Court Orders Release of Bank Guarantee in Tax Dispute

The Court granted the petitioners' request for the release of a Bank Guarantee (BG) issued in favor of Respondent No. 1, directing its return by a specified date. It clarified that the service tax liability was not applicable to the petitioners for the period before a certain date and that the BG was provided instead of paying the tax under protest. The Court emphasized that if the Airport Authority of India (AAI) deposited the service tax without passing on the burden, it could claim a refund. Respondent No. 1 was directed to return the BG as there was no legal basis for retaining it.

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Issues: Release of Bank Guarantee, Service Tax Liability, Refund of Service Tax, Legal Misconception

Release of Bank Guarantee:
The petitioners sought the release of a Bank Guarantee (BG) issued in favor of the Respondent No. 1. The BG dated 16th February 2008 was for a sum of Rs. 70 lakhs. Although the petition initially included two other BGs in favor of Respondent No. 2, those two BGs lapsed and were not renewed. The petitioners, after succeeding in a writ petition, requested the return of the BGs, but the respondents directed them to approach the Court for the same. The Court granted a final opportunity to file replies and restrained the Respondent No. 1 from encashing the BG during the pendency of the petition. The Court found no justification for the Respondent No. 1 to retain the BG and directed its return not later than 30th September 2017.

Service Tax Liability:
The petitioners claimed that no service tax was payable by them for the period before 1st June 2007, based on a previous decision of the Court. They argued that instead of paying service tax under protest, they furnished a BG in favor of Respondent No. 1. Respondent No. 1 contended that since it had already deposited the service tax with the Central Government, only the service tax provider could claim the refund. The Court clarified that if the Airport Authority of India (AAI) deposited the service tax, it could seek a refund by demonstrating that the tax burden was not passed on to the petitioners. As the AAI did not pass on the burden, there was no legal basis for Respondent No. 1 to retain the BG.

Refund of Service Tax:
The Respondent No. 1 argued that it could not seek a refund of the service tax deposited with the Central Government, citing Section 73 A (5) of the Finance Act, 1994. However, the Court found this argument to be based on a misconception of the legal position. The Court emphasized that if the AAI deposited the service tax but did not pass on the burden to the petitioners, it would be entitled to a refund in accordance with the law.

Legal Misconception:
The Court noted that the Respondent No. 1's submission regarding the refund of service tax was a misconception. The petitioners were not liable to pay the service tax for the period before 1st June 2007, and the BG was furnished instead of paying the tax under protest. The Court clarified that if the AAI deposited the service tax and did not pass on the burden, it could claim a refund. Therefore, the Court directed Respondent No. 1 to return the BG issued in its favor to the petitioners.

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