The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai West Zonal Bench, set aside the Commissioner of Customs (Appeals)'s order that had adjusted Special Additional Duty (SAD) refund against duty drawback demand, holding such adjustment impermissible when the demand remains sub-judice and not final. The Tribunal directed the respondent to refund the adjusted amount with applicable interest within two months.
Background & Facts
The Dispute
M/s Johnson & Johnson P Ltd. (appellant) sought refund of SAD amounting to ₹14,28,537/- and ₹3,67,588/- against imports made during November 2016 to March 2017 and October 2016 to November 2016. The Assistant Commissioner of Customs, JNCH, Nhava Sheva-III sanctioned the refund but appropriated the amount towards duty drawback demand confirmed vide Order No. AC/JD/2850/2017-18/DBK(XOS)/ACC dated 27.03.2018. The appellant challenged this adjustment before the Commissioner (Appeals) and, after unsuccessful appeal, filed these appeals before CESTAT.
Key Facts
- The appellant filed refund applications for SAD against imports during specified periods in 2016-2017.
- Assistant Commissioner sanctioned refund vide Order-in-Original No. 238 & 239/2020-21/AM (I) NS-III (date not specified in judgment but referenced as antecedent to appeal).
- The sanctioned refund amount was appropriated towards duty drawback demand confirmed by Order No. AC/JD/2850/2017-18/DBK(XOS)/ACC dated 27.03.2018.
- Appellant filed appeal before Commissioner (Appeals) which was dismissed vide Order-in-Appeal No. 545 & 546 (CRC-SAD-VI)/2022(JNCH)/Appeals dated 10.06.2022.
- Appellant then filed revision before Revisional Authority of Government of India, which allowed the appeal and remanded matter to Original Adjudicating Authority for redetermination within 8 weeks of receipt of order.
- In compliance with remand direction, Assistant Commissioner passed fresh Order-in-Original No. AC/KVV/895/2024-25/DBK(XOS)ACC dated 16.08.2024, dropping the demand-cum-show-cause notice for recovery of drawback.
- This fact was brought to knowledge of Commissioner (Appeals) in parallel proceedings.
- Respondent-Commissioner admitted in status report dated 30.03.2026 that the drawback demand stood completely dropped pursuant to fresh Order-in-Original dated 16.08.2024.
Procedural History
- 27.03.2018: Order confirming duty drawback demand (AC/JD/2850/2017-18/DBK(XOS)/ACC)
- Order-in-Original sanctioning refund: No. 238 & 239/2020-21/AM (I) NS-III (date antecedent to appeal)
- 10.06.2022: Commissioner (Appeals) dismissed appeal vide Order-in-Appeal No. 545 & 546 (CRC-SAD-VI)/2022(JNCH)/Appeals
- Revision before Revisional Authority: allowed and remanded (date not specified, but prior to 16.08.2024)
- 16.08.2024: Fresh Order-in-Original dropping drawback demand (AC/KVV/895/2024-25/DBK(XOS)ACC)
- 30.03.2026: Status report submitted by Commissioner admitting drawback demand dropped
- 29.07.2026: Date of hearing before CESTAT
- 11.09.2026: Date of decision
The Parties' Positions
- Appellant: Contended recovery of drawback order passed without hearing violated natural justice; Revisional Authority's remand and fresh order dropping demand rendered adjustment illegal; entitled to interest on delayed refund under Section 11BB.
- Respondent: Defended Commissioner (Appeals)'s order by asserting no favourable order passed by Revisional Authority during appeal hearing; adjustment order remained in force requiring no Tribunal interference.
Relief Sought
Appellant sought setting aside of Order-in-Appeal dated 10.06.2022, refund of ₹14,28,537/- and ₹3,67,588/- with interest, and consequential relief.
