The Commissioner Of ... v. M/S. Chaitanya Educa...

V.V.S. Rao

This appeal is filed by the Revenue under Section 35G of the Central Excise Act, 1944 against the stay order dated 14.6.2010 of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) whereby and whereunder the respondent’s application for waiver of pre-deposit, under Section 35F of the Central Excise Act, was allowed and recovery of service tax was stayed.

The brief facts, relevant for this case are, as follows. The respondent runs various coaching centres in Andhra Pradesh and other States in India. Coaching is imparted for various courses like Intermediate (10 + 2), Engineering And Medical Courses Entrance Test, and other admission tests. For the four years i.e., 2003-04 to 2006-07, the respondent allegedly charged monetary consideration from students to the tune of Rs.823,20,45,019/-. The respondent’s activity of commercial training or coaching service attracts levy of service tax under Sections 65 (26) and (27) read with sub-section (105)(zzc) of the Finance Act, 1994. After coming into force of the amendment to Section 65(105) of the Finance Act, in spite of advice by the Revenue, the respondent did not obtain registration. By communication dated 31.7.2003, they informed the Range Officer that, there was no legal obligation to obtain registration. In March, 2005, the corporate office of the respondent was inspected and the records were seized. There were proceedings in this Court under Article 226 of the Constitution of India as well as before the Supreme Court under Article 136 of the Constitution. It may not be necessary to advert to those proceedings, in this order. Whatever be the reason, the respondent belatedly obtained Centralized Service Tax registration on 21.6.2006 in Guntur Excise Commissionerate as provider of “commercial training or coaching service”. They also paid Rs.9,98,921/- towards service tax liability for the period from April, 2006 to June, 2006 by submitting half yearly ST-3 Returns. They did not, however, pay the tax for the period from July, 2003 to March, 2007 nor did they furnish half yearly returns.

The jurisdictional adjudicating authority i.e., the Commissioner of Central Excise & Customs issued notice dated 08.9.2008 calling upon the petitioner to show cause as to why action should not be taken under Section 73(1) of the Finance Act, and the Service Tax Rules, 1994, for consideration of the commercial nature of business, wilful delay in obtaining registration, wilful default in payment of service tax and submission of information, and wilful evasion of payment of service tax. In response to the show cause notice, the respondent sent letter dated 25.10.2008 seeking two months’ time for submitting their reply, which was granted. Reply was not submitted, but they sought an opportunity of being heard personally, which was granted on 24.3.2009. On 11.6.2009, the adjudicating authority passed a lengthy Order in Original No.12 of 2009 (OiO), levying service tax, educational cess and penalty on the respondent.

Feeling aggrieved by the OiO, the respondent preferred Appeal No.785 of 2009 before the learned CESTAT along with Service Tax Stay Application No.478 of 2009. In the interlocutory application, they prayed for waiver of pre-deposit of service tax of Rs.87,38,34,876/-, the interest amount under Section 75, and the penalties under Sections 76, 77 and 78 of the Finance Act. It appears that the respondent contended that the demand of service tax is barred by limitation. This weighed with the learned CESTAT which passed the order impeached in this appeal.

After receiving the notice, ordered by this Court on 24.11.2010, the respondent appeared through Counsel, and filed counter affidavit. Inter alia, the respondent opposed the appeal raising the following contentions. As the matter is pending before the CESTAT the appeal is not maintainable; as the respondent society is a non-profit coaching centre, using its surplus only for educational activities, it is not liable to pay service tax; as the respondent is registered under Section 12A of the Income Tax Act, 1961 as a charitable trust, it cannot be treated as a commercial training or coaching centre; and, as levy of service tax was beyond the period of one year, it is barred by Section 73 of the Finance Act.

