The Delhi High Court has set aside a demand of ₹76,72,000 raised against a taxpayer after finding that the adjudicating authority had proceeded on a legal and factual premise that had already ceased to exist.
The Bench of Justice Anil Khetarpal and Justice Shail Jain has observed that the authority could not rely upon an earlier Commissioner (Appeals) order after that order had subsequently been set aside by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).
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The principal issue before the Court was whether the demand confirmed pursuant to a Demand-cum-Show Cause Notice dated 10 December 2019 could survive when the very appellate order relied upon by the Department had subsequently been set aside by the CESTAT.
The petitioner was a partnership firm engaged in the manufacture of engineering products, particularly in the welding sector. It was registered as a 100% Export Oriented Unit (EOU) and also as a private bonded warehouse under Sections 58 and 65 of the Customs Act, 1962.
During 2006–2009, the petitioner purchased goods from its sister concern, another 100% EOU. After paying the applicable duty, it availed CENVAT credit aggregating to ₹35,05,894 on the basis of the duty actually paid.
The Department subsequently alleged that the credit had been wrongly availed. The disputed credit comprised ₹33,70,340 and ₹1,35,554. Although the credit was initially disallowed by the adjudicating authority, the Commissioner (Appeals) allowed the taxpayer’s appeals. The Department carried the matter to the CESTAT, which dismissed the Department’s appeal in 2016.
The Delhi High Court subsequently dismissed the Department’s challenge on 13 December 2017. The Court took note of the admitted fact that the petitioner had actually paid excise duty amounting to ₹35,05,894. The Court also held that the exemption provision relied upon by the Department was subject to conditions and prescribed procedures and was therefore not applicable in the facts of the case. The decision was subsequently accepted by the competent reviewing authority and attained finality.
The controversy giving rise to the present writ petition related to another set of transactions.
Between April and December 2007, the petitioner exported goods through 36 consignments after paying excise duty of ₹76,72,000. Initially, the petitioner filed rebate claims under Rule 18 of the Central Excise Rules, 2002.
Four rebate claims aggregating to ₹7,88,553 were sanctioned. The petitioner was subsequently informed that the rebate had allegedly been wrongly sanctioned because, being a 100% EOU, it was not required to pay duty on the exported goods.
Acting on the Department’s advice, the petitioner deposited the rebate amount of ₹7,88,553 along with interest of ₹1,964. It thereafter withdrew the pending rebate claims and sought to obtain the benefit through refund of CENVAT credit under Rule 5 of the CENVAT Credit Rules, 2004.
The Department, however, rejected the petitioner’s request to take credit of the ₹76.72 lakh duty paid on the exported goods. The petitioner subsequently took the credit and informed the Department of the action.
A Show Cause Notice dated 3 February 2009 was then issued proposing, among other things, disallowance and recovery of the ₹76.72 lakh CENVAT credit, recovery of the rebate amount and imposition of penalty.
The initial adjudication resulted in disallowance of the ₹76.72 lakh credit and imposition of a penalty of ₹1.53 lakh. The petitioner challenged the decision before the CESTAT.
In 2017, the CESTAT remanded the matter, observing that the earlier adjudication had not properly considered the legal position emerging from the earlier proceedings concerning admissibility of CENVAT credit.
Following the remand, the Commissioner, Central Excise, Delhi-II passed an Order-in-Original dated 21 March 2017 dropping the proceedings. The Commissioner recorded, among other things, that the admissibility of the credit initially taken by the petitioner was not in dispute and that the circumstances surrounding the transactions had to be considered in their entirety.
The Commissioner further observed that once the Department had taken the position that the petitioner had erroneously paid duty on the exported goods, the appropriate course was to refund the duty so paid.
This order was accepted by the competent reviewing authority and was not challenged thereafter.
Following the above proceedings, the petitioner filed a refund claim for ₹76,72,000.
The Assistant Commissioner, CGST, Janakpuri sanctioned the refund through Refund Order dated 6 May 2019. While sanctioning the refund, the authority considered the interconnected nature of the earlier proceedings and found that the refund claim was within limitation. The petitioner had also furnished documents evidencing export of the goods.
The Department subsequently reviewed the refund order and directed filing of an appeal. Among the grounds raised by the Department were limitation, the alleged requirement of transitioning the credit through TRAN-1 and the Department’s interpretation of the earlier adjudication order.
While the Department’s appeal against the refund sanction was pending, the Joint Commissioner issued a Demand-cum-Show Cause Notice dated 10 December 2019, proceeding on the premise that the ₹76.72 lakh refund had been erroneously sanctioned and should therefore be demanded and recovered along with applicable interest.
The Department’s appeal against the refund order was allowed by the Commissioner (Appeals) on 16 December 2019.
The Commissioner (Appeals) took the view that the petitioner ought to have transitioned the credit through TRAN-1 and that a cash refund could not be sustained.
The petitioner challenged that decision before the CESTAT in Excise Appeal No. 51000 of 2020.
The CESTAT subsequently delivered a crucial order on 1 August 2024, allowing the petitioner’s appeal and setting aside the Commissioner (Appeals)’s order dated 16 December 2019.