The Legal Issue
The central question was whether adjustment of SAD refund against duty drawback demand under Section 142 of the Customs Act, 1962, is permissible when the duty drawback demand is sub-judice and not final, and whether the appellant is entitled to interest on delayed refund under Section 11BB of the Customs Act, 1962.
Arguments Presented
For the Appellant/Petitioner
The appellant, through Shri Bharath Menon, argued the duty drawback recovery order was passed without hearing them, violating natural justice. They relied on the Revisional Authority's remand direction and fresh Order-in-Original dated 16.08.2024 dropping the demand, asserting the Commissioner (Appeals) was aware of this development. Citing Voltas Ltd. Vs. Commissioner of Central Excise, Hyderabad-II (2006 (201) ELT 615) and Commissioner of Central Excise, Bangalore-III Vs. Stella Rubber Works (2011 (267) ELT 495), they contended adjustment under Section 142 requires finality of demand and cannot be invoked at initial stage when demand is sub-judice. They further claimed interest under Section 11BB as Commissioner (Appeals) gave no reason for non-application.
For the Respondent/State
Shri C.S. Vinod, Authorised Representative for respondent, argued the Commissioner (Appeals)'s order was correct by referring to para 8 of the Order-in-Appeal stating no favourable order was passed by Revisional Authority during appeal hearing. They maintained the demand confirmation order remained in force, negating need for Tribunal interference.
The Court's Analysis
The Tribunal noted the Commissioner's status report dated 30.03.2026 admitting the drawback demand was completely dropped pursuant to fresh Order-in-Original dated 16.08.2024. This admission by respondent-department necessitated release of adjusted amount suo moto, which had not been done.
The Tribunal examined precedent, quoting from Voltas Ltd.) decision:
"... The important thing to be noted is that these amounts decided by the Orders-in-originals were not final. Every Order-in-Original can be appealed. Therefore, at the first stage of confirmation of a demand, no finality has been reached. To put in other words, those demands cannot be called as arrears. There is a possibility that these demands could be set aside by the Commissioner (A) or the Tribunal or any other judicial forum. That is why large number of decisions hold that refund cannot be adjusted against the demands which are sub-judice."
The Tribunal held Section 142 of Customs Act, 1962 permits adjustment only when demand has reached finality. Since drawback demand was sub-judice (evidenced by remand and subsequent dropping), adjustment was illegal. Section 11 should not be invoked at initial stage; Section 11BB provides interest for delayed refunds, squarely applicable here. Commissioner (Appeals) gave no reason for non-application of Section 11BB.
The Verdict
The appeals (Customs Appeal No. 86961 and 86962 of 2022) were allowed. The Tribunal set aside the Order-in-Appeal No. 545 & 546 (CRC-SAD-VI)/2022(JNCH)/Appeals dated 10.06.2022 passed by Commissioner of Customs (Appeals), Mumbai-II. Respondent-Commissioner is directed to refund ₹14,28,537/- and ₹3,67,588/- (total ₹17,96,125/-) within two months of receipt of this order, with applicable interest as per law under Section 11BB of the Customs Act, 1962. Order pronounced in open court on 11.09.2026.
What This Means For Similar Cases
Adjustment Requires Finality of Demand
Authorities cannot adjust refund against recovery of duty drawback (or any demand) under Section 142 Customs Act, 1962 unless the demand has attained finality. Adjustment against sub-judice demands liable to be set aside is impermissible. Practitioners must verify demand finality before asserting adjustment rights.
Interest on Delayed Refund is Mandatory
When refund is wrongfully withheld due to illegal adjustment, interest under Section 11BB Customs Act, 1962 is payable from date refund became due until payment. Authorities must apply Section 11BB without requiring separate justification when adjustment is found illegal.
Procedural Compliance is Non-Negotiable
Principles of natural justice require hearing before passing orders affecting rights. Failure to comply with remand directions (e.g., releasing amounts after demand is dropped) attracts judicial intervention. Authorities must act suo moto to release funds when underlying demand is withdrawn.
