision of pre-deposit mandate as provided under Section 35F of the erstwhile applicable Excise Law. Moreover, the Gujrat High Court in a case of Cadila Healthcare Pvt. Ltd., has categorically held that pre-deposit made by availing CENVAT credit shall be regarded as due compliance in accordance with Section 35F of the erstwhile applicable Central Excise Act.

Post-GST Regime:

Since the statutory vacuum in the erstwhile indirect tax statutes in respect of manner of pre-deposit mandate has not been put to quietus, the revamped regime of indirect taxes as GST, carried with it, as a legacy, this contentious issue, and so got this catch-22 got an opportunity to raise its head and kick in again. 

Numerous cases are being filed in different high courts so as to acquire an understanding and position of certainty with respect to the way in which the pre-deposit mandate is to be complied with under the new GST regime. To the surprise of industry, the Hon’ble Orissa High Court in the case of M/s Jyoti Construction Vs. Deputy Commissioner of CT & GSTheld that the amount in the credit ledger cannot be used to pay the 10% required to be paid under Sub-section (6) of Section 107 of the GST Act. However, in a recent judgement of Oasis Realty vs Union of India, the Hon’ble Bombay High Court has held that the electronic credit ledger can be debited to fulfil the provision of pre-deposit mandate, and the same has been supported by the Department’s Circular F. No.CBIC-20001/2/2022-GST dated July 06, 2022, to which allusion has also been made in the judgement to negate the ratio laid down by the Hon’ble Orissa High Court in the case mentioned hereinabove. The circular specified that any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the provisions of GST Laws, can be made by utilization of the amount available in the electronic credit ledger of a registered person. 

(C)      Modus Operandi of Pre-Deposit:

As mentioned hereinbefore, availment of cash and credit ledger can be put to use to comply with the provision of pre-deposit mandate, but, having regard to the convoluted nature of issue, the modus operandi to make such payment has been an associated issue. Given the modus operandi applicable currently for the compliance of pre-deposit mandate for the appeals arising under erstwhile respective indirect taxation enactments, a discrimination, though inadvertently unintended, seems to fledge vis-a-vis appeals arising under currently applicable revamped indirect taxation statute of GST.

Pre-GST Regime:

To demonstrate the compliance with the statutorily stipulated provision of pre-deposit mandate under erstwhile respective indirect tax laws, a self-attested copy of the document showing satisfactory proof was required to be filed. Column 7, Column 6 and Column 6 of EA1, CA1 and ST4 respectively sought details of the duty/penalty deposited, and the same were prescribed to be used for the purpose of evincing the amount of pre-deposit which was used to get verified by the appellate authority prior to registering the appeal. 

Similarly, in case of appeal filed before the CESTAT, Colum 14(i) of the respective appeal forms (Form EA3 for Excise and Form CA3 for Customs) sought information with respect to payment of duty, fine, fee, penalty, interest along with the payment of proof, and the same was prescribed to be used for the purpose of indicating the amount of pre-deposit made, which was used to get verified by the concerned appellate authority.

Post-GST Regime:

In relation to appeal mechanism provided u/s 107 of the CGST Act, 2017, embodying the pre-deposit mandate as well, Rule 108 (1) of the CGST Rules, 2017 prescribes a Form GST APL-01 for filing an appeal with an option of admitted amount and pre-deposit mandate payment through electronic cash or credit ledger. However, having confronted with the issue of mechanism of modus operandi to make pre-deposit payments in the appeals arising out of and is being filed under erstwhile excise, customs and service laws in the case of Sodexo India Services Pvt. Ltd. vs Union of India, the directions were issued to the department to clarify the matter. 

Accordingly, the department issued an instruction bearing No. CBIC-240137/14/2022 dated October 28, 2022, wherein the department observed that payment of pre-deposit under the erstwhile respective indirect tax laws cannot be made through Form GST DRC-03 on common GST portal, because, the department opined, Form GST DRC-03 is neither a prescribed mode for payment of pre-deposit under GST nor under erstwhile excise, service and customs laws. 

Furthermore, the pre-deposit is stated to be construed neither as a duty nor as arrears under extant GST law, and hence are not covered under the transitional provisions of CGST Act. To prescribe the acceptably valid mode of pre-deposit payment under erstwhile indirect tax laws for appeals arising out of such respective enactments, an allusion was made to a prior Circular No. 1070/3/2019 dated June 24, 2019 wherein the modus operandi prescribed for making e-payment of central excise and service tax arrears was through the creation of a Challan on the integrated CBIC portal.

(D)     Observations and Comments:

• Though the Circular issued by the CBIC should be prospective in nature, however, it would be interesting to see the fate of those appeals (especially those wherein the credit of ITC was utilized for making mandatory pre-deposit), which have been accepted by the Appellate Authority / Appellate Tribunal on the strength of DRC-03 (evidencing statutory pre-deposit);

• In our view, not accepting appeals on the strength of DRC-03 would lead to hardship to those assesses, who have adequate Input tax Credit in their books / account. It would also impact the working capital.