2025 (12) TMI 509 - AT - Central Excise

Interest on investigation and pre-deposits payable from actual deposit date under Section 35FF; recovery proceedings unsustainable

CESTAT allowed the appeal, holding that the assessee is entitled to interest on amounts deposited during investigation and as mandatory pre-deposit from ... Entitlement to interest on amounts paid during investigation and as mandatory pre-deposit - relevant date for calculation of interest - to be calculated from the date of such deposits till the date of refund, or only from three months after the date of refund application - erroneous payment of interest to the appellant or not - HELD THAT:- The party is entitled to interest from the date of making deposit which was properly paid to them from the date of deposit and the same could not have been recovered from them in view of various case law quoted by the appellant. In fact, as distinguished from erroneous refund which is governed by the provisions of Section 11B of the Central Excise Act, 1944 it is by now a trite law that deposits stand on a different footing since the same are not by way of any tax but are mere deposits on which department cannot have any beneficial interest till the time, same are vested in the department by any appropriation. In case there is deposit made and through any adjudication process is held to be not payable to the department, then the department has to return the same with interest. Various case laws indicated by the appellant support this position. This court, therefore, rejects the contention of the department that interest would not have been payable on any deposit during investigation or made for the purposes of mandatory deposit. The underlying principle is that the same was required to be refunded from the date of payment and the interest as has been laid down in the proposition by the Hon’ble Delhi High Court in TEAM HR SERVICES PRIVATE LTD. VERSUS UNION OF INDIA & ANR. [2020 (6) TMI 342 - DELHI HIGH COURT] as well. Same was required to be paid from the date of deposit to the date of paying back. It is thus clear that there is no erroneous payment of interest to the appellant and therefore, there cannot be any recovery proceedings or penalty proceedings for the same. It is thus clear that there is no erroneous payment of interest to the appellant and therefore, there cannot be any recovery proceedings or penalty proceedings for the same. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether interest on amounts paid during investigation and as mandatory pre-deposit is payable from the date of such deposits till the date of refund, or only from three months after the date of refund application. 1.2 Whether the interest already sanctioned and paid on the entire amount of Rs. 70,00,000/- could be treated as 'erroneously refunded' so as to justify recovery under Sections 11A and 11AA and imposition of penalty under Section 11AC(1)(a). 1.3 Whether, in light of CBEC Circular No. 984/08/2014-CX dated 16.09.2014, only the statutory pre-deposit portion (7.5% of the confirmed demand) qualifies for interest from the date of deposit, and the balance paid during investigation attracts interest only under Sections 11B/11BB. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Entitlement and period of interest on amounts paid during investigation and as pre-deposit (a) Legal framework as discussed 2.1 The Tribunal considered Sections 11B, 11BB, 11A, 11AA and 11AC(1)(a) of the Central Excise Act, 1944, and the scheme of Sections 35F and 35FF (mandatory pre-deposit and interest on refund of pre-deposit). The Tribunal also noted CBEC Circular No. 984/08/2014-CX dated 16.09.2014, particularly paras 3.1-3.3, concerning treatment of payments during investigation as pre-deposit to the extent of 7.5% / 10%. 2.2 The Tribunal took note of decisions of various High Courts and of the Tribunal, including Team HR Services Pvt. Ltd., Commissioner of Customs v. DD International Pvt. Ltd., Commissioner of Customs (Exports) v. S.S. Automotive Pvt. Ltd., and Ebiz.com Pvt. Ltd., in which interest on amounts deposited during investigation was granted from the date of deposit till the date of refund. (b) Interpretation and reasoning 2.3 The Tribunal distinguished between 'duty' and 'deposit'. It held that sums paid during investigation or by way of mandatory pre-deposit, prior to final adjudication, are in the nature of deposits and not tax or duty per se. The Department cannot have any beneficial interest in such deposits unless and until they are appropriated as duty pursuant to adjudication that has attained finality. 2.4 The Tribunal reasoned that, where ultimately it is held through the appellate process that the amount is not payable to the Department, the deposited sums remain mere deposits. In such circumstances, the Department is obliged to return these deposits along with interest from the date of deposit till the date of refund, since the Department had use of the assessee's money without lawful basis. 2.5 It was specifically noted that the case law cited by the appellant consistently supports the principle that interest on deposit (including amounts paid during investigation and towards pre-deposit) runs from the date of payment of such deposit to the date of actual refund, and not merely from three months after the date of a refund application. 2.6 The Tribunal rejected the approach that would split the amount into (i) statutory pre-deposit attracting interest from date of payment and (ii) balance amount paid during investigation attracting interest only under Sections 11B/11BB after three months from refund claim. It treated the entire amount as deposit for purposes of interest computation once it was judicially determined that no duty was payable. (c) Conclusions 2.7 The Tribunal held that the assessee was entitled to interest on the entire amount deposited (Rs. 70,00,000/-), including amounts paid during investigation and towards pre-deposit, from the respective dates of deposit till the dates of refund. 