Factors to be considered while granting Stay

Case:- SQL STARS INTERNATIONAL LTD. VS COMMISSIONER OF CUS. HYDERABAD

Citation: - 2012 (276) E.L.T. 465 (A.P.)

Issue: - Grant of Stay and waiver of pre-deposit – factors to be considered.

Brief Facts: - Appellant is a Public Limited Company engaged in the development of software, and providing IT services etc., is registered under the Finance Act, 1994 as the Service provider of commercial training or Coaching Services.

Revenue issued show cause notice dated 23-10-2008 demanding Service Tax toward various services allegedly rendered by the appellant during the period 15-9-2003 to 31-12-2007. It was alleged that the appellant had provided “Business Auxiliary Services", “Man Power Supply Service”, “Maintenance and Repairs Service”, “Management Consultancy Service”. The Service Tax demanded was in relation to the project undertaken by Petitioner from 19-5-2003 to 18-5-2008 for the Madhya Pradesh State Agricultural Marketing Board for their e-Krishi Vipanan Project.

The Adjudicating Authority passed the order confirming the service tax demanded with interest and imposed equal penalty in terms of Section 78 of the Finance Act.

Aggrieved by the said order, appellant carried the matter in appeal to the Tribunal. An application seeking waiver of pre-deposit and stay is also filed. In stay application filed seeking waiver of pre-deposit under Section 35 F of the Central Excise Act,1944 the financial hardship was not pleaded.

The Tribunal directed the appellant to pre-deposit Rs. 2.00 crores within the period of 8 weeks. Thereafter, appellant submitted an application under Rule 41 of the CESTAT (Procedure) Rules, 1982 seeking further time to make payment. They requested that Rs. 50.00 lakhs paid them treated as part of pre-deposit and Rs 40.00 lakhs paid by them as Service tax during the impugned period be considered as part of the pre-deposit and they be granted four month (16 weeks) for payment of the balance Rs 1.10 crores. The miscellaneous application seeking extension of time for pre-deposit of the balance amount was allowed and extension of eight weeks was granted and the appellant was directed to report compliance on 17-06-2011. Thereafter, the Tribunal observed that failure to comply with the terms of the stay order would result in dismissal of the appeal without future indulgence.

Against the stay order of the Tribunal, appellant filed appeal before the High Court.

Appellant contention: - Appellant contended that the appellant had very strong case on merits. In written argument, appellant contended that they were going through severe financial difficulties and suffered a net loss of Rs 28.11 crores for the year 2008-09, Rs 20.17 crores in the year 2009-10 and the accumulated loss on 31.3.2010 was Rs 61.16 crores. They also furnished the relevant extract from the published Balance sheets.

Appellant contended that they were not liable to pay service tax claimed to be due by the respondent as they had not collected service tax from their client. They had submitted that their financial hardship had not be taken into consideration by the Tribunal as they erred in directing the appellants to pay RS. 2.00 crores as pre-deposit for the appeal to be entertained. Reliance was placed on decision given in the case of Benara Valves Ltd. v. Commissioner of Central Excise [2006 (204) E.L.T. 513 (S.C.)].

Reasoning of Judgment:- The High Court held that Section 35B(1)(a) of the Act enables any person aggrieved by a decision or order passed by the Commissioner of Central Excise as an Adjudicating Authority to appeal to the Appellate Tribunal against such order. Under Section 35F, where in any appeal the decision or order appealed against relates to any duty demanded in respect of goods which are not under the control of the central excise authorities or any penalty levied under the 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. Under the proviso to Section 35F where, in any particular case, the Tribunal is of the opinion that deposit of the duty demanded or penalty levied would cause undue hardship to such person, it may dispense with such deposit subject to such conditions as it may deem fit to impose so as to safeguard the interests of revenue.

Thereafter, reliance was placed on the following principles enumerated in various judgments of the Apex Court and of High Court: -

- It was noted that the impugned order of the Tribunal is in an application filed by the Petitioner seeking waiver of pre-deposit under Section 35-F of the Act. While dealing with the primary challenge in the appeal, which is to the order relating to pre-deposit, this Court would not go into the merits and express its views thereon. {Union of India v. Adani Exports Ltd [(2007) 13 SCC 207)]

- The law presumes that public authorities function properly and bona fide with due regard to public interest before examining the order passed by the Tribunal. This Court would be circumspect in granting interim orders of far-reaching dimensions or orders preventing collection of public revenue for no better reason than that the parties had come to the Court alleging prejudice, inconvenience or harm and that a prima facie case has been shown. There can be and there are no hard and fast rules. But prudence, discretion and circumspection are called for. There are several other vital considerations apart from the existence of a prima facie case. There is the question of balance of convenience. There is the question of irreparable injury. There is also the question of public interest. (CCE v. Dunlop India Ltd [(1985) 1 SCC 260])

- In matters relating to grant of stay, pending disposal of appeal, the Tribunal must exercise discretion judicially, and should pass an order which is fair, legal and in public interest. (Benara Valves Ltd [(2006) 13 SCC 347]).