The CESTAT did not merely set aside the Commissioner (Appeals)’s order on a technical basis. It examined the substantive entitlement to the refund.
In its Final Order No. 56215/2024 dated 1 August 2024, the CESTAT held that the petitioner was entitled to a refund of ₹76,72,000 of CENVAT credit under Rule 5 of the CENVAT Credit Rules, 2004.
The Tribunal further held that the substantive benefit could not be denied merely because the petitioner had quoted the wrong rule while filing the refund claim and the Assistant Commissioner had also referred to the wrong rule while sanctioning the refund.
The CESTAT also specifically examined the issue of limitation and held that the refund claim was not barred by limitation. It considered the fact that the Department itself had pursued the earlier proceedings and that the petitioner had awaited the outcome of the Delhi High Court proceedings before filing the refund claim.
A significant factor considered by the High Court was that the petitioner had specifically brought the CESTAT’s 1 August 2024 order to the Department’s notice through a communication dated 24 February 2025.
Despite being informed of the appellate decision, the proceedings arising from the 2019 Demand-cum-Show Cause Notice continued.
Ultimately, the Additional Commissioner, CGST, Delhi (West), passed an Order-in-Original dated 24 March 2025, confirming the demand of ₹76,72,000 against the petitioner.
The impugned adjudication order proceeded on several grounds, including that earlier refund claims had allegedly been rejected and not challenged, that the subsequent refund claim was a fresh claim and therefore time-barred, and that the original refund order dated 6 May 2019 had already been set aside by the Commissioner (Appeals) on 16 December 2019.
The petitioner challenged this reasoning before the High Court, arguing that the Department’s approach completely overlooked the subsequent CESTAT order of 1 August 2024.
According to the petitioner, once the Commissioner (Appeals)’s order dated 16 December 2019 had itself been set aside by the CESTAT, it could no longer be treated as an operative adverse determination.
The High Court found considerable merit in the petitioner’s challenge.
The Court noted that there was no need for it to once again examine the merits of the petitioner’s entitlement to refund because that question had already been considered by the CESTAT in its Final Order dated 1 August 2024. Importantly, the Court noted that the CESTAT order had not been shown to have been set aside or stayed in any subsequent proceedings.
The Court then reconstructed the sequence of proceedings.
The refund was sanctioned on 6 May 2019. The Department challenged that order before the Commissioner (Appeals). During the pendency of that appeal, the Demand-cum-Show Cause Notice was issued on 10 December 2019. The Commissioner (Appeals) subsequently allowed the Department’s appeal on 16 December 2019.
However, that order did not represent the final position because the petitioner challenged it before the CESTAT, which ultimately allowed the appeal on 1 August 2024 and set aside the Commissioner (Appeals)’s order.
The High Court held that the effect of the CESTAT’s Final Order dated 1 August 2024 could not be ignored.
The Commissioner (Appeals)’s order dated 16 December 2019 had set aside the refund order dated 6 May 2019. But the Commissioner (Appeals)’s order was itself subsequently set aside by the CESTAT.
Therefore, the Additional Commissioner could not proceed on the assumption that the 16 December 2019 order continued to operate as a valid adverse determination against the petitioner.
The adjudicating authority was required to consider the legal consequences of the subsequent CESTAT adjudication.
The Court separately addressed the limitation issue.
The CESTAT had expressly considered whether the refund claim was time-barred and had answered the issue in favour of the petitioner. The Tribunal had held that the claim was not hit by limitation.
In these circumstances, the High Court held that the Additional Commissioner could not simply treat the refund as a fresh claim and arrive at a conclusion contrary to the CESTAT’s finding.
The High Court therefore held that the finding that the refund application was a fresh application barred by limitation could not be sustained.
The Court made an important observation concerning the duty of statutory adjudicating authorities.
It held that an adjudicating authority exercising statutory powers is necessarily required to take into account the operative orders of appellate authorities having appellate jurisdiction over it. An adjudicating authority cannot disregard a subsequent appellate determination when that determination directly bears upon the very issue being adjudicated.
The Court emphasised that the CESTAT’s order was directly relevant to both the petitioner’s entitlement to refund and the limitation issue. The Commissioner (Appeals)’s order relied upon by the Additional Commissioner had already been set aside.
Consequently, the impugned adjudication order proceeded on a legal and factual premise that was no longer available to the Department as of 24 March 2025.
The Court concluded that the Additional Commissioner had committed a manifest error in confirming the ₹76.72 lakh demand.
The Court held that the proceedings could not be viewed in isolation by referring merely to the 2019 refund order and the Commissioner (Appeals)’s order of 16 December 2019. The latter order had been carried in appeal and was ultimately set aside by the CESTAT.
The Court therefore found that the impugned Order-in-Original failed for the fundamental reason that it did not give effect to the CESTAT’s subsequent Final Order dated 1 August 2024 and instead proceeded on the basis of an appellate order that had already ceased to operate.
The Delhi High Court set aside both the Demand-cum-Show Cause Notice dated 10 December 2019 and the Order-in-Original dated 24 March 2025 confirming the ₹76.72 lakh demand.
The Court accordingly allowed the writ petition.
The Court also granted relief concerning the statutory pre-deposit made by the petitioner.
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