The Senior Standing Counsel for Revenue submits that, the learned CESTAT was in error in passing the impugned order in a routine manner ignoring Section 35F of the Central Excise Act. He also points out that, in the other appeal filed by the respondent against levy of service tax, the CESTAT had directed deposit of 100% of the tax demanded, whereas in the present case waiver of pre-deposit and stay of recovery was granted without application of mind. He also submits that the CESTAT did not consider the circular dated 28.1.2009 issued by the Central Board of Excise & Customs with regard to retrospectivity. Per contra, the Counsel for the respondent reiterated their position as pleaded in their counter summarized herein above.

The Finance Act, 1994 confers power on the Commissioner to serve notice on the person chargeable with tax, which has not been paid, requiring him to show cause why he should not pay the amounts specified in the notice. Section 73(1) of the Finance Act bars any such proceedings beyond a period of one year unless the non-levy or non-payment of tax is by reason of fraud, collusion, willful mis-statement, suppression of facts, or contravention of the provisions of the Finance Act. After issuing the show cause notice, the Commissioner may conduct such enquiry and pass an order which is appealable under Section 86 before the CESTAT. Section 86(7) mutatis mutandis applies the same procedure and powers exercised by the CESTAT in hearing the appeals under Chapter VI-A of the Central Excise Act. Section 35F of the Central Excise Act requires the person desirous of appealing against a decision or order to deposit with the adjudicating authority the duty demanded or the penalty levied. The condition of pre-deposit may be dispensed with by the CESTAT. This power, however, is not an absolute power and has to be exercised in such a manner as to safeguard the interests of revenue. To appreciate the point, we quote Section 35F of the Central Excise Act to the extent relevant.

35F. Deposit, pending appeal, of duty demanded or penalty levied.- Where in any appeal under this Chapter, the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of Central Excise authorities or any penalty levied under this Act, the person desirous of appealing against such decision or order shall, pending the appeal, deposit with the adjudicating authority the duty demanded or the penalty levied:

Provided that where in any particular case, the Commissioner (Appeals) or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the Commissioner (Appeals) or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue.

(Proviso (2) and Exception are omitted as not relevant).

(emphasis supplied)The main section makes pre-deposit mandatory in order to avail the remedy of appeal before the CESTAT. The first proviso is an exception to the general rule. It confers power on the Commissioner (Appeals), or the CESTAT, to dispense with such deposit “subject to such conditions as may be imposed so as to safeguard the interests of revenue” if the demand “would cause undue hardship”. The question of dispensing with pre-deposit would arise only when the duty demanded, or the penalty levied, would cause undue hardship to the assessee and not otherwise. Any order to dispense with pre-deposit has necessarily to be subject to certain conditions which are to be imposed to safeguard the interests of revenue. This provision and other similar provisions in fiscal laws have been considered in a number of cases. The Apex Court ruled that the power to dispense with the condition of pre-deposit for entertaining an appeal cannot be exercised in a routine manner, and that it should be exercised keeping in view the interests of revenue.

In Asst. Collector, Central Excise v Dunlop India Ltd ((1985) 19 ELT 22 (SC) : (1985) 1 SCC 260 : AIR 1985 SC 330), the Government of India issued a notification under Rule 8(1) of the Central Excise Rules, 1944 exempting tyres, falling under Item 10 of the First Schedule to the Central Excise Act, from certain percentage of excise duty to the extent that the manufacturers had not availed such exemption under the earlier notifications. The department, however, denied exemption to Dunlop who approached the Calcutta High Court. A learned Single Judge passed an interim order allowing the benefit of the exemption to the tune of about Rs.3.00 crores on condition of assessee furnishing a bank guarantee. The Assistant Collector filed Letters Patent Appeal in which the order was modified enabling the revenue to encash 30% of the bank guarantee. In the revenue’s appeal before the Supreme Court, a three Judge Bench deprecated the practice of granting ex parte ad interim orders in tax matters which have the potential for public mischief. The observations and the principles laid down therein are as follows.

