What constitutes payment under protest under Section 11B of the Central Excise Act?

Payment under protest is deemed to exist when a taxpayer pays duty or has amounts appropriated while an appeal against the levy is pending and a stay order is in force, as held in Electro Steel Castings Ltd. and Derm Snuff (P) Ltd. The filing of an appeal itself constitutes protest.

Can a refund claim be barred by limitation if the amount was appropriated during a stay order?

No. If the appropriation occurs during the pendency of an appeal with a stay order, the payment is treated as under protest under the second proviso to Section 11B, and the one-year limitation does not apply, regardless of when the refund claim is filed.

Does the closure of a writ petition challenging an appropriation order prevent a subsequent refund claim?

No. Closure of a writ petition on procedural grounds does not estop a taxpayer from raising the issue of limitation under Section 11B in a separate refund appeal, as the legal questions addressed are distinct.

Section 11B refund claim Madras HC: duty paid under protest

The Madras High Court has clarified that when a taxpayer pays duty or has amounts appropriated during the pendency of an appeal with a stay order, such action constitutes payment under protest, thereby exempting any subsequent refund claim from the one-year limitation under Section 11B of the Central Excise Act. This ruling reinforces the principle that procedural compliance with stay orders is not optional for revenue authorities and that statutory remedies must be respected even when appeals are pending.

Background & Facts

The Dispute

The appellant, M/s. Sanmar Matrix Metals Ltd., was assessed under the Central Excise Act, 1944, and later migrated to the GST regime. The Department issued a show cause notice dated 03.06.2011 proposing to deny CENVAT credit for service tax paid on input services during May 2010 to March 2011. This denial was confirmed by the adjudicating authority in Order-in-Original No.4/2012 dated 30.03.2012, which imposed a demand of Rs. 18,66,451/- along with interest and penalty.

Key Facts

The appellant filed an appeal against Order-in-Original No.4/2012 before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT)
On 06.05.2013, CESTAT passed an interim order staying recovery of the disputed demand, subject to a pre-deposit of Rs. 10,000/-
The appellant complied with the pre-deposit condition
On 06.05.2014, the Department issued Order-in-Original No.30/2014 appropriating a rebate of Rs. 7,92,177/- granted for export goods, against the disputed demand under Order-in-Original No.4/2012
The appropriation order explicitly acknowledged the stay order dated 06.05.2013 but proceeded to adjust the amount anyway
On 10.12.2018, CESTAT allowed the appellant’s appeal and set aside the demand under Order-in-Original No.4/2012
On 14.08.2020, the appellant requested return of the appropriated rebate amount
The request was rejected on 08.09.2020 on grounds of limitation and lack of pre-deposit character
The rejection was upheld by the first appellate authority on 15.03.2021 and by CESTAT in Final Order No.42294/2021 dated 08.09.2021

Procedural History

03.06.2011: Show cause notice issued proposing denial of CENVAT credit
30.03.2012: Order-in-Original No.4/2012 confirming demand of Rs. 18,66,451/-
25.09.2012: First appellate authority confirmed the demand
06.05.2013: CESTAT granted stay on recovery, subject to pre-deposit of Rs. 10,000/-
06.05.2014: Department issued Order-in-Original No.30/2014 appropriating rebate of Rs. 7,92,177/- despite stay order
10.12.2018: CESTAT set aside the demand under Order-in-Original No.4/2012
14.08.2020: Appellant requested return of appropriated rebate
08.09.2020: Request rejected by Department on limitation grounds
15.03.2021: First appellate authority upheld rejection
08.09.2021: CESTAT confirmed rejection in Final Order No.42294/2021
08.04.2022: Civil Miscellaneous Appeal filed before Madras High Court under Section 35G of the Central Excise Act
02.04.2026: Matter reserved for judgment
08.04.2026: Judgment pronounced

Relief Sought

The appellant sought setting aside of CESTAT’s order dated 08.09.2021 and a direction to the Department to refund the appropriated amount of Rs. 7,92,177/- without application of the one-year limitation under Section 11B.

The Legal Issue

The central question was whether a refund claim for an amount appropriated during the pendency of an appeal with a stay order qualifies as payment under protest under the second proviso to Section 11B of the Central Excise Act, 1944, thereby exempting it from the one-year limitation period prescribed under Explanation (ec) to Section 11B.

