2024 (1) TMI 385 - AT - Central Excise

Revenue cannot appropriate sanctioned refund when assessed liability under adjudication order is set aside

CESTAT Allahabad ruled on appropriation of sanctioned refund, dismissing Revenue's appeal. Following precedents from Delhi Bench in Computer Sciences ... Appropriation of sanctioned refund - HELD THAT:- The issue has been set aside by the Delhi Bench of Tribunal in COMPUTER SCIENCES CORPORATION INDIA PVT LTD. VERSUS COMMISSIONER OF SERVICE TAX, NOIDA [2014 (4) TMI 252 - CESTAT NEW DELHI] where it was held that As the assessed liability of the petitioner under the adjudication order has thus suffered a plenary eclipse, the petitioner would entitled to refund. In case of M/S. PEPSICO INDIA HOLDINGS PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH-II (VICE-VERSA) [2019 (5) TMI 1341 - CESTAT CHANDIGARH], Chandigarh bench held the demand itself has been set aside by this Tribunal, therefore, the order of appropriation is not sustainable and the same is set aside. The appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether appropriation of a sanctioned refund against demands that were confirmed but were the subject of pending appeals (and stays) is lawful where the demands have not attained finality. 2. Whether subsequent setting aside (quashing) of the adjudication orders confirming the demands renders prior appropriations of refunds inoperative and requires restitution/refund of the appropriated amounts. 3. Whether basic principles of natural justice/notice or requirement of adjudicatory finality must be observed before adjusting sanctioned refunds against disputed demands. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of appropriating sanctioned refunds against non-final demands Legal framework: The Tribunal examined the power exercised by revenue authorities to adjust sanctioned refund amounts against dues recoverable by the Government under the relevant enactment (including the scheme reflected in section 11-type provisions permitting recovery of sums due to Government). Precedent treatment: The Revenue relied on an authority holding that section 11 (recovery/adjustment provisions) permitted appropriation and that such adjustment was not arbitrary. The Tribunal treated that authority as less persuasive in the factual matrix where the underlying demands were under appeal and later set aside. Conversely, the Tribunal followed and relied on a body of precedents establishing that appropriation against demands which have not attained finality and are under challenge (including appeals with stay applications or pre-deposit schemes) is not sustainable. Interpretation and reasoning: The Tribunal reasoned that where an appeal against a confirmed demand is pending (and in several cited instances a stay was in place or the adjudication was subsequently quashed), the demand has not attained finality and cannot be treated as an arrear for coercive recovery by way of appropriation of refunds. The Tribunal noted that appropriation in such circumstances amounts to recovery against sums which are disputed and not finally adjudicated. It emphasized the principle that appropriations effected during the pendency of appeals, without finality of the demand, are unjustifiable in law. Ratio vs. Obiter: Ratio - appropriation of sanctioned refunds against demands that have not attained finality and are subject to pending appellate proceedings is not sustainable; such appropriation should be set aside. Obiter - observations on the scope of section 11 and its correct interpretation in distinct factual permutations where demands are final. Conclusion: Appropriation of the refund to the extent it was adjusted against the demand that was subsequently set aside could not be sustained and must be set aside; by contrast, appropriation against a demand that remains subsisting and final may be valid (subject to other legal safeguards). Issue 2 - Effect of subsequent quashing of the underlying demands on prior appropriations and entitlement to restitution Legal framework: Principles of restitutive relief where an assessed liability is later quashed, and the consequent entitlement to refund of amounts appropriated towards such liability. Precedent treatment: The Tribunal relied on prior decisions which held that where adjudication orders confirming liability are quashed by a Tribunal or other competent forum, the assessed liability suffers 'plenary eclipse' and the taxpayer becomes entitled to refund; prior appropriations of sanctioned refunds against such quashed demands cannot stand. Interpretation and reasoning: Since the impugned appropriation was made against demands which were subsequently set aside by the Tribunal, the legal basis for appropriation ceased to exist. The Tribunal treated the quashing of the demand as dispositive of the continued validity of any appropriation made to satisfy that demand, and observed that the aggrieved party is entitled to apply for restitution/refund which should be decided according to law and expeditiously. Ratio vs. Obiter: Ratio - quashing of the underlying adjudication order nullifies the foundation for any prior appropriation towards that demand; such appropriated amounts must be made available to the claimant by way of refund/restitution. Obiter - procedural modalities for effecting restitution where appeals and separate administrative remedies exist. Conclusion: Prior appropriations made to satisfy demands which were subsequently quashed are inoperative; the party is entitled to refund/restitution of the appropriated sums in accordance with law. Issue 3 - Requirement of notice/hearing and principles of natural justice before appropriation Legal framework: Requirements under administrative law and prior Tribunal jurisprudence prescribing that before appropriation of refunds towards arrears, show-cause, intimation or an opportunity of hearing should be afforded, particularly where appeals against demands are pending. Precedent treatment: The Tribunal followed authorities holding that before appropriation of refund amounts towards arrears, the adjudicating authority should issue notice or provide an opportunity of hearing; appropriation effected without such notice/communication, during the pendency of an appeal, is contrary to principles of natural justice and established Tribunal practice. Interpretation and reasoning: The Tribunal noted instances where no intimation was given and appeals or stay applications were pending, concluding that appropriation without affording an opportunity or taking into account pendency of appeals contravenes natural justice. It observed that post-amendment regimes (e.g., amended provisions affecting pre-deposit schemes) further restrict coercive collection beyond the mandatorily deposited amount. Ratio vs. Obiter: Ratio - appropriation of refunds toward disputed demands without prior notice/offer of hearing and without regard to pending appeals or stays is not justifiable. Obiter - commentary on the interplay of pre-deposit requirements and limits on coercive recovery beyond deposited amounts. Conclusion: Authorities must afford notice and observe principles of natural justice before appropriating refund amounts to meet disputed demands; appropriation in the absence of such procedural safeguards is liable to be set aside. Cross-References and Operational Conclusion Where demands against which refunds were appropriated are subsequently set aside, the appropriation is rendered unsustainable and the appropriated amounts must be restored by way of refund or restitution; conversely, appropriation against demands that have attained finality may be permissible. Because the relevant adjudication orders were set aside in the present matter, the appeal became infructuous and the appropriations challenged were directed to be set aside in respect of those quashed demands; dismissal of the Revenue's appeal followed on that basis.