Refund of unadjusted service tax credit applies when advances are returned and the service is never provided.

Refund of unadjusted service tax credit was treated as available where advances were returned to customers after the underlying service was not provided. The credit taken under Rule 6(3) remained unutilised in the credit register and was reflected in returns, and Section 142(5) of the CGST Act was noted as contemplating cash refund of tax paid under the service tax regime for services not provided. The limitation objection was found inapplicable on these facts, because the claim arose from an unrecoverable transition balance rather than an ordinary refund claim. The discussion therefore supports cash refund of such credit with applicable interest.

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Issues: (i) whether the assessee was entitled to refund of unadjusted service tax credit arising under Rule 6(3) when the underlying service was not provided and the amount had been refunded to customers; (ii) whether the refund claim was barred by limitation under the refund provisions.

Issue (i): Whether the assessee was entitled to refund of unadjusted service tax credit arising under Rule 6(3) when the underlying service was not provided and the amount had been refunded to customers.

Analysis: The assessee had refunded the amounts received from customers, including the service tax component, after cancellation of purchase agreements. The credit taken under Rule 6(3) of the Service Tax Rules was bona fide and related to service not provided. The record did not show any objection by the Revenue to the availment of such credit, and the unadjusted amount remained lying in the credit register and reflected in the ST-3 return as on 30.06.2017. Section 142(5) of the Central Goods and Services Tax Act, 2017 also contemplates refund of tax paid under the service tax regime in respect of services not provided, to be paid in cash.

Conclusion: The assessee was entitled to refund of the unadjusted credit.

Issue (ii): Whether the refund claim was barred by limitation under the refund provisions.

Analysis: The rejection on limitation was found to be erroneous because the claim arose from unadjusted credit that could not be utilised after the introduction of GST. In the facts of the case, the claim was not to be defeated by applying the ordinary refund limitation so as to deny restitution of an amount which had become refundable on account of non-provision of service and the statutory transition to GST. The Tribunal also relied on the principle recognised in the cited High Court ruling that such amounts are not to be treated as a mere duty refund claim attracting a restrictive limitation where the deposit itself was not lawfully exigible in the relevant sense.

Conclusion: The refund claim was not liable to be rejected as time-barred.

Final Conclusion: The impugned rejection was set aside, and the assessee was held entitled to cash refund of the unadjusted service tax credit with applicable interest.

Ratio Decidendi: Where service tax paid on advances is refunded to customers because the service is not ultimately provided, the resulting unadjusted credit is refundable, and the transition to GST does not permit denial of such refund on a rigid limitation objection when the statute provides for cash refund of tax paid for non-provided services.

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