Excise Duty Recovery During Stay On Demand Treated As 'Under Protest'; Refund Not Time-Barred: Madras HC

The Madras High Court has held that where the Department appropriates amounts during the pendency of an appeal against a Excise duty demand despite a subsisting stay order, such amounts must be treated as paid under protest, and a refund cannot be denied on the ground of limitation.

The bench stated that "If the revenue is permitted to adopt such novel ways to adjust the amounts by getting over an order of stay and thereby indirectly recovering the money, it cannot be construed as a duty payable as on the date of such appropriation."

The court allowed the appeal filed by Sanmar Matrix Metals Ltd., setting aside the order of the Tribunal and directing a refund of the appropriated amount within six weeks.

The Division Bench comprising Justice N. Anand Venkatesh and Justice K.K. Ramakrishnan was dealing with a case where the appellant, Sanmar Matrix, under the Central Excise Act, 1944, had availed CENVAT credit on inputs, capital goods, and input services.

A show cause notice was issued proposing denial of such credit for the period May 2010 to March 2011, which culminated in an Order-in-Original confirming demand along with interest and penalty, and the same was upheld in appeal.

During the pendency of further appeal before the Tribunal, a stay of recovery was granted subject to a pre-deposit.

Meanwhile, the appellant had filed a rebate claim for export of goods, which was sanctioned; however, the Department appropriated the rebate amount against the disputed demand despite the subsisting stay order.

The appropriation covered rebate claims aggregating Rs 7.92 lakh across multiple transactions and was adjusted against total alleged arrears exceeding Rs 74 lakh, including the disputed demand.

Subsequently, the tribunal set aside the demand, and the appellant sought a refund of the appropriated amount. The request was rejected by the Department on the ground that the claim was time-barred under Section 11B, and this view was upheld by the appellate authority as well as the Tribunal, leading to the present appeal.

The taxpayer-company contended that the appropriation made during the subsistence of the stay order was illegal and that the pendency of appeal itself amounted to protest, thereby excluding the applicability of the limitation under Section 11B.

It was argued that such appropriation could not be treated as payment of duty so as to attract the limitation provisions. The Department, however, maintained that the refund claim arose only after the Tribunal's order and ought to have been filed within one year.

The court held that appropriation of a rebate during the pendency of an appeal, despite a subsisting stay order, cannot be justified and must be treated as payment made under protest.

The bench stated that the second proviso to Section 11B specifically provides that the limitation of one year will not apply where any duty and interest has been paid under protest. Therefore, in the teeth of the order of stay granted by CESTAT, that the appropriation that has been made by the department by taking advantage of the unamended provision, at the best can only be construed as a payment made under protest.

The bench opined that "the appropriation was done by the department when the appeal was pending before CESTAT and an order of stay of recovery was also granted. Even if the department wants to justify this appropriation by relying upon the law as it stood prior to the amendment which came into effect from 01.10.2014, such appropriation will be construed as a payment of duty under protest. In such an event, the second proviso to Section 11B of the Act will come into play and the limitation of one year will not apply where the duty and interest has been paid under protest Consequently, the amount that was appropriated pursuant to the Order-in-Original No. 4/2012 dated 30.03.2012, cannot be brought under Explanation (ec) of Section 11B of the Act and therefore, the limitation as prescribed under Sub-section (1) of Section 11B will not apply for the refund sought for by the appellant. Consequently, the refund sought for by the appellant is not barred by limitation."

It observed that once an appeal is filed challenging a demand, it inherently signifies protest, and any recovery made during such pendency cannot be construed as voluntary payment of duty.

The bench stated that "On the other hand, this Court is only testing the effect of such an appropriation order passed during the pendency of an appeal where an order of stay was also granted. This Court has already held that such appropriation made during pendency of the appeal will be construed as the payment of duty under protest and as a consequence, the period of limitation will not apply."

The court further held that in cases of payment under protest, the limitation prescribed under Section 11B would not apply, and such claims cannot be brought within the ambit of refund consequent to appellate order under Explanation (ec). Accordingly, the appeal was allowed and the Department was directed to grant refund to the assessee.

For Appellant: Advocate, Radhika Chandra, for  Advocate, K.Vaitheeswaran

For Respondent: Senior Standing Counsel, N.Dilip Kumar