Limitation Not Applicable When Refund Is Appropriated During Pending Appeal: Madras High Court Ruling

The Madras High Court in Sanmar Matrix Metals Ltd. Vs Commissioner of GST And Central Excise has clarified an important aspect of refund and limitation under the Central Excise Act, 1944. Where the department appropriates a sanctioned refund during the pendency of an appeal against the underlying demand, such appropriation is to be treated as payment of duty under protest. As a consequence, the time limit under Section 11B for filing a refund claim does not apply.

This judgment provides significant relief to assessees facing appropriation of amounts during ongoing appellate proceedings and reinforces judicial views that contesting a demand itself amounts to protest.

Background of the Dispute

Status of the Appellant and CENVAT Credit Issue

  • The appellant, Sanmar Matrix Metals Ltd., was an assessee governed by the Central Excise Act, 1944, and subsequently migrated to the GST regime.
  • The assessee had availed CENVAT credit on:
    • Excise duty paid on inputs and capital goods, and
    • Service tax paid on input services
      under the CENVAT Credit Rules, 2004.
  • A show cause notice dated 03.06.2011 was issued proposing to deny CENVAT credit of service tax on input services for the period May 2010 to March 2011.
  • The adjudicating authority confirmed the proposal via Order-in-Original No. 4/2012 dated 30.03.2012, raising a demand of Rs. 18,66,451/- along with interest and penalty.

Appeals Against Denial of CENVAT Credit

  • The assessee challenged the Order-in-Original before the first appellate authority, which dismissed the appeal.
  • The assessee then filed a further appeal before the CESTAT, South Zonal Bench, Chennai.
  • During the pendency of this appeal, CESTAT passed an interim stay order dated 06.05.2013, directing:
    • A pre-deposit of Rs. 10,000/- within four weeks, and
    • Granting stay of recovery of dues arising from Order-in-Original No. 4/2012 during the pendency of the appeal, upon such pre-deposit.

Parallel Refund Claim and Subsequent Appropriation

Refund Sanction Under Rule 18

  • Independently of the CENVAT dispute, the assessee had filed a rebate/refund application under Rule 18 of the Central Excise Rules, 2002, seeking refund of excise duty paid on goods exported.
  • This refund claim was processed, and by order dated 06.05.2014 (Order-in-Original relating to rebate), the department sanctioned the rebate.

Adjustment of Sanctioned Rebate Against Arrears

  • Instead of releasing the refund amount to the assessee, the department appropriated the rebate towards:
    • Alleged arrears of revenue including the demand and penalty confirmed in Order-in-Original No. 4/2012 dated 30.03.2012,
    • Along with other arrears, aggregating to Rs. 74,32,547/-, after adjusting the rebate of Rs. 7,92,177/-.
  • The appropriation order took note of the CESTAT stay order dated 06.05.2013, but proceeded on the footing that the stay had lapsed under the then-prevailing provisos to Section 35C(2A).

Tribunal’s Final Decision in CENVAT Appeal

  • The CENVAT appeal was finally heard by CESTAT, which passed a final order dated 10.12.2018, setting aside the demand arising out of Order-in-Original No. 4/2012.
  • As a result, the very basis on which the earlier appropriation of rebate had been made ceased to exist.

Assessee’s Claim for Return of Appropriated Amount

Refund Request and Rejection on Limitation Grounds

  1. Following the favourable CESTAT order, the assessee addressed a communication dated 14.08.2020, referring also to an earlier letter dated 27.07.2020, seeking return of the rebate amount that had been appropriated towards the demand under Order-in-Original No. 4/2012.
  2. The department rejected this request via Order-in-Original No. 23/2020 dated 18.09.2020, on two principal grounds:
    • The amount appropriated was not in the nature of pre-deposit, and hence could not be refunded merely on a letter, and
    • The request was barred by limitation under Section 11B, on the basis that:
      • The CESTAT order was dated 10.12.2018, and
      • The refund claim ought to have been made within one year from this date, in terms of Explanation (B)(ec) to Section 11B.