The Karnataka High Court has settled a question that has long troubled service tax appellants navigating the post-GST procedural landscape: CENVAT credit transitioned into the Electronic Credit Ledger under Section 140 of the CGST Act can validly be used to discharge the mandatory pre-deposit under Section 35F of the Central Excise Act, 1944 (as applicable to service tax appeals before CESTAT), and a CBIC Instruction to the contrary cannot override this statutory right. The ruling, by a Division Bench of Justice S.G. Pandit and Dr. Justice K. Manmadha Rao in W.P. No. 1913 of 2026 (T-RES) (decided 10.08.2026), quashes a CESTAT defect order and directs the Tribunal to treat the petitioner's ECL-based pre-deposit as valid compliance of Section 35F.

The petitioner — M/s Shakti Enterprises, engaged in sorting, blending, processing and packing of tea for Hindustan Unilever — had accumulated CENVAT credit on packing materials under the erstwhile CENVAT Credit Rules, 2004. When GST was introduced in July 2017, this credit was transitioned via Form GST TRAN-1 and credited to the Electronic Credit Ledger. A service tax demand was confirmed by the Principal Commissioner in December 2023 and the petitioner preferred an appeal before the CESTAT Bengaluru, making the mandatory pre-deposit of ₹79.77 lakh by debiting the ECL through Form GSTR-3B. The Tribunal's Registry objected, and in December 2025 the CESTAT upheld the objection, relying on a CBIC Instruction dated 28.10.2022 which prescribed that pre-deposits in legacy disputes must be made through cash payment on the designated CBIC portal.

The Karnataka Division Bench found this position unsustainable on multiple grounds. Section 35F of the Central Excise Act, as applicable to service tax appeals through Section 83 of the Finance Act, 1994, prescribes a pre-deposit as a condition for entertaining the appeal but does not specify the mode of payment. It neither mandates cash nor prohibits the use of credit. Under the pre-GST regime, CESTAT's own Circular No. 15 (dated 28.08.2014) had expressly permitted CENVAT credit to be used for pre-deposit, a position affirmed by the Gujarat High Court in Cadila Healthcare. The fundamental question was whether the transition of credit into the ECL altered this position.

The court held that it did not. Section 140 of the CGST Act was enacted precisely to protect the vested right in accumulated credit — not to create new credit but to preserve existing credit in a different form. The Supreme Court in Eicher Motors had held that validly earned credit becomes a vested right which cannot be extinguished without an express legislative provision. Rule 142(3) of the CGST Rules permits payment of tax, interest or penalty through Form DRC-03 by debiting the ECL, and pre-deposit is in substance an advance deposit of the demanded amount — i.e. tax, interest or penalty. The court also applied the Delhi High Court's ruling in Army Welfare Housing Organisation, which had specifically examined whether transitioned CENVAT credit could be used for Section 35F pre-deposit in legacy cases and held that it could.

As for the CBIC Instruction of October 2022, the court found that it addressed only the administrative procedure for cash payments through a designated portal in the absence of the legacy ACES system, and did not contain any prohibition on using credit. Even if it had, an administrative instruction cannot curtail a mode of payment recognised under the statutory scheme and by judicial precedents; it cannot override a vested right preserved by the legislature. The CESTAT's defect order was quashed and the Tribunal directed to treat the pre-deposit as valid and adjudicate the appeal on merits.

- 2026-juristway.com-2211-HC(Karnataka)-GST  |  High Court of Karnataka | W.P. No. 1913 of 2026 (T-RES)  |  10.08.2026