High Court Allows Use of Transitioned CENVAT Credit for CESTAT Pre-Deposit Under GST, Restores Appeal

The Delhi High Court allowed the organisation to use the transitioned CENVAT credit for the CESTAT pre-deposit under GST, rejecting CBIC circular objections raised by the tax department. In conclusion, it restored the appeal.

The present writ petition has been filed in the Delhi High Court by an organisation named Army Welfare Housing, challenging an order dated June 23, 2023, raising a tax demand amounting to Rs. 84.95 crore, along with a penalty.

The key dispute in the current case is “whether CENVAT Credit, which was lying in the account of the Petitioner prior to the coming into effect of the GST regime, i.e., before 1st July, 2017, and was transitioned into the electronic credit ledger of the Petitioner after the GST regime, can be used for making a pre-deposit in respect of an appeal to be filed before the Customs Excise and Service Tax Appellate Tribunal (CESTAT)”.

The dispute began when the tax department levied a service tax demand of Rs. 84.95 crore on the organisation. The aggrieved organisation filed an appeal before the CESTAT; however, it rejected the same because a proper pre-deposit was not made. The organisation had asked to use credit in DRC-03 for pre-deposit, which was not allowed by CENVAT. Therefore, in conclusion, it ruled that the pre-deposit could not be paid using transitioned CENVAT credit under GST.

However, the organisation disagreed with the decision of CESTAT and cited earlier judgments of the Bombay High Court and the tribunal, each of which permitted using CENVAT credit or DRC-03 for pre-deposit. Further argued that the tax department should not take away earlier rights permitted under the old law just because the GST regime was introduced.

However, the tax department opposed the argument of the organisation, citing an earlier CBIC circular dated October 28, 2022, which stated that payment for pre-deposit should not be made using DRC-03 under the Central Excise Act or Finance Act.

When the Delhi High Court analysed the arguments of both sides, it noted that CENVAT credit lawfully can be used to pay tax, interest, or penalty. The Court clarified that a pre-deposit is nothing but a partial payment of the disputed tax or penalty.

To announce the final decision, the High Court cited earlier judgments of the High Court and Supreme Court decisions, including the Gujarat High Court’s ruling in Yasho Industries and Bombay High Court decisions, all of which favour the assessee, ruling that credit in the electronic credit ledger can be used for making a pre-deposit. In conclusion, the court allowed the petitioner to make payment of the pre-deposit using CENVAT credit, even after the introduction of GST.

Directed the organisation to furnish Form DRC-03 within 15 days, after which CESTAT must restore and hear the appeal on merits. Finally, disposed of the writ petition and the appeal was restored.