The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that central excise officers cannot compel an assessee to deposit money during an investigation against a tax liability that may arise after adjudication. An amount deposited before any assessed liability exists does not become excise duty merely because it is credited under the excise duty accounting head.
The bench of Dr. Rachna Gupta (Officiating President) and P.V. Subba Rao (Technical Member) directed payment of interest on the refunded amount of ₹1,40,93,564, treating the entire sum as a pre-deposit under Section 35F of the Central Excise Act, 1944. Interest was ordered under Section 35FF at the applicable statutory rate, from the date of deposit until the date of refund.
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The Bench however, rejected the company’s claim for interest at 12% per annum, holding that interest must be awarded within the statutory framework.
The company, which manufactures steel products, faced an investigation into suspected clandestine manufacture and removal of finished goods. The department subsequently issued three show cause notices dated May 3, 2012, February 6, 2013, and July 25, 2013.
During the investigation, and even before the first notice was issued, the company deposited ₹1,40,93,564 through four cheques and a debit entry in its CENVAT account between September 21, 2011, and March 9, 2012.
By an adjudication order dated March 24, 2014, the Commissioner confirmed the demand and appropriated the deposited amounts. However, the Tribunal set aside that order on January 22, 2019, allowing the company’s appeal with consequential relief.
The company then sought a refund with interest through a letter dated February 14, 2019, received by the department on February 26, 2019. The Joint Commissioner sanctioned the refund on May 23, 2019, but declined to grant interest. The Commissioner (Appeals) upheld that decision, leading to the present appeal.
The company argued that the money paid during the investigation was a deposit rather than excise duty. Since the underlying demand had been set aside, it claimed interest from the dates on which the payments were made.
The department maintained that the amounts had been appropriated towards duty and that the refund arose after the Tribunal overturned the demand. It therefore sought to apply Sections 11B and 11BB, contending that no interest was payable because the refund had been sanctioned within three months of the refund application.
The central issue was whether the money retained by the department constituted duty or a deposit, and which statutory provision governed interest on its refund.
The Tribunal found that when the company deposited the money in 2011 and 2012, there was neither any assessed duty nor a confirmed demand requiring those payments.
It explained that crediting money under a particular government accounting head does not, by itself, make that amount tax or duty. The payment must also relate to an assessment or modification of assessment, and the liability must be due at the relevant time.
The Bench compared the payments with unutilised balances in the erstwhile Personal Ledger Account under central excise and balances in the electronic cash ledger under GST. Such balances represent money deposited with the government without necessarily constituting tax already due.
Accordingly, the company could have sought repayment when the money was deposited or immediately thereafter, as no assessed liability existed against which it could be appropriated.
The Tribunal clarified that a person seeking repayment of such an amount need not establish that officers obtained it through pressure or duress.
Even where money was paid under a misunderstanding, a refund could be sought if the payment was not against an assessed liability. If the department rejected the claim, the depositor could pursue the available appellate remedies.
On the power to collect money against anticipated demands, the Bench observed, “Central Excise Act does not empower any officer to compel … any amount in anticipation of any liability…”
The Tribunal reasoned that advance collection requires statutory authority. It referred to tax deduction at source and advance tax under income-tax law as examples where the legislature expressly provides for collection against anticipated liabilities.
The Bench noted the practice of accepting payments made during investigation towards the pre-deposit required for filing an appeal.
In this case, no direction had been issued to retain only the mandatory pre-deposit and return the balance. Consequently, the Tribunal held that the entire amount retained during the appellate proceedings had to be treated as a pre-deposit under Section 35F.
It also rejected the Revenue’s argument that the refund necessarily fell under Section 11B. The company had merely submitted a letter seeking consequential refund following the Tribunal’s earlier order. Even an application describing the claim as a refund of duty would not alter the underlying nature of the payment, the Bench held.
While accepting the company’s entitlement to interest, the Tribunal declined to award the requested rate of 12%.
It relied on the Supreme Court’s larger Bench ruling in Commissioner of Income Tax, Gujarat v. Gujarat Fluoro Chemicals, which clarified the scope of Sandvik Asia Ltd. v. Commissioner of Income Tax. The Tribunal held that the company could claim interest according to the applicable statutory provisions and could not obtain a different rate merely on considerations of fairness or compensation.
The Bench distinguished the provisions governing interest on delayed payment of duty, delayed refund of duty, and refund of appellate pre-deposits, emphasising that each operates according to its own statutory conditions.
CESTAT modified the impugned order to treat the entire ₹1,40,93,564 as a deposit under Section 35F.
Since the principal amount had already been refunded, the Tribunal directed the department to pay interest under Section 35FF at the applicable rate from the date of deposit until the date of refund. The operative order did not specify a numerical interest rate.
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