It is indeed a great pity — and, we wish we did not have to say it but we are afraid we will be signally failing in our duty if we do not do so — some courts, of late, appear to have developed an unwarranted tendency to grant interim orders — interim orders with a great potential for public mischief — for the mere asking. We feel greatly disturbed. We find it more distressing that such interim orders, often ex parte and non-speaking, are made even by the High Courts while entertaining writ petitions under Article 226 of the Constitution … …

… … Governments are not run on mere bank guarantees. We notice that very often some courts act as if furnishing a bank guarantee would meet the ends of justice. No governmental business or for that matter no business of any kind can be run on mere bank guarantees. Liquid cash is necessary for the running of a Government as indeed any other enterprise. We consider that where matters of public revenue are concerned, it is of utmost importance to realise that interim orders ought not to be granted merely because a prima facie case has been shown. More is required. The balance of convenience must be clearly in favour of the making of an interim order and there should not be the slightest indication of a likelihood of prejudice to the public interest. We are very sorry to remark that these considerations have not been borne in mind by the High Court and interim order of this magnitude had been granted for the mere asking.

(emphasis supplied)

BenaraValves Ltd v CCE ((2006) 204 ELT 513 (SC) : (2006) 13 SCC 347)is a case directly involving the construction of Section 35F of the Central Excise Act. While observing that, “it has become an unfortunate trend to casually dispose of stay applications …” it was held therein as follows.

Two significant expressions used in the provisions are “undue hardship to such person” and “safeguard the interests of the Revenue”. Therefore, while dealing with the application twin requirements of considerations i.e. consideration of undue hardship aspect and imposition of conditions to safeguard the interests of the Revenue have to be kept in view.

As noted above there are two important expressions in Section 35F. One is undue hardship. This is a matter within the special knowledge of the applicant for waiver and has to be established by him. A mere assertion about undue hardship would not be sufficient. It was noted by this Court in S. Vasudeva v. State of Karnataka, (1993) 3 SCC 467 : AIR 1994 SC 923, that under Indian conditions expression “undue hardship” is normally related to economic hardship. “Undue” which means something which is not merited by the conduct of the claimant, or is very much disproportionate to it. Undue hardship is caused when the hardship is not warranted by the circumstances.

For a hardship to be “undue” it must be shown that the particular burden to observe or perform the requirement is out of proportion to the nature of the requirement itself, and the benefit which the applicant would derive from compliance with it.

The word “undue” adds something more than just hardship. It means an excessive hardship or a hardship greater than the circumstances warrant.

The other aspect relates to imposition of condition to safeguard the interests of the Revenue. This is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to safeguard the interests of the Revenue. Therefore, the Tribunal while dealing with the application has to consider materials to be placed by the assessee relating to undue hardship and also to stipulate conditions as required to safeguard the interests of the Revenue.

It was further held as follows.

It is true that on merely establishing a prima facie case, interim order of protection should not be passed. But if on a cursory glance it appears that the demand raised has no legs to stand on, it would be undesirable to require the assessee to pay full or substantive part of the demand. Petitions for stay should not be disposed of in a routine manner unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand. There can be no rule of universal application in such matters and the order has to be passed keeping in view the factual scenario involved. Merely because this Court has indicated the principles that does not give a licence to the forum/authority to pass an order which cannot be sustained on the touchstone of fairness, legality and public interest. Where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizen’s faith in the impartiality of public administration, interim relief can be given.

In BhavyaApparels (P) Ltd v Union of India ((2007) 216 ELT 347 (SC) : (2007) 10 SCC 129) the Supreme Court interpreted Section 129E of the Customs Act, 1962, which is in pari materia with Section 35F of the Central Excise Act, as requiring the Tribunal to consider the question whether or not a direction to deposit the amount would cause undue hardship and held that, without considering the said question, it cannot go into the merits of the appeal itself. In Union of India v Adani Exports Ltd ((2007) 218 ELT 164 (SC) : (2007) 13 SCC 207) the Supreme Court laid down that, besides focusing on prima facie case, balance of convenience and irreparable loss, the Tribunal must necessarily impose conditions as may be necessary to safeguard the interests of revenue, while granting an order to dispense with pre-deposit for filing an appeal.