Arguments Presented

For the Appellant

The appellant argued that the appropriation of the rebate amount on 06.05.2014 occurred while a stay order was in force, and the appeal against the underlying demand was pending. The filing of the appeal itself constituted a protest against the levy, as held in Electro Steel Castings Ltd. and Derm Snuff (P) Ltd. The Department’s action in ignoring the stay order and appropriating funds amounted to coercive recovery, which under judicial precedent, must be treated as payment under protest. The second proviso to Section 11B explicitly excludes such payments from limitation, and the Department’s reliance on the expired provision regarding automatic vacation of stay was legally untenable.

For the Respondent

The Department contended that the appropriation order dated 06.05.2014 was not challenged through a writ petition until 2014 - 2015, and those writ petitions were closed on 22.07.2019. Therefore, the appellant was estopped from collaterally challenging the appropriation order in a refund appeal. Further, the refund claim was filed on 14.08.2020, more than one year after the CESTAT order of 10.12.2018, and thus barred under Explanation (ec) to Section 11B. The Department also argued that the rebate was not a duty paid under protest but a separate statutory benefit, and its appropriation was lawful under the unamended provisions of Section 35C(2A) prior to 01.10.2014.

The Court's Analysis

The Court undertook a detailed examination of Section 11B, its provisos, and the jurisprudence on payment under protest. It emphasized that the second proviso to Section 11B explicitly excludes from limitation any duty paid under protest. The Court held that the very act of filing an appeal against a tax demand, coupled with the existence of a stay order, constitutes a clear protest against the legality of the levy.

"Now, where a person proposes to contest his liability by way of appeal, revision or in the higher courts, he would naturally pay the duty, whenever he does, under protest. It is difficult to imagine that a manufacturer would pay the duty without protest even when he contests the levy of duty, its rate, classification or any other aspect..."

The Court relied on Commissioner of C. Ex., Chennai-II v. Electro Steel Castings Ltd. and Derm Snuff (P) Ltd. v. Commissioner of Central Excise, where the Supreme Court held that payment made during pendency of appeal is deemed to be under protest. The Madras High Court extended this principle to situations where the revenue authority appropriates a refund during the pendency of an appeal with a stay order. The Court rejected the Department’s argument that the stay order was automatically vacated under Section 35C(2A), noting that the provision required delay attributable to the appellant, which was not established.

The Court further held that the closure of writ petitions on 22.07.2019 did not foreclose the present appeal, as those petitions addressed the legality of the appropriation order directly, while the present appeal addressed the legal effect of the appropriation under Section 11B. The Court clarified that it was not re-adjudicating the appropriation order but determining whether the appropriation triggered the protection of the second proviso.

The Court also noted the Department’s Circular dated 04.07.2016, which prohibited recovery during stay, reinforcing that the Department’s conduct was inconsistent with its own policy.

The Verdict

The appeal was allowed. The Madras High Court set aside the CESTAT’s Final Order No.42294/2021 dated 08.09.2021. The Department was directed to refund the amount of Rs. 7,92,177/- appropriated against the demand under Order-in-Original No.4/2012, within six weeks from the date of receipt of a copy of this judgment. No costs were awarded.

What This Means For Similar Cases

Payment Under Protest Is Presumed During Stay

Practitioners can now assert that any tax payment or appropriation occurring during the pendency of an appeal with a stay order is legally deemed to be under protest
This presumption applies even if the taxpayer does not file a formal protest letter
The burden shifts to the revenue authority to prove the absence of protest, which is nearly impossible when a stay is in force

Limitation Does Not Apply to Refunds Triggered by Stay-Based Appropriations

Refund claims arising from amounts appropriated during stay periods are not subject to the one-year limitation under Section 11B
Taxpayers may file refund claims years after the appropriation, provided the underlying demand was set aside and the appropriation occurred during a stay
This creates a powerful tool for taxpayers to recover funds even if they delayed filing due to litigation pendency

Revenue Authorities Cannot Exploit Procedural Gaps

The Department cannot rely on expired or misapplied provisions (e.g., Section 35C(2A)) to bypass stay orders
Any attempt to appropriate funds during a stay order will be treated as a violation of statutory protections
Revenue authorities must now ensure that appropriation orders explicitly state whether a stay was lifted by order or lapse, and if not, must refrain from adjustment

Section 11B Central Excise Act | Refund Claim for Duty Paid Under Protest During Stay Order Not Time-Barred: Madras HC