- On merely establishing a prima facie case, interim order of protection should not be passed. 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. Petitions for stay should not be disposed of in a routine matter 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. (Indu Nissan Oxo Chemicals Industries Limited v/s Union of India [(2007) 13 SCC 487])

- The Petitioner has no absolute right of stay. He can obtain stay of realisation of tax levied or penalty imposed in an appeal subject to the limitations of Section 35-F of the Act, which gives discretion to the authority to dispense with the obligation to deposit in case of ‘undue hardship’. That discretion must be exercised on relevant material, honestly, bona fide and objectively. (Bhavya Apparels (P) Ltd. v. Union of India [(2007) 10 SCC 129]).

- Two significant expressions, used in Section 35-F of the Act, are “undue hardship to such person” and “safeguard the interests of revenue”. While dealing with an application filed under Section 35-F these twin considerations must be kept in view. The word “undue” adds something more to “hardship”. It means an excessive hardship or a hardship greater than the circumstances warrant. “Undue hardship” is normally related to economic hardship. “Undue” 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 in complying with it. “Undue hardship” is a matter within the special knowledge of the Applicant for waiver, and has to be established by him. A mere assertion of undue hardship would not suffice. Imposition of conditions, to safeguard the interest of revenue, 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 interest of revenue. The Tribunal, while dealing with the application, has to consider the material placed by the Assessee relating to undue hardship, and should stipulate conditions required to safeguard the interest of revenue. (Benara Valves Ltd. (2006) 13 SCC 347; S. Vasudeva v. State of Karnataka AIR 1994 SC 923; Monotosh Saha v. Special Director, Enforcement Directorate (2008) 12 SCC 359).

The following principles should be kept in mind while considering the applications for stay or for dispensing with the requirement of pre-deposit under Section 35F of the Act: -

(i) 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
(ii) Interim order ought not be granted merely because a prima-facie case has been shown
(iii) The balance of convenience should 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
(iv) While dealing with the application, the twin requirement of consideration i.e. consideration of undue hardship, and imposition of conditions to safeguards the interests of revenue must be kept in view.
(v) When the Tribunal decides to grant full or partial stay, it has to impose such condition as may be necessary to safeguard the interests of the revenue. This is an imperative requirement
(vi) An Appellate Authority, being a creature of the statute, cannot ignore the statutory guidance while exercising general power or expressly conferred incidental powers [Commissioner of Central Excise, Guntur VS Sri Chaitanya educational committee, 2011 (22) S.T.R. 135 (A.P.)]

On merits, the High Court held that there is no reason to go into the merits of the appeal pending before the Tribunal or to examine whether the Respondent was justified in levying service tax, interest and penalty under the Finance Ac t, 1994 with regards the services allegedly rendered by the Appellant during the period 15^th September, 2003 to 31st December, 2007. It was only noted that the Tribunal in the order under challenge had observed that the Appellant had not made out a prima facie case for complete waiver of the amount adjudged.

Considering the afore-said judgments, the High Court examined the contentions raised by the parties. The primary contention is that the Tribunal, while granting conditional waiver of pre-deposit, did not take into consideration the financial hardship of the Appellant. As noted hereinabove, the twin requirements which Section 35-F of the Act requires the Tribunal to consider are the financial hardship of the Appellant, and the manner in which the interest of revenue is to be protected. As against the service tax demanded of Rs. 6,91,96,898 and penalty imposed for a like amount, i.e. a total sum of nearly 14 Crores, the Tribunal has merely directed the Appellant to deposit Rs 2.00 Crores. While the submission of petitioner that the order of the Tribunal does not reflect the Petitioner’s financial hardship having been taken into consideration cannot be said to be without merit, it needs also to be borne in mind that the other essential requirement of Section 35-F of the Act is that the interest of the revenue should be protected. How the requirement of pre-deposit of Rs. 2 Crores, as against the total tax and penalty demanded of nearly Rs. 14 Crores, would safeguard the interests of revenue is difficult to fathom. But then the Revenue has not come in appeal before us, and it is only the Assessee who is aggrieved by the order of the Tribunal requiring them to deposit less than 15 per cent of the tax and penalty demanded under the order of the Respondent. While Section 35-G of the Act requires the Tribunal to consider, and form an opinion, whether deposit of duty demanded or penalty levied would cause undue hardship to the Appellant, it does not mandate the Tribunal to waive pre-deposit in every case of undue hardship. As the Tribunal has also to consider protecting the interest of revenue, discretion exercised by Tribunal in granting partial waiver of deposit, and directing the Appellant to deposit less than 15 per cent of the total tax and penalty, would not justify interference by this Court. It is only if the exercise of discretion by Tribunal, substantially waiving the requirement of pre-deposit in the present case, is patently illegal would interfere by this Court, under Section 35-G of the Act, be justified. The order, requiring the Appellant to deposit Rs. 2 Crores, which is less than 15 per cent of the tax and penalty demanded of nearly Rs. 14 Crores, cannot be said to be a patently illegal exercise of discretion by the Tribunal. The High Court held that it was satisfied that the order of the Tribunal does not necessitate interference in an appeal filed by the Appellant herein under Section 35-G of the Act. The only relief which the Appellant is entitled to is for extension of time to deposit the said amount of Rs. 2.00 Crores. In case the Appellant deposits the said amount within three weeks from today, the Tribunal may entertain their appeal, and adjudicate thereupon in accordance with law.

Decision: - Appeal dismissed.

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PJ/Case Laws/2012-13/1001

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