The Karnataka High Court has held that mandatory pre-deposit required for filing a service tax appeal can validly be discharged by utilising CENVAT credit transitioned into the GST regime and reflected in the Electronic Credit Ledger.
The bench of Justice S.G. Pandit and Justice K. Manmadha Rao ruled that the law does not prescribe cash payment as the exclusive mode for satisfying the pre-deposit requirement under Section 35F of the Central Excise Act, 1944.
The bench quashed the defect order passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bengaluru, which had refused to recognise a pre-deposit of ₹79,77,301 made by debiting the Electronic Credit Ledger through Form GSTR-3B.
Buy Now: 70+ Judgements Indirect Tax – July 2026 | E-Magazine
The central question before the High Court was whether the mandatory pre-deposit under Section 35F of the Central Excise Act, 1944, as made applicable to service tax matters through Section 83 of the Finance Act, 1994, could be discharged by utilising CENVAT credit transitioned into the GST regime under Section 140 of the CGST Act, 2017.
The Court answered the question in the affirmative, holding that transitioned CENVAT credit reflected in the Electronic Credit Ledger could be utilised for making the statutory pre-deposit.
The petitioner/assessee was a proprietorship concern engaged in sorting, blending, processing and packing of tea for Hindustan Unilever Limited. Under the erstwhile service tax regime, the petitioner had availed CENVAT credit on packing materials under the CENVAT Credit Rules, 2004.
Following the introduction of GST from July 1, 2017, the petitioner transitioned its unutilised CENVAT credit into the GST regime by filing Form GST TRAN-1. The Department accepted the transitioned credit, which thereafter appeared in the petitioner’s Electronic Credit Ledger.
Subsequently, following an investigation, the Department issued a show cause notice alleging irregular availment of CENVAT credit and suppression of taxable value. The Principal Commissioner confirmed the demands through Order-in-Original No. 04/2023-24 dated December 27, 2023.
The petitioner challenged the order before CESTAT and made the mandatory pre-deposit of ₹79,77,301 by debiting its Electronic Credit Ledger through Form GSTR-3B.
The Tribunal’s Registry raised an objection concerning the manner in which the pre-deposit had been made. By its defect order dated December 12, 2025, CESTAT declined to accept the Electronic Credit Ledger debit as valid compliance with Section 35F.
The Tribunal primarily relied upon the CBIC Instruction dated October 28, 2022, and took the view that pre-deposit in legacy matters was required to be made through cash payment on the designated CBIC portal. It nevertheless granted the petitioner four weeks to make the deposit in the prescribed manner.
The petitioner approached the Karnataka High Court challenging this approach.
Before the High Court, the petitioner argued that under the pre-GST regime, utilisation of CENVAT credit for making statutory pre-deposits had already been recognised.
Reliance was placed on CESTAT Circular No. 15/CESTAT/General/2013-14 dated August 28, 2014, as well as the Gujarat High Court’s decision in Cadila Healthcare Pvt. Ltd. v. Union of India.
The petitioner further relied on the Gujarat High Court’s decision in Yasho Industries Ltd. v. Union of India, which was subsequently affirmed by the Supreme Court, and on the Delhi High Court’s ruling in Army Welfare Housing Organisation v. Union of India. According to the petitioner, these decisions recognised transitioned CENVAT credit as a legitimate source for satisfying the statutory pre-deposit requirement.
The Revenue defended the Tribunal’s decision and relied upon the CBIC Instruction dated October 28, 2022.
It was argued that the Electronic Credit Ledger could be utilised only for payment of output tax under Section 49(4) of the CGST Act and that a pre-deposit for a legacy service tax dispute did not fall within that category.
The Revenue also relied upon decisions of the Tribunal that had followed the CBIC Instruction and supported the requirement of cash payment through the designated portal.
The Karnataka High Court closely examined Section 35F of the Central Excise Act.
The Court observed that the provision prescribes the percentage of duty or penalty that must be deposited as a condition for entertaining an appeal, but does not prescribe an exclusive mode of payment.
Importantly, according to the Court, Section 35F neither mandates payment in cash nor expressly prohibits utilisation of available credit.