2.8 Interest earlier sanctioned and paid on that basis was held to be in accordance with law, and not excessive or beyond entitlement. Issue 2: Validity of treating interest already granted as 'erroneous refund' and recovery under Sections 11A, 11AA and 11AC(1)(a) (a) Legal framework as discussed 2.9 The Tribunal examined the provisions for recovery of duties and interest under Sections 11A and 11AA and imposition of penalty under Section 11AC(1)(a) in the context of alleged 'erroneous refund'. It also referred to the refund provisions under Section 11B and contrasted them with the regime applicable to deposits and pre-deposits, including the interpretation of Section 35FF. (b) Interpretation and reasoning 2.10 The Department's case rested on the premise that, in view of CBEC Circular No. 984/08/2014-CX, only 7.5% of the confirmed duty demand could be treated as pre-deposit under Section 35F, and that interest from date of deposit was legally payable only on such pre-deposit portion. On this basis, the authorities below had treated the interest earlier paid on the balance amount as 'erroneously sanctioned', initiating recovery under Section 11A along with interest under Section 11AA and penalty under Section 11AC(1)(a). 2.11 The Tribunal contrasted this departmental view with the judicial precedents cited, which consistently treated sums deposited during investigation and as pre-deposit-when ultimately found not payable-as deposits on which interest runs from the date of deposit to the date of refund. It observed that such deposits are not 'duty' for purposes of the refund provisions under Section 11B, and thus cannot be brought within the 'erroneous refund' framework that presupposes refund of duty or tax under that section. 2.12 The Tribunal held that deposits stand on a different footing from 'refund of duty' under Section 11B. Where a deposit is directed to be returned after adjudication in favour of the assessee, the Department has no statutory authority to invoke 'erroneous refund' provisions to recover interest already paid on such deposit in accordance with settled judicial principles. 2.13 It emphasised that, in light of the case law and the nature of deposits, there was no legal error in the earlier grant of interest on the entire deposit from the date of payment. The Department's reliance on the circular to curtail such interest was held to be contrary to the judicially settled position and could not override binding precedent. (c) Conclusions 2.14 The Tribunal concluded that there was no 'erroneous refund' of interest in law; therefore, the show cause notice and the impugned order demanding recovery of Rs. 16,55,345/- as excess interest, along with interest under Section 11AA and penalty under Section 11AC(1)(a), were unsustainable. 2.15 Consequently, the recovery proceedings and penalty were set aside. The appeal was allowed with consequential relief, and it was held that no portion of the interest earlier refunded to the appellant could be recovered by treating it as erroneously sanctioned. Issue 3: Effect and scope of CBEC Circular No. 984/08/2014-CX vis-à-vis judicially recognised entitlement to interest on deposits (a) Legal framework as discussed 2.16 The Tribunal considered para 3 of CBEC Circular No. 984/08/2014-CX dated 16.09.2014, which provides that amounts paid during investigation or audit, to the extent of 7.5% / 10% of the confirmed demand (subject to monetary limits), may be treated as deposit for fulfilling the statutory pre-deposit requirement under Section 35F, and that any excess over such percentage 'shall not be treated as deposit under the said sections'. (b) Interpretation and reasoning 2.17 The appellate authority below had relied on this circular to hold that only the 7.5% component qualified as 'pre-deposit' entitled to interest from date of payment under Section 35FF, while the balance amount paid during investigation would be treated as duty and thus attract interest only under the refund provisions of Section 11B/11BB (i.e., after three months from the date of refund application). 2.18 The Tribunal, however, found that this circular could not diminish or restrict the judicially declared right of an assessee to interest on deposits from the date of deposit to the date of refund, where ultimately no duty is adjudged payable. It held that a circular cannot override or nullify binding precedents of High Courts and of the Tribunal, which recognise such interest on the entire deposit amount, whether or not it strictly falls within the percentage of statutory pre-deposit under Section 35F. 2.19 The Tribunal further held that the nature of the amount-as deposit versus duty-must be determined by the substantive facts and the final adjudicatory outcome, not merely by administrative circular language. When the adjudicatory process concludes that the assessee's liability does not exist, sums paid earlier, regardless of label or quantum compared to 7.5%, retain the character of deposits and must be refunded with interest from the date of deposit. (c) Conclusions 2.20 The Tribunal held that CBEC Circular No. 984/08/2014-CX cannot be relied upon to deny interest from the date of deposit on amounts paid during investigation that are ultimately found not payable, nor to justify treating such interest as 'erroneous refund'. 2.21 Accordingly, the circular did not support the Department's position, and the earlier grant of interest on the entire amount deposited remained legally valid and unrecoverable.