2024 (3) TMI 915 - AT - Central Excise

GST refund denied for payments made during recovery action after tax evasion despite subsequent discharge

CESTAT Ahmedabad dismissed the refund claim where the party paid GST under Reverse Charge Mechanism for banking and financial services related to foreign ... Refund claim - amount was paid in GST era under Reverse Charge Mechanism towards banking and financial service received for expenses made in foreign currency for facilitation of external commercial borrowings (ECB) - time limitation - HELD THAT:- The party has not only paid duty of extended period in 3 installments i.e. in April 2018, October, 2018 and November 2018 but has also paid interest and penalty there upon seggregating the three. On this issue, it is found at Commissioner (Appeals) has correctly held that payments made were part of the recovery action under the enforcement done by DGCI and therefore duty, interest and penalty were paid for extended period. It is also found that adjudicating authority whose findings have been endorsed in the impugned order, has correctly held that the amount is paid as part of the recovery action. The input credit or refund of the same cannot be allowed. It is held that in recovery action and when penalties imposed and are discharged and duty paid under extended period, the credit to person who has evaded tax and then paid duty, interest and penalty cannot be allowed - appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether refund or input tax credit is admissible for service tax paid under Reverse Charge Mechanism (RCM) after the GST cut-off date where payment was made in the GST era. 2. Whether payments made pursuant to an enforcement enquiry and deposited along with interest and penalty constitute voluntary payments or recoveries for the purposes of entitlement to refund/input credit under the saving provisions and Section 142(8)(a) of the CGST Act. 3. Whether amounts paid as duty, interest and penalty in discharge of liabilities determined for extended periods (after being pointed out by tax authorities) are barred from being treated as admissible input tax credit or refundable under the transitional/saving provisions. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of refund/input credit for tax paid under RCM after GST cut-off Legal framework: The Court considers the transitional and saving provisions (including the saving provision of section 174), the existing law provisions under the Central Excise Act (refund provisions under section 11B), and the corresponding definitions carried into the CGST framework (sections 2(48), 142(3) and 142(8)(a) of the CGST Act). Payment of service tax under RCM in the pre-GST period but made after the appointed date raises questions of entitlement to input tax credit or refund under the new regime. Precedent treatment: Tribunal decisions have recognized that voluntary payment of tax under RCM before/after the cut-off can permit CENVAT/credit or refund in certain circumstances; earlier orders have allowed credit/refund where payments were made suo motu or voluntarily. Interpretation and reasoning: The Court accepts the general proposition that, in the normal course, voluntary payment of duty after the cut-off can give rise to entitlement to benefit under the saving provision. However, the entitlement depends on the character of the payment - voluntary (suo motu) versus payment in consequence of enforcement or recovery. The presence of an enforcement enquiry and documentary evidence showing payment in response to notices/advice from investigative authorities is material to classification. Ratio vs. Obiter: The statement that voluntary post-cutoff payments may qualify for refund/credit is treated as a general ratio drawn from prior decisions; its application is fact-sensitive and not a blanket rule. Conclusion: Entitlement to refund/input credit for RCM payments after the cut-off is potentially available where payments were truly voluntary, but such entitlement does not automatically extend to payments shown to be made pursuant to recovery/enforcement actions. Issue 2 - Characterisation of payments as recovery vs. voluntary: effect of enforcement enquiries and associated interest/penalty Legal framework: Section 142(8)(a) of the CGST Act provides that amounts which become recoverable in pursuance of assessment or adjudication proceedings under the existing law shall, if recovered as an arrear under the CGST Act, not be admissible as input tax credit. Provisions governing adjudication and extended period liability (sections analogous to 11A-11AC under existing law) and provisions relating to interest and penalty were invoked in the adjudicating/enforcement proceedings. Precedent treatment: Prior tribunal orders distinguished voluntary payments from those made pursuant to detection by authorities; voluntary self-assessment payments have been permitted credit/refund in earlier decisions where there was no enforcement action compelling payment. Interpretation and reasoning: The Court examines contemporaneous records: letters from investigative authorities, timelines showing that liability was pointed out by the Directorate and that the claimant subsequently made payments by challans in multiple instalments (including segregation of duty, interest and penalty). The Court reasons that payments made after being pointed out by authorities and in response to an enquiry are not 'suo motu' but are payments in the course of recovery/adjudication. The statutory language of section 142(8)(a) bars input tax credit for amounts recovered as arrears under the CGST Act when those amounts were made recoverable by assessment/adjudication under existing law. Payment to avoid higher penalties when made as part of enforcement action does not convert the payment into a voluntary one for purposes of refund/credit entitlement. Ratio vs. Obiter: The core holding that payments made pursuant to enforcement/detection constitute recoveries (and thereby fall within the bar of section 142(8)(a)) is ratio decidendi as applied to the facts. Observations about factual indicia distinguishing voluntary payments (e.g., absence of enquiry, presence of self-assessment filings) serve as guiding dicta for future fact patterns. Conclusion: Payments made in pursuance of an enforcement enquiry and subsequently deposited as duty, interest and penalty are recoveries and not voluntary payments; such payments are excluded from admissible input tax credit/refund under section 142(8)(a). Issue 3 - Effect of payment composition (duty, interest, penalty) and extended period liabilities on refund/credit claim Legal framework: Where liabilities relate to extended period assessments and include interest and penalty, the categorisation under existing law (recovery/arrears) and their conversion into arrears under GST determine admissibility as input tax credit under the transitional provisions. Precedent treatment: Authorities have previously allowed refunds/credit where duty was paid voluntarily and not as part of an enforcement action; conversely, decisions have disallowed credit where payment was outcome of adjudication/recovery. Interpretation and reasoning: The Court notes that the impugned order, endorsed by appellate authorities, found payments to cover duty, interest and penalty paid after being pointed out by the enforcement directorate. The payments were made in instalments at dates after the determination, and records demonstrate their payment in pursuance of an enquiry. Given that section 142(8)(a) expressly excludes amounts recovered as arrears from being admissible as input tax credit, the Court treats payments that include interest and penalty tied to enforcement as falling squarely within that exclusion. Ratio vs. Obiter: The conclusion that composite payments (duty plus interest and penalty) made under compulsion of enforcement cannot be treated as eligible for input credit/refund is ratio where payments are shown to be recovery; general remarks about different factual scenarios remain obiter. Conclusion: Where liability for an extended period has been determined by authorities and amounts (including interest and penalty) are paid in response to such determination, those payments are recoveries and are not admissible as input tax credit or refundable under the transitional/saving provisions. Overall disposition The Court upholds concurrent findings of lower authorities that the payments were part of a recovery action following an enforcement enquiry and therefore barred from refund or input tax credit under section 142(8)(a) and related transitional provisions; appeals are dismissed. Cross-references: the Court distinguishes prior decisions that permitted refund/credit in cases of voluntary post-cut-off payment on the factual basis that those payments were not made pursuant to enforcement or recovery.