The Court therefore declined to read a cash-only requirement into the statutory provision when Parliament itself had not imposed such a restriction.
A significant part of the judgment concerns the nature of CENVAT credit transitioned into the GST regime.
The Court referred to Section 140 of the CGST Act and observed that the transitional provision was enacted to protect the vested rights of taxpayers in unutilised CENVAT credit.
According to the Court, transition of the credit into the Electronic Credit Ledger did not create a new credit. Rather, it preserved the existing credit in another form. The legislative objective was therefore one of continuity rather than extinguishment of existing rights.
The High Court also relied on the Supreme Court’s decision in Eicher Motors Ltd. v. Union of India, where the principle was recognised that once credit has been validly earned, it constitutes a vested right and cannot be taken away without express legislative authority.
The Court also considered the interaction between Section 140 of the CGST Act and Rule 142(3) of the CGST Rules.
It noted that Rule 142(3) permits payment of tax, interest and penalty through the prescribed mechanism. The Court reasoned that the transitional CENVAT credit, once validly carried into the Electronic Credit Ledger, could be utilised for making payments under the GST framework.
The Court consequently held that the statutory scheme permitted utilisation of such credit rather than requiring the taxpayer to make a fresh cash payment merely because the dispute originated under the earlier indirect tax regime.
The Karnataka High Court found support in the Gujarat High Court’s ruling in Yasho Industries Ltd., which had been affirmed by the Supreme Court.
The principle emerging from that decision was that, in the absence of a statutory requirement that payment be made exclusively through the Electronic Cash Ledger, a pre-deposit could be made by debiting the Electronic Credit Ledger.
The Court held that the same underlying principle applied in the present case because Section 35F did not contain an exclusive cash-payment mandate.
The High Court also relied on the Delhi High Court’s decision in Army Welfare Housing Organisation, which specifically considered the utilisation of transitioned CENVAT credit for making a pre-deposit in legacy matters.
The Delhi High Court had reasoned that transitioned CENVAT credit remained available after introduction of GST and that there was no rational basis for denying its utilisation for statutory pre-deposit merely because of the underlying dispute related to the earlier regime.
One of the most important observations in the judgment concerns the legal effect of the CBIC Instruction dated October 28, 2022.
The Karnataka High Court found that the Instruction primarily prescribed an administrative procedure for cash payments through a designated portal in legacy matters. It did not expressly contain a statutory prohibition against utilisation of transitioned credit.
The Court held that an administrative instruction cannot override the statutory scheme or curtail rights preserved by Parliament. In particular, executive instructions cannot take away vested rights where the legislation itself has not imposed such a restriction.
The Court further held that CESTAT had proceeded primarily on the basis of the CBIC Instruction without adequately examining Section 140 of the CGST Act and the judicial precedents concerning utilisation of transitioned credit.
The High Court also considered the purpose behind the mandatory pre-deposit.
It observed that a pre-deposit represents only a portion of the disputed demand and is intended to secure the Revenue’s interest while the appeal remains pending.
Once the prescribed amount has been debited from the Electronic Credit Ledger and credited to the Government, the Court held that the statutory requirement has been satisfied.
Rejecting the transitioned credit despite its lawful availability would impose an additional financial burden on the taxpayer and could effectively impair the statutory right to pursue an appeal.
The High Court ultimately concluded that the mandatory pre-deposit under Section 35F of the Central Excise Act, as applicable to service tax appeals, can validly be discharged through utilisation of CENVAT credit transitioned under Section 140 of the CGST Act and reflected in the Electronic Credit Ledger.
The Court consequently found CESTAT’s order rejecting the pre-deposit legally unsustainable.
The writ petition was allowed and the CESTAT defect order dated December 12, 2025 was quashed and set aside.
Most significantly, the High Court expressly declared that the ₹79,77,301 pre-deposit made by debiting the Electronic Credit Ledger through Form GSTR-3B constituted valid compliance with Section 35F. CESTAT was directed to treat the pre-deposit as valid and proceed to entertain and adjudicate the appeal on merits.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
Read More: LC Charges Recovered in High Seas Sale Can’t Be Taxed as Banking Service: CESTAT
