The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has clarified that amounts paid under coercive or legally untenable departmental directions during the SVLDRS regime are not deemed payments under the scheme and must be refunded. This ruling reinforces the principle that taxpayers cannot be penalized for complying with unlawful administrative demands.
Background & Facts
The Dispute
The appellant, Gokul Auto Industries, engaged in manufacturing batteries under Chapter 85 of the Central Excise Tariff Act, 1984, was found to have evaded Central Excise Duty by clearing goods clandestinely between 01.04.2010 and 26.03.2013 without registration, invoices, or duty payment. The turnover exceeded Rs. 1.5 Crores annually, but the appellant concealed this by selling goods on unrecorded "chits" and destroying them post-dispatch.
Key Facts
The appellant manufactured and cleared goods without Central Excise registration from 01.04.2010 to 26.03.2013
Show Cause Notice (SCN) dated 27.03.2015 proposed confiscation of goods valued at Rs. 38,24,205 and penalty
Second SCN dated 16.09.2013 proposed recovery of duty of Rs. 98,89,979 with interest and penalty
Combined adjudication order dated 29.03.2016 imposed:
Confiscation of goods with option to redeem on payment of Rs. 10,00,000 redemption fine
Penalty of Rs. 2,50,000
Duty demand of Rs. 98,89,979 with matching penalty
Rs. 8,00,000 paid during investigation adjusted against duty
Appellant filed appeal before CESTAT during pendency of adjudication order
Procedural History
22.10.2019: Department informed appellant that SVLDRS-2019 does not cover waiver of redemption fine; application liable for rejection
03.12.2019: Appellant paid Rs. 10,00,000 as redemption fine under compulsion
06.12.2019: Appellant requested issuance of Form SVLDRS-3
09.12.2019: Department issued SVLDRS-3 and SVLDRS-4 discharge certificate
16.09.2020: Appellant applied for refund of Rs. 10,00,000 redemption fine, relying on M/s Synpol Products Pvt Ltd v. Union of India (SCA No. 21744/2019)
31.12.2021: Assistant Commissioner rejected refund under Section 11B of Central Excise Act, citing no refund provision under SVLDRS-2019
29.11.2022: Commissioner (Appeals) upheld rejection, holding redemption fine is part of "duty payable" under SVLDRS
05.01.2026: Hearing before CESTAT
23.04.2026: Final order passed by CESTAT
The Parties' Positions
For the Appellant
Redemption fine was paid only because the department illegally insisted on it as a precondition for SVLDRS application
Department’s communication dated 22.10.2019 and 08.11.2019 were legally untenable per Synpol Products
Payment was not voluntary under SVLDRS; it was compelled by unlawful direction
Synpol Products held redemption fine must be included in arrears for declaration eligibility, but not as a prepayment condition
Refund should be allowed as payment was made under duress and contrary to judicial pronouncement
For the Respondent
Redemption fine was paid voluntarily as part of SVLDRS compliance
SVLDRS-2019 does not provide for refund of any amount paid under the scheme
Section 130(2) of Finance Act, 2019 bars refund of excess pre-deposits
Payment of redemption fine was integral to settlement under SVLDRS
Synpol Products only clarified eligibility criteria, not refund entitlement
Relief Sought
The appellant sought:
Refund of Rs. 10,00,000 paid as redemption fine
Setting aside of the Commissioner (Appeals) order dated 29.11.2022
Setting aside of the Assistant Commissioner’s order dated 31.12.2021
Costs of litigation
The Legal Issue
Can a taxpayer claim refund of a redemption fine paid under a departmental direction that was later declared legally untenable by the High Court, where such payment was not a prerequisite under the SVLDRS-2019 scheme?
Arguments Presented
For the Appellant
The appellant relied on the judgment in M/s Synpol Products Pvt Ltd v. Union of India (SCA No. 21744/2019), wherein the Gujarat High Court held that requiring payment of redemption fine as a precondition for filing a declaration under SVLDRS-2019 is legally unsustainable. The court clarified that redemption fine must be included in the calculation of arrears under Section 121(c), but cannot be made a pre-deposit condition under Section 125. The appellant argued that the department’s insistence on payment before accepting the SVLDRS application was ultra vires, and the payment was made under compulsion. Citing Commissioner of Customs v. Ghaziabad Ship Breakers Ltd and Commissioner of Central Excise v. J.M. Baxi & Co., the appellant contended that payments made under illegal directions, even if labeled as "pre-deposits," are refundable upon judicial reversal of the direction, without invoking unjust enrichment.
