The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has restored a service tax appeal after finding that the assessee had deposited the entire 10% of the disputed amount required at the two appellate stages.
The bench of Dr Rachna Gupta (Judicial Member) has observed that the payments made through two challans were sufficient compliance with Section 35F of the Central Excise Act, 1944. It observed that denying the assessee an opportunity to contest the case on merits despite the deposit would violate the principles of natural justice.
The appellant/assessee was registered with the Service Tax Department for providing taxable services, including restaurant services. During scrutiny of its financial records for the period from 2015-16 to 2017-18, the department reportedly noticed several discrepancies.
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These included the alleged availment of inadmissible CENVAT credit, failure to make the required reversal under Rule 6(3) of the CENVAT Credit Rules in respect of exempted services, non-payment of service tax on miscellaneous income and the alleged wrongful availment of abatement on service charges collected through invoices.
The scrutiny also covered verification of transitional credit declared through TRAN-1 and the alleged non-payment of late fees for delayed filing of ST-3 returns.
The company accepted the discrepancies relating to TRAN-1 verification and late filing fees and deposited the applicable amount. It, however, contested the remaining allegations.
The department subsequently issued a demand-cum-show-cause notice dated April 22, 2021. The notice proposed the reversal of CENVAT credit amounting to Rs 14.01 lakh.
It also proposed the appropriation of Rs 30,266 already deposited by the company against the proposed reversal. A further service tax demand of Rs 3.77 lakh was proposed, together with interest under Section 75 of the Finance Act, 1994.
The notice also sought the imposition of a penalty under Section 78(1) of the Finance Act, read with Rule 15(3) of the CENVAT Credit Rules, 2004.
The adjudicating authority substantially confirmed the proposals through an order dated January 18, 2023. However, it dropped a demand of Rs 3.42 lakh concerning the denial of abatement on service charges collected through invoices.
The company challenged the adjudication order before the Commissioner (Appeals). The appeal was dismissed as non-maintainable because the company had not deposited the mandatory amount prescribed under Section 35F at the time of filing the appeal.
Before CESTAT, the departmental representative maintained that compliance with the pre-deposit requirement was mandatory. Since the prescribed deposit had admittedly not been made when the first appeal was filed, the department argued that there was no infirmity in the Commissioner (Appeals)’ decision.
The company did not appear before the Tribunal despite being given several opportunities, including a final opportunity. CESTAT therefore heard the departmental representative and examined the records.
The Tribunal examined Section 35F of the Central Excise Act, which applies to service tax proceedings through Section 83 of the Finance Act, 1994.
Under Section 35F, an assessee must deposit 7.5% of the disputed duty or penalty before filing an appeal before the Commissioner (Appeals). An additional 2.5% is required when a further appeal is filed before CESTAT, taking the cumulative deposit to 10% of the disputed amount.
The provision specifically includes erroneous CENVAT credit and amounts payable under Rule 6 of the CENVAT Credit Rules within the expression “duty demanded”.
CESTAT noted that the company had not deposited the initial 7.5% before the Commissioner (Appeals). However, the record established that it subsequently deposited the entire cumulative amount of 10%.
The company deposited Rs 2,45,218 and Rs 66,135 through two challans dated February 22, 2024. The total amount deposited was Rs 3,11,353.
The Tribunal found that the two payments covering the entire 10% of the disputed amount constituted sufficient compliance with Section 35F.
It held that once the prescribed cumulative amount had been deposited, the company should be allowed to present its case before the Commissioner (Appeals). Refusing to consider the appeal on merits in such circumstances would deny the company a proper opportunity of hearing and violate natural justice.
“Denying any opportunity to the appellant of representation/proper hearing vis-à-vis merits of the case will amount to the violation of principles of natural justice,” the Tribunal observed.
CESTAT accordingly granted the company an opportunity to represent its case before the Commissioner (Appeals), who must now record findings on the merits of the disputed service tax and CENVAT credit demands.
Allowing the appeal by way of remand, the Tribunal directed the Commissioner (Appeals) to conduct de novo adjudication on the merits.
The appellate authority was instructed to provide the company a reasonable opportunity of representation and pass a fresh order within three months from the date it receives a copy of the CESTAT order.
The Tribunal did not express any opinion on the merits of the underlying tax demands. Its decision was confined to recognising the subsequent deposit as sufficient compliance with the statutory pre-deposit requirement and restoring the company’s opportunity to contest the demands.
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