InduNissan Oxo Chemicals Industries Ltd v Union of India ((2008) 221 ELT 7 (SC) : (2007) 13 SCC 487)is a case under Section 129E of the Customs Act. Following Dunlop India Ltd, the Supreme Court reiterated that,

"petitions for stay should not be disposed of in a routine manner unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand."

In MonotoshSaha v Enforcement Directorate ((2008) 229 ELT 492 (SC) : (2008) 12 SCC 359), Section 19 of the Foreign Exchange Management Act, 1999, which is in similar terms as that of Section 35F of the Central Excise Act, was considered. Following BenaraValves the Supreme Court upheld the order of the Tribunal which directed deposit of 60% of the penalty amount for the purpose of entertaining the appeal.

From the judicial decisions analysed as above, the following principles would emerge which have to be kept in mind while considering the applications for stay or for dispensing with the requirement of pre-deposit under Section 35F of the Central Excise Act, or under Section 129E of the Customs Act, or other similar provisions.

1)The applications for stay should not be disposed of in a routine manner unmindful of the consequences flowing from the order requiring the assessee to deposit full or part of the demand;

2)Three aspects to be focused while dealing with the applications for dispensing of pre-deposit are: (a) prima facie case, (b) balance of convenience, and (c) irreparable loss;

3)Interim orders ought not to be granted merely because a prima facie case has been shown;

4)The balance of convenience must be clearly in favour of making of an interim order and there should not be the slightest indication of a likelihood of prejudice to the interest of public revenue;

5)While dealing with the applications twin requirements of consideration i.e., consideration of undue hardship, and imposition of conditions to safeguard the interests of revenue have to be kept in view;

6)When the Tribunal decides to grant full or partial stay, it has to impose such conditions as may be necessary to safeguard the interests of the revenue. This is an imperative requirement; and

7)An appellate Tribunal, being a creature of the statute, cannot ignore the statutory guidance while exercising general powers or expressly conferred incidental powers.Reverting to the facts of the case, the adjudicating authority followed the procedure contemplated under the law and issued the show cause notice. The respondent sought time twice or thrice to submit their explanation/objections. They did not do so. Of course they sought for personal hearing. After hearing the respondent personally, the Commissioner passed an elaborate order. When an application for stay and waiver of pre-deposit was made by the respondent, the CESTAT passed the following order granting relief.

On perusal of the records and considering the submissions made by both sides, we find that the show cause notice in this case has been issued on 8.9.2008 demanding service tax for the period 2003-2007. We find that the activity of the appellant, i.e., training or coaching and collecting consideration was in dispute from the date when the definition of “Commercial Training and Coaching Centre” was introduced. We find that the decisions cited by the learned counsel are in favour of the assessee. It is also fact that the Govt. of India has brought in retrospective amendment to the definition of “Commercial Coaching and Training Centre” which could include the activity of the appellant and liability to service tax arises. Retrospective amendment made by the Act is silent on the question of limitation. We are in agreement with the learned counsel that the entire amount of service tax is hit by limitation. In view of this, application for waiver of pre-deposit of the amount involved is allowed and recovery thereof stayed only on the ground of limitation till the disposal of the appeal.

In our considered opinion, the order of the CESTAT is not in accordance with the law laid down by the Supreme Court. The learned CESTAT failed to focus its consideration on prima facie case, balance of convenience and irreparable loss. It did not consider the aspect of undue hardship which must exist for exercising power under Section 35F of the Central Excise Act. Even assuming that there is hardship, the Tribunal ought not to have granted the order of stay or dispensation of pre-deposit without imposing conditions. For these reasons, we are not able to sustain the impugned order inspite of the offer of the respondent (made through their Counsel) to deposit Rs.5.00 Crores (Rupees five Crores only) as a precondition for continuing stay.

In the result, for the above reasons, we allow the appeal, set aside the impugned order of the CESTAT and remit the matter to enable them to consider the matter afresh in the light of the above summed up principles laid down by the Supreme Court. We request that this exercise shall be completed within a period of six weeks from the date of receipt of a copy of this order. There shall be no order as to costs.