The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) Allahabad has clarified that amounts paid by taxpayers under protest, even if initially treated as duty, do not acquire the character of duty if the underlying classification is later overturned. This judgment reinforces the principle that interest must be paid on such deposits upon refund, irrespective of whether they were labeled as duty in returns.
Background & Facts
The Dispute
M/s Som Pan Products Pvt. Ltd. (Respondent) is a manufacturer of chewing tobacco and unmanufactured tobacco products, including a product marketed as "Zarda Scented Tobacco." The Department of Central Goods and Services Tax (CGST), Noida, issued a Show Cause Notice dated 04.05.2016 proposing to recover duty of Rs. 56,12,275 on the ground that the Respondent had incorrectly classified Zarda Scented Tobacco under CETSH 240399.10 (chewing tobacco) instead of CETSH 240399.30 (Zarda). The Respondent contested the classification and paid the demanded amount under protest.
Key Facts
- The Respondent commenced manufacturing chewing tobacco w.e.f. 01.05.2015
- The Department issued a capacity determination order on 05.05.2015, which the Respondent did not accept
- The Respondent deposited the disputed amount under protest, citing Rule 6(1) of the Chewing Tobacco Packing Rules
- The amount was not declared as duty in the ER-1 returns
- The Adjudicating Authority, by Order dated 16.03.2017, confirmed the demand and imposed an equal penalty
- The Respondent appealed to CESTAT, which, by Final Order No. 72313-72317/2018 dated 25.09.2018, allowed the appeal and held that the product was correctly classified as chewing tobacco under CETSH 240399.10
- The Revenue filed an appeal before the Supreme Court against the CESTAT order
- The Supreme Court dismissed the Revenue’s appeal on 10.01.2026
- The Respondent filed a refund claim for Rs. 5,01,96,143 paid under protest
- The Assistant Commissioner, by Order dated 14.11.2018, sanctioned refund of Rs. 4,99,30,330 but denied refund of Rs. 2,65,813 and interest on the entire amount
- The Commissioner (Appeals), by Order dated 08.05.2019, allowed the appeal and directed refund of the entire amount with interest
Procedural History
- 04.05.2016: Show Cause Notice issued proposing duty demand of Rs. 56,12,275
- 05.05.2015: Capacity determination order issued by Department (rejected by Respondent)
- 16.03.2017: Adjudicating Authority confirms demand and penalty
- 25.09.2018: CESTAT allows appeal, holds correct classification is CETSH 240399.10
- 10.01.2026: Supreme Court dismisses Revenue’s appeal against CESTAT order
- 14.11.2018: Assistant Commissioner grants partial refund but denies interest
- 08.05.2019: Commissioner (Appeals) allows refund with interest
- 12.03.2026: Hearing before CESTAT Allahabad
- 15.04.2026: Final Order passed
The Parties' Positions
Revenue (Appellant): Argued that the amount paid was duty, not a deposit; that the Respondent accepted the classification in ER-1 returns; and that interest is not payable under Section 11B of the Central Excise Act as the payment was not a refund of duty but a voluntary deposit.
Respondent: Contended that the payment was made under protest, not in compliance with any final determination; that the classification was disputed from inception; and that the amount was never treated as duty in accounting or returns.
Relief Sought
The Respondent sought full refund of Rs. 5,01,96,143 with interest at the statutory rate from the date of deposit until realization. The Commissioner (Appeals) had granted this relief. The Revenue appealed to set aside the interest component.
The Legal Issue
Is interest payable on the refund of an amount paid by a taxpayer under protest, where the underlying classification of goods is later held to be correct by the appellate authority and the Revenue’s appeal is dismissed by the Supreme Court, even if the amount was initially labeled as duty in the department’s demand?
Arguments Presented
For the Appellant
The Revenue contended that the amount paid by the Respondent was a payment of duty under Section 11B of the Central Excise Act, and therefore interest could not be granted unless the payment was made under protest and subsequently refunded as duty. It argued that the Respondent had filed ER-1 returns indicating the amount as duty, and that the Show Cause Notice was issued to appropriate the amount as duty, not as a deposit. It relied on the principle that once an amount is paid as duty, it becomes part of the revenue stream and cannot be treated as a mere deposit.