For the Respondent
The department argued that the redemption fine was paid as part of the SVLDRS settlement process and that Section 130(2) of the Finance Act, 2019 explicitly bars refund of any amount paid under the scheme. It contended that Synpol Products only addressed eligibility for filing a declaration, not entitlement to refund of amounts already paid. The department maintained that the appellant had voluntarily opted for SVLDRS, received discharge under Form SVLDRS-4, and could not now seek refund of amounts paid to secure that discharge.
The Court's Analysis
The Tribunal undertook a detailed analysis of the legal framework under SVLDRS-2019 and the binding precedent set by the Gujarat High Court in M/s Synpol Products Pvt Ltd v. Union of India. The court emphasized that the department’s communications dated 22.10.2019 and 08.11.2019, which conditioned SVLDRS application on payment of redemption fine, were directly contrary to the High Court’s holding that such a condition violates Section 125 of the Scheme.
"The interpretation made by the Board in the communication dated 20.12.2019 in order to consider the declaration made by the declarant, the payment of redemption fine is prerequisite, is not tenable in law, because as per Section 125 of the Scheme a declarant cannot be made ineligible to file a declaration for non-payment of redemption fine."
The Tribunal noted that the appellant had no legal obligation to pay the redemption fine prior to filing the SVLDRS declaration. The payment was made solely in response to an illegal directive. The Tribunal rejected the department’s argument that the payment was "under SVLDRS," observing that the department itself had denied that redemption fine was covered under the scheme. Therefore, the payment could not be classified as a payment made under the scheme’s provisions.
The Tribunal further held that the Commissioner (Appeals) erred in conflating the inclusion of redemption fine in arrears (as required under Section 121(c)) with the requirement of its prior payment. The High Court’s judgment did not mandate prepayment; it mandated inclusion in the declaration. The appellant’s failure to include the fine in the declaration was not due to negligence, but because the department had refused to accept the declaration unless the fine was paid first.
The Tribunal also relied on the principle established in Ghaziabad Ship Breakers Ltd and J.M. Baxi & Co., that payments made under illegal administrative directions, even if labeled as pre-deposits, are refundable when the direction is judicially invalidated, without requiring proof of unjust enrichment.
The Verdict
The appeal was allowed. The CESTAT set aside the Commissioner (Appeals) order dated 29.11.2022 and the Assistant Commissioner’s order dated 31.12.2021. The department was directed to refund the redemption fine of Rs. 10,00,000 to the appellant within 6 weeks from the date of the order. Interest at 6% per annum was awarded from 03.12.2019 (date of payment) until actual refund. Costs of Rs. 25,000 were awarded to the appellant.
What This Means For Similar Cases
Payments Made Under Illegal Directions Are Refundable
Practitioners must now argue that any payment made under a departmental directive later declared unlawful by a court is not a valid payment under the scheme
The burden shifts to the department to prove that the payment was voluntary and not coerced
Refund claims under Section 11B of the Central Excise Act cannot be rejected solely on the ground that the amount was paid during a settlement scheme
SVLDRS Settlement Does Not Bar Refund of Illegally Extracted Payments
Settlement under SVLDRS-2019 does not extinguish the right to refund amounts paid under illegal conditions
Section 130(2) applies only to excess payments made voluntarily under the scheme’s terms, not to payments compelled by unlawful directives
Taxpayers who paid redemption fines, interest, or penalties under erroneous departmental interpretations may now seek refund if judicial precedent invalidates the basis of such demand
Procedural Compliance Must Align with Judicial Pronouncements
Revenue authorities must immediately align internal communications with binding court rulings
Delayed compliance with judicial orders exposes the department to refund liabilities and litigation costs
Taxpayers should document all coercive communications and promptly file refund claims upon favorable judgments
