The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has allowed an appeal and set aside a demand of ₹54,00,034 along with interest and penalty, holding that the recovery proceedings were initiated beyond the statutory limitation period.
The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh, (Technical Member) found fault with the department for failing to decide the manufacturer’s refund application for several years and observed that the departmental inaction could not be used as a basis to sustain the subsequent recovery proceedings.
The appellant/assessee operates a manufacturing unit in Kutch, Gujarat, manufactures products including glass shells, wires and cables, ceiling fans and switchgear. The unit was availing the benefit of Notification No. 39/2001-CE dated July 31, 2001, as amended.
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The notification provided an exemption from excise duty, to the extent of duty attributable to value addition undertaken by eligible manufacturers in the Kutch region. The scheme also permitted manufacturers, subject to specified conditions, to take credit of the monthly refundable amount in their account current instead of receiving the refund in cash.
The dispute arose from the financial year 2008-09. According to the department’s audit, the appellant had taken suo motu credit of ₹54,00,034 in its account current in April 2010, describing the entry as “Re-credit (08-09 annual).”
The department alleged that the credit had been taken in violation of Notification No. 39/2001-CE. A show cause notice was subsequently issued on February 29, 2016, proposing recovery of the amount along with interest and penalty.
The Joint Commissioner, by order dated January 25, 2018, confirmed recovery of ₹54,00,034 with interest and imposed an equivalent penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 25 of the Central Excise Rules, 2002.
The Commissioner (Appeals) upheld the adjudication order, prompting the company to approach the CESTAT.
The principal legal question before the Tribunal was whether the department could initiate recovery proceedings several years after the appellant had taken the credit.
The Tribunal framed two issues: first, whether the appellant had violated Notification No. 39/2001-CE by taking suo motu credit of the refund amount; and second, whether the department’s action in issuing the recovery notice after six years from the date of credit was legally sustainable.
The appellant argued that the notice dated February 29, 2016 was clearly beyond the permissible limitation period, since the disputed credit had been taken in April 2010.
It relied upon Section 11A of the Central Excise Act, 1944 and contended that the notification itself treated irregular or excess credit as recoverable in the same manner as erroneously refunded duty. Consequently, the statutory limitation governing recovery of erroneously refunded duty would apply.
The department argued that the appellant had no authority to take the disputed credit on its own without waiting for verification and determination by the jurisdictional Assistant Commissioner.
According to the department, the conditions of Notification No. 39/2001-CE had been breached and the violation came to light only during audit. It therefore sought to justify invocation of the extended limitation period.
The department relied upon decisions including Garden Silk Mills Ltd., BDH Industries Ltd. and Krishna Electrical Industries Ltd. to contend that suo motu credit or refund was not permissible without sanction by the competent officer.
However, when the Bench specifically asked about the status of the refund application filed by the appellant in 2009, the Revenue informed the Tribunal that the status could not be ascertained and that efforts were being made to locate the relevant records.
The Tribunal examined the scheme under Notification No. 39/2001-CE in detail.
Under paragraph 2C, an eligible manufacturer opting for the credit mechanism could take the refundable amount in its account current, subject to prescribed conditions. The manufacturer was required to submit the relevant statement to the Assistant Commissioner or Deputy Commissioner, who was then required to determine the amount correctly refundable. If excess credit had been taken, the manufacturer was required to reverse it within five days of receiving the departmental intimation.
The notification separately contained paragraph 2.2 concerning the annual differential refund. Where the total refund during the financial year was less than the total eligible duty paid, the differential amount was to be refunded, subject to the prescribed ceiling.
Significantly, paragraph 2.2(2) required the Assistant Commissioner or Deputy Commissioner to refund the differential amount by May 15 of the subsequent financial year.
The Tribunal accepted the appellant’s limitation argument.
It noted that paragraph 2C(g) of the notification specifically provided that irregular or excess credit, if not reversed within the prescribed period, was recoverable as a recovery of duty of excise erroneously refunded.
Section 11A of the Central Excise Act prescribed a normal limitation period of one year and an extended period of five years in cases involving specified circumstances such as fraud, collusion, wilful misstatement, suppression of facts or contravention with intent to evade duty.
For erroneous refunds, the relevant date was linked to the date of the refund.
In the present case, the appellant had taken the disputed credit in April 2010, whereas the show cause notice was issued only on February 29, 2016.
The Tribunal therefore held that the notice had been issued after the expiry of the maximum five-year limitation period. It consequently concluded that the proceedings arising from the time-barred notice could not be sustained.
The Tribunal went beyond the limitation issue and examined the department’s handling of the appellant’s original refund application.
The appellant had submitted its application for the differential refund for financial year 2008-09 on May 11, 2009. The application was required to be dealt with within the framework prescribed under the notification.
However, years later, the department was unable to provide a categorical answer as to whether the application had been disposed of or was still pending.
The Tribunal recorded that a November 2025 communication stated that the refund claim was not pending with the concerned office. However, after the Bench sought a categorical report, the Commissionerate subsequently reported in February 2026 that it could not state whether the ₹54,00,034 refund claim was pending or had already been disposed of.
The Bench made strong observations regarding this state of affairs.
It held that the departmental report did not reflect well on the functioning of the Division Office. According to the Tribunal, instead of deciding the refund application in a timely manner, the concerned Assistant Commissioner remained inactive for years, and only after the issue was detected in audit did the department initiate recovery proceedings several years later.
The Tribunal directed the jurisdictional Chief Commissioner to enquire into the matter and ascertain the reasons for the prolonged inaction by departmental officers.
It also called for corrective measures, highlighting that the failure to process the taxpayer’s application within the prescribed framework could not simply be overlooked.
The observation is particularly significant because the dispute was not merely about the taxpayer’s entitlement to the amount. The Tribunal also examined whether the department itself had discharged its statutory responsibilities under the exemption notification.
On the merits, the Tribunal found that the appellant had submitted the annual differential duty statement to the jurisdictional authority in May 2009.
The appellant waited for departmental action but received no decision for almost a year. It subsequently took the disputed suo motu credit in April 2010.
The Tribunal held that, in the circumstances, the appellant could not be faulted for its action.
The Bench distinguished the decisions cited by the Revenue, observing that those cases concerned materially different factual situations.
In particular, the Tribunal noted that the present case involved a specific statutory scheme under Notification No. 39/2001-CE that permitted eligible manufacturers to take credit in their account current subject to submission of the requisite statements and departmental determination.
The Tribunal also relied upon its earlier decision in Parle Products Pvt. Ltd., which had been affirmed by the Gujarat High Court.
The principle emerging from that decision was that where an alleged breach by the manufacturer was itself connected with a procedural failure on the part of the Central Excise authorities, the Revenue could not mechanically demand repayment of the benefit.
Applying that reasoning to the present dispute, the Tribunal found that the department had failed to verify and decide the refund claim filed by the appellant within the prescribed period.
The CESTAT ultimately concluded that the demand could not survive on limitation.
It also independently found that the impugned order was unsustainable on merits because the jurisdictional Assistant Commissioner had failed to verify and decide the refund claim submitted on May 11, 2009, which was required to be dealt with by May 15 under paragraph 2.2(2) of Notification No. 39/2001-CE.
Accordingly, the Tribunal set aside the impugned order and allowed the appeal.
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