For the Respondent
The Respondent relied on Parle Agro Pvt Ltd v. Commissioner CGST, Noida (2022), Ucal Fuel Systems Ltd. v. CC E, Chennai-II (2014), and Toyota Kirloskar Auto Parts Pvt. Ltd. v. CCus., Bangalore (2009) to argue that interest is payable on refund of amounts paid under protest when the underlying liability is extinguished. It emphasized that the payment was made under compulsion, not voluntary compliance, and was never accepted as duty in the Respondent’s books or returns. It further cited Godfrey Phillips India Ltd. v. CCE & ST, Ghaziabad (2017) to assert that classification is a matter of legal determination, not administrative fiat, and that the Department’s demand did not bind the taxpayer.
The Court's Analysis
The Tribunal examined the nature of the payment and the procedural posture of the case. It noted that the Respondent had consistently disputed the classification from the outset, refused to accept the Department’s determination under Rule 7 and Rule 9 of the Chewing Tobacco Capacity Determination Rules, and paid the amount only under protest. The Show Cause Notice dated 04.05.2016 was issued to appropriate the amount as duty, but the Respondent never conceded liability.
"The very Show Cause Notice which was issued to appropriate the amount deposited by the Appellants has been set aside by this Bench and therefore, the fact that the appellants deposited an amount, and not duty, is settled."
The Tribunal held that the Assistant Commissioner’s Order dated 14.11.2018 had already recognized the payment as a revenue deposit, not duty, and this finding was not challenged by the Revenue in its appeal before the Commissioner (Appeals). The Tribunal emphasized that the Revenue’s failure to challenge this finding at the first appellate stage precluded it from raising the issue at the appellate tribunal level.
The Tribunal further noted that the Supreme Court’s dismissal of the Revenue’s appeal against the CESTAT order dated 25.09.2018 conclusively established that the classification of the product as chewing tobacco under CETSH 240399.10 was correct. This rendered the entire basis of the demand void ab initio. The Tribunal relied on settled jurisprudence that where a taxpayer pays an amount under protest and the liability is later extinguished, the payment is treated as a deposit, and interest is payable on refund.
The Tribunal rejected the Revenue’s argument that the amount was treated as duty in ER-1 returns, noting that such declarations are procedural and do not alter the legal character of the payment. The Tribunal held that the Respondent’s conduct - consistent protest, non-acceptance of classification, and absence of voluntary payment - clearly indicated that the payment was not duty but a deposit.
The Verdict
The Revenue’s appeal was dismissed. The Tribunal upheld the Commissioner (Appeals)’s order dated 08.05.2019, directing the refund of Rs. 5,01,96,143 with interest at the statutory rate of 6% per annum from the date of each deposit until actual payment. The Tribunal directed the Department to process the refund and interest within 6 weeks of the order date. Costs of Rs. 10,000 were awarded to the Respondent.
What This Means For Similar Cases
Interest Is Mandatory on Protest Payments
- Practitioners must now assert interest claims on all amounts paid under protest, even if initially classified as duty in departmental notices or returns
- The legal character of the payment is determined by the taxpayer’s conduct and intent, not by departmental labeling
- Failure to claim interest at the first appellate stage does not waive the right if the underlying liability is extinguished
Classification Disputes Do Not Convert Deposits Into Duty
- Taxpayers disputing classification are not obligated to pay duty; any payment under compulsion remains a deposit
- ER-1 declarations are procedural and do not constitute admission of liability
- The burden shifts to the Department to prove voluntary payment, not merely the existence of a demand
Precedent from Other Tribunals Is Binding
- CESTAT affirmed the applicability of rulings from Madras, Bangalore, and Delhi benches on interest on protest payments
- The Parle Agro and Toyota Kirloskar precedents are now binding on all CESTAT benches for similar factual matrices
- Practitioners should cite these cases in all refund and interest claims arising from disputed classifications
