Advertising agency wins appeal after refund amount wrongly appropriated without hearing under Section 79(1) CGST Act

CESTAT Chandigarh allowed the appeal by an advertising agency seeking refund of pre-deposit amount of Rs. 8,00,000/-. The Tribunal found clear violation of natural justice principles as the appellant was not provided opportunity of hearing before appropriation of refund amount under Section 79(1) of CGST Act, 2017 against arrears from another order. The appellant was also not served copy of the demand order. The Tribunal set aside the impugned order and remanded the matter to original adjudicating authority with directions to decide afresh following due process within sixteen weeks.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the adjudicating authority was justified in appropriating the refund amount of Rs. 8,00,000/- under Section 79(1)(a) of the CGST Act, 2017, against alleged recoverable arrears arising from a separate Order-in-Original confirming Service Tax demand.
• Whether the appropriation under Section 79 of the CGST Act, 2017, was valid when the demand arose under the erstwhile Service Tax provisions and not under the CGST Act.
• Whether the appellant was denied principles of natural justice, specifically the opportunity of hearing, before the appropriation order was passed.
• Whether the order confirming the demand, which formed the basis for appropriation, was duly served on the appellant and whether non-service affects the validity of appropriation.
• Whether the appellate tribunal (CESTAT) has jurisdiction to entertain the appeal against the order passed under Section 79 of the CGST Act, 2017.
• Whether the matter requires remand for fresh adjudication adhering to principles of natural justice.

2. ISSUE-WISE DETAILED ANALYSIS

Appropriation of Refund under Section 79 of the CGST Act, 2017

The legal framework governing appropriation of refunds under Section 79 of the CGST Act, 2017, requires that the amount refundable to a taxpayer can be appropriated against any outstanding dues recoverable under the CGST Act, 2017, specifically arising from recovery proceedings initiated under Section 78 of the CGST Act. The appellant contended that the demand arose under the erstwhile Service Tax provisions (Finance Act, 1994) and not under CGST Act, and therefore, Section 79 was not applicable for appropriation.

The Court noted that the original authority appropriated the refund amount citing recoverable arrears of Rs. 68.69 lakhs pending against the appellant pursuant to an Order-in-Original dated 24.03.2022, which confirmed a Service Tax demand. However, the appellant argued that the order confirming the demand was not served on them, thus denying them the opportunity to appeal or represent their case. The Court found merit in this argument, emphasizing that appropriation without prior notice or opportunity to be heard violates principles of natural justice.

The Court further observed that the appropriation order was preceded by a letter from the Range Superintendent indicating premeditation, undermining the independence of the adjudicating authority's decision.

Service of Demand Order and Opportunity of Hearing

Section 37C of the Central Excise Act mandates service of adjudication orders on the assessee. The appellant submitted that the order dated 24.03.2022 confirming the Service Tax demand was never served on them. This non-service was a critical procedural lapse as it deprived the appellant of the chance to challenge the demand or seek stay.

The Court relied on authoritative precedents, including the Madras High Court's decision in Gayatri Agencies, which underscored the mandatory nature of personal hearing and adherence to natural justice in tax proceedings. The Court also referenced the Supreme Court judgment in Saral Wire Craft Pvt Ltd, which held that violation of natural justice warrants remand for fresh consideration.

Given these precedents, the Court held that the appellant's right to be heard was violated by the appropriation without notice or hearing. This violation rendered the appropriation order unsustainable.

Jurisdiction of the Tribunal to Entertain Appeal Against Order under Section 79 of CGST Act

The Revenue raised a preliminary objection that the tribunal lacked jurisdiction to entertain the appeal against the appropriation order passed under Section 79 of the CGST Act. The appellant countered that the cause of action arose under the Service Tax Act and that the appropriation under Section 79 was not applicable.

The Court noted that an interim order had already overruled the jurisdictional objection, but acknowledged that the issue could be revisited in appropriate circumstances. The Court emphasized that the primary concern was adherence to natural justice rather than jurisdictional technicalities at this stage.

Consolidation of Appeals

The Revenue suggested that all three appeals pending before the tribunal, involving the confirmation of Service Tax demand, refund appropriation, and maintainability of appeals, be heard together for judicial economy. While the Court acknowledged this, it proceeded to decide the narrow issue of appropriation and natural justice in the instant appeal, leaving other appeals to be decided separately.

Application of Law to Facts and Treatment of Competing Arguments

The appellant's submissions highlighted procedural irregularities and violation of natural justice, supported by case law emphasizing mandatory personal hearing and service of orders. The Revenue relied on the statutory provisions of Section 79 and the existence of pending arrears to justify appropriation without notice.

The Court carefully weighed these competing contentions and found that the procedural safeguards and principles of natural justice must prevail over mechanical application of appropriation provisions. The absence of service of the demand order and denial of hearing were fatal to the appropriation.

3. SIGNIFICANT HOLDINGS

The Court held:

"It is a clear case of violation of principles of Natural justice. Revenue also argues that the action having been taken under section 79 of the CGST Act,2017, the Tribunal has no jurisdiction to entertain the appeal. I find that this Bench vide interim order dated 22.02.2024 held that the objection regarding the jurisdiction is over-ruled. However, I am of the considered opinion that that was only an interim order. Looking into the facts and circumstances of the case, the violation of principles of natural justice, in a matter concerning the implementation of the Finance Act, 1994, is of a primary and immediate concern of the Bench."

"The appellants have been denied an opportunity to represent against the action proposed to be taken against them and to appeal against the order that saddles them with a demand of Service Tax. I find that such an order can not be sustained and requires to be set aside."

"In both the cases, relied upon by the appellant as well as by the learned Authorized Representative for the department... the matter was remanded back to the authorities for a fresh re-consideration following the principles of natural justice and according opportunity to the appellants to represent themselves."

The Court directed that the appeal be allowed by way of remand to the original adjudicating authority with a mandate to decide the issue afresh, strictly adhering to principles of natural justice and due process, and to complete the proceedings within sixteen weeks.

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